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 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 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, 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, share a few observations, given the mission-critical role Aramark has played and will continue to play as a key enabler in the 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 in 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. 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 one and a half billion dollars 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 strengthen 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 & 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 timeline 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 business is 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.
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 frontline care that includes food service, cleaning, and supplying PPE for essential roles in hospitals and other critical industries. At healthcare 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. 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 healthcare, 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've seen a slowdown as a direct result of government-mandated shutdowns, with continued operations in healthcare and other essential businesses. Operations in Latin America have been affected to a lesser extent, 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 healthcare 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 five boroughs through June. As part of our philanthropic program, we've donated over 150,000 lb of food to local organizations and continue to provide food, supplies, and other resources to communities around the country.
As you may have seen yesterday, we are supporting the American Red Cross Coronavirus Outbreak Fund to honor the incredible healthcare 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 healthcare providers and other critical industries. Our products are shipping to Aramark clients across the U.S. and in the healthcare, 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 frontline 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. Our commitment to strong relationships with key strategic and preferred suppliers has been invaluable during this period. While focused on helping communities in 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 22nd, 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 & 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. Year-over-year performance was unfavorably impacted by about $12 million in the quarter by the strategic exit of non-core 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, helped 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 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. While a portion of the lower equity base 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 costs, 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 are 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 & 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 non-core facilities 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 uniforms 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. 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 six-month period, free cash flow of -$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 in 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 will 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. 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 worked 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 four 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 four quarters. This amendment is intended to prevent the effects of COVID-19 from distorting the covenant calculations.
We're 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, non-cash, 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 had been previously identified as having undergone additional testing for possible impairment in the 2019 10-K.
Given the rapidly changing market dynamics, we have determined to withdraw our previously stated guidance for the 2020 fiscal year. While there is some 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 beside such a strong and seasoned team, who bring a deep industry knowledge and proven service and 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.
Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. In order to accommodate participants in the question queue, please initially limit yourself to one question and one follow-up. Our first question will come from Kevin McVeigh with Credit Suisse. Please go ahead.
Great, thanks so much, and congratulations, on the execution in a tough environment. jon, 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, you know, obviously, where appropriate, and just any sense of the cadence on that?
Certainly, Kevin, thank you for the question. You know, obviously, you see a very rapidly developing environment, with multiple municipalities and states beginning to develop their reopening strategies. You know, 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, you know, to implement upon reopening strategies. As you would expect, our employees will all be wearing appropriate PPE 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.
That you'll see more grab-and-go kinds of opportunities. And we'll facilitate customer orders, both from a mobile application perspective, pre-order perspective. Situations may exist where customers are slotted into service times and periods to maintain social distancing and service flexibility. Our teams have been very actively engaged in developing these new models, and we are prepared literally to customize a solution for every customer location that we operate in, whether that's B&I or higher education or the other businesses we operate. We feel like we've developed the appropriate plans, and we're ready to engage as soon as our customers are.
Super helpful. You know, 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 PPE opportunities are, and also on the hygiene side as it relates to, you know, kind of the uniform model kind of currently and where the opportunity is longer term?
Absolutely. We think we provide an essential service, and we like to call it cleaner, healthier, 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 PPE equipment. As we've had a very strong clean room business, where we had historically been providing those kinds of services and capabilities to the pharmaceutical sector and the chip manufacturing sector. 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 and that manufacturing capacity.
That makes a ton of sense. Thanks so much. Stay safe.
Thank you.
Thank you. Our next question will come from Toni Kaplan with Morgan Stanley. Please go ahead.
Thank you. I was hoping you could talk about how you're thinking about the longer-term structural changes for the business post-COVID-19. 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? You also mentioned the benefit from greater shift to outsourcing. Positives and negatives, just wanted to hear your thoughts.
Yeah, absolutely. you know, 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 ed, our higher education customers about their desire to reopen in the fall and to be engaged and to make sure that student experience is appropriate. you know, the distance learning experiment that's taken place over the last several months has 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. 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. I think we can return to an environment where we can operate very effectively. In Business & Industry, it remains to be seen what, you know, how many employees will return to their work locations. I do know that human beings are creatures of, you know, 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 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. 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. We are confident that the opportunities to grow the business will continue. You mentioned the self-op conversion element.
We do believe that more and more companies who currently operate their own food service 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. 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. Can you give us a sense of maybe some of the recent trends in the business in April? Have you seen any growth rates trough? I guess just anything around the variability around recoveries and maybe particularly sports, you know, if you expect that attendance in stands may return before there's a vaccine, you know, things like that as well. Thank you.
Yeah, it's a very dynamic environment. I would say it's a little early to call, 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, you know, how to get back to operation in a way that both protects the players and the fans. They're working through their various ideas and various approaches. It's really too early to make a call on when that might happen. We're highly confident that everybody's very, very much incented to go ahead and get back to operation, as you will. I think, you know, 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, do you have anything that you want to comment on?
I think a quick look at the flash for April, you know, looks to be, you know, probably on a revenue basis, around, you know, 50% roughly down. I think there's, you know, 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, you know, sort of six to seven weeks in.
Thank you.
Thank you. Our next question comes from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, great. Thank you very much. Very good call. I just wanted to, you know, focus in on, you know, talking about new business wins. You know, I was surprised you actually, you know, talked about that, especially in this environment. You know, how are you actually going about winning this new business? 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. Thanks.
Sure. Thank you. Well, first of all, you know, I think our teams have been dedicated to this new sales effort, you know, from the outset. You know, recognizing that these kinds of times present not only significant challenges, but significant opportunities. Our people have really been focused on, you know, continuing to find ways to serve customers, both our existing and new customers, and focus on, you know, 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. We have been very successful.
We've sold over $100 million worth of new business since February internationally, which is just a terrific effort, significant portion of that in China specifically in the healthcare sector, but also significant wins in Germany and other countries. We're continuing to focus on the sales effort. Domestically, we've got some significant wins that are, you know, in the in the queue already that we haven't announced that we're very excited about both in the higher education space as well as the B&I space.
You know, so our teams are really focused on continuing to grow the business, and knowing that the company will come out of this, and we wanna be focused in creating that growth paradigm, or re-energizing growth paradigm that we talked about all the way back in October when I joined the company. Some good wins. And, you know, there are some very significant opportunities in the pipeline that we're working on. We do see customers delaying slightly and deferring. You know, we're obviously not in person making presentations, but we are submitting, for example, a very large healthcare 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 this presentation.
Organizations recognize the imperative to continue moving forward, and so we're doing that on the growth side.
Okay, great. Just as a follow-up, why don't you just also focus on the comment about Asia, or I think it was particularly in China, having recovered. What does that actually mean by recovered? 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, you know, maybe discuss if, you know, 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. Thanks.
Yeah, well, that's a, that's a great question, and boy, I, you know, I think it's got application to much more than our just, our particular business, right? You know, first of all, China is the area that has recovered most significantly. Particularly, we operate in the healthcare sector there, and our business has returned to pre-COVID-19 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, seven 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, you know, that represents a blueprint for recovery around the world, very hard for me to comment on that. I do believe that, you know, the conditions in China are very different than they are in other parts of the world. Hard to say. Our operations are generally operating, you know, very well there. We've got great leadership, a team that's done an extraordinary job.
That 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.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Shlomo Rosenbaum with Stifel. Please go ahead. Your line is now open, Shlomo.
Sorry. Can you hear me now?
Hey, yes, we can, Shlomo. How are you?
I want to start with just a couple, you know, 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? Just in general, about, you know, 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. This situation with respect to grocery store capacity and meat production is not one that's affecting us at this point in time. As a general rule, we're somewhat insulated by the difference between the products that we buy and the way we buy them. Right now, supply chain disruption, not a significant impact for us.
With respect to campus dining, we have had in almost every case, you know, 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. You know, we were very close to the end of the semester and had pretty much worked down to the board plan. We don't anticipate that there would be a material impact from any refund that might be required of Aramark underneath those programs. We would expect that there would be an underlying negotiation with the customer about, you know, future program costs or modification of programs to support them. Generally, we don't see it as having a material impact.
Okay. Thank you. Then just one other item. Before this, the whole pandemic, one of the efforts that you had to improve the uniforms business is to roll out the routing system that AmeriPride had to all other parts of the uniforms business, to improve the route density. Can you talk about 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 or 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, you know, 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, you know, going cross-country to go ahead and do implementations in locations where they don't operate. 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. 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 location.
We've adopted a change in implementation plan, but we're still implementing, if that makes sense.
Thank you.
Thank you. Our next question comes from Andrew Steinerman with J.P. Morgan. Please go ahead.
Hi, Tom. I wanna jump into the 50% revenue declines you've seen in the last, you know, kind of six or seven weeks. If you can make a comment by division, U.S. Food Services, International and Uniforms. Secondly, you know, 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 declines during that period?
Yeah. Good morning, Andrew. Not really wanting to get into the breakdown of that at the moment. You know, we're still sorting it out, having just looked at the information. It appears as a... To say that it's been pretty steady throughout the month, I will comment on that. You know, 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. 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.
I think pretty steady for the month would be the cadence.
Mm-hmm. Could you just say if the uniform declines are less than the food and support services declines?
They have been.
Okay. Thank you.
Thank you. Our next question will come from Gary Bisbee with Bank of America. Please go ahead.
Hey, guys. This is Jay H anna on for Gary today.
Hey, Jay.
Just a quick question going back to that sort of new customized model you're gonna be using, just with regard to the heightened 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?
You know, first of all, I think, as we ramp up operations, we'll be ramping them up to meet the customer demand. We will not go to 100% of capacity initially. As, you know, if you take an average B&I location, the expectation, we believe, is that they will stage employees back into the facility. 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 that, I think, will differ greatly by community, you know, by infection rate in various localities, by the medical system in various communities. I think it'll be a wide range of activity.
Our expectation is that we'll ramp up slowly to go ahead and meet the increased demand as it comes on board. Our service programs will be designed initially with lots of grab and go, you know, 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 PPE, and they will all be temperature checked every morning before they come into work. 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.
We're conveying a very healthy, hygienic environment to the customer, so that they can feel comfortable in coming into the location. We anticipate a ramp up over a period of time. We'll scale up our operations over that, over that time period and manage the cost structure accordingly to maintain the appropriate levels. That's probably the simplest way to put it, and I think it'll be different by business unit. It's gonna be very, very customized by location and by customer.
Okay. Just with regard to the, that decremental margin level, what do you think gets you from that 20% down to 15% that was spoken to in the release in the deck?
Yeah, I'll take a shot at that, Tom can add color commentary as we'd like as well. You know, 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, you know, this issue. You know, today, if, you know, if the business begins to ramp up over the period of the month of May and June, you know, we'll continue to manage in the, in the framework that we have around that 20% level.
If the 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. 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. 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.
Okay, thank you, and good luck.
Thank you.
Thank you. Our next question will come from Andrew Wittmann with Baird. Please go ahead.
Great, thanks for taking my question. I only have one question, because most of them have been asked and answered, but I did wanna, 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 impacts here in the March quarter, but maybe the best way to characterize it is maybe a range and how you think the second half of the year compares to last year's second half of the year in terms of cash flows. Is it just the impact of net income? You talked about that working capital might be a source of cash capital.
Presumably, there's gonna 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'd be helpful.
Yeah. Tom, you wanna go ahead and take that one?
Yeah. Well, you know, Q3 is not a particularly strong cash flow quarter for us historically. Certainly the current environment's put additional pressure on working capital in particular, you know, at the moment. Q3, we're managing tightly, managing strongly. The cash conversion cycle, you know, needs to level out and balance between, you know, AR, AP, and inventory. Right now, you know, a slight increase in DSO as everybody was coming to grips with the world. We're balancing that out at the moment, you know, as we get to a steady state, we feel like as I said before, very much get to a cash flow or sorry, working capital neutral position.
you know, when you pull that all the way down, you've got, you know, somewhat of a weak quarter in three historically. We think we'll manage to, you know, neutral, maybe slightly positive cash from operations, can get to neutral working capital. CapEx, we're working hard negotiating with clients, looking at what can be deferred without compromising the business. Like I said, we've got limited maintenance CapEx. I was looking at Q3, you know, again, with the history, we would expect that to be, you know, a moderate use. Q4 really just depends on higher ed, and it restarting, and also to a degree, the S&E world.
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.
Okay, great. Thank you. I'll leave it there.
Thank you. Our next question will come from Manav Patnaik with Barclays. Please go ahead.
Hi, 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 gonna pick up or slow down. I was just hoping to get some color on your ability to flex up the labor as these locations start to open up, but still, you know, maintaining the same, you know, level of service that you look to achieve.
Yeah, that's a great question. That is, you know, 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, you know, having a recruitment operation put in place for our frontline employees so that, if they were looking for employment, we could help them find additional opportunities. We expect that as the, as the call up takes place, that we'll see the vast majority of our employees return to work under the conditions, you know, as we, as we ramp up. Our management team, you know, I'm 100% confident we'll have a great leadership team in place.
Our technical employees, skilled chefs, and the like, you know, 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 you know, we believe that we'll be able to ramp up to meet the demand. Again, it will be a ramped-up process. It'll take place over a period of time. It won't be a 100% callback for everybody at, right at the beginning. It'll depend on each individual location and the business model. Keep in mind, many of our businesses, you know, higher education, K-12, basically are furloughed during the summertime to begin with. This is a...
Those are groups of employees who are very used to this as part of the process and the way they live their lives. 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.
Yeah, that makes sense. Just given that, when these locations open, I imagine there's gonna be a greater focus on cleanliness and hygiene across these locations. Just wondering about the potential opportunity on the facility services side to answer for some of that. Thanks.
Yep, that's a great question as well. You know, we do think it's a very significant opportunity. You know, we've developed protocols to put in place in all of our locations that are Aramark responsibilities. We will have, you know, very significant deep cleaning and hygienic standards in all of our operations to give the customer the strongest sense of safety and security and wellbeing. 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. We think there will be significant demand for enhanced sanitation and security.
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. We do see it as something that has significant potential for us.
Thank you. Our next question, we will now move to Hamzah Mazari with Jefferies. Please go to.
Good morning. Thank you. My first question, and I think, John, you alluded to this, I think several times, 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 gonna get pushed to the right in this environment?
you know, I don't, you know, I don't think so. I think the investments that we had intended to make in the business, we are continuing to make. That is particularly focused on the growth paradigm, as I said. Adding sales resources, adding sales managers to the businesses. We've taken those actions. We have not made any reductions to those parts of the organization going forward. I think, you know, we have not deferred or delayed those investments. you know, we're very much focused on going on offense, if you will, when the timing is right, when our customers are ready for it, and when the marketplace is ready for it.
We've positioned ourselves in such a way that we believe we can respond very, very rapidly, particularly, you know, to the theoretical self-op conversion opportunity that we believe will exist. I, you know, the simple answer, we're working very hard, you know, to 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. We really feel like he'll make a difference in that business. We've continued to focus on making other leadership changes in, 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. We're gonna continue to invest in the growth of the enterprise.
That's great. Just a follow-up question. Are you still, you know, seeking out government assistance? Is that a focus? Maybe you can just tie that into how you're thinking about current liquidity. Thank you.
Sure. We do have a very active government affairs organization working against both the CARES Act in 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. You know, we continue to have efforts underway to lobby, you know, 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 healthcare. 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.
We do have a very active effort underway, in that regard, and, we'll continue to focus on it.
Thank you.
Thank you. We will now move to Seth Weber from RBC Capital Markets.
Hey, good morning. Hope everybody's 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. You know, I think I heard some better, you know, 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 in the educational space? Thanks.
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, you know, that we've been able to achieve to date. You know, some of which, we haven't announced yet, because we're still under the contracting phase. We do feel very comfortable that, you know, that we'll get to a very positive position by year end. You know, our retention rates have significantly improved across the enterprise, including in higher education. We're confident that we can, you know, that we'll have a very positive run rate by year end.
Okay, thanks. Then, John?
Let me just add there that just remember, I mean, state the obvious potentially, but, you know, 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 in that it's so pronounced in education that, you know, because the startup dates are at a certain time throughout the sector, that flow through is really a product of what happened or didn't happen, you know, a year ago on the impact of this year. As John referred to, the pipeline and the things that are being worked on now will carry into next year.
That makes sense. Sure. Then I was surprised, I think I heard a couple times, you know, mention about positive pricing. Can you just shed any more color on what's driving that? It's, you know, it's a little surprising given the kind of the macro challenges. Thanks.
Yeah, I can touch on that, John.
Go right ahead.
Yeah, I think I mentioned the last call, last quarter that, you know, I was impressed with coming in fresh, impressed with Aramark's, you know, ability to price to the contract that they have with clients. There's a lot of focus on it. You know, it's a negotiated number with clients and, you know, 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, you know, 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, you know, with clients, site by site, in conjunction with many other topics, to best serve the client and make sure that, you know, we, Aramark and the clients are both served. Yeah, pricing's always been a big driver. I'm impressed with the focus on it, here. You know, we'll continue to be.
Super. Thank you very much, everybody.
Thank you. 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. 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.