Q3 2020 Aramark Earnings Call

<unk> Investor Relations and corporate Affairs ask yourself.

Thank you and welcome to Earmarks third quarter fiscal 2020 earnings conference call and webcast I hope those listening are doing well along with it was around you.

This morning, we will be hearing from our Chief Executive Officer, John Stilmar as well as our Chief Financial Officer, Tom on drop off.

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.

All to 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 other FCC filings.

Additionally, we will be discussing certain non-GAAP financial measures 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 for lease and good morning, everyone I hope all of your staying healthy and during his role as can be expected. During these continued unprecedented times.

I look forward to sharing an update with you today on the current state of the business there were fortunate tenacity ever teams.

Looking at close partnership with our clients on the front lawn.

We navigate the ever changing environment and seek to further earmarks position as a key enabler in the broader recovery and beyond.

In the third quarter or actions resulted in improved client retention trends, a new business wins, including Purdue University Manhattan College.

Liens University in Canada, It's wellness Ford Motor company under business starting partnership.

Increased the Jordi and our cost structure is a bunch when adjusted operating income dropped through of 20%.

Strengthened balance sheet with over two and a half a billion dollar some cash availability.

I'm incredibly proud of our individual team members, who have continued to step up in selfless ways to serve clients are countless locations their responsibility to adapt in the face of significant diversity is a true testament to their dedication work ethic and sense of personal pride.

These are the people, who are making remarks, which especially company and their drive and commitment motivates motivates me every day.

As part of these efforts you shift over 30 million pieces of personal protection product following or shift a certain production lines within uniforms to serve heightened demand from employees clients and customers.

If we provided more than 55 million meals to students in nearly 300 school districts across the country.

We've opened up 400 pop up convenience and grocery mutations for frontline healthcare workers.

Donated food supplies and PPNR need to communities in need including partnering with a different Leon Black family, The American Red class Robinhood and the merits one to provide more than 400000 care packages to New York City healthcare hearings on the sidelines.

Partnered with the urban lead to provide meals during the sample to community members in several cities across the country, including our hometown in Philadelphia.

And recognizing the critical need for health and safety, we developed ever say a comprehensive approach to maintaining a superior hydrogenics standard that will support the safe reopening and sustainable management of our client locations.

In partnership with Jefferson Health and in accordance with the recommendations of the CDC WH Io and other leading health organizations ever safe features five distinct strategic pillars.

Embedding good health and hygiene practices that include carefully design process standards, PPD health monitoring and promoting a culture and environment to sustain healthy practices.

Greetings appropriate social distancing practices into operations through visual cues physical alterations other service enhancements, while maintaining efficient traffic flow.

Implementing new and enhanced cleaning sanitation and district disinfecting procedures that include new processes equipment, and cleaning agents as well as careful assessment in high risk areas that require special attention.

Employing available in emerging technologies, such as artificial intelligence human machine interface infrared robe robotics contact racing and mobile solutions to further improve the safety and experience with employees and customers.

As an example, we've developed and launched Quickies convenient stores that Africans customers was safe and convenient no touch experience and expanding and introducing new service offerings and capabilities to best meet evolving consumer dining facilities and other needs.

We're also excited to introduce the ever safer West Web based service and mobile App service designed for small and medium sized businesses, such as restaurants, and retailers, where reopening safely as a critical concern and additional guidance to do so is greatly needed.

This valuable resource utilizes the ever say proprietary platform to provide trusted information timely and clear decision, making and affect different sustainable execution.

Activity across our different sectors has been encouraging as we partner closely with clients that are at various stages of operation.

Areas within our portfolio with have remained relatively stable, namely the facilities and corrections business as well as the healthcare sector. We expect resilience in these areas largely driven by the gradual return of elected health care procedures as well as more frequent and comprehensive facility cleaning.

Education was impacted from the accelerated summer shutdown as discussed on the prior earnings call throughout the third quarter. We continue to operate across most locations offering extended and expanded meal programs as well as modified retail operations.

We're actively engaged in conversations with our education partners about how they will return to school at this time, we are encouraged by the various commitments we are seeing from our higher Ed and K through 12 clients for their return in the fall.

Tom will provide added insight on the most current trends.

Sports and entertainment reflected the continued suspension of professional sports leagues and postponement concerts and events sports has begun to proceed with with the major League baseball NHL and NBA, playing without fans as an interim solution.

The NFL is taking measures in an effort to include fans and some capacity based on local jurisdiction as they kick off their season in the coming weeks, we're actively engaged with our NFL clients to help bring fan safely back to the stadiums as appropriate.

Leisure activity has increased as national parks recently reopened across the country with modified and enhanced operations to meet the safety in hygiene standards required in today's environment demand at many of those at many of these locations has been better than expected as our national parks provider appealing vacation destination that.

Allow for social distancing and the freedom that comes with the outdoors.

In business and industry operations have been industry in geographic dependence are being <unk> portfolio represents approximately 20% pure white collar, 20% pure blue collar and 60% hybrid of the too.

Many client locations continued operations in some capacity.

In recent weeks, we're starting to see previously shuttered locations return a portion of their workforce. We expect this business to have a longer recovery tailwind, while identifying opportunities for higher capture rates.

Uniforms has demonstrated resilience quickly bouncing back from April troughs solution oriented services, including PPD that I mentioned earlier had been in high demand as customers require high genic products for safety.

International operations are at various stages of response, depending on geography, China has largely recovered and we continue to have new client wins, particularly in health care due to our efforts on the front lines.

China drove double digit organic revenue growth in the third quarter and incredible achievement from the team that reinforces the value of our services in this environment.

Europe in Canada are exhibiting encouraging activation trends across various lines of business, while balancing country specific government mandates.

Well, we are experiencing a delayed impact in South America, we did just when a new extractive services clients in Chile.

Our international team is sharing best practices across regions that include implementing ever safe as a new offerings solution.

During this time, we've not compromised our long term growth mindset that contributed to our recent new business wins that I mentioned earlier, we look forward to working closely with our new partners on enhance dining experiences and safer more efficient facilities.

Looking ahead, we haven't a robust new business pipeline and believe we are well positioned to capture future opportunities, particularly those that are self operated.

Earmarks balance sheet remains strong with ample liquidity following our proactive actions to drive down the billion dollar revolver and supply and subsequently issue an upsize 1.5 billion dollar debt offerings.

At the end of the third quarter, we had over two and a half billion dollars and cash availability.

Our discipline.

Second our ability to to be cash flow positive since the bond issuance in late April Tom will provide more detail on our impressive cash flow trends.

As we navigate the current environment and focus on our long term strategy and we've made changes to the organization that has created a fit for purpose business to best support our field associates and clients. This includes action, we have taken to restructure and realign resources to allow us to emerge stronger when the pandemic is behind us.

Before before turning the call over to Tom I want to highlight a crucial topic that is deeply personal to me diversity the quality and inclusion for all as a company. This is also this has always been one of air marks core values and we've been consistently recognize forward as a top 50 company for diversity of best place to work for LGBTQ.

Hi, good quality.

Place to work for disability inclusion and a top 50 employer for equal opportunity.

But there is always an opportunity to do more and that starts with reflection education and action.

With that I am proud to announce that we formed an executive diversity council that will provide strategic focus to advance diversity, the quality and inclusion among earmark employees client partners customers suppliers and the communities. We serve we've also made dash handsome to the newly created role of chief diversity and sustainability officer.

She has been with earmarked for 18 years contributing in a variety of leadership roles across the organization, including diversity and inclusion talent management organizational development and human resources.

We look forward to developing and executing impactful plans that will reduce inequality support and lower communities and drive our sustainability strategy strategies for generations to come.

I will now pass it over to Tom for more detailed financial review of the business.

Thanks, and good morning.

Before reviewing the financial performance in the quarter I want to reiterate Jones message.

I couldn't be more proud of how they are more teams across the globe promptly responded quickly adapting to new environment.

We continue to lead by example to serve our clients with a solution oriented mindset.

It is truly inspiring to work along side team members with such dedication.

Now turning to the results.

Our third quarter performance was consistent with the expectations that we laid out on our last earnings call.

Of course, our results were meaningfully impacted by curve at night team with the diverse kit diversification of the portfolio as well as the flexibility of their remarks operating model resulted in sequential revenue improvement each fiscal month of the third quarter.

No I dropped to 20% of corresponding revenue decline.

And positive cash flow generation since the bond issuance on April 20 seconds, resulting in a minimal cash flow use free cash flow use a 37 million during the quarter.

But the total company organic revenue was down 45% in the quarter compared to the prior year as modest underlying growth was more than offset by reduced or suspended operations at multiple client locations.

Over the course of the quarter, we saw improvement each month following the April trough when revenues were down 50% with increasing activity. So most notably in uniforms in international as well as the education and leisure businesses.

It's encouraging trend in the business has continued into July with a great organic revenue down 36% compared to the same period last year.

In the third quarter U.S. food facilities had an organic revenue declined to 56% compared to the prior year.

As our education business dining and sports businesses were most heavily impacted.

The leisure business was shut early in the quarter, but began to see activity in late may with a limited capacity reopening most national Park locations.

Facilities health care corrections businesses remain relatively stable throughout the quarter.

So the healthcare sector was impacted by fewer visitor patient meals due to the temporary suspension of elective procedures.

International organic revenue decreased 41% compared to the prior year.

As Canada, and Europe, specifically, Germany, and Spain, where particularly affected by government shutdowns.

Despite the headwinds our international team continues to execute on its growth strategies exemplified most recently I knew mining client win in Chile.

And they awarded Queens University in Canada, as John just mentioned.

Can't pets, China has now largely reopened and posted double digit organic growth revenue in the quarter also driven by strong contributions from new business wins.

Organic revenue and uniforms is down 12% versus the prior year as the impact Cobot 19 was partially offset by new business, including increased demand for pp offerings.

Essential businesses within our diverse client portfolio continue to operate and generated strong demand for our safer cleaner and healthier services.

As a result of the company's flexible operating model and continued cost mitigating actions.

We were able to effectively manage a lot drop through to 20% the corresponding revenue declines.

We purposely left untouched any of the cost required to effectively service our clients grow the underlying business, including sales and client management resources.

We will continue to operate business with a long term mindset focused on sustainable value creation.

Total company adjusted operating income was a loss of $144 million in the quarter down 163% compared to prior year on a constant currency basis.

Yes, food and facilities was able to significantly offset the revenue impact to covert 19 through proactive labor and product cost management.

I will come from client contract renegotiations.

Question a cost containment.

As well as receiving just over $10 billion it carries that employee retention credits.

Offset absorbing a 100% the benefit costs for furloughed employees.

International is a live performance also benefits benefited from strong product to labor cost management against the Cobot 19 revenue headwind as well as contributions from net new business one earlier in the fiscal year.

Nearly 50 million from government assistant programs to offset labor cost associated with the required retention of employees.

The international operations tend to have less flexible labor cost base in the near term compared to the U.S.

Due to specific.

Country labor laws and regulations.

Uniform segment operating with a higher fixed cost base than the rest of the business.

Constrained resilience by partially offsetting the covert 19 impact on revenues by generating income from strong demand for high janick solutions, including pp offerings.

As well as lower SGN expenses.

Synergies from the Ameriprise acquisition, and just over 10 million from government assistance programs to offset labor costs associated with the retention of employees and our Canadian operations.

And finally corporate expenses were down 28% compared to prior year due to actions taken to reduce personnel costs and general corporate expenses as well as lower equity based compensation expenses.

Adjusted EPS was a loss of 69 cents for the quarter as a result of lower ally.

And higher interest expense associated with our deliberate drawdown of the revolver in March and the 1.5 billion bond issue in late April.

In the quarter Cares Act benefits also include the deferral.

The third remittance of federal payroll taxes, and oil carry back modifications, which provided approximately $50 million income tax benefit.

Our remarks government affairs team is advocating for policies that will support and protect our employees clients and customers.

We'll continue to seek to optimize the appropriate available stimulus programs as we manage the business.

Now turning to cash flow.

As a result of the decisive actions and operational discipline, we were able to generate positive cash flow from operations in the quarter.

And contain free cash flow to a minimal use 37 million.

Assets that sudden initial in fact of working capital in late March and into April.

Collection trends began to normalize.

The combined with sustainable cash managed management strategies.

Free cash flow was positive after the bond issue on April 22nd.

At quarter end remark at over 2.5 billion in cash availability.

Our strong balance sheet allows us to remain focused on our capital allocation priorities and we remain committed to investing in growth opportunities for the business paying down debt and returning value to shareholders.

With that we also announced this morning, the approval of our quarterly dividend payment.

I'll now touch briefly on our GAAP results.

These metrics were largely impacted by covert 19 in the same way I outlined for ally earlier.

In addition, GAAP operating loss that loss and diluted loss per share included most notably 125 million in severance charges associated with actions taken to restructure and rely on personnel resources within the company.

The majority of these charges approximately 75 million.

We are within the international business, resulting from prescriptive labor laws and regulations.

Certain countries in which we operate.

In the current environment, we've taken these actions to rightsize the business to create a fit for purpose organization is best positioned to serve our clients and deliver strong sustainable performance.

Looking forward, we expect to see modest sequential improvement in the fourth quarter compared to third quarter.

As previously mentioned slot revenues, which were down 36% compared to prior year.

Continued the positive revenue trend that we've seen since April when the topline sell 50% compared to prior year.

At this time, we are encouraged that more than half of our higher at clients are expecting students to return in person for the fall semester with about 10% planning to exclusively implement remote learning.

The balance or considering a variety of hybrid approaches.

In addition, we continue to actively participate in extended government sponsored K 12 mill programs.

But the reopening of education and preparation for potential activity and business dining and sports and entertainment with the NFL season.

We will absorb certain initial restart cost.

Much like when we initially begin service falling into account win.

As we take actions to ensure the safety of employees clients and customers.

Such progress is expected to result in a marginally higher AOL eyedrops run rate in the fourth quarter.

We will continue to remain focused on cash flow build on the actions we have already taken.

Based on the current anticipated activity and higher Ed.

We expect to do liver neutral to slightly positive free cash flow in the fourth quarter.

I want to close by reiterating my strong belief in the future of this business.

The reasons why joined air Mark in January, but a very factors that differentiate us today.

Highly valued service offerings passionate team members and strong growth potential.

Thanks for your time this morning John.

Thank you Tom It is an extraordinary time for all of US Im extremely proud of how era. Mark has responded and remain confident that we're taking the appropriate steps to create significant value for our stakeholders.

Have considerable opportunity ahead of us that we believe will provide earmarked the ability to emerge as a stronger more agile company and I'd like to take this opportunity to saying all the associates that are mark for their hard work dedication and commitment to serving our customers.

Operator, we'll now take on the we'll now open up the call to be a resource for questions.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one then you touched on phone if you wish to be removed from the Q. Please press the pound sign or the hash key using a speaker phone you may need to pick up the hands that first before pressing the numbers in order to accommodate participants in the question can you. Please initially a limit yourself.

To one question and one follow up.

In the Pheno from Oppenheimer is online with a question.

Your line is now very low.

Okay. Thank you very much are really good job managing through all this year pretty impressive.

Cash from operations and just managing the business overall, so congratulations there.

Thank you.

You know what I want that maybe focused on it is education, a little bit yet some wins, there give us a little bit more detail on those wins, particularly maybe how you got them.

What are those margins look like now versus what you've historically done in the past.

And then also it seems like you're very bullish on are not very bullish on education.

Are you seeing something in education and sort of what are the risks that you see as far as maybe schools deciding that we opening is not really in their best interest and maybe they go virtual or you just need some ground level detail on drilling what you're seeing what's driving your.

Encouraging statements you made that education. Thanks.

Hi, Thanks, I'll start off and Tom can jump in as well well first of all the new business wins were very excited about.

Purdue University was a self op conversion other retail operations, we feel.

Very honored to have been selected to operate that contract.

The Queens University in Canada is the largest university operation in Canada, again, very excited about that opportunity.

And of course I also mentioned the Ford Motor partnership, which is a new national contract for those operations.

On the higher Ed side, we as Tom alluded to we've had significant dialogue with our education customers literally were engaged everyday in dialogue about the operating.

Model that each in University will will adopt and as you said over 50% of those customers have told us it will be in person in the classroom, we're still awaiting decisions on the operating model from some universities and so it's too early to comment on what might take place in terms of total education reopening.

Some of the 10% have said that they'll have an.

Online learning.

Environment during the first semester. So the hybrid examples that are being developed are very different buying campus by university and so it's very difficult to predict what exactly will happen.

But we are engaged in dialogue literally every day with those customers to make sure that they have the best experience for students that are on campus in a safe by Janet way.

Those students can safely in the dining halls take advantage of word plans and be confident in their safety and security.

Tom do you have anything you want to add to that.

I think I'd just ask you talked about.

The financial structure.

Those deals.

We'll see.

Anything changing much other than around the edge for the current environment within those higher at contracts.

Certainly for the long term.

You build flexibility into the model both for the client and for US. So that we can can move forward together.

With whatever comes so I see that still being the general structure the contracts.

Flexibility and client focus.

And I don't think thats going to impact the profitability over the term of the contracts these new wins.

Okay.

A follow up on the cash management side very good job there again.

Yes. It was a sense of what I know you talked about getting driving the drop down to 20% and then you also need and said that you could get down to 15% you need to.

I guess, what have you been seen there as far as I guess it seems like you've been encourage more and that's why you don't really aiming for 15% anymore.

Or just sort of broad strokes on what you're thinking there. Thanks.

Mhm.

Yes, I think from the beginning we said we weren't going to.

Be driven by a number where we're going to be focused on our clients serving our clients needs and it really came to light early but that there were different.

Requirements by clients, even within a sector.

So we needed to remain flexible with that and that that obviously puts pressure on your ability to drive out cost.

To go to 15, we said early on was going to be more negative situation, where we think but this would be prolong the current environment, but prolonged and deeper.

And more certainly.

Negative.

Where we find ourselves now is that.

There are.

Good signs.

Reopening signs here and there it still as we all know.

Almost week to week at times.

And therefore, we're we're keeping ourselves ready, we're keeping cost in the business. So that we are ready when our clients are Betty and that's been difficult for our operators, but they've as you've seen in the Q3 done tremendous job of balancing both our cash flow needs as long as well as.

As being prepared for our clients. So I don't I, certainly don't see us as I said, just a minute ago moving.

A low 20 at this point given what we see as some.

Encouraging signs of activity into the fourth quarter.

Yes, I'll just add a couple of quick comments.

I think the organization has shown incredible flexibility in terms of managing our cost structure.

There are levers that we can continue to pull to reduce costs further but as Tom indicated what we've tried to do is maintaining organization, that's fundamentally able to serve our clients.

Very very rapidly.

As their needs develop and as a situation evolves.

Ana and frankly, because we want to make sure that we have an organization that has the best mailing management team the best level of talent in the industry and so we're very cognizant of making sure that we hold onto those people that we think are critical for the future of the organization.

And for the future and and hopefully that will be able to bring back all those era Mark employees who've been furloughed are laid off in the in this temporary process one of the things that Weve also committed to is making sure that we maintain our growth focus and so we have not made any cost reductions with respect to marketing organizations and.

Our sales organizations, we've been very focused on making sure that we maintain that that growth mindset and discipline going forward.

Let me and let me add one last point that I don't want to give the impression that we're.

Rebuilding its all these costs into the business.

Based on overly optimistic projections things can change and so.

We're continuing to stay flexible and we will continue to do that hopefully a proven that that the model can move pretty rapidly.

And reflect the and respond to the current environment and so as things.

Move in a different direction, we'll be ready.

Thank you as a reminder to ask a question you'll need to press Star then one our next question comes from Kevin Mccarthy with Credit Suisse. Your line is now open.

Great Hey, congratulations on the cash flow.

Just to results overall digital uptick or is it to that so.

Really really well John Hey.

Just wanted to spend money on.

Talking about.

Structurally businesses change you folks you're a leader in the industry that just coming on todays weary areas that you're going to deal that define the outcome in the sense. So whether its unique and then I'll step up in uniform or on the food service side and then within the context of that you know is there an opportunity.

And what are the more capitalize that approach in this space.

To drive some consolidation just any puts and takes around that super helpful.

Sure. We obviously believe that we are well positioned going forward given the strength in the breadth of the organization and the balance sheet to take advantage of any opportunistic.

Growth.

Opportunities, if you will that come to us and those we will.

I'd be very aggressive in the in the pursuit of growth with respect to new account wins, particularly as as we believe the self op conversion.

Phenomenon will increase.

We're highly confident that as customers and clients who are currently self operated.

Come to grips with the issues that they've had to face and covert 19 that there will be an acceleration of self op conversion trends and we believe we're well positioned to take advantage of that from both the resource perspective, as well as a capital perspective.

With respect to other operators that may not be well capitalized we are seeing.

Impacts in the business as clients.

Our having their services affected and we believe there may be some opportunity as.

Some of the smaller companies may decide or may have issues with respect to their financial performance.

But really what we're going to focus on right now is both organic growth through new sales opportunities.

Growing those relationships with our existing customers focusing on new service offerings that we think we'll adapt to the changing environment.

And we'll also to continue to take a look at.

At M&A opportunities that present themselves across the across the portfolio.

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

Hi, John and Tom questions first one on the July trend of minus 36% could you give us band of how U.S. foodservice is doing in food and support services is doing in July and how uniform is doing in July and then my second question is.

If you could time, you said drop through op margins for the fourth quarter will be higher than 20% can you give us sense if anything.

Does that mean 25, and if you can make a comment on interest and taxes for the fourth quarter also that'd be helpful.

Sure and you in terms of the revenue.

36% for the so that for July for the company.

You asked.

Okay.

A bit above that total us.

International is right about the the company average and then uniforms was significantly below that.

In July that company average.

On the revenue on the flow through.

You know it depends a bit and I hate to hedge the the answer but it does depend a bit on the activity and the speed of the activity.

Within higher Ed and sports so if if the more certainty we see I think that that the drop through will be.

Closer to 20, if there is some stop and starts I think it could be closer to 25.

With with people false starts or people changing their mind at the last minute. After we've stepped up and a little color around why that why those cost pressures are there when you start up that account or restarted in account, particularly in this environment.

You do have certain inefficiencies in in product cost in labor scheduling.

And alike, and some other peripheral direct costs at the unit.

Once you get into a routine the cadence setting a unit and that can take.

Months or or whatever what the new account you view build in those efficiencies and you get better it at all those things and so as we restart with new points of service across campuses.

[music].

Diverse points of service.

There will be a level in efficiency out of the gate and Thats, where those increased costs.

Concrete bit.

So I think it could be in between that range, depending on the environment the restart environment.

And then with with interest and tax.

Interest should be pretty predictable at this point.

Rick fairly reflective of Q3.

I don't see much would change for Q4.

We'll look at the end of the quarter based on on cash flow is too.

De leveraging a bit and that certainly continues to be the goal.

But for the fourth quarter I don't think interest should change that much and.

Tax we're still working through that to the overall benefit of the cares Act.

Get significant benefit this quarter as we will for the year with DNL Kerry carry backs. So I'll come back to place I'll come back here with a little more detail on the tax rate for the year.

Thank you.

Good thank you.

Mm.

Thank you. Our next question comes from James and leave with Citi. Your line is now open.

Good morning, everybody. Thanks for taking my question.

If you took a bit more about.

You will be clients, saying about longer term.

Plans, how that might impact attendance on site.

I know, whether it's realistic to get back to prime margin levels with kind of structurally lower level in attendance.

Sure I think we can both take a stab at that first of all I think it's very early yet to predict exactly what would be an eye business will look like and we are seeing signs of.

Green shoots if you always employers bring back employees on a limited basis in some geographies. It's obviously significantly impacted by the type of operation the geography, and whether it's an office environment or blue collar environment et cetera.

So that probably the consensus that we have today from customers is that it may take a little longer to bring employees back given the current state of covert 19.

What timeframe that looks like.

It varies by city.

So.

Ultimately the structure of the business I do believe will return to a more normalized.

Look you may have operations that have downsized or maybe maybe smaller than they were before I think fundamentally the contract structure. The industry is probably going to be is going to be changing.

Some of those operations that were PML historically because of the size and scale may now be management fee going forward I do I don't think the margins in the business will change all that dramatically ultimately the margins will be I think somewhat average.

You know over the over the history of the business. It's been a very consistent performer and I think that them that business will evolve to that same kind of level of performance, even though the contract structure, maybe somewhat different going forward not only for us, but I'm sure for our competitors as well.

So I think being I has a longer road to recovery again.

It will be dependent upon the the speed with which employers come back to their offices I will say as a general rule, you're seeing a lot of commentary a lot of conflicting commentary in the press about weather companies will maintain their work from home kinds of.

Approaches for the long term.

Frankly, I've been talking to a lot of Ceos of a lot of public companies recently in almost all of them are saying listen it's it's tough to manage an organization from a cultural perspective by remote control and they really have a strong desire to bring their employees back.

Into the communities so those employees can be engaged and and.

With the company and to be part of a team.

And so ultimately I think companies will return to the workplace.

But it will take some time and it's very hard for us predict what that timing it looks like.

Okay. Thank you very much.

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

Thanks, very much I'm curious about the delivery opportunity that you see during this period.

On college campuses, which might have some restrictions around dining halls have you been investing more in that business going into the fall and how should we think about the opportunity you have in delivery.

In education. Thanks.

Sure. We we have multiple approaches to food delivery on campus. We certainly have the advantage of being on site and we have the advantage of being close to those students and.

I think there's significant opportunity one that can be addressing in a number of ways.

Both was cut with customize program development in each individually university, depending on the type of location, whether it's an urban campus or more sprawling campus.

The good uncle initiative is one that serves that delivery model pretty well.

And yet we've also established partnerships with other delivery providers on campus to make sure that our product gets delivered to those students.

You know through third party means so we do think that there will be an increasing trend towards eating and dorms and eating remotely and we are positioned we've got service models and up and.

Marketing programs develop to go I had an address that that need.

For students to be served.

That way.

Tom I don't know if you have anything else you want to add to that.

No.

Great.

Also just within the different verticals of the U.S. business curious, which as you.

Do you expect to improve and those quickly from here you pick just give some color on each of the different part of off.

Tom Why don't you go ahead and take that.

Sure.

Well I mean in terms of magnitude of of improvement, obviously sports and.

Higher Ed have that the greatest.

Ability to come back I think from up speed standpoint, you know education certainly from from.

Down significantly.

In the third quarter.

[music].

70 plus percent will.

We'll see the biggest move in Q4.

Sports is still uncertain.

And not really have any visibility there as John said I think business dining has a linear path back I don't think it's going to be need great speed, but I think it will continue.

To nudge forward so.

I think overall with those being the three biggest impact sports higher Ed being high I would see the education.

Second the greatest potential to to be back.

Quickly followed by a linear path with business dining and.

Still question Mark around sports.

Great. Thank you.

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

Hi, good morning, Thanks for taking the questions first refresh me I'm, just I'm, probably just rounding out from from the last question, but compared to past likely the negative surprises on health care down 21% facilities down 17% you don't seem to be were found to date improving much into Q4. So is there anything kind of effect.

Not taking about your mix the major underperforming in those segments and how do we expect those segments to maybe recover over the coming quarters.

Yeah, I'll take a shot at that.

First of all healthcare and we continue to see improvement throughout the balance of the year as I think we talked about the.

The delay in elective surgery surgical procedures and the like and we think that that business will continue to improve as healthcare system adaption and comes back more broadly.

And so we don't see anything systemic there on a facility side.

I think you'll see a ramp up as businesses returns so those because those numbers will improve as.

Businesses and other institutions required deep cleaning before restarting.

So I don't think theres anything there that affects the long term nature of that business that though they'll be ratably relatively stable growing during the fourth quarter again, it really just be dependent upon the pace of change and the other businesses. Some of the facilities business. Obviously is attached to sports and entertainment. So those are significantly sized operation.

As if those stadiums and arenas begin to reopen and operate those businesses would return so theres a bit of a knock on effect on some of the other businesses.

So how much they're engaged.

Thanks, just as a follow up clearly kind of pre the tell you that situation and you were talking about your plans and sort of.

It may take a call whatever it may take for years to kind of not you'll plan.

How is that whole corona virus issue so to change the pace at the 10 around you were trying to act as it giving any opportunities to accelerate some of those opportunities or is it could I think pools in the plans that you were looking to an act for that business.

Well I would I would say that we've continued to March down the path that we laid out.

Making organizational changes with respect to culinary marketing.

Food offerings.

It hasnt impacted those plants whatsoever.

And the same could be said for the growth initiatives.

Were undertaken over the course of about <unk> of this over the last several months, we've continued to invest and adding new sales resources to the organization.

Most of what we wanted to achieve.

We've been able to do even in this environment with respect to adding the right talent.

We've had the opportunity to.

Re establish some new leadership in some of the businesses. We've had the opportunity to go ahead, and and make organizational changes to get resources closer to the customer even in the face of.

<unk> reductions that we've had to make we've been able to reengineer the organization in a way that we think positions is extraordinarily well going forward. So I would say.

Our plans have been.

Somewhat.

Impacted by covert 19, but not our approach.

So really I don't see it impacting the way we are the way, we will operate and going forward.

Thank you very much.

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

Okay, great. Thanks.

I just had a two questions and then just a clarification from a prior question. My first question was regarding the uniform rental business. You mentioned a couple of times in your prepared remarks that you had good strong sales of PTSD I'm, just kind of curious how the organic rental trends are held up inside that maybe there is a we've seen from other players.

There's been some big onetime sales or spike in sales.

I called out for direct sale.

But I kind of curious on the rental trends in particular and then my second question was regarding the dividend out looked in the press release today you noted the 11 cents dividend, it's going be paid in September.

John I was hoping you could just talk about the thought process the board with the uncertainty that's out there.

Cash flow not being as great as it normally is why that makes sense and how you approach. It from here and then the quick clarification.

On that I wanted to ask about was just a little bit of confusing terminology earlier on the.

On the.

Kind of growth outlook by segment I think you mentioned that.

The U.S. that the that the.

Organic trends were a little bit better than 36%.

Did you mean like that that the growth trends were below company average in that just because that makes it better than it sounds like the the growth trends in us food we're.

Trending.

You know better than 36% Didnt make a lot of since I just want to clarify that thanks.

Yes, Tom do you want to take that last part of the question first and then I'll come back to the rental trend from the dividend.

Process going forward sure, yes, the U.S. food the decline in July was higher than the company average for the U.S.. Okay. Okay, just sort of be clear.

Yeah, I think in off and trying to offer some insight into what we see as the improving revenue trend over the with the start of the quarter.

Yeah, I think and we're trying to give some visibility but.

Without offering a lot of specifics and we apologize for that we just see a continuing improvement.

During July that.

That is.

Follow on from the from the from the previous quarter, so attempting to give some.

Some supportive clarity with respect to to revenue trends so.

With respect to the rental trends at the end uniforms.

There.

The rental trends have.

Yes.

Improved on a weekly basis since the trough in April.

I think thats, what were probably consistent with what the rest of the industry has discussed in disclosed.

There continues to be improvement.

A week to week.

In rental trends I don't think we have disclosed.

That number specifically.

But I would say what you're seeing in our in our numbers is very consistent with what you're seeing elsewhere.

With respect to the pp any sales we are experiencing.

Significant pp any sales.

In uniform services and in refreshment services, where we've offered that opportunity to our customers.

For things like masks and and the like.

That is we believe that business has sustainable.

Opportunities in it as a as facilities adopt new sanitation approaches and trends and.

Office is like dental offices, using barrier gowns more aggressively than they had historically, so and we see continuing revenue streams coming from pp any not just one time sales, although the quarter did have some significant.

Sales lift as a result of pp any so.

Think theres more to come on that and we'll see how that continues to evolve I would say that we're very hopeful that we'll have continuing growth from that sector going forward.

With respect to the dividend.

Given the the strong cash flow generation, they improved can't really significant cash flow results in the quarter word.

Deemed inappropriate to go ahead and pay the dividend going forward, we think it's a very strong indication.

Of the of the Companys ability to generate cash and to.

Continue to manage the cost structure.

We believe that it's an indication of very strong support.

From the board and we think.

We're pleased that they adopted that that approach.

The board will maintain flexibility, obviously going forward and if there.

If there comes a time, where they may need to reconsider that they will do that but.

We're very confident in our ability to continue paying it.

At this time.

Cool thank you very much.

Thank you. Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is now open.

Hi, This is a actually Greg calling on I, just wanted to ask a little bit more about the contract renegotiations and maybe using education as an example.

Some of these schools and move towards a hybrid model it.

50, 60% occupancy by the students.

Do you expect those contracts to turn into management fees, where they were PML and maybe a little color on with enhance cleaning probably comes enhance costs. There. So how do you make sure that you're getting paid appropriately and those contracts.

Yes, I would say we've been able to engage in a very active contract renegotiation process with all of our customers over the course in the last several months to make sure that weekend.

Adapt and to serve their particular needs across all the businesses not just.

EMEA and I've been in healthcare and in higher education as well.

As the as the hybrid models are adopted we'll be working with each individual customer to make sure that we have.

An opportunity to earn an appropriate level of profitability under that new model.

The those negotiations literally take place every day, we've got what we consider to be extraordinary relationships and long term partnerships in place.

And we think that we'll be able to react and respond to whatever.

Whatever needs they have and whatever modifications that need to be made we believe that we can get done to make sure that were paid appropriately for providing the service that they desire.

Okay, and then a a couple of times, you've mentioned higher demand for any and hygiene type products. It's one a little color on your ability to flex that supply to meet the demands.

Yeah, we as we mentioned we have shifted production in our Mexican operations to to pp any equipment.

And we're able to meet the demand that we've had both from our client organizations and customers as well as their remarks need.

In the business as well so.

Those operations were able to ramp up very quickly.

And we have the scale that we need in order to continue to manufacturer.

To take advantage of that opportunity so.

Our supply chain is very robust add the fact that we have the ability to self manufacture a lot of this.

During this very favorable for us.

And it has allowed us to serve.

A number of customers who couldn't get supply from other sources. So we're confident in our ability to continue to manufacturing to continue to supply the needs that a that both we have and that our customers have.

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

Hey, good morning.

Following up on the on the question a minute ago about contract renegotiations could give us a sense.

Our unit economics trending in locations that are.

Are you seeing a lot of them that you're able to manage cost too.

Animal profit level.

Unit level.

Or is that really variable just trying to understand how quickly you can get the sort of a normalized.

Level, even on lower base.

Revenue coming back in a lot.

Thank you.

Sure.

The as I mentioned the contract renegotiation process has really been ongoing since the beginning of co that as customers, particularly in the BNS sector and in a higher Ed sector.

Shutdown in head and head needs for us to provide some level of service.

We were able to renegotiate both new contracts as well as men.

Memorandums of understanding to go ahead and serve their current needs.

It really is a state of flux in.

On a on a location by location basis each individual contract.

As being renegotiated by their district managers by the RVP use and by the clients in order to adapt to the new service model that that specific client needs and so.

Unit economics, it's our intention to continue to operate this business at margins that are very close to our historic level to be paid appropriately for providing the services that are desired.

And so we've been able to in without with.

Without exception to go ahead and put new contracts are understanding is in place to go ahead and protect us on the downside and to create opportunity going forward. So I don't want to comment on individual contracts or individual negotiations I don't think thats appropriate, but I would say our teams have been extraordinarily adapt.

At doing what's right not only for the customers, but doing what's right for Aero Mark going forward.

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

Hi, Thanks coming out of this environment. It seems like there could be greater overlap in the FSS and uniform segment than ever, particularly on the facility side. When we think about clients to meeting this increased cleaning sanitation, how you characterize the overlap in these segments currently in as you look at the uniform peers stock valuation ride.

Widening relative to the catering peers is there a case to keep the separate or even consider other strategic actions to maximize the value.

First of all there is significant overlap between the businesses, obviously, our our customers have had.

You have had.

Have had our organization respond in a multitude of ways.

To help serve their needs we have a lot of customers that are normally foodservice customers that had reached out to the uniform organization to go ahead and certain needs for there.

Pp any equipment and other areas. So there is.

Significant opportunity to explore.

For additional growth potential there with our existing customer base.

And we continue to do that a uniform services continues to be focused on serving its core rental customers as well.

I think the business strategy question is one that obviously, we have talked about many times.

Today, we're focused on improving the results of the business Theres significant potential for growth there are significant potential for margin improvement.

And we think ultimately we can close that valuation gap.

With respect to those.

Uniform peers as we continue to improve the business both by adopting.

The synergies that came out of the Ameriprise acquisition, the adoption of ABS the route accounting system.

That showed significant improvement as we implement that a new operations in old existing earmark operations, we see continued improvement.

So there is lots and lots of opportunity there and I think over time.

The company will continue to address the strategic issue.

But today, we're focused on improving the operating results on serving our customers on being really focused on managing the organization as tightly as we possibly can.

Given the current environment.

And in looking for those opportunities to expand and grow the business and ways to serve our customers.

Thank you. Our next question comes or slow Rosenbalm with Stifel. Your line is now open.

Hi, Thank you for taking my questions Hey, John can you talk a little bit you mentioned that you ceiling progress in the business that is being kind of overshadowed by.

The closures in the businesses.

Can you just talk about what's the progress you're seeing its underlying is that referring to retention rates is referring to new wins and you know can you talk a little bit about how you expect to come out of this stronger than you were beforehand, what are you referring to exactly.

Yeah, I you know I would say first of all retention rates are increasing.

And we've seen continued improvement across the enterprise and retention rates and the various businesses we operate.

We're seeing very strong business, new business pipelines, we see significant opportunities as a result of what we believe will be.

And enhanced self op conversion cycle.

Going forward. So we think that the company is well positioned to take advantage of all of those trends.

The improved retention, obviously extraordinarily important from the from a long term growth.

Perspective, we think a lot of that improvement is as a result of the actions we've taken in the various businesses both to improve leadership as as a as well as.

By repositioning organizational resources back into the businesses. So that they are closer to the customer in impacting the business.

On a on a day to day basis. So we.

We see the strategy.

Continuing to have an impact.

We believe that strategy has been validated and we're going to continue to move down that path very aggressively to make sure that we have an organization thats extraordinarily focused on developing innovative solutions for our customers in individual markets, we operate and I'm excited about this organization because we have the.

Strongest management team in the industry, some really great people focused on delivering.

Results for our customers.

And I'm very excited about the prospects for the future based on a team that we have running this business I think the job that they've been able to do over the course in the last four months has been absolutely extraordinary.

All of this that they've been able to achieve as a result of those people on the ground day to day really just grinding it out and making very tough decisions, but the right decisions for our customers in the right decisions for the business. So I'm extraordinarily excited and I believe everything that we do.

Who is an outflow of the quality of the management team and I, just I feel very strongly that I've got the best in the industry.

Okay, Great if I could just follow up with the Tom just is there anything in the startup costs that you're expecting in the September quarter.

That would change kind of the seasonal cash outflow that normally see in December I guess im asking is there anything you're going to be doing earlier. It. Therefore would mean that your normal seasonal significant outflow in December would be less because you're doing then september versus the December quarter.

Yes.

It will but for whatever reason usually that that.

Fourth quarter.

Cash flow inflow is driven by the board plan prepayments.

For the for the ongoing semester and then the U.S follows in Q1, so those will.

Normalized day, they they do move roughly in tandem so.

As we.

The startup of the higher Ed is is less certainly then it will would be in the normal normal year.

The outflow in Q1 will be less.

Okay, great. Thank you.

Thank you. Our next question comes from Seth Weber with RBC capital markets. Your line is not.

Hi, Good morning, Thanks for taking my question I I'd just following up on a cash flow question Capex, a pretty big step down here in the third quarter can you just.

Talked as how you're thinking about near term and maybe intermediate term capex is this.

Around the right level will it come down a little bit more just any any guidance you can help on that thank you.

Yes, a little hard to look at it as a percent the traditional measure our percent of revenue.

Given the revenue change so as a dollar amount.

You're right the the.

Annualized rate has has fallen.

A lot of that has been around the expectations. This path. This summer this past quarter with with clients what they wanted to tackle what they have it.

It's also been part of a client renegotiations is.

As John alluded to so.

Certainly the the spend in the quarter I think is is not.

Where it will it's not a run rate.

We don't want it to be a run rate because we want to really is the capex to our clients benefits and grow with them. So I think this is is a little bit lower in Q3 than than we would see going forward, but we'll continue to work to manage it along with the operating cash flows.

So that we keep ourselves or that could position, but certainly have our our clients' needs in our contractual obligations.

First and foremost in those discussions we don't want to.

Leave our clients hanging.

To our benefit so we will will manage it accordingly.

Okay, and then if I could just clarify the comment about the monthly improving trend the trends improving through the quarter.

I'm, just trying to displace out how much of that might be due to just the lower mix of education just seasonally.

If that makes sense I mean are you seeing improving trends kind of across the portfolio or is it just really a function that education is a smaller.

Portion.

Thanks.

Yes.

Outside of sports, which.

Moving on has seen a little bit of activity. This summer versus where we were in April so if I if I take the 50% drop in April on revenue down to the 36 in July.

The quick answers, we've seen improvement across every line of business it's been.

Almost imperceptible in sports and very significant.

In others like uniforms, but there's been improvement across the board.

Okay Super It I appreciate it thank you very much.

Thank you in the next question comes from Hamzah Mazari with Jefferies. Your line is now open.

Hi, good morning, Thank you.

John you had spoken about outsourcing trends accelerating potentially bolt or during cold Barrick Bosko very.

Could you maybe comment on do you see that in uniforms as well not just food and which verticals in who do you see that most happening given your customer conversations.

Yes, great question.

First of all in in the foodservice business, we see that trend in health care in higher education, especially which obviously are are still Billy.

The business units that have the highest degree of self up opportunity yet so.

Significant conversion, we believe in both health care and in higher education major universities.

Produce a great example of that the the win at Purdue.

As a self op conversion of their retail operations.

And we see more and more.

Universities beginning to have that dialogue around is is that right to go ahead and.

And finally outsource.

Print, particularly given this environment.

And so we see that trend accelerating in health care or higher education on a uniform side. We do believe that this represents an opportunity that.

The customers that have a need for safer and more high janick.

Solutions, I will turn to a professional provider than as opposed to having their employees washer launder their own uniform. So we do believe that there is opportunity there.

As a result of the need for more Hydrogenics solutions, we have an opportunity or we have.

A service model that can provide very strong assurances in terms of cleanliness and hydro and hygiene and.

And we think companies will be looking for that.

As I mentioned earlier, one of the areas that we think as a significant potential is is the met the medical services.

Business as you know people now are wearing barrier gallons in virtually every situation in health care, whether it be dental offices or clinics or whatever in order to provide some personal protection. So those are things that we can both manufacturer and Ken longer and so we see that that as an opportunity as well for unit.

Harm services.

Got it and just my thank you and just my follow up question.

It was pretty cool evade you know you obviously had a U.S. Turner our plan and you know you've talked about net new business being better retention being better.

What was your timeline originally for turning around the U.S. business.

And you know post goal there clearly it's delayed but but just curious Greek already how were you thinking about their turnaround and what's the best way to measure milestones in terms of success of turnaround obviously as being masked by coverage is the best way just to look at your numbers versus.

Plus or how would you tell investors.

Did that don't sorta judged the U.S. Joyner arm today.

Yeah, well first of all I would say judge it by there were two key elements of the turnaround.

Key elements were improving retention getting a retention rate backup to historic levels.

There are mark.

And that's an area that we haven't seen already significant improvement.

And the net new business.

So the growth numbers, so that we would be winning a greater share of those new opportunities going forward and to do that we implemented a number of changes the reorganization. The the addition of sales management resources throughout the enterprise and we really began that process.

In.

Late fall early winter as Weve as we'd look to reorganize salesforce as an add those resources. So.

I would say the two benchmarks, our retention and new business wins.

I think we've had some really good early successes across both of those goals and we continue to see.

Improvement the strong sales pipeline and today, what I consider to be the very strong leadership in those businesses that I believe will will deliver results over the medium term I think initially we talked about the fact that it take sales manager somewhere between 18 to 24 months to come up to speed in those businesses.

It is like health care higher Ed business dining as they got to know their territories and so you know I think that that is still the timeframe that we're looking at for continued improvement I think the opportunities are accelerating.

And I'm very and I'm very pleased by the quality of our team. So I think that we'll continue to see improvement in those two benchmarks.

And that will be demonstrating.

At the strategy is working and is.

And that we're making progress.

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

Terrific again, thank everybody for joining us. This morning really appreciate the support of all of you.

And again I'd like to extend my thanks to all the earmark associates.

Around the world for the hard work.

And the dedication they show this organization everyday.

Very proud of all of you and and thank you again, so that that ends our call. Thank you.

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

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