Greetings. Welcome to ABM Industries First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Susie 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 first quarter fiscal 2021 financial results. A copy of this release and an accompanying slide presentation can be found on our corporate website. Before we begin, I would like to remind you that our call and presentation today contain predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation, as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the Company’s website under the Investors tab. I would now like to turn the call over to Scott.

Thanks, Susie. Good morning. And thank you all for joining us today to discuss our first quarter results. As you read in yesterday’s press release, 2021 is off to a tremendous start. Total revenue was approximately $1.5 billion, representing a 7.5% decline versus last year, which exceeded our expectations and reflects continued sequential improvement. As anticipated, our Aviation segment remains the primary driver behind the revenue decrease. On both the GAAP and an adjusted basis, earnings grew by 160% or more year-over-year. GAAP continuing EPS grew to $1.10 per share or $1.01 per share on an adjusted basis. Adjusted EBITDA margins expanded more than 400 basis points to 8.3% compared to last year. Anchoring these results was elevated demand for higher margin work orders for virus protection, as well as our EnhancedClean services, which are longer term in nature. Effective labor management continued to be a lever for profitability. As you may remember, the majority of our contracts are performance-based. So, any efficiencies we find in staffing as the occupancy drops or schools are in a hybrid situation, inures orders to our benefit. This is the advantage of having a flexible labor model. Earl will discuss our segments in more detail, but overall, our industry group drivers are similar to what we saw during the balance of last year. Not surprisingly, our Aviation and Technical Solutions segments were challenged by the pandemic, due to decreased global travel and limited site access for retrofit projects and educational facilities. Education is a segment though grew top and bottom line during the quarter, which shows how well our team has adapted operationally to the hybrid learning system. And Business & Industry and Technology & Manufacturing are still strong outperformance. They’ve been able to offset COVID-related revenue compression with higher margin work orders, EnhancedClean…

Thanks, Scott, and good morning, everyone. Let me start by thanking all of my fellow ABM team members for the warm welcome I’ve experienced since joining the organization. Today marks my 100th day at ABM, and my early impressions about the organization’s drive to collaborate and execute have only grown. As I continue to evaluate and assess our business needs, my main area of focus will be on helping to determine the appropriate enablers for both strategic growth and continuous improvement. As I will discuss in more detail shortly, our strong results over the past several quarters coupled with our leadership position in the marketplace, provides us with great opportunity to invest in our future growth potential. I look forward to finalizing our thoughts on areas such as our internal investing strategy and sharing with all of you over the course of the year. Now, onto the results. Revenue for the quarter was $1.5 billion, a decrease of 7.5% compared to last year. The decrease in revenue reflects the continued impact COVID-19 has had across our business segments. As a reminder, the pandemic had not yet impacted operations significantly until our second quarter last year. And as such, this quarter reflects the full year-over-year impact. Partially offsetting this revenue decline was the ongoing demand for higher margin disinfection-related work orders and EnhancedClean services. Work orders were particularly strong within our Business & Industry and Technology & Manufacturing industry groups. On a GAAP basis, our income from continuing operations was $74.6 million or $1.10 per diluted share compared to $27.9 million or $0.41 last year. In addition to our strong operational performance, the increase versus last year was driven by favorable developments in prior year self-insurance adjustments. We saw an $11.4 million benefit this year compared to $6.6 million in the…

Thank you. [Operator instructions] Our first question is from Sean Eastman with KeyBanc Capital Markets. Please proceed.

Hi team. Certainly a strong start to the year. Pretty impressive. I guess along those lines, my first question is, if we just look at the annual guidance, you guys are off to a head start here with the first quarter, implying around 30 -- over 30% of earnings in the first quarter versus kind of a high-teens number on average over the last 10-years in the first quarter. So, I'm just curious where you think you might need to have some conservatism in there. Given this head start, I mean, is it really just the labor efficiency dynamic as revenue recovers? Is it the technology investments ramping up? Any color around that cadence would be helpful.

Yes. I mean, I think you hit it right on the head. And I think predominantly, we have to remember, it's early, right? We just finished Q1. And we have some nice line of sight into Q2, but it's early in the year, and we want to be responsible, right? So, I think, we'll always have an opportunity as we go along to update, if we need to, Sean. But for now, I think we feel real comfortable where we are.

Okay. Got it. And the capital allocation comments are interesting, just around the stability and where leverage is. I'm just curious what an acquisition could look like for you guys. Maybe it's early there as well. But, just a bit of a flavor for what you guys are looking at. What kind of supplement to the organic growth recovery do you envision? It would be helpful to understand that.

Sure. I mean, look, for us, we're looking in two primary areas. First, building into our core, which is janitorial. And if anything, COVID-19 has really elevated that core. So, that's something that we're excited to look at. And then also, our ATS group. We love that division. We love where society’s heading towards energy efficiency, sustainability, electric vehicle charging. These are all our major work streams there. So, we've talked about in the past that we want to build our geographic footprint across the U.S. So, I could see us doing some fill-in acquisitions there as well. So, that's kind of where our focus is at the moment. Those two areas, core janitorial and ATS.

Okay. And then one last quick one for me, on ATS, I mean you guys have exposure to EV charging. You have exposure to energy efficiency in buildings, two clear priority areas from the new administration. I mean, have you seen the ATS bid pipeline firm, or is that sort of a stay tuned, too early?

No. Look, we have a really strong pipeline and a strong backlog. And I think the new administration's attitudes towards the things I just talked about, sustainability and energy management, are great. And it really goes beyond the administration, right? It's -- it really goes to society, right? And it's just -- it's playing into all the right trends. And if you remember, the ATS group also -- there's a fair amount of work in educational facilities. And you all know how strained budgets are for schools, K-12 and frankly higher ed. And so, we come in with really good energy saving solutions. And you've heard us talk before about proof points of literally saving teachers' jobs, saving afterschool programs. So, we think that there's going to be good momentum towards selling energy projects into schools as well. So, everything is pointing up for us in ATS. It's just for us right now, the impediment has been access to facilities, right, with COVID. And we suspect we'll see a lot more traction in the back half of the year as the vaccines roll out. And also as schools close, we'll have a chance to get access and start churning that backlog and turning it into real revenue. And remember, backlog is signed contracts. So, we're super confident. We have a very strong backlog. We just have to turn it into revenue by actually starting the project.

Our next question is from Andy Wittmann with Robert W. Baird. Please proceed.

Great. And good morning, everyone. Thank you for taking my questions. I was just hoping to just understand a little bit more again this quarter, the driver of the year-over-year margin improvement. Last quarter, I guess, you said it was kind of roughly half mix benefit from tag and EnhancedClean and the other half was the benefit of labor management. Was there any difference in the character of that, particularly considering that some of the corporate investments also came in and were an offset the other way?

Yes. No. Thanks, Andy, for the question. You're spot on. Very similar to what we saw last quarter, this year-over-year uptick that we're seeing in margin is driven by those two components. So, firstly, the labor efficiencies that we've been receiving as well as the higher margins associated with both work orders and EnhancedClean services. And that really attributed to 400 basis points of the year-over-year accretion really again split 50-50. In addition to that, we saw the one less working day, which attributed to about 40 basis points, which was offset by incremental investments that you'll see in the corporate expense line.

Got it. Okay. Well, given that, and I appreciate the physical occupancy data that you guys shared, the 15 going to 25 by Labor Day. I guess, you said and then by calendar year-end, getting a lot more normal than that. I mean, that is a recovery in physical occupancy of the space, but I wouldn't say that that's any kind of sharp snapback or major change very quickly. And in fact, that Labor Day represents most of the rest of your fiscal year. So, given that and just doing some math on your guidance here, using your EPS guidance and some of the other known quantities here, it looks like the balance of the EBITDA margins are down pretty significantly -- not down, up year-over-year, up to historic levels, down sequentially from a great performance in 1Q is what I mean. I mean, I'm calculating something in the mid-6s for the balance of the year. So, that's a pretty big change. So, I was hoping that you could give a little bit more meat on the bone, other than kind of what you said, or in addition to what you said, to get us comfortable with the fact that this is the right margin level to be thinking about for the balance of the year.

Yes. Look, again, we want to be responsible, Andy, you know we are. And we look at the remainder of the year, and we do think there's going to be momentum back, which will cause us to lose some of the labor efficiencies we get in the hybrid model, predominantly in commercial as there's momentum back to the office. So that -- and that's it. And then, we are going to be starting the corporate investments. We have a slow start at Q1 because we wanted to be super cautious with -- we want to be super cautious with the pandemic still. Remember, our quarter is like November, December, January, right? So, we'll be starting to build in those investments in our strategy and IT area. And it's all for long-term growth. We are going into a growth mode at ABM, and we need to support it with those investments.

Got it. I have just one last question to follow up on kind of on the fundamentals of the business and demand. Last year, I think, was defined by very, very low customer loss, very high retention. Everybody just kind of wanted to hunker down, not change anything, make sure that they do this. You guys have talked a lot about how ABM's been well positioned with your processes and your leadership in the industry as the ability to take share. I was wondering, Scott, if you could talk a little bit about the dynamics. Now that we're starting to think about reopen, are there more customers looking to switch providers going forward now that the world is a little bit more stable? And just given that -- as they look to switch, are they also looking to bake into the base contract some of the work order that's become so consistent as part of what their process is. You're offering EnhancedClean as basically the deeper level of cleaning. But, are customers looking to switch? And if they switch, are they looking to bake in more content? And what are the implications of that if they do on margins? Thanks. Sorry for the long question.

Yes. I got the essence of it, for sure. Look, Q1 was great retention for us. We were in that 92%, 93% zone. And I think earlier on, we were more cautious about a lot of rebids happening. I think, certainly, if there's one area, it’d probably be Education, because the one thing we know, the school budgets, they're all constrained, right? And they'll be looking for opportunities. So, we'll expect to see a higher level of bids in education, but that's -- there's a plus side to that, too, right? Because all this other work is going to get bid out that we don't have, right? And we do love our platform now with our EnhancedClean. So, where we may get a little pressured on retention, we may pick it up on the sales side. And with EnhancedClean, it's not in the scope of work. And we don't -- as things get rebid for the first couple of years, I'm not so sure how robust the bidding activity is going to be. And what makes me think about that, Andy, is not only are we talking to clients, but on top of that, so many of our clients have their space needs in flux in terms of how they're going to lay out the floors for distancing and the definite -- the use cases they're going to have when people come back. So, I don't think there's going to be this rush to go bid right away until they understand the occupancy. But even still, when it does get baked in over the next couple of years, I don't think we're going to have too much of a deterioration on margin. Because if you think about EnhancedClean, it is the people are better trained because they're using different types of chemicals, they're using expensive equipment. So, we believe between that and all the resources we're putting in with our advisory panel that we're going to be able to maintain a good portion of our margins when it eventually does get baked in. But again, I just don't think it's going to be immediate because there's too many other drivers that are going to inhibit them from having this all-out bidding.

Our next question is from Sam Kusswurm with William Blair. Please proceed.

Good morning, Scott, Earl. I hope you’re both doing well. I'll have another one for the margins. Do you think that 2021 adjusted EBITDA margin is where profitability kind of peaks out for you guys? I know you mentioned some costs to be going back throughout the year here. Basically, I'm curious if your long-term margin outlook of 5.5% to 6% is kind of irrelevant now because the business was changing. Is 6%-plus the new normal, given customers want this high-margin virus protection moving forward?

Yes. I mean, that's a good question. So, I think for us, if you remember pre-COVID, that 5.5% to 6% zone was where we were trying to gravitate to over the next two or three years. It's certainly -- we believe that COVID and kind of the virus awareness in society has squarely put us into that 5.5% to 6% zone. And we're going to be thinking about investing into our business over the next five years. We're going to do the things that we need to do to break out of that zone. That is our ultimate goal. We always want to overachieve. But, I think for now, what we're really saying is we solidly landed into that zone a couple of years ahead of where we wanted to be. And the next phase -- we're finishing up 2020 vision now. I think the next phase of a five-year journey is going to outline a path to get out of that zone.

Great. That's helpful commentary. Maybe switching gears, I have a quick one on B&I then. I assume there's a lot of clean disinfection work that must be done in preparation for some of these folks going back to work as well. I'm kind of wondering as far as it relates to your guidance, are you contemplating the significant step-up in B&I-related reopening revenue in your fiscal fourth quarter of this year?

Yes. So, we do believe there will be increased volume as there is a return to work. And the offsetting factor to that is we're going to have to step up, right? So, we look at those two in conjunction with one another, but there will definitely be elevated volumes as people return back. But, if you remember, like with our fiscal year, we end October 31, and we think at that time, we're going to be somewhere between that 25% to 50% of occupancy. So, it's probably going to be more like '22 when you're going to have a robust return to the office, where those levels will be even elevated past what we'll see in '21.

Our next question is from David Silver with CL King. Please proceed.

Scott, I wanted to follow up maybe on one of your answers here regarding retention rates. So, I mean, historically, you've been very clear about pursuing high retention rates on your annual contracts. I'm just wondering if you have any early data thus far, like on a couple of things. First off, the six-month EnhancedClean contracts. My sense is a lot of those are coming up for renewal. And I'm just wondering if you have some early read on retention rates there. And then, maybe more qualitative comment regarding the tag work or the work orders that you're seeing. So, I mean, it’s very hard to generalize, but is there seemingly a customer strategy evolving where maybe they have a work order every couple of weeks or so, or once a month to supplement the standard annual contract? So, just some idea of the cadence there on EnhancedClean and the work orders? Thank you.

Yes, sure. No problem. So look, I think for us, again, it's been sustained, right? And if you look at our work orders and EnhancedClean, we did $150 million of that in the first quarter as compared to $300 million all of last year. So, we're excited about that. And then, our renewals have been very strong on EnhancedClean so far, which is a really good sign. But, I think what was even more powerful for us is when we surveyed our clients, 90% of our clients said on reopening, they're going to do the same, if not more, virus protection, which is pretty incredible. And then, take that to the next level, 85% of our clients said, when they look out two years past the pandemic or more, they're going to continue to be doing virus protection. So, it kind of proves the thesis that we've been saying all along that in some extent, Pandora's box has been opened around virus protection and awareness and been confirmed. And not only through the survey results, but as you can imagine, we're constantly communicating with our clients about reopen plans. And it just confirms what we're hearing in the surveys. So, really optimistic. Was that helpful?

Yes. No, that's great. One quick one and then one strategic question. But the quick one would be on the CARES Act. And I believe last year, the Cares Act allowed you to defer roughly, I think, $100 million or so of employment taxes. Can you just maybe remind me what -- or can you update us on how that is going -- how that went in the first quarter? And then maybe from a FY21 basis, will any of that accumulated kind of deferral need to be repaid? So, maybe the fiscal year '21 cash flow impact puts and takes on the CARES Act would be great. Thank you.

Yes. David, it's Earl. Let me address that. So for start, if you look at the cash flow from operations this quarter, we landed at about $40 million, which if you think about Q1, this is probably the first time in recent history that Q1 has actually generated positive cash as opposed to actually being a net drop on cash. $31 million of that cash flow came from the CARES Act. So, if you look at what did last year, 130, 31, this year, it’s about $161 million. That will be repaid in two halves. The first half being next fiscal, which is really December -- the end of December 2021, and then the following fiscal -- or the following fiscal, the balance of that amount.

Okay. All right. Great. I appreciate that. And then, last question would be more, I guess, just a -- it's a multitasking question first for you, Scott. But, when I think of your company here, I think you have this big new opportunity or newish opportunity that you're moving aggressively to invest in and to exploit regarding the post-pandemic business environment? And then, I also would say that within the last year, you've also initiated another significant kind of longer term strategic effort regarding your transformation programs. And I'm just wondering, as you kind of steer the ship here, can those two very significant high priority efforts, can they continue on without interruption? Is there some competition internally for resources? How does human resources view filling senior openings on one project or one effort versus the other? Just -- and of course, your time to management attention. So, how do you kind of manage, I guess, those parallel tracks on two high priority and frankly newer efforts relative to how your company has been positioned over the past several years? Thank you.

No, that's a good question. I don't think they're out of line, to be honest. I think, they all are aligned together into kind of one vision going forward. And the way I think about it is, we're going to have this work stream and investing into the business organically. And that's the EnhancedClean, EnhancedFacilities and continuing to build excellence around that. So, you're going to have that. But, on a parallel path to that, we're going to be investing in our tech, right? And part of the tech is infrastructure and it's kind of table stakes, right, getting your data right, forming a framework around your technology, but that's really to accelerate and grow the business through client-facing technology, right? So, we get stickier with clients. And that client-facing technology can intersect with EnhancedClean, right, in terms of tracking systems and dashboards. So, I think that's really important. And then, also to accelerate the business, the technology is going to work towards workforce management, getting our people more efficient, getting our people more data, more touch points with our clients because we're informing them and enriching them with the data that we're capturing. So, I think it really aligns well, and we'll lay out in detail the next five years in the coming months. But, we're really excited about our ability to invest in our people and to invest in technology. And again, it's just going to come together beautifully and on line. So, we're really excited to talk about it over the next couple of months.

All right. Just one final comment, but I did want to call out. I thought the slide deck that you put together for this call was exceptionally useful and helpful. And the opportunity to go through it last night was an added plus. So, thanks for the extra effort. I appreciate it.

That's great. Thanks.

And we do have time for one more question. Our final question will be from Marc Riddick with Sidoti & Company.

So, let me also echo the last comments, the slide deck, for those who haven't had the chance to see it so far, I thought was exceptional, had a lot of great detail, and I really appreciate that. I really appreciate all the commentary that you've already given. But, I wanted to touch a little bit on the investment commentary, because in addition to the investments that you've talked about, I want to circle back to the idea that you've begun a national commercial campaign. And I don't think that's a small thing for a company that's century old, to for the first time, have a commercial. So, I was wondering if you can sort of talk a little bit about that thought process, what the branding opportunity that you see is, and what it kind of means for ABM as well as what it means for EnhancedClean in general?

Sure. I mean, look, we -- you can imagine the pride we had, right, to have a national TV commercial for a company like us. And it was so well done, and we get such great comments on it. And I think it's multipurpose, right, Marc. Part of it is just the commercial side of it, meaning the commercial business side of it, and we're already seeing web traffic up over 10% just from the commercial, which is -- so that the payback is incredible. And just from a branding standpoint, it just repositions our brand and elevates our brand. And especially what we're doing with EnhancedClean and making sure people understand, Marc, that like we're an essential service. We're first responders. And we even say like, with healthcare professionals, they can't even -- hospital can't open until we've cleaned it, right? So, I think it just does so much for us on so many different levels. But, it doesn't hurt when you get a pure financial payback and you start seeing web traffic up and that turning into actual business.

And then, just to be clear, the commercial hasn't been out for very long, right? I mean, when did that hit the year?

It's just been out for like two weeks? Yes.

Yes. I was sort of thinking about, on top of the investment commentary that you've made. So, as you're sort of thinking through the technology investments or what have you, from a timing perspective, I would imagine that some of that will see later this year and then flowing into next year. And then, obviously, you still got some decisions to make around that. But, is that a reasonable way to think about the technology spend that you have in front of you?

Yes. So, Marc, just let me address that. So, when we look at the technology spend, it's -- part of it is the planning and design that we currently are investing against our future IT infrastructure, which again will start with a rollout of the ERP system across the enterprise. Again, the decision right now is we're not going to do that in kind of like a big bang approach, but rather will be a series of rollouts. But presumably, you could see some deployment at the end of this year and then flowing into FY22.

Okay. That's helpful. And so, one of the surprises, I guess, of the call is the commentary around the acquisitions and looking at acquisitions as a more -- maybe more near-term potential use of cash than maybe some of us were thinking about. And I appreciate you including the commentary on the prioritization of what you might be looking at from an acquisition pipeline perspective. Is it too early to have begun to look at sort of what that pricing for those types of assets might look like, or how should we think about that -- the potential range of opportunities that might be in front of you?

Yes. It's probably a little early. And different assets have different ranges, right? Like the ATS stuff is a little bit more pricey than the janitorial. And it's because it's higher growth, higher margin, right? So, I think we have to synthesize all that. And there's other things that we take into consideration, just besides multiple and pure financials. It's like, is there a strategic component to it? Like with ATS, where we talked about expanding our footprint and filling in gaps that we don't have -- or that we do have, rather, around the country. So, we put all those together and bake it into our analysis. But, it's kind of early right now for us. But hopefully, we'll have more to report on soon.

Okay. And then, the last thing for me is, a year ago, EnhancedClean didn't exist, and we were obviously in a different place, right? So, I wanted to sort of get a sense of, when we begin to sort of look at longer term what EnhancedClean could be. And it seems as though there's a certain -- there's going to be certain flow based on the types of customers that we have. But, it certainly seems to be encouraging from the survey data that you had in your slides and the like. I wanted to get a sense of that survey work and the feedback that you're getting, how recent was that? And do you get a sense that maybe some of the bigger picture issues, like the stimulus, like -- is that beginning to be reflected back in the commentary that you're getting from customers? Thank.

Yes. I think that one of the biggest knock-on effects to this, Marc, has been the elevation of our brand, right? Because what our competitors are doing a lot of the same stuff that we're doing, but they're basically coming in and saying, we can electrostatic spray, right? Well, we could do that, too. But, when you take on at the EnhancedClean program, you get a different level of training, you get signage with it, right, you get a different level of the way you communicate to clients. You can even have evidence-based testing when we're done to show whether or not we've been successful in eradicating the COVID in the space. And it all ends with kind of the proverbial seal on the window that says, this facility has been EnhancedClean certified, because you remember, when we talk about the fact that we put together an advisory panel. So, I think the biggest push about this, Marc, is that it kind of -- it separates us from the pack. It really differentiates us. As we talked about before, a lot of our competitors are smaller regional companies. They don't have the resources that we have or the scale that we have or the supply chain. All those things are coming to fore now that we're this pandemic and has really inured to our benefit.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yes. Thank you. I just want to thank everybody for being on the call and all the support. And again, I want to thank our teammates for this incredible, incredible performance, and again, culture like no other, really enthusiastic. And we’ll look forward to being back in Q2 to update you. And in the meantime, just stay safe and don't let your guard down. We're getting out of this. So, let's continue on, everybody. Thank you.

Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.