ABM Industries Incorporated

Greetings and welcome to the ABM Industries second quarter 2021 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, Mr. David Gold, Investor Relations for ABM Industries. Thank you. You may begin.

Thank you for joining us this morning. With us today are Scott Salmers, our President and Chief Executive Officer, and Earl Ellis, our Executive Vice President and Chief Financial Officer. We issued our press release yesterday afternoon announcing our second quarter fiscal 2021 financial results. A copy of this release and an accompanying slide presentation can be found on our corporate website. Before we begin, I'd 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. 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 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, David. Good morning, and thank you all for joining us today to discuss our second quarter results. As detailed in yesterday's press release, ABM reported strong second quarter financial results, building on the progress we achieved in our first quarter. Second quarter adjusted income from continuing operations per diluted share increased to 82 cents, up nearly 37% from the year-ago quarter. We generated significant operating leverage with adjusted EBITDA improving 17% year-over-year to $106.6 million and adjusted EBITDA margin increasing 100 basis points to 7.1% on slightly higher revenues. We were pleased to note that for the first time in five quarters, growth in four of our key segments, B&I, T&M, education, and technical solutions, more than offset the softness in aviation, which while improved on a sequential basis, continued to reflect the impact of the pandemic. In short, our second quarter performance reflected a consistently high level of operational execution by our team, amid gradually improving business conditions in sync with the reopening of the economy. This strong showing and our current visibility have enabled us to increase our full year guidance for adjusted earnings per share while we continue to invest to support future growth. Consistent with what we have discussed over the past several quarters, our customers continue to prioritize protecting their people and spaces driving strong demand for our higher margin virus disinfection work orders. Enhanced clean, our proprietary and trusted protocol for cleaning and disinfecting spaces was an important contributor to our second quarter results as well. We also continue to benefit from efficient labor management as our flexible labor model enabled us to identify and capitalize on staffing efficiencies arising from the adoption of remote and hybrid work environments particularly within our B&I segment, where office occupancy in large metropolitan areas remain relatively low. As employees transition back to the office, we anticipate some easing in our labor efficiency, but we expect revenue growth in the second half of the year and increased work orders to mitigate that effect. With our scale, capabilities, and market diversity and breadth of services, ABM remains well positioned for continued revenue and earnings growth as the reopening momentum continues. There are several key trends that support our outlook for continued strong performance in the coming quarters. First, our clients in both the office and manufacturing markets indicate they plan to continue to incorporate disinfection into their cleaning protocols as they prepare for the return of staff and workers to their offices and industrial facilities. In fact, given the heightened concerns around pandemic risk and greater awareness of public health issues in general, we expect these specialized services to remain in demand and to become part of our client contracts. ABM has been an essential partner in helping our customers navigate through the challenges of the past year, and our 90% plus retention rate, which ticked up in the second quarter, speaks to the confidence our customers have in our services and capabilities. Second, we expect continued sequential improvement in our aviation segment as pent-up demand for travel translates into higher demand for aviation services. As Earl will discuss in his comments, we are transitioning our aviation business mix to favor higher margin contracts with airports and adjacent facilities with less of a focus on airline services. This strategic shift has created attractive growth opportunities for ABM outside of the airport, such as parking services, and provides for a more consistent and more profitable business mix in our aviation segment. Additionally, we expect to see increased demand for disinfection and cleaning services in line with the pickup and travel activity. Early signs of return to leisure travel have been encouraging, and increased business travel is projected to follow later in the year and into next year. Third, school districts have accelerated the return to in-person learning. Our conversations with school district professionals and educational institutions indicate that with the full-time return to school expected this fall, cleaning and disinfecting will be a priority throughout the school year. We expect these services to become part of the broader scope of services for new contracts and rebids providing ABM with revenue and growth opportunities. Finally, the energy efficiency and retrofit solutions that we offer in our technical services segment, our highest margin business, provide significant operating cost savings for our customers and enable them to reduce their environmental impact. Now that we have greater access to client sites, we expect to increasingly work through our technical services backlog which was at a record level at the end of the second quarter. Additionally, this segment is well positioned to benefit from the new administration's priorities around decarbonization and energy efficiency. As we look toward the second half of the fiscal year, we are confident that we can leverage our significant competitive advantages to achieve continued progress. You may recall that at the very outset of the pandemic, we established 19 operational task forces, or pods as we call them, to marshal our tremendous internal resources on the issues at hand to focus on our virus disinfection offerings, our field operations, as well as finance, legal, liquidity, cash flow, and human resources. This task force model proved to be a fast and effective way of identifying potential business issues and utilizing cross-functional expertise to develop and implement solutions. Given the success of these initiatives, we will continue to use this model to address emerging situations. In fact, our Human Resources Task Force is now focused on recruiting and retention and will be instrumental in helping us manage utilization as additional staffing is required to accommodate increased occupancy levels. Additionally, our strong balance sheet and robust cash flow provide us with substantial resources to fund investments to support future growth. We invested in information technology initiatives during the first half of fiscal 2021, and we anticipate investing further during the second half of the year. These investments in technology, data analytics, and strategic initiatives are designed to strengthen our client relationships and further empower our employees. While we will speak about these initiatives later in the year, I can share that we are currently piloting client-facing solutions using sensors to generate real-time occupancy data that inform our janitorial programs and allow us to share service delivery details with our clients via digital displays. Additionally, we are expanding our use of technology to workforce management with a digital task management solution that records work performed and facilitates dynamic route changes to accommodate shifting client demand. Lastly, the ABM brand is recognized worldwide and our recent advertising campaign has served to reinforce the scale, scope, and capabilities of our organization. These attributes enabled us to step in immediately to provide our branded services to clients needing a safe environment for their employees and consumers. The ABM brand is synonymous with this tremendous commitment to customer service which is supported by our ability to deliver. As we enter a post-pandemic environment, we believe the ABM brand will provide us with considerable competitive advantages across our business segments. Turning now to the specifics of our outlook, given our strong performance in the first half and our expectations for continued year-over-year growth in the second half, we are maintaining our guidance for full-year fiscal 2021 gap income from continuing operations of $2.85 to $3.10 per diluted share, inclusive of a second quarter litigation reserve of 32 cents. At the same time, we are increasing our guidance for full-year 2021 adjusted income from continuing operations to $3.30 to $3.50 per diluted chair, up from $3 to $3.25 previously. This includes additional investments in client-facing technology and workforce management. We're also increasing our outlook for adjusted EBITDA margin to a range of 7% to 7.3% from 6.6% to 7% previously. We also ended the first half with robust new sales of $727 million, including $100 million associated with our enhanced clean offerings, another first half record. This supports our confidence in the company's organic second half performance. Additionally, we continue to explore acquisition opportunities where, as a strategic buyer, we would be able to drive meaningful revenue and operating synergies. Before I turn the call over to Earl, I'd like to thank all of our ABM team members for their continued dedication and hard work. Over the past year, we have made tremendous operational progress and have proven our value as an essential partner to our clients during these dynamic and challenging times. I've never been more inspired by our purpose, our team, and our organization. I also want to thank our customers for their confidence in us. As we emerge from this difficult period I am so pleased with our performance and I'm more confident than ever in our future potential. I'll now turn the call over to Earl.

Thanks, Scott, and good morning, everyone. Second quarter revenue was $1.5 billion, up 0.1% from last year. As Scott mentioned, revenue in four of our segments grew on a year-over-year basis, offsetting the continued pandemic-related softness we've experienced in the aviation segments. Key revenue growth drivers in the quarter included higher disinfection-related work orders and continued strong demand for our enhanced clean services. On a GAAP basis, income from continuing operations was $31.1 million, or $0.46 per diluted share. By comparison, in last year's second quarter, we reported GAAP income from continuing operations of negative $136.8 million, or negative $2.05 per diluted share. As Scott mentioned, GAAP income from continuing operations in this year's second quarter includes a non-cash $30 million reserve for an ongoing litigation, equivalent to $0.32 for diluted share. This non-cash reserve relates to litigation dating back 15 years, primarily relating to a legacy timekeeping system that was phased out in full by 2013. You will find additional information in our Form 10-Q, which will be filed later today. The recorded reserve is based on a host of factors, considerations, and judgments, and the ultimate resolution of this matter could be significantly different. As this litigation remains ongoing, we are unable to disclose further information at this time. As a reminder, last year's gap loss included a $2.55 per share impairment charge. Excluding these charges, our adjusted income from continuing operations in the second quarter of fiscal 2021 was $55.5 million, or $0.82 per diluted share, compared to $40.4 million, or $0.60 per diluted share, in the second quarter of last year. The increase in adjusted income from continuing operations was attributable to our strong operational performance, including growth in our higher margin services, as well as efficient labor management and the recapture of bad debt. In addition, we benefited from favorable business mix particularly in our technical solution segment where we executed on higher margin projects. Excluding items impacting comparability, corporate expense for the second quarter increased by $26.6 million year over year. Approximately $10 million of the variation was due to increased stock-based compensation, with the remaining $16 million representing investments and other related expenses. Thus, information technology and other strategic investment spend in the first half of fiscal 2021 was $20 million, in line with our expectations.

Now, turning to our segment results.

Business and industry revenue grew 1.4% year-over-year, $796.2 million, driven largely by strengthened demand for higher margin disinfection-related work orders and enhanced clean services. As a result, operating profit in this segment increased 44.1% to $85.3 million. Our technology and manufacturing segments continue to see upside from demand for COVID-19 related services. Revenue here increased 5.4% year over year, $246.3 million, and operating profit margin improved to 10.9%, up from 8.4% last year. We've benefited from the recapture of roughly $2 million of bad debt in this year's second quarter. But even adjusting for this, our profit margin still showed improvement. The growth in revenue and margin was fueled by a higher level of work orders and new customer contract wins for our services. Education revenue grew 7% year over year to $214.2 million, representing the strongest growth rate among our segments in the second quarter. The acceleration in revenue growth primarily reflected the positive impact from the reopening of schools and other educational facilities in the second quarter and the shift towards more in-person learning. Education operating profit totaled $13.6 million, representing a margin of 6.3%, slightly down year over year on an operating basis as a result of labor challenges in our southern U.S. operations. Bad debt expense was roughly $1 million lower than last year, and this was a contributing factor to the operating profit improvement we experienced in this segment. Although the specific labor costs I mentioned will not recur in the third quarter, we anticipate that the return of students to school on a full-time basis will lead to some reduction in labor efficiency within this segment in the second half. Aviation revenue declined 19.7% in the second quarter, $148.3 million. Although reduced global travel continues to weigh on this segment, revenue improved 3.6% on a sequential basis, marking the third consecutive quarter that aviation segment revenue has improved sequentially. With industry data points indicating a progressive recovery in global travel, we are optimistic that revenue in our aviation segment will continue to improve over the second half of fiscal 2021. Aviation operating profit was $5.8 million, representing a margin of 3.9%. While our airline customers continued to request higher margin enhanced cleaning services, such as electrostatic spraying, margin remained below normalized levels given reduced volumes. As Scott mentioned, we have focused on securing more profitable overall business with airports and related facilities and have continued to de-emphasize our airline services work This strategic shift in our aviation segment business mix had a positive revenue and margin impact on our second quarter results and should benefit future periods as well. Technical solutions revenue increased 2.6% year over year to $125.5 million. Operating margin was 8.2% in the second quarter, up significantly from 5.3% in the first quarter of fiscal 2021 due to a favorable mix of higher margin projects. As client site access improves, we remain positive on the growth trajectory of the technical solution segment. Shifting now to our cash and liquidity. We ended the second quarter with $435.7 million in cash and cash equivalents, compared to $394.2 million at the end of fiscal 2020. With total debt of $797.9 million as of April 30th, 2021, Our total debt to pro forma adjusted EBITDA, including standby letters of credit, was 1.7 times for the second quarter of fiscal 2021. Second quarter operating cash flow from continuing operations was $125.9 million, down from $162.3 million in the same period last year. The decline in cash flow from continuing operations during the second quarter was primarily due to the timing of cash taxes. For the six-month period ending April 30th, 2021, operating cash flow from continuing operations totaled $171.2 million. Free cash flow from continuing operations was $117 million in the second quarter of fiscal 2021 and $156 million for this year's first half. As a reminder, cash flow is benefiting from payroll tax deferral related to the CARES Act. Beginning next year, the deferral will be paid at $66 million in each of the next two years. We were pleased to pay our 220th consecutive quarterly dividend of 19 cents per common share during the second quarter, returning an additional $12.7 million to our shareholders. Our board also declared our 221st consecutive quarterly dividend which will be payable in August to shareholders of record on July 1st. Supported by the strength of our balance sheet, we have the financial resources to support our capital allocation priorities of adding additional growth by investing organically while pursuing potential acquisitions. Now I'll provide some additional color on our guidance and outlook. As mentioned, our increased guidance for full year fiscal 2021 adjusted income from continuous operations is now a range of $3.30 to $3.50 per diluted share, compared to $3 to $3.25 previously. Our upward revised adjusted earnings forecast reflects the strength of our first half, as well as our positive view for the second half. As a reminder, our third quarter has one fewer day than last year, equivalent to about $6 million in reduced labor expense. On a GAAP basis, we continue to expect EPS from continuing operations of $2.85 to $3.10, inclusive of the $0.32 litigation reserve in the second quarter. We continue to expect a 30% tax rate for fiscal 2021, excluding discrete items such as the work opportunity tax credit and the tax impact of stock-based compensation awards. As we noted in our first quarter conference call in March, our expectation was to achieve cash flow above our historical range of $175 million to $200 million for fiscal 2021. Now having generated $171 million of operating cash flow in the first half alone, we are confident that we will achieve free cash flow for fiscal 2021 of $215 million to $240 million. We are pleased with our positioning as business across the country emerged from the pandemic, and we look forward to helping our clients provide safe environments for their employees and customers. And I am personally looking forward to meeting with each of you in person, hopefully as soon as later this year, and to connecting with you virtually until then. 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Good morning, Scott. Good morning, Earl. Good morning. Good morning. Thank you guys for taking my questions. So, um, a couple of questions on labor, first labor costs, and then, um, labor availability, um, on the labor cost side, the last quarter, you said that you anticipated retaining most of your labor arbitrage through year. And that is a big part of your margin expansion coming from labor savings. But here we are a couple months later and inflation is on the rise and on the forefront of everyone's mind. Do you think the piece of your margin expansion that came from labor savings over the last 12 months, is it your expectation that eventually gets inflated away in the coming period?

Yeah, that's a good question. So, I mean, the answer is yes, and we've consistently said that. But I think, you know, it's important, Tim, to level set this. And just as a reminder, you know, 50% of our revenues come from unionized labor, which is above market wage and having benefits. So we never really see pressure there. So it's really on the other 50%. So we have mitigation right there. And for us, as we think about labor and what we're doing, we put together a pod for this, just like we did during COVID when we talked about how we created these task forces. So we have kind of a multi-discipline task force just focused on recruiting and labor efficiencies right now. And we're hyper-targeting certain areas because not every area is built the same, right? There are places like Orlando and Dallas and Houston, which have a little bit more pressure than other areas. And again, we're only really mostly focused on the non-union areas. So I think, you know, it's something that's top of mind for us, but I always point people back to 2018 and 2019 when there were labor pressures as well and how we navigated there. And it is what we do, right? So eventually, eventually we'll see some of the efficiencies trail off, which is what we said, because people will return to work and we'll be restaffing the buildings, but we are going to maintain some of those savings because of efficiencies of restaffing. So we feel good about that. And then, You know, the last thing I'll say about the labor pressures is, you know, we do ultimately get this back from our customers. It's not exactly elastic, but we pass through and we've shown in 18 and 19 that as labor costs rise, we're really good at recapturing those from customers because they get it, because they're facing the same thing. So it's not anything that's kind of just segmented to our industry. Again, top of mind, but we feel like we got this.

Okay. That's very reassuring. Thanks, Scott. Any of the investments that you've made recently, is there anything there that would help you pass on this cost in a different way, new capabilities that you have that you hadn't had before, or is that not really related to this piece of the business?

It's not necessarily the latest piece of business, but I will tell you, The first tranche of our technology path was a couple of years ago when we upgraded our HR system and went to the cloud and got a, again, much better capability. So it helps us have insight and information that we never had a couple of years ago. And in this kind of labor game, the key is having information, knowing where the pressure points are, knowing how to articulate and dynamically staff. So I'd say, you know, the newer investments are not necessarily exactly related to labor because fortunately we got ahead of that fortuitously.

Understood. If I could just squeeze one more in, I wanted to ask about labor availability. I mean, you guys had 114,000 employees towards the year end. And I know this is down from 2019, but still more employees than pretty much every other company on my coverage list. So, My question here is not about labor costs. It's about labor availability. Most companies I talk to list labor availability as the prevailing issue right now, even more so than inflation. So is labor availability a major issue for you right now? And if so, has this affected service levels in any material way?

Yeah, so, you know, funny, I would say probably for our 12-year history, labor availability is always top of mind, right, because of what we do, right? But what I would say is this. I'd say it's still a little early in the game, right? There is a federal stimulus out there of $300 a week, which we all know about, over and above unemployment, and You know, you do the math on that. You think about a $15,000 a year bump for people who are on unemployment. So that's something that keeps people at home. And we're starting to see some of the states rolling off, you know, starting this month. And In September, the federal program rolls off. So I think it's a little early to see about what the labor availability will be in the fall when people return to work, because that's when we're really going to need it. Like, we don't have this massive need right now because, you know, generally speaking, Tim, right now, it's still very muted occupancy in office buildings, right? And travel is still only at 60% of where it was. So I think we'll have more to say, and other companies are going to have more to say after the federal stimulus wears off, and how many people re-enter the workforce. So for now, we're navigating it well. But, you know, again, we'll acknowledge it's definitely at muted levels right now of need, right? So I think September is going to be the time where everybody's going to really understand what the availability pressures are. But I think anything before that is just speculation in our minds.

Okay.

Is that helpful?

Does that make sense? Yeah, that's very helpful. Understood. Thanks for taking my questions. You got it, Tim.

Thank you. Our next question comes from the line of Sean Eastman with KeyBank Capital Markets. Please proceed with your question.

Hi, guys. Thanks for taking my questions, and nice job again this quarter.

Thank you.

I guess just going back to the – you know, margin discussion, the different moving parts there. I mean, we have an updated second half outlook, but it seems like the dynamic in the business doesn't really change too, too much until the fall, you know, September, October. So it's kind of right at the end of the fiscal year. I'm just wondering how much we can extrapolate from this second half updated margin guidance. You know, as we think about what's sustainable going into next year, I mean, you know, I could just go around in circles around the different moving parts between labor efficiencies and, you know, how these IT investments trend, you know, ATS, you know, coming back and, you know, being a growth driver again. I mean, you know, is this implied second half run rate sustainable? You know, what are the, you know, big moving parts we really need to consider in our models going into next year relative to that run rate?

Sure. So let's, you know, and obviously we're not ready to guide yet for, for 22. So I'm going to have limited to say about that, but I could tell you, look, we feel super confident about the second half of this fiscal year for us. That's why we were able to raise guidance. And a lot of that, honestly, Sean has to do with having better line of sight. We've been really consistent about the fact that we want to be responsible. And until we have line of sight, We're not going to get over our skis, right? So I think we have, at this point in time, we feel like we have really good line of sight to the rest of this year. And the dynamics look really good, you know. Between enhanced clean and our work orders in the second half, they maintained at the levels of the first half. And we feel like it's going to be strong for the rest of this year. We believe there's going to be a return to work. Is it going to be 100% office occupancy? Absolutely not. But, you know, we're probably seeing somewhere around 25% average across the country and probably more in the range of 40% in the southern states and 15% on the coast. So we think that's going to tick up and return to work is going to be more revenues for us. It's going to be more disinfection services. We'll give a little bit of that back from the labor efficiencies because we'll have to restaff the building. But that's really a positive trend for us. And the last thing, and you mentioned it is technical solutions. We have, we have a backlog of over $250 million in business, our strongest ever. And more importantly, our churn rate is up. You know, we, we, we typically, you know, our churn rate for, for the second quarter was somewhere in the range of 12%. And, but sequentially through the quarter got stronger and stronger and, And so we're excited about that to actually turn the work. So I think you're going to see revenues go up in the second half. You're going to see disinfection strong. You'll see, again, the mitigation on the labor side, but you're also going to see ATS showing up as well. So I think we feel really good about that. And, you know, we'll see where it goes into 22 as we get closer to that. And, again, November 1st starts our 22, and I think that's still going to be at the time where people are returning to work. And so I think we'll have a good start to 22 as well. But, again, it's early to start guiding. Does that make sense?

Yep. Yeah, it does. Okay. And, you know, obviously the balance sheet, you know, primed for – For some capital deployment here, it seems like you kind of stepped up your M&A commentary a little bit in your communications here this quarter. I mean, could you just speak to the velocity in the acquisition pipeline? I'm hearing from a lot of companies that sort of seller decision-making is really accelerating here.

Yeah, so, yeah, there's definitely more activity. And remember for us, we were pretty consistent last year that until we get through this pandemic and until we feel like there's stabilized liquidity and what have you, we weren't going to start thinking about it. So we've only been in the game for, you know, a very short period of time, but we have our teams out there. There is activity. We'd like to think there's going to be opportunity for us. And, you know, the nice thing for us as there's, you know, and you've I'm not going to tell you anything you haven't heard about private equity and having access to capital. But the nice thing for us is that we, as a strategic buyer, have synergies, both operating and revenue, that helps make us competitive if there's an attractive asset out there. So it's definitely a priority for us, M&A, because growth is so important. So we're excited about what we're starting to see.

Okay, excellent. I'll turn it over there. Thanks so much, Scott. Thanks, Sean.

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

Great. Good morning. Thanks for taking my question, Scott. In your prepared remarks, you mentioned that your B&I customers and some of your manufacturing customers, they're going to keep cleaning. You think that some of the enhanced cleaning services might become part of the contract and so I just want to understand that mechanism a little bit more. Do you expect that those will be negotiated contracts or as they look to increase the size do you think generally speaking that your customers as they look to increase the amount of cleaning that they do that they go out to rebid with that and what do you think as these things become part of the base contract and less tag work or work order work what if any implications are there to the margins? What are your thoughts on that one?

Yeah, that's a great question. And I think, you know what, Andy, I think we've been really consistent for the past few quarters saying that the natural gravitation of this work will be to be embedded in scope. Because, I mean, look, I was a former facility manager. That's what I would do, right? And so I think as clients start thinking about re-tendering contracts, which will probably happen over the next year or two, I do see them incorporating it. It's a smart thing to do. And I think You know, we've talked about 30% margins on this work. We'll see that trail down a little bit. I don't know where it'll end up landing. Will it land at 20%? Will it land at 25%? But, you know, the reality is for us, there is, it's a higher value service and you can build in a higher margin for a higher value service. There's training, there's equipment, there's all these protocols. So I think we'll be able to retain a good amount of the margin and But absolutely the expectation is that it will gravitate into the base contracts for the bigger clients, for the smaller tenants. You know, I think it's still going to be kind of on a work order basis, which would make sense for them as well.

That makes sense. But as we said here today in June, are you seeing those kinds of discussions happening or this is just still, I mean, you've been saying this for a while, like you just said there, but are you seeing anything today that towards this trend in here in June?

Not yet. You know why? Because people aren't really focused on rebidding contracts right now, right? You know, I think, you know, if you think of the life of a facility manager right now, what's top of mind for them is preparing for return to work for all their workers, right? So they're looking at reoccupancy programs. They're looking at space planning for their offices, you know, all the health and safety stuff. You know, rebidding a janitorial contract is a pretty big deal. It takes a lot of focus and effort. So my sense is that kind of thing is going to happen probably 22, 23 versus the back half of this year because we just haven't heard about any plans yet on scale to get in the market and rebid. And I think the other part of it, the insight I have, Andy, and maybe this is helpful, is when you don't know, when you're a facility manager and you don't know what your ultimate occupancy is going to be or floor layout, You're getting ahead of yourself by bidding the contract because you can't really drill down on a good scope yet because you just don't know how it's all going to land. So kind of if I were in their shoes, I would think it's premature right now to start putting together a formal scoping for what the new ways of work look like because people haven't really returned yet. Does that make sense?

Yep. Makes a lot of sense. Just on technical solutions here, you guys put in electric vehicle charging stations. You retrofit schools with all kinds of different systems. Both of these things are talked about as having – actually, some of these have passed. The $1.9 trillion thing had money directly for schools. I'm wondering – I wouldn't expect it that it's in the backlog yet, but are you bidding projects that you can kind of tied to these monies that have been allocated already. Um, you mentioned the record backlog. I'm just kind of curious as to if that's kind of before, before the stimulus here or after the stimulus and any comments that you have on that particular.

Yeah. Yeah. I think the good news is where we haven't seen yet the direct effect of that. Cause you know, a lot of these programs haven't been formalized, but I can tell you that, um, this kind of bundling of solutions and our energies. We call it BES, which is bundled energy solutions, which is this project retrofit work. We're seeing a lot of activity on that because there are still other government programs out there. And, you know, the school districts can raise capital where they're getting the pressures on their operating margins still. So we're just seeing an increase on pipeline side of clients who are talking about ways to lower operating expenses. And that plays right into the strength of what we do with our, again, our bundled energy solution. And then you take on top of that the administration's new focus with decarbonization and e-mobility. And our EV charging is probably, it's still a relatively small segment for us, but it's probably our fastest growing. And it's really turning into something that we're putting a lot of focus on. So We think everything that's going on societally and with the administration is going to be a big tailwind for us in 22 and 23. Okay, that's helpful.

Then just last question quickly here for Earl. I wanted to talk about the unallocated corporate expense segment results. I mean, you guys... You mentioned in the prepared remarks that you're kind of $20 million of investments this year over last year. That's on track. You guys have been saying it was going to be $40 for the year. It seems like that's kind of where you are on those investments. But I just wanted to make sure that for all of our models here that we're getting this right. If you look at last year's corporate unallocated expense segment, it's going to be plus $40 million on these investments. But I also think that there's, because the year is, Where it is, you mentioned in the press release even that the stock compensation is going to be up in addition to that. So I was just wondering if you could help us a little bit as to how much the stock comp is up year over year as well, just so that we can kind of get a sense of what that line is. And then obviously the implications, we'll be able to back into the implications for the operating segment margins as well. Just be kind of helpful to understand how you're thinking about that unallocated segment line.

Sure, Andy, would love to do that. So just to start with, you know, as you mentioned last quarter, we're continuing to invest in both our talent to support our future growth opportunities, as well as, you know, the planning and design phase of our tech solutions rollout or the rollout of our tech transformation. And as we mentioned, you know, that investment year over year is approximately a $40 million increase. And, you know, when we look at the year to date, we've actually spent $20 million of that. Although, if you recall, in Q1, it was actually a little bit of a late start in that we actually spent probably about $3 to $5 million of that, but caught up in the second quarter. As we look to the back half of the year, that $10 million clip will continue to spend over Q3 and Q4. Now, having said that, however, when you look at it from a year-over-year perspective, it might look a little lumpy in that if you look at Q3, you have to recall last year where we actually had the benefit of the furlough. you'll actually see as a result of that a pickup. And then when you look to Q4, although we'll still be spending that $10 million, that spending actually started last year in Q4, and therefore Q4 year-over-year will look kind of flattish. But we are still on track with the $40 million spend for this year. In addition to that, we are seeing an increase in our share-based compensation, and that's due to the tune of approximately $15 million year-over-year. And that's a product of a number of things, including special grants that came up last year, as well as just how we're actually tracking on the grant that will actually come to vesting this year. Again, you're going to see some lumpiness in that. In that year-over-year increase, you'll see the vast majority of that impacting in this past quarter, Q2 year-over-year. As last year, we took a significant reduction in our reserves. as we were anticipating the impact of the pandemic. We then started to ramp up that investment last year, that accrual last year. So if you look at the back half of this year, we anticipate more of a smoothing year over year with regards to share-based compensation.

All right, that's very helpful. Thank you very much. Have a great day, guys.

Thank you.

Thank you.

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

Hi, good morning. So maybe if I could just ask Earl to follow up a tiny bit on the stock-based comp discussion that you just finished. Always a number of moving parts in these programs, but for our understanding purposes going forward, should we be tracking, let's say, the closing, you know, the point-to-point change in your share price? In other words, January 31 to April 30 led to the bulk of that expense this quarter, or is it more of a cruel with time or an average share price? In other words, you know, might there be a couple of rules of thumb you could share that might give us a little bit of a heads up you know, going forward to kind of adjust our expectations for that expense item. Thank you. Sure.

Well, you know, when you look at our share-based compensation, for the most part, you know, there are a number of metrics, but the large percentage is really, metric is really weighted on our financial performance, and that would be both revenue as well as our EBITDA. So one of the things that you can clearly track is how we're actually, you know, progressing on those two metrics, And it's clear to say, especially this year, with regards to our EBITDA and our earnings that, again, have been driven by the margin expansion, that really is the significant benefactor, if you will, to the increased accrual that we're actually seeing in the stock compensation plan.

Okay, thank you for that. And then, Scott, I had a question about the project reserve that your company took a couple of quarters ago, so I think it was $18 million pre-tax. But my understanding was that was kind of tied to the inability of your customer to kind of open or begin operations. I was just wondering if you could give us an update there on whether you think the current pace of, let's say, the reopening of workplaces and social venues and things. I mean, should we be thinking that that reserve might be reversed in coming quarters? Maybe just an update on that issue, please.

Yes. Yeah, so look, I'm an eternal optimist, right? But I will tell you, David, we are in active discussions. And it's something that's really difficult to comment on because it's still ongoing. So just like any other kind of reserve we take, we don't give up and we go after it. And so I think suffice to say active conversations and more to come on that.

Okay, and then maybe just one more kind of bigger picture question. And, you know, this would have to do with branding, I guess, or your marketing strategies and your marketing programs to date. So, you know, you've mentioned in the past you have ramped up marketing efforts on a number of platforms. And, you know, I've seen your national commercial on CNBC quite a bit. And two things. I mean, first, I was just wondering if you could point to any tangible, you know, results in particular product lines or subsectors where you think the greater awareness, the greater, you know, visibility, you know, has made a difference. And then secondly, maybe just a longer-term, you know, perspective. In other words, your company's been in business for over a century. You already have a national footprint. And yet, you know, you kind of have redoubled your, you know, marketing efforts here. Maybe if you could just point to maybe from a, you know, a one or two year perspective. I mean, where do you think that that, you know, greater awareness that the branding efforts are going to have the biggest effect? In other words, might it encourage people who had been using maybe a regional player or a mom and a pop to step up to a higher level of, service that they associate with your name now, or maybe regionally, you know, areas where you hadn't been that you're looking to penetrate, maybe that's a necessary precondition for success there. So just overall, you know, branding, success to date, and then where should we look for the greatest impact over the next year or two? Thank you.

Sure. Yeah. So look, I think, you know, especially with what we're doing with the commercial, you know, brand is so important. And what you're trying to do is create differentiation in the market. And, you know, you hit on it, right? There's like kind of ABM and then there's regionalized competitors. And, you know, what we're attempting to do, and I think the pandemic has done it, is really say like there's kind of us and our resources and our scale. And there's everybody else. And the way that that manifested itself is on our supply chain. We were never the ones that were without disinfectant or PPE for our people, electrostatic sprayers, because of, again, our sourcing capability. And not every client that had a regional player can say that they fared as well. And then we had an advisory council that we put together of outside experts to synthesize what the CDC and the World Health Organization was saying so our clients could get a better lens on that you know all these things you know the small regional players couldn't do and then you know you you you put on top of that you know commercials on CNBC it's like it's it's just creating a choice differential that we think is going to be super impactful hopefully that's going to um have an impact on our retention over the next couple of years. You know, we've been over 90%, you know, a one, one percentage point tick up in retention is dramatic in our business. So we're hoping that we've seen, um, last time I checked and my information is a few weeks old, but I think it was, it was something around a 10% increase in hits on our website and our, our sales team seeing, um, tracking coming through digitally. So, I think it's a confluence of things, David, but again, it's elevating the brand between how we performed and the exposure now that we're doing on TV and through all the social channels. All we're trying to do at ABM is create a separation between our platform and our small regional competitors.

Okay, great. Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad at this time. Our next question comes from the line of Mark Riddick with Sidoti & Company. Please proceed with your question.

Good morning. Good morning. Good morning.

So I wanted to sort of fill in a few of the blanks that we've had from some of the other questions that you've already answered. I wanted to start first with going back to the acquisition commentary in the press release that you've talked about a little bit more recently. I just wanted to touch a little bit on whether or not there's any particular areas that you would view as priorities or things that are kind of top of the list that you'd like to see accomplish, whether it be a regional fill-in or a service line area? How should we think about your prioritization of potential acquisitions?

Sure. So, look, I think for us, we're very intent on sticking to our core, right? And the core of what we do is janitorial, stationing, engineering, right? And that, you know, with the pandemic and what's happened through or virus protection and our credibility there. We think that's a great accelerator for us. So we'll look for scale there. And you know how much we love the ATS work, right? It's our fastest growing and most profitable segment. So we have a high interest in growing that platform too. So you know what, Mark? I think before we start looking for adjacencies outside of the core of what we do, we're really going to stick within the core. And scale is always better, right? Integrating a small company is as much work as integrating a big company. So I think we're going to synthesize those. And then there are certain regions, even with our ATS work, there are certain regions that we'd like to fill in where we're maybe not as strong as others. So there'll be a little bit of a geographic bent when it comes to ATS. So we have a really good matrix of what we're looking for. And You know, what we said for the past few years is what I'd say now. We are not going to be reactive. We're going to be strategic and planful on how we go after acquisitions.

Great. And then I want to switch back to talking about some of the segment activities seen during the quarter, because one of the things that was interesting to me was the strongest segment growth-wise was in education. It seems as though of all the areas of your work, that seemed to have been the biggest beneficiary of the strength of the rollout of vaccines and what have you. I was wondering if you could talk a little bit more about some of the conversations that you're having within the education space and maybe some of the commentary or maybe what you're seeing from the benefits of funding, uh, that kind of gives you, it seems as though it gives you greater confidence for the upcoming school year, but, but certainly the vaccine seems to have accelerated activity, you know, at the very end of this school year. Uh, but it also seems to maybe have accelerated the timing of some of those conversations. So I was wondering if you could talk a little bit more about that.

Yeah. You know, um, you know, it's a good question from, from the educators we've been talking to, you know, within our client base and stuff we hear in the industry. it seems to be this very binary shift towards in-person learning and the whole remote, you know, when it comes to the fall, right? Because that's really, you know, the next really piece of the puzzle right now that school is generally out right now. We're talking about in-person, which is great from a revenue standpoint for us. You know, again, we'll give some of the back of, you know, the labor efficiency, but, you know, all the educators we talk to, you know, healthy, clean, safe buildings is top of mind. And, you know, it's for them and the parents, right? Parents are very vocal about this. So we're excited about the potential in education because we suspect, you know, if you look at our different segments, right, our technology and manufacturing, which is, you know, really focused on, you know, as much on the manufacturing side, they never stop. Our revenues always remain strong. And then you had our B&I, which is the office occupancy reduction, right? I think aviation is the one that's going to lag probably more than any other segment. But education, I think it's going to have a strong comeback in the fall, whereas when you look at B&I, you know, I don't think anyone thinks that offices are going to be 100% occupied in the fall, whereas, you know, it could be close to that for education. So I think you're going to see a pretty strong rebound there.

Right, right. And then the last thing for me, totally different area, but I was wondering if you could give updated thoughts around, given the strength of free cash flow generation, debt reduction, which was faster than we were expecting, certainly nice to see there. I wanted to talk a little bit about views of future share purchase and how we should think about sort of given the strength of the business versus where your stock price is now, how your thoughts are evolving there. Thanks.

Yeah, it's Earl, Mark. Thanks for the question. I would say that we're really pleased with the amount of cash that we're currently sitting on, as well as our low leverage, which really gives us the opportunity now really to deploy that capital for the purposes of supporting our long-term growth strategy. And as such, we're going to be looking to invest in both organic as well as inorganic growth. Now, having said that, we're going to remain our flexibility with regards to capital and As you know, we currently have authorization upwards of about $145 million from the board to actually pursue share buybacks. So we'll keep that flexibility as time proceeds. But at this point in time, the focus really is around allocating capital for growth purposes, for long-term growth.

Thank you very much. Thank you, Mark.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Summers for any final comments.

I just want to take a moment to thank everyone for supporting us through this period. I'm so proud of what our team members have done and appreciate the interest from our investor base and analyst base in what we're doing. You can tell that there's a strong level of enthusiasm about the future for ABM. between, you know, the brand elevation between our margin elevation and about societal, you know, reflections on virus protection going forward. We think we're just in a super good spot to continue to invest in and accelerate the platform. And the most important thing is just, you know, we're not out of this yet. And I would just urge everybody to, uh, you know, not let their guard down and stay safe through this. And, uh, We have good things coming. So thank you all for the time today. Really appreciate it.