ABM Industries Incorporated

Greetings, and welcome to the ABM Industries second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Suzy Kim, Vice President of Investor Relations and Treasurer for ABM Industries. Thank you. You may begin.

Thank you all for joining us this morning. With us today are Scott Salmers, our President and Chief Executive Officer, and Anthony Scaglione, Executive Vice President and Chief Financial Officer. We issued our press release yesterday afternoon announcing our second quarter and fiscal 2020 financial results. A copy of this release and an accompanying slide presentation can be found on our corporate website. Before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the words estimate, expect, and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation, as well as in our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the investor tab. I would now like to turn the call over to Scott.

Thanks, Susie. And good morning to everyone on today's call. First and foremost, I hope you and your loved ones are all safe and healthy during these extraordinary times. While we'll be providing our customary review to the second quarter results we released yesterday afternoon, I'm sure we can all agree that nothing about the way we live and operate today is the same as it was when we last spoke to you. And today's discussion will be unique compared to our previous earnings calls as well. Almost as soon as we reported our solid first quarter results in March, COVID-19 unfolded quickly throughout the country. Shelter in place became our new way of life, and nearly every industry has been impacted by the disruptions and closures that have occurred. By mid-March, our services were classified as essential, and we were on the front lines of the pandemic. Over the past few months, the pride I've had for our organization has been completely redefined. During a dynamic, ever-shifting environment, we rapidly mobilized to address the safety of our teammates and stakeholders and the heightened needs of our clients. Our corporate teams also worked around the clock to prepare us financially for the unknown. And as you can imagine, for a company like ABM, with 20,000-plus clients and 140,000 employees, coordination of these critical elements was far from simple. We deployed an operational task force dedicated to understanding infection control and cleaning protocols based on the guidance and recommendations of the CDC, World Health Organization, and OSHA, among others. We also set up an additional 18 cross-functional task force, or as we call them internally, our pods, spanning field operations, finance, legal, human resources and of course our large enterprise shared service center these pods covered areas of critical importance we've all read and most likely experienced the supply shortages that have been rampant throughout the pandemic on top of that cities were changing personal protective equipment standards for employers frequently I'm so pleased to say that we've been able to meet the demands of our clients during this frenzied environment because of our procurement scale and our pod structure. One of the pods is focused on daily site-level shutdowns, enabling us to track labor and modulate staffing levels up and down dynamically. We had one of our strongest cash flow quarters ever, which was the direct result of our liquidity pods and the intense focus on collections and payables. And the list of mission critical pods ensuring business continuity goes on and on. So we've risen to every challenge and our second quarter results demonstrate the agility and action oriented execution of our teams and continue to be best in class. These results don't happen by accident. The coordination across the firm was simply incredible. I've never been prouder to be part of ABM, and my confidence in our organization's ability to withstand any event could not be stronger. So let's get to some data. For the first quarter, we achieved revenues of $1.5 billion, a revenue decline of only 6.2% compared to last year, and this was driven predominantly by our aviation divisions. With passenger air travel down 95% by April, revenue declines in our aviation position were certainly expected. Frankly, our top line results for the quarter were not as dramatic as may have been expected given how hard commerce was hit by the pandemic. Tempering the revenue decline was a record quarter for higher margin work orders, which we call tags, as client demand surged and we responded to protect their facilities. We also achieved new sales bookings of more than $500 million year to date, an incredibly positive milestone for this time of the year, even by pre-COVID standards. And I would ask you to pause on this and recognize that we contracted for over a half a billion dollars in new business for the first half of this year in this environment. Our results for the quarter also underscored the adaptability and nimbleness of our variable cost structure, particularly during periods of fluctuating demand. We manage direct labor, our largest cost by far, to align with business dynamics. This, in addition to higher margin Tegra, led to adjusted earnings and EBITDA margins that materially exceeded our performance last year and materially exceeded any expectations we could have had as COVID became a reality. That's another data point to pause and reflect on. So our ability to execute through crisis speaks for itself. Looking forward, we recognized early on janitorial services were going to take on much more significance in what we are now calling the new normal. We knew that a property's cleaning protocols would become the top priority for facility management and property owners. And in response to that, we began developing our proprietary Enhanced Clean program in March. Through our three-step approach, Enhanced Clean will provide clients with a programmatic methodology that has been reviewed by experts using hospital-grade disinfectants, specialized equipment, dedicated signage, and innovative technology. Our solutions include hygiene and safety protocols, utilization of disinfecting procedures like electrostatic spraying and antimicrobial treatments, products for high-touch surfaces, personal protective equipment, and employee training in disinfection best practices. This has all been validated by an advisory panel of external and internal experts and includes evidence-based testing to confirm a lack of viral presence. We believe over time enhanced clean will become part of our client's permanent scope and not just a tag or work order. Our view is that virus protection will be a lasting change well past COVID. We've also become a leading voice for our industry. In April, we announced our partnership with six of the largest privately owned cleaning contractors to form the Cleaning Coalition of America. As a founding member, And with our head of strategy as president, ABM is committed to representing an industry with more than 1 million workers who are on the front lines of this pandemic across the country. Our coalition represents the needs of an industry that has been playing a vital role in keeping essential services operating as the country works to recover from this pandemic. So clearly, we've delivered in an incredibly tough and unpredictable environment. But I'm sure the question on your minds is about what we are seeing today and how we anticipate broader economic recoveries to occur. First, let's all remember, it's only been three months under this new operating environment. So, for us to say we have clear insight would be a mistake. Market dynamics keep changing and there are still too many unknowns today. Will schools reopen? How quickly will air travel start returning? Will there be a COVID spike in the fall or will the curve continue to flatten and people return to their offices? All unknowns and clearly out of our control. So for us to estimate guidance for the remainder of the year doesn't make any sense given so many near-term variables. However, I'll take you through some of the longer-term fundamentals we see in our end markets that should give you perspective as we navigate the next year or two. So let me set the framework. clients are starting to look ahead and explore how and when they will reenter the workplace in the new normal. In preparation for this, we see a shift towards wellness and sustainability clearly happening, and our clients are intensely focused on providing their stakeholders with a safe environment. And they want to provide transparency about what they are doing to achieve this, so our services are going to move to the forefront rather than behind the scenes. Access to staffing and supplies is also a top priority. With a new realization that cost is only one component of the decision tree, given their experience over the last few months, service providers with a robust supply chain at scale will be prioritized. With what ABM brings as a holistic solution versus our fragmented regional competitors, we believe we will undoubtedly become the clear choice in the future. In the short term, it still comes down to when will people be ready to return to their spaces and more normalized daily life and what will that mean? Depending on the industry, there are a variety of factors spanning a wide spectrum of possibilities. So let's go through our end markets. And let's start with B&I and T&M. Pre-COVID, B&I and T&M had been stable performers. growing with strategic accounts while driving profit through strategic labor management. With the pandemic, we saw clients overdrive COVID-related tag orders as they engaged in crisis response modes to protect their occupants. We're currently within the peak period of site closures and work-from-home protocols, so daily services have modulated down with reduced occupancy since that initial period. Despite the downturn, We're starting to see clients plan workplace reentries as markets reopen, and as a result, we believe enhanced clean interest will build as well. This could result in additional tab work and longer-term scope changes. Because enhanced clean is a higher margin offering, we see long-term incremental margin capture in both of these segments. And we believe organic growth has the potential to move from GDP to GDP plus, as indications are that many clients will be spending more for cleaning. Again, we're only three months in, but this is what we are surmising at this point. Aviation and education are probably the two segments that have been and will be the most viable operationally in the near term. Passenger air travel has declined dramatically, and it's uncertain when both domestic and international travel will return to anywhere near its pre-COVID values. Prior to the pandemic, we had begun shifting our business mix, prioritizing airport opportunities over airlines. We believe this will serve us well as we see opportunities at airports around the country with investments in infrastructure and facility upgrades still planned. You may have seen the unveiling of Terminal B last week at LaGuardia Airport, where we are the primary service provider. Now, that being said, recovery in the aviation sector will still be longer term. Within education, I'm sure many of you have personally experienced how K-12 and higher education institutions have moved to remote learning formats in the short term. During the second quarter, we saw education clients who are very loyal to their extended staff at ABM accelerate summer cleanings to the spring. And we are cautiously optimistic that our work will continue through this intermittent phase as infection control is a top priority for educators and parents. But full returns in both K through 12 and universities have not yet been defined. Some schools in the south, are talking about full returns, including intramural sports, while schools in the Northeast have discussed delayed returns. Many of the decisions for the fall will come to a head in mid-July. So we will have a far better outlook by the end of Q3. But one thing we are certain of, once back, our enhanced clean disinfection control will be front and center in the education space. Technical solutions exists right in the middle of the spectrum for us. We have a strong backlog coming into the year, and that fortunately remains so today, which is the takeaway for our investors. Projects will pause, not cancel. Return in Q2 was impacted by the decreased ability to access project locations. With technical solutions primary end market in the education sector, School administrators were operating in crisis mode and retrofit projects weren't top of mind in the second quarter. Student safety and future planning was. Therefore, we're seeing a short to medium-term impact. With that said, education clients will be looking at their budgets and seeking ways to ease constraints, especially through a slowdown or a recession. Across the country, we have seen school budget cuts. ranging from 7% to 25%. And this plays right into the compelling cost savings offering that our technical solutions business has been built on. Retrofit projects are capital expenses and energy savings of 30 plus percent translate to operate budget savings and allow schools to retain teachers and fund afterschool programs. We had a big energy project win in the South just two weeks ago. A $6 million capital retrofit project translated to energy savings that allowed 15 teachers targeted for exit to remain on the payroll and all after-school programs to stay in place. So we believe 2021 could see some strong winds in ATS. So when you package all this up, while we're operating under conditions that can't be estimated financially with any degree of certainty over the next six months, The long-term fundamentals for our business are stronger than they've ever been. Having ample liquidity and the flexibility to invest in growth areas such as enhanced clean will allow us to capitalize on a range of opportunities in a post-COVID world. As we sit here in June, we're moving from a period in the March-April timeframe that for us was critically reactive into a period that is far more prescriptive and planned, and we couldn't be more ready. Finally, I want to address Anthony. As many of you know, Anthony and I began this journey together five years ago. And over that time, ABM has transformed to become the powerful enterprise it is today. Anthony has been instrumental in creating our strategy, executing our goals, supporting our culture, and developing so much of the talent that makes ABM what it is today. And when it comes to talent development, that includes Dean Chin, who will be named our interim CFO. Anthony has not only been among my most respected colleagues, but he is my friend as well. So this is really bittersweet. I know I speak for everyone at ABM when I express our gratitude for Anthony's contributions over his 11 years of service. and we wish him the absolute best of luck as he pursues the next phase of his personal and professional journey. He will always be an indelible part of ABM's past and future success and a permanent member of the ABM family. With that, I'll turn it over to Anthony one last time to cover our financial results.

Anthony? Thanks for those kind words, Scott. It has been a privilege to be part of the ABM team over the last 11 years. Scott has always said, the foundation of ABM strength is our people. And that is what I will miss the most. At ABM, I've been granted so many opportunities, specifically over the last five years of CFO. Among the most special was spending time with our extraordinary teams across our front lines and throughout our corporate offices, both in the US and internationally. I can attest that we have the most passionate teams who are often the unsung heroes of some of the country's most important facilities. And, of course, everyone I have worked with on the finance team over the years has impacted my life, both personally and professionally. While I am excited for the next phase of my professional journey, I am sad to leave the amazing people here at ABM. I have the utmost confidence that this team will lead ABM to an even brighter future and continue to unlock great success, which I will always cheer on. Now onto the second quarter. Revenues for the quarter were $1.5 billion, a total decrease of approximately 6% compared to last year, reflecting the COVID-19 operating environment predominantly within aviation, technical solutions, and education. Partially offsetting the revenue decline was record work orders, or as we call them, TAGs. TAGs were a strength in the quarter for B&I, technology and manufacturing, as well as education. During the quarter, we also recorded an impairment charge. We typically perform our annual assessment of goodwill during the fourth quarter unless there's a potential indicator of impairment. As a result of the impact COVID-19 had on our industry groups, notably within aviation and education, we performed the assessment of our goodwill and intangible values during the second quarter. With the assistance of third-party valuation experts and factoring in the impact of COVID-19 on the more sensitive end markets impacted by the pandemic, as well as higher overall discount rates, we recorded a pre-tax non-cash charge of $172.8 million, or $2.55 per diluted chair. Therefore, on a GAAP basis, we reported a loss from continuing operations of $136.8 million, or $2.05 per diluted chair. On a year-over-year basis, I'd also like to remind everyone that the second quarter saw one extra working day, which has traditionally equated to approximately $7 million in additional labor expense. Given the variability during the quarter, we estimate that this had an approximately $6 million impact during the quarter. On an adjusted basis, income from continuing operations for the quarter increased to $40.4 million, or $0.60 per diluted share, compared to $31.5 million, or $0.47 last year. Our year-over-year growth was driven operationally by our higher margin tag revenue, as well as lower expenses associated with reductions in discretionary spend, share-based comp reversals, and the timing of IT project expenses. Partially offsetting this quarter's performance was an increase in bad debt expense of approximately $9 million due to specific reserves established for client receivables in certain industries. We will continue to monitor client receivables and overall credit conditions and feel this reserve was prudent at this time. We also do not see any further increases. Our strong performance during the quarter led to adjusted EBITDA of approximately $91 million at a margin rate of 6.1% compared to $84.7 million or 5.3% last year. Now turning to our segment results. As a reminder, these results reflect the impact of COVID-19 on revenues and operating profit across most of our industry groups. Additionally, at the operating profit segment level, these results also include the non-cash impairment charge related to goodwill and intangibles within aviation, education, and technical solutions. Moving to B&I. B&I delivered $785.6 million in revenue and operating profit grew more than 20% to $59.2 million for a margin rate of 7.5%. Despite the modest decline in revenue, which was driven by less work in parking and facility services, B&I experienced a rise in janitorial demand. More specifically, tags and expansions with national clients grew immediately as they sought our assistance during the onset of the pandemic and throughout the quarter. We also exited some lower margin accounts in our U.S. business. And as a reminder, apart from a relatively small presence in sports and entertainment arenas and consumer-related parking, we are not heavily exposed to industries that may have had a more challenging operating environment during the pandemic, such as hospitality and retail. Technology and manufacturing reported revenues of $233.7 million, up 4.2% versus last year. Operating profit was $19.7 million for an operating margin of 8.4%. New business with manufacturing, logistics, and high-tech clients enabled T&M to offset any business declines from COVID disruptions and certain contract losses from last year. Clients in T&M look to ABM to ensure their continued operating environment in many critical end markets like food processing, industrial manufacturing, and utilities. Janitorial, including higher tag demand, and facility services all grew versus last year. Operating profit margins were impacted modestly by higher reserves for client receivables, mainly associated with the pandemic, as well as the lingering impact of lost accounts from last year. Aviation reported revenues of $185 million. An impairment charge of $61.1 million led to an operating loss of $60.5 million. As we discussed on last quarter's call, we expressed aviation's vulnerability to COVID-19, and our results for the quarter demonstrate the unfortunate developments that have occurred in the broader macro operating environment since then. We have been able to implement cost and expense actions aggressively to mitigate pandemic-related effects. For example, dynamic labor reporting allowed us to reduce labor that aligned with client demands We believe enhanced clean services such as electrostatic spraying could be part of the new norm in this segment given the heavy impact that the pandemic has had on the travel industry. While we see headwinds and significant uncertainty in the segment and are monitoring passenger travel data and statistics to gauge future demand, we are repositioning the portfolio to better align ABM in this segment going forward. Revenue in education was $200.1 million, down $9 million from last year, reflecting pandemic-related school closures. An impairment charge of $99.3 million related to both our legacy and GCA portfolio led to an operating loss of $85.8 million. Excluding the impairment, operating profit would have grown by 28.6% to $13.6 million for an operating margin of 6.8%, higher than our expectations for Q2, given the timing of summer cleans. While we continue to see tremendous opportunity for long-term outsourcing trends in this segment, the current pandemic has shifted demand and it's unknown when and to what degree schools will reopen in the fall. Finally, on to technical solutions. Technical solutions reported revenues of $122.3 million down from last year's $135.9 million due to lower project churn. As Scott mentioned, the pandemic prevented access to certain project sites, mainly during the latter part of the quarter. A $12.4 million impairment charge related to our U.K. operations led to an operating loss of $8.4 million. Excluding the impairment, operating profit would have been $3.9 million or an operating margin of 3.2%. Also impacting this quarter's results was the negative impact of higher commission expense from the amortization of commissions that were capitalized last year due to ASC 606. Turning to cash and liquidity, cash flow from operations was approximately $162 million during the quarter, and free cash flow was approximately $155 million. As Scott touched on, the liquidity offers we mobilized immediately at the onset of the pandemic was instrumental in achieving these results. We implemented acute tracking related to critical accounts receivables and payables across all main drivers, including billing and collections, direct and indirect payroll, procurement, and taxes, among other aspects. The work of all these cross-functional teams in conjunction with the strategic March drawdown of our credit facility enabled us to end the quarter with record cash and cash equivalents of $556 million. To strengthen our liquidity even further, we recently negotiated our credit facility. This was a preemptive measure intended to allow us maximum flexibility as we navigate the coming quarters during the pandemic. As you will see in the full amendments filed with our 10Q later this week, some of the changes in the credit facility include favorable max leverage limits, especially over the next four quarters, out of an abundance of caution given the trailing calculation of our bank-defined EBITDA. The ability to net up to $100 million as part of our max leverage calculation. Revised fixed charge coverage ratios that reflect the potential for additional borrowing and associated interest. and provisions that protect our board's ability to continue ABM's longstanding dividend policy. In addition, the amended facility bears interest at the higher cost of borrowing and also contains other negative covenants given the flexibility provided by the aforementioned provisions. As evidenced by our pre- and post-amendment covenant achievement for the second quarter, these actions were precautionary, and we remain committed to using our strong cash flow generation and balance to de-lever and continue to invest in our growth. We've ended the quarter with total debt, including standby letters of credit, of $1.4 billion and a bank-adjusted leverage ratio of 3.68 times, or 3.97 times under our pre-amendment facility. We also repurchased approximately 200,000 shares of common stock for $5.1 million. And in March, we suspended all further share repurchases as we focused on prudent liquidity management throughout this crisis. During the quarter, we paid our 216 consecutive quarterly cash dividends for a total distribution of approximately $12.3 million. And as stated in our earnings release, I am pleased to share that our Board of Directors approved our 217 consecutive quarterly cash dividends. During the quarter, Congress enacted the CARES Act, and in the U.K., a similar act was passed, which provided certain stimulus measures to the broader economy. We have adopted some of the business tax provisions that were permitted under this new legislation. This includes a refundable credit for employee retention, primarily in the UK, as well as the deferral of certain U.S. payroll tax remittances through December 31, 2020, to future years, with 50% of the deferred amount due in calendar 2021 and the remaining due in calendar 2022. While we're on the topic of taxes, I also want to note that before the pandemic, we had originally anticipated $7 million related to discrete tax items, such as the work opportunity tax credit and the tax impact of stock-based compensation awards. Given the disruption to traditional hiring practices due to the pandemic, we currently believe WASDE will be lower this fiscal year as a result of the current environment. And as I mentioned earlier, just as we saw the extra working day in Q2 this year, we will see one less working day in Q4. Finally, I'd like to reiterate Scott's statement that we have withdrawn our annual guidance outlook. Despite the immeasurable nature of current events, I did want to provide some additional financial context of actions that have been taken after the second quarter. These actions may modulate over time as we align client demands for our services during the pandemic and beyond. At the project level, as discussed, we have instituted several measures to better match revenue changes with labor. We've implemented temporary reductions in salary across certain staff and management, temporarily furloughed and reduced hours for certain corporate staff, while continuing to provide full benefits to those impacted. We've reduced or suspended certain benefits, such as our 401k matching. And while these actions were difficult, we felt they were the right actions to help us manage through this uncertain period, while providing us enough flexibility to manage backup as we see demand and the general market and operating environment stabilized. In conclusion, I will echo Scott's pride in our team for the execution and determination during this very difficult time. Under unprecedented conditions, we've risen once again to achieve and even exceed our goals. I remain excited about the momentum ABM will continue to build into the future. Operator, we are now ready for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Thank you. Our first question comes from the line. of Sean Eastman with Keeping Capital Market. Please proceed with your question.

Hi, team. Thanks for taking my questions. Congratulations on a good quarter. And Anthony, congratulations on what seems to be an exciting new opportunity. So first one for me is, you know, clearly blowout margin performance in the quarter, helped in part by the tags. And I'm just curious about you know, how those type of work orders trended into the third quarter as we moved into sort of this peak facility closure environment. And I guess more broadly, what we're trying to flesh out is how sustainable this margin performance was this quarter and whether there is a structural change in margins in effect here.

Yeah, I'll take that. So You know, I just want to frame this whole conversation by this is still really early on, right? And we did see great tag performance in Q2. And, you know, we believe there's an opportunity for it to continue into Q3 as offices reopen and the economy reemerges. Our longer-term goal, Sean – is to convert those TAG work orders into permanent scope changes and hold that margin percentage, right? So they are higher margin services because if you think about it, right, we have to train our people in virus protection. The equipment is more costly. The chemicals are more costly. So it justifies a higher margin. So for us, the trick is going to be how do you convert these TAG work orders to see them come down and become more permanent and ultimately shift our margin mix up on a more permanent basis. So I think the way we're looking at the phasing over the next six months plus is that when offices reopen and people are coming back, there will be a sustained tag level. Because if you're a facility manager, here's the way you're thinking about the reopening. You're saying I have to blitz the place as people come back, And I don't have the time right now to think more thoughtfully, more prescriptively about how I'm going to re-engineer the longer-term scope. So we think, you know, kind of phase one of reopening, you'll still see elevated tag levels. And kind of phase two, and whenever that happens, six months from now, 12 months from now, you'll start seeing a drop off in tags. and you're going to see the shift towards scope adjustment. So that's the way we're thinking about it. Is that helpful?

Yeah, that's helpful. And I guess the other dynamic, you know, it would be helpful to get some color on is, you know, there are some scope modulations around this. You know, any sense at all on how many of those or to what magnitude of those are, you know, going to be permanent changes changes in terms of how your clients are, you know, approaching, you know, office life. And I'm just curious also, you know, how competitors are responding to some of those scope modulations. You know, has there been any pressure on pricing on just a normal, you know, normal janitorial contracts during the quarter, like outside of TAGS?

Yeah, so I think, again, I will say it's early on, but every facility manager that we've talked to has talked about the fact that they have to have virus protection now as a long-lasting scope enhancement. I mean, can you imagine just even you going back to your office and you see the building manager and you say, hey, what's different about cleaning now? And they're like, well, nothing much. That couldn't happen, right? So there has to be permanent change in virus protection. So that's going to happen and that's going to be higher margin. And I think what we're hearing too and what we're seeing is that there has to be more transparency around these cleaning programs with signage or what have you. So this all plays to our benefit for the long term and why we do think this will be lasting. We've had advantage over our competitors because if you remember, our competitors are the smaller fragmented companies, and they haven't had the access that we have had to supply chain. Anecdotally, I don't have statistics for you, but I've heard of us picking up work from other clients that we didn't have because their contractors didn't have access to supply chains. And, you know, we've always talked about how scale is an advantage for ABM. This pandemic certainly proved that out, just, again, just because of how robust our supply chain was and our ability to train and have the resources and have an advisory panel. So we haven't seen pressure on pricing, you know, right? We haven't because everyone's very intent on having this virus protection. But we do think over the long term, this is going to help us. And we did mention in prepared remarks that, There is an opportunity to move up our growth levels in BNI, which we've always said was GDP, to start knocking on the door of GDP+. So I just think everything is – the fundamentals are just pointing up.

Very helpful. I'll pass it along. Thanks very much. Thanks, Sean.

Thank you. Our next question comes from the line of Andrew Whitman with Baird. Please proceed with your question.

Oh, great. Thanks. There's a lot to unpack here. And Anthony, before I forget, I wanted to say it's been a pleasure and best of luck. Thank you. But yeah, so just here in the prepared remarks, I heard three things that I thought I wanted to drill into a little bit more. I heard first that obviously tags were great in the quarter. I heard in the prepared remarks that they declined somewhat, but it sounds like you still expect those to stay high, which I guess makes sense. But The second thing I heard is that you had a $9 million bad debt write-off in the quarter. I wanted to just confirm that that was not excluded from adjusted EPS. That was that actually the quarter would have been better if not for that. And then I heard that there actually were several significant, sounds like, margin-related actions post the quarter that you mentioned kind of at the end of your prepared remarks that presumably were not part of the reason the margins were so good in the quarter that you just reported. So those all seem fairly significant to me. I guess the question is, did I understand those things correctly? And then I guess from there, the question is, the margin performance, particularly in B&I and education, how sustainable do you think the mix is? will be to allow you to keep those margins elevated. In other words, is this a fair rate to think about in the near term, or do you think you may be over-earned from very heavy tag work in the quarter? Sorry for the long question.

No, no problem. I'll try to answer the component parts, Andy, and thank you for the kind words at the onset. So from the standpoint of a margin, most of that is going to be driven by the gross margins. as well as some corporate actions that we took that were unique in a quarter, like this share-based comp, all within our adjusted. And that's going to be offset by the working day as well as the bad debt. So we did not exclude any of those items to the reported number. And then there's going to be pluses and minuses across other core categories. When you speak about the actions that we took after the quarter, really those actions outside of direct labor, because I think one of the things that you saw in the quarter as our revenue growth modulated down, we were able to take corresponding actions on the direct labor side to maintain and, in some cases, even improve the margin profile at the site level. But those actions outside of direct labor are really intended to manage expenses across the various unknowns and to offset certain costs that we anticipate to increase, namely around PPE, supplies, as well as some overhead costs that are embedded in some parts of the business that have are difficult to take out, like in aviation. We took out a lot of costs, but there's a certain level of overhead that you have to maintain. So when you look at that and you look at what those are really preemptive in nature, Andy, and we expect as conditions begin to improve going forward, we will begin to bring back some of those costs, specifically the reduction in salaries and the furloughs, et cetera. But we've done this as a preemptive measure. To your question around The margin profile in B&I and T&M, both of those margin profiles benefited, obviously, from TAG. And as you can imagine, some of our TAGs are pass-through margins, very similar to the base contract. But what we saw in this quarter was what we really were excited about, which were the higher margin TAGs that really became a focal point as the pandemic began to spread. And it's one of the reasons why we set up the program around enhanced clean, because we do believe This is not something that's going to be temporary. We believe there is a lasting effect as it relates to the importance of sanitation, the importance of what we do on a day-to-day basis. So we do expect some continuation as it relates to whether it's going to be tagged or embedded in the contract. You know, to Scott's point, that's things that we're working on as we go forward. And, Scott, I don't know if you want to add anything else.

No, I think you got it right. You know, the long term is that the facilities business has forever changed. And the stuff that we did and we specialized in that was always back to the house behind the scenes is front and center. Because when people return to their offices, it's all about creating a sense of trust and safety. And the way you're going to do this is by visibility of the staff. So I think these are all incremental positives for us over the long term.

Great. I just had two other, I think, quicker follow-ups here that I wanted to ask, and just so we can understand greater context. I think typically you guys have said that your tag revenue is around 20%, say, of the B&I segment. That's just kind of an average. I know it's not exactly that, but given that the mix shift was pretty significant here, I was wondering how much of the revenue this quarter was driven by the higher margin tag I think that would just help us understand exactly how this all unfolded in the quarter a little bit better.

Yeah, I'm not sure where you got your 20% from. Typically, our tags on an enterprise basis average around 4% to 5% on an annualized basis, and that's across all categories, B&I being the largest benefit given its concentration on the janitorial side, followed by T&Ms. What we saw in the quarter, if you would analyze, is probably trending closer to a 7% of overall revenues being tagged. And again, those are obviously higher margins to the point I made earlier. For B&I, it really led the growth in the quarter. We saw approximately more than 50% growth in the quarter year-on-year from tags. And then overall, we had significant growth across all of the and markets, but B&I led the way in terms of that growth.

Sorry for misquoting you. That's really helpful context, and I appreciate that. Scott, the last one that I have is for you, and it has to do with the $541 million of new business sold in the first half of the year. Thank you for disclosing that again. I guess, Scott, Two questions on that. One is how much of that is in technical solutions versus in the annuity? I know in the past when you've mentioned this number in the past, it's combined both businesses, both the annuity businesses, if you will, as well as technical solutions. So I was hoping you could help us separate that a little bit. And then if you could talk about the other side of this equation, which is retention rates through all of this and how this could translate into net new business.

Hey, Andy, let me take the first part. So on the bookings, a really solid story, as Scott alluded to, great growth from a revenue standpoint in the first half. And the story is quite interesting, and you point out the right point. So in 2019, our first half, you know, a little over 50% of that bookings was APS. And that really led to the strong backlog, led to where we stand from an overall revenue growth perspective in that industry group and what you saw over the last 12 months. And that was really followed by B&I of roughly 20% in the bookings. And then the rest is going to be scattered across all the other industry groups. As you fast forward into this year, close to 50% of the bookings is in B&I. So the story has changed quite a bit year on year. And you would expect that, right? You would expect, given some of the challenges of accessing the sites, given some of the challenges and disruptions, some of the end markets that are very conducive to ATS, that you would have expected a slowdown. That being said, there's still 30% of the total, which is significant. And we are excited about the prospects of ATS on a longer-term basis. But it is a year-over-year dynamic, which really points to the diversification strength of our business model. And then on the retention, Scott, if you wanted to add on retention.

Yeah, look, retention was really strong in the quarter, 94%. But I think I'm less interested in quarterly retention. I'm more interested in longer term. And, you know, Andy, I can only speak anecdotally about this, but I've been talking to our operators around the country, and if I had a nickel for every time a client has said to us, you will never lose our business, right, after this. Because you have to remember, you put this in context, right, these clients are in crisis. And I think what people forget is that when COVID first hit, nobody thought we were going to move to work from home, right? You know, everyone was thinking, hey, this could be a week. This could be two weeks, or we're going to stay in place. We have to do extra virus protection. And we, like, mobilized so fast, and we had extra labor there. We were doing disinfecting. You know, we were kind of the cavalry coming to the rescue for a period of time. And then because we had the PPE, because we were able, because of our procurement, to get the supplies they needed, I truly believed. that this is going to inure to our benefit over time from a retention standpoint. And, you know, look, will people have short memories? We're all realists about this too, right? Could there be cost pressures down the road if we move into a recession? Yeah. But I think in terms of our brand with our clients, I don't know how it's ever been stronger than it is today.

Thank you very much. Good luck.

Thanks.

Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Good morning. First, I'd like to say congratulations to Anthony on a very successful tenure at ABM, and good luck to you in your future endeavors, Anthony.

Thank you so much, Tim. It really means a lot.

Yeah, absolutely. I'd like to ask about your contracts. We've talked about the upside potential from scope modification, but I'm looking for a little bit more color. On the flip side of that, the downside with scope modification, which is a good thing, I understand, but I just want to talk about it with respect to your aviation business. Can you just tell us what you're seeing? What clients are doing to reduce the scope of their contracts with you in aviation, maybe with an example or two, and if those are temporary or permanent changes? Thank you.

Yeah, I'll take that. So the aviation business, it's really challenging right now because aviation is all about volume, right, and traffic, and it's been so far down. And our revenues actually – haven't modulated down as much as the air traffic has because airports still have to stay open. And the airlines themselves are doing much more virus protection. So I think you're going to see a shift, again, no different really than any of the other industry groups. You're going to just see the shift towards higher, for us, higher margin services and the virus protection because it's going to be part of every end markets protocol and You know, again, we've heard people say that, you know, if you have a choice between going to a supermarket or going to an airport and getting on a plane from a pure safety standpoint, you'd rather choose the latter because of how much they're doing in terms of sanitizing and cleaning at airports and planes. So that's going to just be a lasting change, but revenue absolutely down until passenger traffic picks up. But again, just final point on that. Passenger traffic won't pick up until word of mouth starts happening where the people that start flying go back and tell their friends and family and business associates, I got to tell you, planes are cleaner than ever. I got to tell you, they're really prepared. Right? But it'll be a long term. It goes to that same thing, Tim, of like people have to feel safe and secure in their spaces, right? And it's, you know, the new normal is not about lobby finishes or how pretty the airport is. It's about the cleaning program and, again, how transparent you are about it, how much you're talking about it, the signage, the visibility of our people. It's pretty exciting for us.

That does sound exciting, Scott. So what would be an example of that, like with your aviation business? Does that mean employees will be cleaning the planes in between flights in addition to just going through and quickly cleaning up the garbage? Are they going to be wiping down surfaces? What's the practical application of this enhanced focus on clean with respect to aviation?

Sure. The best way I could describe it to you, And it was interesting for me as I transitioned into this role a few years ago and started really understanding about aviation. In between flights, when they're cleaning the plane, we would say it was less about actual cleaning and more about logistics, right? You start at the back of the plane. Our people are getting the seats upright so they're uniform across. They're fixing the magazines. They're putting the pillow in place, right? They're putting the trays back. So It was logistics first, cleaning second. Now it's going to be about cleaning first. It's going to be about electrostatic spraying. It's like if you don't go onto that aircraft and it doesn't feel like you're in an operating room, their brand is going to be deteriorating. So I think the shift has gone, again, from logistics to cleaning. Okay, that's very clear. Thank you for that.

That's exactly what I was curious about. Maybe one more question from me, just touching on the competitive environment. We talked to a number of small local providers in different regions around the country, and everybody sounds, frankly, very busy right now. But in thinking about this longer term, do you think there are market share opportunities with larger potential customers who may be want to step up their hygiene programs and switch to a more sophisticated provider like ABM? And if so, what does that sales process look like? What can ABM maybe bring to the table that many of the smaller players cannot?

So let's think about enhanced clean, which is what we're rallying around, right? So enhanced clean isn't just virus protection. It's not just taking an electrostatic sprayer and dispersing disinfectant. And I think that's what a lot of our smaller regional companies will do. Here's what Enhance Clean is for us, training our employees, giving them the proper PPE, giving them standard operating practices on how to act in a space, giving full robust signage to our facilities partners that they can display. We've put together an advisory panel of external experts as well as our internal experts from our healthcare division to opine and certify the program. So like when you walk into an ABM facility and you're doing our enhanced cleaning program, there's going to be literally that sticker on your front door that says, this property is enhanced clean certified, right? And we're also going to be doing evidence-based testing where we're going to be swabbing after we've done the virus protection and documenting and proving that we've killed the virus. Like our smaller competitors, they just don't have the resources or the depth or the scale to do that and then also guarantee that they're going to have the supplies and the PPE. So, you know, if you're a Fortune 500 company and you're using a smaller regional company, you know, your brand is going to be based on your cleaning protocols and your holistic program. We haven't seen anybody in the market have anything near the enhanced clean program. So we think that's going to allow us to pick up market share. And, again, doing this digital marketing, our salespeople are tracking down leads that are coming through our website. We're putting money around digital outreach. I mean, our smaller competitors, regional competitors, you know, I mean, you're probably chuckling now, but do you think they have, like, a digital marketing department with digital outreach? So I think we're going to be attacking all these different platforms. So I just think, you know, if we play this thing right, I think it's going to be quite compelling.

Okay, good color. Thank you, Scott. Good luck, Anthony. Thanks. Thanks.

Thank you. Our next question comes from the line of David Silver with CL King & Associates. Please proceed with your question.

Yeah, thank you. So I have maybe a comment and then one question, and the comment would be related to, you know, Anthony's tenure there. And I think back to – I guess the number of initiatives that your company's put in place just over the last couple years and maybe the strategic procurement function that theoretically really didn't exist before. And then the more recent investments in upgraded IT designed to create a national customer database and then the enhanced HR capabilities. I don't know. I kind of think everything came together in a very, very nice package. And I know Anthony wouldn't take all the credit for it, but, you know, based on your long history of the company, but the relatively recent, you know, vintage of those enhanced capabilities, I mean, I really think it came together very nicely. And I wonder if he could have executed as well. in the current environment without, you know, all those proactive steps that were put in place over the last couple of years.

Yeah, so, I mean, I would take that. And, you know, Anthony's been just, you know, foundational to our success and going to really be missed. But that being said, you know, what Anthony would say is it's a team, right? He's put together an amazing team of people and, you know, you know, these kinds of actions, even if it's something like a financial system or any of these protocols happens across, you know, they don't happen in silos. So we have a really amazing team. Dean Chin, who's going to be appointed our interim CFO, has worked closely with Anthony. And a lot of the things that you mentioned, they've been side by side on. So, you know, I'm preempting Anthony, but, you know, all he would, would continue to say is that, you know, we just have this amazing, amazing team. Okay.

Oh, sorry. I was just going to add, you know, the investments that you alluded to, you know, set us up for success today. So, you know, if you think back when we made the investment in HR, when we made the investment in sales, a lot of questions around, you know, how much were those investments? Why were you making it? And if you recall, there was, you know, some, consternation, I would say, in terms of our ability to execute. But if you fast forward to today and you look at what those investments have allowed us to accomplish in this environment, had we not made those investments and had we not had the fortitude to make those investments, it may have been a different story this quarter. So really proud to Scott's point about the collective team effort across the enterprise and the ability to execute in good times and in bad times, which has allowed us to you know, be where we are today.

Okay, thank you for that. And now my question, and I hope I get this out clearly, but I'm going to maybe do a little pushback on technical solutions and the decline that were there and I guess the impairment charge. But I kind of wonder about whether there is kind of tradeoffs, right, between an elevated level of TAG work or an elevated a higher than traditional amount of effort and budget, you know, committed to the cleaning function. And I'm just wondering whether you think during, let's say, like during the current quarter, some of that elevated TAG work came out of the same budget that normally would have gone to a technical solutions project. So, in other words, technical solutions you try to cross-sell to the customers that you're already performing cleaning services for. And, you know, this quarter's results indicate that per customer there's a greater emphasis and more budget dollars committed to cleaning.

Yeah, no, you know, I will tell you, yeah, the way I would answer that is, know it's it's really mixing and matching you know it's apples apples and oranges because um the ats work is project work and it's capital it's not operating so um and you know so so that was a real issue and with ats the slowdown is they didn't have access to the facilities because when the facilities were shut down they you know they shut them down and um that was really the delay. I think they're starting to see access open up now. And, you know, you think about it, their end market is education. So if you're a school administrator and you're going through this crisis, the last thing you're thinking about right now is, you know, giving the technical team the access to shut down the school and shut down the systems. You're thinking about getting these kids to an e-learning platform. So they were very distracted. Now they're starting to come up for air. And And really the pivot point here and why we think there's so much opportunity in the ATS division is because school budgets are being cut around the country. Everyone's seen it in their own community. And the way you get around that is you save money on energy. And it plays right into our sweet spot. So we think ATS is going to have an amazing trajectory. You know, to trade in dollars, you're talking about capital versus operating. You know, we don't really see that.

Okay, that's very clear. Thank you. And then last question, but with your enhanced cleaning program that you're offering and, you know, using as a lever to gain market share, does that commitment, like when a customer agrees to an enhanced clean type of service, Does that come with a warranty or a guarantee of any kind or something that, in effect, might create a liability, you know, for your company, you know, in the event that the service doesn't reach expected standards, anything like that to note about Enhanced Clean? Thank you.

Sure. Yeah, no, that's a great question. No, the answer is it doesn't. You know, we're very prescriptive, even in our contract language, that it doesn't. Because, you know, this is the one thing, like, nobody knows where it's coming from. And, you know, people come to an office, but, you know, they could be bringing it with them. And, you know, the one thing we know, at least for now, about once you do virus protection, it doesn't last for 30, 60, 90 days, right? So, So we absolutely don't make those guarantees. What we do, though, with our enhanced plan, which is different than everyone else's, is that we will do evidence-based testing. So we'll go in, we'll do electric static spraying, and then we'll test on the spot to show that we've actually killed the virus. But then once we're done, you know, there's no liability at that point. And clients understand that.

Okay, great. Thanks very much.

You got it. Thank you. Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question.

Thank you. Thanks for taking my follow-up, and thanks for all that detail on the new technology that you can introduce to clients. Do you have to buy different types of equipment going forward, or are you pretty well set to fill extra demand for enhanced cleaning services?

Yeah, so the equipment that you use for enhanced clean is very different than what any janitorial provider has now, like an electrostatic spraying machine, which is, you know, we kid around, but you think about like Ghostbusters, right? It's literally like a spray-on, and when it sprays, it electrostatically sticks to the surfaces. That kind of equipment is quite expensive. It could be $3,000 or $4,000 per machine. which again plays to ABM's strength, right? Because we have the capital to make these investments. And even the disinfectants that we're buying are more expensive. So very, very different. We've pre-ordered multi-million dollars worth of equipment now to make sure that our supply chain is secure. And again, with our scale, it's been amazing because We get the access that others don't. So, yeah, very, very different type of application for the virus protection.

Thank you. And one more for me, if I may. In technical solutions, have you done historically or have you received incoming client requests to study air quality or improve air quality with your work on HVAC systems?

Yeah, we do. And it's been in heightened demand. It's not the same level as enhanced clean, but I don't want to get too technical, but there's such things like MERV filters that you can put on your HVAC system that filter out viruses. People are talking about using UVC light in air conditioning systems, which has been known to kill virus. But this is such an emerging thing, right? We've We've never seen anything like this before. So, a lot of people are studying and sticking their toe in. And so, it's early on, but our technical solutions outside of just energy efficiency, people are looking at things like, again, filtration and UVC lighting to kill the virus.

Okay. Thank you, sir. Sure.

Thank you. Ladies and gentlemen, we have time for one more question. Our final question comes from the line of Mark Riddick with Sidoti and Company. Please proceed with your question.

Hi. Good morning, everyone. Anthony, congratulations. Thank you very much for all your help and assistance over the years and certainly wish you the best in your future endeavor. Thanks, Mark. I wanted to sort of focus with my two questions really more on strategy and timing and kind of how certain things came to be. I think in the prepared remarks you made mention as far as the cleaning program development beginning in March. Maybe you can sort of take us through sort of the timeframe and then when that particular offering began to be put in front of potential customers and maybe kind of the dynamic and the feedback there. I just wanted to get a little bit more of a scope around kind of, because it's been certainly a very dynamic time for everyone, but certainly for you guys over the last several weeks. So I was wondering if you could take us through that, and then I have one last follow-up.

Sure. So the way to think about it is, right, we start hearing words of COVID in February, and in March it was all about what we were calling our tag work for disinfection. But that wasn't our enhanced clean program. So, you know, wave one of this was go kill the virus, right? We didn't even have electrostatic machines. We were doing, you know, hands with hand labor, right? So wave one of this was just kill the virus with disinfectant. And during that wave one, we said, you know, this is long-lasting. This has changed the facility's industry forever, we need to develop something more programmatic. And that's where we came up with Enhanced Clean, which I said has everything from standard operating procedures to PPE to an advisory panel, this holistic program with signage. That all came together in really March to mid-April, and we just really started rolling it out. over the last couple of weeks, and we haven't even rolled it out yet holistically. We're really focusing on our larger enterprise clients right now. So the evolution went from pure disinfection, reactive, go clean it, to this big holistic offering that's really, really in early, early stages right now.

Okay, that's very, very helpful. So now that actually kind of leads a little bit into the follow-up, which is, I was wondering if you could spend a little time on the development of the cleaning coalition and kind of how that came to be because there seems to be – this also seems to be very new as far as timing. But I want to get some thoughts as to the development of it, kind of how that came to be, and then sort of the goals in that process because it seems as though that's going to have the opportunity to be – uh, kind of drive the conversation, not just for yourselves, but for the entire industry. So I just wanted you to talk about that a bit.

That, yeah, that's great. We, um, you know, we, we actually were really proud to have taken the lead on that. We, we, we, you know, we, this, this crisis was happening and all of a sudden, you know, we see in Congress, you know, people lobbying on their behalf that started with the aviation industry. Right. And there was this recognition that, that, We don't have a voice in legislative matters. The industry doesn't have a voice in legislative matters. So we dialed up our five or six bigger competitors, if you will, in the marketplace. Larger scale cleaning companies said, do you want to get together and pull our voices for what's important going forward and create a coalition? We'll hire a lobbying group, a media publicity group, and see if we can get stuff done because We represent over a million workers, again, that didn't have a voice. And as the CARES Act program was coming together, we said, you know, there are things that we have to focus on, like getting priority on supplies. There was no priority after the health care providers. And we were sitting there saying, hey, listen, even health care providers can't do their work unless we get to clean. America can't reopen unless we're cleaning those spaces and places, right? Right. So we put this together and we said, we're going to lobby Congress. We're going to talk about basically having our voice heard. And literally everyone was really excited about this. And we think that this is something that can have legs past COVID and we can start having more of a voice in legislative matters. But that's also going to depend on whether or not the things that we're advocating for can get some traction, right? Because we're still probably small. compared to some of the other bigger lobbying groups. So we're going into this eyes wide open, but I think we're pretty excited about this initiative of pooling what's important to the industry.

And I would add, Mark, if you think about the front line and having them understand the precautions we're taking, and some of this is also marketing, because as you know, what was a headwind for us for the last couple of years in terms of the labor pool, access to labor pool, recruiting, you know, where unemployment is and where we see opportunities from a labor standpoint, that headwind goes away. It doesn't mean that necessarily costs associated with the per hour charge necessarily dissipates, but the increase in costs that we saw, we see that as no longer as a headwind and potentially as a tailwind going forward.

I greatly appreciate it. Thank you very much.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to management for any final comments.

Okay. I just want to, first of all, thanks everyone for joining. But before I hang up, I just have to tell you, you know, I said it in my prepared remarks, I just can't thank our team enough for everything they've done through this crisis. This has literally been 24-7. And, you know, you think about what we do, our teams are on the front line fighting the virus, right? You know, if it's a fire, we're the firefighters. And it's just, it's just, I just don't have the words to articulate what our folks have done and accomplished on behalf of our clients. And, you know, safety is the most important thing and our people have stayed safe and We've given them the training, and they feel good about what they're doing because we are actually helping society. It's just been phenomenal. And, again, one last shout-out to Anthony. He's been an amazing partner to me over the last five years. We're going to miss him, but excited about his next venture. And, you know, he's going to be where he's going. He'll make a foundational change there as well. So really excited for him. Look forward to updating you all in Q3. I think we're going to have a lot more insight to what's going on with this pandemic over the next three months. So we'll chat then. Stay safe and don't let your guard down. It's not over yet, everybody. Thanks so much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.