Aramark (ARMK) 2020 Q2 法說會逐字稿

Good morning, and welcome to Aramark's Second Quarter 2020 Earnings Results Conference Call. My name is Cherie, and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast (Operator Instructions)

I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Affairs. Ms. Kissell, please proceed.

Thank you. And welcome to Aramark's Second Quarter Fiscal 2020 Earnings Conference Call and Webcast. Certainly hope those listening are doing okay. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website.

With that, I will now turn the call over to John.

Thank you, Felise. And good morning, everyone. First and foremost, I hope all of you and your families are safe and healthy. I'd like to open the call with some thoughts and reflections on the current operating environment. Here are a few observations given the mission-critical role Aramark has played and will continue to play as a key enabler in a broader recovery and where we go from here. I will also review our quarterly performance as well as the proactive actions our Board and management team are taking to position Aramark to emerge as an even stronger company. When I returned to Aramark in October, I never imagined we would be front and center amid a global crisis with a critical mission ahead of us. During this pandemic, our teams have worked tirelessly on the front lines at hospitals, schools and other facilities, providing safe and hygienic food, uniforms and facility services. Our team members have stepped up in unimaginable ways to serve clients at countless locations. And as I shared with employees a few weeks back, these individuals are truly heroes working among heroes, helping us to get past this acute period.

As we review the business with you today, Aramark is taking decisive actions to navigate this challenging environment while pursuing paths to ultimately build a sustainable growth-minded organization that can particularly flourish when the pandemic is behind us. Our strategies are deep-rooted in our ability to leverage a diversified and flexible business portfolio to join forces with an impactful network of world-class leaders and influential partners to maintain strong liquidity and financial flexibility and to unlock the long-term economic potential of the business. We are taking timely proactive steps to adapt the company to the current challenging environment and to further bolster our already strong financial position. To that end, we recently announced an upsized offering of $1.5 billion of senior notes and an amendment to our existing credit agreement to provide additional financial flexibility and to further improve the company's already strong balance sheet as well as available cash balances. A proactive drawdown on our revolver as a precautionary measure, similar to other prominent companies. The temporary reduction of salaries for certain executives, including the named executive officers as well as the cash retainer fee of our directors and other significant reductions to general corporate expenses. I know Tom plans to share his perspective as well as actions underway to optimize working capital and defer capital expenditures as appropriate to adapt the company without compromising the business and strength in Aramark over the long term. We are managing through varying degrees of closures and cancellations of schools, colleges, businesses and sporting events where the top line impact from these necessary governmental actions began in March and continues through today.

To mitigate the bottom line impact, we are simultaneously flexing our highly variable cost structure. In some capacity, we are operating in hard-hit areas such as Education, helping to nourish students while schools are closed, serving over 25 million meals across hundreds of K-12 school districts as well as business and industry focused on the manufacturing and pharmaceutical sectors that remain in operation. We are in close touch with the professional sports leagues that are currently determining the most appropriate time line for their return, including Major League Baseball, an important potential upcoming season for us that could represent an abridged schedule playing into late fall.

Our leisure businesses in operation in some of our larger properties, including Lake Powell, Pikes Peak and Lake Quinault with reduced attendance. And Yosemite and Denali are currently closed. Denali is largely accessed by Alaska-bound cruise ships with a peak period typically from June to September.

And corrections remains relatively stable as we assist clients supporting the safety and well-being of this population. Our teams in Healthcare, facilities and other as well as Uniforms are admirably managing the demand in front-line care that includes foodservice, cleaning and supplying PP&E for essential roles in hospitals and other critical industries. At health care facilities across the country, we've opened on-site pop-up grocery stores to serve as a one-stop shop for doctors, nurses and other hospital staff to grab necessities on their way home. We've mobilized our emergency relief and large-scale event expertise to aid temporary field hospital operations in several cities. And at hundreds of essential businesses, state and municipal facilities, we're providing safe, hygienic meals and uniforms as well as additional deep cleaning and facility services.

In international, our diverse verticals across 18 countries are at different stages of managing through their respective operations. In Asia, where we primarily operate in health care, our business has largely recovered. We've been awarded new opportunities in this region, specifically in China, based on the strength of our response to the pandemic and the commitment we demonstrated to our clients.

In Canada and Europe, most predominantly in Spain and Germany, we have seen a slowdown as a direct result of government-mandated shutdowns with continued operations in health care and other essential businesses.

Operations in Latin America have been affected to a lesser extent, and our teams are quickly adapting to changing conditions in that region. Broadly, we are complying with country-specific government protocols and expect to participate in the appropriate programs for employee support, business loans, tax deferrals or reimbursement once these programs are formalized.

As I mentioned earlier, I wanted to spend a moment discussing how the company has been contributing to the pandemic response. I'm proud and humbled by Aramark's efforts and those of our individual team members. We've created an effective platform that is joining forces with world-class and influential partners to foster a hospitality spirit throughout our portfolio and beyond. Recently, we were honored to join the Debra and Leon Black Family, the Mayor's Fund, Robin Hood and the American Red Cross in supporting the health care heroes at the epicenter of the pandemic in New York City. Aramark employees are providing procurement, assembly and delivery services for up to 500,000 packages of shelf-stable food and personal care products to staff at hospitals across the 5 boroughs through June.

As part of our philanthropic program, we've donated over 150,000 pounds of food to local organizations and continue to provide food, supplies and other resources to communities around the country. And as you may have seen yesterday, we were supporting the American Red Cross Coronavirus Outbreak Fund to honor the incredible health care workers for their hard work and sacrifice as part of the National Nurses Week and National Hospital Week.

Uniforms has shifted certain production lines to manufacture millions of medical masks, scrubs and gowns for health care providers and other critical industries. Our products are shipping to Aramark clients across the U.S. in the health care, pharmaceutical, biotech, medical device and other vital industries where employees rely on these supplies to perform their jobs.

As we look to the future, our teams have been working to define the new normal across our operations. We have developed comprehensive reopening plans, including new models for service delivery and customer engagement, all designed to ensure the safest, most hygienic environments. Our diverse supply chain remains stable and largely unaffected for front-line operators, clients and customers. We're particularly focused on assisting in PPE supply replenishment, which our Uniforms team is now helping enormously to address, as I just mentioned. We're closely monitoring commodity markets and seeking appropriate entry points to mitigate any potential future volatility. And our commitment to strong relationships with key strategic and preferred suppliers has been invaluable during this period.

While focused on helping communities and need across the nation, we also recognize the immediate hardship this is having on many of our employees. In addition to offering support where we can, our government affairs team is working to identify opportunities for Aramark to be of service in response to the pandemic and targeted stimulus that will help us provide that service.

Aramark expects to see multiple benefits under the CARES Act, including employee retention tax credits, payroll tax deferral, NOL carryback modifications and other stimulus measures as we have every intent to fully reactivate the business and ultimately pursue the multiple growth opportunities ahead.

While we are managing the complexities of the current environment, we've also continued to sharpen our organizational bench strength that includes the return of Jack Donovan, a respected hospitality industry veteran, who was appointed President of Higher Education in March. Jack previously spent 18 years with Aramark, holding various leadership roles, including President of Higher Education and Group President of Education, Corrections and Sports & Entertainment. He also served as Executive Vice President and Chief Growth Officer of Univar Corporation. We look forward to Jack's leadership and the impact it will have on one of our largest businesses.

I'm confident that with our strengthened executive team, combined with our seasoned Board and passionate employee talent, Aramark has the right people in place to quickly resize our flexible business and manage through even the most challenging periods while ensuring we will be fully prepared to perform strongly in the recovery.

With that, Tom will now provide a detailed financial review of the business. Tom?

Thank you, John. When I joined the company a few months ago, I certainly didn't expect for the world to be where it is today. We've all had to make many adjustments, both personally and professionally. And like John, I couldn't be more proud of how the Aramark team around the world has responded.

Our performance in the second quarter was in line with preliminary results announced on April 22 and is a testament to the flexibility of the variable cost model and diversification of the business. Our strong capital structure was further enhanced after quarter end with the recent actions that increased liquidity and amended the secured debt covenant in our credit agreement to provide for greater flexibility. While there was underlying growth -- revenue growth across the overall business in the quarter, organic revenue fell 5.4% or $218 million compared to the prior year, driven by an estimated $325 million impact related to COVID-19. U.S. food and facilities had an organic revenue decline of 7.7% or $186 million compared to the prior year. The decrease was primarily attributable to an unfavorable

impact across much of the segment, as John detailed, of an estimated $225 million related to COVID-19. This impact was slightly offset by underlying net new business growth in business dining and facilities and through solid pricing gains throughout all the U.S. businesses.

International organic revenue decreased 4.1% or $38 million compared to the prior year as our teams dealt with the virus for much of the quarter, specifically in China. In the period, COVID-19 reduced revenue by an estimated $75 million, offsetting the net new business growth, strong account retention and price increases across multiple regions, most notably in emerging markets. Additionally, year-over-year performance was unfavorably impacted by about $12 million in the quarter by the strategic exit of noncore custodial accounts in Europe late last fiscal year. The Uniform segment showed resilience in the quarter, growing the top line 1% compared to the prior year, overcoming an estimated $20 million impact from COVID-19. The positive momentum from our investment in sales resources earlier in the year, combined with the segment's diversified client portfolio, help mitigate the revenue impact of the virus. First Aid and Restroom services continued to perform well in the quarter as the demand for clean, safe and healthy workspaces increased in the current environment.

Adjusted operating income was down 30% or $72 million in the quarter on a constant currency basis compared to the prior year, with an estimated $70 million of the downturn attributable to COVID-19. This limited impact was due to our ability to quickly flex the fully variable components of the P&L, namely cost of goods sold, hourly labor and other direct unit costs. For the sake of clarity, I want to note that the provisions needed to fund our equity and incentive-based compensation plans were significantly reduced given the impact of COVID-19 when truing up these provisions at the end of the quarter. To get an appropriate estimate of potential payout, the adjustment included funding generated throughout the first half of the year. This action provided a bigger benefit in Q2 than we expect to get in Q3 or Q4 if the current level of business impact from COVID-19 remains the same. So while a portion of the lower equity-based and incentive compensation expense in the quarter won't repeat, it will be offset by the significant actions we took at the end of the quarter and into April to reduce semi-variable cost, including renegotiations of client contracts, field and management salary and other compensation adjustments and reductions to general corporate expenses. With these additional mitigating initiatives now in place, we continue to expect the AOI drop-through rate to ratably improve to approximately 20% over the near term, which we believe can be managed lower to near 15% over an extended period as conditions and duration warrant.

Before turning to a detailed view of AOI performance by segment, let me add one broader point about the drop-through rate. We will continue to operate the business with a long-term perspective and not to achieve a short-term metric. We have left untouched many costs required to maintain and grow the underlying business, including sales and client management resources. If we can win new business, retain a client or extend a contract by carrying extra costs or making a high-return capital investment, we will do so in light of both near-term cash management and long-term value creation. In fact, as an example, we're already benefiting from this approach as we have signed over $75 million of new business in Asia and Europe since February due to the efforts of our teams to provide additional support and meet clients' needs during the initial outbreak of the virus.

Now turning to AOI segment performance. U.S. food and facilities declined 39% or $59 million on a constant currency basis, primarily as a result of an estimated $50 million profit impact related to COVID-19 as well as negative net new business in Education and increased investment in sales resources to accelerate longer growth recovery. The international segment's AOI fell 67% or $29 million on a constant currency basis, driven by an estimated impact of a little more than $30 million from COVID-19, slightly offset by the benefit from the strategic exit of noncore facilities earlier -- or sorry, late last year in Europe. The international operations tend to have a higher drop-through rate as labor costs are less variable in the near term due to labor laws and regulations specific to each country.

AOI in Uniform decreased 9% or $6 million on a constant currency basis due to an estimated impact of nearly $10 million related to COVID-19 as well as from personnel costs related to sales growth initiatives and the interruption of operations related to damage caused by tornadoes to our Nashville commercial laundry facility. These profit decreases were somewhat offset by solid underlying new business growth and synergies from the AmeriPride acquisition. And corporate results were $22 million favorable to prior year, attributable to a reduction in equity-based compensation expectations resulting from the impact of COVID-19.

Adjusted EPS was $0.26 for the quarter, down 44% to the prior year on a constant currency basis as a result of lower adjusted operating income.

For the 6-month period, free cash flow of negative $297 million was $163 million less than prior year due to a $235 million negative change in working capital. Accounts payable and accrued expenses namely accrued payroll, bonus and commissions payable declined at the end of the second quarter as a result of COVID-19, offset somewhat by a decrease in inventory and accounts receivable. Capital expenditures were slightly lower on a year-over-year basis. Free cash flow is historically negative in the first half of the fiscal year due to seasonality of the business, with the second quarter generating positive cash flow. In the second fiscal quarter, the company generated $108 million in positive free cash flow. In order to appropriately position ourselves in the current environment, we will exert near-term cash discipline that includes prudent management of working capital and capital expenditures, while still looking to capitalize on long-term growth opportunities. Working capital is expected to be roughly neutral once we approach a steady operating state. Capital expenditure needs are very stable, and the significant majority arise from client retention and new business opportunities. The ability to defer this spend can be negotiated in many cases without compromising the business. We also have limited maintenance capital needs. M&A will not be a focus in the current environment, but we remain watchful for tuck-in highly accretive deals to supplement organic growth should any opportunities arise.

In the second quarter and immediately following, we took proactive actions to strengthen our cash position. As previously announced in March, we fully drew down our $1 billion revolver. And subsequent to quarter end, we successfully issued $1.5 billion in unsecured senior notes due in 2025. These actions give us significant balance sheet strength during uncertain times. In conjunction with the debt issuance, we work closely with our secured lenders to amend the credit facility covenants to provide additional flexibility. The amendment suspends Aramark's senior secured debt covenant for 4 quarters from the September 2020 quarter to the June 2021 quarter. Thereafter, the secured debt covenant will be tested using the latest quarters from calendar 2019 as needed to total 4 quarters. This amendment is intended to prevent the effects of COVID-19 from distorting the covenant calculations. We are currently focused on liquidity in the near term, but deleveraging is still an important part of our capital allocation strategy, and we remain committed to paying down debt as operations stabilize.

Let me touch briefly on our GAAP results before concluding. These metrics are largely impacted by COVID-19 in the same way I outlined earlier. In addition, GAAP operating income, net income and diluted earnings per share were impacted by a pretax noncash goodwill impairment charge of $199 million, specifically related to our Northern Europe reporting unit, which was driven by a change in various factors, including the discount rate used in testing and the pre-COVID near-term growth outlook for this reporting unit. This is the same reporting unit within the FSS International segment that have been previously identified as having undergone additional testing for possible impairment in the 2019 10-K.

Finally, given the rapidly changing market dynamics, we are determined to withdraw our previously stated guidance for the 2020 fiscal year. But while there is uncertainty ahead, I want to reinforce our belief that the company is well positioned with an experienced and focused management team, diversified client base, geographic reach and flexible operating model as well as strong liquidity. We believe that the demand for safe food, hygienic facilities and cleaner uniforms will ultimately enhance the trend toward outsourcing, notwithstanding the clear near-term disruption. We will remain focused on this opportunity and on our strategy to fully deliver on the company's long-term potential. Thanks. John?

Thank you, Tom. It is an extraordinary time for all of us. But even in this period, I'm confident that Aramark has considerable opportunities ahead with an ability to unlock significant value for shareholders. This is a moment where experience particularly matters, and I'm extremely honored to have the opportunity to work besides such a strong and seasoned team who bring a deep industry knowledge and proven service and a consumer experience. From strengthened customer relationships to added leadership bench strength to significantly enhanced financial flexibility, combined with an expected increased demand for quality and hygiene worldwide when normalcy returns, Aramark will emerge with renewed purpose and resolve.

Operator, I'd like now to open the call up for questions.

(Operator Instructions) Our first question will come from Kevin McVeigh with Crédit Suisse.

Great. And congratulations on the execution in a tough environment. I wonder, can you share with us any sense of how you plan to reopen and how that can ultimately impact the service kind of trajectory going forward, obviously, where appropriate? And just any sense of the cadence on that?

Certainly, Kevin, thank you for the question. Obviously, you see a very rapidly developing environment with multiple municipalities and states beginning to develop their reopening strategies. And we believe that we'll be well positioned to go ahead and participate as those reopenings take place. We've developed several new business models to implement upon reopening strategies. As you would expect, our employees will all be wearing appropriate PP&E as they serve their customers. They'll be temperature checked every day. You can expect the service model will be different in locations based on the need to maintain safe and hygienic conditions. You can expect that self-serve operations will probably be shuttered in the beginning and maybe for the longer term. And so you'll see more grab-and-go kinds of opportunities. And we'll facilitate customer orders, both from a mobile application perspective, preorder perspective. Situations may exist where customers are slotted into service times and periods to maintain social distancing and service flexibility. So our teams have been very actively engaged in developing these new models. And we are prepared literally to customize the solution for every customer location that we operate in, whether that's B&I or higher education or the other businesses we operate. So we feel like we've developed the appropriate plans and we're ready to engage as soon as our customers are.

That's super helpful. And then on the Uniform side, you kind of press released earlier that you'd cut over some manufacturing facilities. Can you just give us a sense of what the PP&E opportunities are? And also on, the hygiene side, as it relates to kind of the Uniform model kind of currently and where opportunity is longer term?

Yes, absolutely. We think we provided an essential service. And we like to call it cleaner, safer and healthier, providing clean uniforms, safer environments, healthier environments. And the services that we provide play right into that need, if you will. We have switched over production in our Mexican manufacturing operations to manufacture PP&E equipment. As you know, we've had a very strong clean room business where that -- or where we had historically been providing those kinds of services and capabilities to the pharmaceutical sector and the chip manufacturing sector. So this is a logical extension of that capability. And we're increasing our manufacturing capacity so we can literally make millions of masks going forward. We see that as both a short-term need for our customers and other constituents. And we also see it as a longer-term opportunity for the organization as we expand that capability in that manufacturing capacity.

Our next question will come from Toni Kaplan with Morgan Stanley.

I was hoping you could talk about how you're thinking about the longer-term structural changes for the business post COVID-19. So for instance, how are you thinking about the potential for a greater shift to working from home on B&I, maybe lower higher ed enrollments, changes to prepaid meal plans, just any sort of structural changes we should be thinking about? And you also mentioned the benefit from greater shift to outsourcing. So positives and negatives, just wanted to hear your thoughts.

Yes, absolutely. It's -- I think it's a little early to predict what the structural changes will be. I do believe in higher education that there will be significant demand. We're hearing more and more from our higher education customers about their desire to reopen in the fall and to be engaged and to make sure that, that student experience is appropriate. The distance learning experiment that's taking place over the last several months have been frustrating for many, including the educational institutions. I don't think students feel like they're really getting the educational experience that they would like. And so there is a very high desire to go ahead and return to the higher ed sector. And we're seeing that in both large institutions as well as small institutions.

We have the opportunity, I think, to go ahead and customize programs and service methodologies to serve the needs of the students in a safe and hygienic way and to serve the needs of administrations in a safe way. So I think we can return to an environment where we can operate very, very effectively.

In Business & Industry, it remains to be seen what -- how many employees will return to their work locations. I do know that human beings are creatures of -- want to be social creatures. And that working from home on a temporary basis is somewhat attractive. But I think all of us have experienced the desire to kind of get back into the world. And we think that, that will have an impact as well on decision-making in terms of bringing people back to work in their respective environments. We can adapt all of the locations we operate. As we -- as I said, we have a very flexible operating model. So we can develop service capabilities and service methodologies to upsize or downsize based on the ramp-up of employees into individual locations. So it's something we're very sensitive to, something that we're working on diligently in terms of making sure that we have the right service models in place. And we are confident that the opportunities to grow the business will continue. And you mentioned the self-op conversion element. We do believe that more and more companies who currently operate their own foodservice will recognize the value-add of having an organization that's got both the breadth of capabilities as well as the scope of opportunity or the scope of services that we can offer to go ahead and potentially outsource their services. And historically, when there's been a significant event like this, almost always self-op conversion increases. And we think that, that will happen now as well.

That's great. And can you give us a sense of maybe some of the recent trends in the business in April? Have you've seen any growth rates trough? And I guess just anything around the variability around recoveries and maybe particularly sports, if you expect that attendance and stands may return before there's a vaccine, things like that as well.

Yes. It's a very dynamic environment. I would say it's a little early to call what's going to happen with respect to the return of sports. I think the leagues are working very carefully to try to understand how to get back to operation in a way that both protects the players and the fans. So they're working through their various ideas and various approaches. So it's really too early to make a call on when that might happen. But we're highly confident that everybody is very, very much incented to go ahead and get back to operation, as you will. And so I think that there will be significant effort against this. Just can't -- I just can't tell when that timing may take place.

With respect to April results, I don't know. Tom, have you -- do you have anything that you want to comment on?

Yes. I think a quick look at the flash for April looks to be, probably on a revenue basis, around 50% roughly down. I think there's -- in the pockets that we've mentioned, obviously, the number of units operating is far larger than that. But I think that that's sort of the state of play and where we see things sort of 6 to 7 weeks in.

Our next question comes from Ian Zaffino with Oppenheimer.

Great. Very good call. I just wanted to focus on talking about new business wins. I was surprised you actually talked about that, especially in this environment. How are you actually going about winning this new business? And maybe, John, also just broadly, since you've joined, maybe if you could kind of discuss your new wins and what they've been doing in this new world?

Sure. Thank you. Well, first of all, I think our teams have been dedicated to this new sales effort from the outset and recognizing that these kinds of times present not only significant challenges but significant opportunities. So our people have really been focused on continuing to find ways to serve customers, both our existing and new customers, and focus on continuing to grow the organization. That's why I think Tom mentioned in his remarks that we have not taken any action against growth-focused cost buckets, if you will. We're not reducing sales forces. We're not eliminating investments in sales technologies. We're really continuing to invest in those areas. And we have been very successful. We've sold over $100 million worth of new business since February internationally, which is just a terrific effort, a significant portion of that in China, specifically in the health care sector, but also significant wins in Germany and other countries. So we're continuing to focus on the sales effort domestically. We've got some significant wins that are in the queue already that we haven't announced and that we're very excited about, both in the higher education space as well as the B&I space. So our teams are really focused on continuing to grow the business and knowing that the company will come out of this, and we want to be focused in creating that growth paradigm or reenergizing growth paradigm that we talked about all the way back in October when I joined the company. So some good wins. And there are some very significant opportunities in the pipeline that we're working on. We do see customers delaying slightly and deferring. We're obviously not in person making presentations. But we are submitting, for example, a very large health care opportunity, a video presentation that was recorded in each of the person's home. So I literally recorded a video in my own home to submit for the -- for this presentation. So organizations recognize the imperative to continue moving forward. And so we're doing that on the growth side.

Okay. Great. And then just as a follow-up, I wanted to just also focus on a comment about Asia, I think particularly in China having recovered. What does that actually mean by recovered? And then also, maybe give us a little bit more color on that recovery as far as what areas did really well, which areas are still lagging? And maybe discuss if the China recovery is kind of a blueprint you'd maybe see in the rest of the world as the rest of the world moves past quarantines.

Yes. Well, that's a great question. And boy, I think that's got application to much more than our -- just our particular business, right? First of all, China is the area that has recovered most significantly. And particularly, we operate in the health care sector there. And our business has returned to pre-COVID conditions. We're operating at a higher rate than we had prior to the pandemic occurring there or beginning there in Wuhan. Several of our operations there -- first of all, our operations ran 24 hours a day, 7 days a week in China during the crisis. Our business team there -- our leaders in China did an extraordinary job of responding to the crisis. And it's really a result of their efforts that led us to serve -- to sell several significant new hospital additions, including the largest operation that will operate there over the course of the last couple of months. Whether that represents a blueprint for recovery around the world, very hard for me to comment on that. I do believe that the conditions in China are very different in other parts of the world. So hard to say. But our operations are generally operating very, very well there. We've got great leadership, and the team that's done an extraordinary job. Aramark, almost always, in times of crisis, and you see this throughout our history, responds and performs extraordinarily well under very adverse conditions. And our people in China have just done a fantastic job.

Our next question comes from Shlomo Rosenbaum with Stifel.

Sorry. Can you hear me now?

Yes, we can, Shlomo.

I want to start with just a couple of cash flow and cost items. Are there any requirements in terms of ending semesters early for the company to make any refund payments on meal plans? And then just in general about -- you talked about commodity prices. There, we're seeing shortages of areas like in meat. Is that spiking any of your costs? Or is that a concern in terms of some of your fixed price contracts?

Right now, we are not seeing any dislocation in our supply chain with respect to the products that we purchase and the supply availability. Obviously, we operate under very long-term agreements and have very solid supply partners. So this situation with respect to grocery store capacity and meat production is not one that's affecting us at this point in time. And so as a general rule, we're somewhat insulated by the difference between the products that we buy and the way we buy them. So right now, supply chain disruption, not a significant impact for us.

With respect to campus dining, we have had, in almost every case, we've had discussions with our customers and our clients with respect to their intent in terms of how they will handle various refunds for board plans. We were very close to the end of the semester and had pretty much worked down the board plan. So we don't anticipate that there would be a material impact from any refund that might be required of Aramark underneath those programs. And we would expect that there would be an underlying negotiation with the customer about future program costs or modification of programs to support them. But generally, we don't see it as having a material impact.

Okay. And then just one other item. Before the whole pandemic, one of the efforts that you had to improve the Uniforms business is to roll out the routing system that AmeriPride adds to all other parts of the Uniforms business to improve the route density. Can you talk about the progress you might have made during the quarter? Is it still going according to the way that you wanted to do that? Is there any slowdown over there? Any thoughts on costs? Just where are you with that program?

Sure. That's a great question, Shlomo. Thank you. As a matter of fact, we've continued to work through the implementation. We've modified the implementation process because, as you would expect, you're limiting travel and you're not having people going cross-country to go ahead and do implementations in locations where they don't operate. So instead of the original plan, what we've done is we've adopted a regional-based plan close into the AmeriPride locations where we could go ahead and extend the capability and do the installations in a tighter geographical perspective. So we're continuing to make progress in the implementation. We're continuing to see benefits from the implementation. But it's in the -- it's in those operations that are geographically contiguous to the existing AmeriPride locations. So we've adopted a change in implementation plan, but we're still implementing, if that makes sense.

Our next question comes from Andrew Steinerman with JPMorgan.

Tom, I want to jump into the 50% revenue declines you've seen in the last kind of 6 or 7 weeks. If you can make a comment by division, U.S. foodservices, international and Uniforms.

And then secondly, have revenue declines in recent weeks been less than that average? Like, do the declines feel like they've already passed the largest magnitude of the clients during that period?

Yes. Not really want to get into the breakdown on that at the moment. We're still sorting it out having just looked at the information. It appears as an anecdote to say that it's been pretty steady throughout the month and we'll comment on that. Obviously, it was a sudden turn right at the end of March and not much has changed. Things were in steady state for the balance of the month. So we don't really see much. Though, as John referred to, a lot of talk has really bubbled up here in the last week in a number of places, including business dining. So I think pretty steady for the month would be the cadence.

And could you just say if the Uniform declines are less than the Food and Support Services declines?

They have been.

Our next question will come from Gary Bisbee with Bank of America.

This is Jay Hanna on for Gary today. Just a quick question going back to that sort of new customized model you're going to be using, just with regard to the height and hygiene standards and probably more social distancing within the cafeterias. I mean, how do you expect this to flow through to the cost structure, I guess, like on a unit basis?

First of all, I think as we ramp up operations, we'll be ramping them up to meet the customer demand. So we will not go to 100% of capacity initially as, if you take an average B&I location, the expectation, we believe, is that they will stage employees back into the facilities. So they may start with 30% or 40% and then stage them in over several weeks as they test the waters, if you will, in terms of reopening. But -- and that, I think, will differ greatly by community, by infection rate in various localities, by the medical system in various communities. So I think it'll be a wide range of activity. So our expectation is that we'll ramp up slowly to go ahead and meet the increased demand as it comes onboard. And our service programs will be designed initially with lots of grab-and-go, prepackaged food product that can be delivered either at the desk for the consumer or that they can pick up from pickup stations or that they can come to the cafeteria and grab maintaining appropriate social distancing standards. Our expectation is all of our employees will be wearing appropriate PP&E. And they will all be temperature checked every morning before they come into work. So we'll be confident that we've got a safe environment. We'll also be engaging in very significant deep sanitation practices throughout every day, multiple times throughout the day. So we're conveying a very healthy hygienic environment to the customer so that they can feel comfortable in coming into the location. So we anticipate a ramp-up over a period of time. We'll scale up our operations over that time period and manage the cost structure accordingly to maintain the appropriate levels. So that's probably the simplest way to put it. And I think it'll be different by business unit. It's going to be very, very customized by location and by customer.

Okay. And then just with regard to the decremental margin level, what do you think gets you from that 20% down to 15% that was spoken to in the release and the deck?

Yes. I'll take a shot at that and Tom can add color commentary if he would like as well. We're -- as Tom said, we're not managing to that metric. We're managing -- obviously, we want to be able to grow the enterprise, but we're being highly sensitive to this issue. And today, if the business begins to ramp up over the period of the month of May and June, we'll continue to manage in the framework that we have around that 20% level. If a downturn continues or gets worse for some reason, we have the flexibility to go ahead and take additional cost out that we haven't focused on yet because we're really focused on being able to rebuild the enterprise and to respond quickly to customer demand when that time comes. So we're being very careful, as I said earlier, not to take out growth resources, not to touch the sales organization or not to touch investments that relate to the growth of the company and the capability of the company. So we're very focused on a very disciplined strategy here. But there are other levers that we can pull, if necessary, and that's how we would get down to the 15% level. Tom, I don't know if you want to add anything to that?

No, that's well said.

Our next question will come from Andrew Wittmann with Baird.

Great. I only have one question because most of them have been asked and answered. But I did want to, unless I missed it, I wanted to get a little bit of a sense about how you all are thinking about free cash flow? Obviously, you had some impact here in the March quarter. But maybe the best way to characterize it is maybe a range and how you think that the second half of the year compares to the last year's second half of the year in terms of cash flow. Is it just the impact of net income? You talked about that working capital might be a source of cash capital. Presumably, there's going to be fewer kind of growth CapEx needs. But if you could just help us a little bit understand what you guys are thinking about for free cash flow for the balance of the year, I think that would be helpful.

Yes. Tom, do you want to go ahead and take that one?

Yes. Well, as you know, Q3 is not a particularly strong cash flow quarter for us historically. And certainly, the current environments put additional pressure on working capital, in particular, at the moment. So in Q3, we're managing tightly, we're managing strongly. The cash conversion cycle needs to level out and balance between AR, AP and inventory. Right now, they're a slight increase in DSOs as everybody was coming to grips with the world. And so we're balancing that out at the moment. But as we get to a steady state, we feel like we'll, as I said before, very much get to a cash flow -- or sorry, working capital neutral position. So when it comes to -- when you pull that all the way down, you've got somewhat of a weak quarter in 3 historically. We think we'll manage to neutral, maybe slightly positive cash from operations, can get to neutral working capital. CapEx, we're working hard, negotiating with home clients, looking at what can be deferred without compromising the business. And then like I said, we've got limited maintenance CapEx. So I was looking at Q3, again, with the history, we would expect that to be a moderate use. And Q4 really just depends on higher ed and it restarting and also, to a degree, the SME world. So hard to give you a look for the half without complete clarity yet on Q4. But I would expect a moderate use on free cash flow in the third quarter.

Our next question will come from Manav Patnaik with Barclays.

This is actually Greg calling in. I guess on the flexible labor structure, I mean, that's always been part of the business model, but usually with better visibility into when demand is going to pick up or slow down. So was just hoping to get some color on your ability to flex up the labor as these locations start to open up while still maintaining the same level of service that you look to achieve?

Yes. That's a great question. And that is -- the terrific thing is we've been able to maintain contact with our -- the employees who have been furloughed and laid off, we've maintained an active communications approach with them to keep them engaged. As you know, we talked about having a recruitment operation put in place for our front-line employees so that if they were looking for employment, we could help them find additional opportunities. We expect that as the call up takes place that we'll see the vast majority of our employees return to work under the conditions as we ramp up. Our management team, I'm 100% confident we'll have a great leadership team in place. Our technical employees, skilled chefs and the like, we've been very careful to make sure that we have ongoing relationships with them and ongoing communications so that when the time comes that they'll return to the company that they know and love. And we believe that we'll be able to ramp up to meet the demand. Again, it will be a ramped-up process. It will take place over a period of time. It won't be 100% callback for everybody right at the beginning. It will depend on each individual location and the business model. But keep in mind, many of our businesses, higher education, K-12 basically are furloughed during the summertime to begin with. So this is -- those are groups of employees who are very used to this as part of the process and the way they live their lives. So we believe that we'll be able to maintain our appropriate labor standards, that we'll get the people back that we need to have back to meet the customer demand.

Yes. That makes sense. And then just given that when these locations open, I imagine there's going to be a greater focus on cleanliness and hygiene across these locations. Just wondering about potential opportunity on the facility services side to answer for some of that.

Yes. That's a great question as well. And we do think it's a very significant opportunity. We've developed protocols to put in place in all of our locations that are Aramark responsibilities. And so we will have very significant deep cleaning and hygienic standards in all of our operations to give the customer the strongest sense of safety and security and well-being. And we have very strong capabilities that we can sell to our customers who are looking to -- our clients who are looking to create that kind of an environment for their employees. And we think there will be significant demand for enhanced sanitation and security. And we've got all the right protocols and all the right sales models in place and are actively beginning to have dialogues with our customers about that opportunity. So we do see it as something that has significant potential for us.

Our next question, we will now move to Hamzah Mazari with Jefferies.

My first question, and I think, John, you alluded to this, I think, several times, but how are you approaching the focus on the U.S. turnaround just given the COVID disruption? I know you mentioned investments are not being sort of held back. Is there anything as part of your turnaround that you think is going to get pushed to the right in this environment?

I don't think so. I think the investments that we had intended to make in the business, we are continuing to make. And that is particularly focused on the growth paradigm, as I said. So adding sales resources, adding sales managers to the businesses, we've taken those actions. And we have not made any reductions to those parts of the organization going forward. So I think we have not deferred or delayed those investments. We're very much focused on going on offense, if you will, when the timing is right, when our customers were ready for it and when the marketplace is ready for it. And so we've positioned ourselves in such a way that we believe we can respond very, very rapidly, particularly to the theoretical self-op conversion opportunity that we believe will exist. So the simple answer, we're working very hard continue to invest in the organization for its long-term growth. We've continued to make enhancements to the leadership team as well. The addition of Jack Donovan to the higher education team, we're very excited about. Jack has a very strong leadership background, both inside of Aramark and outside of the company. And we really feel like he'll make a difference in that business. And we've continued to focus on making other leadership changes throughout the organization, the appointment of Carl Mittleman to the international job, the appointment of Alison Birdwell to the Sports & Entertainment job. We're very excited about the leadership team and the capabilities that it brings to bear. So we're going to continue to invest in the growth of the enterprise.

That's great. And just a follow-up question. Are you still seeking out government assistance? Is that a focus? Maybe you can just tie that into how you're thinking about current liquidity.

Sure. We do have a very active government affairs organization working against both the CARES Act and making sure that the company is positioned to go ahead and utilize any of the provisions under the act that would be beneficial to our employees and to the organization. We continue to have efforts underway to lobby in a way that can be productive for both our organization and the industry, particularly as it relates in the K-12 sector with the USDA, as it relates to health care. And so we're very proactive in terms of trying to make sure that we can get our legislators to understand the ways that they can help keep our employees working and the way that they can help the recovery. So we do have a very active effort underway in that regard, and we'll continue to focus on it.

We will now move to Seth Weber from RBC Capital Markets.

I hope everybody is doing well. I just wanted to try and tie together a couple of the comments on the educational space, the negative new -- net new wins here in the second quarter, but I think I heard some commentary about some better traction going forward. I think in a prior call, you had talked about comps turning positive by the end of the year. Is that still your expectation on the educational space?

Yes. I think with respect to new account sales, we feel very strongly about the pipeline that we have in place and some of the new account wins that we've been able to achieve to-date, some of which we haven't announced yet because we're still under the contracting phase. So we do feel very comfortable that we'll get to a very positive position by year-end. Our retention rates have significantly improved across the enterprise, including in higher education. So we're confident that we can -- that we'll have a very positive run-rate by year-end.

Yes. And then, John, let me just add there that -- Just remember -- I mean, state the obvious potentially, but the negative net new business or the net new business, whichever way it goes, is really a product of a year ago because that's what flows through, especially it's so pronounced in education that -- because the start-up dates are at a certain time throughout the sector that, that flow-through is really a product of what happened or didn't happen a year ago on the impact of this year. And then as John referred to, the pipeline and the things that are being worked on now will carry into next year.

That makes sense. Sure. And then I was surprised -- I think I heard a couple of times -- mentioned about positive pricing. Can you just shed any more color on what's driving that? It's a little surprising given the kind of the macro challenges?

I can touch on that, John.

Go ahead.

Yes. I think I mentioned the last call -- last quarter that I was impressed with coming in fresh, impressed with the Aramark's ability to price to the contract that they have with clients. There's a lot of focus on it. It's a negotiated number with clients. And the ability to follow up on that and achieve pricing is certainly a testament to the service levels. And that's been a consistent driver of revenue growth for quite some time and certainly in the first quarter and this quarter. Your point is a valid one going forward. I mean, in the environment, might it be a little more difficult to get the pricing even contractually potentially. But that's a lot of what's being negotiated right now in -- with clients site-by-site in conjunction with many other topics just to best serve the client and make sure that we, Aramark, and the clients are both served. So yes, pricing has always been a big driver. I'm impressed with the focus on it here. And we'll continue to be.

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Zillmer for any closing remarks.

Terrific. Again, thank you, everybody, for joining this morning. We look forward to continuing the dialogue with all of you. And again, I'd like to thank the Aramark employees around the world for their hard work and dedication during this extraordinary time period. I'm excited to be your leader, and thank you again for all your hard work. Take care.

Ladies and gentlemen, thank you for participating. This concludes today's conference. Thank you for your participation. You may now disconnect.