Q4 2020 ABM Industries Inc Earnings Call
[music].
Greetings welcome to ATM industries.
Fourth quarter 2020 earnings Scott.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to Suzy Kim Vice President of Investor Relations and Treasurer. Thank you you may begin.
Thank you all for joining us this morning with US today are Scott Salmirs, our President and Chief Executive Officer, and Earl Ellis, Our New Executive Vice President and Chief Financial Officer.
We issued our press release yesterday afternoon, announcing our fourth quarter and fiscal 2020 financial results a copy of this release and an accompanying slide presentation can be found on our corporate website.
Before we begin I would like to remind you that our calling presentation today contain predictions estimates and other forward looking statements. Our use of the word estimate expect and similar expressions are intended to identify these statements.
These statements represent our current judgment of what the future holds while we believe them to be reasonable. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation as well as in our filings with the FTC.
On the course of this call certain non-GAAP financial information will be presented on.
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.
Before we begin I'd like to remind everyone that Earl join less than a month ago. After the fiscal year end and although quickly acclimating himself to the business.
Should you have any questions. After today's call. Please follow up with Investor Relations Accordingly.
I would now like to turn the call over to Scott.
Thanks, Susie and good morning, everyone. Thank you for joining us on todays call and we hope you on your family's from a safe and healthy.
It's hard to believe we're already at the close of 2020 uncovering on fourth quarter results on the on.
Other items were about to discuss only the second full quarter of cold in my teens impact on on financials.
For Q4, we reported revenues of approximately $1.5 billion for the quarter. This represents a 9.9 per cent declined versus last year and a considerable sequential improvement when comparing to our more than 15% decline in Q3.
Once again, our diversified client base demonstrates the resilience of our business.
Our technology and manufacturing industry group grew almost 7% and business and industry. There's what was education posted revenue results that were only slightly down.
As one would expect our aviation segment drove the majority of our organic decline versus last year.
Technical solutions also saw a large revenue decline and continue to see challenges in flight access which affect the churn rates positively the backlog of committed work in technical solutions is healthy and the pipeline for 21 is robust. So all things considered it was a good revenue story for the quarter.
From a profit perspective.
There was sustained demand for higher margin Coburn related work orders and on hands clean program, particularly in business and industry and technology manufacturing are.
Our financial performance was protected by our variable labor model and our ability to dynamically adjust staffing based on them out.
And we continue to see profit arbitrage by efficiently managing labor as we scaled unconsolidated staff during the quarter.
This has been one of the key contributors of our financial performance through the pandemic as.
As a result of all these factors we grew earnings on both a GAAP and adjusted basis versus last year.
Income from continuing operations grew to $53.1 million or 78 cents per share on.
On an adjusted basis, we delivered $46.7 million or 69 cents per share.
Adjusted EBITDA margin rose to 6.2% versus 5.6% last year.
Even more compelling these results incorporate a non cash reserve we took for an entertainment related project within our technical solutions segment.
This was a unique circumstances on client and not a reflection of our broader project portfolio within technical solutions.
Just had a 120 basis point impact on our adjusted EBITDA margin as well as our earnings so even when including the strength of the quarter after quarter. Our performance continues to demonstrate consistent strength and execution.
In so many ways 2020 will stand out as a pivotal year for EBITDA.
The pandemic has created a shift on the public mindset as professional class a janitorial services are now unquestionably viewed as an essential and non discretionary services.
So what are you on us must demonstrate that they are providing clean healthy and safe spaces that are occupants can trust.
Not only will this be required but it will be a reflection of their branch.
Our response with our enhanced clean service gives our clients. The peace of mind that comes with study protocols on practices that keep facility sales and this offering creates even more distance between us and our competitors.
As a company that's been around from more than 110 years he'd be has withstood and grown during many global events with 2020 test what else in historic ways and I've never been more inspired by our organization.
I want to take a moment to recap some of our team's accomplishments more specifically.
Since March we have been on the front line battling a pandemic that has disrupted nearly every industry volume.
While navigating a constantly evolving environment as we learn more about the virus, we prioritize the health and safety on employees and our clients above all and when it came to P. P and our global supply chain, our procurement team did not disappoint when others in our space did as they couldn't come.
Dominate surging demand.
Also we partnered with large cleaning contractors to form the cleaning coalition of America to represent our industry, which played a critical role on restoring our country.
Coalition plants depressed for a vaccine priority for our industry and developed a focused campaign on awareness around what differentiates best in class providers.
D.B.M., we were particularly proud of how we proactively developed our own expert back certified programs to answer our clients needs with disinfection protocols, such as specialized training and signage electrostatic sprang up disinfectant and air filtration.
All of this is being supported by one of the most comprehensive marketing campaigns, we average developed.
Which shouldn't be minimized is the fact that we mobilized multiple cross functional task forces across all the critical areas of our business that elevated our adeptness and will endure long past the pandemic.
These task forces led to improved operating procedures for labor management sales and financial activities.
As an example or approach to collections, let us to generate more than $450 million in cash flow from operations and $420 million from free cash flow both records for the from there.
Translates to nearly $1 billion of liquidity, including $400 million per cash, which is an extremely powerful position to be in during still uncertain times.
As we move into 2021, our intention is to capitalize on the momentum and shift from defense to offense.
Beginning with our executive team, we recently announced several appointments to further align our internal organizational structure to our business strategies first I'm pleased to introduce our new CFO or allow us on this morning's call Earl is a seasoned finance executive joining us from best buy a leading fortune 500.
A provider of consumer technology products and services with 125000 employees from North America.
We're all held several executive positions across finance and most recently he was responsible for leading enterprise capital project planning cost transformation on procurement.
As well as supporting digital and technology and global real estate.
During his tenure at best buy well also spearheaded several strategic initiatives targeting labor and logistics group.
Total join less than three weeks ago, but just quickly immersing himself in our business.
I'm also excited that Renee Jacobson has been promoted to chief operating officer and will lead all of our clients facing industry groups since.
Since joining a b M. Eight years ago, Rene has consistently driven on operational performance and service excellence and his leadership was unquestionably instrumental in our successful navigation of 2020.
A COO he will providing strategic guidance for our operations and drive our financial results across all of our platforms.
Good day, we'll also continue to work with Sean Mahoney, our new President book sales and marketing.
So insurance arrive on EBITDA in 2017, we broke sales records each succeeding year and we achieved another record and 2020 with new sales at $1.2 billion, an amazing accomplishment for any year, but especially in a year when so much of the economy was caused.
Both Renee and Sean's leadership, our operations from sales teams proves to be a powerful combination and 2020 and will undoubtedly exceed our expectations on 2021.
Speaking of 2021 later in the year, we will be sharing our refreshed business strategy, which builds on the positive changes and the acceleration we saw with our 2020 vision.
At that time, we will be reviewing our technology plan and path towards a digital platform for our employees on clients. In fact, just as I discussed last quarter. Some of our near term investments or Reengagement survive. A few projects that were put on hold due to the pandemic like our ERP system and data management.
Roadmap on.
Other investments will be new given the opportunities that arose as a result of the pandemic such as enhanced clean and the associated build on that program.
On that front from a payback standpoint, we concluded the year with over $300 million in sales for our enhanced clean program and Colgate related activities and we have some really exciting sales and marketing plans lined up over the next few months to continue accelerating and differentiating ourselves from the marketplace.
Of course, we will be responsible on our investment approach given how smoothed. The operating environment is we recognize that we must plan for the long term, while also keeping on maniacal focus on what the near term they bring.
There's no doubt that conditions remain on certain particularly as we operate over the winter months coated cases continue to rise throughout the country and I'm sure you've seen or experienced various stages of closures in your own communities.
Unfortunately, the operating environment isn't any more predictable than it was last quarter cash.
Clients are still generally matching for the shorter term as they react to resurgence is which caused occupancy volatility and they don't yet have the ability to predict when the workforce on March will return while vaccine news is encouraging the widespread availability and use is also on how known today, which could.
Impact the timing of recoveries on Reopenings.
Therefore, our visibility remains limited and as you would expect we're not providing guidance for the full fiscal year on 2021, However, we aren't going to share on near term expectations for the first fiscal quarter. This.
This is the only time, we anticipate guiding to such a short term view given the uniqueness of the moment.
For the first quarter, we expect GAAP EPS of 63 cents to 58 cents in earnings per diluted share or adjusted EPS of 60 cents to 65 cents per diluted share.
These rangers compare to last year's 41 cents on 39 cents respectively.
Both considerable increases on a year over year basis.
We also expect adjusted EBITDA margin in the range of 6.1% to 6.4% expanding from 4.3% last year.
At this time, we believe we may have seen the bottom in revenue compression as a result of Coca 19.
Sequentially, we could see similar to slightly better organic declines in what we saw on Q4.
We also anticipate good demand for pandemic related work orders and enhance claim to continue throughout Q1 the.
The investments I discussed earlier should also continue into Q1, which you will see in both our segment profit and corporate lines in general investments will continue throughout fiscal 2021, but the magnitude and cadence will be determined by both on a long term strategy and where we see the broader recovery.
Going.
We will go through more detail on some of the assumptions for the quarter on year, which is obviously still dynamic.
Sure we have better line of sight for the full year by Q2, we would anticipate providing full year guidance at that time.
Before I turn the call over to Earl I want to thank our team members again for their dedication to our purpose as a company to take care of the people spaces on places that are important to you.
This purpose has never meant more than it does today our value to clients has risen because our teams have been the ambassadors of our brands and demonstrated the operational excellence that sets m. apart from our competitors.
Nine months ago, we couldn't have imagined how 2020 would culminate for ATM.
We not only exceeded our pre coded expectations, but actually accelerated into our long term EBITDA margin range of 5.5% to 6%.
Our 2020 vision journey has come to a climatic transition leading us into the next phase of growth and excellence and building on our strong foundation to propel us into the future.
Next year, we'll also marked our fiftyth anniversary on the New York Stock Exchange and we look forward to celebrating this milestone and EPS history.
So while last year was certainly a memorable one for our organization I am now looking forward to the opportunities that lie ahead, and I'm more excited than ever.
Now to Earl who will cover our financial results.
Thanks for the warm welcome Scott I'm, so excited to be part of the avian King I recognized early on that the culture here, So special and unique even adjusted my first few weeks, yeah, I have witnessed an exceptional drive to collaborate and execute that clearly thats maybe on the part.
As I spend the next several months diving into the business I look forward to developing and sharing my perspectives on our financial strategy over future calls.
Now onto our quarterly results.
Revenue for the quarter were 1.5 billion a total decrease of approximately 9.9 per cent compared to last year, reflecting our second full quarter of COVID-19 revenue decline, particularly in the aviation and technical solutions segment.
Partially offsetting this revenue decline was continued demand for higher margin work orders.
That we have been providing for our clients through the pandemic.
Particularly within business and industry and technology and manufacturing.
GAAP income from continuing operations was 53.1 million or 78 cents per diluted share compared to 48.1 million or 71 cents last year.
These results reflect the continuation of favorable claims trends related to self insurance reserves, we saw a benefit of $21.3 million and self insurance adjustment of which 6.2 million was related to the current year.
On an adjusted basis income from continuing operations for the quarter increased to 46.7 million or 69 cents per diluted share compared to 44.7 million or 66 cents last year.
Similar to the third quarter, our GAAP and adjusted earnings growth versus last year was driven primarily by a significant increase in higher margin work orders as clients was volume to COVID-19 as well as the continued management of direct labor to align with the demand environment from legacy services.
Partially offsetting these results was a $17.6 million reserve for notes receivables from a project related to a unique family entertainment customer within the technical solutions segment. We are currently working with the client to resolve the issue.
Addition, operational investments in such areas as our enhanced clean program continues which was embedded in our operating segment result, we.
We also reengaged certain corporate projects such as investments in IP that were previously put on hold as we prioritize business continuity during the pandemic.
This amount was approximately $10 million for the quarter.
On a year over year basis, the fourth quarter also experienced one less work day, which equated to approximately $6 million in labor expense savings Oh.
Ill speak about the cadence of our working day for fiscal 2021 later on the call, but the number of day in the fourth quarter of fiscal 2021 will be comparable at 65 days.
Our overall performance during the quarter led to adjusted EBITDA of approximately 92.5 million at a margin rate of 6.2 per cent compared to 93 million or 5.6% last year.
Now for a discussion of our segment results.
As a reminder, these results reflect the ongoing impact of COVID-19 on revenue API.
Operating profit reflects the mix shift towards higher margin workforce labor modulation on legacy services demand as well as operational investments such as enhanced clean.
Be high revenues were 794.3 million down just 1.6%.
We're encouraged by the sequential top line improvement compared to decline of 6.3% last quarter.
The pandemic negative impact on our parking and sports and entertainment business continued this quarter similar to Q3.
Offsetting this cobot compression and the loss of some lower margin business, we had consistently strong demand for higher margin pandemic related work on this.
This led to a more favorable mix of BNS business that led to operating profit growth of more than 65% to 84.7 million with a margin rate of 10.7%.
Another very resilient segment for us during the pandemic has been our T. an m. business revenues were 245.2 million for the quarter up 6.7 per cent versus last year on.
Operating profit grew more than 30% to 23.5 million from an operating margin of 9.6%.
This segment is particularly comprised of essential service providers, such as Biopharma logistics and industrial manufacturing as a result demand has been driven by work order and enhance clean work more than offsetting any coleman related and other account losses throughout the year.
In education, we reported revenue of $212.2 million, reflecting the new school season, and the adoption of hybrid models across our K 12, and higher education portfolios.
Operating profit of $15.1 million or 7.1% margin reflects labor related savings as a result of modified staffing at site locations during the pandemic.
As many of us are likely experiencing today with our own children.
There remains a great deal of variability in this segment has different cities with sponsor resurgence is particularly ahead of the holiday season.
We continue to monitor development and partner with our clients to address both day to day cleaning and disinfection needs as well as longer term budget constraints, where our technical solutions offering can be compelling.
Aviation reported revenue of $141 million and an operating profit of 3.5 million.
Clearly demonstrating how that pandemic continues to have a dramatic impact on the industry.
However, as discussed last quarter, our goal was to achieve a breakeven position or better by the fourth quarter.
We are pleased to have closed the year in a profitable position.
And now on to technical solutions, which reported revenue of 123.1 million compared to $175.5 million last year.
As a reminder, this segment expenses phenomenal growth last year exceeding 25% during Q4 of fiscal 19.
In addition to a tougher compare site access as being disrupted by the endemic back.
Backlog remained in our healthy adult, which we've historically defined as above $150 million.
We are actively monitoring our ability to churn through these projects.
The operating loss of 3.6 million was driven by a reserve of notes receivables related to a single entertainment customer and associated with the client increasing credit risk, resulting from the pandemic, which we continue to pursue.
Turning to cash on liquidity.
During the quarter, we generated a record 198.7 million in cash flow from operations and free cash flow of $189.6 million for the quarter. This led to 457.5 million in cash flow and 419.5 million of free cash flow per year.
As a reminder, these results include $101 million in deferred U.S. payroll taxes as a result of the carrier.
Which will be due in 2021 and 2022.
Even excluding this these are records for the year.
Due to our strong cash position, we ended the quarter with total debt, including standby letters of credit on $883.4 million at a bank adjusted leverage ratio of 2.1 times.
Additionally, we ended the quarter with cash and cash equivalents of 394.2 million.
During the quarter, we paid our 218th consecutive quarterly cash dividend for a total distribution of approximately 12.3 million.
And as stated in our earnings release I am pleased to share that our board of directors approved our 219th consecutive quarterly cash dividend.
Now for a quick recap of our annual results.
Total revenues were approximately $6 billion, a decrease of 7.9% versus last year.
The decrease in revenues was attributable to the COVID-19, Pandemics impact on business operations predominantly during the third and fourth quarters of this year.
Our GAAP income from continuing operations for fiscal 2020 was 0.2 million.
On an adjusted basis income from continuing operations for the year was $163.5 million or $2.43 per diluted share.
Adjusted EBITDA for the year increased 6.6% to 361.9 million and we ended the fiscal year with an adjusted EBITDA margin of 6%.
Now turning to our guidance outlook.
We are providing guidance for the first quarter fiscal 2021.
At this time, we expect GAAP EPS to be in a range of 53 to 58 cents and adjusted EPS to be in a range of 60 to 65 cents.
Adjusted EBITDA margin is anticipated to be between 6.1% to 6.4%.
This guidance outlook assumes organic growth will be sequentially flat to slightly improved versus the fourth quarter of fiscal 2020.
We anticipate higher margin work orders and labor efficiencies to continue into the first quarter.
And as Scott discussed extensively we're planning to invest in fiscal 2021.
The first quarter, we'll see the same level of investments that we saw during the fourth quarter fiscal 2020 of approximately $10 million.
The first quarter, we'll also have one less working day versus last year, which could lead to approximately $6 million in lower labor expense.
However, we are preparing for the potential for higher payroll taxes, beginning in January pursue we fully as well as federal assets such as FICA.
With respect to interest.
Based on our operating expectations for the first quarter and our current cash position, we do not anticipate an increase from borrowings compared to the fourth quarter.
Therefore sequentially interest expense should decrease slightly due to the continuing amortization of our term loan.
The tax rate for the quarter is anticipated to be approximately 30%.
This rate excludes discrete tax items, such as the work opportunity tax credit and the tax impact of stock based compensation awards. The total impact on which we currently expect will be under $1 million in Q1.
As it relates to fiscal 2021.
As illustrated in today's presentation, there will be one less working day in the new fiscal year, one less day in Q1, one more day in Q2, one less day in Q3 and flat from last year in Q4.
With respect to cash flow, we assume government related benefit in the UK and us such as the care that will not recur.
This should be considered when ascertaining free cash flow for the new fiscal year.
However, we drove higher free cash flow as a result of Sharklet operational practices in response to the pandemic and we intend to continue to uphold these andas and disciplined.
Lastly, well.
Related to taxes in fiscal 20, our full year impact for the work opportunity tax credit was $4 million, reflecting the pandemic impact on traditional Highland practice.
Currently Watsi is expected to expire on December 31 of this calendar year. However, we are actively monitoring Congress for related action, including an extension on watch it.
Before I turn the call over to the operator I'd like to reiterate my excitement about being part of the M. team on.
On the heels of such strong results for 2020, I look forward to sharing more with you over the coming quarters.
Operator, we're now ready for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tele indicate you lightness in the question Kim You May Press Star two if he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star as he is.
One moment, while we poll for questions.
And our first question comes from Andrew Wittmann with Baird. Please proceed.
Oh, great. Thanks for taking my questions to morning, everyone.
I guess my question. My first question here has to do with the margins and there are obviously very good you guys have continued to positively surprise here over the quarters.
And so I wanted to dig into that.
Particularly on the gross margin expansion I guess I was hoping that you could give us some sense about how much of the gross margin expansion, which posting its purely from the mix of having so much or tag revenue less parking revenue things of that nature. So mix benefit from what seems like you guys actively really.
Managed your labor pool.
Against the base business to drive efficiencies there so.
No that might be a hard question to quantify but I thought I would try and see what you could tell us. So we can understand kind of some of the moving pieces inside of it.
Yes sure Randy.
Good to hear you.
Okay.
Giardia EBIT margin increased income from pandemic related work orders and also our enhanced clean and then also on labor Magic on that's probably about 50 50 and in terms of contribution.
And so it's been a it's been a really good story for us and.
I think the better story is that we're continuing to see momentum into the first quarter, which is reflected in the quarterly guidance and.
We wish we could give full year guidance to give you a better sense of that.
It is really still early on but I will tell you Andy the one thing that has changed I think you would look.
Maybe a couple of months ago, you would you would think that you know this was with the vaccine coming it would be more on the buy an area that and it's all going to be over in October right now and I think what we're starting to learn now that this isn't a quarter by quarter that.
There's there's going to be a rollout of these vaccines that are going to be from supply chain issues and and weve, even seen that from all the polls I've seen at least 50% of the population is anything on it takes the vaccine. So we think this is going to be a longer term story than something that again, there's going to be feeling like more binary.
And then and then you think about kind of the office environment and you can have some people that are taking the vaccines some people that aren't taking the vaccine. So.
We're still going to be people wearing masks is still going to be a need to disinfect because I'm not sure. They didn't figure it out whether or not if you've been vaccinated you can still transmit it right and then and then the question is how long does the vaccine less so there's so many uncertainties there so.
Whereas again I think earlier in the year, we thought this could be maybe a quarterly story I am not sure it's not longer term yearly story right now so and we're seeing the heightened awareness so.
Don't think the momentum is going to change anytime soon.
Yes, I wanted to dig in on that I am glad you kind of went that direction Scott because.
As I mean, you've obviously had to do scope with your customers you know, obviously not occupying so what space and it feels like and I guess, you just said that basically is that the scope youve manager labor, probably even better that's afforded you some margin improvement I guess the question the agenda on to that is as we do reopened net whatever pace that is.
And you do have to read layer in labor as your customers are more occupied need more services.
Do you expect that you'll be able to retain some of this margin all of this margin or do you feel like you'll have to progressively give some of the profit margin back to your customers. I was just wondering how you see that playing out.
Sure. So look I think the labor efficiencies that we're getting now because remember it also on a 10% occupied right and and thank goodness, it's 10% occupied but yet on revenues of only 10% down you can make a case why day 90 per cent down right. So I think as we staff will lose.
Some of that labor arbitrage on our goal is to maintain some of it but we're certainly not going to maintain all of it you know that wouldn't be sensible. So I think we're going to we're going to capture permanently some of that labor arbitrage and then from from the Colgan related activities I think we're going to retain a fair amount of that just because of.
On the awareness and and the flip side. So all this Andy is that as we occupy it's going to turn into a revenue story right because people are going to be back and you.
So I think we'll start seeing growth again, and we're thinking that's probably more of a back half story you know from.
For us it's always been about momentum you just want confidence and momentum. So I think the vaccine is going to start doing that so, whereas you may see a little trail down in margin from the labor efficiency, you'll see revenue go up.
That makes sense the fuel for me just one last question I wanted to also ask about some of the investments I think you said the word investments a few times on the conference call. It does seem like a pretty material here and just wanted to make sure that we're all understanding this correctly I think when you Wouldnt fiscal 2020 started before the business. So pre pandemic items you guys were to.
Talking about putting in.
An incremental $20 million, mostly related to I. Ci initiatives and digitization process things on the phone.
Let's take a pretty sure that's correct, but but now we heard here in this quarter that it was $10 million up just for this quarter and that there's another $10 million for next quarter. So that's 20 already and it feels like the run rate of investments. Obviously, therefore is a lot larger than you thought about a year ago at this time.
I guess first of all can you can you validate that and then the second thing is.
What else, our customers and shareholders going to be benefiting from how else I can be seen in your results.
So that we know that you're getting a good return on your decremental industry.
Yeah. That's a great question. So I think let's go back you know where you started.
Pre pandemic, we were talking about the ERP right that was that was the big deal for US and we did say that we were going to pause that because we were obviously it was on liquidity event right. The pandemic. So.
As we started getting strong from a liquidity standpoint in our results. We said we got to go back assets again, but I think the pandemic change so much and that caused us to rethink our our longer term Tech road map and where the remote workforce. We will you know whether you'd be and with clients being remote we said.
Have to rethink that so we're going through this what we would call an exploration phase of how do we move forward how do how do we create this digital platform. How do we look at how we're going to interact with clients and how do we look at how we're going to interact with our workforce from a workforce management standpoint. So all that is on the way and that's.
The investments that you're really seeing when you talk about that $20 million. The 10 in the 10 and it's all going to be founded on the ERP system as the first as the first leg of this thing right because you need to have your data you need to have a good financial system. So we think as the year unfolds, we'll have a better story of how much we're spending how much.
It will be capitalized versus opex, so we will be thinking about that.
And so we'll give you more color as it goes on as the strategy framework shapes up but I think the backdrop to all this is we're going to be prudent we are still on the mill a pandemic. So even with these investments Andy if things get squishy in the economy with resurgence is we could always pull those back.
Is that helpful.
It is thank you very much happy new year happy holidays, everyone.
Same to you.
Our next question is from show on Eastman with Keybanc capital markets. Please proceed.
Hi, Tim Thanks for taking my questions on Earl welcome welcome.
Thank you Sir.
I wanted to go back to.
Just the sustainability of margins I'm, just trying to understand this transition from.
You know shorter term planning work order dynamic to enhance clean uptake.
What has been sort of the margin impact from.
Moving over to that more permanent.
Contract structure within enhance Queen and maybe you could just comment on the uptake on an ex clean.
Since inception there.
That's great.
I'm glad you I'm glad you asked that actually because we can clarify that so when you think of pandemic related activities, which and just like large scale disinfecting spaces right and I think we've talked about this before it's basically the types. The chemicals that were using in pantries and bathrooms is now being used in general office space to disinfect.
Right and and there's two ways the clients are going about it they are either hiring us based on a work order basis, which you know again just to make it real simple it's.
Well they talk to us on a Monday, and say, Hey, Thursday night can you come and disinfect and could you bring two more people to take care of high touch services. So that's one way and then the other way is what we call the brands it enhance clean where a client will come to us from say listen I want to talk about a longer term program over the next 369 months. So.
And we just make sure like every night you come and you'd just in fact, we have four people permanently right. So so work orders or short term in nature and enhance clean is longer term, we're seeing similar margins in both and they're they're not competitive right and and taking on work or work.
Appliance Thats on a work order and moving on to enhance client. If we don't do that it's really not a fail. It's really it's really dictated by a client themselves because you may be a client that saying listen.
I can't really judge yet the occupancy cadence of my team I'm not sure. How many people are coming back when they're coming back I don't want to commit to a longer term that right now it could be a client that saying you know the pandemic has shifted our business, we're having our own financial you know it.
Issues right now so I don't want to commit to the longer term. So let's just do this on a short term basis. So so they're not competitive projects and you know, we we like enhanced clean better because we always like like any business you want to lock into a longer term contract, but you know in our mining work order is not a fail. It's just a rough.
Collection of clients on situation and if you think about what we did this year you know $300 million worth of pandemic and it has clean activities on such a short period of time, because remember covert wasn't the full year. So.
I think.
We're super excited about that and you know that.
The $300 million that we did in and sales in this area ended up being $200 million in the year on the TNL and we expect that to more than double next year.
Okay Super helpful. And then also just piggybacking on Andy's question just wanted to understand your as we think about it I don't want to steal the Thunder and the strategy day next year, but.
As we think about this digital transformation you know.
Leveraging data.
Is it more of a you know market share angle.
Angle is it a cut customer stickiness angle or or is it you know a margin angle just sort of curious how you're thinking about that.
You know that payback on that benefit from these investments.
Sure and that's all have elements on all three right like clearly on the.
The key to our future is how do you have you connect better with clients have you give them day. The dashboards insights that is going to make them more sticky with us right, where they don't want a detached from US right, but then the as a whole other element internally about how we manage our workforce.
More and more it's a mobile workforce right for what are the tools that we could to give our team and in terms of task orders every day safety.
Safety moments in the morning, how could they punch in and punch out so the ability to like to enhance our workforce and and create margin on labor management by being more efficient by dealing with our by dealing with our workforce and wheel times through digital tools.
You know, it's just phenomenal and you'll find that there are a lot of service companies, especially with a distributed workforce that are all working on these tools. So we're just trying to jump ahead of it and I think you know in the short term, it's going to be about kind of stickiness stickiness with clients its going to be about getting a day to foundation because.
Don't have good data there is no point right. So you have to you have to create a data framework and then over the long term if we can actuate on activate our distributed workforce we.
We expect to see margin accretion that's for sure.
Gotcha and then one last one from me I mean it is noteworthy.
To see you guys exiting fiscal 20 in the low two times range from a leverage perspective. So I just have to ask you know how you're thinking about use of cash clearly we have this digital transformation as a big priority, but you know.
It seems like you have enough dry powder to start looking at acquisitions or or maybe even the buyback. So im just curious how you guys are thinking about.
Putting this huge free cash flow number in fiscal 2000 to work.
Yes, Sean Thanks. Thanks for the question, it's Earl I would say a couple of things first of all I'd love to take the opportunity to really thank the teams for the focus and effort on.
Forward and really managing our cash this year, it's been amazing job and that they've actually been able to take four days out. So we are sitting.
On a fair amount of cash and we feel really good about our liquidity as far as you know our higher key priorities when looking at cash allocation. It first we first look at really investing in our organic growth, while maintaining our dividend program and then followed by that looking at opportunities with her.
Back to both M&A and share buybacks. So this strategy, we do not see this changing at this point in time, however in light of the uncertainty with regards to our current environment, we're going to be very prudent and cautious with regard to making cash cash choices.
Our next question is from Tim Mulrooney with William Blair. Please proceed.
Good morning, Scott Earl Thank you for taking my questions on URL Congrats on the new gig.
Thanks, very much appreciate it yeah. So.
I had a bunch of margin question, but that's been beaten to death on this today. So I'm just to ask a couple.
Yes on your on your segment so on.
On your T. them segment.
Do you think the technology side of this business.
Will be a headwind moving forward I've seen quite a few articles across my desk from Tech company Ceos, who are planning to shift some of their workforce to a prominent work from home situation. Obviously, the manufacturing side should stay strong, but I'm curious, how you're thinking about the tech side of the business from a.
Three to five year perspective.
Yes, so yeah.
Good morning by the way good morning.
I'm I'm still bullish on still bullish on on on the Tech sector I think thats EPS. The fuel the economy, I think that that's where where we're going to see growth as a country and you know it's funny you read about.
On the same things you are reading right, but we're talking to our clients, saying well. We keep seeing is you know the googles of the world. The Amazons of the world taking more space right. They are expanding in New York City now, they're expanding in Texas. So I.
I think the narrative out there for them as work from home, but when you really drill down and you talk to employees they quite like being back in the office and so I think theres going to be a mix I think you'll see possibly less people on the office, but I think those companies on such growth trajectory.
From that I think.
I'm just bullish on that sector and we've talked about this before but I just want to keep hitting home because what I'm about to say is is what I've heard from the top real estate companies on the country is even if there is a foundational shift where 25% of the people work from home and that that is a.
Massive shifts right for for a pandemic, that's only nine months end, but even if 25%.
Okay folks start working from home you still have to space out your existing office space, because we've been jamming people and we've been having people trading desks in cubicles. So I think you're going to see floor plates shift and so I am I am as optimistic as ever and in office space in general because like.
People want to collaborate and work and on the tech side Super optimistic.
Okay. Thank you Scott.
And then on the technical solutions business, which has been humming along really nicely in the last several years and then obviously much decelerated materially in 2020, Yeah. How does this set up look for 2021, I I know school budgets across the country are tight and you can sell them on the payback period would your solutions.
On the an indoor air quality is a going concern so but after that schools are kind of distracted with other things right. Now. So just how do you think about 2021 is it is it or we're building year for technical solutions or do you think we could have potentially another strong year like we saw on 2018 and at 20 on team.
Yeah, I think I think technical solutions is going to be sequentially strong right. So I think the way you have to think about this that there's there's a couple of ways. We look at it right first is our sales pipeline right, which is really what are the qualified leads that we're going after having closed from yet with the qualified leads that we're going after our pipeline is as big.
It gets a lot bigger than ever so that's that's pretty exciting for us. But then you have to look at backlog, which is the other term that we use and backlog is committed work like signed contracts that we have that we just haven't started yet right and our backlog is really strong for 21, it's just the other term that we use.
This churn rate, which is how fast do you take that backlog and turned it into actual work, where you really have people in the field installing the equipment right changing out the lighting and that's what's been the inhibitor. We're probably maybe 50 per cent down in terms of churn rate on recently, just because they haven't had.
Access to the facilities right because the coated so so we'd love to see the churn rate higher would be great right. Because that's really that's thats end year revenue, but as long as you have that strong backlog you have the committed work and that is really strong and we think now with the vaccine and with the.
Economy, getting some momentum I think our churn rates are going to start picking up and I think this is going to be a big back half of the year story, which is you know Tim on the back half is always the big time for HTS right. Because generally speaking we do so much in school. So that's the time when schools are closed and we have ultimate access.
I think thats going to happen again, so and on.
The last thing I'll say, which is which is pretty obvious the tailwinds on this business on just show strong with energy sustainability, all the green that's happening in society.
And then you take that coupled with what you mentioned educational facilities being so so strapped for cash and this is a clear path to freeing up energy efficiency.
Still all in all in on technical solutions.
No that's great color, Scott backlog, very strong turn rate improving but from that.
That's very helpful. I appreciate your time this morning, Thank you gentlemen.
Hi, especially on.
Our next question is from Marc Riddick with Sidoti and company. Please proceed.
Yes.
Hi, good morning, everyone.
Okay.
Morning, Earl.
Welcome to a JV I'm looking forward to working with you going forward.
I wanted to just touch a lot of that but first of all thank you from being as thorough as you've been on on your commentary. So a lot of my questions have already been answered, but wanted to touch a little bit on future pricing dynamic and how we should think about how that's evolved particularly with enhance clean and I was wondering if you could touch a little bit maybe on.
The parts of the program that are gaining the greatest level of client receptivity, even if it's not necessarily you know what the big day during the fourth quarter, what they're doing right now Scott if you could talk a little bit about whats the part that they like the most and maybe if you could talk about maybe what the how.
That pricing structure has a ball so far on how it may evolve going forward. Thanks.
Sure So I think.
I think what they like.
Particularly about a b M. As a thorough analysis of our program you know because you know the.
There there, but there's a lot of janitorial companies that are coming and say we can do this in fact, we could do electrostatic spraying and you know certainly we can do that but we haven't taken that approach. We've basically said Nonetheless, we are different than everyone else. We have an ex spread advisory panel with people from the outside.
Slide from from from medical schools from from famed educational edges.
Educational institutions that formed up this advisory panel with our own folks in the healthcare business. Because you know we have the healthcare business. So they like the fact that they get this extra piece of advice outside of just looking at the World Health organization CDC them, we're doing extra training of our people and we we have signed a gym.
Place right, we're doing evidenced based testing after we're done and and the way you think about it literally going to if you have on hands clean program for your facility you literally get the proverbial sticker on the window that says this facility is enhanced clean certified and when people come back to work, which you have to establish a pure facility.
Sure is trust and safety people has to feel good about where they're going to for their own health and for their families health right. So when you're dealing with a company like an a b M. Big public company that has these resources, we really started differentiating ourselves and.
You know mark because of all the things I. Just said we are getting a premium on pricing because it's not purely labor based function. This is more of an up skilled function because of the training because of the equipment that we use in the chemicals, we're using so we're seeing elevated pricing and and that's.
Not going to change only because of what we're doing and.
Everything that has to go into it. So so were enthusiastic about that and we haven't had a pushback yet now go in the future if clients on our screens and they're looking for savings.
My senses and.
I bet you you'll agree with me now.
We are they are not going to cut back isn't disinfecting I don't think any facility manager landlord wants to say you know we're going it's a tough time, so we're not going to be disinfecting. So we feel like we have some resilience in that product line. So I.
The arrows pointing up in this area for us.
And then I'm glad you mentioned that because that was one of them so sort of on a wrestling with is if you look at the the the.
The videos and things that you have on on the site as we talk a little bit more about that visibility to the end user.
And how that kind of how you're seeing that evolving because basically it to put it in a different way at least the way I'm looking at it it's almost like a assets.
Hey, it's a branding extension b, it's kind of like a good housekeeping seal of approval that even to now be in People's visual.
Visuals going forward. So I was wondering could talk a little bit about that because that basically to me seems like something that that's going to expand your your brand going forward for for years to come is that a reasonable way of looking at this.
Yes. It is on I'm, so glad I'm. So glad you brought that up because this is the first time in Abiam's history that we product ties a service right enhance clean in a registered trademark it's our it's our it's our product if you will for a service company and we've done a ton of social media outreach you know.
We've been branding it safety seen you know and there's been AD campaigns on the web.
We have we are going to be rolling out in calendar year 21, a very aggressive campaign and we've talked about the investments and that was brought up earlier by Andy and and we've been so focused on the IP side, but we're going to be investing and enhance clean too. That's part of our investments you know we're going to take the.
And on that awareness is heightened and.
It's it's such an amazing opportunity for a company like ATM and the resources, we have to differentiate ourselves between our competitors, which largely speaking are smaller regional companies. Just don't have the ability to put together an expert advisory council or to do the kind of social media outreach.
That we're doing it on the branding on the advertising. So there's a lot more to come and really excited to follow up with you remember this question because we will be talking about it on the next quarterly call.
Excellent. Thank you very much.
Our next question is from Tate Sullivan with Maxim Group. Please proceed.
Hi, Thank you on good morning, everyone and welcome everyone and just a follow up questions on on on Scott on technical services and thanks for all the detail on there and I understand the theme Park related project Todd It sounds like that's a small mark end market in technical solutions for you, but can you remind us is most of your other work.
In the backlog for technical solutions education, or can you provide more context on that market exposure per your backlog, yes, yes, yeah. It we really have two foundational areas of of technical solutions.
The education space, which is the large majority and then we do a lot of government work, whether its mission critical work, we have special clearances.
We do for the government and I'm just just in general government building since it's a sector that we've been growing in so.
You have the same park, one was a little out of what we normally do.
But you know in terms of from from the safety and security standpoint, you should be thinking of that backlog is education and government facilities.
Thank you and as has the bidding activity for technical solutions, just shut down or are there still still opportunities out there.
No. It's in terms of our solution by yeah.
Yes, no it's actually going the other way it spiking up right now.
We're seeing more activity and you know I would also remind you are from a sales person on standpoint, we cut back on salespeople in 2020 from the Prudency standpoint, right. We furloughed people, we've reduced hours all the things you do in a you know.
I say it has kitting, but the liquidity play book right you know so.
Now you know we're getting back on the track of hiring salespeople. We historically over the last couple of years have targeted net increases of 10% in salespeople and and if you remember we and the majority of those are technical solutions people and what we would typically sales were going to hire talent.
We present, the 10% would fall out of the bottom.
You know just because we keep raising the bar this year, our aspiration is to grow by 20%. So we're going to be very aggressive about bringing people and really strong people that understand technical solutions because again the opportunities are so strong, especially especially on the edge.
Vacation side, where every single community is cut their education budget and are cutting teachers and after school programs and we have the answer we have the answer and our technical solutions segment, So super optimistic.
Great and tailing on that just last one from me I mean, it how receptive bigger clients today in the current environment to sit on the on.
To hearing about your integrated solution I mean, I'm talking about combining other facility services into contracts and in addition, a janitorial services can you comment just on on that kind of those kind of conversations you're having please.
I think more of the conversations on our cross selling within our industry groups. You know so it's less about I want to hear more about how parking in janitorial and integrated it's more about if you think about on education segment are on a proper education segment, it with where were starting to see traction.
If we get a janitorial bid for.
In our education segment, and we'll we'll come back and we'll respond to that bid, but we're also say will also say hey, here's alternative to be we can also look at a bundled energy solution offering that could lower your costs on your facility. So if you hire a b M for your janitorial you know we could.
Really.
Come up with a solution that could really offset some of those down a total cost. So there's been a lot of reception from clients in our education segment to hearing about how we can enhance a basic janitorial RFP, that's really encouraging for us.
We have time for one final question from David Silver with CL King. Please proceed.
Yeah, Hi, thank you.
Scott.
I wanted to follow up on your comment in your prepared remarks about shifting from defense to on offense.
And in particular I was.
Just wondering about you.
You know the the client their customer choices that you might be making in other words, Scott I think you know historically for you the right customer retention rate was 100% if not more.
And I am just wondering but obviously the business environment has changed a lot you come out with a differentiated.
Offering you're investing in training and other kind of upgrading of the workforce. So is this the type of environment, where you know overtime.
You might be trying to target a particular, you know more suitable or more ideal.
Customer demographic ones that are willing to.
Pay the higher prices for the upgraded services that you're in investing in.
And maybe going back.
A couple of years ago, I mean, youve talked about calling your contract portfolio of kind of lower margin or less attractive forms of business.
And I'm just wondering again that that was more defensive but maybe now do you target.
Certain customer groups that maybe are not fully represented in but the ones that represent the most ideal fit with the way your service offering is evolving thanks.
Yes, that's a good question, there's a lot there and on pack, but what what I would say is that you know are our sales group is really focused on that we have an area called sales effectiveness, which are just basically data analysts that you know look at all these segments and figure out where we want to play right, which is super import.
You.
You may have seen or we've talked about in the past how weve started gravitating towards retail distribution, you know like kind of the Amazons on the walmarts of the world people that because that's a really strong growing segment and we've been doing really well there and we see that as opportunity in the future and.
Yes, historically, our retention rate last year, you may remember is about 90%. This year were 92 day, 93%.
Which is a really good trend and kind of what we know where we're looking to go in the future. So I think this is something that will always be focused on and when we when I talked about going from defense to offense that was really more in terms of investing into the business on making these investments you know I have to tell you there so much data out there.
From past recessions past UBS.
Bumps on the road like we're seeing here with the pandemic. There's so much data out there about companies who at this time.
On a hunker down and go on the offensive versus companies that take the opportunity to go on the offensive and its extraordinary in terms of the long term profitability and success of companies to take this opportunity to go on the offense and that's exactly what we're doing by investing in.
Again cautiously investing in but thats, where that comment came from which is we're not focusing down were not going into a shell, we're doing really well where liquid where we're having record profitability.
Profitability record growth so.
It's really a sentiment that you know you look at AB enemy look look at a company that is excited about the future and excited to have the ability to go on offense.
Okay. Thank you very much.
Thank you.
We have reached the end of our question and answer session I would like to turn it back over to management for closing remarks.
Yeah, well, thanks, everyone for coming on today's call I'll, just make it brief I think.
You've heard the sentiment here, we're super excited about where IBM is going I think 21 is going to be a great year for us there's still a lot of uncertainty, but we're going to navigate it as adeptly as we did in 2020 and just we're going to be continuing to build the muscle strength, but the most important.
I can say at this time is just have an amazing holiday everybody and more importantly don't let your guard down stay safe and let's look forward to 21, and an effective vaccine and we all get back to normal so thanks everybody.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
All right.