Q4 2020 Aramark Earnings Call

<unk> fourth quarter and full year 2020 earnings results Conference call. My name is Victor and I'll be your operator for today's call.

This time and I like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen only mode.

And the conference call for questions at the conclusion of the company remarks.

I will now turn the call over to Felise So Wes.

Vice President Investor Relations and corporate Affairs and its capital. Please proceed.

Thank you and welcome to Aramarks fourth quarter and fiscal year 2020 earnings conference call and webcast.

I hope those listening are doing well along with those around you.

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

As a reminder on 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 and the risk factors and DNA and other sections of our annual report on form 10-K.

And our other FCC filing.

Additionally, we will be discussing certain non-GAAP financial measures a.

A reconciliation of these items.

You S. GAAP can be found in this mornings press release and so.

Well and on our website.

So with that I will now turn the call over to John John.

Thank you ladies and good morning, everyone and thank you for joining and I Hope you and your families are staying safe and healthy.

Today I plan to review the current state of the business reflect on the impact for actions we have undertaken since my return to the company as well as providing natural beauty you're ahead collector, we've driven by our commitment to unlock more and more significant growth potential.

I remain incredibly proud of our teams on the front line around the globe for their passion resilience and ability to provide to provide innovative solutions to serve clients and their greatest time and need.

Okay actions on extraordinary work at night, and our ability to quickly adapt and ensure continuity of service.

As a result, I truly believe were a stronger organization today and.

Clearly defined purpose I would also add on but all employees have a true and profound ownership mentality and meaningfully benefits aramark and or customers.

Our business transformation strategies over the past year, and most notably since cobot and resulted in leadership and organizational change that advance the execution of our initiatives.

Strengthen to client and supplier relationships.

A renewed entrepreneurial spirit with a great margin side.

Made investments and accelerating growth.

Our effective management of our effective <unk> of our flexible business model across a diverse portfolio that led to an adjusted operating income dropped 22% on a constant currency basis over the second half of the fiscal year, while continuing to invest and growth resources.

And delivered positive cash flows and the bond issuance and April resulting in our ability to maintain ample cash availability at quarter end.

The company and casual platform contributed to improved sequential quarter over quarter performance.

Exhibiting career exhibited encouraging revenue trends across all segments compared to the third quarter and navigated the challenging environment.

We mobilized to share experiences across businesses and geographies cross.

Cross functional teams were established and included leaders and operations technology marketing and new business sales to leverage best practices in order to anticipate client and consumer needs and to innovate and implement solutions.

This business Interconnectivity has proven exceedingly advantageous.

I'd now like to turn to the performance by business segment in the quarter.

U.S. food and facilities drove solid improvement compared to the third quarter, driven by key factors and each business sector agile.

Education demonstrated progress on the fourth quarter as most clients employed various in person and hybrid learning models.

In higher education, we are currently serving approximately 90% of client locations and some matter with a meal participation rate at 70% of prior year levels, while experiencing lower retail and catering volumes.

And K through 12, we're actively participating on the universal and government sponsored meal programs and provide all students free meals and our school in addition to offering meal delivery and pickup solutions.

This program was just extended and through the and the other 2021 school year.

Sports leisure and corrections reflected quarter over quarter improvement, Although stadium attendance remains sparse sports and entertainment is reactivating as professional sports leagues begin to include fans and limited capacity based on local jurisdiction.

Leisure typically at its peak during the summer months reflected increased activity with modified operations and corrections remained stable.

Well additional business and industry client locations opened throughout the fourth quarter companies remain measured and a return to work strategies with decisions driven largely by need and corporate culture as well as local regulatory restrictions.

As previously stated we expect the and I to have a longer recovery tailwind.

We have developed innovative offerings and include delivery solutions as well as enhanced capabilities to drive higher capture rates and our locations.

Performance on facilities and other showed resilience with clients requested more frequent and comprehensive services. Those locations. We opened we are pursuing extensive cross selling opportunities in this area and its hydronic safety is a top priority.

Our health care base business remains stable with science and strengthening performance and selected procedures increased and visitors restrictions began to ease.

Going forward, we anticipate a significant new business pipeline and health care systems evaluate the benefits of self op conversions.

Over the course of the quarter, we invested and our health care sales capabilities to capitalize on these multiple opportunities and create another strong platform for growth.

International reported sequential quarterly improvement across all regions that reflected the team's tenacity and ability to manage through government and post imposed restrictions on.

Operations remained at various stages of response, depending on geography and industry specific focus.

Europe demonstrated improving trends and shutdowns gradually used and the summer months and we are currently leveraging past experiences as further government imposed restrictions are undertaken.

Rest of world exhibited resilience, but by China, yet again, delivering double digit revenue growth.

The international team continued to win diverse new business and the quarter, including mining and Chile, Several health health care clients and China as well as manufacturing in Korea and Mexico.

The sales momentum and and in international continues with over $30 million already sold in the first quarter led by a balance attrition and aligned sales result.

Uniform says emerged as a particularly high demand business on meaningful opportunities ahead rental.

Rentals experienced improving trends in addition to increased client interest in adjacent services, including P.P. acne.

The team remains committed to implement value enhancing strategies that include increasing our sales resources. We added a 150, new members and the sales force interest over the past year with plans to add an additional 100 and fiscal 21.

Expanding adjacent see services, particularly on safety and Sanitization and.

Fully integrating our official ABS route or accounting system over the course of the quarter, we convert into additional markets and expect the remaining operations to largely be on this platform by later this year.

Greeting efficiencies rock and mice pricing strategies enhanced data analytics and improved service capabilities.

And supply chain, we continue to leverage on various spend tools to drive productivity cost reductions and efficiency on.

Our ongoing focus on deepening and strengthening our most strategic supplier partnerships is targeted to <unk> to deliver and not just productivity, but also on improvements and program areas, such as corner and collaboration product on price and product optimization to ensure client and consumer satisfaction.

As we effectively managed the business through this unprecedented period, we remain highly committed to building earmarks growth paradigm such progress as most recently reflected in higher education, and Sacramento State University, a prominent self op conversion that just announced its intention to outsource to earmark.

Looking ahead, our growth opportunities will be driven by leveraging innovation, taking place at a rapid pace to create seamless experiences for clients, particularly through adapted offerings that serve and the new environment.

What are our robotic capabilities, new applications and food delivery or autonomous grab and go convenience locations that include Quickies. Our award winning new concept, we have developed unique platforms with new and enhanced approaches to serve clients.

Technology has also been deployed to advance experiences such as cash flows and contact free payment options, particularly in our sports and entertainment business and being on the sector with strong initial success.

And facilities, we just launched Eric Mark intelligent workplace experience or AI Wx connect technology that utilizes real time and digital inputs from building systems wireless sensors, and occupant feedback to create safe on environments and improved building operational performance.

We're also applying our proprietary ever say platform focused on strategies to create client confidence and reopening and ongoing management on locations, while maintaining strict safety and hygiene protocols, we expect to scale the servicers as appropriate to reflect the ever changing needs of our clients.

We also continue to add organizational bench strength and most recently, including the appointment of Denise O'brien and early November to lead sales enablement, where she will partner with the businesses to support and drive and remarks growth priorities, including sales talent acquisition supporting large account client strategies as well as sales analytics.

Denise previously spent 27 years when there are mark and various leadership capacities from field operations to sales and corporate functional roles.

Before I turn the call over to Tom I want to acknowledge our dedicated team members, who continue to support our community and so on Tropic efforts, despite the challenges and Carbonite team.

While we were not able to hold our traditional in person Aeromar Goldman community day. This fall our teams mobilized to donate back to school and health supplies to public schools and provide a glance through our community partners for pandemic relief food and security and other projects.

I'm extremely proud of this commitment and the positive impact and made our local communities. The complements our deepening partnership with the urban League.

In addition last week, we announced a collaboration with American corporate partners and National non profit organization to help returning veterans and active duty spouses finder post military career through one on one venturing networking and on line career advice and it's an honor to be affiliated with such a commendable cause.

And we'll now turn the call over to Tom for a detailed financial review of the business.

Thanks, John and good morning.

Before we begin and I want to Echo John's sentiment and.

Also say how proud I am of our teams around the world.

Our continued commitment to our clients and customers.

True test and that of airports dedication to service.

Also as a reminder, the company's fourth quarter fiscal year 2020 included a 50 threerd week of operations.

For comparability purposes, and my comments are based on a 52 week 52 week basis.

Unless otherwise noted.

Our fourth quarter performance was consistent with the expectations, we articulated on the last earnings call and subsequent fire side chat webcast.

While our results obviously remains impacted by COVID-19.

Revenue showed solid improvement compared to the third quarter.

In addition, while we continue to invest in growth oriented resources and incur certain reopening expenses and <unk>.

We controlled the cost we could control during the quarter, leading to a day on drop through great and 23% on corresponding revenue decline.

Strong discipline and cash flow management again without compromise and growth related investments resulted in the business generating 146 million of free cash flow during the quarter, leaving the cash company cash availability and a healthy 2.6 billion at the end of the fourth quarter.

Consequently, and subsequent to quarter end.

Paid down $680 million of our revolving credit facility that will create future interest expense savings.

For the total company organic revenue was down 36% in the quarter compared to the prior year, reflecting solid improvement from the third quarter year over year organic revenue decline of 45%.

And strengthening performances across all segments as John noted largely driven by client Reopenings and expanded service offerings.

Yes, food and facilities had an organic revenue decline at 45% versus the prior year company.

And to a 56% decrease versus the prior year and third quarter.

Quarter over quarter progress was led by education.

Driven by University, Reopenings and participation and Universal government sponsored meal program, serving K 12.

International organic revenue decreased 31 per cent compared to the prior year.

And improvement compared to 41% decline in the third quarter.

China, and once again contributing double digit growth and the quarter, while navigating various stages and government imposed restrictions.

Organic revenue and uniforms is down 9% versus the prior year compared to a 12% year over year decrease and the previous quarter.

Performance and fourth quarter was most notably driven by improving trends and the rental business as.

As well as height and client demand for gas and see surfaces.

Total company adjusted operating income was a loss and 12 million in the quarter.

Refinery, reflecting as previously mentioned the 23% drop through rate.

On a corresponding revenue declined as the operating teams continue to effectively manage and you'd at product labor and other direct costs based on site level demand.

And unit cost control activity was somewhat offset by increased above unit costs related to operations field marketing HR and culinary to support greater business activity across all segments.

Corporate results and the quarter included higher cash and equity based compensation expense.

And the prior year, resulting from certain actions taken to reward the organization for a job well done and incredibly challenging environment as.

As well as inside the company leadership and remain focused on growth and long term value share holder creation.

Adjusted EPS was a loss of 35 cents and the quarter as a result of lower ally and higher interest expense associated with the $1.5 billion bond issuance in April and.

And deliberate drawdown on the revolver and March.

As I shared earlier, our recent pay down on the revolver is expected to drive interest expense savings and future quarters.

Now turning to cash flow.

And the quarter, we generated $252 million of cash from operations, and 146 million and free cash flow as effective cash management more than offset the net loss due to the impact of COVID-19 on operating results.

But the company is expected continued solid cash flow performance and strong liquidity, we remain committed to investing and growth opportunities paying down debt and.

Attorney value and shareholders that includes our quarterly dividend payment just announced this morning.

We continued to participate in the appropriate country specific government assistance programs, including benefits from the Cures Act here in the U.S.

Through these programs, we received approximately 62 million of labor credits and the quarter Joe.

Also at the costs, we incurred worldwide.

Related to the retention of the employees.

And per absorbing a 100% of benefit cost associated with furloughed employees.

Under the cares Act specifically.

We also had deferred remittance and federal payroll taxes, and and oil carry back modifications that totaled approximately 11 million and income tax benefits.

And we'll continue to look to optimize the available stimulus programs as appropriate.

Let me now touch briefly on our GAAP results.

And I previously mentioned fiscal 2020 contained a 50 threerd week of operations and is reflected in the GAAP numbers, yes.

The extra week contributed an estimated 177 million to revenue.

Well, having a negligible impact on operating income.

Interest expense and taxes for the extra week netted to an estimated $5.7 million expense, resulting in net net loss attributable to the 50, Threerd week, and 5.5 point $4 million or two cents per share.

The GAAP operating loss net loss and diluted loss per share.

Included certain non cash impairment charges.

Cost related to the organizational realignment that was initiated just prior to the fourth quarter.

Let me conclude by reflecting on the full year and.

Touching on our current thoughts on fiscal 2021.

Airports financial performance in fiscal 2020 highlighted the fortitude of our people and the flexibility of our operating model.

Organic revenue for the year declined 21 per cent compared to fiscal 2019.

Underlying growth and the first half more than offset by the impact of Cove and 19 throughout the remainder of the year.

Adjusted operating income similarly affected by COVID-19 was 294 million for the year.

Company quickly and quickly and thoughtfully implemented and unit cost reduction strategies, including renegotiation of client contracts.

As well as reduced core general corporate expenses to manage the A.O. I drop through rates and 22% on a constant currency basis during the second half of the year all.

All this while continuing to invest in growth related resources.

These proactive measure actions combined with effective working capital management strategies also benefited free cash flow, which was limited to a use and 188 million in fiscal 2020.

And as John mentioned, the company has generated positive free cash flow since the bond issuance in April.

As we commence fiscal 2021, we will continue to leverage our resilient operating model on managing the business with a long term perspective.

And firmly believe we are well positioned to navigate the ever changing environment appreciating the pace and exact timing of the recovery is evolving.

Based on our current expectations, we anticipate.

Organic revenue to improve over the course of the year with the first quarter expected to be largely in line with last quarter's revenue levels.

When considering the various stages of client reopening plans and.

And the timing shifts and higher Ed as many universities planned and the fall semester early.

We anticipate a wide to reflect the drop through rate of 20% to 25% and the first half of the year.

As a result of continued disciplined cost management ongoing restart costs associated with client reopenings as well as continued investment to support growth initiatives.

Margins are expected to gradually increase throughout the course of fiscal 2021.

As we transition from managing and drop through rate in the first half and.

Driving margin progression in the second half compared to fiscal 2020.

And we anticipate free cash flow.

Be in a range of $100 million use.

Generating $200 million dependent on the pace of recovery and timing of underlying growth.

We expect that the first quarter will reflect the seasonal outflow primarily associated with higher Ed.

Followed by cumulative cumulatively positive cash flow for the remainder of the year.

Thanks for your time, this morning, and I'll hand, it back over to John.

And thank you Tom.

We are operating in an environment of places enhanced value on execution expertise as Tom stated and we expect business performance improvement as the year progresses, and our transformative actions across the business our unlocked.

We're also closely monitoring and promising news reported this week and last of a potential of potential COVID-19 vaccines and the impact they may have on business in general.

Our belief and earmarks success is rooted in our exceptional teams around the globe were in the trenches with an unwavering commitment to serve clients. It's with this passion and focus on mine, but I have no doubt of our promising future.

Operator, we'll now turn the call over to you for questions.

Thank you we will now begin the question answer session. If you have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the queue. Please.

Please press the pound sign or the hash key.

If you are using a speakerphone you may need to pick up the handset first before pressing and numbers and.

In order to accommodate participants and the question queue. Please limit yourself to one question and one follow up on.

First question on will come from the line of Ken and Kevin Mcveigh from Credit Suisse. You may begin.

Great. Thanks, so much and congratulations on the results and then obviously very tough environment.

And Tom or John I guess.

Obviously, the cash flow is really really impressive, but just what drove the decision to kind to repay the 680 million of debt post the quarter I wouldn't want to to start there.

Yes.

Okay well.

Kevin and originally through.

Drew it down and out of an abundance of caution on it.

It's tough to go back to April now it seems so long ago that you know it was a it was a prudent measure at the time since.

Since then we've executed all the cost containment actions that John and I you know.

New and bleed business could could execute and.

And really strong working capital management.

It's a pretty strong cash flow result, we had since the bond issue and the revolver drawdown and found ourselves.

With a very healthy.

Balance sheet healthy.

Cash availability at year end and and.

Adjusted was the right thing to do and take.

Take the potential interest savings and.

Net of course capital is available to us should we need it on on short call, but at the moment and feel good about where we are and and and with the resources we have at hand.

Two per helpful. And then just real quick on any thoughts on John and Tom just on E and obviously on the uniform side, you're seeing really nice trends, there as well as the facilities and other.

Client demand is it similar kind of the trends driving those two or is it you know clients expecting other things had a facilities as opposed to uniform just any thoughts around that if you think about it within the context of the holistic business.

Sure I'll take that you're on first of all the uniforms because on the nature of their customer base continue to see improvement as more and more organizations return to work and.

And have a higher degree of certainty in terms of and.

Employees on site, so you see and the improving rental trends throughout the business and you also see and the in the.

Quarter additional PPD sales that were and that were requested during that quarter on the on the facility side as customers reopened and we saw a significant focus on enhanced cleaning requirements and not only on a on an episodic basis to reopen.

And but also on a continuing basis to maintain very high levels of hygiene and safety and confidence on the part of employers and institutions for their constituents and so we see that demand continuing.

To improve over time, and we see significant cross selling opportunities and both of those markets as we utilize those businesses to enhance safety and hygiene protocols for our customers.

Thanks, so much.

Thank you. Our next question comes on line of Stephen Grambling from Goldman Sachs You may begin.

Thanks, two related questions on and the first is a bit myopic, but with the vaccine news have you heard or seen chain.

Change behavior across segments, and then as a related follow up the guidance has a fairly wide range of outcomes embedded and ER and the free cash flow range. There I guess, if you could just elaborate on what are some of the assumptions.

Net or embedding the low end and the high end of that range and any other details you can provide on on some of the the lined out and simple and capex. Thanks.

I'm sure you know with respect to the vaccine news on I think obviously you have.

Many people hopeful that that can have an impact on their operations and business you know as the white availability and white availability becomes apparent.

You know I think all the business was wrong, we operate in have varying degrees of.

Have varying plans to reopen and restarts and based on their specific needs and the availability and availability of a vaccine would would significantly impact those I think it's too early to make a call on how it might impact the balance of the year.

And you know a lot of uncertainty with respect to timing implementation over.

Overall vaccine rates and the like so I think do you have a hopeful attitude on the part of most people and most of the business leaders, we deal with a buck and still a lack of certainty over how that might impact timing and return to work strategies and Tom do you want to take the question on the cash flow.

Sure.

It's really a bit of a.

Balance between Pacer recovery and underlying growth opportunity the range on the cash flow.

Yes so.

The quicker that the pace of recovery the stronger.

We'll have to be reinvesting in working capital as units reopened so that's going to put a little downward pressure on on free cash flow a similarly, if we.

Continue to get good underlying.

New business growth that could put pressure on free cash flow in terms of Capex investment.

So those two things might move us towards the lower end of the range. The upper end of the range would be and probably a little more stagnant and pace of recovery. So that the working capital demands on there and let's.

On a slower new business model so.

That that that's the range given the uncertainty that we still have and and.

And the pace and of recovery and the underlying new business performance.

That's helpful. Maybe one quick follow up on that I mean, I get the assumption there is that.

Working capital the inversely correlated to revenue if we think further out about the margin profile I know you've talked about a balance reinvestment approach.

Given what you've learned through ratcheting down the business adjusting the business and some of the convert the comments you made about technology, how should we be thinking about where margins could ultimately shake out overall for the business and a recovery thinking longer term and what are the puts and takes to to evaluate.

Yeah.

First of all I think we've guided historically that we believe margins and divestments will continue to recover and expand to pre corporate levels. We still are firm believers.

Yeah and that you.

And that model. If you will we think there's lots of business improvement initiatives that we can engage and as we reopened and we think we have engineered the organization and such a way that we've got some permanent cost reductions built into the operating model moving forward. We continue to make very significant progress on supply chain initiatives.

Does that continue to enhance margin capability. So we think long term.

The margin profile of the businesses and enhanced.

As a result of all these changes and that will return to pre cope and levels and beyond as we move forward past the pandemic.

Our next question will come fly and the Encino from Oppenheimer you may begin.

Hi, Great John and.

Maybe Tom Kim arms, and you guys are pretty involved on can you just talk about some big and new business wins, what the pipeline looks like how.

How personally bump and you guys actually and this I mean to try and give us a little bit.

Color on what's going on there. Thanks.

I'm sorry that question broke up for me a little bit do you would you mind repeating it.

Sure on the question is can you talk about and the new business wins and the pipeline that you're seeing out there also.

Also and how integral are you.

And in some of these new business wins and the pipeline maybe.

Maybe you could kind of give us a little color on how.

How you're participating in that and what Tom. Thanks, certainly well, we have a philosophy that everybody sells and this organization and as a matter of fact and just this past week, we were together and our.

Corporate office.

And with the leaders and the various businesses talking through growth strategies for the balance of 2021 and beyond and so we're we're intimately involved in both the stretch strategy and frankly in the customer evaluation and in the proposal process. So we're actively engaged in parts and.

On page and speak to prospective clients on <unk> on a continuing basis as we pursue those kinds of opportunities and so we're we're always willing and able to engage and and be part of that everybody sales mantra. If you will.

As I said earlier I think the pipeline is going to be very very active we've enjoyed a number of very good wins already this year I'm, particularly on the international side and that when its Sacramento state, we see a very robust pipeline of opportunities across the range of businesses.

And so we see a very active selling season.

As a as a real as a real possibility and are a real benefit to the future growth of the company.

On an international basis I'm extraordinarily impressed with the results we've been able to achieve.

In Chile, and in China, and frankly, and pretty much everywhere around the globe, even during that even during cold and there seems to be a very significant.

The improvement and the sales results on an international basis and domestically, we see some very large scale proposal opportunities some.

Some of which I'm not going to comment on because I don't want to identify some for our competitors.

And we're very pleased with the with the.

Quality of the pipeline.

Approached the organization is taken.

The fact that everybody has engaged and believes and the mantra and her of everybody sells and we are taking a very proactive actions to continue to enhance and growth paradigm is and as Tom and I. Both said and the discussion we have continued to make investments focused on growth.

Throughout the throughout COVID-19, we havent made reductions to any of the areas that impact the sales process or marketing processes and so we're very very much focused on that.

And our next question on control line of James Eylea from Citi You may begin.

Yeah, good good morning, everybody.

Just following up on on that Oh answer around.

Business with.

Sounds like an exciting opportunities when might we expect some of these opportunities to land.

And that's kind of secondly.

Can you maybe talk a bit about the competitive on tax some discussion on the industry back.

Struggling is that it's any opportunities to silk on trucks or even to acquire some of these smaller and smaller operators. Thank you.

Yeah, I would say, it's very difficult to predict timing of pipeline because companies and and.

And you.

You know clients.

Yeah, and I have to work through a process, particularly when it comes to self op conversion they have to work through the philosophical process decision first of all to go ahead and outsource and so that takes a period of time for some organizations to resolve and to work through as a as a complete that analysis and then you get into a potential.

If you're working exclusively with the client that process can accelerate if you're working on a bid and a bid situation. Obviously it takes time to go through that as well so hard to predict when the landing spot may occur, but and as I said I think we we anticipate a a good sales you're right. We've got a very robust pipeline and we're very encouraged.

And by the opportunities that we see there.

With respect to the smaller companies you know I would tell you that I think you know there are some companies that probably are stressed from a from a financial perspective.

You know, we we would look at those opportunities to be able to sell.

There are potential clients to pursue their clients on a on a competitive basis as opposed to an acquisition basis, but we would always be open to opportunities. If there was a company that had a client list that was.

No that was strong and was complementary to what we do.

But we're not actively out there and I think.

Suffice it to say, we want to sell new opportunities as opposed to acquire and then we think thats the most effective and efficient.

Way to acquire two acquired growth.

Great Great color. Thank you.

Thank you. Our next question will come from the line and Andrew Steinerman from JP. Morgan you May begin good morning first on Ive two questions first could you talk about October could you comment on organic revenue changes and October year over year overall and for the three segments, particularly.

Commenting on uniform and then secondly, I surely understood day I hope on this but disclaimers about on growth trajectory around what we know about the vaccine and now it does sound like you're pointing to third fiscal quarter. The June quarter. As you are hopefully return to growth.

Quarter and my question to you is could you compare what a moderate recovery would look like to you.

Compared to a much firmer recovery when do you just think about what we know about the vaccine today.

John I'll take the on the first one if you on Oh I'm sure you had to the growth trajectory, Yeah and you did the October look very much like Q4.

And that's probably the simplest way to say it.

And again on a bit of a pause on the road to recovery is as as we've been calling it.

But the and the numbers look.

Total <unk> are very very close to two to Q fours numbers across each of the three sectors.

Okay.

Yeah, and I and I have to be honest I'm I'm, a little bit on comfortable projecting what what things might look like.

Throughout the balance of the year I would say.

Right now were in a state of.

Trying to understand what the impacts will be the higher infection rates, whether there will be any continued shutdowns or additional shutdowns and what the political environment looks like we have business expectations and if things evolve the way, we expect them from a business perspective.

You know I think I think you're right that there is an opportunity to see the that business continue to ramp up over the balance of the year, but I think all of that can be impacted by.

You know by the pandemic and the political environment and so we're going to take a wait and see attitude before we comment to fully.

On a on what that might look like obviously, a vaccine would have significant consequences and the uptake by the American public the rate of vaccination would have significant and significant consequences and and obviously, we have some large businesses that would benefit significantly and the in.

In the springtime from that like sports and entertainment, So just very hard to predict.

You know with any high degree of certainty I do know that we can control what we can control that we have a flexible business model. We can adapt as we've shown over the course of the last six months, we've been able to really manage this very aggressively and very effectively and from a cash flow perspective, and an operating cost perspective.

Got it great organization focused on doing that so we will continue to control what it is weak and control and manage the business as efficiently and effectively as possible.

Our next question on comes on line, though Shlomo Rosenbaum from Stifel. You may begin.

Hi, Good morning. Thank you Hey, John can you comment a little bit more about something that you talked about last quarter and.

Net interest and outsourcing due to cope with 19 Q to discuss whether any of this increased interest is actually translate and Tara peas, and and are you seeing and expansion of that is there any change and what you saw last quarter and then I'll follow up with and I wouldn't have question after that.

Yeah, I would say, we are seeing and expansion of interest that has translated into active dialogues.

There have been some RFP that hit the streets for various opportunities.

And you know and I think we'll continue to be more here.

Here on the force in the next several months as we get into whats more on the traditional selling season, particularly around higher education space through 12, and others in other markets that to.

Typically have call. It from a January to June sales cycle. So I think we're just a little bit early yet in the <unk> and the selling season for us to really be able to call out what is going to look like but we do anticipate higher level of demand.

Okay, Great and then can you talk a little bit more about day higher education.

Expectations and this coming quarter I wasn't clear to me it sounded like there's going to be said the universities are talking about some early closing which might boost revenue like it sounded like we're talking about revenue that's going to be similar to last.

Last year's quarter and and.

Oh, sorry, if I missed something but I'm trying to kind of put that all together.

Yeah, I think what's happening on the University side as many universities as I think you're probably aware have decided to shut down between Thanksgiving and Christmas, which were which are generally generally you've got final exams.

During that time period, so, but universities and proactively said one students go away for Thanksgiving or they're not going to come back until after the first of the year and some other startup schedule and has changed so that and that does have an impact and this quarter in terms of expectation for revenues and I can't tell you what that number would be and and.

You know how that might impact the quarter yet.

We're still working through all that I will tell you from a philosophical and perspective I'm hearing from University, President and those in the industry that are very much focused on the spring semester and how to effect and to how to effectively increased the number of students and bringing them back.

You know on campus and got a number of University, president and saying they made it and they may may have made a strategic error and going completely virtual and then you have some that are that have the opposite view. So it's still very fluid.

And and we'll have a better well have a better view on that obviously as we get through December and understand what the plans are going forward.

For the University sector, but.

You know this quarter will be impacted by the decision to close and really.

And but we've been planning and adjusting for that really since the beginning of the and the school season started.

And our next.

A question on controlling the Manav Patnaik from Barclays you may begin.

Hi, This is actually Greg calling on.

Just to get back on that point on a trajectory to get back to a.

Pre co bid margins I think you talked about some of the opportunities on the permanent cost savings like on.

On the supply chain, maybe could you dig into that a little bit more and if there any other buckets the highly.

Thats right.

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Sure you know I think as we went through the changes in the organization over the course of the last six months.

We've found out on how to do more with less.

And sometimes.

You know as we as <unk> and sometimes when you have to work through crises like this pit.

It's going to position of learning how to work differently and we've been able to adapt and do that.

So I think you'll see permanent reductions and ask DNA going forward as we've learned how to do modify the business and we've moved resources from central to field.

They've been able to adapt and learn how to operate with a.

Fewer people on the organization as well, so I think you'll Steve probably a permanent reduction and SGN a that's a that's likely to last for a very long period of time and as we grow the organization will add back those resources very on a very disciplined basis.

Moving forward, so I think that that's probably a reality.

Also on the supply chain side, and we continue to work with our large scale buyers manufacturers.

And our partners in the industry to look for ways to to not only benefit our operations, but benefit them as well as you know we have a very long standing partnership with Cisco, which was a re initiated for this on and on a new contract basis going forward.

That that contract provides additional benefits for them and for us.

And we think that that will have some enhanced capabilities and enhanced visibility there.

They're under their new leadership, they've very much focused on enhancing the service offering that they're bringing total remark. So we see that as a real sports and.

Potential profit improvement as well so.

Lots of areas you know I think we have.

Continued focus on base operational improvement and we continue to invest and technology to help the operations run more effectively and as you look at things like cashless payment options and and touchless payment options that enhance the check on that and check average opportunities as well across a range of the business.

And as consumers.

You know don't have to reach in their pocket for cash and they can.

Either use their credit card or some I'd card or some other form of payment.

And it it has proven to enhance check averages and across a range of the businesses that we use it and so.

So lots of opportunity there are multiple avenues for margin improvement and growth.

And we're we're very confident on that.

Okay very helpful and then.

Moving on the sales force hiring side I think you talked about the continued hiring on the uniform side on the food services side.

And their continued hiring or is it more about taking those and place they hired last year and.

On the sales side, yes, yes, as you know it takes some time to ramp up employees and the sales and the sales area, particularly on the food side are we projected 12 to 18 months full effectiveness.

And we've hired several new people on the last year on the foodservice side, we continue to look for high quality sales people to go ahead and add to the organization to enhance the capabilities and to and to you know put.

Put more feet on the street, if you will are we.

Feel very comfortable with the level on resource that we have today, but we believe that we can accelerate growth by adding additional resources there as well.

So we're going to pursue that and but I would tell you that I think we're very comfortable and our interest sales skin and if you will we've really made some very significant.

Improvements to the store sales organization, the selling process and most importantly, the sales psychology of the organization and the growth and psychology of the organization over the last share.

Several years and part of that his leadership.

And the individual businesses and part of it is sales structure and we've addressed both of those issues I think I think pretty completely.

Our next question on comes from the line of Andrew Wittmann from Baird you may begin.

Great. Thanks for taking my question I guess most of my questions have been asked and answered, but I did have a clarification that just curious about here and time those accounts with you had about the government assistance you said in the quarter. There was $11 million I think dose and that cares EPS is that the payroll tax deferral. So that's based on an accrual on the balance sheet and then was the sixth.

The two in the quarter that you are correct that you recognize or that you experienced piece and that was a credit. So is that like a contra expense or some things that and income statement effect and the other ones basically a balance sheet effect for the 11 and could you give us the expectation that you think those will be for the fourth quarter.

[noise], Yeah, you've got that right. So 62 is really just a contra expense for costs. We carried that we were reimbursed force so they.

On a net to zero.

In the and and the other the the.

The payroll tax and balance sheet effect on.

In terms of looking forward and all the government programs both abroad and here.

Remain in force.

Our.

Furloughed, our level of furloughed employees and.

Diminish considerably.

From the from the third quarter and fourth quarter to today. So the dollar amounts will will flow.

Paul proportional and.

And then globally a lot of this program, it's a bit extended but we'll continue to monitor those and comply with the local regulations.

Regulations so.

Not and don't have the exact numbers on how those will play out internationally, but.

They should they should both numbers and continue to to fall as we move forward.

Okay. That's all I had thank you.

Thank you next question on comes on line of Toni Kaplan from Morgan Stanley You may begin.

Thanks very much.

In recent quarters, you've spoken about changing your contract structure to cost price and B and I and higher education and.

I want to understand a little bit better what that means for recovery on I know you have the ability to flip back to the prior structure when things got more normal and is there a certain volume levels are level that triggers that idle or is there you know the next quarter. It triggers that like just just how do we think of that.

The ability to sort of return to the upside and.

In terms of that contract structure change.

Those contracts are all individually structured based on specific client needs and locations. So there isn't a single trigger that would affect all the contracts at any given time, it's really a location by location and negotiation with the client and customer as they make decisions that impact their space.

Terrific locations, or so and that's and again and be and I, It's primarily management fee on or in the campus dining and world. We're operating under most of understanding.

That have various triggers based on the university's needs and where they are with respect to students on campus off campus virtual so yes.

It's highly variable based on the individual location and the size of the customer and the type of locations. So there isn't there isn't a single trigger I wish it were that I wish it were that simple, but it's not so it'll be a just like it was when we renegotiated those clients we had to do that and every location, we'll have to renegotiate back to the.

Final terms and every location on on a one on one to one basis.

But generally it will be as employees return or as students return and they reach prequaled at levels. We would go back to the formal contract and the former contract type.

If in fact, that's the choice of the client the client made decide.

To keep the contract under under the new terms, and we would and renegotiate based on that on that at that point and so.

Sorry that doesn't really give you much but that's the best answer I've got.

Okay. That's helpful and wanted to ask about uniform as well, hoping that you could expand a little bit on that trends and that segment on and what are you seeing in terms of just outright service cancellations or just benefit from Oh said the benefit from P.P. any sales and the quicker I you know how.

Do you expect that to continue thanks.

Yeah, I'm going to people and he sales obviously the third quarter was the PPD sales were very very strong fourth quarter was lower.

And then a than third quarter and it remains to be seen what will happen. Now is we have a spike and cases and his or her and a renewed demand.

Additional P.P. any and how it will translate into on going you are.

Those particular products and the great thing is we're in a very strong position to serve our clients need not only in the uniform business, but throughout the rest of the company as well if there if there comes and increasing demand for that kind of equipment, but I would say it should normalize that at a level that that reduced from the third quarter initial slug of demand.

And to a level that's more normalized you know.

On a going forward basis, and we'll see how that how that shakes out.

You know with respect to trends and the business you know, we as I said, we see continuing to and continuing improvement and weekly rental revenues, you know as more and more employers returned to their environments and more and more businesses continue return on one of the things and impacts that business is the fact that we do operate on what in the hospital.

Holiday space.

And so we have restaurants and operations that are not.

Not not at full demand as they ramped up and in terms of limited capacity. So we'll see.

And probably a plateau for a period of time until those restaurant operations are able to bring back.

More customers are on a higher level from a capacity perspective so.

So improving trends overall.

And we expect to continue to grow that business. We're out there actively engaged and selling new customers. Obviously, that's one of the reasons were going to add another 100, and another 100 sales managers this year and and plan for that investment built into our plan going forward.

And we're also going to be focusing on selling those adjacent services. The first day Sanitization, a restaurant services and others.

That that our clients are really looking for so and they said improving trends across the board and and we we expect that to continue.

Our next question comes line and Gary Bisbee from Banc of America Securities You may begin.

Hey, guys good morning I.

I guess the first question.

You've alluded to this a couple of times I guess, specifically higher Ed how are you seeing the recent surge and cases across the U.S. and Europe impacting.

Three openings.

That are coming back.

Go the opposite direction and.

As part of that commentary on the on the current trend I guess I just wanted to clarify Tom when you said Q1.

Similar to last quarter.

Two.

Excluding the 50, Threerd week year to year pace and.

Revenue decline.

<unk>.

You'd expect.

And your next quarter or what exactly.

On it.

Thank you.

Yes, that's it's a 52 week to 52 week comparison, so the Q4 52 week a decline over prior year as a percentage.

We feel will be very similar to Q1.

Again, a bit of a pause and the on the road to recovery.

And and October as I just mentioned.

It's very similar to Q4 to just to back up that that comment.

Yeah, and I would just add some color on the recent surge and cases you know as you as you know this [laughter] very highly dynamic phenomenon, that's occurring around around the globe and restrictions are coming on and coming on.

On a very volatile basis. So you know were.

Obviously poised to do what we need to do in terms and managing the business and all those environments and I think as you take a look at new restrictions that have been levied in areas and most of them are focused on gathering places on and then.

Sales of activities are not as much a with respect to employer activities. So.

You know at this stage, we haven't seen a reversal of employees coming back into buildings work. We're in terms of company operations, but we've seen it kind of plateau and not change. So I think people are waiting to see what that next wave looks like and how they're going to need to respond to it and so it's just a little too early to tell.

I think as all of this was really occurring and real time. So I don't mean to be Obfuscating don't you know and trying not and we're not trying to avoid the question under any circumstance is just that we don't know what we don't know, but we are hyper focused on managing the business and controlling what we control.

So.

For our clients and our operations and just being very diligent and being able to respond literally on a day to day basis to changes in demand.

In the various businesses we operate.

Total totally understood and approach.

Yeah.

As we think to the future and maybe next next spring and summer.

And to comp against the sharp declines and and hopefully.

Turning back to revenue growth.

Would it be reasonable to expect a similar 20, 20% or so.

Incremental margin I guess.

To that.

And the flow through on the downside you've seen in the last few quarters and I guess, if not why not.

And your commentary was on the first half you expect a similar flow through as revenue declines, but and long term, obviously incremental margins won't be that high but but should you see that similar level improvement when revenue doesn't look back at least for some period of time.

Hi, and you should I mean theoretically that's that's absolutely correct. So and so you should I and we're we're looking at as we move to the second second half.

Of the year and that possibility, we're looking at how that May play out and most certainly.

Provital and guidance as we get more clarity around.

Around that but but but theoretically that that that's where we would be.

Yeah as you as you know margin long term margin improvement is absolutely one of the goals of the business along with.

Along with growing the company and the reason we want to grow the company is being generated and long term margin improvement and enhanced earnings profile for the company. So.

We do believe that is a consequence of the reopening of the business as we are able to.

Reaccelerate growth and the enterprise and get year over year improvement from just to return to normal operations.

And our existing business that we should see enhanced flow through.

In terms of margin.

And your next question on can fly and know how is on the design from Jefferies. You may begin.

Hey, good good morning. Thank you. My question is just on on the B and I business.

I think John you mentioned, it's a longer recovery tailwind expected.

Good could you maybe talk about maybe flush that out and are more worried when do you think b and I recovers from a timing perspective to pre Colbert levels do you foresee any impairment did that business given sort of a.

For him and they work from home announcements force for some companies I know, you're pretty diversified with white color blue collar and hybrid, but just any thoughts on how to think about that business.

Yeah, you know I would tell you on long long term I don't believe that there is a significant change to the structure of that business that.

Even even with return to work or even with work from home kind of strategies implemented most.

You know most studies I've seen and most people I've talked to have indicated there that a fairly full and returned to work strategy is and the company's best interest.

And in terms and effectiveness in terms of innovation in terms of engagement.

And so I think that at the margin there will be change, but I don't think at it and dramatically impact the structure of that business over the long term.

You know I think you're going to see continued and we've taken the opportunity to develop a new.

New delivery models for customers of our clients that have people working from home. So we have a very innovative program and where the employer can go ahead and select a package to spend to their employees on various food products and supplies.

You know that deliver directly from me remark to the employee.

We've looked at a number of different approaches from a delivery perspective.

We've looked at a number of different modified service capabilities.

That enhance day the operations on the B and I sector.

Keeping in mind that the total.

Total business to be and <unk> remark is significantly.

Lower than some of our competitors they in long term impact of a b and I shift.

Is is somewhat muted for us because of the mix of business, both domestically and internationally were predominantly.

You know center and the country.

And we've got a significant mix and blue collar operations, which are affected last and in terms of their work from home environment.

In terms of the impact to Aero Mark we see it as somewhat muted.

In the long term and frankly, even in that sector itself or the industry itself. We don't think there is a long term degradation to the model for being on.

Okay, Great and just my follow up question is just a you know we've talked a lot about net new business on the call, but maybe if you could just touch on.

On client retention rates to day, how they're trending and whether you see an opportunity there. Thank you.

Yeah, we obviously, we have a very strong goal around improving client retention, we've seen significant improvement over the last six months.

You know not only for us but for the industry I think clients are proactively made the decision to go ahead and renegotiate contracts with their existing provider and providers I think that phenomenon. As this has been very beneficial for us and I think and Hasbro our competitors as well.

So I think industry retention rates are probably going to be you know.

Very very high and.

But as you know there are some businesses, particularly those self op conversions and there are some industries that require.

Rebid process season, I think those those will continue to move forward.

And it's our intention to move the retention rate of this company on a long term basis up from it and I call. It historic level of 96 to 97 to approaching 98, we want to we want to be and the company known for the best retention and the industry and so we're going to be very focused on continuing to perform for our customers.

And Ah performance, such a way that they don't want to make a change and to be the most valued.

A partner and the in the sector. So.

That's a long winded way of saying and retention is improving and we're going to make it even better sorry.

And our next question will come from Seth Weber from RBC you may begin.

Hi, Good morning, guys is that kind of hands on per set you.

The bench and a lot of the questions I appreciate that the detailed commentary I guess on the uniform side there.

And with the new sales force hires I wonder.

And you could help us understand how large that organization is today and the reach and hiring and.

Yes, Paul Portends to it a change in strategy there or optimism.

Well I think the the recent hiring really is a recognition of the fact that we've been under staffed and undermanned from a sales perspective and that sector for a number of years and that arc AAT and largest competitors have significantly larger sales forces.

And that one of the reasons for the difference and growth rates has been that number of feet on the street and so we recognize the need for a you know to go ahead and compete more effectively by having more resources and.

And particularly as we've layered resources and we brought them into the organization focused on a jason's be services. That's an easy that's an easy part of the business gross sales manager to go ahead and learn the rental side a little tougher. So we progressed those people through the organization into the rental business over and over a period of time, but it's really more a ready.

Ignition that.

We were under a resource from a sales perspective and in order to really change the growth trajectory on uniform is going to be more competitive with our.

Competitors than we needed to a significantly and increase those ranks.

So I you know I don't know that Weve actually disclosed the net number of resources, but I would tell you that it's a significant increase over the over the existing staffing levels.

Of the organization.

Okay. That's helpful and I guess just on that on the sales pipeline, obviously seem to rebuild and there you guys make positive could you maybe speak to the pricing or the margin profile of the pipeline and how is it different or similar to prior years and.

Tom maybe if you can remind us what the capital intensity or needs are for new contract wins. Thanks.

Sure. So on your will take first party you on beta on.

Go ahead.

And I think the margin profile as we look at the opportunities and the pipeline havent changed that much.

Really as we as we you know.

Look too.

To add to that.

Bid on those and.

Take those bids forward the cash.

Capital intensity is always depends on the sector.

You know with higher Ed and sports tending to acquire a.

On a higher capital requirement, but of course they bring.

Longer contracts and equivalent returns as we look at those so that the capex is sector specific and where the activity is and that hasn't really changed and and the margin profile at the moment again, we had.

Noticed much much difference and that I think it's more of a competitive.

A state of the competition and then it is co bit related and.

So we will keep an eye on that and and it's all about India and having the right relationship accounts activity with the clients.

And making sure that we understand what their needs are.

And can address those with with the different solutions that we bring to the table.

Thank you I'll now turn the call back over to Mr. Zimmer career Mikes.

Terrific. Thank you very much and really appreciate the dialogue that Weve had this morning, and the operating the Frank effect and arrays devoted so much time to us on.

And then looking forward to our participation and upcoming conferences and investor outreach and and look forward to having those conversations with you as we move forward. Thanks again for your time and we look forward to engaging in the near future. Thank you.

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

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