Q1 2020 Earnings Call

Welcome to Air remarks, first quarter 2020 earnings results Conference call. My name is Paul I'd never be your operator for today's call. At this time I would like to inform you that this conference is being recorded or rebroadcast and that all participants are in listen only mode. We well open the conference call for questions.

At the conclusion of the company's remarks.

Perhaps care Associates, Vice President capital markets, and Investor Relations will kick off today's call is standing in for Sally's Castle, well, it's unfortunately, I'm going to weather Mr. Scott Scott. Please proceed.

Thank you and welcome to Aramarks first quarter fiscal 2020 earnings conference call and webcast. This morning, we will have to pleasure of hearing from our Chief Executive Officer, John job as well as our new Chief Financial Officer, Tom on drops who were excited to have joined US the error Mark just about four weeks ago. As a reminder, our notice regarding forward looking statements is.

Included in our press release, this morning, which can be found on our website and in our earnings FIDAC. During this call. We will be making comments that are forward looking actual results may differ materially from those expressed or implied as it was all the various risks uncertainties and important factors, including those discussed in the risk factors and DNA and other sections of our.

Annual report on form 10-K, and our SEC filings.

Additionally, we will be discussing certain non-GAAP financial measures. You every year GAAP results include the impact of the divestiture of the health care technologies business that was completed in the first quarter last year as well some miscellaneous unusual organizational items. A reconciliation of these items to U.S. gap can be found in this mornings press release as wells on our website.

With that I will talk turn the call over to John.

Thank you rich and good morning, everyone.

Look forward to spending time with you today to share an update on the progress were making across the company to accelerate revenue growth and unlock the economic potential of the business.

So I continue my visits with our operations leaders and client partners I'm more encouraged than ever about air remarks strong DNA.

Unified commitment to service quality and innovation that is amplified by the integrity and passion of our team.

This powerful mindset gives me confidence in our dynamic path forward as we create long term value for the company and all of our stakeholders.

Im very pleased to welcome Tom on dropped to the team as our remarks, new CFO appointed about four weeks ago. We're extremely fortunate to have Tom a highway season food service and hospitality industry veteran who is not only a financial expert but also provides valued insights as a former chief development officer, and Chief strategy Officer in a few minutes Tom will.

Surface initial observations from our financial results along with his immediate priorities.

I also want to take this opportunity to thank Steve Bramlage for his numerous contribution to start as five year tenure with there are mark as well as for providing his expertise and guidance. During this transition period, when we were Steve all the best.

Turning to our financial performance the quarter materialized as expected and reflects the early actions of our reinvestment for accelerated revenue growth. While we saw organic revenue growth across all segments. There is ample opportunity ahead to drive additional performance.

As we work to elevate the company's hospitality culture and drive future growth across the business, we realigned resources specifically in the areas of client retention sales marketing finance and human resources to more directly support our field organization for serve our clients and then customers.

Mark Bruno are respected leader at Arrow, Mark Who's been with the company 26 years after rising through the ranks has been promoted to chief operating officer use food and facilities as someone who originally hired market era, Mark I'm very confident as their ability to inspire the teams and drive performance.

In addition, dairy Crompton has returned to air Mark as President of business, starting dairy is a highly respected industry leader with more than two decades of prior experience with our mark, including serving as president of business dining and healthcare hospitality.

I firmly believe our leadership changes, but also include the recent appointment of John or a bona to oversee our global supply chain and group purchasing organization, but I mentioned on our last earnings call combined with a talented teams already in place create favorable catalysts for the business, we've already begun to recognize John's influence on our supply.

James strategies, as we implement customized and differentiated experiences for clients that complement our productivity and product quality enhancement initiatives. John in the team are actively strengthening and leveraging our global spend pools conducting comprehensive reviews of targeted product categories.

Refining our broad line distribution programs and extending our procurement scale and innovative forms including beyond our traditional touch points.

We have commenced our reinvestment in the business funded by the approximately $35 million and further synergy capture for the year vendor of Indra and Ameriprise to integrations.

Our spend today includes more field based resources for new account sales efforts and client retention as well as establishing resources to actively pursue adjacent business opportunities that further serve our clients' needs.

We anticipate continuing to realign resources and add where necessary throughout the balance of the year, particularly in the second quarter to ensure we are well positioned for the opportunities ahead.

As part of our work to reignite the hospitality mindset across the portfolio. We are actively creating customized dining experiences that meet our clients partners unique needs and preferences I'm very pleased with the early progress of this approach, but has already resulted in several new and expanded relationships.

I continue to be confident in the company's long term prospects and just a few short months. We've mobilized several key components of our focused plan to unlock the economic potential of the business.

This approach has quickly being adopted by our sales and operations leaders in fact, a few weeks ago I participated in our global sales meeting the excitement the energy and commitment of the team reinforce my enthusiasm in the extensive runway we have ahead.

Before I turn it over to Tom Some of you have asked about our business in China, given what all of US are seeing unfold with the Corona virus.

First and foremost we're focused on ensuring the safety of our employees on the clients. We serve broadly speaking China represents about 2% of our total company business, primarily in healthcare with minimal presence in new Han region. We are monitoring the situation daily and we're in constant contact with our Chinese leadership team.

Now I'd like to turn the call over to Tom to share his initial observations and insights on the Companys financial performance.

Thank you John.

To be air and add the chance or preview.

Well I've only been a part of the company for a short time, it's already clear that Theres, a great deal of talent within the organization and a genuine enthusiasm for the future prospects of anymore.

I look forward to partnering with John the board and our business teams to position resources to best serve our clients drive disciplined revenue growth and strengthen our capital structure for added financial flexibility.

As John mentioned the quarter materialized as expected and reflects the early actions of the commitment to reinvest in hospitality culture and support future revenue growth.

In the first quarter organic revenue grew 1.6% compared to the prior year with increases delivered across all segments.

US food and facilities posted a 0.9% increase in organic revenue backed by solid base business growth in healthcare and sports leisure and corrections, partially offset by negative net new business and education.

Reiterating John's point earlier Theres ample opportunity in the year ahead to drive topline performance.

International grew organic revenue a healthy 3.2% despite the unfavorable impact of the strategic exit of noncore custodial accounts in Europe late last year.

With notable performance also delivered in South America, overcoming the social unrest in Chile.

Uniform shut balance in the quarter growing organic revenue, 2.5% from pricing and volume increases.

I also remaining focused on increasing adjacency services to the additional for additional resort revenue opportunities.

Turning to adjusted operating income in the quarter constant currency Allied was down 2% compared to the prior year.

Ally in us food and facilities declined 11% on a constant currency basis.

Primarily as a result of actions to accelerate growth.

Negative net new business and education.

And an increase in medical insurance claim costs.

And lower income from possessor interest versus the prior year.

International grew constant currency, a lot, 43% due to the strategic strategic exit of the noncore facilities accounts in Europe as well as the timing of incentive based compensation in the prior year.

Uniforms increase constant currency ally by 2% over the prior year as productivity improvements and operations.

And the anticipated synergies from Ameriprise were partially offset by investment in Salesforce resources and training.

Adjusted EPS was six two sets for the quarter, which was flat to the prior year on a constant currency basis.

This was the result of a slight decrease in constant currency hail I just outlined.

Offset by the benefit of reduced interest expense and a lower adjusted effective tax rate in the quarter.

And free cash flow of negative 405 million was $88 million less than the same period last year due primarily to the timing of incentive based compensation payments compared to the prior year and special contributions to employee retirement plans this year.

These outflows were partially offset by slightly lower quarter over quarter capital expenditures.

A reminder, that free cash flow has historically negative in the first quarter due to the seasonality of the business.

The capital structure continues to strengthen and is an area of focus hand opportunity.

The company reduced its net debt position by $221 million in the quarter.

And the leverage ratio remained at 4.2 times.

And finally with an as expected first quarter behind us the outlook for fiscal 2020 on a 52 week basis provided during the last earnings call remains unchanged.

Earlier, John asked me to share my immediate priorities. So let me wrap up with that before turning the call back over to him.

Over the next few quarters I plan to focus my time on five areas.

Number one growth.

I will support the investment to increase sales resources across all business lines and lean on my previous experience to help reinforce the sales process and implement Rick reporting tools to drive accountability and increased close rates on new business.

Number two ownership and retention.

I will work with John in the senior operating teams to continue to identify opportunities to invest in field level hospitality culinary resources training merchandising and marketing programs and help implement the appropriate level of decentralization tumor to promote account ownership by unit managers and improved client retention.

Number three procurement.

I look forward to working with John or Bono and his team to identify ways to grow the avenger business, bringing value and savings to air marks clients and GPL customers.

Number four g. today.

Why up while I believe that accompany can't cut its way to greatness.

We'll work with the businesses and corporate teams to ensure that gene at $8 are invested in the right places and we are fit for purpose to best support our field associates and clients.

And lastly, free cash flow.

I will look to review and implement a series of tested working capital initiatives to improve free cash flow reduce debt and provide financial flexibility to support client investment opportunities and enable us to execute a disciplined strategic M&A program.

While appreciating the immediate work ahead of us I'm confident that we will overtime execute on John's vision to provide great service to our customers and position era Mark for sustained excellence.

Look forward to spending time with many of you in the coming months.

John.

Thanks, Tom I appreciate your insightful perspective, and know that your financial industry expertise will be an invaluable asset to us we propel the company forward.

Before we have the opportunity to take your questions. I also want to thank our associates across the globe for their extraordinary focused on serving our customers and growing the business and to offer my congratulations to the Kansas City achieves our customer for a great season and their Super Bowl went on Sunday.

And now we'd like to go ahead ticket.

And take your questions.

Thank you.

We'll now begin the question and answer session. If you'd have a question. Please press Star then one on your Touchtone phone if you wish to move from the Q. Please press the parts I know the hash key if you are using a speaker phone you may need to pickup the handset first speak for question and then numbers in order to accommodate participants in the.

Question Q. Please initially limit yourself to one question and one follow up.

And our first question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Okay, great. Thank you very much.

Hey, Matt Hi varies.

Maybe you could also maybe brought in.

The conversation talk about some of the experiences you had.

Sure.

Maybe just Mcclatchy best practices, you will bring to our market. Thanks.

We're very sorry. Your your question cut out several times to June would you mind repeating it.

Yes, sorry.

The question Mr.

Maybe to talk about.

The financing focused on maybe touch about your expansion that you had at your last shops.

You'll kind of leads those in what you're doing lower margin was five areas will focus on well, maybe just talk about some best practices that youve.

Well that you've been stable. Thanks.

Hum.

I mean, it's.

Hey, it's great to be here.

Right.

Sure it bring in 25 years of experience to the.

To the business.

John was very persuasive in laying out his vision to me is a tough guy to say no too so.

It's great to be back in the industry.

And Eric has such a great history.

So I was excited by John Division and the chance to help the company sort of reset its priorities and take a more balanced approach to running the business.

Did layout.

The priorities that I have so.

I want to really repeat those I think I would mention that they were listed in a specific priority.

Growth is going to come first we are very focused on that.

And John its initial few months is priority has been there and I think everything else sort of falls from there. So in terms of best practice.

You've got to be able to grow the business you've got to create momentum from the top of the personnel.

Have at work its way down.

So that will certainly be the priority.

And we won't lose I think some really good things.

I have been put in place here some good disciplines.

Cost culture, but I think again, it's just trying to bring the balance back to the.

To the forward looking.

Execution of the business.

Okay. Thanks, and then just a question for John just more broadly speaking.

How do you feel about your your brand lineup.

What you have what you may need to add or maybe some areas that you might need to add and are we kind of happened is like what you had a landmark has thanks.

Thank you well first of all I'm I'm.

I'm very confident in our ability to compete as one era mark that as an organization we have the capability of the technology.

The branded concepts that our customers want.

And.

And where we don't have a brand that serves a particular needs will develop and implement one appropriately for each individual customer I've always had a firm belief that customized solutions are they are the solution set that burst best serves the needs of our of our clients and our customers and so I don't have an hour.

Out of the box solution for any customer in any part of this industry I think.

We have in higher education, we have harvests table Rehabs simple spoon Nbn I.

We have lifeworks, we have a number of premium brands, we can bring to bear when that serves the clients interests.

And we can also compete as one era mark against the vast majority of our customers.

And clients.

I also believe that will do or whatever is necessary to compete aggressively to win new business.

And will partner with branded concepts will partner with restaurant operators will partner with.

Perspective organizations in a way that serves our clients best interests.

And our next question comes from Kevin Mcveigh from Credit Suisse. Please go ahead.

Great. Thank you Hey.

Got it Tom is growth initiatives Super helpful. Can you give us a sense it may be hard but just.

Like the kind of current trajectory, 2% to 4% type organic longer term.

What can that ultimately become and how much of it is kind of close rate versus retention because it looks like to kind of the first two or revenue second two were kind of cost and just any thoughts on that organic growth longer term and what that coming from a margin perspective.

I think the.

Higher is that is that is the additional hatch write down not to the right.

And then if I get it.

Yes, it's hard to say.

It really at the moment I think I think the overall industry.

Yeah look through sort of the market structure, the global opportunity across all business lines that geographies.

That aramark serves as a theres a ton of opportunity.

So the growth rate should be higher.

It can it be.

Mid single digits I think is.

He is probably the.

The goal over over the course of time.

I think thats thats quite doable, but there's work to to be done to do it right now to talk about fit for purpose. So I don't think we're there yet.

It will take time and you can't put salespeople in.

Today, and expect them to to make an impact tomorrow.

But but we will get there.

Turn to the margin impact.

We'll we'll be disciplined about that growth again in the market opportunity as our great enough.

And there is enough.

Available market out there that we don't have two elements, but as it has been said many times over the years in this industry just.

Beat each other up so we'll be disciplined and thoughtful with our growth and so I think the margin will progress.

And I think that that should be the goal. If we if we can't strike a balanced approach to growing the top and bottom line.

We're not really doing our job.

Yes, I would add just a couple of comments Kevin.

I think areas, where you said historically and we want to improve our retention rates and we want to grow the and we want to grow the base business as well as saw new accounts on all three elements are important for that growth trajectory and we have opportunities to improve the level of service to our customers to help grow the base business. So we have increased.

Stomach share.

In the accounts that we already serve so we increased participation rates and increase check averages which leads to further growth.

We believe that we are kind of a historic level of retention inside the company right now.

And we think we had opportunity to improve it so adding 100 basis points to retention would dramatically altered the trajectory of the.

Business going forward, and we think we have that opportunity and as Tom said to improve closure rates in the in the business as we sell new account. So we've got three levers we're working against all three of them.

Awesome, Okay I'll hop back in thank you so much.

Thank you.

Our next question comes from Andrew Steinerman from Jpmorgan. Please go ahead.

Hi, Andrew I wanted to know if organic revenue growth should progress.

Throughout the year, particularly thinking about second quarter as I look at slide seven it doesn't have that little graph that was in the last slide deck that sort of had a line up into the right to give you a sense of quarterly cadence.

Hi.

I hate to Andrew get into sort of quarter by quarter detail.

I think talked historically about it progressing throughout the year I think we still feel confident about that if.

Start to finish so to speak so we fully expect to have.

Good solid momentum going into to fiscal 21.

But within.

The second third fourth quarters, we see a progression.

Yes.

Okay.

Hi, John sorry.

Sorry, I was just going to add.

The.

You have the seasonality kind of occurring in the business.

You have the ramp up of the National parks, and the and the sports Entertainment business that occurs.

Third and fourth quarter, and second and third quarter, especially on the sports side. So.

It's hard to really hard to really.

Kind of.

Delineating the quarter over quarter growth as you know the selling season at higher education tends to be in spring. So.

Too early to make a call on what the sales hit rate will be in what the closure rate will be so.

We're working very aggressively to to move those numbers I will have better visibility here and probably the next quarter.

And the drag from the custodial purging contracts and Europe is now fully in the numbers as a first quarter right.

Yes, Thats correct.

Okay. Thank you.

Our next question comes from Toni Kaplan from Morgan Stanley. Please go ahead.

Thank you.

This is for Tom just a follow up on I think your first question.

But just given your prior experience at one of their remarks mean.

Please competitors just curious on any initial thoughts on noticeable differences between the two organization.

I guess, what you think.

Well, how our market growth closer to what that competitors and during his time.

Yes.

Well a cup is a great business air Mark is a great business.

So that's probably as close as I'll get to a comparison.

I would I know is there is no structural difference between the companies, they're similar but different.

I think roughly 25% accomplices business.

As in lines of service or geographies that remarks, not ended and the same work sort of the other way so.

The comparisons are a little different.

But I understand the need or or people's desire for benchmarks.

But our goal at our focus is really going to be on being the best we can be and I know that sounds like a cliche.

But we want to grow the topline at an accelerated rate.

I want to progress the margin and we want to deliver free cash flow increases.

If we do that we're going to deliver for our shareholders.

Regardless of what any of our competition does so that's really our focus.

Well look up one day and sort of see where we are in a comparison way.

But thats that's could start what we're after we're after serving our clients and served our shareholders.

And doing that with the early experiences that John and I haven't and a really really solid management team has that's in place and the town's put in place.

That's helpful and then my follow up.

Do you anticipate any changes to the.

These capital allocation policy.

And many more or less in the focus.

Hi, how are you thinking about the Korean buyback authorization, just any thoughts around capital allocation.

Sure.

A bit early to to sort of.

Definitively opine on it but.

I do know in a general sense that our first priority with free cash flow is going.

To be too.

Reinvest in the business of take the opportunities we tend to support growth.

[music].

M&A on a disciplined and strategic.

Tuck in basis would be the second.

And then if.

And and reducing debt of course.

So once those three things are sort of evaluated and we look at.

Other options for the cash but.

I'll get a little deeper into that as I go ahead.

Certainly.

Ill give a clearer view on on the set priorities as we get into the year.

Thank you.

Our next question comes from Gary Bisbee from Bank of America. Please go ahead.

Hey, guys. This is actually Jay and on for Gary today.

Okay.

Just wondering quickly on the GPO, what's the longer term road map, there that going to be an M&A focus or I guess internal growth, what's what's the longer term plan.

Yes, I think this is John.

I think you hit both elements I, we're going to work very hard to grow the purchase spend.

By selling those services to third parties.

And to continue to expand our relationship with our partners.

In that business. So there's definitely inorganic opportunity. There. We'll also look to bolt on acquisitions and GPO space that will increase our spend pool.

Yeah and.

There are various opportunities.

To do that.

We will primarily be focused on serving both the needs of our existing.

Business as well.

And really.

Getting the synergies out of that combination of our purchase spend as core arrow Mark.

And the GPO spend as well so we still have plenty of plenty of earnings improvement opportunity on both sides.

Okay, Great and then for that 30 to 40 million incremental spend this year did I hear you say that was primarily going to occur in Q2 or like what what's the cadence for the remainder of the year.

Yes, we have basically we've already begun investing we've begun hiring salespeople throughout the throughout the businesses targeted on those businesses that we revpas that we believe had the best.

Growth characteristics and our best opportunities.

Reform services has made significant hires over the course of the year already and will continue to bring on additional people primarily focused on adjacent on adjacent opportunities.

First a restaurant services and the like.

Bring those sales managers on first.

Because those represent significant margin opportunities and we have a.

Great base of business to sell against than our existing customers and potential new customers. So we'll be spending that we've already begun spending those resources we've added resources in.

The various growth organizations.

And we'll continue to ramp up through the balance of the year. It's our belief that we will spend that entire amount at some point during the year, but it really depends on the quality of the people that were able to recruit developing and higher.

And the cadence will really be determined by that by the availability of quality quality candidates.

I'd just add on the on the sales.

Side and sort of the growth expectation that the different lines of business all have different sales cycles.

And so we've tried to.

John as tried to to add across those different sales cycles. So for instance uniforms refreshment services.

Sort of be and I have shorter.

Sales cycles, Hello to contract so to speak add so the impact could be felt a little sooner from those hires.

Healthcare education.

Certainly at Park Sports Entertainment, they have long multi year.

Sales cycles, but if you don't start doing the work building relationships today.

Never grow the business. So there are some investments that will will will pay off.

More in the near term others that will be multiyear payoffs.

That makes sense. Thank you.

Our next question comes from Manav Patnaik from Barclays. Please go ahead.

Hi, This is actually Greg calling on from.

Just wanted to dig in on the uniform business a bit more.

I think last quarter. It may have been a little early to talk about it and maybe some of the commentary already about investments give some indication on how you're thinking about that business, but just hoping to get some color on how you're thinking about our mark competitive positioning there and an opportunity going forward.

Sure.

This is John.

First of all I will tell you that I spent I've spent a significant amount of time inside the uniform business over the course of the last.

Four months been extraordinarily impressed by our operating team and the strategy is they've laid out.

For the organization the opportunities so they have in front of them in terms of improving the growth rate.

Improving margin.

As I said in our last call My primary focus who is going to be on.

Looking at ways to improve the operating results in that business.

And.

And looking at the strategic investment opportunities that we have inside of uniform services.

The board.

Has not taken up any any discussion with respect to strategic alternatives and I don't anticipate doing that.

In the near term I'm really focused on improving the core business.

It operates at a at a very good margin.

And and we've got a great team running against it.

They have worked very hard to realize the synergies of Ameriprise and are undergoing.

Significant strategic.

Implementations with respect to the rounder route accountability system, which will have dramatic impact with respect to I think our ability to operate and report on business.

And so we're really focused on those efforts right now, but I will tell you. The time that I've spent with the Burbank team was extraordinary and really really like the business and think that there. They are really focused on the right things.

Very helpful and then maybe on the food services side.

Just curious also to get your perspective on the facilities side, because thats I guess, a piece that has kind of differing views among the big catering players on on how active to be in that space. So just just hoping to get your view on on how facilities fits with the core food services offering. Thanks.

Yeah, you bet.

First of all we have we have two different facilities businesses on the health care side, the facilities businesses integrated along with our.

Foodservice operations, because it's truly an integrated system sale and so that business is aligned in that organization and very focused on serving the total needs of the healthcare system in the healthcare customer and then in the other businesses facilities are stood up as a standalone business, providing services to our wide range of customers.

Both in higher education, and and business dining.

We like to business operates at good margins, we've got us very strong team working against that business.

We see it as an opportunity to continue to grow we've got some very strong technical capabilities and a very strong portfolio of existing customers.

We also have significant opportunity there there are it is all look very large segment.

And we have a very specific business unit focused on growing that segment. So we like it or not we're not going to shy away from it.

And and we have people really focused on on doing the right things in that in that business.

And our next question comes from Seth Weber from RBC Capital markets. Please go ahead and good morning.

Maybe similar question, but on the educational business can you just talked about.

The headwinds that you're seeing near and.

What what what the plan is to kind of turn that business more positive and when I know, it's kind of a long cycle business, but how are you thinking about the turn that could happen in education. Thanks.

Yes, that's that's absolutely true it is a long cycle selling business.

And we are very focused on that selling season right now.

As you would as you would guess.

We think the first of all were number one in that business. We have a very strong position and we think we have certainly are right to win.

I think that business was affected by the decisions over the last few years to cut resources and decentralized resources.

So we have appropriately moved resources back into the business to be focused on serving those unique customers in developing.

Portfolio solutions that really that really serves to higher education marketplace more effectively so.

I think the Downstreaming of those resources the repositioning of them. If you will into higher education will help to accelerate that change.

We've got a very aggressive.

Team of sales leaders in that marketplace and a good operating and good operating leadership.

And there are a couple of fundamental issues inside of higher education that I think all companies will struggle with over a period of time like lower enrollments and in certain universities.

And and Thats, a headwind that will need to that will need to work through we have a number of customized programs develop to improve the meal plan take up by freshman and the re adoption of meal plans by upperclassman.

Focused on new marketing initiatives to go ahead and have an impact on that as well so were.

It's not a single solution kind of change it is approaching the marketplace with multiple solutions.

And I think that.

That will have a very significant impact in the very near term on that business unit.

So you think that could we could see a positive turn.

By the end of by the end of fiscal 20.

Absolutely I think we can I think we're going to absolutely see a positive turn in our new account.

Acquisition rate and our retention rates, whether that will translate immediately to topline.

Sales growth.

In this fiscal year is an open question remember when you sell into account you're opening in the fall. So you'll have one period of new business implemented in this fiscal year. So you will see a turn in the success.

But not necessarily an improvement in the numbers until we get into next year.

Okay, and then if I could just get a clarification John in your prepared remarks, I think you used the term going after business aggressively.

Doing whatever it takes kind of thing I mean, I, just want to understand where pricing kind of comes in in your.

In in that framework I understand there's a lot of initiatives to help margin, but is pricing going to be.

Lever that you use to go after new business. Thanks.

Well I will answer I'll answer it this way, we're going to compete on a very disciplined.

Basis.

And we are not going to use price as a lever to sell new accounts, we're going to provide services to our customers that are are designed to fit their needs and expectations.

And we will do it.

On a basis that is accretive to margins and to grow the business appropriately and on a balanced basis, we are not.

We're not going to lower our financial expectations to sell new accounts.

Okay. Thank you very much.

Our next question comes from.

Sorry from Jefferies. Please go ahead.

Hi, good morning, Thank you.

My first question is just around how you how are you thinking about timeframe.

For the turnaround on organic growth.

Five years is it three years in as part of that.

I know you talked a lot about net new business.

Retention, adding salespeople, but are you comfortable that theres nothing structural in your product or any heavy lifting that you have to undo from sort of prior management teams investments and you know standardization technology.

And et cetera.

Yes.

Both answered every time you go ahead, so I guess as I mentioned before I don't think Theres anything structural.

It's sort of an execution, it's at approach to selling new business, it's a resource to selling new business.

Making it a priority.

Making retention of priority.

But in terms of a client offer.

Just that hospitality.

Culture.

The focus on on serving and satisfying the customer and client that's all there.

I don't believe it's going to take.

Additional capex in any category either for clients or within the business.

To grow.

This is just about a priority prioritization and a reinvestment in feed on the street.

And then letting as I mentioned before.

Those businesses grow, but the albeit at different pace based on.

The lifecycle or the sales cycle. So I probably ask your question is can be less than five years, but but more than one quarter.

Yes, I would.

Or did very well known is going to be less than five years and more than one quarter I think.

We definitely have.

Strong pathway and trajectory towards significantly improving the organic growth rate.

What I would characterize the medium term the we have expectations to improve the growth rate this year and to continue to improve it next year as we've made the strategic investments in new selling resources, we expect.

You know that many of them will be productive this year in some of the businesses and that the longer cycle sales will begin to really have an impact in 2021.

Particularly in higher education.

So I don't see this was a multiyear effort I also don't see it as a.

Multiyear investment requirements, we believe that.

That will can we have the resources.

That we need to operate the business.

Going forward that we can make the use we've made the strategic investment this year.

And we can add these resources and really have an impact on the business across all three of those growth.

Paradigms, if you will book based business growth retention and new account sales.

So we see this as a strategy that will accelerate.

Going into the end of this year and will continue going into next year as well.

That's very helpful. My my follow up question on uniform.

You talked about.

You know sort of no strategic options at this stage.

And at the same time, you've talked about investing in adjacent sees in that business and turning it around.

First of all maybe talk about is there any synergy in uniform and the foodservice business.

I guess, you're the only company that owns a uniform asset and then too.

Is the uniform business or turn around two so are you executing on two separate turnarounds or is the uniform business just you know.

Investing in first stayed a little bit.

Yes, I would I would not characterize uniform business as a turnaround business I would say, it's a business that that performs.

Very well in the marketplace. It operates in that there are some.

Differences in the structure of the business between Austin, our competitors that we're working to that we're working to close.

Both through technology implementations, and as ER and by scaling up the organization through the.

Our pride acquisition.

The route accounting system is one area, where that were that acquisition, we believe will pay very significant dividends.

So I see it as a business that has significant improvement potential.

Not as a turnaround business.

They operate very effectively.

Given the assets that they have and given the resources that they have so the strategic investments in uniforms is really about creating additional runway.

Adding the adjacent to services like first aid.

We've already built that business very significantly in a very short period of time. It comes at very good margins.

It is very accretive and so the investment in those sales managers, we think will drive very significant returns.

In that business so.

Again, I don't see it as a turnaround I see it as significant improvement potential.

I think I'd add that.

While it doesn't have that sort of traditional synergy definition.

Or overlap with the the other side of the business, it's a very familiar business to me out.

I have not been exposed to it in my career and and walking it feels very familiar it's a b to b business.

Operates very similarly to the food and service side from a contract standpoint from a business relationship standpoint retention.

All those things are very familiar so I think for both John and I, it's not very difficult business to manage got an excellent.

Operating the management team.

And as John said, it's Scott good financial metrics, so loan I'm excited to get into it a bit more.

And our next question comes from Andrew Wittmann from Baird. Please go ahead.

Great. Thank you for taking my questions.

I'm going to keep going to uniforms little bit here. So maybe the competitors have cited some concerns about some softness in their end markets.

That have held them back from a little bit more optimistic on their own guidance I was wondering if you guys have seen any.

Pockets of weakness either by end market or geographically that would be notable.

I would tell you I don't I don't see that as I look at the business.

I think.

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In general they're experiencing good growth across all the geography use.

And.

I don't see any particular segment weakness.

We do serve.

We have significant customers in the automotive sector, we have significant customers across such a wide variety of customers and clients.

I think we're we're somewhat.

Insulated from any specific industries.

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Downturn, if you will or softness, but I would tell you from both the geographic perspective.

And a customer perspective.

We're confident in the trajectory for that business this year.

Great and then just a follow up question here I just wanted to try to get.

A sense of your.

Your goals for the margin profile I mean.

Two years ago company called Gene case services.

Was generating.

Operating margins in the 12% range before they got taken up by sentence that was on less than $1 billion of revenue you guys are obviously more than twice the size of that.

Is the move to.

12 or beyond is that the right way to think about what your business is capable of.

Or how can you put the at the margin potential in contact for US as you Affectuate Your plan.

Yes, I think it's certainly we we aspire.

To that level of margin attainment.

I think that over a period of time it is attainable, particularly as we.

Scale up the adjacent to use.

The real difference between us and send tosh.

Historically has been.

The fact that were unionized and they're not.

The fact that they've got the business that was built by building plants.

To specification as opposed to buy acquisition, which is the way we built we built the company so.

We have.

Different footprint different plants structure.

That that gives us a slightly lower lower margin profile.

But again, the the build out of the services capabilities, the adding other adjacent to services the improvement of the route accounting system.

Gives us significant headroom in terms of margin improvement potential and so thats what were focused on as I mentioned on our last call I've run multiple distribution businesses I've spent significant time inside the.

The uniform company and I'm very confident in our ability to have a significant impact on the.

On the margin potential in that business.

Great. Thanks.

Our next question comes from.

Paul Rosenbaum from Stifel. Please go ahead.

Hi, Good morning, Thank you for taking my questions Hey, John I, just wanted to ask you.

His long cycle business and you noted a number of things that are changes that are going on right now that will should impact the business more positively as time goes on.

The ones I'm noticing our strategic hiring and then kind of the routing system that you're talking about in uniforms are there other ones that you want to highlight that are already going on but people can't really you don't see the impact immediately but it's one of those things that as you put it into motion the impact and numbers become more apparent overtime.

Yes, I think that's a great question and I think really the and the actions that we've taken today have all been focused on creating that long term.

Growth potential opportunity probably the most significant action we've taken to date has been to re resource the businesses by taking.

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The the organizations that had been centralized into a center of excellence and focused on multiple businesses.

And downstreaming them back into the markets that they they serve so we've taken resources out of a center, giving them to business binding, giving them to healthcare given him to higher education.

We've put people back into the businesses.

The thing that they know and love. So they can focus on that in those individual markets and have really deep intimate understanding and deep impact on those on those businesses and I think of that we'll have a significant result over over a period of time as those leaders and those sales leaders have the opportunity to reengage with.

Customers in a much more intimate way so.

Very much behind the scenes.

Think also the strengthening of the leadership group.

Reintroduction of Gary Crompton into business dining.

Marks promotion, most or all I think terrific.

Terrific elements of contributing to the to the growth culture in the company and the focus on new account sales and customer relationships and that will have a significant impact over over a longer period of time.

Great and then.

On Compass is called the talked a little bit about weakness in Vietnam sector. In Europe is that something that you guys are noticing as well or is there anything on a macro perspective, Besides obviously stuff going on in China that you want to call out on this call that people should be aware of.

Yes, I don't a we're not seeing that our international results are actually a very strong we don't break it down obviously by country and by segment, but we're not seeing that softness.

In the European results.

Okay, great. Thank you so much.

Thank you.

Our next question comes from Stephen Grambling from Goldman Sachs. Please go ahead.

Good morning, just a couple of quick follow ups, you talk to the synergy capture benefits in the quarter can you just elaborate on the magnitude of the capture maybe whats left as you think about the too.

Acquisitions, Ameriprise vendor and then perhaps talk to integration cost admit that may be expected going forward.

Certainly first of all we projected the synergies for the total year to be approximately $35 million between the two.

Integration between the two acquisitions, we see that materializing as expected.

I don't see any real gaps in in that realization any either on either organization seeing significant progress in a vendor atomera pride.

We did not calculate as part of the Ameriprise acquisition, the value or the benefit associated with the implementation of the route accounting system across the enterprise and we're beginning to really see that that can be.

Very significant tangible synergy benefit, but havent really quantified it yet as we've adopted it in a couple of our.

Former era, mark facilities, and our piloting and testing it and really satisfied and happy with the results that we're seeing so as we get further along in those tests will be able to quantify that theoretical benefit by that implementation, but we're already seeing very positive impacts from it.

That's great and then maybe another follow up.

On the cash flow side.

Opex this quarter looked a bit.

Lower than than typical on lower than the prior year period can you talk to the trajectory of your capex spend and it sounds like most of the investments that you're making are going to be much more PML focus and investing in sales folks versus.

Client contracts, but we've seen some of the peers starts to inch that up so if you have any thoughts around.

Client contract investment.

And how you think about evaluating those versus other opportunities. Thanks.

Sure.

The two different categories of of capital if you will to secure contracts.

Okay and contracts.

We don't particularly differentiate Tom.

It's cash out its cash to win new business.

And so we look for.

Acceptable returns for that investment and we'll continue to alone in any given quarter capex can be a bit lumpy.

Based on the opportunities.

Hopefully we are looking at a great fourth quarter.

That install of education business and that would.

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Requirement of Capex more than likely so in terms of progression I think it's best to look at sort of the full year year on year and at the moment, we're looking at the pipeline that we've got.

Sure.

Again optimistic that the opportunities are there and the and the Capex will will trend towards historical norms, and and and then into next year as well.

That's helpful. Thanks, So much best of luck is here.

Thank you.

I will now turn the call back over to Mr. Zilmer for closing remarks.

Terrific again, thanks, everybody for joining us. This morning, we look forward to conversations.

At the end of next quarter, we're very pleased with the state of the organization and I'm very pleased to have Tom sitting by my side here as we.

Move forward.

And.

Looking forward.

To a just a great results through the balance of the year. So thank you very much.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.

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Okay.

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And so.

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