Q2 2020 ABM Industries Inc Earnings Call
Greetings and welcome to the ATM industries second quarter 2020 earnings call. At this time all participants are in listen only mode. A question and answer, especially with all the formal presentation. If anyone should require operator system. During the conference. Please press star zero, our new telephone Keypad as reminder, this conference is.
Being recorded I'd now like to turn the conference over to your host Ms. Suzy Kim.
As president of Investor Relations and Treasurer for Abiam industry.
Thank you you may begin.
Thank you all for joining us this morning, whereas today or Scott Salmirs, <unk>, President and Chief Executive Officer.
Exactly.
I could have vice President Chief Financial Officer.
We issued a press release yesterday afternoon, adapting our second quarter fiscal 2020 <unk> financial results.
A copy of this really.
Companies like presentation can be found in our corporate website.
Before we begin I would like to remind you that computation today contain predictions estimates and other forward looking [laughter] are you said before.
And similar expressions are typically identified these statements.
These statements represent our current judgment future Holt.
We believe them to be reasonable. These statements are subject to risks and uncertainties that could cause <unk> actual results to differ materially.
Yes. It describes the slides that accompany that presentation was in our filings a b C C.
During the course of this call certain non-GAAP financial information will be protected.
So you should have those numbers to GAAP financial measures.
Well at the end up the presentation and on the company's website under the Investor tab.
I would now like to turn the call over to Scott.
Thanks Uzi.
Good morning, everyone on today's call.
First and foremost hope you and your loved ones are all states unhealthy during these extraordinary times.
Well, we'll be providing our customary where do you trust second quarter results. We've released yesterday afternoon I'm sure. We'd all agree that nothing about the way we live in operate today is the same as it was when we last spoke to you in today's discussion will be easily compared to our previous earnings calls as well.
Almost as soon as we reported our solid first quarter results in March coping 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 but mid March or services were classified as essential.
And we're on the frontline sort of pandemic.
Over the past few months prior had four 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 or corporate teams also worked around the clock to prepare.
Chris financially so the unknown and as you can imagine for a company like Abiam with 20000, plus clients and 140000 employees coordination of these critical elements was far from simple.
We deployed and operational task force dedicated to understanding of sexual control and cleaning protocols based on the guidance and recommendations of the CDC World Health organization and Olsher. Among others. We also set up an additional 18 cross functional task force or as weak.
Called them internally or pod spanning field operations finance legal human resources and of course or a large enterprise shared service center. These parts coverage areas are critical importance.
Overhead and most likely experience the supply shortages that had been ramping throughout the pandemic on top of that cities were changing personal protective equipment standards for employers frequently.
So pleased to say that we've been able to meet the demands of our clients during the spreads eat environment because of our procurement scale and all pod structure.
One of the parts is focused on daily right level shutdowns, enabling us to track labor and modulates staffing levels up and down dynamically.
We had one of our strongest cash flow quarters ever which was the direct result of our liquidity pod and the intense focus on collections on payables and the list of mission critical part ensuring business continuity goes on and on so we have 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 we're simply incredible.
Never been prouder to be part of the ATM and my confidence in the organization's ability to withstand any event.
Could not be stronger.
So let's get to some data.
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 Division.
With passenger air travel down 95% by April revenue declines in our Aviation Division, We're certainly expected frankly, our topline results for the quarter, we're 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 surge 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 year, even by pre covert standards and I would ask you to pause on this and recognize that we contracted for over a half a billion dollars a 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 managed direct labor, our largest cost by far to align with the business dynamics.
In addition to higher margin Tegra led to adjusted earnings and EBITDA margins that materially exceeded our performance last year materially exceeded any expectations. We could have had as cold it became a reality.
That's another data points applause to reflect on.
So our ability to execute through crisis speaks for itself.
Looking forward.
We recognized early on janitorial services, we're going to take on much more significance in what we are now calling the new normal.
We knew that a properties cleaning protocols will become the top priority such as so what do you imagine property owners and in response to that we began developing our proprietary enhance clean program in March.
Through our three step approach and hence clean will provide clients with a programatic 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 electric static spraying and anti microbial treatments.
Products for high touch surfaces personal protective equipment and employee training and 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 overtime in the hands clean will become part of our clients permanent scope and not just a tad will work order.
Our view is that Fiveish protection will be a lasting change well past cobot.
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 Abiomed is committed to representing an industry with more than 1 million workers, who are on the short lines of this pandemic across the country.
Our coalition represents the needs of an industry that has been playing a vital role and keeping essential services operating as a 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're 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 cheap changing and there are still too many unknowns today.
We'll schools reopen how quickly will air travel start returning will there be a co. Good spike in the fall or will the curve to continue to flatten and people returned to their offices all in loans and clearly out of our control.
So for us to estimate guidance for the remainder year doesn't make any sense given so many near term variables. However.
Take you through some of the longer term fundamentals, we see in or end markets that should give you perspective as we navigate the next year or two.
So let me set the framework.
Today clients are starting to look ahead and explore how and when they will re enter the workplace and 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 stake holders with the safe environment and they want to provide.
Hi, transparency about what they're doing to achieve this so our services are going to move to the forefront rather than behind the scenes.
Access to staffing 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 he began brings as a holistic solution versus our fragmented regional competitors. We believe we will undoubtedly become the clear choice in the future sure.
In the short term, it's still comes down to one will people will be ready to return to their spaces and more normalized daily life and what will that mean.
Depending on the industry there a variety of factors spanning a wide spectrum of possibilities. So let's go through our end markets and let's start with be Eni and TNL.
Pre coded benign CNN had been stable performers growing with strategic accounts, while driving profit through strategic labor management.
With the pandemic.
We saw clients overdrive cobot related tag orders as they engaged in crisis response modes to protect their occupancy.
We're currently within the peak period of site closures and work from home protocols. So daily services have modulator down with reduced occupancy since that initial period. Despite the downturn, we're starting to see clients planned workplace re entries as markets reopened and as a result, we believe in.
Hence clean interest will build as well.
This could result in additional Ted work and longer term scope changes because enhance 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 it. This is what we are surmising at this point.
[noise] aviation in education are probably the two segments that have been will be the most viable operationally in the near term.
For aviation.
Passenger air travel has declined dramatically and it's uncertain when both domestic and international travel will return to anywhere near its pre covert volumes.
Each of 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 upgrade still plan.
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 aviation sector will still be longer term.
Within education.
I'm sure. Many of you have personally experience how K through 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 EM accelerate some of 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.
Well for returns in both came through 12 and universities have not yet been defined some schools in the south or talking about full returns, including intramural sports well schools in the northeast have discussed delayed returns.
Many of the decisions for the fall will come to ahead in mid July. So we will have a far better outlook by the end of Q3.
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 had a strong backlog coming into the year and that Fortunately remain so today, which is the takeaway for our investors projects, we'll pause not cancelled but churn in Q2 was impacted by the decrease ability to access project location.
Yes.
Technical solutions primary end market in the education sector.
School administrators, we're operating a crisis mode and retrofit projects, we're on 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 east constraints, especially through a slow down or 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, our capital expenses and energy savings of 30 plus percent translate to operating budget savings and allow schools to retain teachers and fund after school programs.
We had a big energy project win in the South just two weeks ago Ussix million dollars capital retrofit project translated to energy savings that allows 15 teachers targeted for exit should remain on the payroll and all after school programs to stay in place.
We believe 2021 can see some strong wins and Ats.
So when you package all the so 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 enhance clean will allow us to capitalize on a range of opportunities in the post Kobin world.
As we sit here in June we're moving from a pure you 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 abiomed has transformed to become the powerful enterprise. It is today.
Anthony has been instrumental in creating our strategy executing on goals supporting our culture and developing so much of the how that makes a beyond what is today and when it comes to talent development.
That includes gene Chen who will be named our interim CFO.
Anthony is not only been among my most respected colleagues, but he is my friend as well. So this is really bitter sweet.
I know we speak for everyone today.
Express our gratitude for Anthony's contributions over his 11 years, a service and we wish him the absolute best of luck as he pursues the next phase such as personal and professional journey.
We'll always be an indelible part of Abiam's past and future success and the permanent member of the ABS family.
With that I'll turn it over to Anthony one less time to cover our financial results Anthony.
Thank you look kind word Scott it's been a privilege to lead part of the ATM team over the last 11 years.
Scott has always said the foundation of avian strengthens our people and that is what I will miss them out.
At ATM I've been granted so many opportunities specifically over the last five years a CFO.
Among the most special spending time with our extraordinary team across our frontline and throughout our corporate offices, both in the U.S. and internationally.
I can attack that we have the most passionate team or often the unsung hero some of the country most important facility.
And of course.
Everyone I've worked with on the finance team of the year has impacted my life.
Both personally and professionally.
While I am excited for the next phase My professional journey I am that that lead the amazing people here already yeah.
I have the outlook confident that team will beat abiomed to an even brighter future and continue to unlock great success, which I'll always chair on.
Now onto the second quarter.
Revenues for the quarter 1.5 billion in total decrease of approximately 6% compared to last year, reflecting the cobot 19 operating environment predominantly with an aviation technical solution and education.
Partially offsetting the revenue declined with record work order, what we call them tag.
Pag strengthen the quarter for be Eni technology 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 theres the potential indicator of impairment.
As a result for the impact Cobot 19 had on our industry group, notably within aviation in Education, we performed the assessment of our goodwill and intangible value during the second quarter.
With the.
Third party valuation expert and factoring in the impact of Coca 19 on the more sensitive end market impacted by the pandemic as well at higher overall discount rate. He recorded a pretax noncash charge of 172.8 million or $2.55 per diluted share.
Therefore on a GAAP basis, we reported a loss from continuing operations 736.89 or $2.05 per diluted share.
On a year over year basis, I'd also like to remind everyone that the second quarter saw one extra working day, which had traditionally equated to approximately 7 million an additional labor expense.
Given the variability during the quarter, we estimate that this had an approximately 6 million dollar impact during the quarter.
On an adjusted basis income from continuing operations for the quarter increased to 40.4 million or 60 cents per diluted share compared to 31.59 or 47 cents last year.
Our year over year growth driven operationally by our higher margin tag revenue.
Well as lower expenses associated with reductions in discretionary spend.
Share based comp reversal and the timing of IP project expenses.
Partially offsetting this quarter's performance was an increase in bad debt expense of approximately 9 million due to specific reserve established for client receivables in certain industries.
We will continue to monitor client receivable and overall credit condition and build 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 84.79 or 5.3% last year.
Now turning to our segment results.
As a reminder, these results reflect the impact of cobot 19 on revenues and operating profit across most of our industry groups.
Finally at the operating profit segment level. These results also include the noncash impairment charge related the goodwill and intangible within aviation education and technical solution.
Moving to be Eni.
Being I delivered $785.6 million in revenue and operating profit grew more than 20% to 59.2 million or margin rate of 7.5%.
The modest decline in revenue, which was driven by less working parking facility services being experienced a rise in janitorial demand.
More specifically tagged and expansion with national client grew immediately as they thought RF during the onset of the pandemic and throughout the quarter.
We also exited some lower margin account in our youth business and as a reminder, apart from a relatively small presence in sports and entertainment arena and consumer related parking we are not heavily exposed the industry that may have had a more challenging operating environment during the pandemic such as hospitality and retail.
Technology and manufacturing reported revenue the 233.79 up 4.2% versus last year.
Operating profit was 19.79 for an operating margin of 8.4%.
New business with manufacturing logistics and high decline in April PNM to offset any business declined from covance disruption and certain contract losses from last year.
I think PNM looked at IBM ensure their continued operating environment. Many critical end market like food processing industrial manufacturing and utilities.
Senatorial, including higher Titan Man and facility services, all grew versus last year operating profit margins were impacted modestly by higher reserves for client receivable, mainly associated with the pandemic as well as the lingering impact of walk the count 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 last quarter call, we breadth aviation vulnerability and cobot 19, and our results for the quarter demonstrate the unfortunate development 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 demand.
We believe in hand cream services, such as electrostatic spraying could be part of the new norm in that segment given the heavy impact that the pandemic has had on the travel industry.
While we see headwinds and significant uncertainty in that segment and our monitoring passenger travel data analytics engage future demand we are repositioning the portfolio to better align ATM in this segment going forward.
Revenue in education, with 200.1 billion down 9 million from last year, reflecting pandemic related school closures.
An impairment charge of 99.39 related to both our legacy and GCA portfolio led to an operating loss of 85.8 by.
Excluding the impairment operating profit would have grown by 28.8% to 13.9 from an operating margin of 6.8% higher than our expectation for Q2, given the timing of summer claims.
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 Len and to what degree schools will reopen in the fall.
Finally onto technical solution.
Technical solutions reported revenues of 122.39 down from last year's 135.99, due to lower project churn.
As Scott mentioned, the pandemic prevented accept that certain project site, mainly during the latter part of the quarter.
A 12.4 million impairment charge related to our UK operations led to an operating loss of 8.4 million. Excluding the impairment operating profit would have been 3.99 or an operating margin of 3.2%.
Also impacting this quarter's results with the negative impact of higher Commission expense from the amortization of commission that were capitalized last year due at the six effects.
Turning to cash and liquidity cash from operations of approximately 162 million during the quarter and free cash flow with approximately 155 million.
Scott touched on liquidity office, we mobilized immediately at the onset of the pandemic was instrumental in achieving these results.
We implement that acute tracking related to critical accounts receivables and payables across all main drivers, including billing and collection direct and indirect payroll procurement and taxes among other aspects.
The work of all these cross functional team in conjunction with the strategic March drawdown of our credit facility and enable us to end the quarter with record cash and cash equivalent of 556 million.
To strengthen our liquidity even further we recently negotiated our credit facility.
This was a preemptive measure intended to allow maximum flexibility as we navigate the coming quarters during the pandemic.
You will see an all amendment filed with our 10-Q later this week some of the changes in the credit facility include favorable Max leverage limit, especially over the next four quarters out of an abundance of caution given a trailing calculation of our bank defined EBITDA.
The ability to net up to 109 part of our Max leverage calculation.
Revised fixed charge coverage ratio that reflect the potential for additional borrowings and associated interest.
And provisions that protect our board the ability to continue abiomed longstanding dividend policy.
In addition, the amended facility bears interest at a higher cost of borrowing and also contained other negative coven given the flexibility provided by that I mentioned permission.
As evidenced by our pre and post the maintenance Covenant achievement for the second quarter. These actions were precautionary and we remain committed to using our strong cash flow generation and balance de lever and continue to invest in our growth.
We ended the quarter with total debt, including standby letters of credit of 1.4 billion any bank adjusted leverage ratio 3.68 times or 3.97 times under our pre amendment facility.
We also repurchased approximately 200000 shares of common stock for 5.9 and in March we suspended all further share repurchases as we focus on prudent liquidity management throughout this crisis.
During the quarter, we paid our 216 consecutive quarterly cash dividend for total distribution of approximately 12.3 million and I stated in our earnings release I am pleased to share that our board of directors approved our 217 consecutive quarterly cash dividend.
During the quarter Congress enacted to Canada, and the UK similar act with path, which provided certain stimulus measure for the broader economy. We have adopted some of the business tax provision that were permitted under this new legislation.
Include the refundable credit for employee retention, primarily in the UK as well as the deferral of certain payroll tax remains the through December 30, Onest 2020 to future year with 50% of the deferred amounts due in calendar 2021, and the remaining do 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 the discrete tax items, such as the work opportunity tax credit and the tax impact of stock based compensation Awards.
Given the disruption to do additional hiring practices due to the pandemic. We current believe watsi will be lower this fiscal year as a result at the current environment.
And as I mentioned earlier jump as we thought the X are working day in Q2. This year, we will see one less working days in Q4.
Finally, I'd like to reiterate got statement that we have withdrawn our annual guidance outlook.
Slightly a measurable nature of current events I did want to provide some additional financial contracts of actions that have been taken after the second quarter.
These actions made modular it overtime as we align client demand for our services during the pandemic and beyond.
At the project level as discussed we have instituted several measures to better match revenue changes what 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 benefit to those impacted.
We've reduced our suspended certain benefits such as our form 10-K matching.
And while these actions were difficult we thought they were the right actions to help US managed through this uncertain period, while providing us enough flexibility to match back up and we see demand and the general market an operating environment stabilized.
In conclusion, I will echo Scott Pride in our team for the execution and determination that during the very difficult time.
Under unprecedented condition weve rhythm once again to achieve and even exceed our goals.
I remain excited about the momentum able continues to build into the future.
Operator, we're now ready for questions.
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One moment, please follow poll for questions.
Thank you.
Our first question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Tim Thanks for taking my questions congratulations on a good quarter and Anthony Congratulations on a.
What.
It seems to be an exciting new opportunity. So first one for me is clearly blow out margin performance in the corridor.
Helped in part by the tags and I'm. Just curious you know how would that 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 flush out is how sustainable. This margin performance was this quarter and whether there is a.
Structural change in margins in a in effect here.
Yes, I'll take that.
So.
Yes I.
I just want to frame this whole conversation by this is still really early on right.
And we did see great Tech performance in Q2, and we believe there's an opportunity for to continue into Q3 as offices reopened and the economy reemerge as our longer term goal Sean is to convert those tag work orders into permanent scope.
Changes and hold that margin percentage right. So.
That they are higher margin services, because if you think about it right we have to train our people and virus protection. The equipment is more costly the chemicals are more costly. So it justifies the higher margin. So for us the trick is going to be how do you convert these tag work orders and see them come down and become more permanent and ultimately.
The shift our margin mix up on a more on or more permanent basis. So I.
I think.
The way, we're looking at the seizing over the next six months plus is that when offices reopened and and people are coming back.
Be.
Existing peg level, because if you are facility managers, 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 forcefully more prescriptively about how I'm going to reengineer the longer term scope. So.
Thank you know kind of phase one of the reopening you'll still see elevated tag levels and kind of phase two and whenever that happens as at six months from now 12 months from now you'll start seeing a drop often tags and youre going to see the shift towards scope adjustment and so that's that's the way we're thinking about it if that's helpful.
Yes, that's helpful and.
I guess the other dynamic it'd be helpful to give some color on is there are some scope modulations around this.
Yes, any sense at all on how many of those or to what magnitude to those are going to be permanent.
Changes in terms of how your clients are approaching.
You know office life, and and I'm. Just curious also how competitors are responding to some of those scope modulations has there been any pressure on pricing long.
Just a normal.
Normal janitorial contracts.
Contracts during the quarter like outside of tags.
Yes, so 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 well nothing much you to cut back.
Wouldn't happen right. So there has to be there has to be permanent change in virus protection. So that's going to happen and that's it can be higher margin and I think what we're hearing to and what we're seeing is that there has to be more transparency around these cleaning programs at with sign into what have you. So this all please too.
To our benefit for the long term and why we do think this will be lasting we've had we've had advantage over our competitors because if you remember our competitors set all the smaller fragmented companies and they haven't had the access that we have had to supply chain.
You know anecdotally I don't have statistics for you, but I've I've heard of us picking up work.
From other other.
Clients that we didnt have because they are contractors didnt have access to supply chain and you know we've always talked about how scale is an advantage for abiam. This this pandemic certainly prove that out just again, just because of how robust our supply chain was and our ability to train and have the resources have an advisory panel. So.
We haven't seen pressure on pricing.
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 and prepared remarks, yes. There is an opportunity to to move up our growth levels and in being high which we've always said with GDP.
To start knocking on the door GDP plus so.
I just think everything is the fundamentals just pointing out.
Very helpful. I'll pass it along thanks very much.
Thanks, Sean.
Thank you. Our next question comes from the line of Andrew Wittmann with Baird. Please proceed with your question.
[music].
Great. Thanks.
It's a lot to unpack here and Anthony before I forget the one to say.
The pleasure and best of luck.
But.
Yes, so just here in the.
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 for great in the quarter I heard in prepared remarks, you did decline somewhat but I'd like you still expect us to stay high which I guess makes sense, but.
The second thing I heard is that you had a 9 million dollar bad debt write off in the quarter. I wanted just confirm that that was not excluded from adjusted EPS that was it actually the quarter and better if not for that.
And then I heard that they're 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 seemed fairly significant to me I guess the question is did I understand the things correctly and then I.
I guess from there the question is.
[music].
The margin performance, particularly in Vienna in education.
How sustainable do you think the mix.
I will be to allow you to keep those margins of elevated in other words is this.
A fair rate to think about in the near term or do you think you maybe over earned from very heavy tag work in the quarter sorry for the one question no no no problem I'll try to answer the component part Dan the and bank. Thank you for the kind words beyond that so.
So from from the standpoint of a margin.
Most of that is going to be driven by the gross margin expansion as well as some corporate actions that we took that were unique in the quarter like the share based comp all within our adjusted and that's going to offset by the working day as while at the bad debt, though we did not exclude any of those items to the reported number and then they're going to be pluses and minuses.
Across other core categories. When you speak about the actions we took after the quarter really though the accident that a direct labor I think one of the thing that you saw in the quarter as as our revenue modulator down we were able to take corresponding actions on the direct labor side to maintain.
And in some cases, even improve the margin profile.
Site level, but those actions that have direct labor really intended to manage expenses.
Across the various unknown and to offset certain cost that we anticipate increase namely around PB supply.
As well as some overhead cost that are embedded in some parts of the business.
Difficult to take out like in aviation, we took a lot of costs, but there's a certain level of eight overhead that you have to maintain so when you look at that you look at what what those are really preemptive in nature and DMD. We expect as conditions begins to improve going forward. We will begin to bring back some of those call specifically the reduction in salary.
And the furloughed.
Et cetera, but we've done that that the preemptive.
To your question around the margin profile and be 19, and both of those margin profile benefited obviously from tags.
And as you as you can imagine and some of our CAGR Passthrough margin very similar to the based contract, but what we saw in the quarter with what we really were excited about where the higher margin on tags to that really became.
Focal point at the pandemic began to as Brad as one of the reasons why we set up the program around in hand clean because we do believe.
This is not something that's going to be temporary we believe there is a lapping effect as it relates to the importance of sanitation the importance of what we do on a day to day basis.
We do expect some continuation as it relates to leather and going to be tag or embedded into contract the got point.
Things that we're working on a go forward. It's got to know if you want to add Amy.
No I think I think you've got it right.
The the long term is that the facilities business has for ever change.
And the stuff that we didn't we specialize and there was always back to the house behind the scenes is front and center because.
Then people will return to their offices its all the about creating a sense of trust and safety and the way you're going to we were going to do this 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 thing quicker follow ups here that I wanted to ask and just just for so we can understand greater context, I think typically you guys said that your tag revenue is around 20% say of the BNS segments. Like that's just kind of an average I know, it's not exactly that but given.
But 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 though just help us understand exactly how this all unfolded in the quarter little bit better.
Yes, I don't I'm not sure where you got your 20% from typically our tax on an enterprise basis average around 4% to 5%.
On an annualized basis and that across all categories being high being the largest the benefit given that concentration on the janitorial side, followed by PNM. What we saw in the quarter, you would analyze probably trending closer to a 7% of overall revenue being tags and again those are obviously higher margin.
To the point I made earlier for B and I repeat led the growth in the quarter, we saw approximately a more than 50% growth in the quarter year on year from tax and an overall, we had significant growth across all of the end markets, but be an eye led delay in terms.
With that growth.
Sorry for Misquoting, you, that's really helpful context, and I appreciate that Scott the last on that I have is for you and has to do with the $541 million of new business sold.
In the in the first half of the year. Thank you for disclosing that again I guess.
Two questions on that one is how much of that is in technical solutions versus in the annuity I know in the past and Youve required when you.
Mentioned this number in the past it's been.
It's combined both businesses both the annuity businesses, if you all as well as technical solution. So I was hoping you could help us separate that a little but then if you could talk about the other started this equation, which is a retention rate through all of this.
And how this could translate into net new business.
Hey, Andy let me take the first part on the bookings are really solid story.
Got alluded too great growth from a revenue standpoint in the first half and the story.
Quite interesting and your you point out.
Right point, selling and 20 2019, our first half little over 50% of that bookings, what Ats and that really led to the strong backlog led to where we stand from a from an overall revenue growth perspective in that in that industry group ended on what you saw over the last 12 month and that was really followed by being.
Roughly 20% into 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 as isn't being high. 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 site given some challenges and disruption somebody 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 the longer term basis.
But it ended the year over year dynamic, which really points to the diversification strength of our business model and then on the retention.
You want to that on retention.
Yeah look retention was really strong in the quarter, 94%, but I think I'm I'm less interested in quarterly retention are more interested in longer term and.
Andy I can only speak anecdotally about this but and talking to our operators around the country and if I had a nickel every time a client has sets US you will never lose our business right. After this because you have to remember you put us in context rates.
These clients are in crisis, and I think what people forget is that when covert 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'd like mobile so fast and we had extra labor that we were we were doing disinfecting and we kind of the Calgary coming to the rescue for for a period of time and then because we had the.
Because we were able because of our procurement to to get into supplies they needed.
I wish I truly believe that.
This is going to nor to our benefit over time from a retention standpoint and.
Well people have short memories wall realist about this too right could there be could there be cost pressures down the road, if we move into recession, yeah, but I think in terms of our brand with our clients.
I don't know, how it's ever been stronger than than it is today.
Thank you very much good luck.
Thanks.
Thank you. Our next question comes from the line of Tim movie with William Blair. Please proceed with your question.
Good morning.
First I'd like to say congratulations Anthony in a very successful tenure at ABS and good luck to you and your future endeavors Anthony.
Amongst them really mean GLA.
Yes, absolutely so.
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 modifications, which is a good thing I understand but I just want to talk about it with respect 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 are too and if those are temporary or permanent changes. Thank you.
Yeah, I'll take that fully aviation business, it's really it's 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 modulator down as much as the the air traffic has because airports still has to stay on.
Open and there the airlines themselves are doing much more virus protection. So I think you're going to see a shift again no no difference really than any of the of the industry groups. You are going to see the shift towards higher for us higher margin services in the virus protection, because it's going to be part of every.
End markets protocol and.
I guess, we've heard people say that you know if you had a choice between going to supermarket, we're going to an airport and getting on the plane from a pure safety standpoint, you'd rather choose the latter because of how much of their doing in terms of sanitizing and cleaning at airports and planned so that's going to speed.
Alaskan same change, but revenue absolutely down until passenger traffic picks up but again just final point of that passenger traffic will pick up until word of mouth starts happening where the people that start flying go back and tell their friends and family in business Associates I got Italia planes.
Cleaner than ever got Italia, they're really prepared.
Right, but it'll be along.
Again.
It goes to that same thing Tim of like people have to feel safe and secure in their spaces right and we and it's it's 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 not 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 and.
With respect to aviation.
Sure I have the best way back to describe it yet.
It was it was interesting for me as I transition into this role a few years ago and started really understanding about education in between flights window cleaning the plane.
We would say it was less about actual cleaning and more about logistics right. You started the back of the plane. Your our people are getting the seats up right. So they're uniform across their fixing the magazines that putting the pillow in place right, they're putting the trace back. So it was it was the love.
Just express cleaning second now it's going to be about cleaning first it's going to be about electrostatic spring. 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 is gone there.
Again from logistics the cleaning.
Okay. That's very clear thank you for that but that's what I was that's exactly what I was curious about maybe one more question for me just touching on the competitive environment, we talk to a number 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.
Do you think there our market share opportunities with larger potential customers, who maybe.
I want to step up their hygiene programs and switch to a more sophisticated provider like ABS and if so what does that sales process look like what can ATM, maybe bring to the table that many of the smaller players cannot.
So, let's think about enhance clean which is what we are rattling around right so enhance clean.
Isn't just virus protection, it's not just taking the and electrostatic sprayer and disbursing disinfectant and I think thats, 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 pp, giving them standard operating practices on how to how to act in the space, giving full robust signage to our facilities partners that they can display we put together an advisory panel of external experts as well as our.
Internal experts from our health care Division.
Opine and certify the program so like when you walk into an ATM facility and you're doing on hand screening programs, there's going to be literally that sticker on your front door that says this property is enhance clean certified right and.
Also going to be doing evidenced based testing, where we're going to be swabbing. After we've done the virus protection and documenting and proving that we killed the virus like our smaller competitors. They just don't have the resources or the depth of the scale to do that and then also guarantee that theyre going to have the supplies and the P.P. So.
If you're a fortune 500 company and you are using a smaller regional company. Yeah. Youre brands is going to be based on you cleaning protocols and your holistic program. We haven't seen anybody in the market has anything near the enhanced clean program. So we think thats going to allow.
Allow us to pick up market share and again, we're 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 are smaller competitors regional competitors.
You, probably chuckling now, but do you think they have like a digital marketing department with digital outreach. So I think right we're going to be attacking all these different platform. So I just think if if 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 C.L. King and Associates. Please proceed with your question.
Yes. Thank you.
I hope it get comment and then one question and the comment would be related.
Anthony Hey, there.
And I think back to them.
I guess the number to the initiatives at the company your company put in place over the last just over the last couple of years and maybe the strategic procurement function.
Equally what really Didnt exist before and then the more recent investments in upgraded IC design.
Create a national customer database, and then enhance HR capabilities and I didn't know kind of think everything came together in a very very nice package and I know Anthony take all the credit for the.
Based on your long history of the company relatively recent vintage of those enhance capabilities I mean, I really think it came together very nicely and I Wonder if you could have executed well in the current environment without.
All those proactive steps.
Please.
Yes.
Yes, so I mean I would take that.
Anthony's been just.
Foundational to our success and its going to really be missed but that being said you know.
What Anthony with says its team right is put together an amazing team of people and.
These kinds of actions, even if it's something like a financial system or or any of these protocols happens across they don't happen and silos. So we have a really amazing team.
Gene Chen who is going to be appointed our interim CEO CFO has worked closely with Anthony and and a lot of the things that you mentioned they've been side by side on so.
You know I'm preempting, Anthony but all he would would continue to say is that we just have this amazing amazing team.
Okay.
Oh, sorry go ahead, I would just going to us and add the investment that you alluded to set us up our success. Today. So you think back when we made the investment in HR when I made the investment sale a lot of questions around.
How much with other than that manned why are you, making game and if you recall there was some.
Consternation I would say in terms of our ability to execute but if you back order today and you look at levels investments have allowed us to accomplish in this environment. How do we not made those investments than had we not Ben had fortitude to make of investment. It may have been a different story. This quarter, so really proud to Scott point about the color.
The team members across the enterprise and the ability to execute.
In good times in Bad times, which has allowed us to.
Be where we are today.
Okay. Thank you for that and now my question I hope by gifted, though clearly, but I'm going to maybe do a little pushback on a technical solution.
Decline that were there and I guess the impairment charge, but.
I kind of wonder about whether there is kind of trade offs rate between an elevated level of tank work or an elevated.
Higher than traditional amount of effort and budget you know committed to the cleaning function.
And I'm just wondering whether you think during what they like during the current quarter some of that elevated tag.
We're came out of the thing budget normally would've gone.
To a technical solutions project. So in other words technical solutions, you try to cross sell to the customers that you've already performing cleaning service for it.
This quarter's results indicate there.
Per customer there, there's a greater emphasis in more budget dollars committed to cleaning.
Yes.
Yeah, the way I would answer that as you know, it's really mixing and matching it's apples to apples and oranges because.
Dates, yes work is project work and its capital it's not operating so and yeah. So so that was a real issue and with Ats the slowdown as they didn't have access to the facilities because when the facilities was shut down they you know they shut them down and.
That was really the delay I think they're starting to see access open up now and you know you think about 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 giving the technical team the access to shutdown the school in shutdown.
These 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 scene.
In their own community and and the way you get around that is you save money on energy and its plays right into our sweet spot. So.
So we think Ats is going to have an amazing trajectory, but you know trading trading dollars you are talking about capital versus operating.
We don't really see that.
Okay. No time, that's very clear. Thank you and then last question, but with your enhance the cleaning program that you're offering and using as a as a lever to gain market share does does that commitment like when a customer agrees to enhance the clean type of service does that come with a.
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 that the service doesn't reach.
Expected standards or anything like that to to know about enhance acclaim. Thank you.
Yeah, No. That's a great question, how the answer is it doesn't we're very prescriptive, even in our contract language that it doesn't because.
This is the one thing like nobody knows where it's coming from and if people come to an office, but you know they could be bringing with them and the one one thing we now at least for now about once you do Vivus protection. It doesn't last for 30 60 90 days right. So so we don't we we absolute.
We don't make those guarantees what we do though with our hands claim which is different than everyone else is that we will do evidence based testing. So we'll go in we'll do electric static spring and then we'll test on the spot to show that we've actually killed the virus, but then once we're done.
We were you know, there's no liability at that point and and clients understand that.
Okay.
Okay, great. Thanks very much.
Got it.
Thank you Sir our next question comes in line of Tate Sullivan with Maxim Group. Please proceed with your question.
Well. 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 by different types of equipment going forward are you pretty well set to fulfill extra demand for enhanced cleaning services. Please.
Yes, so that so the equipment that you used for enhanced clean is very different than what any janitorial provider has now like electrostatic spring machine, which is we could around but you think about like ghost Busters right. It's literally like a spray on and with that sprays that electro statically sticks to the Sir.
Fusses, though that kind of equipment is quite expensive it could be three or $4000 per machine, which again place. The IBM spreads right because we have the capital to to make these make these investments and even the disinfectants that we're buying our or more expensive so very very different we.
These preordered multimillion dollars worth of equipment now to make sure that our supply chain to secure.
And again with our with our scale, it's been amazing because.
We get the access that that others don't so you have very very different type of application for the virus protection.
Thank you and one more for me.
In technical solutions have you done historically or you've received incoming client requests to study air quality or improve their quality with their work on each HVAC systems.
Yeah, we do and and it's been in heightened demand not too. It's not the same level is enhance clean, but I don't Wanna get too technical but theres such thing is like Merv filters that you can put on your hvdc system that filter out viruses people are talking about using you VC light.
In air conditioning systems, which has been known to kill virus, but this is such an emerging thing right with its we've never seen anything like this before so a lot of people are are studying and sticking their toe in and if so it's early on but our technical solutions outside of just energy efficiency piece.
You are looking at things like again filtration and you'll see lighting to kill the virus.
Okay.
[music].
Sure.
Thank you, ladies and gentlemen, we have time for one more question.
Our final question comes from line of marketing.
<unk> Company. Please proceed with your question.
Hi, Good morning, everyone. Anthony Congratulations. Thank you very much for all your hope and assistance over the years, and certainly which gives us near near future endeavor.
Thanks Mark.
I wanted to sort of focus with with my two questions really warm on strategy and timing kind of how certain things seem to be I think in the prepared remarks, you mid mentioned as far as the the cleaning program development beginning in March you could maybe just sort of take us through sort of the timeframe and then when.
That that chiller offering began to be put in front of potential customers and maybe tended to the dynamic in the feedback from there I just wanted to get a little bit more of a scope around kind of because it's been it's certainly a very dynamic timeframe for rubber one but do you guys a loss of a week. So it's like you could take a c. that then I have one.
That's helpful.
Sure. So the way to think about it is right that this we start hearing word of Covidien February and and in March It was all about or what we were calling our tag work for for disinfection, but that wasn't our enhance clean program. So you know wave one of this was.
Go killed the virus right. We didn't have have electrostatic machines were doing hands with Lee hand labor right. So so we wanted this was was just killed the virus with disinfectant and during that wave. One. We said you know this this is long lasting this has changed the facility for these industry forever we.
We need to develop something more programmatic and that's where we came up with enhanced claim which I said has everything from standard operating procedures to P. P to an advisory panel. This holistic program with signs that all came together and really March to mid April and we just really.
Started rolling it out over the last couple of weeks and we havent, even roll that out yet holistic, we really focusing on a larger enterprise clients right now so.
The the evolution went from pure disinfection reactive go clean it to this big holistic offering that's really really early early stages right now.
Okay. That's very very helpful. So now that actually kind of leaves a little bit emptied the follow up which is I was wondering if you spend a little time on the development of the easy cleaning coalition and I kind of how that came to be because there seems to be.
This is also seems to be very new as far as timing, but once you get some thoughts as to the development of mid kind of how that came to be and then sort of the goals and that process is it seems as though thats going to have the opportunity to be.
Kind of drive the conversation not just for yourselves was for the entire industry socialize did talk about that a bit.
Yes, great we.
We actually we're really proud to have taken the lead on that we.
This this crisis was happening and all the sudden we see and Congress 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 and legislative matters. So.
We dialed up our five or six bigger competitors. If you will in the marketplace larger scale cleaning company. So do you want to get together and pull pull our voices for what's important going forward and create a coalition, we'll hire lobbying group a immediate 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 carriers Akt program was coming together. We said you know there's things that we have to focus on like getting priority on supplies is there was no priority after the health care providers, and we were sitting there, saying hey listen.
Even health care providers can't do that work unless we get to clean America can't reopened unless we're cleaning those spaces in places right. So.
So we put this together and so we're going to lobby Congress little we're going to talk about you 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 cove. It and we can start having more of a voice and legislative matters, but that's all.
Also going to depend on whether or not the things that were advocating for couldn't 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 will pooling what's important to the industry.
And I would add.
Market do you think about the front line.
And having them understand the precautions or taking and some of this is also marketing because that you know what would the headwind for us for the last couple of years in terms of the labor pool opted to labor pool recruiting.
Where unemployment is and where we see opportunity from a labor standpoint that headwind goes away doesn't mean, they didn't necessarily costs associated with the per hour charge necessarily dissipate, but the increase in cost that we saw we see that as no longer the headwind and potentially a tailwind going.
In card.
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 comment.
Okay, I just want to personal thanks, everyone for joining but before I hang up I just have to tell you I said in my prepared remarks, I I just can't thank our team enough for everything they've done through this crisis.
This is literally been 24, seven and you know you think about what we do our teams are on the front line fighting this if virus right. It.
If it's a fire with a firefighters and its system. It's just that I just don't have the words to articulate.
What our folks have done an accomplished on behalf of our clients and.
Safety is the most important thing in our people if stage safe and we've given them the training and they feel good about what they're doing because we are actually hoping society. It's just been phenomenal and again when last shout out to Anthony has been an amazing partner to me over the last five years, we're going to Miss some books.
Cited about his next venture and.
It is going to be what where he is going home make a foundational change there as well so really excited Sam 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 will chat then stay safe and.
All that your car 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.