Aramark (ARMK) Q4 2020 Earnings Call Transcript

Aramark (NYSE: ARMK) Q4 2020 earnings call dated Nov. 17, 2020

Corporate Participants:

Felise Kissell — Vice President, Investor Relations and Corporate Affairs

John Zillmer — Chief Executive Officer

Tom Ondrof — Executive Vice President and Chief Financial Officer

Analysts:

Kevin McVeigh — Credit Suisse — Analyst

Stephen Grambling — Goldman Sachs — Analyst

Ian Zaffino — Oppenheimer — Analyst

James Ainley — Citigroup — Analyst

Andrew Steinerman — J.P. Morgan — Analyst

Shlomo Rosenbaum — Stifel Nicolaus — Analyst

Greg Bardi — Barclays — Analyst

Andrew Wittmann — Baird — Analyst

Toni Kaplan — Morgan Stanley — Analyst

Gary Bisbee — Bank of America Securities — Analyst

Hamzah Mazari — Jefferies — Analyst

Gunnar Hansen — RBC Capital Markets — Analyst

Presentation:

Operator

Good morning and welcome to Aramark’s Fourth Quarter and Full Year 2020 Earnings Results Conference Call. My name is Victor 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.

Felise Kissell — Vice President, Investor Relations and Corporate Affairs

Thank you and welcome to Aramark’s fourth quarter and fiscal year 2020 earnings conference call and webcast. I hope those listening, are doing well, along with those around you. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, a 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.

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

John Zillmer — Chief Executive Officer

Thank you, Felise. And good morning everyone and thank you for joining us. I hope you and your families are staying safe and healthy. Today, I plan to review the current state of the business, reflect on the impactful actions we’ve undertaken since my return to the company, as well as provide an initial view of the year ahead, collectively driven by our commitment to unlock Aramark’s significant growth potential.

I remain incredibly proud of our teams on the frontline around the globe for their passion, resilience and ability to provide innovative solutions to serve clients in their greatest time of need. Their heroic actions and extraordinary work ignited our ability to quickly adapt and ensure continuity of service. As a result, I truly believe we’re a stronger organization today, with a more clearly defined purpose. I would also add, that our employees have a true and profound ownership mentality, that meaningfully benefits Aramark and our customers.

Our business transformation strategies over the past year, and most notably since COVID, have resulted in leadership and organizational change, that advanced the execution of our initiatives, strengthened client and supplier relationships, a renewed entrepreneurial spirit with a growth mindset. We’ve made investments in accelerating growth, effective management of our effective business — of our flexible business model across a diverse portfolio that led to an adjusted operating income drop through of 22% on a constant currency basis over the second half of the fiscal year, while continuing to invest in growth resources and delivered positive cash flow since the bond issuance in April, resulting in our ability to maintain ample cash availability at quarter end.

The company’s agile platform contributed to improved sequential quarter-over-quarter performance. The business exhibited encouraging revenue trends across all segments compared to the third quarter, as we navigated the challenging environment. We mobilized to share experiences across businesses and geographies. Cross-functional teams were established, that included leaders in operations, technology, marketing, and new business sales, to leverage best practices, in order to anticipate client and consumer needs, and to innovate and implement solutions. This business interconnectivity has proven exceedingly advantageous.

I’d now like to turn to the performance by business segment in the quarter. U.S. Food and Facilities drove solid improvement compared to the third quarter, driven by key factors in each business sector. Education demonstrated progress in the fourth quarter, as most clients employed various in person and hybrid learning models. In higher education, we are currently serving approximately 90% of client locations in some manner, with a meal participation rate at 70% of prior year levels, while experiencing lower retail and catering volumes. In K-12, we are actively participating in the Universal government sponsored meal programs, that provide all students free meals in their school, in addition to offering meal delivery and pickup solutions. This program was just extended through the end of the 2021 school year.

Sports leisure and corrections reflected quarter-over-quarter improvement, although stadium attendance remained sparse. Sports and Entertainment is reactivating, as professional sports leagues begin to include fans in limited capacity, based on local jurisdiction. Leisure, typically at its peak during the summer months, reflected increased activity with modified operations, and corrections remained stable.

While additional business and industry client locations opened throughout the fourth quarter, companies remain measured in the return to work strategies, with decisions driven largely by need and corporate culture, as well as local regulatory restrictions. As previously stated, we expect B&I to have a longer recovery tailwind. We’ve developed innovative offerings, that include delivery solutions, as well as enhanced capabilities to drive higher capture rates in our locations.

Performance and Facilities and Other showed resilience, as clients requested more frequent and comprehensive services, as locations reopened. We are pursuing extensive cross-selling opportunities in this area, as hygienic safety is a top priority.

Our Healthcare base business remained stable with signs of strengthening performance, as elective procedures increased, and visitors restrictions began to ease. Going forward, we anticipate a significant new business pipeline, as healthcare systems evaluate the benefits of self-op conversion. Over the course of the quarter, we invested in our Healthcare sales capabilities, to capitalize on these multiple opportunities and create another strong platform for growth.

International reported sequential quarterly improvement across all regions, that reflected the team’s tenacity and ability to manage through government imposed restrictions. Operations remained at various stages of response, depending on geography and industry specific focus. Europe demonstrated improving trends, as shutdowns gradually eased in the summer months, and we are currently leveraging past experiences, as further government imposed restrictions are undertaken. Rest of world exhibited resilience, led by China yet again, delivering double digit revenue growth. The international team continued to win diverse new business in the quarter, including mining in Chile, several Healthcare clients in China, as well as manufacturing in Korea and Mexico. This sales momentum in international continues with over $30 million already sold in the first quarter, led by a balanced, efficient and aligned sales result.

Uniforms has emerged as a particularly high demand business for meaningful opportunities ahead. Rentals experienced improving trends, in addition to increased client interest in adjacency services, including PP&E. The team remains committed to implement value enhancing strategies, that include increasing our sales resources, we added 150 new members to the salesforce just over the past year, with plans to add an additional 100 in fiscal ’21. Expanding adjacency services, particularly in safety and sanitization, and fully integrating our efficient ABS route accounting system. Over the course of the quarter, we converted additional markets and expect the remaining operations to largely be on this platform by later this year, creating efficiencies through optimized pricing strategies, enhanced data analytics, and improved service capabilities.

In supply chain, we continue to leverage our various spend pools to drive productivity, cost reductions and efficiency. Our ongoing focus on deepening and strengthening our most strategic supplier partnerships, is targeted to deliver not just productivity, but also improvements in program areas such as culinary collaboration and product optimization, to ensure client and consumer satisfaction.

As we effectively manage the business through this unprecedented period, we remain highly committed to building Aramark’s growth paradigm. Such progress is most recently reflected in higher education at Sacramento State University, a prominent self-op conversion that just announced its intention to outsource to Aramark. Looking ahead, our growth opportunities will be driven by leveraging innovation, taking place at a rapid pace to create seamless experiences for clients, particularly through adapted offerings that serve in the new environment. Whether our robotic capabilities, new applications in food delivery or autonomous grab-and-go, convenience locations that include QuickEats, our award winning new concept. We have developed a unique platforms with new and enhanced approaches to serve clients.

Technology has also been deployed to advance experiences, such as cashless and contact free payment options, particularly in our sports and entertainment business and B&I sector, with strong initial success. In Facilities, we just launched Aramark Intelligent Workplace Experience or AIWX Connect, technology that utilizes real time digital inputs from building systems, wireless sensors and occupant feedback to create safer environments and improved building operational performance. We are also applying our proprietary EverSafe platform, focused on strategies to create client confidence in reopening, and ongoing management of locations, while maintaining strict safety and hygiene protocols. We expect to scale these services as appropriate, to reflect the ever-changing needs of our clients.

We also continue to add organizational bench strength, that most recently includes the appointment of Denise O’Brien in early November, to lead sales enablement, where she will partner with the businesses to support and drive Aramark’s growth priorities, including sales talent acquisition, supporting large account client strategies, as well as sales analytics. Denise previously spent 27 years with Aramark in various leadership capacities, from field operations, to sales and corporate functional roles.

Before I turn the call over to Tom, I want to acknowledge our dedicated team members, who continue to support our community and philanthropic efforts, despite the challenges of COVID-19. While we were not able to hold our traditional in-person Aramark Building Community Day this fall, our teams mobilized to donate back-to-school and health supplies to public schools, and provided grants for our community partners for pandemic release, food and security and other projects. I’m extremely proud of this commitment and the positive impact it made in our local communities, that complements our deepening partnership with the Urban League.

In addition, last week we announced a collaboration with American Corporate Partners, a national nonprofit organization, to help returning veterans and active duty spouses find their post-military careers through one-on-one mentoring, networking and online career advice. It’s an honor to be affiliated with such a commendable cause.

I will now turn the call over to Tom, for a detailed financial review of the business.

Tom Ondrof — Executive Vice President and Chief Financial Officer

Thanks John and good morning. Before we begin, I want to echo John sentiment and also say how proud I am of our teams around the world. Their continued commitment to our clients and customers is a true testament of Aramark’s dedication to service. Also as a reminder, the company’s fourth quarter and fiscal year 2020 included a 53rd week of operations. For comparability purposes, my comments are based on a 52-week to 52-week basis, unless otherwise noted.

Our fourth quarter performance was consistent with the expectations we articulated on the last earnings call, and subsequent fireside chat webcast. While our results obviously remained impacted by COVID-19, revenue showed solid improvement compared to the third quarter. In addition, while we continue to invest in growth oriented resources, and incur certain reopening expenses, we controlled the costs we could control during the quarter, leading to an AOI drop-through rate of 23% of corresponding revenue decline. Strong discipline and cash flow management, again, without compromising growth related investments, resulted in the business generating $146 million of free cash flow during the quarter, leaving the company’s cash availability at a healthy $2.6 billion at the end of the fourth quarter. Consequently and subsequent to quarter end, we paid down $680 million of our revolving credit facility, that will create future interest expense savings.

For the total company, organic revenue was down 36% in the quarter compared to the prior year, reflecting solid improvement from the third quarter year-over-year organic revenue decline of 45%. The strengthening performance was across all segments as John noted, largely driven by client reopenings and expanded service offerings. U.S. Food and Facilities had an organic revenue decline of 45% versus the prior year, compared to a 56% decrease versus the prior year in the third quarter. Quarter-over-quarter progress was led by Education, driven by university reopenings, and participation in the universal government sponsored meal program, serving K-12.

International organic revenue decreased 31% compared to the prior year, an improvement compared to a 41% decline in the third quarter, with China once again contributing double-digit growth in the quarter, while navigating various stages of government imposed restrictions.

Organic revenue in Uniforms is down 9% versus the prior year compared to a 12% year-over-year decrease in the previous quarter. Performance in the fourth quarter was most notably driven by improving trends in the rental business, as well as heightened client demand for adjacency services.

Total company adjusted operating income was a loss of $12 million in the quarter, reflecting as previously mentioned, a 23% drop-through rate of corresponding revenue decline, as the operating teams continued to effectively manage in-unit product, labor and other direct costs based on site level demand. This in-unit cost control activity was somewhat offset by increased above unit costs, related to operations, field marketing, HR and culinary, to support greater business activity across all segments.

Corporate results in the quarter included higher cash and equity-based compensation expense, compared to prior year, resulting from certain actions taken to reward the organization for a job well done, in an incredibly challenging environment, as well as company leadership to remain focused on growth and long-term value shareholder creation.

Adjusted EPS was a loss of $0.35 in the quarter, as a result of lower AOI and higher interest expense, associated with the $1.5 billion bond issuance in April and deliberate drawdown of the revolver in March. As I shared earlier, our recent paydown on the revolver is expected to drive interest expense savings in future quarters.

Now turning to cash flow; in the quarter, we generated $252 million of cash from operations and $146 million in free cash flow, as effective cash management more than offset the net loss due to the impact of COVID-19 on operating results. With the company’s expected continued solid cash flow performance and strong liquidity, we remain committed to investing in growth opportunities, paying down debt and returning value to shareholders, that includes our quarterly dividend payment that just announced this morning.

We continue to participate in the appropriate country specific government assistance programs, including benefits from the CARES Act here in the U.S. Through these programs, we received approximately $62 million of labor credits in the quarter, to offset the costs we incurred worldwide, related to the retention of the employees, and for absorbing 100% of benefit costs associated with furloughed employees. Under the CARES Act specifically, we also had deferred remittance of federal payroll taxes and NOL carryback modifications, that totaled approximately $11 million in income tax benefits. We will continue to look to optimize the available stimulus programs as appropriate.

Let me now touch briefly on our GAAP results. As I previously mentioned, fiscal 2020 contained a 53rd week of operations, that is reflected in the GAAP numbers. The extra week contributed an estimated $177 million to revenue, while having a negligible impact on operating income. Interest expense and taxes for the extra week netted to an estimated $5.7 million expense, resulting in a net loss attributable to the 53rd week, of $5.4 million or $0.02 per share. The GAAP operating loss, net loss and diluted loss per share included certain non-cash impairment charges, and costs related to the organizational realignment, that was initiated just prior to the fourth quarter.

Now let me conclude by reflecting on the full year and touching on our current thoughts of fiscal 2021. Aramark’s financial performance in fiscal 2020 highlighted the fortitude of our people and the flexibility of our operating model. Organic revenue for the year declined 21% compared to fiscal 2019, with underlying growth in the first half more than offset by the impact of COVID-19 throughout the remainder of the year. Adjusted operating income similarly affected by COVID-19 was $294 million for the year. The company quickly and thoughtfully implemented in-unit cost reduction strategies, including renegotiation of client contracts, as well as reduced general corporate expenses, to manage the AOI drop-through rate to 22% on a constant currency basis during the second half of the year. All this, while continuing to invest in growth related resources.

These proactive actions, combined with effective working capital management strategies, also benefited free cash flow, which was limited to a use of $188 million in fiscal 2020. And as John mentioned, the company has generated positive free cash flow since the bond issuance in April.

As we commence fiscal 2021, we will continue to leverage our resilient operating model, while managing the business for the long-term perspective. We firmly believe we are well positioned to navigate the ever-changing environment, appreciating the pace and exact timing of the recoveries evolving. Based on our current expectations, we anticipate organic revenue to improve over the course of the year, with the first quarter expected to be largely in line with last quarter’s revenue levels, when considering the various stages of client reopening plans, and the timing shift in higher ed, as many universities plan to end the fall semester early.

We anticipate AOI to reflect a drop-through rate of 20% to 25% in the first half of the year, as a result of continued disciplined cost management, ongoing restart costs associated with client reopenings, as well as continued investment to support growth initiatives. AOI margins are expected to gradually increase throughout the course of fiscal 2021, as we transition from managing a drop-through rate in the first half, to driving margin progression in the second half compared to fiscal 2020. And we anticipate free cash flow to be in a range of $100 million use, to generating $200 million, depending on the pace of recovery and timing of underlying growth. We expect that the first quarter will reflect a seasonal outflow, primarily associated with higher ed, followed by cumulatively positive cash flow for the remainder of the year.

Thanks for your time this morning. And now, I’ll hand it back over to John.

John Zillmer — Chief Executive Officer

Thank you, Tom. We are operating in an environment that places enhanced value on execution expertise. As Tom stated, we expect business performance improvement as the year progresses, and our transformative actions across the business are unlocked. We’re also closely monitoring the promising news reported this week and last of potential COVID-19 vaccines and the impact they may have on business in general. Our belief in Aramark’s success is rooted in our exceptional teams around the globe, who are in the trenches with an unwavering commitment to serve clients. It’s with this passion and focus in mind, that I have no doubt of our promising future.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from the line of Kevin McVeigh from Credit Suisse. You may begin.

Kevin McVeigh — Credit Suisse — Analyst

Great, thanks so much and congratulations on the results in an obviously very tough environment. Hey Tom or John, I guess, obviously the cash flow was really, really impressive, but just what drove the decision to kind of repay the $680 million of debt post the quarter? I wanted to start there?

Tom Ondrof — Executive Vice President and Chief Financial Officer

Yeah, I’ll take that up. Well, Kevin, we originally drew it down out of an abundance of caution. It’s tough to go back to April now, it seems so long ago, it was a prudent measure at the time. Since then we’ve executed all the cost containment actions that John and I believed the business could execute, and really strong working capital management to produce the cash flow result we had, since the bond issue and the revolver drawdown, and found ourselves with a very healthy balance sheet, healthy cash availability at year-end, and felt it was the right thing to do, and to take the potential interest savings, and that of course — capital is available to us, should we need it on short call. But at the moment, we feel good about where we are and with the resources we have at hand.

Kevin McVeigh — Credit Suisse — Analyst

Super helpful. And then just real quick, any thoughts John or Tom just on — you know, obviously on the Uniform side, you’re seeing really nice trends there, as well as the facilities and other. Client demand, is it similar kind of trends driving those two, or is it clients expecting other things out of facilities, as opposed to Uniform? Just any thoughts around that, as you think about it, within the context of the holistic business?

John Zillmer — Chief Executive Officer

Sure, I’ll take that. And first of all Uniforms, because of the nature of their customer base, continue to see improvement, as more and more organizations return to work and have higher degree of certainty in terms of employees on-site. So you see the improving rental trends throughout the business, and you also see in the quarter, additional PP&E sales that were that were requested during that quarter.

On the facility side, as customers reopened, we saw a significant focus on enhanced cleaning requirements, and not only on an episodic basis to reopen, but also on a continuing basis to maintain very high levels of hygiene and safety, and confidence on the part of employers and institutions for their constituents. So we see that demand continuing to improve over time, and we see significant cross-selling opportunities in both of those markets, as we utilize those businesses to enhance safety and hygiene protocols for our customers.

Kevin McVeigh — Credit Suisse — Analyst

Thank you so much.

Operator

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

Stephen Grambling — Goldman Sachs — Analyst

Thanks. Two related questions and the first is a bit myopic, but with the vaccine news, have you heard or seen any changed behavior across segments? And then as a related follow-up, the guidance has a fairly wide range of outcomes embedded in the free cash flow range there. I guess if you could just elaborate on what are some of the assumptions that are embedding the low end and the high end of that range, any other details you can provide on some of the line item [Technical Issues] and capex? Thanks.

John Zillmer — Chief Executive Officer

Sure. With respect to the vaccine news, I think obviously you have many people are hopeful that it can have an impact on their operations and the business, as the wide availability becomes apparent. I think all the businesses we operate in, have varying degrees of — have varying plans to reopen and restart, based on their specific needs and the availability of a vaccine would significantly impact those. I think it’s too early to make a call on how it might impact the balance of the year. A lot of uncertainty, with respect to timing, implementation, overall vaccine rates and the like. So I think, that we have a hopeful attitude on the part of most people and most of the business leaders we deal with, but still a lack of certainty over how that might impact timing and return to work strategies.

Tom, do you want to take the question on the cash flow?

Tom Ondrof — Executive Vice President and Chief Financial Officer

Sure. It’s really a bit of a balance between pace of recovery and underlying growth opportunity, the range on the cash flow is. So the quicker the pace of recovery, the stronger we will have to be reinvesting in working capital, as units reopen. So that’s going to put a little downward pressure on free cash flow. Similarly, if we continue to get good underlying new business growth, that could put pressure on free cash flow in terms of capex investment. So those two things might move us towards the lower end of the range. The upper end of the range would be, probably a little more stagnant pace of recovery, so that the working capital demands aren’t there and a slower new business model. So that’s the range, given the uncertainty that we still have and the pace of recovery in the underlying new business performance.

Stephen Grambling — Goldman Sachs — Analyst

That’s helpful. Maybe one quick follow-up on that. I mean, I guess, the assumption there is that, working capital be inversely correlated to revenue. If we think further out about the margin profile, I know you’ve talked about a balanced reinvestment approach. Given what you’ve learned through ratcheting down the business, adjusting the business and some of the comments you’ve made about technology, how should we be thinking about where margins could ultimately shake out overall for the business in recovery, thinking longer term, and what are the puts and takes to evaluate?

John Zillmer — Chief Executive Officer

Yeah. Well, first of all, I think we’ve guided historically that we believe margins and divestments will continue to recover and expand to pre-COVID levels. We still are firm believers in that model, if you will. We think there is lots of business improvement initiatives that we can engage in, as we reopen. We think we have engineered the organization in such a way, that we’ve got some permanent cost reductions built into the operating model moving forward. We continue to make very significant progress on supply chain initiatives, that continue to enhance margin capabilities. So we think long-term, the margin profile of the business is enhanced, as a result of all these changes, and that will return to pre-COVID levels and beyond, as we move forward, past the pandemic.

Operator

Our next question will come from the line of Ian Zaffino from Oppenheimer. You may begin.

Ian Zaffino — Oppenheimer — Analyst

Great. Hey, John and maybe Tom too, as I know you guys are pretty involved [Phonetic]. Can you just talk about some of the new business wins, what the pipeline looks like? How personally involved are you guys actually in this? I mean, if you can kind of give us a little bit of color of what’s going on there? Thanks.

John Zillmer — Chief Executive Officer

I’m sorry, that question broke up for me a little bit. Do you mind repeating it?

Ian Zaffino — Oppenheimer — Analyst

Sure. The question was, can you talk about some of the new business wins and the pipeline that you’re seeing out there? Also how integral are you in some of these new business wins and the pipeline? Maybe you can kind of give us a little color on how you’re participating in that, along with Tom? Thanks.

John Zillmer — Chief Executive Officer

Certainly. We have a philosophy that everybody sells in this organization, and as a matter of fact, just this past week, we were together in our corporate office, with the leaders of the various businesses, talking through growth strategies for the balance of 2021 and beyond. And so we’re intimately involved in both the strategy, and frankly in the customer evaluation, and in the proposal process. So we are actively engaged and participate and speak to prospective clients on a continuing basis, as we pursue those kinds of opportunities. And so we’re always willing and able to engage and be part of that, everybody sells mantra, if you will.

As I said earlier, I think the pipeline is going to be very, very active. We’ve enjoyed a number of very good wins already this year, particularly on the international side, and that win at Sacramento State, we see a very robust pipeline of opportunities across the range of businesses, and so we see a very active selling season, as a real possibility and a real benefit to the future growth of the company.

On an international basis, I’m extraordinarily impressed with the results we’ve been able to achieve in Chile and in China, and frankly, pretty much everywhere around the globe, even during COVID, there seems to be a very significant improvement in the sales results on an international basis, and domestically, we see some very large scale proposal opportunities, some of which I’m not going to comment on, because I don’t want to identify them for our competitors, and we’re very pleased with the quality of the pipeline, the approach that the organization has taken, the fact that everybody has engaged and believes in the mantra of everybody sells, and we are taking very proactive actions to continue to enhance that growth paradigm. As Tom and I both said in the discussion, we have continued to make investments focused on growth throughout COVID-19. We haven’t made reductions to any of the areas that impact the sales process or marketing processes, and so we’re very, very much focused on that.

Operator

And our next question will come from the line of James Ainley from Citi. You may begin.

James Ainley — Citigroup — Analyst

Yeah, good morning everybody. Just following up on that answer around new business wins, sounds like some exciting opportunities. When might we expect some of these big opportunities to land? And then kind of secondly, could you maybe talk a bit about the competitive contracts from discussion in the industry about some of the smaller players struggling? Is that presenting opportunities to absorb contracts, or even to acquire some of these smaller operators? Thank you.

John Zillmer — Chief Executive Officer

Yeah, I would say, it’s very difficult to predict timing of pipeline because companies and clients have to work through a process, particularly when it comes to self-op conversion, they have to work through the philosophical process decision, first of all to go ahead and outsource. And so that takes a period of time for some organizations to resolve and to work through as they complete that analysis. And then you get into potential — if you’re working exclusively with the client, that process can accelerate. If you’re working in a bid situation, obviously it takes time to go through that as well. So hard to predict when the landing spot may occur. But as I said, I think we anticipate a good sales year, we’ve got a very robust pipeline and we’re very encouraged by the opportunities that we see there.

With respect to the smaller companies, I would tell you that I think there are some companies that probably are stressed from a financial perspective. We would look at those, as opportunities to be able to sell to their potential clients, to pursue their clients on a competitive basis, as opposed to an acquisition basis. But we would always be open to opportunities, if there was a company that had a client list that was strong and was complementary to what we do. But we’re not actively out there. I think suffice it to say, we want to sell new opportunities, as opposed to acquiring, and we think that’s the most effective and efficient way to acquire growth.

James Ainley — Citigroup — Analyst

Great. Very clear. Thank you.

Operator

Thank you. Our next question will come from the line Andrew Steinerman from J.P. Morgan. You may begin.

Andrew Steinerman — J.P. Morgan — Analyst

Good morning. First, I have two questions. First, could you talk about October? Could you comment on organic revenue changes in October year-over-year overall? And for the three segments, particularly commenting on Uniform? And then secondly I truly understood the hopefulness, but disclaimers about growth trajectory around what we know about the vaccine now. It does sound like you’re pointing to third fiscal quarter, the June quarter, as your hopeful return to growth quarter. And my question to you is, could you compare, what a moderate recovery would look like to you, compared to a much firmer recovery when you just think about what we know about the vaccine today?

Tom Ondrof — Executive Vice President and Chief Financial Officer

John, I’ll take the first one, if you want to comment on the growth trajectory. Yeah. Andrew October looked very much like Q4. That’s probably the simplest way to say it. Again, a bit of a pause on the road to recovery is, as we’ve been calling it, but the numbers look — in October are very, very close to Q4’s numbers across each of the three sectors.

Andrew Steinerman — J.P. Morgan — Analyst

Okay.

John Zillmer — Chief Executive Officer

Yeah, I have to be honest, I’m a little bit uncomfortable projecting what things might look like, throughout the balance of the year. I would say right now, we’re in a state of trying to understand what the impacts will be, the higher infection rates, whether there will be any continued shutdowns or additional shutdowns, what the political environment looks like. We have business expectations and if things evolve the way we expect them from a business perspective, I think you’re right, that there is an opportunity to see the business continue to ramp up over the balance of the year. But I think all of that can be impacted by the pandemic, and the political environment. So we’re going to take a wait and see attitude before we comment too fully, on what that might look like. Obviously, a vaccine would have significant consequences in the uptake by the American public, the rate of vaccination would have significant consequences and obviously, we have some large businesses that would benefit significantly in the spring time from that, like sports and entertainment.

So just very hard to predict with any high degree of certainty. I do know that we can control what we can control, that we have a flexible business model, we can adapt as we’ve shown over the course of the last six months, we’ve been able to really manage this very aggressively and very effectively from a cash flow perspective and an operating cost perspective, we’ve got great organization focused on doing that. So we’ll continue to control what it is we can control, and manage the business as efficiently and effectively as possible.

Operator

Our next question will come from the line of Shlomo Rosenbaum from Stifel. You may begin.

Shlomo Rosenbaum — Stifel Nicolaus — Analyst

H, good morning. Thank you. Hey John, can you comment a little bit more about something that you talked about last quarter, of increased interest in outsourcing due to COVID-19. Can you discuss whether any of this increased interest has actually translated to RFPs and are you seeing an expansion of that? Is there any change in what you saw last quarter? And then I’ll follow up with a question after that?

John Zillmer — Chief Executive Officer

Yeah, I would say we are seeing an expansion of interest. It has translated into active dialogs. There have been some RFPs that hit the streets for various opportunities, and I think will continue to be more here over the course, for the next several months, as we get into what’s more of the traditional selling season, particularly around higher education, K-12 and other markets that typically have, call it from a January to June sales cycle. So I think we’re just a little bit early yet in the selling season, for us to really be able to call out, what that is going to look like. But we do anticipate a higher level of demand.

Shlomo Rosenbaum — Stifel Nicolaus — Analyst

Okay, great. And then can you talk a little bit more about the higher education expectations in this coming quarter? It wasn’t clear to me, it sounded like there is going to be — the universities are talking about some early closing, which might boost revenue? Like it sounded like we’re talking about revenue that’s going to be similar to last year’s quarter, and I apologize if I missed something, but I’m trying to kind of put that all together?

John Zillmer — Chief Executive Officer

Yeah, I think what’s happening on the university side, as many universities — as I think you’re probably aware, have decided to shut down between Thanksgiving and Christmas, which are generally — generally you’ve got final exams during that time period. But universities have proactively said, once students go away for Thanksgiving, they’re not going to come back until after the first of the year. And so their start-up schedule has changed. So that does have an impact in this quarter, in terms of expectation for revenues. I can’t tell you what that number would be, and how that might impact the quarter yet.

We’re still working through all that. I will tell you, from a philosophical perspective, I’m hearing from University Presidents and those in the industry, that they’re very much focused on the spring semester, how to effectively increase the number of students, bring them back on campus. We’ve got a number of University Presidents saying, they may have made a strategic error in going completely virtual. And then you have some that that have the opposite views. So it’s still very fluid, and we’ll have a better view of that obviously, as we get through December and understand what the plans are going forward for the university sector. But this quarter will be impacted by the decision to close early, but we’ve been planning and adjusting for that really since the beginning of — the school season started.

Operator

And our next question will come from the line of Manav Patnaik from Barclays. You may begin.

Greg Bardi — Barclays — Analyst

Hi, this is actually Greg calling on. Just to get back on the point on the trajectory to get back to pre-COVID margins. I think you talked about some of the opportunities on the permanent cost savings like — on the supply chain. Maybe could you dig into that a little bit more, and if there are any other buckets to highlight, where you see opportunity to drive those permanent cost savings?

John Zillmer — Chief Executive Officer

Sure. I think as we went through the changes in the organization over the course of the last six months, we’ve found out how to do more with less, and sometimes as we — sometimes when you have to work through a crises like this, it has been a position of learning how to work differently, and we’ve been able to adapt and do that. So I think you will see permanent reductions in SG&A going forward as we’ve learned how to modify the business. We’ve moved resources from central to field. They’ve been able to adapt and learn how to operate with fewer people in the organization as well. So I think you’ll see probably a permanent reduction in SG&A, that’s likely to last for a very long period of time. And as we grow the organization, we will add back those resources on a very disciplined basis moving forward. So I think that that’s probably a reality.

Also on the supply chain side, we continue to work with our large-scale suppliers, manufacturers, and our partners in the industry to look for ways to not only benefit our operations, but to benefit them as well. As you know, we have a very longstanding partnership with Cisco, which was reinitiated for this on a new contract basis going forward. That contract provides additional benefits for them and for us, and we think that that will have some enhanced capabilities, and enhanced visibility under their new leadership. They are very much focused on enhancing the service offering that they’re bringing to Aramark. So we see that as a real source of potential profit improvement as well.

So lots of areas. I think we have continued to focus on base operational improvement. We continue to invest in technology, to help the operations run more effectively, and as you look at things like cashless payment options and touchless payment options, that enhances check average opportunities as well, across the range of the businesses, as consumers don’t have to reach in their pocket for cash, they can either use their credit card or some ID card or some other form of payment, and it has proven to enhance check averages across a range of the businesses that we use it in.

So lots of opportunity there. Multiple avenues for margin improvement and growth, and we’re very confident in that.

Greg Bardi — Barclays — Analyst

Okay, very helpful. And then maybe on the salesforce hiring side, I think you talked about the continued hiring on the Uniform side. On the foodservices side, is there continued hiring, or is it more about taking those employees that you hired last year and ramping them up on the sales side? Thanks.

John Zillmer — Chief Executive Officer

Yeah. As you know, it takes some time to ramp up employees in the sales area, particularly in the food side. We’ve projected 12 to 18 months of full effectiveness, and we’ve hired several new people in the last year on the foodservice side. We continue to look for high quality salespeople to go ahead and add to the organization, to enhance the capabilities and to into put more feet on the street, if you will. We feel very comfortable with the level of resources that we have today, but we believe that we can accelerate growth by adding additional resources there as well. So we’re going to pursue that. But I would tell you, I think we’re very comfortable in our sales skin, if you will. We’ve really made some very significant improvements to the sales organization, the selling process, and most importantly, the sales psychology of the organization and the growth psychology of the organization over the last several years. And part of that is leadership in the individual businesses, and part of it is sales structure. And we’ve addressed both of those issues I think pretty completely.

Operator

Our next question will come from the line of Andrew Wittmann from Baird. You may begin.

Andrew Wittmann — Baird — Analyst

Great. Thanks for taking my question. I guess most of my questions have been asked and answered, but I did have a clarification, that I was curious about here. And Tom, there was a comment that you had about the government assistance. You said in the quarter, there was $11 million. I think that was in the CARES Act, was that the payroll tax deferral, so that’s basically an accrual on the balance sheet. And then was the $62 million in the quarter that you recognized or that you experienced? You said that was a credit, so is that like a contra expense or something? Is that an income statement effect and the other one is basically a balance sheet effect for the $11 million, and could you give us the expectation, what you think those will be for the fourth quarter?

Tom Ondrof — Executive Vice President and Chief Financial Officer

Yeah, you’ve got that right. So the $62 million is really just a contra expense for costs we carried, that we were reimbursed for. So net to zero in the end. And the other, the payroll tax, the balance sheet effect. In terms of looking forward, all the government programs, both abroad and here, remain in force, are furloughed — our level of furloughed employees have diminished considerably from the third quarter and fourth quarter to today. So the dollar amounts will fall proportional. And then globally, a lot of these programs have been extended, but we’ll continue to monitor those and comply with the local regulations. So, don’t have exact numbers on how those will play out internationally. But they should — both numbers should continue to fall, as we move forward.

Andrew Wittmann — Baird — Analyst

Okay, that’s all I had. Thank you.

Operator

Thank you. The next question will come from the line of Toni Kaplan from Morgan Stanley. You may begin.

Toni Kaplan — Morgan Stanley — Analyst

Thanks very much. In recent quarters, you’ve spoken about changing your contract structure to cost plus and B&I and higher education? And I just wanted to understand a little bit better, what that means for a recovery? I know you have the ability to flip back to the prior structure, when things get more normal. Is there a certain volume level that triggers that, or is there the next quarter it triggers that? Like just how do we think about the ability to sort of return to the upside, in terms of that contract structure change?

John Zillmer — Chief Executive Officer

Yeah. Those contracts are all individually structured, based on specific client needs and locations. So there isn’t a single trigger that would affect all the contracts at any given time. It’s really a location by location negotiation with the client and customer, as they make decisions that impact their specific locations. And that’s — again in B&I, it’s primarily management fee in the campus dining world, we’re operating under memos of understanding, that have various triggers based on the universities’ needs, and where they are with respect to students on-campus, off-campus, virtual. So it’s highly variable, based on the individual location, and the size of the customer, and the type of locations. So there isn’t there isn’t a single trigger. I wish it were that simple, but it’s not.

So it will be — just like it was, when we renegotiated those clients, we had to do that in every location. We’ll have to renegotiate back to the original terms in every location on a one-to-one basis. But generally it will be, as employees return or as students return and they reach pre-COVID levels, we would go back to the formal contract — in the former contract type. If in fact that’s the choice of the of the client. The client may decide to keep the contract under the new terms, and we would renegotiate based on that, at that point. So sorry, that doesn’t really give you much, but that’s the best answer I’ve got.

Toni Kaplan — Morgan Stanley — Analyst

Okay, that’s helpful. Wanted to ask about Uniform as well. Hoping that you could expand a little bit on the trends in that segment. What are you seeing in terms of just outright service cancellations or just benefit from — also the benefit from PP&E sales in the quarter? How do you expect that to continue? Thanks.

John Zillmer — Chief Executive Officer

Yeah, going to PP&E sales. Obviously, the third quarter was — the PP&E sales were very, very strong. Fourth quarter was lower than the third quarter. It remains to be seen what will happen now, as we have a spike in cases and is there a renewed demand for additional PP&E and how it will translate into ongoing use of those particular products. The great thing is, we’re in a very strong position to serve our clients’ needs, not only in the Uniform business but throughout the rest of the company as well if there comes and increasing demand for that kind of equipment. But I would say, it should normalize that at a level that’s reduced from the third quarter initial slug of demand, to a level that’s more normalized on a going forward basis, and we’ll see how that shakes out.

With respect to trends in the business. We, as I said — we see continuing improvement in weekly rental revenues, as more and more employers return to their environments and more and more businesses continue to return. One of the things that impacts that business, is the fact that we do operate somewhat in the hospitality space. And so we have restaurants and operations that are not at full demand, as they’ve ramped up in terms of limited capacity. So we’ll see — probably a plateau for a period of time, until those restaurant operations are able to bring back more customers on a higher level, from a capacity perspective. So improving trends overall, and we expect to continue to grow that business. We’re out there actively engaged in selling new customers, obviously. That’s one of the reasons we’re going to add another 100 sales managers this year and plan for that investment built into our plans going forward. And we’re also going to be focusing on selling those adjacency services, the first aid, sanitization, restaurant services and others, that our clients are really looking for. So as I said, improving trends across the board and we expect that to continue.

Operator

Our next question comes from the line of Gary Bisbee from Bank of America Securities. You may begin.

Gary Bisbee — Bank of America Securities — Analyst

Hey guys, good morning. I guess the first question, you’ve alluded to this a couple of times I guess, specifically, higher ed. How are you seeing the recent surge in virus cases across the U.S. and Europe, impacting either the pace reopenings or the volumes that are coming back? Have you seen any go the opposite direction? And as part of that commentary on the current trend, I guess I just wanted to clarify, Tom, when you said Q1 similar to last quarter, were you referring to the organic, excluding the 53rd week’s year-to-year pace of revenue decline, being a number you’d expect to continue next quarter? What exactly what was that comment. Thank you.

Tom Ondrof — Executive Vice President and Chief Financial Officer

Yeah. It’s a 52-week to 52-week comparison. So the Q4 52 week decline over prior year as a percentage, we feel will be very similar in Q1. Again, a bit of a pause on the road to recovery, and October as I just mentioned is very similar to Q4 to back up that comment.

John Zillmer — Chief Executive Officer

Yeah. And I would just add some color on the recent surge in cases. As you know, this very highly dynamic phenomenon that’s occurring around the globe and restrictions are coming on and coming off on a very volatile basis. So we’re obviously poised to do what we need to do, in terms of managing the business in all those environments, and I think as you take a look at new restrictions that have been levied in areas, most of them are focused on gathering places, on the kinds of activities. Not as much with respect to employer activities. So at this stage, we haven’t seen a reversal of employees coming back into buildings, or in terms of company operations. But we’ve seen kind of plateau and not change. So I think people are waiting to see what that next wave looks like, and how they’re going to need to respond to it. So it’s just a little too early to tell, I think as all of this is really occurring in real time.

So don’t mean to be obfuscating, we’re not trying to avoid the question under any circumstance. It’s just that we don’t know what we don’t know. So we are hyperfocused on managing the business and controlling what we control for our clients and our operations and just being very diligent, and being able to respond, literally on a day-to-day basis, to changes in demand in the various businesses we operate.

Gary Bisbee — Bank of America Securities — Analyst

Yeah, no totally understood and appreciate that. As a follow-up, as we think of the future and maybe next spring-summer, starting to comp against these sharp declines and hopefully inflecting back to revenue growth. I guess, would it be reasonable to expect a similar 20% or so incremental margin, I guess, to the flow through on the downside you’ve seen in the last few quarters? And I guess if not, why not? I realize your commentary was on the first half, you expect a similar flowthrough as revenue declines. But in long-term, obviously incremental margins won’t be that high. But should you see that similar level of improvement when revenue does inflect back, at least for some period of time?

Tom Ondrof — Executive Vice President and Chief Financial Officer

You should. I mean theoretically, that’s absolutely correct. So we’d say you should, and we’re looking at, as we move to the second half of the year and that possibility we’re looking at how that may play out, and we’ll certainly provide more guidance, as we get more clarity around that. But theoretically, that’s where we would be.

John Zillmer — Chief Executive Officer

Yeah. As you know, long-term margin improvement is absolutely one of the goals of the business, along with growing the company. And the reason we want to grow the company is, to generate that long-term margin improvement and enhance earnings profile for the company. So we do believe that is a consequence of the reopening of the business, as we are able to reaccelerate growth in the enterprise, and get year-over-year improvement from just the return to normal operations in our existing business, that we should see enhanced flow through in terms of margin.

Operator

And our next question will come from the line of Hamzah Mazari from Jefferies. You may begin.

Hamzah Mazari — Jefferies — Analyst

Hey, good morning. Thank you. My question is just on the B&I business. I think, John, you mentioned, it’s a longer recovery tailwind expected. Could you maybe talk about — maybe flush that out a little more, when do you think B&I recovers from a timing perspective to pre-COVID levels? Do you foresee any impairment to that business, given sort of permanent work-from-home announcements for some companies? I know you’re pretty diversified with white collar, blue collar and hybrid, but just any thoughts how to think about that business?

John Zillmer — Chief Executive Officer

Yeah, I would tell you. Long term, I don’t believe that there is a significant change to the structure of that business that even with return to work, or even with work-from-home kind of strategies implemented, most studies I’ve seen, most people I’ve talked to, have indicated that a fairly wholesome return to work strategy is in the company’s best interest. And in terms of effectiveness, in terms of innovation, in terms of engagement. So I think at the margin, there will be change. But I don’t think it dramatically impacts the structure of that business over the long term, I think you’re going to see continued — and we’ve taken the opportunity to develop new delivery models for customers of our clients that have people working from home. So we have a very innovative program where the employer can go ahead and select a package to spend to their employees, their various food products and supplies, that are delivered directly from Aramark to the employee.

We’ve looked at a number of different approaches from a delivery perspective. We’ve looked at a number of different modified service capabilities, that enhance the operations on the B&I sector. Keeping in mind that the total business in B&I for Aramark is significantly lower than some of our competitors. They in long-term impact, of a B&I shift is somewhat muted for us, because of the mix of business, both domestically and internationally, we’re predominantly center of the country, and we’ve got a significant mix of blue collar operations, which are affected less in terms of their work-from-home environment.

So in terms of the impact to Aramark, we see it as somewhat muted in the long term, and frankly, even in the sector itself, the industry itself, we don’t think there is a long-term degradation to the model for B&I.

Hamzah Mazari — Jefferies — Analyst

Great. And just my follow-up question is just — we’ve talked a lot about net new business on the call, but maybe if you could just touch on client retention rates today, how they’re trending and whether you see an opportunity there? Thank you.

John Zillmer — Chief Executive Officer

Yeah, we — obviously we have a very strong goal around improving client retention. We’ve seen significant improvement over the last six months. Not only for us, but for the industry. I think clients have proactively made the decision to go ahead, and renegotiate contracts with their existing providers. I think that phenomenon has been very beneficial for us, and I think it has for our competitors as well. So I think industry retention rates are probably going to be very-very high. But as you know, there are some businesses, particularly those self-op conversions and there are some industries that require re-bid processes. And I think those will continue to move forward.

It’s our intention to move the retention rate of this company on a long-term basis, up from, call it historic level of 96% to 97%, to approaching 98%. We want to be the company known for the best retention in the industry, and so we’re going to be very focused on continuing to perform for our customers, and perform in such a way that they don’t want to make a change, and to be the most valued partner in the sector. So that’s a long-winded way of saying, retention is improving and we’re going to make it even better. Sorry.

Operator

And our next question will come from the line of Seth Weber from RBC. You may begin.

Gunnar Hansen — RBC Capital Markets — Analyst

Hi, good morning, guys. This is Gunnar Hansen on for Seth. You’ve answered a lot of the questions. I appreciate the detailed commentary. I guess on the Uniform side, clearly with the new sales force hires. I wonder, John, if you could help us understand how large that organization is today, and if the recent hiring, portends to the change in strategy there or optimism?

John Zillmer — Chief Executive Officer

Well, I think the recent hiring really is a recognition of the fact that we’ve been understaffed and undermanned from a sales perspective in that sector for a number of years, and that our largest competitors have significantly larger salesforces. And that one of the reasons for the difference in growth rates, has been that number of feet on the street. So we recognize the need for — to go ahead and compete more effectively, by having more resources. And particularly as we’ve layered resources in, we’ve brought them into the organization, focused on adjacency services. That’s an easy part of the business for our sales manager to go ahead and learn. The rental side is a little tougher, so we’ve progressed those people through the organization into the rental business over a period of time. But it’s really more a recognition that we were under resourced from a sales perspective, in order to really change the growth trajectory on Uniform, is tend to be more competitive with our competitors, that we needed to significantly increase those ranked.

So I don’t know that we’ve actually disclosed the net number of resources. But I would tell you that it’s a significant increase over the existing staffing levels of the organization.

Gunnar Hansen — RBC Capital Markets — Analyst

Okay, that’s helpful. And I guess just on the sales pipeline obviously you seem to be building there, you guys remain positive. Could you maybe speak to the pricing of the margin profile of the pipeline, and how is it different or similar to prior years? And Tom, maybe if you can remind us what the capital intensity or needs are for new contract wins? Thanks.

Tom Ondrof — Executive Vice President and Chief Financial Officer

Sure. John do you want to take the first part, or do you want me to?

John Zillmer — Chief Executive Officer

Go ahead.

Tom Ondrof — Executive Vice President and Chief Financial Officer

Okay. I think the margin profile — as we look at the opportunities in the pipeline haven’t changed that much really, as we look to bid on those and take those bids forward. The capital intensity is always dependent on the sector, with higher ed and sports tending to require a higher capital requirement. But of course, they bring longer contracts and equivalent returns, as we look at those. So, the capex is sector specific, and where the activity is and that hasn’t really changed. And the margin profile at the moment again, we haven’t noticed much difference in that. I think it’s more of a competitive state of the competition than it is COVID related. So we’ll keep an eye on that, and it’s all about in the end, having the right relationship and connectivity with the clients, and making sure that we understand what their needs are, and can address those with the different solutions that we are bringing to the table.

Operator

Thank you. I will now turn the call back over to Mr. Zillmer for closing remarks.

John Zillmer — Chief Executive Officer

Terrific, thank you very much. And really appreciate the dialog that we’ve had this morning. The fact that you have really devoted so much time to us. Really looking forward to our participation in upcoming conferences and investor outreach, and I look forward to having those conversations with you as we move forward. Thanks again for your time, and we look forward to engaging in the near future. Thank you.

Operator

[Operator Closing Remarks].