Q3 2020 ABM Industries Inc Earnings Call
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Do you all for joining us this morning with us today or Scott Salmirs, Our President and Chief Executive Officer has been Chen our interim Chief Financial Officer, We issued a press release yesterday afternoon announcing our third quarter in fiscal 2020 <unk> financial results.
Yeah. This release and an accompanying slide presentation can be found in our corporate website.
Before we begin I would like to remind you that calling presentation today contain predictions estimates and other forward looking statements are used to the worth asking it expects and similar expressions are intended to identify these statements.
These statements represent our current catchment of what the future.
Well, we believe them to be reasonable. These statements are subject to risks and uncertainties that could cause <unk> actual results could differ materially. These doctors are described in the slide that accompanies our presentation as well as in our filings with the FCC.
During the course of this call certain non-GAAP financial information will be presented a reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the Investor tab.
I would now like to turn the call over to Scott.
Thanks, Susie good morning, and thank you for joining us on today's call to discuss <unk> third quarter results.
So not pressures, we reported revenues of $1.4 billion for the quarter.
While this represents a 15% decrease first last year.
Nation segment contributes more than half of that declines as you probably expect excluding aviation revenue was down less than 8%.
In addition, we sort trends improve as the quarter progress across all of our other segments. We for another record quarter pandemic, driven work orders, particularly within the business and industry and technology and manufacturing segments. This offset some of the scope reductions that occurred with clients disruptions and modify.
Right operations due to reduced occupancy.
We also expanded but she's strategic accounts and other central operations, such as manufacturing facilities.
Even with an technical solutions, sorry access improved as the quarter advanced I mean, we're able to restart churning through our strong backlog.
So revenue has been disappointing for us, especially when contrasted against the reduction in published during the quarter because of the dynamic nature of our direct labor structured where we experienced scope reductions we allied staffing to match the work.
[laughter] preserves margin I can even a passive as we find efficiencies through labor strategies other tight controls.
What do we performed also reflected.
Well decisions, we made early on to prepare us financially for the uncertainty or the pandemic, which was right in front of us at the beginning of the quarter in Bay, we instituted temporary reductions and salary across certain staffing management, which included the executive team and the board.
We also temporary furloughed and would you say I watched and certain corporate staff and like many firms, we reduce or suspended benefits such as our four one came matching.
He's worked really hard decisions that had to be made but necessary to potentially protect liquidity and ensure business continuity during very uncertain times.
The combined impact of higher margin workforce labor efficiencies and corporate actions led to our significant year over year fashion and profit.
From continuing operations grew to $56 million were 83 cents per share and on an adjusted basis $50.1 billion for 75 cents for sure.
Adjusted EBITDA margin rose to 7.9% versus 5.6% last year. So we couldn't be more pleased with our performance.
And we continued being disciplined on collections and payables during the quarter.
Cash flow from operations was approximately $130 million.
How to 21 million <unk> free cash flow basis. This is one of our all time highs and enabled us to achieve laboratory 2.2 times.
Our team understood how much more priority this was and the results speak for themselves.
Now do we successfully manage through the past six months, we've reversed many of the temporary cost reductions occurring during the third quarter.
Yes. This doesn't mean, our intense focus on managing the business through changing conditions overlaps in any way in fact much of the discipline. We invoke during the past few months, that's now incorporate it into our standard operating procedures.
The health and safety for team members at all clients has been our top priority and if so proud the determination or people have shown during this time.
We quickly adopted our standard operating practices to follow the guidelines CDC and other governing bodies as well as our own Advisory Council and that's an essential service broader our team members with tasked with being agile and responsive to the rapidly changing needs of our clients as they work to protect their employees.
Their customers and their facilities.
That's been an overwhelming and we believe this will have a lasting impact on retention.
Now I could spend hours on this call. Highlighting example, after example, our team members have made a difference during the stressful time.
In the northwest Independent School district of Fort Worth, Texas or education team members Hope the district conduct for modified graduation ceremony by cleaning and disinfecting throughout the events.
Administrators were able to preserve the special occasion for nearly 1500 students I agree to celebrate Tory safe and sanitizing bar.
In the UK or a b M team members were among those recognized by Prince Charles and London's Mayor said the club for contributions and keeping the city's transit system, the transport for London clean and hydronic.
And as you most likely you've seen our frontline workers have been featured by numerous media outlets for critical disinfection works across airports that airlines as the aviation industry continues to respond to the pandemic.
Again. These few examples only touch on the many many instances of E. B M fulfilling our mission of making a difference.
Oh, the persist I continue to be inspired by our team members face a personal commitment implied.
These results don't happen by accident, they happen through dedication to each other operational excellence and strong client relationships.
Now what do these results mean for the full year and beyond.
As we stated Im always we feel it would be imprudent to attempt the guidance outlook at this time.
Recent events have redefined the concept of uncertainty and clients are still determining what the next few months will look like for them and we also onshore how close it will play out.
He will go through detail some of the assumptions that could be considered at this juncture, but understand information continues to come in daily and we are still in a very dynamic period, I mean more to the point as I mentioned earlier, we for top line trends improve throughout the quarter. This encouraging absolutely. However, we can't ignore.
Sure how recoveries, we openings and resurgence is we're still at different stages across industries and regions.
We're not at a point sustainable clarity yet when it comes to questions like how long the schools remain open or close how quickly will air travel start with Charlie will there be a corporate spike this fall and winter and what does that mean office re occupancy.
The diversity within our portfolio means there could be a variety of outcomes as well look at the various between industries like aviation versus technology manufacturing.
As one sector faces headwinds the others remaining Sean.
And headwinds don't necessarily mean lower profitability, our variable cost structure, especially with 60 and pro forma strip. In contrast had been a particular strength for us. So a lot remains highly alone and not necessarily linear to results <unk>.
More than ever we appreciate the diversity in our portfolio mix.
Longer term, we firmly believe heightened awareness of Csone clean spaces is here to stay we continue to invest in or enhance clean program to meet our clients' needs.
Our enhanced think program is a three step approach that delivers healthy spaces with a certified disinfection process, We haven't advisory council, consisting of internal and external leading experts in infectious disease and industrial hygiene. This group will advise us on so many different aspects of EMS business.
Going forward and provide significant value to all clients as they returned to their space to safely navigate change and deliver assurances to their employees customers and the public by demonstrating trust worthy cleaning and disinfection.
During the quarter, we formally kicked off the first wave of our enhanced clean deployment plan targeting off top clients and educating them on this unique offerings. This will be a cornerstone for sustaining some of the higher margin demand. We're currently seeing pipe commitments spanning terms of six to nine months.
Significantly higher margin profile that is reflective of the value we're providing ultimately the total penetration of work orders placed in the hands clean can elevate our legacy margin profile, regardless of operating environment.
In conjunction with the and has Queen launch we recently unveiled at targeted media campaign called safety seem to generate the med visit our IR web site or go to enhance clean back hub to watch the video.
This is the most comprehensive marketing strategy, we've developed at the firm and we couldn't be more enthusiastic in fact, I'm thrilled to share that we recently crossed over the hundred million dollar sales more Ford has thing program.
So many of our prestigious clients have begun to sign up even clients like United Health care, who invested in the healthcare space I understand infection control they want our services.
Just tremendous validation.
We were optimistic that we will continue growing our base, especially as we start to return to normalcy across our end markets and we occupancy accelerates.
And 100 million dollar market. It has clean there's not the only milestones reached at the end of August we crossed the billion dollar Mark and new sales.
As you know this is typically our annual target.
Normally we would wait till the fourth quarter for ourselves update.
I have achieved this in August drinks, such an unusual year, where so much of polymer assess pause is yet another testament of how remarkably our teams have executed we wanted to make sure we mentioned on the call.
We will continue to build an investment ourselves effort as we see the powerful insults of a well trained sales force and then in grain sales culture across the enterprise.
Additionally, we will restore projects that were put on hold as the pandemic develops.
We intend to revisit areas like all I T roadmap.
We couldn't be more pleased to have Melanie corporate Ruiz on the team as our new Chief Information officer, She will be instrumental in determining how we reengaged these projects and accelerate towards a digital future.
So despite the unpredictability of these extraordinary times, we're committed to driving the momentum we experienced during the third quarter by managing the financial operational and strategic elements within our control.
That's all results have demonstrated our service excellence remains unparalleled and we are focused on leveraging our strengths to enable organization all clients and our communities to emerge from this pandemic even stronger.
Before turning the call over to Dean for our financial results I want to comment on the social and cultural movements that are currently sweeping the country.
That's a representative of hundred 40000 team members, who work and contribute in communities all across this country. There's never been more powerful time to leave all companies core values of respect integrity and trust.
We have a responsibility to those who dedicate themselves to a b M. Every day during the quarter, we launched in endeavor that we have been developing since the beginning as the year.
He'd be EMS culture, and inclusion Council. This committee of our team members will be responsible for aligning our overarching business strategy with diversity at ATM.
We will shape or organizational priorities to continue to nurture and advance an inclusive workplace.
We also joined the other New York City headquartered businesses through the partnership for New York City to reassert, our commitment to diversity and inclusion among wallboard executive leadership and our entire workforce.
We will be supporting programs that reinforce and reflect that this is a top priority for ATM.
Fostering diversity is critical to our long term success and our ability to fulfill our vision of being the clear choice through our people.
In all respects, we're going to continue to build the stronger E. B M. Both financially and culturally.
I'll turn the call over to de now, but not before thanking him for being off financial Steward this quarter and continuing to drive excellence across the enterprise Deane.
Thanks, Scott before I review, our financial performance for the quarter I would like to acknowledge our exceptional finance organization for persisting through another quarter end. Our teams continued to deliver during these complex time and I've never been powder to be a member of this Pete.
In addition, I wanted to express what a pleasure it has been need and connect with many of you on this call over these past few mine.
Now for a quarterly results.
Revenue for the quarter were 1.4 billion, a total decrease of approximately 15% compared to last year, reflecting a full quarter of Cobank 19 decreases in most of our business segments, partially offsetting this revenue decline with record demand for work orders, which are the higher margin services.
I've been providing through the pandemic.
Work orders were particularly elevated in business and industry and technology and manufacturing.
GAAP income from continuing operation, what 56 million or 83 cents per diluted share compared to 36.5 billion or 55 cents last year.
Our current results reflect an 8.5 million favorable impact related to prior year self insurance reserves.
We continue to see improvement in claim trends and we are encouraged by the sustained impact from our risk instead be program.
On an adjusted basis income from continuing operation for the quarter increased at 50.1 million or 75 cents per diluted share compared to 40.2 million or 60 cents last year.
On a GAAP and adjusted basis, we achieved earnings growth versus last year as a result up higher margin revenue mix due to a significant increase in work orders and our ability to achieve efficiencies by aligning labor would be creep legacy services.
Additionally, as Scott referenced we implemented temporary salary reduction carload and reduce out for certain corporate staff and management.
These actions contributed 18 million in the quarter on a pretax basis or approximately 18 cents per share primarily in technical solutions in corporate and more than offset certain increases and other expenses.
This included bad debt related to client receivables, primarily and they'd be a nice segment and other expenses, including enhanced cream.
As it relates to Baghdad.
We will continue to exercise prudent as we monitor client receivables and overall credit conditions, particularly within certain sectors throughout this period.
Our overall performance during the quarter led to adjusted EBITDA of approximately 109.79 at a margin rate of 7.9% compared to 93 million or 5.6% last year.
Now turning to segment results as a reminder, these results reflect a full quarterly impact of cobot 19 compression on revenue as well as operating profit expansion due to direct and direct labor management and revenue decline. Additionally, as I previously mentioned these results also reflect.
Men specific increases in bad debt reserve and investments associated with enhance Queens.
Yeah, and I revenues were 756.9 million, but operating profit growing more than 58% to 71.6 million at a margin rate up 9.5%.
Just don't went last quarter. The decrease in revenue was driven by declines in parking and to a lesser extent facility services, partially offsetting the decline was substantially more demand for higher marketing work orders as a result, a pandemic related client need.
This enabled us to January maintain our janitorial work and created a more favorable mix during the quarter.
The locked up certain lower margin contracts at the end of last year as well like new business starts and expansion with key client further led to our profit growth for the quarter.
PNM reported revenues of 243.2 million up 7.2% versus last year, and even higher than last quarter.
Operating profit was 24.5 million at an operating margin up 10.1%.
PNM is experiencing strong resilience during the pandemic as many of our clients on the manufacturing side I provide an essential services and remain open.
It has driven and increasing work order demand, particularly within the tech logistics and industrial manufacturing end market.
It's enabled us to offset the revenue impact of any cobot related compression and profit impact of higher margin account losses from last year.
Revenue in education was 188.6 million down 26.8 million from last year, reflecting school closures. However, operating profit of 18.3 million increased considerably versus last year's 12.6 million as a result of labor related savings associated with it.
Lease revenue. This segment contains a higher degree of fixed fee and performance contracts.
They segment in particular Kinex parents bearing results dependent on the impact of covered 90.
I schools reopen revenues will expand but we will also be stopping to meet that demand. Conversely excludes roaming and hybrid state we would still be performing work and have the ability to calibrate labor accordingly.
So for this reason, we must continue to monitor our K through 12, and higher education portfolio, given the sensitivity based uncovered a resurgence patterns.
Overtime, we believe enhance clean well be an important part of our offering and our technical solutions segment can alleviate potential budget constraints for school districts as they deal with the Pandemics economic impact.
Aviation reported revenues of 116.4 million, an operating loss of 8.29 with our revenue decline of more than 55% for the quarter aviation continues to be our most impacted settlement during that pandemic as global travel declines and flight reductions continue to pervades.
Industry.
Accordingly, we have managed variable costs and expenses to match the Matt.
Our results for the quarter included an approximately 4 million sovereigns accrual you need to the UK.
Looking ahead, we believe passenger travel will remain uncertain for the foreseeable future as we outlined last quarter, we're actively pursuing a deliberate shift away from airlines and expand in our airport portfolio.
Recently, we won a contract with the Port Authority of New York, and New Jersey for Airport Shuttle bus services.
At this shift continues we will continue to manage labor and expenses acutely where possible.
Through these strategies our goal is to improve by the fourth quarter toward the breakeven position.
Finally onto the technical solutions.
Technical solutions reported revenues of 119.2 million down from last year's 165.79. This decline reflects our limited side access, which impeded our ability to try and are still strong backlog of approximately 170 million, particularly during the early part of the quarter.
Operating profit up 13.2 million enabled us to support expenses and expand operating margins to 11.1% compared to 10.8% last year.
Over the medium to long term, we believe our technical solution business, well see more opportunities in the market for budgeting solutions as municipality and education facilities seek to overcome covered 90.
We continue to demonstrate our disciplined approach to manage our working capital through our internal liquidity offers which we establish last quarter. As a result, we achieved cash flow from operations out of 130 million during the quarter and free cash flow of 121 nine.
This includes 42 million in deferred U.S. payroll taxes as a result of the care that which will be doing 2021 in 2020 to.
Due to our strong cash position, we ended the quarter with total debt, including standby letters of credit of 916 million and a bank adjusted leverage ratio of 2.2 times.
This leverage ratio reflects the substantial pay down of our precautionary revolver borrowings and much. Additionally, we ended the quarter with the cash and cash equivalent of approximately 239 highlighted in our ample liquidity manage and drive our business geron, even though most uncertain time.
As we continue to navigate the current operating environment, we need to maintain our prudent approach to liquidity and capital allocation as we monitor client demand.
We will prioritize organic endeavor, such as our investment and enhance clean and our longstanding dividend policy. We will of course be opportunistic should we have greater visibility on what the future whos.
During the quarter, we paid our 217th consecutive quarterly cash dividend for a total distribution of approximately 12.39 and I stated in our earnings release I'm pleased to share that the board of directors approved our 218 consecutive quarterly cash dividend.
Now onto guidance.
As we stated in our press release it remains difficult to provide an accurate range given the variability of outcomes that can occur in this environment. However, I'd like to provide some additional content for the fourth quarter based on our current view of the business.
Given the month to month top line improvement, we saw during Q3 and new business. When we believe we can continue to offset some of the cobot compression as a result, we could see flat to modest sequential improvement inorganic revenue for the fourth quarter.
Additionally, based on what we saw during the quarter, we do not anticipate a material slowdown in our higher margin work and labor management will also be an ongoing area of focus dependent on demand as Scott describe dependent on the level of work, we perform live work and modular up and down leading to varying degrees of library.
Currency.
The fourth quarter will have one less working days, which could lead to approximately 6 million in lower labor expense.
As a result of our positive quarterly performance and our ample liquidity position the temporary staff and management costs. I described earlier concluded and therefore under the current circumstances well not.
Materially impact the fourth quarter.
In addition to these operationally driven elements I also want to discuss our assumptions for interest expense capital expenditures and income taxes for the remainder of the air and potentially next year as well.
First on interests.
Based on the aforementioned operating assumptions and our current cash position, we do not anticipate a significant increase in borrowings for the fourth quarter as such we believe interest expense will be approximately 10 million for the quarter.
Now as I mentioned earlier, we plan to continue managing working capital and liquidity conservatively Sientra. We are prepared if conditions rapidly changing the near term.
Therefore, we do not anticipate a material increase in capital expenditures to occur during the fourth quarter.
As Scott discussed we will be reviewing our strategic priorities over the next few months to determine what traditional investment we will reengage as we adjust to our new norm.
We are also assuming that any government related benefits in the UK and U.S. They tried the care that will not recur there should be considered when ascertain in free cash flow for next year. Obviously, we will continue to drive higher free cash flow conversion through the disciplines, we have sharpened over the past few months.
Lastly related to taxes I want it to remind everyone that given the disruption to traditional hiring practices due to the pandemic. We continue to believe watsi would be less than our original pre cobot expectation of 79 and this could continue into next year as well.
In conclusion, while there are clear number there about that we must consider during these unprecedented times.
Our results on this quarter, how exceptionally our teams have executed this foundation had threaten our ability to navigate towards a profitable future operator, we're now ready for questions.
Thank you we will now be conducting a question and answer session.
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Our first question has come from the line to Tim Mulrooney of William Blair. Please proceed with your question.
Scott Dan Good morning, Congrats on a great quarter.
Hey, thanks, so much.
Thank you Kim.
Yeah. So.
A couple of questions here first of all your consolidated EBITDA margin expanded by 230 basis points in the third quarter or can you talk a little bit about how much of that was from higher margin enhance clean work versus labor efficiencies versus furloughs, and then as I'm thinking about these three buckets can you share with us what that implies from a broader.
Perspective, when we're thinking about your longer term EBITDA target margin range of 5.5% to 6%.
Thanks, Tim as you would expect our 230 basis point margin expansion had puts and takes first I would like to describe the positive items that drove on a gross basis 320 basis points.
During the quarter as we've described we had temporary salary furlough and work with our reduction that had an impact of 130 basis point.
Also included in that 320 basis point gross where they impact of labor efficiencies as we manage the cover covered revenue compression the significant higher demand that we had from work order.
Demand and they were all sort of certain fixed overhead cost that we were unable to leverage on during the quarter as you would expect.
Offsetting this growth 300 basis 320 basis points was 100 basis points related to bad debt as we continued to monitor our credit whether or not so for certain clients and also our investment and enhance clean.
Yeah, and you know what I would ask him to this like when you kind of think of of even the medium term now and what this means for us.
We talked in the past about kind of the right. So for US. So you know we would say like the Golden Zone was 5.5% to 6% EBITDA margin and I think what this does workovers doing is accelerating that for us and you know, where we're really enthusiastic about where we're heading and theirs.
This has been certainly disciplines that have happened within our organization through covert.
In terms of Esso piece, you know standard operating practices.
We've talked though over the last few years with 2020 vision about how difficult it is too and green like really foundational changes in terms of getting 300 branch offices to adopt standard operating practices well we've done it.
Coated and we talked a little bit about this last quarter about our pods or our task force. It was set up to manage collections payables labor and as that rigor has really resonated with our employees from that really seeing the benefit of it. So we're going to continue with that muscle strength and that.
That's really going to in order to our benefit down the road and then with enhanced clean you know there is gonna be embedded enhance clean you know going forward I mean, I don't think anybody can imagine going back to an office and talking to the landlord of the office building or to your head of facilities and.
And them, saying Oh, you know we're back to normal there's no more virus protection right. So we think I think that's going to.
Be completely embedded going forward and then even as we staff. The buildings, we think we're going to find efficiencies as for place expand so we're truly optimistic about our ability to kind of maintain the you know margins in that five gonna have to 6% range from the Big question will be you know do.
We break out past that 6% and you know from our perspective, it's just too early right now to determine that.
Okay.
Hi, good color. Thank you second on this subject of enhance clean in your press release.
He kind of highlighted hey, we had a lot of higher margin work in the quarter. So my my question has and now I'm kind of thinking about your be and I understand I'm segment.
How much of that higher margin work was emergency work and how much do you think is kind of here to stay in other words, how much of it do you think was one time.
Have work versus the longer tail enhance clean type work.
Yeah, you know you may not like this so but I have to tell you. It's just too early to tell right. I think you generally speaking you know March was the months, which was you know part of Q2, where there was a lot of reactive work right I think it's I think but this quarter was more program.
In the hope that it would free safety and people wanting to get back I think the real test first Tim is how much of this will be embedded into the future.
And you know for us to hit the hundred million sales, Mark and enhance cleaner remember and hence clean is different at workforce enhance clean means I want to put a program in place and my property for six to nine months right. That's kind of been what it's been averaging and so we think it's the tip of the iceberg you know as.
Operationally do I want to see that double next year, you know I do.
So I think I think the big thing is that virus protection is here to say and whether you're an educational facility, whether you're at airport or you're an office building you can't move into the future without a program that's going to make people feel safe and so so we're optimistic I think it's a little.
Earlier I believe by next quarter, we'll have a probably a better window into how much of this we've gotten embedded into kind of that six to nine month range of enhance claim.
Okay, Great No I've got that was it that was great. After I've I think I understand how it laid out now.
More of it.
More enhance clean type work this quarter than last quarter. So transitioning some of that short emergency tag work until the longer term I am higher margin clients and has claimed that makes sense, if I could see and one more one more Scott because I really wanted to get your answer to the or at least here your thoughts on.
So.
Yeah, I think the biggest issue with investors right now is trying to gauge how many you're being I customers will remain customers. If work from home becomes a more permanent fixture of our society I I know, it's a debate that everyone. Having right now we recently heard Netflix as CEO said he wants everyone back to work as soon as a vaccine has discovered but others.
Maybe thinking differently. How are you thinking about this dynamic right now and how it might ultimately impact your business. Thank you, yes, so I I am not wishy washy on this I have very strong opinions and I used to be a facility manager I I wrap this list of Goldman Sachs, The Lehman brothers and.
Managed facilities for CBR East, So I have a little bit of background on it and I will tell you I am so optimistic about the future of office.
You start looking now online that's all this the employee surveys that have circulating around people want to get back to work people people recognize that collaboration this important part of their work experience and frankly their lives right and then you know in my CEO networks from all the different C.
Those I'm talking to across the country. You know, we're all starting to talk about the culture that makes each of our company, so special and and how important is to develop employees.
People, we want people back people want to come back so again and I'm not sure. How you create a strong company with the distributed management team. It just it doesn't make sense to me and I think you combine that with the fact that even if there's a shift let's just say, there's a 25% system work from home which are <unk>.
I don't believe will happen, but even if you do that when you start just a single floor plates. We've heard we've heard tenants talk about having to take 50% more space to get to where they want to do you know where they ultimately want to get to from distancing I can tell you I had the conversations with our internal had a real estate yesterday.
About whether or not we take some of our sub tenant space and office. So that we can create distancing. So I I'm Super optimistic about office space and well I'll give you exit you know some fun facts you know in 2010.
Average square foot per person in an office building was 225 square feet per person, it's migrated down to 150 square feet per person and 2020, I think that's going to start heading up because of social distancing and just as a frame of reference without hundred 50 square feet 1990, It was 420 fives.
<unk> per person. So there is room here to grow so I think this could this could end up surprising people and there could end up being expansions you know minimally neutral for US you know it works for us and and so you know and then you think about who's going to be doing these small.
Occasions, who's going to be bringing people back it's really the class a tenants the class a office buildings that have better air systems that investment in technology and have more robust cleaning specs because of their financial wherewithal, that's abiam's client base, So oh I am on the side or not.
Neutral I am so optimistic about the future of office space and I know I, but if I wasn't the minority I think it's it's heading in the direction, where where my thought processes. So I hope that gives you some clarity, but I I really feel like what I'm, saying is grounded in fact and also.
So yeah from the effectiveness CEO running 140000 person company and wants to keep being coefficient and accelerator.
Yeah. So it makes sense to me Scott I'm really glad I asked thanks for your perspective, I'll I'll hop back in the Q.
Thanks, Tim.
[noise]. Thank you. Our next question is something from the line for Andrew Wittmann of Baird. Please proceed with your question.
Great. Thanks, and good morning, and thank you for taking my questions.
Maybe just a couple here I guess I wanted to start with some of the new sales. So Scott you mentioned.
In your script, you said your billion dollars here.
This quarter ahead of plan, usually like a billion by the year end, but things are doing well see you gave us a third quarter uptake here can you just talk just maybe I guess give some context on this one how much of that.
It is recurring work that's a contractual recurring work and what I'd call you are using annuity businesses versus work. That's in your technical solutions, which would be excuse me [laughter] excuse me.
Little bit more project focus.
So I just given that we're talking are asking about technical solutions you gave a backlog number for the first time that was just wondering how that $170 million backlog that you disclosed compares to the backlog a year ago at this time.
Yes so.
The majority of ourselves has been on the on the annuity business would have the ability of dollars, but by far the majority.
The Ats business, just started picking up towards the back end of quarter.
We just been seeing great demand.
Would it really cruise Andy is that if you make this investment into sales culture. It really pays off and you know we furloughed you know some of our salespeople and we put them on reduced hours. We did all the things that we thought was the responsible things to be doing.
In light of the uncertainty at the start of this pandemic and even with that we sold because you have to remember that or sales don't just come from salespeople. They come from our operators in the field talking with clients and expanding footprint. So.
I, just I am I could tell you candidly and blown away.
You know, we would hit a billion dollars themselves in August in this year, where so much of commerce not only has commerce.
But you know the focus hasn't been that from from facility managers from landlords, that's and that's not necessarily been focused the focus has been getting people back to to hit this mark. There's just I mean, just speaks volumes to what's going on at a b M. I just couldn't be more kind of that I think that's one of the stand out.
Statistics for this quarters to to put on a billion dollars in itself in August than this and this crazy here I mean, it has to be a standout point.
Andy I would add to what Scott said that you know in the past we've talked about a healthy backlog being in between 150 to 200 million and I also wanted to remind you that last year. This time, we had to really large deals that really close that extended that healthy range about so this year.
Lightly down however, you know with with a pandemic and the stoppage in new sales I really don't think it's a comparability.
Equal comparability, you'll ever yeah, when you compare where we are today versus last year.
That's helpful context, and those and I should have asked about your retention rate Scott in your annuity businesses sounds like the the ads are trending very strongly.
During Kobe <unk> it seems hard to believe that there'd be a lot of churn out of the portfolio, but could you just comment on the retention levels that you have seen in the last three months.
Yeah, we will be really transparent and tell you we're not taking credit for it yeah.
Because there hasn't been a lot of activity right. It's all been about you know kind of status of operations, So, but I will say, what we've done through coal that in terms of our enhanced clean program and being there for clients and you know small thing and you but.
Or access to supply chain, because you you know as well as anybody would dealing with smaller competitors in each market and they just did not have the same access to supply chain.
I think I mentioned on last call, we put in order for like $50 million worth of electrostatic sprayers, which which is the equipment that disburses. The the disinfection chemicals, we put in order for $50 million of electric sack sprayers and chemicals, and we had access to supply chain, we did not that our customers down so.
So when when I think of retention I think the big test will be next year. You know did we did we rise above did we create such a standout with client set you know again or that are bigger clients say like you know.
With a b M. One thing we get Shorty right, we get surety because they have the access they have the scale and interest having an advisory Council I can't tell you how many of our clients will call US now and say look I read into C.D.C. I read in the second World Health organization can you help me understand that.
And when you have your own advisory panel, which we cannot think of another small competitor that has one of these I mean I just feel like you know.
We've always talked about scale and you know to scale really matter in our business because it's such a local business I think the one thing that this pandemic is proved out is that in what we do scale matters, just if nothing else from at resource standpoint between supply chain and having an advisory.
Well so.
Yes.
My last question for now is on the education.
Segment here I guess in the quarter, it's mostly the summer season in your third quarter, well, it's kind of half half in session Hot summer and so I.
I don't I'm gonna be careful bought extrapolating the decline in revenues I guess, you're down about 12% year over year in the quarter into the into the you know the the fall school season, but I'm just curious as to what you're seeing in terms of the reopening performance. So far recognizing that anything can change with new covert cases, so at that point.
Lost it anyway, but.
A lot of schools are trying to started at least partially inception, what's the what's the current.
Outlook as it stands today about the revenue performance and does the revenue performance that you're seeing you know today have any implications on on what your margins for the second can be.
Yeah, you know that's a good question and just to give you kind of frame of reference so right now within our portfolio.
You know 50% of its K through 12 that 50% higher Ed.
We would say across the board is 80, so that with the E band portfolio.
85% of our of our business.
Is.
Either hybrid or in person and 15% as online only right and you know.
Where we're studying and literally every day by day, we're studying the trends of what's happening with schools of whether or not there continuing audit in that either hybrid or in person, where they are gravitating to online.
But you know we've been relatively stable at this rate in terms of revenues because you know you know the analogy a uses like at the University of Miami, which has a magnificent campus lush should we do the landscaping there we take care of the health care buildings, there, they're all of the student facilities like.
Even if they go 100% online, they're not going to padlock right. The campus right you still have to take care of the facilities and a lot of the on wind stuff is happening is happening where the teachers are going inside the classroom. So you have to disinfect. So I feel like there is gonna be some stability there at least through.
The fourth quarter. The real question is is gonna be when you look at.
Or the school 21, what is going to happen for that next semester. The spring semester that starts I guess in January right. We will they will they have lessons learned from from this semester as to how they want to approach and that could create some variability for us but that that.
Segment, it's been pretty resilient I mean to be 12% down in revenue given the fact that most of this quarter. The schools were actually closed right norm was attending yeah. We feel like we feel really good about that segment.
Okay, great. Thank you.
Sure.
Thank you. Our next question it's come from the line of Sean Eastland with Keybanc capital markets. Please proceed with your question.
Hi, Tim compliments on another great quarter.
Thank you.
I just wanted to start on Oh.
And just.
You know any puts and takes you can walk us through as we think about next year, you know tough comps easy comps you know I think in particular, it's clear that you guys have done a terrific job around the labor labor management piece on the downswing.
But you know as we think about a scenario where are the operating environments returning to some normalcy, we're getting some recovery in the topline.
You know how to think about your ability to manage labor on the upswing relative to the downswing.
And you know at what point, we started to need to fall back some of the back office investment programs you guys had talked about over the past several quarters, you know any puts and takes around next year in the context of.
Those items will be helpful.
Sure I mean, there's a lot to unpack there that question right in there.
Because because it's it's complicated right, but if you think about a 21, our comps they're going to be impossible right. Because Q1 is had no quoted Q2 had just more but it was a crazy March right because everyone was trying to figure out that can keep people it.
Because we didn't really understand the pandemic then and it was all about you know I'm a heightened the mounted disinfection an oversized work orders. So you know Q2 was a little funky and then Q3 and Q4 will have full covance. So you know it's gonna be hard to do kind of quarterly comps for next year, but.
I do think theres, an opportunity for us as as.
Tenants as employee start returning and we start building back our staff I think we will get efficiencies you always get efficiencies when you get a chance to rebuild in our business, we caught resection into building because people have sections. That's what they call like you know in an office building in the different floors. You know so that's the term of art.
As we resection the buildings and grow I think will create some really good labor efficiencies there on the way up and then you know another really important piece of the Sean is is the labor situation you know for the last two years, we've been dealing with you know unemployment at 3% and that's been impossible to get labor and.
You know we've told you guys anecdotal stories about how you need to get 10 people through the interview process to find one on you know as a janitor and you know with with unemployment wherever it is now you know double digit unemployment I think what's going to happen is the supply side.
We'll be really good for us in terms of trying to find people and they think you know unfortunately for kind of the economy. It really hit the hardest on the people that want to come work for a b M. Right kind of you know the restaurant segment. Some of the retail segment. So I think it's going to be operates.
Tunis sticks for US and then and then the last piece of it is you know not only supply, but actually the cost of labor and we don't see that being a tailwind. We don't think that labor costs are going to go down because of the unemployment. We think battle kind of stay where we are but I think it's going to be a really good tailwind for us in terms of.
The supply side and you know Dean I don't know if you have anything you want to share on that but we're we're feeling pretty good about that.
Thanks Scott.
As a reminder to everyone in the fourth quarter, we will have one less working day and as we look into fiscal year 21 on overall basis. We will also have one more day, but they distribution of that through the quarters will be as follows in Q1 will have one less day.
Thank you will have one more day and then in Q3, one less day and I also wanted to point out that we all kinda read about how states have deficiencies and so we expect an increasing this through E rate for next year, not quite sure exactly what that rate or be yet and also we will look to have conversations with our clients.
As we see an uptick in that rate, but more to common that on that our year end discussion.
It really helpful responses and there isn't a similar vein around free cash flow I mean, clearly you know really excellent job done.
Getting cash in the door and fiscal 20, <unk> you know.
I'd call out to 44 million pairs that tax deferral, I guess how for that.
Becomes a headwind for.
Fiscal 21, but you know any other sort of puts and takes around free cash flow generation. We should think about for fiscal 2001 relative to fiscal 20.
Yeah, Shaun I'll start off with a few comments there no as Scott mentioned, we've talked about the pot the pod structures that we established and a pandemic and we'll continue to utilize those pod structures to have a disciplined approach utilize in standard operating procedures to collect cash.
We as you mentioned, we'll also continue to get the deferral of U.S. payroll taxes during the quarter and would approximate equally about what we had in this quarter and then as Scott also mentioned too as we look to align our strategic priorities over the next few meant we wouldn't expect a material change and capital expenditures.
From Q3.
Yeah, and and before we left this one go I have more of a or an emotional response. This because I'm. So proud of what this firm has accomplished tough historic free cash flow and this time, where again commerce. The shutdown you know you know.
Sure people, you know where companies around the country are struggling with you know maybe paying bills right. You. We know we read right and for our teams <unk>.
He so vigilant about collecting cash and being on it.
And just the rigor involved.
It's just incredible and I talk to other companies in our space and even outside of our space in the first thing they talk about as liquidity and cash flow and how we have to stay on it and it's almost embarrassing about how well we're doing and so I am just I I'm, so proud of Oh what.
We've done and how how seriously our people have taken the concept of collecting cash and again you know Dean mentioned that this is this is a month muscle strength, we are not going to let go I am so enthusiastic about what we've done them, where we're going on cash and add another amazed.
Hi life of this quarter.
All right I'll leave it there thanks very much for the time.
Right.
Thank you. Our next question, it's come from a line of Marc Riddick.
So don't and company. Please proceed with your questions.
Hi, good morning, everyone.
Or a wanted to touch.
Well, what did you touched on the and hence clean give a sense of a client receptivity is wonder if you could spend a little bit of time on on sort of the maybe the types of businesses or particular areas or what have you that were maybe most receptive to the to the service offerings as well as.
Maybe if you could touch a little bit on the you mentioned as far as the six to nine month timeframe. How should we think about of those future renewals or extensions how should we think about how that might then proceed for client who is who signed up.
Yes, so weve seen receptivity across the board on enhance clean because when you really strip of backups like are you going to do disinfection work to protect against protect against Cobot. So you couldn't imagine right anyone or any any landlord or any facility managers, saying, we're not going to do anything so ever.
Ones doing and it's it's a question between.
And then they said this a little earlier, it's a question between do I want to think about all the temporary basis like you know I'm going to give you a work order for a month or do I want to make us more programatic and the programmatic stuff is they enhance claims six to nine months and I think that's the probably for now a proper time horizon two.
So here's what you should think about work order very reactive.
Let's think about this on the temporary basis enhance clean.
Bridge to a vaccine rich to getting people back I want to put a program in place over the next six to nine months to start thinking about getting people back and then ultimately when we're talking two or three years from now we probably won't be talking about has clean anymore. We're gonna have specifications.
So when contracts or did that are going to incorporate regular disinfection, which as you know as a higher margin service for us So gravitate from calling it has clean to say Oh. The specification of the future is going to include doing the things that we used to doing a bathroom into pantry in general office space. So.
Oh and the reason, it's still kind of in its infancy for US I mean 100 loan spectacular right out of the box for a quarter, but you know not every facility manager understands the planful re occupancy yet so you.
As as facility matches as landlord start getting a sense of the patterns for the occupancy that's when they start saying all right I'm going to transition from doing this all the work order to putting this into enhance clean. So that's why we think enhance clean is going to accelerate through 2021.
Because again, you're going to have more of a handle we hope that labor day and with this aspirationally trigger to start getting people back to the office. So we may see when we talk to you in the fourth quarter, a better handle on enhance clean and whats happened, but then you know people have also.
Talked about January being the next triggered when people coming back to the office. So maybe you know not until fiscal year 21 for us to get a better handle on it but I.
I think mark on the highest level I don't think any of us can imagine an airport and educational facility or office building, having ownership, saying, we're not doing enhance clean. It's just it just doesn't sound rational and it's because you have to give.
Your employees and your tenants are feeling of safety. This is the only way to do it, especially with ours because you get a certification you literally get that sticker on the door, but census. This this facility is enhanced thing certified and if you think about schools. You know parents are going to be like I don't want to spend my kids back unless I'm guaranteed.
Now that you're doing the right disinfection. So we're we're super optimistic about the future of enhanced coal.
Okay, great that that's very helpful. And then I was wondering if you could I wanted to circle back to to education for a moment and get a sense of the.
I think you mentioned the of UBS this a bit but just wanted to get a sense of maybe the differences of of activity around the you touched on the K 12 versus higher Ed I wanted to get a sense of.
Our it seems as though they wouldn't be deeper pockets in the higher Ed area.
Maybe be more active on ER implementing something like this I was wondering if you could sort of touch on or maybe what that the funding environment that you're seeing.
And whether or not that could sort of have an impact on the timing of of when these things are are brought on board.
Yeah, I think you know injure within our industry group the education I think it's still a little early because on the K through 12 side. We've seen so much in terms of budget cuts right. You know you read about in the Paypal, Dave How school budgets are being cut so.
Again lets thing right at school budgets are cut can you really cut cleaning is that you know that's the one area that you know is gonna be sacrosanct right for for superintendents right and then the same thing with higher Ed you know how could you cut cleaning that's like the one area, though you know you may want to.
Foodservice you may want to cut you know there's so many other places to look at where you're going to make cuts or other than cleaning right.
But you know also think about our technical solution space right you know our target market is education.
You know we are seeing so much activity, especially on the K through 12 side right now with superintendents, calling and that's actually reaching out to say look I know you having a budget deficit, we can come in and do a retrofit of your electrical mechanical systems typically we find 30%.
Energy savings that's enough to save teacher jobs to save after school programs. So.
The budget cuts interestingly enough or going to be a big tailwind for our technical solutions businesses, they find ways to save money and save again teachers jobs, and they and and those budget cuts for our industry Group education again, I, just will say like I just cant.
I imagine a world where they go back to the two you know the P.T. a with the school board and say, we're making cuts to our cleaning program. It's just it's just I just can't see it.
I appreciate it thank you very much.
Sure.
Thank you we have time for one more question.
Our next question is comfortably line of David Silver C.L. King. Please proceed with your question.
Yeah, Hi, thanks.
Well just a couple of areas I'm going to ask you may be to go back on but.
I Didnt have a question about the.
Marketing effort or the go to market strategy for enhanced the Queen.
And you know just me personally I've seen the advertising online and in industrial.
Marketing.
Could you you touched on maybe the spend at one point in your remarks for this program is there anyway that you could characterize either qualitatively or quantitatively.
Is the rollout and the marketing for the enhance clean services it significantly different than other marketing programs that you've done.
Either you know in the vehicles that you used to disseminate the advertising or the group's you're reaching out on and then just qualitatively. If you could talk about the split between you know new customers customers. She didnt do business with that are responding to enhance clean versus maybe cross selling to your existing.
Got it pays thank you.
Sure sure. So this is nothing like anything we've ever done at the company in terms of or a true like product rollout service rollout.
We've never been on social media. The way we are now so where we've hired you know a proper advertising agency and PR firms like we are dealing with the right way, we see so much opportunity and enhance clean and I'll give you a point of reference which is so interesting so.
Tomorrow, we're doing a webinars being a part of the advertising that you've seen a on the social channels is that we're doing a webinar with our expert panel to tell clients how to get back safely right and we view the webinars as something that could be a good resource for clients, but more importantly.
It's part of advertising right. It's part of how you position your brand as a knowledgeable Brad can do a webinars and we said you know what even if we get 50 people. It would be mission accomplished because it's really about seeing the advertising less about the webinars itself.
We are going to have so we track obviously the registration and again at the outset said, if we can get 50 people 50 important people that would be great. We're close to a thousand people that have registered for this webinars already which is blowing us away. So we were tracking metrics were tracking hits and.
Politically that go to our web site for new customers and and for exhibit even existing customers are are tracking it through so I think it's too early to give you the split now with new customer to existing customer.
We'll have definitely more insight in Q4 once the campaign has gone through one cycle one quarter, but.
This is like nothing we've ever done and you know what we're really hoping is that.
Taking this approach taking you know.
Really leveraging social channels, it's going to be game changing for us and really changed the demand side, but it's it's too early to tell but again you know two to go back to we've never done anything like this before were so enthusiastic about it.
Okay. Thanks for that.
The second question I apologize I'll try to keep it together, but I'm kind of pulling some data points from some other areas and the question might be you know where you see the company, let's say three years from now so as you know safely after the pandemic induced you know shifts and uncertain.
He's a past, but you mentioned and I have the figure in my head 140000 employees, you've mentioned, a particular margin target EBITDA margin target that's above your historical level, but below you know, maybe where you're trending shorter term.
So so this is a question of whether you see the company evolving towards one where you're going to pursue very aggressive topline growth.
Or maybe on Alternatively, one where you aggressively high grade and targeted your efforts in your labor and other resources and kind of drive you know the operating margin line and maybe returns on capital. So three years from now will you have more than 100.
40000 employees, another five and a half for 6% margin or will you have fewer Ana and a higher margin then and what the current target was thank you.
Yeah, No you know and it is it really is talk to speculate lumps, but I would six but I would suspect we'd be growing on all levels you know revenue.
I think we'll be calling on margin, we are gonna be making investments in our I T infrastructure and digital I think this is going to give us an opportunity to kind of leap frog our competition on client facing technology and analytics and you know again, we learn through.
Oh right how are our scale matters like I said it before on supply chain and an advisory Council and now we're recognizing if we could put technology in place digital technology to connect with our customers to get stickier, we think that's going to really drive some incredible value specialty is.
Internet of things starts taking shape so.
Youre going to stick with our operational proficiency, that's going to be Super Super important for us.
We're going to stick with the rigor and discipline around standard operating practices like cash collections, we are going to invest in this company and salespeople and an R.I.T. platform.
David and David This is being just wanted to add on into Scott No. It will continue to be focused on our capital allocation strategy, which has historically been organic investment.
Looking at our or maintaining our longstanding dividend policy and being opportunistic and thoughtful about M&A in share buyback. So as we look into the into three year parity looking at our capital allocation Holistically will continue to do that.
Yes, great great Port.
Okay. Thanks, very much I appreciate it.
Thank you.
Thank you that does and the question answer session I will now hand, the call back over to management for any closing remarks.
Just wanted to thank everyone for their time and again hopefully you've got the tenor of this call. We're super enthusiastic about where this firmness heading and you know on value proposition through this pandemic and our brand the elevation I mean, I just can't say enough about it.
And so the way. This team has performed I mean, it's across all platforms, whether it's or or maintaining the resiliency of our revenue profit margins are our free cash flow, our new sales enhance clean initiatives I mean, we just feel like we're fire.
All cylinders and management teams, just really risen up I'm, just so impressed with what what would our team is doing and so excited so you know more to come in Q4, and the we're heading into in a lot of parts of the country to the colder weather, so you're gonna be more into.
Wars don't let your car doubts stay safe and healthy practice, social distancing Super Super important, but appreciate your patience on this call it and going through with us and again.
Have a great fall everybody. Thank you so much.
Thank you that does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.