Aramark

Good morning and welcome to Aramark's third quarter 2020 earnings results conference call. My name is Jimmy and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felice Cassell, Vice President of Investor Relations and Corporate Affairs. Ms. Cassell, please.

Thank you, and welcome to Aramark's third quarter fiscal 2020 earnings conference call and webcast. I hope those listening are doing well, along with those around you. This morning, we will be hearing from our Chief Executive Officer, John Zilmer, as well as our Chief Financial Officer, Tom Undruff. As a reminder, our notice regarding forward-looking statements is included in our press release this morning. which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the risk factors, MD&A, and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to US GAAP can be found in this morning's press release as well as on our website. With that, I will now turn the call over to John.

Thank you, Felice, and good morning, everyone. I hope all of you are staying healthy and doing as well as can be expected during these continued unprecedented times I look forward to sharing an update with you today on the current state of the business that reflects the tenacity of our teams, working in close partnership with our clients on the front lines as we navigate the ever-changing environment and seek to further Airmark's position as a key enabler in the broader recovery and beyond. In the third quarter, our actions resulted in improved client retention trends and new business wins, including Purdue University, Manhattan College, Queen's University in Canada, as well as Ford Motor Company, a new business founding partnership. Increased agility in our cost structure has led to an adjusted operating income drop through of 20% and a strengthened balance sheet with over $2.5 billion in cash availability. I'm incredibly proud of our individual team members who have continued to step up in selfless ways to serve clients at countless locations. Their response and ability to adapt in the face of significant adversity is a true testament to their dedication, work ethic, and sense of personal pride. These are the people who make Aramark such a special company, and their drive and commitment motivates me every day. As part of these efforts, we've shipped over 30 million pieces of personal protection products following our shift to certain production lines within uniforms to serve heightened demand from employees, clients, and customers. Safely provided more than 55 million meals to students in nearly 300 school districts across the country. We've opened up 400 pop-up convenience and grocery locations for frontline health care workers. Donated food, supplies, and PP&E to communities in need, including partnering with the Deborah and Leon Black family, the American Red Cross, Robin Hood, and the Marathon to provide more than 400,000 care packages to New York City health care heroes on the front lines. Partnered with the Urban League to provide meals during the summer to community members in several cities across the country, including our hometown in Philadelphia. and recognizing the critical need for health and safety, we developed Eversafe, a comprehensive approach to maintaining a superior hygienic standard that will support the safe reopening and sustainable management of our client locations. In partnership with Jefferson Health, and in accordance with the recommendations of the CDC, WHO, and other leading health organizations, Eversafe features five distinct strategic pillars. Embedding good health and hygiene practices that include carefully designed process standards, PPE, health monitoring, and promoting a culture and environment to sustain healthy practices. Creating appropriate social distancing practices into operations through visual cues, physical alterations, and other service enhancements while maintaining efficient traffic flow. Implementing new and enhanced cleaning, sanitation, and disinfecting procedures that include new processes, equipment, and cleaning agents, as well as careful assessment of high-risk areas that require special attention. employing available and emerging technologies such as artificial intelligence, human-machine interface, infrared, robotics contact tracing, and mobile solutions to further improve the safety and experience of employees and customers. As an example, we've developed and launched quick-eat convenience stores that offer customers a safe and convenient no-touch experience, and expanding and introducing new service offerings and capabilities to best meet evolving consumer dining facilities and other needs. We were also excited to introduce the Eversafe OS web-based service and mobile app, a service designed for small and medium-sized businesses, such as restaurants and retailers, where reopening safely is a critical concern and additional guidance to do so is greatly needed. This valuable resource utilizes the Eversafe proprietary platform to provide trusted information, timely and clear decision-making, and effective and sustainable execution. Activity across our different sectors has been encouraging as we partner closely with clients that are at various stages of operation. Areas within our portfolio have remained relatively stable, namely the facilities and corrections business, as well as the healthcare sector. We expect resilience in these areas, largely driven by the gradual return of elective healthcare procedures, as well as more frequent and comprehensive facility cleaning. Education was impacted from the accelerated summer shutdown as discussed on the prior earnings call. Throughout the third quarter, we continue to operate across most locations, offering extended and expanded meal programs, as well as modified retail operations. We are actively engaged in conversations with our education partners about how they will return to school. At this time, we are encouraged by the various commitments we are seeing from our higher ed and K-12 clients for their return in the fall. Tom will provide added insight on the most current trends. Sports and entertainment reflected the continued suspension of professional sports leagues and postponement of concerts and events. Sports has begun to proceed with the Major League Baseball, NHL, and NBA playing without fans as an interim solution. The NFL is taking measures in an effort to include fans in some capacity based on local jurisdiction as they kick off their season in the coming weeks. We're actively engaged with our NFL clients to help bring fans safely back to the stadiums as appropriate. Leisure activity has increased as national parks recently reopened across the country with modified and enhanced operations to meet the safety and hygiene standards required in today's environment. Demand at many of these locations has been better than expected as our national parks provide an appealing vacation destination that allows for social distancing and the freedom that comes with the outdoors. In business and industry, operations have been industry and geographic dependent. Our B&I portfolio represents approximately 20% pure white collar, 20% pure blue collar, and a 60% hybrid of the two. Many client locations continued operations in some capacity. In recent weeks, we're starting to see previously shuttered locations return a portion of their workforce. We expect this business to have a longer recovery tailwind while identifying opportunities for higher capture rates. Uniforms has demonstrated resilience Quickly bouncing back from April Tross, solution-oriented services, including PP&E that I mentioned earlier, have been in high demand as customers require hygienic products for safety. International operations are at various stages of response depending on geography. China has largely recovered, and we continue to have new client wins, particularly in health care, due to our efforts on the front lines. China drove double-digit organic revenue growth in the third quarter, an incredible achievement from the team that reinforces the value of our services in this environment. Europe and Canada are exhibiting encouraging activation trends across various lines of business while balancing country-specific government mandates. While we are experiencing a delayed impact in South America, we did just win a new extractive services client in Chile. Our international team is sharing best practices across regions that include implementing Eversafe as a new offering solution. During this time, we've not compromised our long-term growth mindset that contributed to our recent new business wins that I mentioned earlier. We look forward to working closely with our new partners on enhanced dining experiences and safer, more efficient facilities. Looking ahead, we have a robust new business pipeline and believe we are well-positioned to capture future opportunities, particularly those that are self-operated. Aramark's balance sheet remains strong with ample liquidity following our proactive actions to draw down the billion-dollar revolver and subsequently issue an upsized $1.5 billion debt offering. At the end of the third quarter, we had over $2.5 billion in cash availability. Our disappointment in our ability to be cash flow positive since the bond issuance in late April. Tom will provide more detail on our impressive cash flow trends. As we navigate the current environment and focus on our long-term strategy, we've made changes to the organization that has created a fit-for-purpose business to best support our field associates and clients. This includes action we have taken to restructure and realign resources to allow us to emerge stronger when the pandemic is behind us. Before turning the call over to Tom, I want to highlight a crucial topic that is deeply personal to me, diversity, equality, and inclusion for all. As a company, this has always been one of Aramark's core values, and we've been consistently recognized for it as a top 50 company for diversity, a best place to work for LGBTQ equality, a best place to work for disability inclusion, and a top 50 employer for equal opportunity. but there is always an opportunity to do more, and that starts with reflection, education, and action. With that, I am proud to announce that we've formed an Executive Diversity Council that will provide strategic focus to advance diversity, equality, and inclusion among Aramark employees, client partners, customers, suppliers, and the communities we serve. We've also named Ash Hansen to the newly created role of Chief Diversity and Sustainability Officer. Ash has been with Aramark for 18 years, contributing in a variety of leadership roles across the organization, including diversity and inclusion, talent management, organizational development, and human resources. We look forward to developing and executing impactful plans that will reduce inequality, support and grow our communities, and drive our sustainability strategies for generations to come. I will now pass it over to Tom for a more detailed financial review of the business.

Thanks, and good morning. Before reviewing the financial performance in the quarter, I want to reiterate John's message. I couldn't be more proud of how the Airmark teams across the globe have promptly responded and quickly adapted to the new environment and continue to lead by example to serve our clients with a solution-oriented mindset. It is truly inspiring to work alongside team members with such dedication. Now turning to the results. Our third quarter performance was consistent with the expectations that we laid out on our last earnings call. Of course, our results were meaningful impacted by COVID-19. The diversification of the portfolio, as well as the flexibility of Aramark's operating model, resulted in sequential revenue improvement in each fiscal month of the third quarter. And AOI dropped to a 20% of corresponding revenue decline and positive cash flow generation since the bond issuance on April 22nd. resulting in a minimal cash flow use, pre-cash flow use, of $37 million during the quarter. For the total company, organic revenue was down 45% in the quarter compared to the prior year, as modest underlying growth was more than offset by reduced or suspended operations at multiple client locations. Over the course of the quarter, we saw improvement each month following the April trough, when revenues were down 50%, with increasing activity seen most notably in in uniforms and international, as well as the education and leisure businesses. This encouraging trend in the businesses continued into July, with organic revenue down 36% compared to the same period last year. In the third quarter, U.S. food and facilities had an organic revenue decline of 56% compared to the prior year, as our education, business dining, and sports businesses were most heavily impacted. The leisure business was shut early in the quarter but began to see activity in late May with a limited capacity reopening at most national park locations. Facilities, healthcare, and corrections businesses remained relatively stable throughout the quarter, but the healthcare sector was impacted by fewer visitor and patient meals due to the temporary suspension of elective procedures. International organic revenue decreased 41% compared to the prior year. If Canada and Europe, specifically Germany and Spain, were particularly affected by government-imposed shutdowns. Despite the headwinds, our international team continues to execute on its growth strategies, exemplified most recently by a new mining client win in Chile and the award of Queen's University in Canada, as John just mentioned. China has now largely reopened and posted double-digit organic growth revenue in the quarter, also driven by strong contributions from new business wins. Organic revenue in uniforms is down 12% versus the prior year, as the impact of COVID-19 was partially offset by new business, including increased demand for PPE offerings. Essential businesses within our diverse client portfolio continue to operate and generate a strong demand for our safer, cleaner, and healthier services. As a result of the company's flexible operating model and continued cost-mitigating actions, we were able to effectively manage AOI drop-through to 20% of corresponding revenue declines. We purposely left untouched any of the costs required to effectively service our clients and grow the underlying business, including sales and client management resources. And we will continue to operate the business with a long-term mindset focused on sustainable value creation. Total company adjusted operating income was a loss of $144 million in the quarter, down 163% compared to the prior year on a constant currency basis. U.S. Food and Facilities was able to significantly offset the revenue impact of COVID-19 through proactive labor and product cost management, the outcome from client contract renegotiations, SG&A cost containment, as well as receiving just over $10 million in CARES Act employee retention credits to offset absorbing 100% the benefit costs for furloughed employees. International AOI performance also benefited from strong product and labor cost management against the COVID-19 revenue headwind, as well as contributions from net new business won earlier in the fiscal year, and nearly $50 million from government assistance programs to offset labor costs associated with the required retention of employees. the international operations tend to have less flexible labor cost base in the near term compared to the U.S. due to specific country labor laws and regulations. The uniform segment, operating with a higher fixed cost base than the rest of the business, demonstrated resilience by partially offsetting the COVID-19 impact on revenues by generating income from strong demand for hygienic solutions, including PPE offerings, as well as lower SG&A expenses, synergies from the AmeriPride acquisition, and just over $10 million from government-assisted programs to offset labor costs associated with the retention of employees in our Canadian operations. And finally, corporate expenses were down 28% compared to prior year due to actions taken to reduce personnel costs and general corporate expenses, as well as lower equity-based compensation expenses. Adjusted EPS was a loss of 69 cents for the quarter, as a result of lower AOI and higher interest expense associated with our deliberate drawdown of the revolver in March and the $1.5 billion bond issue in late April. In the quarter, CARES Act benefits also included the deferred remittance of federal payroll taxes and NOL carryback modifications, which provided approximately $50 million in income tax benefit. Merrimark's government affairs team is advocating for policies that will support and protect our employees, clients, and customers, and we will continue to seek to optimize the appropriate available stimulus programs as we manage the business. Now turning to cash flow. As a result of the decisive actions and operational discipline, we were able to generate positive cash flow from operations in the quarter. It contained free cash flow to a minimal use of $37 million. After sudden initial impact, of working capital in late March and into April. Collection trends began to normalize. Combined with sustainable cash management strategies, free cash flow was positive after the bond issue on April 22nd. At quarter end, our market had over $2.5 billion in cash availability. A strong balance sheet allows us to remain focused on our capital allocation priorities, and we remain committed to investing in growth opportunities for the business, paying down debt, and returning value to shareholders. With that, we also announced this morning the approval of our quarterly dividend payment. I'll now touch briefly on our GAAP results. These metrics were largely impacted by COVID-19 in the same way I outlined for AOI earlier. In addition, GAAP operating loss, net loss, and diluted loss per share included, most notably, 125 million in severance charges associated with actions taken to restructure and reline personnel resources within the company. The majority of these charges, approximately $75 million, were within the international business, resulting from prescriptive labor laws and regulations in certain countries in which we operate. In the current environment, we have taken these actions to right-size the business to create a fit-for-purpose organization that is best positioned to serve our clients and deliver strong, sustainable performance. Looking forward, we expect to see modest sequential improvement in the fourth quarter compared to the third quarter. As previously mentioned, July revenues, which were down 36% compared to prior year, continued the positive revenue trend that we've seen since April when the top line fell 50% compared to prior year. At this time, we are encouraged that more than half of our higher ed clients are expecting students to return in person for the fall semester with about 10% planning to exclusively implement remote learning. The balance are considering a variety of hybrid approaches. In addition, we continue to actively participate in extended government-sponsored K-12 meal programs. With the reopening of education and preparation for potential activity in business dining and sports and entertainment with the NFL season, we will absorb certain initial restart costs. much like when we initially began service following a new account win, as we take actions to ensure the safety of employees, clients, and customers. Such progress is expected to result in a marginally higher AOI drop through rate in the fourth quarter. We will continue to remain focused on cash flow and build on the actions we have already taken. Based on the current anticipated activity in higher ed, we would expect to deliver neutral to slightly positive free cash flow in the fourth quarter. I want to close by reiterating my strong belief in the future of this business. The reasons why I joined Aramark in January are the very factors that differentiate us today. Highly valued service offerings, passionate team members, and strong growth potential. Thanks for your time this morning. John?

Thank you, Tom. It is an extraordinary time for all of us. I'm extremely proud of how Aramark has responded and remain confident that we are taking the appropriate steps to create significant value for our stakeholders. We have considerable opportunity ahead of us that we believe will provide Aramark the ability to emerge as a stronger, more agile company. And I'd like to take this opportunity to thank all the associates of Aramark for their hard work, dedication, and commitment to serving our customers. Operator will now open up the call to be a resource for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchdown phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. In order to accommodate participants in the question queue, please initially limit yourself to one question and one follow-up. Ian Zuffino from Oppenheimer is online with a question.

Your line is now open. Okay. Thank you very much. You know, really good job managing through all this. You know, pretty impressive, you know, cash from operations and, you know, just managing the business overall. So congratulations there. Thank you. You know, what I wanted to maybe focus on is education a little bit. You know, you had some wins there. Give us a little bit more detail on those wins, you know, particularly maybe how you got them. You know, what do those margins look like now versus, like, what you've historically done in the past And then also, it seems like you're very bullish on, or not very, but bullish on education. You know, are you seeing something in education? And sort of what are the risks that you see as far as maybe schools deciding that reopening is not really in their best interest and maybe they go virtual? Or just maybe some ground-level detail on what you're seeing, what's driving your, you know, the encouraging statement you made about education. Thanks.

I'll start off and Tom can jump in as well. Well, first of all, the new business wins we're very excited about. Purdue University was a self-op conversion of their retail operations. We feel very honored to have been selected to operate that contract. The Queen's University in Canada is the largest university operation in Canada. Again, very excited about that opportunity. And, of course, I also mentioned the Ford Motor Partnership, which is a new national contract for those operations. On the higher ed side, as Tom alluded to, we've had significant dialogue with our education customers. Literally, we're engaged every day in dialogue about the operating model that each university will adopt. And, as you said, over 50% of those customers have told us they'll be in person in the classroom. We're still awaiting decisions on the operating model from some universities, and so it's too early to comment on what might take place in terms of total education reopening. Approximately 10% have said that they'll have an online learning environment during the first semester. So the hybrid examples that are being developed are very different by campus, by university, and so it's very difficult to predict what exactly will happen but we are engaged in dialogue literally every day with those customers to make sure that they have the best experience for students that are on campus in a safe, hygienic way, that those students can safely eat in the dining halls, take advantage of board plans, and be confident in their safety and security. Tom, do you have anything you want to add to that?

I think I just asked, Ian, you talked about the financial structure of those deals. I don't see anything changing much other than around the edge for the current environment within those higher ed contracts. Certainly for the long term, you know, you build flexibility into the model book for the client and for us so that we can move forward together with whatever comes. So I see that still being the general structure of the contracts, you know, flexibility and client focus. And I don't think that's going to impact the profitability over the term of the contract, these new wins.

Okay. You know, as a follow-up on the cash management side, you know, very good job there again. You know, give us a sense of, you know, I know you talked about driving the drop down to 20%, and then you also maybe said that you could get it down to 15% if you need to. You know, I guess what have you been seeing there as far as, I guess it seems like you've been encouraged more, and that's why you're not really aiming for that 15% anymore, or just sort of broad strokes on what you're thinking there? Thanks.

Yeah, I think from the beginning we said we weren't going to be driven by a number. We were going to be focused on our clients, serving our clients' needs, and it really came to light early that, There were different requirements by clients, even within a sector. So we needed to remain flexible with that, and that obviously puts pressure on your ability to drive out costs. You know, to go to 15, we said early on, was going to be a more negative situation where we thought this would be prolonged, the current environment would be prolonged and deeper, and more certainly negative. Where we find ourselves now is that there are good signs, you know, reopening signs here and there. It's still, as we all know, almost week to week at times. And therefore, we're keeping ourselves ready. We're keeping costs in the business so that we are ready when our clients are ready. And that's been difficult for our operators, but they've, as you've seen in the Q3, done a tremendous job of balancing both our cash flow needs as well as as being prepared for our clients. So I certainly don't see us, as I said just a minute ago, moving below 20 at this point given what we see as some encouraging signs of activity into the fourth quarter.

Yeah, and I'll just add a couple of quick comments. You know, I think the organization has shown incredible flexibility in terms of managing our cost structure There are levers that we can continue to pull to reduce costs further, but as Tom indicated, what we've tried to do is maintain an organization that's fundamentally able to serve our clients very, very rapidly as their needs develop and as the situation evolves. And, frankly, because we want to make sure that we have an organization that has the best management team, the best level of talent in the industry, and so we're very cognizant of making sure that we hold on to those people that we think are critical for the future of the organization and for the future, and hopefully that we'll be able to bring back all those Aramark employees who've been furloughed or laid off in this temporary process. One of the things that we've also committed to is making sure that we maintain our growth focus, and so we have not made any cost reductions with respect to marketing organizations and or sales organizations, we've been very focused on making sure that we maintain that growth mindset and discipline going forward.

And let me add one last point that I don't want to give the impression that we're rebuilding all these costs into the business based on overly optimistic projections. Things can change. And so we're continuing to stay flexible and we will continue to do that and hopefully have proven that the model can move pretty rapidly. and reflect and respond to the current environment. And so if things move in a different direction, we'll be ready.

Thank you. As a reminder to ask a question, you'll need to press star then 1. Our next question comes from Kevin McPhee with Credit Suisse. Your line is now open.

Great. Hey, congratulations on the cash flow and just the results overall. I know there's a lot that goes into that, so really, really well done. I just want to spend a minute on just talking about, you know, structurally the business has changed. You folks are a leader in the industry, but just coming out of this, what are areas that you're going to be able to define the outcome in the sense of whether to make a mental step up in uniform or on the food service side? And then within the context of that, you know, is there an opportunity, you know, as you know, again, one of the more capitalized, better players in the space to drive some consolidation. Just any puts and takes around that would be super helpful.

Sure. You know, we obviously believe that we are well positioned going forward given the strength and the breadth of the organization and the balance sheet to take advantage of any opportunistic growth opportunities, if you will, that come to us. And those we will be very aggressive in the pursuit of growth with respect to new account wins, particularly as we believe the self-op conversion phenomenon will increase. You know, we're highly confident that as customers and clients who are currently self-operated, you know, come to grips with the issues that they've had to face in COVID-19, that there will be an acceleration of self-op conversion trends and we believe we're well positioned to take advantage of that from both a resource perspective as well as a capital perspective. You know, with respect to other operators that may not be well capitalized, you know, we are seeing impacts in the business as clients, you know, are having their services affected, and we believe there may be some opportunity as some of the smaller companies may decide or may have issues with respect to their financial performance But really what we're going to focus on right now is both organic growth through new sales opportunities, growing those relationships with our existing customers, focusing on new service offerings that we think will adapt to the changing environment. And we'll also continue to take a look at M&A opportunities that present themselves across the portfolio.

Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan. Your line is now open.

Hi, John and Tom. Two questions. First one on the July trends of minus 36%. Could you give us a sense of, you know, how U.S. Food and Support Services is doing in July and how Uniform is doing in July? And then my second question is, you know, if you could, Tom, you said drop-through margins for the fourth quarter will be higher than 20%. Could you give us a sense of anything? Does that mean 25? And if you can make a comment on interest and taxes for the fourth quarter also, that would be helpful.

Sure, Andrew. In terms of the revenue, 36% for July for the company. U.S., A bit above that, total U.S. International is right about the company average, and then Uniforms was significantly below that in July, that company average on the revenue. On the flow-through, you know, it depends a bit, and I hate to hedge the answer, but it does depend a bit. on the activity and the speed of the activity within higher ed and sports. So if the more certainty we see, I think that the drop through will be, you know, closer to 20. If there is some stop and starts, I think it could be closer to 25 with people, you know, false starts or people changing their mind at the last minute after we've staffed up. And a little color around why those cost pressures are there, when you start up an account or restart an account, particularly in this environment, you do have certain inefficiencies in product costs, in labor scheduling, and the like, and, you know, some other peripheral direct costs at the unit. Once you get into a routine, a cadence at a unit, and that can take, you know, months or whatever with a new account, you build in those efficiencies and you get better at all those things. And so as we restart with new points of service across campuses, you know, diverse points of service, there will be a level of inefficiency out of the gate, and that's where those increased costs can creep in. So I think it can be in between that range depending on the environment, the restart environment. And then with interest and tax, you know, interest should be pretty predictable at this point. You know, fairly reflective of Q3. I don't see much of a change for Q4. You know, we'll look at the end of the quarter based on cash flow as to, you know, deleveraging a bit, and that certainly continues to be the goal. But for the fourth quarter, I don't think interest should change that much. And tax, we're still working through the overall benefit of the CARES Act. We've got significant benefit this quarter, as we will, for the year with the NLL carrybacks. So I'll come back to you. Please, I'll come back to you with a little more detail on the tax rate for the year. Thank you.

Okay. Thank you.

Mm-hmm. Thank you. Our next question comes from James Ainley with Citi. Your line is now open.

Yeah, good morning, everybody. Thanks for taking my question. Could I ask you to talk a bit more about what your B&I clients are saying about longer-term working from home plans, how that might impact attendance on site, and whether it's realistic to get back to prior margin levels with a kind of structurally lower level of B&I attendance?

Sure. I think we can both take a stab at that. First of all, I think it's very early yet to predict exactly what the B&I business will look like. We are seeing signs of green shoots, if you will, as employers bring back employees on a limited basis. In some geographies, it's obviously significantly impacted by the type of operation, the geography, and whether it's an office environment or a blue-collar environment, et cetera. So, you know, probably the consensus that we have today from customers is that it may take a little longer to bring employees back, given the current state of COVID-19. You know, what timeframe that looks like, you know, varies by city. So, ultimately, the structure of the business, I do believe, will return to a more normalized look. You know, you may have operations that have downsized or may be smaller than they were before. I think fundamentally the contract structure of the industry is probably going to be changing. Some of those operations that were P&L historically because of the size and scale may now be management fee going forward. I don't think the margins in the business will change all that dramatically. Ultimately, the margins will be, I think, somewhat average over the history of the business. It's been a very consistent performer, and I think that the business will evolve to that same kind of level of performance, even though the contract structure may be somewhat different going forward, not only for us, but I'm sure for our competitors as well. So, you know, I think B&I has a longer road to recovery. Again, it will be dependent upon the speed with which employers come back to their offices. I will say, as a general rule, you're seeing a lot of commentary – a lot of conflicting commentary in the press about whether companies will maintain their work-from-home kinds of approaches for the long term. Frankly, I've been talking to a lot of CEOs of a lot of public companies recently, and almost all of them are saying, listen, it's tough to manage an organization from a cultural perspective by remote control, and they really have a strong desire to bring their employees back into the communities so those employees can be engaged with the company and to be part of a team. And so ultimately, I think companies will return to the workplace, but it will take some time. And it's very hard for us to predict what that timing looks like.

Okay, clear. Thank you very much.

Thank you. Our next question comes from Tony Kaplan with Morgan Stanley. Your line is now open.

Thanks very much. I'm curious about the delivery opportunity that you see during this period on college campuses, which might have some restrictions around dining halls. Have you been investing more in that business going into the fall, and how should we think about the opportunity you have in food delivery in education? Thanks.

Sure, we have multiple approaches to food delivery on campus. We certainly have the advantage of being on site, and we have the advantage of being close to those students, and I think there's significant opportunity, one that can be addressed in a number of ways, both with customized program development in each individual university, depending on the type of location, whether it's an urban campus or a more sprawling campus, The Good Uncle Initiative, you know, is one that serves that delivery model pretty well, and yet we've also established partnerships with other delivery providers on campus to make sure that our product gets delivered to those students, you know, through third-party means. So we do think that there will be an increasing trend towards eating in dorms and eating remotely, and we are positioned – we've got service models and – marketing programs developed to go ahead and address that need for students to be served in that way. Tom, I don't know if you have anything else you want to add to that. No.

Great. Also, just within the different verticals of the U.S. business, I'm curious which of these you expect to improve the most quickly from here. If you could just give some color on each of the different verticals.

Tom, why don't you go ahead and take that?

Sure. I mean, in terms of magnitude of improvement, you know, obviously sports and higher ed have the greatest ability to come back. I think from a speed standpoint, you know, education certainly from, you know, down significantly. in the third quarter, you know, 70-plus percent will see the biggest move in Q4. Sports is still uncertain and not really have any visibility there. As John said, I think business dining has a linear path back. I don't think it's going to be any great speed, but I think it will continue to nudge forward. I think overall, you know, with those being the three biggest impact sports, higher ed and B&I, I would see the education sector having the greatest potential to be back quickly, followed by a linear path with business dining and, you know, still a question mark around sports.

Great. Thank you.

Thank you. Our next question comes from Richard Clark with Bernstein. Your line is now open.

Hi, good morning. Thanks for taking the question. So the first question for me, probably just rounding out from the last question, but compared to peers, likely the negative surprises were on healthcare down 21%, facilities down 17%. You don't seem to be referring to those improving much into Q4. So is there anything kind of idiosyncratic about your mix that means you're underperforming in those segments, and how do you expect those segments to maybe recover over the coming quarters?

Yeah, I'll take a shot at that. First of all, healthcare, we continue to see improvement throughout the balance of the year. I think we talked about the delay in elective surgical procedures and the like, and we think that that business will continue to improve as the healthcare system adapts and comes back more broadly. We don't see anything systemic there. On the facility side, I think you'll see a ramp up as businesses return. Those numbers will improve as businesses and other institutions require deep cleaning before restarting. I don't think there's anything there that affects the long-term nature of that business. They'll be relatively stable. to growing during the fourth quarter, and it'll really just be dependent upon the pace of change in the other businesses. And some of the facilities business obviously is attached to sports and entertainment, so those are significantly sized operations. If those stadiums and arenas begin to reopen and operate, those businesses would return. So there's a bit of a knock-on effect on some of the other businesses in terms of how much they're engaged.

Thanks. Just as a follow-up, clearly kind of pre the COVID situation, you were talking about your plans and sort of it may take a quarter, it may take four years to kind of enact your plans. How has the whole coronavirus issue sort of changed the pace of the turnaround you were trying to enact there? Has it given you the opportunities to accelerate some of those opportunities or has it put a big pause in the plans that you were looking to enact for the business?

Well, I would say that we continued to march down the path that we laid out, making organizational changes with respect to culinary marketing, food offerings. You know, so it hasn't impacted those plans whatsoever. And the same could be said for the growth initiatives that were undertaken over the course of this – over the last several months. You know, we continue to invest in adding new sales resources. to the organization. Most of what we wanted to achieve we've been able to do even in this environment with respect to adding the right talent. We've had the opportunity to reestablish some new leadership in some of the businesses. We've had the opportunity to go ahead and make organizational changes to get resources closer to the customer even in the face of you know, reductions that we've had to make. We've been able to re-engineer the organization in a way that we think positions us extraordinarily well going forward. So I would say, you know, our plans have been somewhat impacted by COVID-19, but not our approach. So really, I don't see it impacting the way we will operate going forward. Thank you very much.

Thank you. Our next question comes from Andrew Whitman with Baird. Your line is now open.

Okay, great. Thanks. I just had two questions and then just a clarification from a prior question. My first question was regarding the uniform rental business. You mentioned a couple of times in your prepared remarks that you had good, strong sales of PP&E. I'm just kind of curious how the organic rental trend held up inside that. Maybe there's a We've seen from other players that there's been some, you know, big one-time sales or spike in sales that called out for a direct sale. But I'm kind of curious on the rental trends in particular. And then my second question was regarding the dividend outlook in the press release today. You noted the 11-cent dividend that's going to be paid in September. And, John, I was hoping you could just talk about the thought process on the board with the uncertainty that's out there, with the cash flow not being as great as it normally is. why that makes sense and how you approach it from here. And then the clarification that I wanted to ask about was just a little bit of confusing terminology earlier on the kind of growth outlook by segment. I think you mentioned that in the U.S. that the organic trends were a little bit better than 36%. Did you mean that the growth trends were below company average? In that, just because you said better than, it sounds like the growth trends in U.S. food were trending, you know, better than 36%. It didn't make a lot of sense. I just wanted to clarify that.

Thanks. Yeah, Tom, do you want to take that last part of the question first, and then I'll come back to the rental trends and the dividend process going forward?

Sure. Sure.

Yeah, the U.S. food decline in July was higher than the company average for the U.S. Okay. Okay. I just want to be clear.

Yeah, I think, you know, in trying to offer some insight into what we see as the improving revenue trend over the, you know, with the start of the, quarter, you know, I think, you know, we're trying to give some visibility but, you know, without offering a lot of specifics and we apologize for that. We just see a continuing improvement, you know, during July that, you know, that is follow on from the previous quarter. So attempting to give some supportive clarity with respect to revenue trends. With respect to the rental trends in uniforms, the rental trends have improved on a weekly basis since the trough in April, and I think that's probably consistent with what the rest of the industry has discussed and disclosed. There continues to be improvement. week to week in rental trends. I don't think we have disclosed that number specifically, but I would say what you're seeing in our numbers is very consistent with what you're seeing elsewhere. With respect to the PP&E sales, we are experiencing significant PP&E sales in uniform services and in refreshment services where we've offered that opportunity to our customers. you know, for things like masks and the like. That is, we believe that business has sustainable opportunities in it as facilities adopt new sanitation approaches and trends and offices like dental offices using barrier gowns more aggressively than they had historically. So we see continuing revenue streams coming from PP&E, not just one-time sales, although the quarter did have some significant growth. sales lift as a result of PP&E. So, you know, I think there's more to come on that, and we'll see how that continues to evolve. I would say that we're very hopeful that we'll have continuing growth from that sector going forward. With respect to the dividend, you know, given the strong cash flow generation, the improved or the significant cash flow results in the quarter toward deemed it appropriate to go ahead and pay the dividend going forward. We think it's a very strong indication of the company's ability to generate cash and to continue to manage the cost structure. We believe that it's an indication of very strong support from the board, and we think we're pleased that they adopted that approach. The board will maintain flexibility, obviously, going forward in If there comes a time where they may need to reconsider that, they will do that. But we're very confident in our ability to continue paying it at this time. Cool. Thank you very much. Thank you.

Thank you. Our next question comes from Manal Padhaik with Barclays. Your line is now open.

Hi, this is actually Greg calling on. I just wanted to ask a little bit more about the contract renegotiations and maybe using education as an example. Some of these schools move towards a hybrid model with 50%, 60% occupancy by the students. Do you expect those contracts to turn into management fees where they were P&L and maybe a little color on with enhanced cleaning, probably comes enhanced costs there. So how do you make sure that you're getting paid appropriately in those contracts?

Yeah, I would say we've been able to engage in a very active contract renegotiation process with all of our customers over the course of the last several months to make sure that we can adapt and to serve their particular needs across all the businesses, not just me and I, but in healthcare and in higher education as well. As the hybrid models are adopted, we'll be working with each individual customer to make sure that we have an opportunity to earn an appropriate level of profitability under that new model. Those negotiations literally take place every day. We've got what we consider to be extraordinary relationships and long-term partnerships in place and we think that we'll be able to react and respond to whatever needs they have and whatever modifications that need to be made. We believe that we can get done to make sure that we're paid appropriately for providing the service that they desire.

Okay. And then a couple of times you've mentioned the higher demand for PP&E and hygiene-type products. Just a little color on your ability to flex that supply to meet the demand.

Yeah, as we mentioned, we have shifted production in our Mexican operations to PP&E equipment, and we are able to meet the demand that we've had both from our client organizations and customers as well as Aramark's need in the business as well. Those operations were able to ramp very quickly and we have the scale that we need in order to continue to manufacture and to take advantage of that opportunity. Our supply chain is very robust. The fact that we have the ability to self-manufacture a lot of this is very favorable for us and it has allowed us to serve a number of customers who couldn't get supply from other sources. We're confident in our ability to continue to manufacture and to continue to supply the needs that both we have and that our customers have.

Thank you. Our next question comes from Gary Bisbee with Bank of America. Your line is now open.

Hey, good morning. Maybe just following up on the question a minute ago about contract renegotiations, can you just give us a sense – How are sort of in-unit economics trending in locations that are reopened? Are you seeing a lot of them that you're able to manage costs to, you know, a reasonable profit level at the unit level? Or, you know, is that really variable? I'm just trying to understand how quickly you can get to sort of a normalized level, even on lower base of revenue coming back in a lot of these locations. Thank you.

Sure. You know, as I mentioned, the contract renegotiation process has really been ongoing since the beginning of COVID as customers, particularly in the B&I sector and in the higher ed sector, shut down and had needs for us to provide some level of service. We were able to renegotiate both new contracts as well as memorandums of understanding to go ahead and serve their current needs. It really is a state of flux on a location-by-location basis. Each individual contract is being renegotiated by their district managers, by the RVPs, and by the clients in order to adopt to the new service model that that specific client needs. Unit economics, you know, it's our intention to continue to operate this business at margins that are very close to our historic level to be paid appropriately for providing the services that are desired. And, you know, so we've been able to, without exception, to go ahead and put new contracts or understandings in place to go ahead and protect us on the downside and to create opportunity going forward. I don't want to comment on individual contracts or individual negotiations. I don't think that's appropriate. But I would say our teams have been extraordinarily adept at doing what's right, not only for the customers, but doing what's right for Aramark going forward.

Thank you. Our next question comes from Stephen Gramblin with Goldman Sachs. Your line is now open.

Hi, thanks. Coming out of this environment, it seems like there could be greater overlap in the FSS and uniform segments than ever, particularly on the facility side when we think about clients demanding this increased cleaning and sanitation. How do you characterize the overlap in these segments currently? And as you look at the uniform peers, stock valuation widening relative to the catering peers, is there a case to keep these separate or even consider other strategic actions to maximize the value?

You know, first of all, there is a significant overlap between the businesses. Obviously, our customers have had our organization respond in a multitude of ways to help serve their needs. We have a lot of customers that are normally food service customers that have reached out to the Uniform Organization to go ahead and serve needs for their PP&E equipment and other areas. So there is a significant opportunity to explore for additional growth potential there with our existing customer base and we continue to do that. Uniformed Services continues to be focused on serving its core rental customers as well. I think the business strategy question is one that obviously we have talked about many times. Today we're focused on improving the results of the business. There's significant potential for growth. There's significant potential for margin improvement. and we think ultimately we can close that valuation gap with respect to those uniform peers as we continue to improve the business, both by adopting the synergies that came out of the Ameripride acquisition, the adoption of ABS, the route accounting system, that shows significant improvement as we implement that in new operations. In old existing Aramark operations, we see continued improvement. So there's lots of opportunity there. And I think over time, the company will continue to address the strategic issue, but today we're focused on improving the operating results, on serving our customers, on being really focused on managing the organization as tightly as we possibly can, given the current environment, and in looking for those opportunities to expand and grow the business in ways to serve our customers.

Thank you. Our next question comes from Shlomo Rosenbaum with Stiefel. Your line is now open. Hi. Thank you for taking my questions.

Hey, John, can you talk a little bit? You mentioned that you're seeing progress in the business that is being kind of overshadowed by, you know, the closures in the businesses. Can you just talk about what's the progress that you're seeing that's underlying? Is that referring to retention rates? Is it referring to new WINS? And, you know, can you talk a little bit about how you expect to come out of this stronger than you were beforehand? What are you referring to exactly?

Yeah, you know, I would say, first of all, retention rates are increasing, and we see continued improvement across the enterprise in retention rates in the various businesses we operate. We're seeing very strong new business pipelines. We see significant opportunities as a result of what we believe will be, you know, an enhanced self-op conversion cycle. going forward. So, you know, we think that the company is well positioned to take advantage of all of those trends. You know, the improved retention obviously extraordinarily important from a long-term growth perspective. We think a lot of that improvement is a result of the actions we've taken in the various businesses, both to improve leadership as well as by repositioning the organizational resources back into the businesses so that they're closer to the customer and impacting the business on a day-to-day basis. So we see the strategy continuing to have an impact. We believe that strategy has been validated, and we're going to continue to move down that path very aggressively to make sure that we have an organization that's extraordinarily focused on developing innovative solutions for our customers and in the individual markets we operate. And I'm excited about this organization because we have the strongest management team in the industry, some really great people focused on delivering results for our customers. And I'm very excited about the prospects for the future based on the team that we have running this business. I think the job that they've been able to do over the course of the last four months has been absolutely extraordinary. You know, all of this that they've been able to achieve as a result of those people on the ground day to day really just grinding it out and making very tough decisions, but the right decisions for our customers and the right decisions for the business. So I'm extraordinarily excited. And, you know, I believe everything that we do is an outflow of the quality of the management team. And I just feel very strongly that I've got the best in the industry.

Okay, great. If I could just follow up with Tom. Is there anything in the startup costs that you're expecting in the September quarter that would change kind of the seasonal cash outflow that you normally see in December? I guess I'm asking, is there anything that you're going to be doing earlier that therefore would mean that your normal seasonal, you know, significant outflow in December would be less because you're doing that in September versus the December quarter?

It will, but for a different reason. Usually that's – fourth quarter cash flow inflow is driven by the board plan prepayments for the ongoing semester, and then the use follows in Q1. So those will, you know, normalize. They do move roughly in tandem. So, you know, the startup of the higher ed is less, certainly, than it would be in a normal year. the outflow in Q1 will be less. Okay, great. Thank you.

Thank you. Our next question comes from Seth Webber with RBC Capital Markets. Your line is now.

Hi, good morning. Thanks for taking the question. Following up on a cash flow question, you know, CapEx is a pretty big step down here in the third quarter. Can you just talk to us how you're thinking about near-term and maybe intermediate-term CapEx? Is this around the right level will come down a little bit more. Just any guidance you can help on that. Thank you.

Yeah, a little hard to look at it as a percent, you know, the traditional measure, a percent of revenue given the revenue change. So as a dollar amount, you're right, the annualized rate has fallen. A lot of that has been around the expectations this summer, this past quarter with clients, what they've wanted to tackle and what they haven't. It's also been part of client renegotiations, as John alluded to. So certainly the spend in the quarter, I think, is not where it will – it's not a run rate. We don't want it to be a run rate because, you know, we want to be able to use the CapEx to our clients' benefits and grow with them. So I think this is a little bit lower in Q3 than we would see it going forward, but we'll continue to work to manage it along with the operating cash flows so that we keep ourselves in a good position, but certainly have our clients' needs and our contractual obligations first and foremost in those discussions. We don't want to leave our clients hanging to our benefit, so we will manage it accordingly.

Okay. And then if I could just clarify the comment about the monthly improving trends, the trends improving through the quarter, I'm just trying to splice out how much of that might be due to just a lower mix of education, just seasonally, if that makes sense. I mean, are you seeing improving trends kind of across the portfolio, or is it just really a function that education is a smaller portion?

Thanks. Outside of sports, which, believe it or not, has seen a little bit of activity this summer versus where we were in April. So if I take the 50% drop in April on revenue down to the 36 in July, The quick answer is we've seen improvement across every line of business. It's been almost imperceptible in sports and very significant in others like uniforms. But there's been improvement across the board.

Okay, super. I appreciate it. Thank you very much.

Thank you. And the next question comes from Hamza Mazali with Jefferies. Your line is now open.

Good morning. Thank you. John, you had spoken about outsourcing trends accelerating potentially during COVID, post-COVID. Could you maybe comment on do you see that in uniforms as well, not just food? And which verticals in food do you see that most happening given your customer conversations?

Yeah, great question. You know, first of all, Ian, In the food service business, we see that trend in health care and higher education especially, which obviously are still the business units that have the highest degree of self-op opportunity yet. So significant conversion, we believe, in both health care and in higher education, major universities. You know, Purdue is a great example of that, the win at Purdue. is a self-op conversion of their retail operations. And we see more and more universities beginning to have that dialogue around is it right to go ahead and finally outsource, particularly given this environment. And so we see that trend accelerating in healthcare, higher education. On the uniform side, we do believe that this represents an opportunity that that customers that have a need for safer, more hygienic solutions will turn to a professional provider as opposed to having their employees wash or launder their own uniforms. So we do believe that there is opportunity there as a result of the need for more hygienic solutions. We have an opportunity or we have a service model that can provide very strong assurances in terms of cleanliness and hygiene and we think companies will be looking for that. As I mentioned earlier, one of the areas that we think is of significant potential is the medical services business. As you know, people now are wearing barrier gowns in virtually every situation in healthcare, whether it be dental offices or clinics or whatever, in order to provide some personal protection. So those are things that we can both manufacture and can launder, and so we see that that is an opportunity as well for uniformed services.

Got it. And just my, thank you, and just my follow-up question, pre-COVID, you know, you obviously had a U.S. turnaround plan and, you know, you talked about net new business being better, retention being better. You know, what was your timeline originally for turning around the U.S. business and And, you know, post-COVID, clearly it's delayed. But just curious, pre-COVID, how were you thinking about the turnaround? And, you know, what's the best way to measure milestones in terms of success of turnaround? Obviously, it's being masked by COVID. Is the best way just to look at your numbers versus Compass? Or how would you tell investors to sort of judge the U.S. turnaround today?

Yeah, well, first of all, I would say, you know, judge it. There were two key elements to the turnaround. The key elements were improving retention, getting the retention rate back up to historic levels of Aramark, and that's an area that we have seen already significant improvement. And the net new business, so the growth numbers, so that we would be winning a greater share of those new opportunities going forward. And to do that, We implemented a number of changes, the reorganizations, the addition of sales management resources throughout the enterprise. And, you know, we really began that process in, you know, late fall, early winter as we've looked to reorganize sales forces and add those resources. So, you know, I would say the two benchmarks are retention and new business wins. I think we've had some really good early successes across both of those goals, and we continue to see improvement. The strong sales pipeline and what I consider to be the very strong leadership in those businesses I believe will deliver results over the medium term. I think initially we talked about the fact that it took sales managers somewhere between 18 to 24 months to come up to speed. in those businesses like healthcare, higher ed, business dining, as they got to know their territories. And so, you know, I think that that is still the timeframe that we're looking at for continued improvement. I think the opportunities are accelerating, and I'm very pleased by the quality of our team. So I think that we'll continue to see improvement in those two benchmarks, and that we'll be demonstrating, you know, that the strategy is working and is – and that we're making progress.

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Mr. John Zillmer for any closing remarks.

Terrific. And thank you, everybody, for joining us this morning. Really appreciate the support of all of you. And, again, I'd like to extend my thanks to all the Aramark associates around the world for the hard work. and the dedication that they show this organization every day. I am very proud of all of you, and thank you again. So that ends our call. Thank you.

Thank you for participating. This concludes today's conference. You may now disconnect.