Q2 2020 Earnings Call
Good morning, and welcome to Aramark second quarter 2020 earnings results Conference call. My name is for me and I will be operator for today's call. At this time I would like to inform you that this conference is being recorded for rebroadcast and then all participants are in a listen only mode. We will open the conference call for quick.
Since at the conclusion of the company's remarks.
I'll now turn the call over just the lease Carousel, Vice President Investor Relations and corporate Affairs [laughter]. So please proceed.
Thank you and welcome to era, Mark second quarter fiscal 2020 earnings conference call and webcast, certainly hope those listening or doing okay.
This morning, we won't be hearing from our Chief Executive Officer, John Zilmer as well as our Chief Financial Officer, Tom on drops.
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 risks factors M. DNA and other sections.
Of our annual report on form 10-K, and our other FCC filings.
Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U.S. gap can be found in this mornings press release as well as on our website with that I will now turn the call over to John.
Thank you police and good morning, everyone.
First and foremost I hope all of your.
And your families are safe and healthy.
I'd like to open the call what's your thoughts on reflections on the current operating environment.
Sure if your observations given the mission critical role or almost has played and we'll continue to play as a key enabler in a broader recovery and where we go from here.
We're also review our quarterly performance as well as the proactive actions, our board and management team or take into position or more to emerge that's when even stronger company.
Well I returned to Arrow Mark in October I never imagined, we would be fucking central limit a global crisis when a critical mission ahead of us.
During this pandemic or teams have worked tirelessly on the front lines with hospitals schools and other facilities, providing safe high Janet food uniforms and facility services.
Our team members, who stepped up and unimaginable ways to serve clients are countless locations.
As I shared with employs a few weeks bad news individuals are truly heroes working among your range, helping us to get pass this acute period.
As we review the business with you today, there are mortgage taking decisive actions to navigate this challenging environment, while pursuing paths to ultimately build are sustainable growth from larger organization that can particularly flourish when a pandemic is behind us.
Strategies are deep rooted in our ability to leverage a diversified and flexible business portfolio to join forces moving impactful network of World class leaders and influential partners.
To maintain strong liquidity and financial flexibility.
And to unlock the long term economic potential of the business.
We're taking time, we proactive steps to adapt the company to the current challenging environment and to further bolster our already strong financial position to that end, we recently announced an upsize offering of one and a half billion dollars senior notes and an amendment to our existing credit agreement to provide additional for financial flexibility. That's a further.
The company's already strong balance sheet as well as available cash balances.
Our proactive draw down on a revolver as a cautionary measure similar to other prominent companies.
The temporary reduction of salaries for certain executives, including the named executive officers as well as the cast retainer fee of our directors.
And other significant reductions to general corporate expenses.
I know Tom plans to share his perspective, as well as actions underway to optimize working capital and defer capital expenditures as appropriate to.
To adapt the company without compromising the business and strengthen arrow mark over the long term.
We are managing through varying degrees of closures in cancellation, so schools colleges businesses and sporting events, where the topline impact from these necessary governmental actions began in March and continues through today.
To mitigate the bottom line impact where simultaneously watching are highly variable cost structure.
In some capacity, we're operating in hard hit areas, such as education, helping to nurse students. While schools are close serving over 25 million meals across hundreds of K through 12 school districts.
Well as business and industry focused on the manufacturing and pharmaceutical sectors that remain in operation.
We are in close touch with a professional sports leagues that are currently determining the most appropriate timeline for their return, including major League baseball and important potential upcoming season for us that could represent a bridge schedule playing until late fall.
Our leisure business isn't operation in some of our larger properties, including wake Powell Pikes peak and like when old with reduced attendance and Youre somebody and Denali are currently closed.
Denali is largely accessed by I'll ask about cruise ships, where the peak period typically from June to September.
And corrections remains relatively stable as we assist clients supporting the safety and well being of this population.
Our teams in health care facilities, and other as well as uniforms or admirably managing the demand in front line care that includes foodservice cleaning and supplying keeping any for essentially roles in hospitals and other critical industries.
At healthcare facilities across the country, we've opened on site pop up grocery stores to serve as a one stop shop for doctors nurses and other hospital staff to grab necessities on their way home.
We've mobilized our emergency relief and large scale event expertise to a temporary fueled hospital operations in several cities.
And at hundreds of a central businesses state municipal facilities, we're providing safe cryogenic meals and uniforms as walls addition, additional deep cleaning and facilities services.
In international our diverse verticals across in 18 countries or a different stages of managing through their respective operations.
In Asia, where we primarily operate in health care, our business as largely recovered we've been awarded new opportunities in this region, specifically in China based on the strength of our response to the pandemic and the commitment we demonstrated to our clients.
In Canada, and Europe, most predominantly in Spain, and Germany, we've seen a slow down as a direct result of government mandated shutdowns with continued operations in health care and other essential businesses.
[noise] operations in Latin America had been affected to a lesser extent and our teams are quickly adapting to changing conditions in that region.
Broadly we are complying with country specific government protocols and expect to participate in the appropriate programs for employee support business loans tax deferrals or reimbursement. Once these programs are formalized.
As I mentioned earlier I wanted to spend a moment discussing how the company has been contributing to the pandemic response.
I'm proud and humbled by earmarks efforts.
Those of our individual team members.
We've created an effective platform that is joining forces with world class and in an influential partners to foster hospitality spirit throughout our portfolio and beyond.
Recently, we were honored to join the Debra and Leon Black family, the merits fund Robin Hood, and the American Red Cross and supporting the health care heroes at the epicenter of the pandemic in New York City.
Earmark employees are providing procurement assembly and delivery services for up to 500000 packages of shelf stable food and personal care products to staff at hospitals across the five boroughs through June.
As part of our philanthropic program, we have donated over 150000 pounds of food to local organizations and continue to provide food supplies and other resources to communities around the country.
And as you may have seen yesterday, we're supporting the American Red Cross Corona virus outbreak fund to honor the incredible healthcare workers for their hard work and sacrifice was part of the National nurses week and National Hospital week.
Uniforms has shifted certain production lines to manufacture millions of medical masks scrubs and gallons for health care providers and other critical industries. Our products are shipping to aeromar clients across the U.S. and in the health care pharmaceutical biotech medical device and other vitacost vital industries, where employees rely on these so.
Applies to perform their jobs.
As we look to the future our teams have been working to define the new more new normal across our operations.
We have developed comprehensive reopening plans, including new models for service delivery and customer engagement all designed to ensure the safest most hygienic environments.
Our diverse supply chain remained stable and largely unaffected for frontline operators clients and customers were particularly focused on assisting and pp you supply replenishment, which are uniforms team is now helping enormously to address as I just mentioned.
We're closely monitoring commodity markets and seeking appropriate appropriate entry points to mitigate any potential future volatility.
And our commitment to strong relationships with key strategic and preferred suppliers has been invaluable during this period.
Well focused on helping communities and need across the nation. We also recognize the immediate hardship. This is having on many of our employees.
Addition to offering support where we can our government affairs team is working to identify opportunities for earmarked to be of service.
Response of the pandemic and targeted stimulus that will help us provide that service earmark expects to see multiple kind of benefits under the carriers act, including employee retention tax credits payroll tax deferral and are well carry back modifications and other stimulus measures as we have every intent to fully reactivate the business.
And ultimately pursuit of the multiple growth opportunities ahead.
Well, we are managing the complexities with the current environment. We've also continued to sharpen our organizational bench strength that includes the return of Jack Donovan a respected hospitality industry veteran who was appointed president of higher education in March Jack previously spent 18 years, where there are mark holding various leadership roles, including president of high.
Our education and group President of Education, Corrections and sports and entertainment.
He also served as executive Vice President and Chief growth Officer of Univar Corporation.
We look forward to Jack's leadership and the impact it will have a one of our largest businesses.
I'm confident that with our strengthened executive team combined with our season to board and passionate employee talent earmark has the right people in place to quickly re size, our flexible business and managed through even the most challenging periods, while ensuring we will be fully prepared to perform strongly in the recovery.
With that Tom will now provide a detailed financial review of the business.
Tom.
Thank you John.
[noise] when I joined the company a few months ago I, certainly didnt expect for the world to be where it is today.
Well had to make many adjustments both personally and professionally like John I couldnt be more proud.
Earmark came around the World has responded.
Our performance in the second quarter was in line with preliminary results announced on April 22nd.
And is a testament to the flexibility of the variable cost model and diverse diversification of the business.
Our strong capital structure was further enhanced after quarter end at the recent actions that increased liquidity and amended the secured debt covenant.
Credit agreement to provide for greater flexibility.
While there was underlying growth revenue growth across the overall business in the quarter.
Organic revenue fell, 5.4% or 218 million compared to the prior year driven by an estimated 325 million impact related to cobot 19.
Yes, good facilities had inorganic revenue decline at 7.7% or 186 million compared to the prior year.
The decrease was primarily attributable to an unfavorable impact across much of the segment as John detailed.
With an estimated 225 million related to covert 19.
This impact was slightly offset by underlying net new business growth.
In business dining facilities entry solid pricing gains throughout all the U.S. businesses.
Off setting the net new business growth strong account retention and price increases across multiple regents, most notably in emerging markets.
Additionally year over year performance was unfavorably impacted by about 12 million in the quarter or the strategic exit noncore custodial counts in Europe late last fiscal year.
The uniform segment showed resilience in the quarter growing the top line, 1% compared to the prior year.
Overcoming an estimated 20 million dollar in tax from covert 19.
The positive momentum from our investment and sales resources earlier in the year.
Combined with the segments diversified client portfolio help mitigate the revenue impact to the virus.
First day in restroom services continue to perform well in the quarter.
That's the demand for clean safe and healthy work spaces increased in the current environment.
Adjusted operating income without 30% or 72 million and a quarter on a constant currency bases compared to the prior year.
With an estimated 70 million of the doubter attributable to cover 19.
This is limited impact was due to our ability quickly lex fully variable components of the P.N.L., namely cost of goods sold hourly labor and other direct you to cost.
Per se clarity wants to know that the provisions needed to fund our equity in incentive based compensation plans were significantly reduced given the impact to cope with 19.
Intruding up these provisions at the end of the quarter, they get inappropriate estimate of potential payout.
Just been included funding generated throughout the first half the year.
This action provided a bigger benefit too too and we expect to getting Q3 or two for the current level of business impact from Coby 19 remains the same.
So while a portion of the love lower equity based than incentive compensation expense and the quarter won't repeat it will be offset by the significant actions. We took at the end of the quarter and into April to reduce semi variable cost, including renegotiations acquired contracts.
Feel the management salary and other compensation adjustments.
Reduction in the general corporate expenses.
But these additional mitigating initiatives now in place would continue to expect the a wide dropped through grade to ratably improved to approximately 20% over the near term.
We believe can be managed lower their 15% over an extended period as conditions and duration war.
For turning to a detailed view A.O.L.I. performance by segment, let me add one broader point about the drop through rate.
We will continue to operate the business with a long term perspective and not to achieve a short term metric.
We have left on touched many costs required to maintain and grow the underlying business, including sales and client management resources.
If we can win new business rotated client or extended contract by carrying extra cost or making a high return capital investment we will do so in light of both near term cash management and long term value creation.
In fact is an example, we already betta benefiting from this approach as we've signed over 75 million of new business at age in Europe since February.
Due to the ever efforts of our teams to provide additional support and meet clients needs turned initial outbreak of the virus.
Now turning to analyze segment performance.
He was food and facilities declined 39% for 59 million on a constant currency basis, primarily as a result of an estimated 50 million profit impact.
Way to decode at 19.
As well as negative that new business and education.
And increased investment in sales resources to accelerate longer growth recovery.
The international segments, a wide cells, 67%.
Or 29 million on a constant currency basis.
Driven by an estimated impact of a little more than 30 million from cobin 19, slightly offset by the benefit from the strategic exit noncore facilities.
Earlier, sorry late last year in Europe.
The international operations tend to have a higher drop through rates as labor cost or less variable in the near term due to labor laws and regulations specific to each country.
Hey, why and uniforms decrees, 9% or 6 million on a constant currency basis.
That's made an impact of nearly 10 million related to cope in 19.
As well as for personal personnel costs related to sales growth initiatives.
And the interruption of operations related to damage caused by tornadoes.
Or Nashville commercial laundry facility.
He's profit decreases were somewhat offset by solid underlying do business growth.
Synergies for the <unk> acquisition.
Corporate results were 22 million favorable to prior year attributable to a reduction in equity based compensation expectations, resulting from the impact to cope with 19.
Adjusted D.P.S. was 26 cents for the quarter down 44% of the prior year on a constant currency basis.
As a result of lower adjusted operating income.
For the six month period free cash flow of negative 297 million.
163 million lasted prior year.
You do a 235 million negative change and working capital.
Accounts payable in a crude expenses.
Namely crude payroll bonus intermissions payable declined at the end of the second quarter as a result of covert 19.
Offset somewhat by a decrease in inventory and accounts receivable.
Capital expenditures slightly lower on a year over year basis.
Free cash flows historically negative in the first half of the fiscal year duty seasonality in the business with the second quarter generating positive cash flow.
In the second fiscal quarter, the company generated 108 million in positive free cash flow.
In order to appropriately position ourselves in the current environment.
We will exert near term cast discipline that includes prudent management of working capital capital expenditures, while still looking to capitalize on long term growth opportunities.
Working capital is expected to be roughly neutral once we approach a steady operating state.
Capital expenditure needs are very stable and the significant majority arise from client retention and new business opportunities.
The ability to differ this then can be negotiated in many cases without compromising the business.
We also have limited maintenance capital needs.
And then they will not be a focus in the current environment, but we were may watchful for <unk> highly accreted deals to supplement organic growth should any opportunities arise.
In the second quarter and immediately following we took proactive actions to strengthen our cash position.
Has previously announced in March.
Fully drew down our 1 billion revolver.
And subsequent to quarter and we successfully issued 1.5 billion.
Secured senior nodes.
Due in 2025.
These actions give a significant balance sheet strength during uncertain times.
In conjunction with the debt issuance, we work closely with our secured lenders to amend the credit facility covenants to provided digital flexibility.
The amendments suspends airborne senior secured debt covenant for four quarters.
From the September 2020, Porter to the June 2021 quarter.
Thereafter, the secured debt covenant will be tested using the latest quarters from calendar 2019 as needed to total four quarters.
This amendment is intended to prevent the effects of covert 19 from distorting the covenant calculations.
We're currently focused on liquidity in the near term.
D. Leveraging is still an important part of our capital allocation strategy.
And we were remain committed to paying down debt as operation stabilized.
Let me touch briefly on our gap results before concluding.
He's metrics are largely impacted by covert 19 in the same way outlined earlier.
In addition gap operating income that income and diluted earnings per share where impacted by a pre tax noncash goodwill impairment charge of 199 million.
Specifically related to our northern Europe reporting unit.
Which was driven by a change in various factors, including the discount rate used and testing and the <unk> near term growth outlook for this reporting unit.
This is the same reporting unit within that F.S.S. International segment.
That had been previously identified as having undergone additional testing for possible impairment in the 2000 1910 k.
Finally, given the rapidly changing market dynamics, we have determined to withdraw are previously stated guidance for the 2020 fiscal year.
But while there's uncertainty ahead.
I want to reinforce our belief that the company's well positioned with an experience than focus management team diversified client base <unk>.
Geographic region.
Flexible operating model as well as strong liquidity.
We believe that the demand for safe food, Hi, genic facilities cleaner uniforms, ultimately enhance the trend toward outsourcing.
Notwithstanding the clear near term disruption.
We will remain focused on this opportunity and on our strategy to fully deliver on the company's long per turn potential.
Thanks, John.
Thank you Tom It is an extraordinary time for all of us, but even in this period I'm confident that are a mark has considerable opportunities ahead with an ability to unlock significant value for shareholders.
This is a moment where experience, particularly matters and I'm extremely honored to have the opportunity to work beside such a strong and season team, who bring a deep industry knowledge, improving service and the consumer experience.
From <unk> strengthen customer relationships to added leadership from strength to significantly enhance financial flexibility.
<unk> unexpected increased demand for quality and hygiene worldwide when normal she returns.
Mark will room, <unk> will emerge with renewed purpose and resolve.
Operator, like now to open the call up for questions.
Thank you Oh now begin the question unanswered question.
I have a question please Palestine bottom line.
Phone, if you wish to be removed from Q.. Please press the pound sign or the <unk>, if you're using a speaker phone you may need to pick up the handset first before pressing them on money in order to accommodate participants in the question Q. Please initially limit yourself to one question in one file.
I first question will come from Kevin Mcsame with Credit Suisse. Please go ahead.
Great. Thanks, so much in congratulations on the execution a tough environment.
<unk> any sense of how you plan to real thin and and how they can ultimately in pop service kinda trajectory going forward, you know, obviously, where appropriate and just any sense of the kittens on that.
Oh, certainly Kevin. Thank you for the question I'm sure you know, obviously, you see a a very rapidly developing environment with multiple municipalities in spades beginning to develop their reopening strategies and you know we believe that will be.
Well positioned to go ahead and participate as as those Reopenings take place.
We've developed several new business models, you know to implement a upon reopening strategies as you would expect our employees will all be worrying appropriate P.P.N.E.S.A. Serbs or customers they'll be temperature checked every day.
Can expect the service a model will be different in locations based on the need to maintain safe from high Janicke conditions, you can expect to self serve operations will probably be.
Shuttered in the beginning and maybe for the longer term.
So that you'll you'll see more grabbing go kind some opportunities.
And will facilitate customer orders Ah both from a mobile application perspective, preorder perspective situations may exist, where customers are slotted into service times and periods to maintain a social distancing service flexibility. So.
Teams had been very actively engaged in developing these new models and where where are prepared.
Literally to customize the solution for every customer location that we operate in whether that's being an eye for higher education or or the other businesses. We operate so we feel like we've developed the appropriate plans when we're ready to engage in as soon as our customers are.
Super Helpful. And then you know I'm a uniform side, he kind of pressure at least earlier they eat cut over some manufacturing facilities. Just gives the sense of what that P.P. opportunities are and will also in the hiking signed it is it really to to <unk> currently in in where the opportunities out longer.
Yeah, absolutely you know, we we think we provide an essential service and we like to call. It cleaner salty safer in health or you know providing cleaning uniforms are safer environments, a healthier environments and the services and that we provide play right into that that need if you will.
We have a switched over production in our Mexican manufacturing operations to manufacture P.M.P.P. any equipment. As you know we've had a very strong clean room business, where that building or where we had historically <unk>, providing those kinds of services and capabilities to the pharmaceutical sector and the chip manufacturing sector. So this is.
Logical extension of that capability, and we're increasing our manufacturing capacity. So we can literally make millions of masks going forward, we see that as a both a short term.
Need for our customers and and other constituents and we also C.N. is a longer term opportunity for the organization as we expand that capability him that manufacturing capacity.
It makes you turn the sense. Thanks, so much they say.
Thank you.
<unk>. Our next question will come from Tony Kaplan with Morgan Stanley. Please go ahead.
Thank you.
Helping you could talk about how you're thinking about a longer term structural changes for the.
Post calls that 19. So for instance, how are you thinking about.
Potential for a great shift to working from home on B.N.I., maybe lower or higher add enrollments.
Changes to pre paid meal plans, just any sort of structural changes we should be thinking about and you also mentioned that benefit from greater shift outsourcing. So the positives and negatives just glad to hear your thoughts.
Yeah, absolutely yeah, it's I think it's a little early to predict what the structural changes will be I do I do believe in higher education that there will be significant demand, we're hearing more and more from our or higher edge <unk> or higher education customers about their desire to reopen in the fall and to be engaged and to make sure that.
Student experiences appropriate.
You know the the distance learning experiment, that's taken place over the last several months has been frustrating for many including educational institutions I don't think students feel like they're really getting the educational experience that they would like yeah and so there is a very high desire to go ahead and return.
To the higher at sector, and we're seeing that in both <unk>, a large institutions as well as smaller institutions. We have the opportunity I think to go ahead, and customize programs and and service methodology is to serve the needs of the students in a safe from the high genic way into sort of the needs of administration.
<unk> in a safe way. So I think we can return to a into an environment, where we can operate very very effectively.
In business and industry. It remains to be seen what you know how many employees will return to their work locations I do know that human beings are creatures of you know want to be social creatures and that working from home Oh on a temporary basis is somewhat attractive, but I think all of us have.
<unk> the desire to kind of get back into the world and we think that that will have an impact as well on decision, making in terms of bringing people back to back to work in their respective environments. We can adapt all of the locations. We operate as we as I said, we have a very flexible operating models. So we can develop.
<unk> capabilities and service methodologies to up size or downsize based on the ramp up of employees into individual location. So.
It's something we're very sensitive to something that we're working on do diligently in terms of making sure that we have the the right service models in place and and we are confident that the opportunities to to grow the business will continue and you mentioned the soft conversion.
Element, we do believe that more and more companies, who currently operate their own food service will recognize the value out of having an organization that has got that both of the breadth of capabilities as well as the the scope of opportunity or the scope of services that we can offer to go ahead and.
Potentially outsourced or services and <unk> historically, when there's been a a a significant event like this almost always soft conversion increases and we we think that that will happen now as well.
That's great.
Can you give us offensive maybe some of the recent trends in the business in April have you seen any growth rates try off and I guess, just anything around the variability around recoveries and maybe particularly sports you know if you expect that attendance and stands may return before there.
Vaccine, you know things like that as well okay.
Yeah, it's a very dynamic environment I would say, it's a little early to call to call, what's going to happen with respect to the return of sports I think the leagues are working very carefully to try to understand.
You know how to get back to operation in a way that both protects the players and the fans. So they're working through there are various ideas in various approaches. So it's really too early to make a call on when that might happen.
But we're highly confident that everybody is very very much incentive to go ahead and get back to operation as you will and so I think you know that there will be significant.
Effort against this just can't I, just can't tell when that timing may take place with respect to April results. I don't know Tom have you didn't have any do you have anything that you want to comment on.
Yeah, I think a quick look at the flash for April you know looks to be.
Oh, yeah, probably.
On a revenue basis around you know, 50% roughly down I think there's you know in the pockets that that we've we've mentioned obviously the the number of units operating a is far larger than that.
But I think that that's that's sort of the state of clay and where we see things you know.
Sort of six to six to seven weeks in.
Thank you.
Thank you know our next question comes from ends a female with Oppenheimer. Please go ahead.
Hi, great. Thank you very much <unk>.
Very good call I just wanted to your focusing on you know talking about new business <unk>.
Your aren't aren't there, especially in this entire make you know how you actually going about winning this new business and maybe John Oscars broadly since you joined maybe if you could kind of discussion you knew wins and like they've been doing this new world. Thanks.
Sure. Thank you well first of all you know I think our teams have been dedicated to this new sales effort you know from the outset and.
You know recognizing that these kinds of times present, nah not only significant challenges, but significant opportunities are people are really been focused on you know continuing to find ways to serve customers, both our existing and new customers.
Focused on you know continuing to grow the organization. That's why I think Tom mentioned in his remarks that we have not taken any action against growth focus cost buckets. If you will we're not reducing sales forces were not eliminating investments in sales technologies were really continuing to invest in those.
Areas and we have been very successful we've sold over $100 million worth of a new business.
Since February internationally, which is just a a terrific effort a significant portion of that in China.
Typically in the health care sector, but also significant wins in Germany and other.
Countries. So we're continuing to focus on the sales effort domestically. We've got some significant wins that are you know in the in the queue already that we haven't announced that we're very excited about both in the higher education space as well as the being I space. You know sorry teams are really focused on.
Renewing to grow the business.
And knowing that the company will come out of this and we want to be focused in creating that growth paradigm or reenergizing growth paradigm that we talked about all the way back in October when I joined the company. So some good wins and you know there are some very significant opportunities in the pipeline that we're working on we.
Do see customers.
<unk> slightly and deferring you know, we're obviously not in person, making presentations, but we are submitting for example of a very large healthcare opportunity. A video presentation that was recorded in each of the persons home. So I literally recorded a video in my own home to submit before they.
This presentation, so organizations recognize the imperative to continue moving forward and so we're doing that on the gross side.
Okay, Great and then just as a follow up why don't you. Just also focus on the comment about Asia I think is particularly in trying to having recovered.
What is it actually mean by recovered and then also maybe give it a little bit more color on that recovery as far as what areas did really well, which areas just are lagging and you know maybe discuss if you know the China recovery is kind of a blueprint you'd maybe see in.
The rest of the world as the rest of the world moves past quarantines. Thanks.
Yeah.
That's the that's a great question on but you know I think that's got application to much more than are just our particular business right. You know first of all China is the the area that has recovered most significantly and it particularly we operate in the health care sector, there and our business has returned.
To pre coded conditions were operating at a higher rates than we had prior to the pandemic occurring there are beginning there in <unk> several of our operations there and first of all our operations ran 24 hours a day seven days a week in China during the.
Crisis.
Our business team there are leader or our leaders in China didn't extraordinary job of responding to the the crisis and it's really a result of their efforts that let us to serve.
To sell several significant new hospital additions, including the largest operation will operate their over the course of the last couple of months, whether you know whether that represents a blueprint for recovery are around the world very hard for me to comment on that I do believe that you know the conditions in China are very different than here.
In other parts of the world.
So hard to say, but our operations are generally operating you know very very well there we've got great leadership in a team that's done an extraordinary job.
Arrow, Mark almost always in times of crisis and you see this throughout our history responds and performs a extraordinarily well under very adverse conditions on our people in China, just on a fantastic job.
Okay. Thank you very much thanks.
Thank you.
<unk> I next question comes from <unk>. Please go ahead.
Yeah mine is now <unk>.
Oh, sorry, you hear me now.
Yes for cash Lemme, how are you.
I want to start with just a couple you know cash flow in cost items are there any requirements in terms of enjoying a semesters early for the company to make any refund payments on <unk> Neil plans and then just in general about you know you talked about.
Commodity prices divorcing shortages of areas like.
Meat.
Spiking any of your costs are Daddy eat concern in terms of some of your fixed price contracts.
Ah right now we are not seeing any dislocation in our supply chain with respect to the products that we purchase and the supply availability.
Obviously, we operate under very long term agreements in have very solid supply partners. So this situation with respect to grocery store capacity and meat production is not one that's affecting us at this point in time.
And so as a general rule, where we're somewhat insulated by the by the difference between the products that we buy and the way we buy them. So right now supply chain <unk> disruption not a significant impact for us.
With respect to campus dining we we have had.
In almost every case you know we'd had discussions with our customers and our clients with respect to their intent in terms of how they will handle.
Various refunds for board plans you know we were very close to the end of the semester and had pretty much work down to the board plan. So we don't anticipate that there will be there would be a <unk> material impact from a refund that might be required of aeromar underneath those program.
And we would expect that there would be an underlying negotiation with the customer about.
You know future program costs or a modification of programs to support them, but generally we don't see it as having a material impact.
Okay. Thank you and then just one other item before the whole pandemic one of the efforts that you had to improve the humor for us because this is to rule out the routing system that American ads all other parts of the uniforms business to improve the route density you talk about progress you might have made during the quarter is it's still going.
According to the way that you wanted to do that or journey slow down over there any thoughts and costs, just just where are you with it program.
Sure It and that's a great question. It's a limo. Thank you as a matter of fact, we've continued to.
You know to work through the implementation we've modified the implementation process because as you would expect you're limiting travel and you're not having people you know going cross country to go ahead and do implementations in in locations, where they don't operate so in.
Instead of the original plan and what we've done what we've done as we've adopted a regional based plan a close into the air Pride locations, where we could go ahead and extend the capability and do the installations energy in a tighter geographical <unk> perspective, so we're continuing to make progress in the implementation work.
Continuing to see benefits from the implementation, but it's in the it's in those operations that are geographically contiguous to the existing America pride location. So we've adopted a change in implementation plan, but we're still we're still implementing if that makes sense.
Thank you.
Thank you know our next question comes from Andrew Steinerman with J.P. Morgan. Please go ahead, hi, Tom <unk> I want to jump into that 50 per cent revvy declines you've seen in the last you know kind of six or seven we kept it could make a comment by division and you ask food services indexed international and uniforms and then secondly.
You know have ravaged declines in recent weeks then last 10 that average like do the declined to feel like they've already passed the largest magnitude of declined during that period.
Yeah <unk> I.
Not really wanting to get into the the the breakdown of that at the moment you know, we're we're still sorting out having just looked at the information <unk>.
It it appears as a as a an antidote to say that that it's been pretty steady throughout the month that will come on on that.
You know obviously it was a sudden turn right at the end of March and not much has changed.
Thing going steady state for the balance of the month.
So we don't really seem much though as John referred to a lot of talk has has really bubbled up here in the last week.
In a number of places, including a business dining.
So I think pretty steady for the month would be the would be the the cajuns.
Hmm <unk> could you just say if the uniform declined to less than the food and what's <unk> services declines.
They have that.
Okay. Thank you.
Thank you now I next question will come from Gary <unk> with Bank of America. Please go ahead.
Hey, guys. This is G.A. and unfair Garrick yeah.
Okay. Just a quick question going back to that sort of knew customized.
Oh, you're going to be using just with regard to that heightened hygiene standards and probably more social distancing within the cafeteria is I mean, how do you expect us to flip through to the cost structure I guess like on a unit basis.
You know first of all I think as we ramp up operations will be ramping them up to meet the customer demand. So we will not go to 100% capacity initially as.
You know if you take an average being I location. The expectation. We believe is that they will stage employees back into the facilities. So they may start with a 30% or 40% and then stage and the men over several weeks as a as they test the the water.
If you will in terms of reopening and but in a and that I think will differ greatly by community.
You know by infection rate and various localities by the medical system and various communities. So think it'll be a wide range of activity. So our expectation is it will ramp up slowly to go ahead and meet the increase demand as it comes on board and our service programs will be designed initially with.
Lots of grabbing go you know pre packaged food product that can be delivered either at the desk for the consumer or that they can pick up from pickup stations.
Or that they can come to the cafeteria, and grab maintaining appropriate social distancing standards.
Our expectation is all of our employees will be a <unk>, we'll we'll be wearing appropriate P.P.N.E. and they will all be temperature checked every morning before they come into work so we'll be confident.
We've got a safe environment will also be engaging in very significant deep sanitation practices throughout.
Every day multiple times throughout the day, so we're conveying a very healthy hijack environment to the customer so they can feel comfortable in coming into the location. So we anticipate a ramp up over a period of time, we'll scale up our operations over that over that time period and managed to the the cost structure record.
<unk> to maintain a the appropriate levels.
So that's probably the simplest way to put it in I think it'll be different by business unit or it's going to be very very customized by location and by and by customer.
Okay, and then I just with regard to that that detrimental margin level well what do you think it's you from that 20 per cent downed 15% that that was spoken to in or at least in the back.
Yeah, I'll take a shot at that and Tom can add a color commentary is we'd like as well you know where as Tom said, we're not managing to that metric. We're managing obviously you want to be able to grow the enterprise, but we're being highly sensitive to you know this issue and.
You know today, if you know if the business begins to ramp up over the period of the month of May and June.
You know, we'll continue to manage in the in the framework that we have around that 20% level. If it if the downturn continues or it gets worse for some reason we have the flexibility to go ahead and take additional cost out that we'd haven't focused on yet because we're really focused on being able to rebuild the energy.
Prize and to respond quickly to customer demand when that time comes so we're being very careful as I said earlier not to take out growth resources not to touch the sales organization or not to touch investments that relate to the growth of the company and the capability of the company. So we're very focused on.
Very disappointed strategy here, but there are other lovers that we can poll if it if necessary and that's how we would get down to the 15% level time I don't know if you want to add anything to that.
No it as well so.
Okay. Thank you in a good luck.
Thank you.
<unk> Yeah I next question will come from Andrew went men with back. Please go ahead [noise].
[noise] great. Thanks for taking my question I only have one question because most of have been asked and answered, but I did want to let's say missed it and when they get a little bit of a sense about how you all are thinking about free cash flow, obviously had some impact shared the march quarter, but maybe maybe the best way to characterize it is maybe a range and high.
You think that the second half the year compares to the to the last your second half the year in terms of cash flows. It is it just the impact of of net income you talked about that working capital might be a source of of cash capital. Presumably this can be fewer kind of growth cutbacks needs, but if you could just help us a little bit under.
And what you guys are thinking about for free cash flow for the Bell, let's see I think that'd be helpful.
Yeah.
<unk>.
Yeah, Oh, you know a cute three not particularly strong cash flow or force historically.
And certainly the occur environments put the additional.
Pressure on on working capital in particular.
You know at at the moment so.
Two three or more management tightly managing strongly the cast conversion cycle, you know needs to level out and balance between you know A.R.A.P.N. inventory on right now there.
You know a slight increase in India. So users everybody was coming to grips with with the world.
And.
So we're balancing that out the ball, but but were you know as we get to a steady state.
We feel like we'll we'll as said before very much get to cash flow or started working capital neutral position. So.
You know when it comes that when you pulled out all the way down you got you know somewhat of a week quarter and three historically or we think well managed to <unk> neutral 80 slightly positive cash from operations.
Can get to neutral working capital.
<unk>.
We're working hard negotiating with clients looking at what can be deferred without compromising the business and then like I said, we've got limited maintenance cat back so.
I'm Gonna cute three <unk> again with the history of limited expect that to be you know a moderate use.
And Q. for really just depends on.
On higher Ed and restarting.
And and also to a degree the yes in the world.
So hard to to give you a look for the house without complete clarity yet aren't queue for but I would expect a moderate use on free cash flow in in the third quarter.
Okay, great. Thank you I'll leave it there.
Thank you know I next question will come from Manav <unk>, Yeah with Barclays. Please go ahead.
Hi, this actually I'd cry, calling and I guess on the flexible labour structure. I mean, that's always been part of the business model, but usually with better visibility into when demand pick opera flowed out. So it's just hoping to get some color on your ability to flex up the labor as as these.
Location start to open up while still maintaining the same yeah level of service look to achieve.
Yeah, that's a great question on that is.
The the terrific thing as we've been able to maintain contact with our the employees who are have been furloughed and laid off we've maintained inactive communications approach with them to keep them engaged as you know we talked about.
You know, having a recruitment operation put in place for frontline employees. So that if they were looking for employment, we could help them find additional opportunities we expect a that as the as the call up takes place.
That will see the vast majority of our employees returned to work under the conditions.
As we as we beat as we ramp up or management team. You know 100 per cent confident we'll have a great leadership team in place.
Our technical employees skilled chefs in the like you know we've been very careful to make sure that we have ongoing relationships with them and ongoing communications. So that when the time comes adult returned to to the company that they that they no one love and you know, we believe that we'll be able to ramp up.
To meet the demand again, it will be a ramped up process it'll take place over a period of time it won't be 100 per cent call back for everybody. It right at the beginning it'll depend on each individual location and and the business model, but keep in mind many of our businesses you know higher education.
Through 12, basically or furloughed during the summertime to begin with so this is those are groups of employees are very used to this as part of the process and the way they on the way they.
Live their lives. So we believe that will be able to maintain our appropriate labor standards that we'll get the people back that we need to have back to meet the customer demand.
Yeah that makes sense and then just given that when these locations. Okay. I imagine that's gonna be at greater focus on cleanliness and hygiene across heats up cases, it's wondering about.
Actual opportunity on that facility services side to answer for some of that that yep. That's a that's a great question as well you know we do we do think it's very significant opportunity.
You know we've developed protocols to put in place and all of our locations that are arrow Mark responsibilities and so we will have.
You know very significant deep cleaning and high Genex standards in all of her operations to give the customer the strongest sense of safety and security and wellbeing and and we have a very strong capabilities that we can sell to our customers who are looking to our clients who are looking to create that kind of an environment for their employees.
We think there will be significant demand for enhanced sanitation and security and we've got all the all the right protocols and all the right sales models in place in our in our actively beginning to have dialogues with our customers about that about that opportunity. So we do see it as something that.
Has significant potential for us.
Thank you now our next question only one now moved to have them design with Jeffrey's. Please go to.
<unk>. Good morning. Thank you My my first question and I think John you alluded to this I think several times, but.
How are you approaching the focus on on the U.S. turned around just given the covert disruption I know you mentioned the investments are not being sort of how the back is there anything as part of your turn around that that you think is going to get bush to the right in this environment.
You know I I don't you know I don't think so I think investments that we had intended to make.
In the business, we are continuing to make and that is particularly focused on.
The growth paradigm as I said, so adding sales resources, adding sales managers to the businesses. We've we've taken those actions and we have not made any reductions to those parts of the organization going forward. So I think you know we have not deferred or delayed those investments.
You know, we're we're very much focused on.
Going on off fence, if you will when the when the timing is right when our customers are ready for it and and when the marketplaces ready for it and so we've positioned ourselves in such a way that that we believe we can respond very very rapidly, particularly you know to the theoretical soft conversion opportunity that it.
That we believe will exist.
So I you know that's <unk> simple answer we're working very hard.
To continue to invest in the organization for its long term growth.
We've continued to make a enhancements to the leadership team as well as the addition of Jack Donovan to the higher education team. We're very excited about Jack has a very strong leadership background, both inside of Arrow, Mark and outside of the company.
And we really feel like he'll make a difference in that business and we've continued to focus on other on making other leadership changes and throughout the organization.
Yeah appointment of Karl middlemen to the international job the appointment of Allison Birdwell to the to the sports and entertainment job. We're very excited about the leadership team and the capabilities that it brings to bear so.
We're going to continue to invest in the growth of the enterprise.
That's that's great and just just to follow up question are you still you know seeking our government assistance is that a focus maybe you can just tie that into how good thinking about car liquidity <unk> I'm sure. We do have a very active government affairs organization working.
<unk>, both the cares act in making sure that the company's positioned to to go ahead and utilize any of the provisions under the act that would be beneficial to our employees into the organization.
You know we continued to to have efforts underway to lobby.
You know in a way that can be productive for both our organization and the industry, particularly as it relates in the K. through 12 sector with the U.S.T.A. as it relates to health care.
And so we're <unk> very proactive in terms of trying to make sure that we.
Can get her legislators to understand the ways that they can help keep our employees working in the way that they can help the recovery. So we do have a very active effort underway in that regard and we'll continue to focus on it.
Thank you.
[noise]. Thank you <unk> from I.B.C. cap it on my Cat.
Hey, good morning, hope everybody's doing well I I, just wanted to try and tie together a couple of the comments on the educational space the negative new net new winds here in the in the second quarter, you know, but I think I heard some commentary about some some better you know better traction going.
<unk> I think in a prior call you had talked about comps turning positive by the end of the year is that still your expectation educational space. Thanks.
Yeah, I think with respect to new account sales, we feel very strongly about the pipeline that we have in place and some of the new account wins.
That you know that we've been able to achieve to date.
You know some of which we haven't denounced yet because we're still under the contracting phase. So we do feel very comfortable that you know that we'll get to a very positive position by year end.
You know our retention rates have significantly improved across the enterprise, including including in higher education. So you know we're confident that we can.
We'll have a very positive run rate by year end.
Okay, and then made on the.
Let me just that they're that just.
The obvious potentially but you know the the the negative that new business or the net new business whichever way. It goes it's really a product of of a year ago, because that's what flows through especially in that it's so pronounced an education that you know because the started dates for at a certain time throughout the sector that that slow.
True is really a product of what happened or didn't happen you know a year ago on the impact of this year and then as John referred to the pipeline of the things that are being worked on now we'll we'll carry into next year.
That makes sense sure and then.
I was surprised the I think I heard a couple times pause it and you know mention about positive pricing can you just shut any more color on what's what's driving that it's you know, it's a little surprising given the kind of the macro challenges. Thanks.
Jogging I can touch on that job Oh, Yeah, I I think I mention the the the last call last quarter that.
It was impressed with coming in fresh impressed with their remarks.
You know ability to to price to the contract that they have a client's there's a lot of focus on it.
You know it's a negotiated.
Number with clients and you know the ability to to follow up on that and achieve pricing is certainly a testament to the to the service levels and that's been a consistent a driver revenue growth.
You know for quite some time and certainly in the in the first quarter and and this quarter. Your point is is a valid one going forward I mean in the environment might be a little more difficult to get the pricing, even even contractually potentially but that's a lot of what's being negotiated right now in.
You know with clients site by sight in in in conjunction with many other topics.
That just to best serve the client and make sure that.
We <unk> in the clients are both serve.
So yeah pricings always been a big driver.
Test with the focus on it here and and you know we'll continue to be.
Super Thanks, very much everybody.
Thank you know I'm showing no further questions and they came at this time I wouldn't I like to change the call back Oh, they're gonna Miss <unk> finding closing them.
Terrific again, thank everybody for joining this morning, we look forward to continuing the dialogue with all of you.
And again like to thank the or a mark employees around the world for their hard work and dedication. During this extraordinary time period I'm excited to be your leader and thank you again for all your hard work take care.
Ladies and gentlemen, thank you for participating this <unk> today's conference. Thank you for your participation you may not just kidding.
[music].