Good morning and welcome to Aramark’s Third Quarter 2020 Earnings Results Conference Call. My name is Jimmy 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 and that all participants are in a listen-only mode.

We will open the conference call for questions at the conclusion of the company’s remarks. 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 third quarter fiscal 2020 earnings conference call and webcast. I hope those listening are doing well along with those around you. This morning, we will be hearing from our Chief Executive Officer, John 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..

Diversity, equality and inclusion for all. As a company, this has also this has always been one of Aramark’s core values and we have been consistently recognized for it as a top 50 company for diversity, a best place to work for LGBTQ equality, a best place to work for disability inclusion and a top 50 employer for equal opportunity.

But there is always an opportunity to do more and that starts with reflection, education and action. With that, I am proud to announce that we formed an Executive Diversity Council that will provide strategic focus to advance diversity, equality and inclusion among Aramark employees, client partners, customers, suppliers and the communities we serve.

We’ve also named Ash Hanson to the newly created role of Chief Diversity and Sustainability Officer. Ash has been with Aramark for 18 years, contributing in a variety of leadership roles across the organization, including diversity and inclusion, talent management, organizational development and human resources.

We look forward to developing and executing impactful plans that will reduce inequality, support and grow our communities and drive our [indiscernible] strategies for generations to come. I will now pass it over to Tom for a more detailed financial review of the business..

Highly valued service offerings, passionate team members and strong growth potential. Thanks for your time this morning.

John?.

Thank you, Tom. It is an extraordinary time for all of us. I’m extremely proud of how Aramark has responded and remain confident that we are taking the appropriate steps to create significant value for our stakeholders.

We have considerable opportunity ahead of us that we believe will provide Aramark the ability to emerge as a stronger, more agile company. And I’d like to take this opportunity to thank all the associates of Aramark for their hard work, dedication and commitment to serving our customers.

Operator, we will now take the – we will now open up the call to be a resource for questions..

[Operator Instructions] Ian Zaffino from Oppenheimer is online with a question. Your line is now open..

Okay, thank you very much. Really good job managing through all this. Pretty impressive cash from operations and just managing the business overall, so congratulations there..

Thank you..

What I want to maybe focus on is education a little bit. You have some wins there, give us a little bit more detail on those wins, particularly maybe how you got them? What do those margins look like now versus like what you’ve historically done in the past? And then also, it seems like you’re very bullish on or not very, but bullish on education.

Are you seeing something in education? And sort of what are the risks that you see as far as maybe schools deciding that reopening is not really in their best interest and maybe they go virtual or can you touch maybe some ground level detail and really what you are seeing and what’s driving your the encouraging statements you made about education?.

Thanks. I will start off and Tom can jump in as well. Well, first of all, the new business wins, we’re very excited about. Purdue University was a self-op conversion of their retail operations. We feel very honored to have been selected to operate that contract.

The Queen’s University in Canada is the largest university operation in Canada, again, very excited about that opportunity. And of course, I also mentioned the Ford Motor partnership, which is a new national contract for those operations. On the higher ed side, we as Tom alluded to, we’ve had significant dialogue with our education customers.

And literally, we’re engaged every day in dialogue about the operating model that each university will adopt. And as you said, over 50% of those customers have told us, it’ll be in-person in the classroom. We’re still awaiting decisions on the operating model from some universities.

And so it’s too early to comment on what might take place in terms of total education reopening. Approximately 10% have said that they will have an online learning environment during the first semester.

So the hybrid examples that are being developed are very different by campus, by university, and so it’s very difficult to predict what exactly will happen.

But we are engaged in dialogue literally every day with those customers to make sure that they have the best experience for students that are on-campus in a safe, hygienic way, that those students can safely eat in the dining halls, take advantage of board plans and be confident in their safety and security.

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

Flexibility and client focus. And I don’t think that’s going to impact the profitability over the term of the contracts, these new wins..

Okay. As a follow-up on the cash management side, a very good job there again. Give us a sense of and I know you talked about kind of driving the drop-down to 20%, and then you also maybe said that you could get down to 15%, if you need to.

I guess, what have you been seeing there as far as I guess, it seems like you have been encouraged more, and that’s why you are not really aiming that 15% anymore or just sort of broad strokes on what you are thinking there? Thanks..

Yes. I think from the beginning, we said we weren’t going to be driven by a number. We were going to be focused on our clients, serving our clients needs, and it really came to light early that there were different requirements by client even within a sector.

So, we needed to remain flexible with that, and that obviously puts pressure on your ability to drive out cost. To go to 15%, we said early on, was going to be a more negative situation where we think thought this would be prolonged. The current environment would be prolonged and deeper and more, certainly, negative.

Where we find ourselves now is that there are good signs, reopening signs here and there. It’s still, as we all know, almost week-to-week at times and therefore, we are keeping ourselves ready. We are keeping costs in the business so that we are ready when our clients are ready. And that’s been difficult for our operators.

But they have, as you have seen in the Q3, done a tremendous job of balancing both our cash flow needs as well as being prepared for our clients. So I don’t I certainly don’t see this, as I said just a minute ago, moving below 20% at this point, given what we see as some encouraging signs of activity into the fourth quarter..

Yes. And I will just add a couple of quick comments. I think the organization has shown incredible flexibility in terms of managing our cost structure. There are levers that we can continue to pull to reduce costs further.

But as Tom indicated, what we have tried to do is maintain an organization that’s fundamentally able to serve our clients very, very rapidly as their needs develop and as the situation evolves. And frankly, because we want to make sure that we have an organization that has the best management team, the best level of talent in the industry.

And so we are very cognizant of making sure that we hold on to those people that we think are critical for the future of the organization and for the future. And, hopefully, that we will be able to bring back all those Aramark employees who have been furloughed or laid off in the in this temporary process.

One of the things that we have also committed to is making sure that we maintain our growth focus. And so we have not made any cost reductions with respect to marketing organizations and/or sales organizations. We have been very focused on making sure that we maintain that growth mindset and discipline going forward..

And let me add one last point that I don’t want to give the impression that we are rebuilding all these costs into the business based on overly optimistic projection. Things can change.

And so we are continuing to stay flexible, and we will continue to do that and hopefully have proven that the model can move pretty rapidly and reflect and respond to the current environment. And so if things move in a different direction, we will be ready..

Thank you [Operator Instructions] Our next question comes from Kevin McVeigh with Credit Suisse. Your line is now open..

Great. Congratulations on the cash flow and just the results overall. I know there’s a lot that goes into that, so really, really well done. I just want to spend a minute on just talking about structurally, the business has changed. You folks are a leader in the industry.

But just coming out of this, where are the areas that you are going to be able to define the outcome in the sense of whether it’s an incremental step-up in Uniform or on the foodservice side? And then within the context of that, is there an opportunity, it’s again, one of the more capitalized, better players in the space to drive some consolidation.

Just any puts and takes around that would be super helpful?.

Sure. We obviously believe that we are well positioned going forward given the strength and the breadth of the organization and the balance sheet to take advantage of any opportunistic growth opportunities, if you will, that come to us.

And those, we will be very aggressive in the pursuit of growth with respect to new account wins, particularly as we believe the self-op conversion phenomenon will increase.

We are highly confident that as customers and clients, who are currently self operated come to grips with the issues that they have had to face in COVID-19 that there will be an acceleration of self-op conversion trends and we believe we are well positioned to take advantage of that from both the resource perspective as well as a capital perspective.

With respect to other operators that may not be well capitalized, we are seeing impacts in the business as clients are having their services affected, and we believe there may be some opportunity as some of the smaller companies may decide or may have issues with respect to their financial performance.

But really, what we are going to focus on right now is both organic growth through new sales opportunities. Growing those relationships with our existing customers, focusing on new service offerings that we think will adapt to the changing environment.

And we will also continue to take a look at M&A opportunities that present themselves across the portfolio..

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

Hi, John and Tom. Two questions. First one on the July trends of minus 36%, could you give us a sense of how U.S. Food Services is doing in Food and Support Services is doing in July and how Uniform is doing in July? And then my second question is, if you could, Tom, you said drop-through margins for the fourth quarter will be higher than 20%.

Could you give us a sense of anything? Does that mean 25%? And if you can make a comment on interest and taxes for the fourth quarter also, that would be helpful?.

Sure, Andrew. In terms of the revenue, 36% for the for July for the company, U.S., a bit above that, total U.S. International is right about the company average and then Uniforms was significantly below that in July, that company average on the revenue.

On the flow-through, it depends a bit, and I hate to hedge the answer, but it does depend a bit on the activity and the speed of the activity within higher ed and sports. So if the more certainty we see, I think that the drop-through will be closer to 20%.

If there is some stop and starts, I think it could be closer to 25% with people fall starts or people changing their mind at the last minute after we have staffed up. And a little color around why that – why those cost pressures are there.

When you start up an account or restart an account, particularly in this environment, you do have certain inefficiencies in product cost, in labor scheduling and the like and some other peripheral direct costs at the unit.

Once you get into a routine, a cadence at a unit and that can take months or whatever, with the new account, you build in those efficiencies and you get better at all those things.

And so as we restart with new points of service across campuses, diverse points of service, there will be a level of inefficiency out of the gate, and that’s where those increased costs can creep in. So I think it could be in between that range, depending on the environment, the restart environment.

And then with interest and tax, interest should be pretty predictable at this point, fairly reflective of Q3. I don’t see much of a change for Q4. We will look at the end of the quarter based on cash flow as to de-leveraging a bit, and that certainly continues to be the goal. But for the fourth quarter, I don’t think interest should change that much.

And tax, we are still working through the overall benefit of the CARES Act, get significant benefit this quarter as we will for the year with the NOL carry-backs. So I will come back to you, please. I will come back to you with a little more detail on the tax rate for the year..

Thank you. Good. Thank you..

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

Yes, good morning everybody. Thanks for taking my question.

Could I ask you to talk a bit more about what your B&I clients are saying about longer term working-from-home plans? How that might impact attendance on-site and whether it’s realistic to get back to prior margin levels with kind of structurally lower level of B&I attendance?.

Sure. I think we can both take a stab at that. First of all, I think it’s very early yet to predict exactly what the B&I business will look like. We are seeing signs of green shoots, if you will, as employers bring back employees on a limited basis in some geographies.

It’s obviously significantly impacted by the type of operation, the geography and whether it’s an office environment or a blue-collar environment, etcetera.

So probably the consensus that we have today from customers is that it may take a little longer to bring employees back given the current state of COVID-19, what time frame that looks like, varies by city. So ultimately, the structure of the business, I do believe, will return to a more normalized look.

You may have operations that have downsized or may be smaller than they were before. I think fundamentally, the contract structure of the industry is probably going to be is going to be changing. Some of those operations that were P&L historically because of the size and scale, may now be management fee going forward.

I don’t think the margins in the business will change all that dramatically. Ultimately, the margins will be, I think, somewhat average. Over the history of the business, it’s been a very consistent performer.

And I think that the business will evolve to that same kind of level of performance even though the contract structure may be somewhat different going forward, not only for us, but I am sure for our competitors as well. So I think B&I has a longer road to recovery.

Again, it will be dependent upon the speed with which employers come back to their offices. I will say, as a general rule, you are seeing a lot of commentary, a lot of conflicting commentary in the press about whether companies will maintain their work-from-home kinds of approaches for the long term.

Frankly, I have been talking to a lot of CEOs of a lot of public companies recently, and almost all of them are saying, listen, it’s tough to manage an organization from a cultural perspective by remote control and they really have a strong desire to bring their employees back into the communities so those employees can be engaged and with the company and to be part of a team.

And so ultimately, I think companies will return to the workplace, but it will take some time and it’s very hard for us to predict what that timing looks like..

Okay, clear. Thank you very much..

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

Thanks very much. I am curious about the delivery opportunity that you see during this period on college campuses, which might have some restrictions around dining halls. Have you been investing more in that business going into the fall and how should we think about the opportunity you have in food delivery on in education? Thanks..

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

And I think there’s significant opportunity, one that can be addressed in a number of ways, both with customized program development in each individual university, depending on the type of location, whether it’s an urban campus or a more sprawling campus.

The Good Uncle initiative is one that serves that delivery model pretty well, and yet, we have also established partnerships with other delivery providers’ on-campus to make sure that our product gets delivered to those students through third-party means.

So we do think that there will be an increasing trend toward eating in dorms and eating remotely, and we are positioned. We have got service models and marketing programs developed to go ahead and address that need for students to be served in that way. Tom, I don’t know if you have anything else you want to add to that..

No..

Great. Also, just within the different verticals of the U.S.

business, curious which of these you expect to improve the most quickly from here, if you could just give some color on each of the different verticals?.

Tom, why don’t you go ahead and take that?.

Sure. I mean, in terms of magnitude of improvement, obviously, sports and the higher ed have the greatest ability to come back. I think from a speed standpoint, Education certainly from down significantly in the third quarter, 70% plus. We will see the biggest move in Q4. Sports is still uncertain and not really have any visibility there.

As John said, I think business dining has a linear path back. I don’t think it’s going to be in great speed, but I think it will continue to nudge forward.

So I think, overall, with those being the three biggest impact, sports, higher ed and B&I, I would see the Education sector having the greatest potential to be back quickly, followed by a linear path with business dining and still a question mark around sports..

Great, thank you..

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

Hi, good morning. Thanks for taking the questions. So the first question for me, just well, probably just rounding out from the last questions, but compared to peers, likely the negative surprises were on Healthcare down 21%, facilities down 17%. You don’t seem to be referring to those improving much into Q4.

So is there anything kind of idiosyncratic about your mix that means you are underperforming in those segments and how do you expect those segments to maybe recover over the coming quarters?.

Yes. I will take a shot at that. First of all, Healthcare, we continue to see improvement throughout the balance of the year as I think we talked about the delay in elective surgical procedures and the like. And we think that, that business will continue to improve as the healthcare system adapts and comes back more broadly.

And so we don’t see anything systemic there. On the facilities side, I think you will see a ramp-up as businesses return. So those numbers will improve as businesses and other institutions require deep cleaning before restarting.

So I don’t think there’s anything there that affects the long-term nature of that business that they will be relatively stable to growing during the fourth quarter, and it will really just be dependent upon the pace of change in the other businesses. And some of the facilities business, obviously, it’s attached to sports and entertainment.

So those are significantly sized operations. If those stadiums and arenas begin to reopen and operate, those businesses would return. So there’s a bit of a knock-on effect on some of the other businesses in terms of how much they are engaged..

Thanks. Just as a follow-up, clearly, kind of pre the COVID situation, you were talking about your plans and so it may take a quarter, it may take four years to kind of enact your plans.

How has the whole coronavirus issue sort of changed the pace of the turnaround you were trying to enact there? Has it given you the opportunities to accelerate some of those opportunities or has it put a big pause in the plans that you were looking to enact for the business?.

Well, I would say that we have continued to march down the path that we laid out, making organizational changes with respect to culinary marketing, food offerings. So it hasn’t impacted those plans whatsoever, and the same could be said for the growth initiatives that were undertaken over the course of this over the last several months.

We have continued to invest in adding new sales resources to the organization. Most of what we wanted to achieve, we have been able to do even in this environment with respect to adding the right talent. We have had the opportunity to reestablish some new leadership in some of the businesses.

We have had the opportunity to go ahead and make organizational changes to get resources closer to the customer. Even in the face of reductions that we have had to make, we have been able to reengineer the organization in a way that we think positions us extraordinarily well going forward.

So I would say our plans have been somewhat impacted by COVID-19 but not our approach. So really, I don’t see it impacting the way we will operate going forward..

Thank you very much..

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

Okay, great, thanks. I just had two questions and then just a clarification from a prior question. My first question was regarding the Uniform rental business. You mentioned a couple of times in your prepared remarks that you had good, strong sales of PP&E. I am just kind of curious how the organic rental trends held up inside that.

Maybe there’s a we have seen from other players that there’s been some big onetime sales or spike in sales that’s called out for direct sale. But I am kind of curious on the rental trends in particular. And then my second question was regarding the dividend outlook in the press release today.

You noted the $0.11 dividend that’s going to be paid in September.

And John, I was hoping you could just talk about the thought process of the Board with the uncertainty that’s out there, with the cash flow not being as great as it normally is, why that makes sense and how you approach it from here? And then the quick clarification that I wanted to ask about was just a little bit of confusing terminology earlier on the kind of growth outlook by segment.

I think you mentioned that in the U.S. that the organic trends were a little bit better than 36%. Did you mean that the growth trends were below company average in that just because you said better than it sounds like the growth trends in U.S. food were trending better than 36%. It didn’t make a lot of sense. I just want to clarify that. Thanks. .

Yes. Tom, do you want to take that last part of the question first? And then I will come back to the rental trends and the dividend process going forward..

Sure. Yes, the U.S. food, the decline in July was higher than the company average for the U.S..

Okay. That’s what I thought. I just want to be clear..

Yes. I think in trying to offer some insight into what we see as an improving revenue trend over the – with the start of the quarter. I think we are trying to give some visibility but without offering a lot of specifics, and we apologize for that.

We just see a continuing improvement during July that is a follow-on from the previous quarter, so attempting to give some supportive clarity with respect to revenue trends. So with respect to the rental trends in uniforms, they are the rental trends have improved on a weekly basis since the trough in April.

And I think that’s probably consistent with what the rest of the industry has discussed and disclosed. There continues to be improvement week-to-week in rental trends. I don’t think we have disclosed that number specifically. But I would say what you are seeing in our numbers is very consistent with what you are seeing elsewhere.

With respect to the PP&E sales, we are experiencing significant PP&E sales in Uniform services and in refreshment services where we have offered that opportunity to our customers for things like masks and the like.

That is we believe that business has sustainable opportunities in it as facilities adopt new sanitation approaches and trends and offices like dental offices using barrier gowns more aggressively than they had historically.

So we see continuing revenue streams coming from PP&E, not just onetime sales, although the quarter did have some significant sales lift as a result of PP&E. So I think there is more to come on that, and we will see how that continues to evolve. I would say that we are very hopeful that we’ll have continuing growth from that sector going forward.

With respect to the dividend, given the strong cash flow generation, the improved or the significant cash flow results in the quarter, Board deemed it appropriate to go ahead and pay the dividend going forward. We think it’s a very strong indication of the company’s ability to generate cash and to continue to manage the cost structure.

We believe that it’s an indication of very strong support from the Board, and we think we are pleased that they adopted that approach. The Board will maintain flexibility, obviously, going forward.

And if there comes a time where they may need to reconsider that, they will do that, but we’re very confident in our ability to continue paying it at this time..

Thank you very much..

Thank you..

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

Hi. This is actually Greg calling on. I just wanted to ask a little bit more about the contract renegotiations and maybe using education as an example. Some of these schools move toward a hybrid model with 50%, 60% occupancy by the students.

Do you expect those contracts to turn into management fees where they were P&L? And maybe a little color on with enhanced cleaning probably comes enhanced costs there, so how do you make sure that you’re getting paid appropriately in those contracts?.

Yes. I would say we have been able to engage in a very active contract renegotiation process with all of our customers over the course of the last several months to make sure that we can adapt and to serve their particular needs across all the businesses not just B&I, but in Healthcare and in Higher Education as well.

As the hybrid models are adopted, we will be working with each individual customer to make sure that we have an opportunity to earn an appropriate level of profitability under that new model the those negotiations literally take place every day.

We have got what we consider to be extraordinary relationships and long-term partnerships in place, and we think that we’ll be able to react and respond to whatever needs they have and whatever modifications that need to be made, we believe that we can get done to make sure that we’re paid appropriately for providing the service that they desire..

Okay. And then a couple of times you’ve mentioned the higher demand for PP&E and hygiene-type products just wanted a little color on your ability to flex that supply to meet the demand..

Yes. We as we mentioned, we have shifted production in our Mexican operations to PP&E equipment, and we are able to meet the demand that we have had, both from our client organizations and customers as well as Aramark’s need in the business as well.

So those operations were able to ramp very quickly, and we have the scale that we need in order to continue to manufacture and to take advantage of that opportunity. So our supply chain is very robust.

The fact that we have the ability to self manufacture a lot of this is very favorable for us and it has allowed us to serve a number of customers who couldn’t get supply from other sources. So we are confident in our ability to continue to manufacture and to continue to supply the needs that both we have and that our customers have..

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

Hey, good morning.

Maybe just following up on the question a minute ago about contract renegotiations, can you just give us a sense how are sort of in-unit economics trending in locations that are reopened? Are you seeing a lot of them that you are able to manage costs to a reasonable profit level at the unit level or is that really variable? I’m just trying to understand how quickly you can get the sort of a normalized level even on lower base of revenue coming back in a lot of these locations? Thank you..

Sure. As I mentioned, the contract renegotiation process has really been ongoing since the beginning of COVID as customers, particularly in the B&I sector and in the higher ed sector, shut down and had needs for us to provide some level of service.

We were able to renegotiate both new contracts as well as memorandums of understanding to go ahead and serve their current needs. It really is a state of flux in on a location-by-location basis.

Each individual contract is being renegotiated by their district managers, by the RVPs and by the clients in order to adopt to the new service model that, that specific client needs.

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

And so we have been able to, without exception, to go ahead and put new contracts or understandings in place, to go ahead and protect us on the downside and to create opportunity going forward. So I don’t want to comment on individual contracts or individual negotiations. I don’t think that’s appropriate.

But I would say our teams have been extraordinarily adept at doing what’s right not only for the customers but doing what’s right for Aramark going forward..

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

Thanks. Coming out of this environment, it seems like there could be greater overlap in the FSS and Uniform segments than ever, particularly on the Facilities side.

When we think about clients demanding this increased cleaning and sanitation, how would you characterize the overlap in these segments currently? And as you look at the uniform peers, stock valuation widening relative to the catering peers, is there a case to keep these separate or even consider other strategic actions to maximize the value?.

First of all, there is significant overlap between the businesses. Obviously, our customers have had they have had our organization responded in a multitude of ways to help serve their needs.

So we have a lot of customers that are normally foodservice customers that have reached out to the Uniform organization to go ahead and serve needs for their PP&E equipments and other areas. So there is significant opportunity to explore for additional growth potential there with our existing customer base, and we continue to do that.

Uniform services, continues to be focused on serving its core rental customers as well. I think the business strategy question is one that, obviously, we have talked about many times. Today, we are focused on improving the results of the business. There is significant potential for growth. There is significant potential for margin improvement.

And we think, ultimately, we can close that valuation gap with respect to those Uniform peers as we continue to improve the business, both by adopting the synergies that came out of the AmeriPride acquisition, the adoption of the ABS, the route accounting system that shows significant improvement, as we implement that in new operations and in old existing Aramark operations, we see continued improvement.

So there’s lots of opportunity there. And I think over time, the company will continue to address the strategic issue.

But today, we are focused on improving the operating results, on serving our customers, on being really focused on managing the organization as tightly as we possibly can given the current environment and in looking for those opportunities to expand and grow the business in ways to serve our customers..

Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Your line is now open..

Hi, thank you for taking my questions. Hey, John, can you talk a little bit you mentioned that you are seeing progress in the business that is being kind of overshadowed by the closures in the businesses.

Can you just talk about what’s the progress that you are seeing that’s underlying? Is that referring to retention rates? Is it referring to new wins? And can you talk a little bit about how you expect to come out of this stronger than you were beforehand? What are you referring to exactly?.

Yes. I would say, first of all, retention rates are increasing, and we have seen continued improvement across the enterprise and retention rates in the various businesses we operate. We are seeing very strong business new business pipelines.

We see significant opportunities as a result of what we believe will be an enhanced self-op conversion cycle going forward. So we think that the company is well positioned to take advantage of all of those trends the improved retention, obviously, extraordinarily important from a long-term growth perspective.

We think a lot of that improvement is a result of the actions we have taken in the various businesses both to improve leadership as well as by repositioning the organizational resources back into the businesses so that they’re closer to the customer and impacting the business on a day-to-day basis. So we see the strategy continuing to have an impact.

We believe that strategy has been validated, and we’re going to continue to move down that path very aggressively to make sure that we have an organization that’s extraordinarily focused on developing innovative solutions for our customers and in the individual markets we operate.

And I’m excited about this organization because we have the strongest management team in the industry, some really great people focused on delivering results for our customers. And I am very excited about the prospects for the future based on the team that we have running this business.

I think the job that they have been able to do over the course of the last four months has been absolutely extraordinary.

All of this that they have been able to achieve is a result of those people on the ground, day to day really just grinding it out and making very tough decisions, but the right decisions for our customers and the right decisions for the business. So I am extraordinarily excited.

And I believe everything that we do is an outflow of the quality of the management team. And I just I feel very strongly that I’ve got the best in the industry..

Okay, great.

If I could just follow-up with Tom, just is there anything in the start-up costs that you are expecting in the September quarter that would change kind of the seasonal cash outflow that you normally see in December? I guess I am asking is, is there anything that you are going to be doing earlier that, therefore, would mean that your normal significant outflow in December would be less because you are doing that in September versus the December quarter?.

It will, but for a different reason. Usually, that fourth quarter cash flow inflow is driven by the Board planned prepayments for the ongoing semester and then the use follows in Q1. So those will normalize. They do move roughly in tandem.

So as we as the start-up of the higher ed is less certainly than it would be in a normal year, the outflow in Q1 will be less..

Okay, great. Thank you..

Thank you. Our next question comes from Seth Weber with RBC Capital Markets. Your line is now open..

Hi, good morning. Thanks for taking the question just following up on a cash flow question. CapEx a pretty big step down here in the third quarter can you just talk to us how you are thinking about near-term and maybe intermediate-term CapEx? Is this around the right level? Will it come down a little bit more? Just any guidance you can help on that..

Yes. A little hard to look at it as a percent, the traditional measure, percent of revenue given the revenue change. So as a dollar amount, you’re right. The annualized rate has fallen. A lot of that has been around the expectations this summer, this past quarter with clients, what they’ve wanted to tackle, what they have.

It’s also been part of client renegotiations, as John alluded to. So certainly, the spend in the quarter, I think, is not where it will it’s not a run rate. We don’t want it to be a run rate because we want to be able to use the CapEx to our clients’ benefits and grow with them.

So I think this is a little bit lower in Q3 than we would see it going forward. But we will continue to work to manage it along with the operating cash flows so that we keep ourselves in a good position but certainly have our clients’ needs and our contractual obligations, first and foremost, in those discussions.

We don’t want to leave our clients hanging to our benefit. So we will manage it accordingly..

Okay. And then if I can just clarify the comment about the monthly improving trends, the trends improving through the quarter, I am just trying to splice out how much of that might be due to just the lower mix of education just seasonally, if that makes sense.

I mean, are you seeing improving trends kind of across the portfolio or is it just really a function that education is a smaller portion?.

Yes. Outside of sports which, believe it or not, has seen a little bit of activity this summer versus where we were in April. So if I take the 50% drop in April on revenue down to the 36 in July, the quick answer is we have seen improvement across every line of business.

It’s been almost imperceptible in sports and very significant in others like uniforms. But there’s been improvement across the board..

Okay, super. I appreciate it. Thank you very much..

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

Good morning. Thank you. John, you had spoken about outsourcing trends accelerating potentially during COVID, post-COVID.

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

Yes, great question. First of all, in the foodservice business, we see that trend in healthcare and in higher education especially, which obviously are still the business units that have the highest degree of self-op opportunity yet. So significant conversion, we believe, in both healthcare and in higher education, major universities.

Purdue is a great example of that. The win at Purdue is a self-op conversion of their retail operations. And we see more and more universities beginning to have that dialogue around, is it right to go ahead and finally outsource, particularly given this environment? And so we see that trend accelerating in healthcare, higher education.

On the uniform side, we do believe that this represents an opportunity that the customers that have a need for safer, more hygienic solutions will turn to a professional provider than as opposed to having their employees wash or launder their own uniform.

So we do believe that there is opportunity there as a result of the need for more hygienic solutions. And we have an opportunity or we have a service model that can provide very strong assurances in terms of cleanliness and hygiene, and we think companies will be looking for that.

As I mentioned earlier, one of the areas that we think has a significant potential is the medical services business. As you know, people now are wearing barrier gowns in virtually every situation in healthcare, whether it be dental offices or clinics or whatever in order to provide some personal protection.

So those are things that we can both manufacture and can launder. And so we see that, that is an opportunity as well for uniform services..

Got it. And just my follow-up question pre-COVID, you obviously had a U.S. turnaround plan, and you talked about net new business being better, retention being better. What was your time line originally for turning around the U.S. business? And post-COVID, clearly, it’s delayed.

But just curious, pre-COVID, how were you thinking about the turnaround? And what’s the best way to measure milestones in terms of successive turnaround? Obviously, you are being masked by COVID. Is the best way just to look at your numbers versus campus or how would you tell investors to sort of judge the U.S.

turnaround today?.

Yes. Well, first of all, I would say, judge it by there were two key elements to the turnaround. The key elements were improving retention, getting the retention rate back up to historic levels of Aramark, and that is an area that we have seen already a significant improvement in.

The net new business, so the growth numbers, so that we would be winning a greater share of those new opportunities going forward. And to do that, we implemented a number of changes, the reorganizations, the addition of sales management resources throughout the enterprise.

And we really began that process in late fall, early winter as we have looked to reorganize sales forces and add those resources. So I would say the two benchmarks are retention and new business wins.

And I think we’ve had some really good early successes across both of those goals, and we continue to see improvement, the strong sales pipeline and the, what I consider to be, the very strong leadership in those businesses that I believe, will deliver results over the medium term.

I think, initially, we talked about the fact that it took sales managers somewhere between 18 to 24 months to come up to speed in those businesses like healthcare, higher ed, business dining as they got to know their territories. And so I think that, that is still the time frame that we are looking at for continued improvement.

I think the opportunities are accelerating, and I’m very pleased by the quality of our team. So I think that we will continue to see improvement in those two benchmarks and that we will be demonstrating that the strategy is working and is and that we are making progress..

Thank you. And I am showing no further questions in the queue at this time. I’d like to turn the call back to Mr. John Zillmer for any closing remarks..

Terrific. Again, thank you, everybody, for joining us this morning. Really appreciate the support of all of you. And again, I would like to extend my thanks to all the Aramark associates around the world for the hard work and the dedication that they show this organization every day. I’m very proud of all of you, and thank you again.

So that ends our call. Thank you..

Thank you for participating. This concludes today’s conference. You may now disconnect..