Aramark (ARMK) 2009 Q2 法說會逐字稿

Good afternoon. Welcome, ladies and gentlemen, to the Aramark Corporation second quarter 2009 earnings conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions after the presentation. I will now turn the call over to Chris Holland, Senior Vice President and Treasurer. Please proceed, Chris.

(technical difficulties) 2009. Here with me today is Fred Sutherland, our Executive Vice President and Chief Financial Officer. Fred and I will present an overview of our second quarter and year-to-date results and business operations, after which there will be an opportunity for phone-in participants to ask questions. I would like to remind you that any recording or other use for transmission of this audio may not be done without the prior written consent of Aramark. As we discuss the results, you may want to refer to the Form 10-Q we filed earlier today which contains our second quarter results for fiscal 2009. This Form 10-Q can be found on our website at www.aramark.com.

In today's discussion of results, we mention certain non-GAAP financial measures. The Form 10-Q, as well as schedules we posted to our website today, include reconciliations of these non-GAAP financial measures to the most comparable GAAP measures as required by SEC rules. Our discussion of adjusted operating income during today's call will in each instance exclude the incrementals intangibles amortization and property and equipment depreciation expense resulting from the going private transaction. The impact of stock option expense under FAS 123R, as well as an approximately $34.2 million charge we recorded in the second quarter to reposition our uniform and career apparel segment, given demand softness in our direct marketing business and the overall challenging economic environment. All of these items are detailed in the schedules posted to our website before this call. In addition, this quarter's sales and profits were somewhat affected by a shift in the calendar related to last year's 53rd week, as well as the timing of the Easter holiday. These factors caused a reduction in the number of service days in our first fiscal quarter and an increase in the number of service days in our second fiscal quarter. However, for the first half of the fiscal 2009, there is not a material difference in the number of service days as compared to the prior year.

Various remarks that we may make in this call relating to matters that are not historical facts, including remarks about future expectations, anticipation, beliefs, estimates, plans and prospects constitute forward-looking statements. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our Form 10-K and the Form 10-Q we filed earlier today. We disclaim any duty to update or revise such forward-looking statements, whether as a result of future events or otherwise. I would now like to turn the program over to Fred Sutherland.

Good afternoon, and thank you for joining us for our second quarter 2009 results call. I would like to review our business and operating results, and then Chris will cover a few additional details on our performance. Turning to our results for the second fiscal quarter, we achieved sales of $3 billion, down 5% from the prior year quarter. As with the first quarter, the growth rate was affected by the relative year-over-year strength of the dollar. Organic sales growth, which excludes both the impact of currency changes and acquisitions, was flat. Adjusted operating income was $149.9 million, up 2% from the prior year level. The 2% reported growth rate would have been flat excluding the negative impact of currency translation and the positive impact of additional service days in the quarter.

For the first half of fiscal 2009, sales were $6.2 billion, down 5% over the prior year period and just about flat on an organic growth basis. Our adjusted operating income was down 7% to $329.3 million, with currency translation contributing about 4 points of the decline and operating income for the half. While the competitive and macroeconomic environment is challenging across many of our businesses, our levels of annualized new business continue to be solid and our retention rates are generally consistent with our targets. We continue to see excellent long-term growth opportunities across many of our businesses with the less cyclical sectors, including education and healthcare offering particularly attractive opportunities for growth.

Now, turning to our North American food and support services segment. Second quarter reported sales were down less than 1% to $2.1 billion, with strong growth in higher education nearly offsetting declines in the business and industry and sports and entertainment sectors. Organic sales growth for the segment was slightly positive for the quarter, but would have been slightly negative excluding the benefit of the additional service days in the quarter. For the first half, sales were down 3% to $4.2 billion, with organic growth down in the low single digits. Turning to the sectors within the North American business, in general, the as-reported sales growth rates that I'm about to describe reflect the negative 1 to 2 percentage point impact of a weaker Canadian dollar.

Our business and industry sector had a mid-single digit sales decline for the quarter and for the first half, as higher sales in our remote services business in Canada and in facility services, as well as the impact of several small acquisitions in our refreshment services business, were more than offset by a decline in business food services and refreshment services due to lower populations and reduced discretionary spending across our account portfolio. We expect that the demand environment in the business sector will remain challenged for some time, and we will maintain a particularly sharp focus on costs in this sector. The education sector had high single-digit growth for the quarter and low single-digit growth for the first half, with strong base of business growth in our higher education food business offset somewhat by the impact of prior year loss business in K-12. The sector did benefit somewhat in the second quarter from additional service days. However, there's not really a material difference in service days when evaluating the results for the first half. In our healthcare sector, we realized a low single-digit sales decline for the quarter and for the first half, again reflecting, in part, Canadian dollar weakness, with solid base business growth being offset by the impact of certain loss business in the prior year. We expect that revenue growth in this sector should improve over the balance of the fiscal year as we began realizing the impact from approved new business and the retention results as compared with the prior year.

Our sports and entertainment sector had a mid-teens sales decline in the quarter and a low double-digit sales decline in the first half. Results in the quarter in the first half reflected particular weakness in our convention centers and parks businesses, while we also saw some softness in our arena operations due to lower year-over-year attendance at NBA and NHL games. With respect to major league baseball, so far this season, attendance and per capita spending levels at our venues have generally been consistent with our expectations and are showing relatively modest declines overall to prior year levels. We remain somewhat cautious with respect to how baseball will perform for us throughout the season, and we are focusing both on revenue enhancement as well as cost control at our existing operations. We were very pleased to open three new or refurbished venues this season; Citi Field, the home of the Mets, Roger's Stadium, the home of the Toronto Blue Jays and Kaufmann Stadium, the home of the Kansas City Royals, all to very excellent reviews. Adjusted operating income in the North American food and support services segment rose 12% in the quarter to $109.7 million, led in particular by strong profit performance in the education and healthcare sectors driven by solid base business growth and effective control of costs. As expected, segment results did benefit somewhat from the additional service days in the quarter and were negatively affected by currency translation. The net impact of these two factors contributed approximately 4 percentage points to the income growth in the quarter.

Cost mitigation and cost control efforts across the businesses had a positive impact and contributed to the segment's solid margin performance in the quarter. For the first half, the segment had adjusted operating income of $238.9 million. A weak Canadian dollar reduced income by about 3% so that income for the six months was down about 2% compared to the prior year, but primarily by a solid profit performance in the education and healthcare sectors. Overall, we are pleased with the segment's performance so far this year, especially given the external environment that we are operating under, which is as difficult as any we have ever seen. Our diversified portfolio of sectors, services and clients continues to be a source of strength and stability for Aramark. Our business model also provides us the flexibility to react to softness and demand by fairly quickly reducing costs, therefore allowing us to mitigate a significant proportion of any demand-driven profit impact. As we move forward, we will continue to pursue both revenue enhancement and appropriate cost control.

Turning to the international food and support services segment, second quarter reported sales of $560 million were down 15% from the prior year period as the negative impact from currency translation reduced sales by about 20 percentage points. Sales were up 5% on an organic basis, led primarily by the addition of new contracts in Chile, the UK and Spain, as well as the timing of the Easter holiday, which fell during the fiscal second quarter in 2008. For the first half, currency translation reduced sales growth by about 19 percentage points, leading to reported sales that were down 12%. Organic growth was a positive 7%, led by growth in Chile, the UK, Spain, Germany and Belgium. Second quarter adjusted operating income was $21.4 million, down 7% from the prior year quarter. However, income growth was positive when excluding the 9 percentage point decline attributable to the net effect of currency translation and the additional service days in the quarter.

For the first half, adjusted operating income was $42.8 million, down 14% compared to the prior year. This reported decline was entirely the result of the negative impact of currency translation, which reduced profit growth by about 15 percentage points in the first half. In our uniform and career apparel segment, second quarter sales of $399 million were down 7% from the year-ago quarter on both an as-reported and organic basis with our uniform rental business declining by about 3% and the direct marketing business declining about 20% overall. The sharp sales decline in our direct marketing business was across the board as both our traditional business clients and government agency clients in our galls division curtailed their spending significantly. For the first half, segment reported sales were $828 million, down 5% from the prior year with our uniform rental business flat. Segment organic growth was also down in the mid-single digits with the rental business down slightly during the second half. The segment's second quarter adjusted operating income was $28 million, down from $35.5 million in the prior year due to a combination of mid-single digit profit decline in our uniform rental business and very weak performance in the direct marketing business, which generated an operating loss during the quarter. In the first half, adjusted operating income was $65.4 million, down from $76.5 million, due in particular to the weak results in direct marketing.

As you may remember, over the past several quarters, we have been conducting an extensive review of our WearGuard Crest direct marketing division, and more recently, we have been examining our uniform and career apparel segments' overall cost structure, given the challenging economic environment. As a result, we took action in the second quarter to begin the integration of our WearGuard Crest operations into our much larger uniform rental business. This will include exiting the portion of the WearGuard direct sales business that focuses on consumers and very small business accounts. The shutdown of WearGuard's existing stand-alone distribution and operations center and the relocation of these operations into our existing rental distribution facilities network. This will further boost our ability to seamlessly provide both direct sale and rental items across our client base and reduce our direct sale operations cost.

In addition, we will be reducing headcount about 10% across the entire uniform business to respond to volume declines at our existing client locations which result from lower employment levels. The actions we are taking at WearGuard Crest, along with the actions in the remainder of the uniform and career apparel segment will enable us to operate more effectively and allow us to continue to provide our uniform rental customers with a very broad set of both rental and direct sale options. These moves will also more appropriately size the segment's infrastructure to the realities of the current demand environment. These actions have resulted and are recognizing certain charges in the second quarter which are largely noncash, primarily for additional inventory reserves, severance obligations and certain other asset write-downs. The charges total approximately $34.2 million before tax, or about $21 million after tax, with the pretax amount reflected in our second quarter income statement as part of cost of services provided. There will also be in aggregate approximately $4 million in additional end period costs over the next four quarters related to the repositioning, mostly related to relocation and shutdown expenses.

It is important to highlight that we expect the results of these segments repositioning efforts to be both earnings and cash flow positive for Aramark going forward, both in the short-term, as we reduce the WearGuard Crest asset base and over the longer-term, due to more efficient operating cost structure. Corporate expenses, excluding the items Chris mentioned earlier, were $9.2 million in the quarter compared to $9.3 million in the year-ago quarter. For the first half, corporate expenses were $17.8 million compared to $16.4 million in the prior quarter. For the second half of the year, we would expect these expenses to be slightly lower than in the prior year. Now, let me turn it back to Chris for some additional details on the quarter and on the half.

Thanks, Fred. I would like to wrap up our remarks by commenting on our financing, capital structure, and cash flow. Our adjusted EBITDA for the trailing 12 months ending April 3 was $1.087 billion, up slightly from $1.083 billion at January 2, 2009 and from $1.079 billion at March 28, 2008. Interest and other financing costs were $119.2 million for the second quarter compared to $129.4 million in the prior year. For the first half, interest and other financing costs were $244.4 million compared to $258.4 million in the prior year. Approximately 75% of our total debt portfolio is at fixed interest rates, and our overall weighted average cost of debt is approximately 6.75%. Total reported debt at the end of the second quarter was $5.853 billion, down from $5.969 billion at the end of last year's second quarter. Our secured debt as defined in credit agreement totaled $4.047 billion, including a term loan balance of $3.694 billion and a revolver balance of $51 million. Our accounts receivable securitization facility had $238 million utilized at the end of the quarter.

We enjoyed a strong liquidity position overall and as of quarter end, we had more than $525 million of available capacity under our $600 million revolving credit facility, and our credit facility is nicely distributed among a diverse group of 29 financial institutions. We also had $108 million of cash at quarter end. Based on our trailing adjusted EBITDA, our secured debt ratio improved to 3.65 times as of April 3 compared to 3.77 times as of January 2, 2009 and compared to 3.79 times in the year-ago quarter. Net capital expenditures for the quarter were $75 million compared to $73 million in the prior year quarter. For the year to date, net capital expenditures total $150 million compared to $140 million last year. For the full year, we expect our capital expenditures to be roughly in line with the prior year level, but below our planned level of expenditures coming into the year. As expected and consistent with historical patterns, working capital was a use of cash for us during the first half of our fiscal year. However, our working capital performance for the quarter and the year-to-date showed significant improvement compared to both prior year and our own expectations. Our teams are doing an excellent job in managing our receivables and our day sales outstanding improved again this quarter as compared to last year. Working capital management will continue to be a key focus and priority for us as we move through the balance of fiscal 2009.

During the quarter, we spent a total of $30 million on acquisitions, primarily related to the purchase of the remaining 20% of our Chilean subsidiary that we did not already own. For the year to date, we've spent a total of $49 million on acquisitions compared to $16 million in the prior year period. In this environment, we will continue to seek to invest strategically, but prudently in certain sectors and geographies. Now let me turn it back to Fred.

Thanks, Chris. Summing up our performance so far this fiscal year, our global food and support services business has delivered positive organic growth and levels of profitability that, excluding the impact of currency translation, are comparable to prior year's levels. Our uniform rental business is performing relatively well in today's high unemployment environment, and we are moving decisively to reduce our direct sales cost structure and better integrate our rental and direct sales capabilities. All of our teams have worked very hard to mitigate the profit impact from revenue declines in certain sectors, and our second quarter profit performance demonstrated good success in these efforts. We have shown good discipline in our use of capital, both for investment and in working capital management, and our cash flow and debt ratios have improved over last year. While the environment is challenging, we are still pursuing the many attractive growth opportunities that we have, especially in our less cyclical sectors and with our existing clients and believe that we are well positioned to seize these opportunities in the months and in the years ahead. Thank you, again, for your time this afternoon and for your support of Aramark. We would now be pleased to take your questions.

(Operator Instructions) Our first question comes from [Reed Ken] with Banc of America.

I just was wondering, a couple of things. On the gross margin, I guess most, if not all that charge you took went through the cost of sales line, and I was just wondering if you strip that out, if you could talk a little bit about how some other factors influence that, especially food costs, whether you saw some benefit there.

Sure. Our overall as-reported margin in our food business was up over prior year, and we did see -- we have seen a reduction in the rate of increase in food costs, clearly. A year ago, food cost increases were in the high single-digit range, and today they are in the low single-digit range. We've also seen some margin pick up from more effective management, more efficient management of our labor.

Okay, and on the food margin, is that a -- do you have much visibility out with your contracting, say, through the end of this calendar year in terms of seeing where that might go? Is the rate of increase going to continue to decline, do you think?

Well, we're hopeful that our -- we'll be able to maintain margins pretty comparable to where we have been. It, of course, depends to some extent on what the year-over-year demand is. So if we see accelerated weakness in the sales line, existing clients cut back employment and that sort of thing, that's going to put some pressure on the margin. But we've -- during the second quarter, what you saw across the business, including the uniform rental business, too, was the various cost mitigation programs really gaining some traction and that -- and those are -- certainly will continue through the balance of the year.

Okay. My other question was just on -- you made a comment about better retention. I guess I was hoping you could just elaborate on that a little bit within your US businesses by segment. And then more generally, in your contracting discussions these days, are you maybe seeing a better opportunity with some of your healthcare and education customers who are facing tough budgets, who may be more open to the outsourced opportunity? I'm just thinking of the growth opportunity with the new customer growth there. Thanks.

In the retention area, I think what I said is that our retention has typically been so far this year consistent with our targets, which, as you know, is in the 94%, 95% range across the businesses. So so far, that's been the result of our efforts this year. With respect to new business, as we've talked about in prior quarters, you have two forces at work. On the one hand, you have clients who are interested in more cost efficiencies and certainly, that's one of the strengths that we bring to the table and the ability to improve the economics of the operation through revenue enhancement through a much sharper consumer focus. But quite frankly, you also see some indecision within client organizations, given the pressures that they are under and the pressures individuals are under within an organization. So I think to be fair, we haven't seen an overwhelming migration towards contracting out on the part of self-ops, but just the continued gradual conversion that we've seen over the years.

Thanks, Fred.

And our next question comes from Reza Vahabzadeh from Barclays Capital.

Good afternoon.

Hi, Reza.

Just on the US food and facilities services, obviously, margins and EBIT improved nicely over the year. Can you talk about how much of that was maybe the extra service days, how much of that was your cost control mitigation efforts, just kind of elaborate on that particular segment.

Yes, I think as we said, the reported profit growth was about 12%. If you net out currency and the benefit of service days, it would have been about 8%, so still nice, nice performance. And again, as we talked about, really driven by the less cyclical sectors, with education and healthcare both delivering very strong performance and really, the cost mitigation and control efforts are really across all of the businesses and so as we bring more focus on food costs and on managing labor more aggressively, certainly in those sectors that are continuing to grow, you can see nice drop-through, and we certainly saw that. So still a very solid high single-digit growth, ex the calendar impact, and it's really, as we talked about the end of Q1 as we begin to put these plans in place, as Fred said, you're seeing the benefits of them pretty clearly in the second quarter.

Got it. And then as far as the cost savings and cost mitigation initiatives that you have unrolled so far, what's the annualized impact of those initiatives, and when should we start to see the full run rate impact of that?

We really haven't quantified the annualized impact. But I think that we have seen a good portion of those in the second quarter because the businesses pretty much across the company started focusing on the downturn in the first quarter and many of these programs were being rolled out at the end of the first quarter. So I think we'll -- we hope to continue to see the same sort of margin performance as we go forward that we saw in the second quarter, recognizing second quarter margin was benefited somewhat by the additional service days.

Right. Obviously, food costs are moderating. Are you generally on the spot market, or do you forward contract a portion of that?

Yes, we -- as you know, we contract directly with the manufacturers by and large. And it's really -- think of us as being fixing prices over a number of months, anywhere from three to nine months maybe, depending on the contracts. So at any point in time, and we obviously, as you can imagine, have hundreds, if not thousands of vendors on that side. So there's sort of a constant rolling off of prior negotiated pricing. And so we've got a large supply chain group that is constantly negotiating with these vendors. So we're not in the spot market, but we're not really hedging ourselves out much more than probably three or four months on average.

Okay, and what are the trends in labor cost inflation, if any? Has that moderated, or has that stayed in line with historical patterns?

Yes, it's really no different. Again, we hadn't seen much pressure on wage rates even historically and hadn't had a real difficulty sourcing labor at those rates. And so I don't think we've seen really much of a change.

Okay, and then lastly, acquisitions. Obviously you've made some of that in this quarter. Will there be more to go in this next 12 months as maybe more opportunities come your way, or should we expect more of the same as in the last couple years?

Again, I think that the theme is the same. We're certainly continuing to look at opportunities that are attractive to us strategically. We're pretty sector-focused and geography-focused in terms of where we're looking to grow. And -- but we're also being pretty disciplined in this environment. And obviously, the targets are being impacted by this environment, and you've got that dynamic again where there may be a bid ask that's a bit wider than typical between the buyer and the seller. So, I think -- I don't think you're going to see an unusual level of activity as you look out over the next 12 months compared to what you've seen from us in the past and maybe a bit less.

Okay. Thanks so much.

Sure.

And our next question comes from Karru Martinson with Deutsche Bank.

Good afternoon. Just looking at the international business, I was wondering if you are seeing any sort of a slowdown going forward as they kind of lag at the US economy. But then also, it seems that you're doing a good job winning in new accounts there. I was wondering what the dynamic there is on that front?

We have seen a slowdown in Europe recently. We have, as you know, large operations in Germany, in the UK and Ireland and in Spain, Belgium. And that's been somewhat of a lag to the US slowdown, but we are clearly seeing that. And you might recall that our business mix is more weighted towards business clients outside of the US, outside of North America than it is inside of North America. I think the position with respect to new -- the ability to win new business and lost business really has been pretty much the same, frankly, over the first half of the year.

Okay, and in terms of the headcount reduction, the 10% in the uniform and career apparel, when should we see those cuts come?

A lot of them have already occurred. And that's really a reference to total headcount reduction from the beginning of the fiscal year to based on these most recent actions that we've taken to where we see the business as we complete this latest round of reductions. So they have been occurring throughout the fiscal year. Some more have obviously occurred quite recently on the back of our decision to move forward on the restructuring and repositioning Fred talked about. So as we get into, certainly Q4, we would fully be realizing the benefits of those reductions and really towards the end of Q3, almost fully realizing them.

Okay. Could you just refresh us in terms of when do we anniversary the lost business in the K-12 education side?

Really at -- we're getting close. The school year is wrapping up here in the next number of weeks. So by the time we're to Q 4, we have about lapped it.

Okay, and then just lastly, I think you mentioned in the first quarter that you guys -- the goal is to be free cash flow positive for the year. Just -- is that still the case?

Absolutely.

Thank you very much, guys.

You're welcome.

And our next question comes from Carla Casella with JPMorgan.

Hi. Couple of questions. One, on the stadium and sporting event, you mentioned that baseball attendance has been in line with your expectations. Can you give us a sense for how much you expect that business to be down for the year, the attendance?

Well, we do expect attendance to be down for the year, and we are hoping that it's going to be down in the low single digits. That would be our expectation.

Would that put it in line with what you saw with the winter sporting events?

Yes, pretty much.

Yes.

Okay. And actually --

Actually -- NFL actually was sort of flattish, NBA and NFL.

Okay, and then when you've opened the new stadiums you've mentioned, is there typically a big increase in the amount of concessions in there or the price points, or how would that vary versus their replacements?

Well, typically we do pick up some revenues. In a new -- Citi Field, for example, even though the facility itself, the seating is smaller, the total revenues that will come out of that facility in a season are higher, just because of the structure. It has a much higher number of suites, more club seats, more restaurants, so the overall revenues go up. And it would be -- the other two are actually refurbished facilities. But we would expect to see some pickup in revenue as a result of it either being a new facility or an upgraded facility.

Okay. And then last question, as you look month to month in terms of the business services, I guess the typical business food service type client, are you seeing any stabilization in traffic at those businesses, or is it still under pressure?

I think it's still under pressure. Again, I think when you look to, the key number really to focus on is unemployment and obviously, we've all seen unemployment continue to move higher, and those people that have been employed in a lot of cases are in accounts that we run. So as companies continue to reduce headcount, which they obviously are, our business would continue to feel that impact, and I think that's certainly still true today.

Okay, great. Okay. Thanks.

You're welcome.

And our next question comes from Mary Gilbert with Imperial Capital.

Yes, I wondered -- kind of going through some of the initiatives that you talked about, particularly associated with the charge that you took, the $34 million. So it sounds like that is going to be accretive, particularly since that distribution business direct to consumer was losing money. Could we see a swing there where we would have, let's say it would be accretive to EBITDA to the tune of like $15 million, just exiting that portion of the business and then plus the cost savings being added to that? So could that be sort of a $15 million to $20 million positive impact? And then, considering the other initiatives, the way you're looking at your business with some of the challenges, would you say you still expect -- would you expect EBITDA to be up year-over-year as a result?

I think that the number you referenced in terms of an impact is certainly possible once we come all the way through the restructuring, right, which is going to take us, as we said, over the next three quarters to fully implement. In the meantime, as we said in our prepared comments, there's some additional in period costs that we're going to continue to recognize. And obviously, the business overall is also somewhat stressed in this environment. Certainly, the sectors we're exiting more so, but the rest of the business is stressed from a demand standpoint. But as you look out certainly 12 to 18 months and we get into a more stable environment, I think the improvement you talked about is probably a reasonable one.

Really not expecting our -- the total transfer of the distributions and the customization -- the distribution and the customization operations until somewhere around the end of the calendar year, and possibly into the second quarter. But you're right, we'll get two benefits. One is even though we have a P&L charge, for example, we set up part of that charge is for additional reserves on inventory. But the inventory liquidation will be cash positive. So the net of the one-time action will be cash positive and then in addition, once we complete the restructuring and the relocation, we'll essentially -- we expect to be avoiding the operating losses of that business going forward.

Yes, yes, so that makes it accretive.

That's right.

Actually, given the working capital improvement, I know there's seasonality in there that we experienced in the second quarter, but I sort of get the impression that we should see working capital as a source of cash this year. If so, what would be the magnitude of that number? Could we see a $50 million to $100 million benefit? I wanted to kind of get an idea of how we should look at working capital.

Sure. I don't think we want to give a projection necessarily for the year, but certainly, in a typical year, you have working capital sort of neutral. Again, last year, for some specific reasons we talked about, it was a $75 million, $80 million use. This year, we certainly anticipated it to be closer to zero, and we're certainly six months through the year, as we said, nicely improved over prior year and certainly nicely improved compared to our own expectations. So we're going to continue to focus very much on driving receivables and driving working capital. And I think we'll see how we end the year. But certainly, we're running ahead of where we thought we would be.

Okay, great. So, yes, it looks like now it's going to be closer to a source. You've been targeting to be break-even or to have that be flat year-over-year, but looks like you're doing better than you expected on those efforts. So it could be a source of cash.

I think it's certainly possible. As Chris said, we expect working capital to range from a modest use to a modest source of cash. Not to get too deep into the accounting, but the reserves that were set up as a part of the $34 million charge, many of those are essentially in current liabilities as severance reserves, for example. Mechanically, that is a reduction of working capital. But if you look at the change in working capital through the first six months of this year compared to the first six months of that year, the improvement in that change year-over-year is well in excess of the reserves that were established in current liabilities as a part of that charge. So even on an apples-to-apples basis, it's quite a bit better. Some of that naturally comes out, because in the economy, as the growth rate of the business declines, you get some freeing up of working capital as a result of that, but also importantly, as Chris mentioned earlier, day sales outstanding across all of our businesses and our receivables have actually declined. We've been very focused on collections, and receivables are a major component of working capital in this business. It's not a high inventory business.

Absolutely. Okay, great. So I guess just -- we're trying to weigh all various business segments in the end markets that you serve and how you're managing, because you are clearly seeing weakness in some of the sensitive sectors, particularly internationally with the business services side, domestically here with the sports arenas, convention centers, and the like and of course, the uniform side. So we're trying to weigh all of that, but I get the impression, when I look at this quarter, you did have some benefits because of additional service days. But we wondered, with the initiatives that you have, are you able to offset the erosion on the top line and maintain the same level of profitability? Is that sort of fair? Is that fair to look at it that way?

I think if you look at our EBIT, or EBITDA, if you look at our LTM EBITDA, adjusted EBITDA as Chris mentioned, LTM, September LTM, December LTM March, what you're seeing is we're holding our adjusted EBITDA pretty much constant to actually improving it slightly. And the uniform rental business is down modestly in profit in the first half. As we mentioned earlier, the overall global food and support services business is up slightly on an organic -- adjusting for currency. So in general, the actions we've taken to enhance revenues and control costs have largely kept our EBITDA constant. In addition to that, because we've been very focused on controlling capital expenditures and controlling working capital, we're -- our expectation this year is the amount of incremental bottom line cash flow that we'll generate out of those activities will more than offset any flatness or potential declines in the EBITDA. So we're feeling fairly confident that our bottom line free cash flow is not going to be negatively affected because of the mix of all of these actions.

Got it. I got it, yes. On the EBITDA side, it's hard to know whether or not you'll be able to sustain EBITDA as we move through the year with the challenges. But even so, you're able to offset that with those other actions on the working capital side and reduction in CapEx.

That's right.

Correct.

Perfect. That's helpful. Thank you.

You're welcome.

And we'll take our next question from Theresa Fox with Stone Harbor.

Thank you. Your charge of $35 million that you took during the quarter, could you give us a little more granularity, how much of that is related to the severance costs, facility closing, inventory writedown, et cetera?

Sure. The inventory -- and I believe this details in the Q in the footnotes of Q, so you can certainly verify it there. I think the inventory is in the $18 million range. The other asset impairments, which includes the facility in Norwell as well as some other assets, is another $3 million or so, or $5 million in total between all of the other asset categories. And severance is another $6 million to $8 million, I think, if I recall. So I don't have the numbers, unfortunately.

And that would be across the entire uniform segment.

Across the entire segment.

But that -- actually, I think it's footnote 12 in the 10-Q --

Okay, alright. I didn't get that far yet.

We just released it a few hours ago, but it's in there.

Okay. And could you -- I'm just confused about why the rental business is holding up well versus WearGuard. Is there some fundamental differences in those businesses? I would think they would move in corollary.

I think that the direct sale business is somewhat more discretionary. The rental product, if you think about it, if a business is continuing to operate, even if it's operating with fewer employees, which a lot of our clients are, the uniform and product we're providing is typically essential to the operation of the business. So the pressure there is really fewer people wearing the uniforms. The direct sale is much more discretionary. You've got people who can continue to wear what they're wearing as opposed to replacing it with a new garment.

Okay. And just another question. On the prison business, which last year, you suffered a cost inflation and dietary restraint, so margins were squeezed there. I was wondering if you could give us an update for this year. Thank you.

The inflationary environment is very much moderated in the corrections business, which as you recall correctly, is the one business where we're providing a fixed-price meal and don't have an ability to really manage through higher commodity costs. But I think we've really lapped that issue, and that business is now stable from a profit standpoint.

Okay, thank you.

You're welcome.

And our final question is a follow up from Reza Vahabzadeh with Barclays Capital.

Yes, on the healthcare and education segments in the US, obviously, reasonable sales trends year-to-date. Without getting into specific guidance, is it likely that those kinds of sales trends would be sustained in the foreseeable future? And on the other side of the coin, the business and industry sales trends as well as sports, have those sales trends -- would you expect those trends to remain about the same in the near term?

Yes, I think on education, there's the two pieces we've talked about, higher education, we would expect to continue to perform in that mid to high single digit range. And as we said, as we get through the end of this fiscal K-12, which will begin to lap some the lost business, should return to more normal levels of positive growth. Healthcare, as we said, which has been a little more flattish recently, we would expect to grow at higher rates as we move through the balance of the year on the back of, again, stronger retention and better new sales versus prior year. So again, over the both near and medium term, both those sectors, we think, will continue to show nice positive organic growth.

The business sector we think will continue to be under pressure, and sports and entertainment, which is, as you remember, is not only our stadium and arena operations, but it also includes our national parks business and our convention center accounts, we think will continue to be under pressure. Whether it stays at this level year-over-year or ratchets down a bit, is really, I think, a function of whether unemployment continues to rise and whether there continues to be acceleration in the decline in the economy.

Got it. And on Europe, obviously organic sales have been solid lately. Is that a function of particular new wins that you might cycle against, or is that a continuing trend that one should expect? It's been, to some extent, driven by some new wins that we may cycle against and to an earlier question that was asked, we are seeing, particularly in Europe, an overall slowdown, and you can see that reflected in international in the organic growth rate in the second quarter versus the first quarter.

And just the one other thing I'll just highlight and obviously, we can talk about it in the coming quarters, but the impact of the Olympic games last year will obviously impact the reported organic growth rates for international business, but we'll try to give clarity to what the impact is once we get there.

Because we did recognize sales both in Q3 and in Q4 last year related to the Olympics in Beijing.

Right, in our organic growth numbers, which won't obviously be there this year.

Got it. and then just a cash cost of the restructuring charge would involve, obviously, the severance expenses, but also essentially the writedown of the inventory, which is basically cash that was previously spent on inventory.

Well, if you think about cash going forward, the inventory reserve is noncash and the inventory liquidation is cash position. It's true that we spent cash on that inventory earlier.

Right.

But from this day forward, if you look at the components of that charge, it's really the severance portion of it that is cash negative. And we get a tax benefit. As we mentioned, it's about $20 million after tax, so over the coming quarters, as we incur those losses, we will get a cash tax benefit.

Got it. Thank you.

You're welcome.

And that concludes today's question-and-answer session. I'll turn the call back over to Mr. Chris Holland.

Thank you again for your time and participation today, and we hope that you have a great afternoon.

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