ABM Industries Inc (ABM) 2020 Q2 法說會逐字稿

Greetings, and welcome to the ABM Industries Second Quarter 2020 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Ms. Susie Kim, Vice President of Investor Relations and Treasurer for ABM Industries.

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 Anthony Scaglione, Executive Vice President and Chief Financial Officer.

We issued our press release yesterday afternoon announcing our second 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 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 the slide that accompanies our presentation as well as in our filings with the SEC.

During the course of this call, certain non-GAAP financial information will be presented.

A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the Investor tab.

I would now like to turn the call over to Scott.

Thanks, Susie, and good morning to everyone on today's call.

First and foremost, I hope you and your loved ones are all safe and healthy during these extraordinary times.

What we'll be providing our customary review to second quarter results we released yesterday afternoon.

I'm sure we can all agree that nothing about the way we live and operate today is the same as it was when we last spoke to you.

And today's discussion will be unique compared to our previous earnings calls as well.

Almost as soon as we reported our solid first quarter results in March, COVID-19 unfolded quickly throughout the country.

Shelter in place became our new way of life, and nearly every industry has been impacted by the disruptions and closures that have occurred.

By mid-March, our services were classified as essential, and we were on the front lines of the pandemic.

Over the past few months, the pride I have for our organization has been completely redefined.

During a dynamic, ever-shifting environment, we rapidly mobilized to address the safety of our teammates and stakeholders and the heightened needs of our clients.

Our corporate teams also worked around-the-clock to prepare us financially to the unknown.

And as you can imagine, for a company like ABM with 20,000-plus clients and 140,000 employees, coordination of these critical elements was far from simple.

We deployed an operational task force dedicated to understanding infection control and cleaning protocols based on the guidance and recommendations of the CDC, World Health Organization and OSHA, among others.

We also set up an additional 18 cross-functional task force or, as we call them internally our pods, spanning field operations, finance, legal, human resources and, of course, our large enterprise shared service center.

These pods covered areas of critical importance.

We've all read and most likely experienced the supply shortages that have been rampant throughout the pandemic.

On top of that, cities were changing personal protective equipment standards for employers frequently.

I'm so pleased to say that we've been able to meet the demand of our clients during this frenzied environment because of our procurement scale and our pods' structure.

One of the pods is focused on daily site level shutdowns, enabling us to track labor and modulate staffing levels up and down dynamically.

We had one of our strongest cash flow quarters ever, which was the direct result of our liquidity pods and the intense focus on collections and payables.

And the list of mission-critical pods, ensuring business continuity goes on and on.

So we've risen to every challenge, and our second quarter results demonstrate the agility and action-oriented execution of our teams and continue to be best-in-class.

These results don't happen by accident.

The coordination across the firm was simply incredible.

I've never been prouder to be part of ABM, and my confidence in our organization's ability to withstand any event could not be stronger.

So let's get to some data.

For the first quarter, we achieved revenues of $1.5 billion, a revenue decline of only 6.2% compared to last year, and this was driven predominantly by our Aviation division.

With passenger air travel down 95% by April, revenue declines in our Aviation division was certainly expected.

Thankfully, our top line results for the quarter were not as dramatic as may have been expected given how hard commerce was hit by the pandemic.

Tempering the revenue decline was a record quarter for higher-margin work orders, which we call tags, as client demand surged, and we responded to protect their facilities.

We also achieved new sales bookings of more than $500 million year-to-date, an incredibly positive milestone for this time of the year, even by pre-COVID standards.

And I would ask you to pause on this and recognize that we contracted for over $0.5 billion in new business for the half -- first half of this year in this environment.

Our results for the quarter also underscored the adaptability and nimbleness of our variable cost structure, particularly during periods of fluctuating demand.

We manage direct labor, our largest cost by far, to align with business dynamics.

This, in addition to higher-margin tag growth led to adjusted earnings and EBITDA margins that materially exceeded our performance last year and materially exceeded any expectations we could have had as COVID became a reality.

That's another data point to pause and reflect on.

So our ability to execute through crisis speaks for itself.

Looking forward, we recognized early on, janitorial services were going to take on much more significance in what we are now calling the new normal.

We knew that a property's cleaning protocols will become the top priority to facility management of property owners.

And in response to that, we've began developing our proprietary EnhancedClean program in March.

Through our 3-step approach, EnhancedClean will provide clients with a programmatic methodology that has been reviewed by experts using hospital-grade disinfectants, specialized equipment, dedicated signage and innovative technology.

Our solutions include hygiene and safety protocols, utilization of disinfecting procedures like electric static (sic) [electrostatic] spraying and antimicrobial treatments, products for high-touch surfaces, personal protective equipment and employee training in disinfection best practices.

This has all been validated by an advisory panel of external and internal experts and includes evidence-based testing to confirm a lack of viral presence.

We believe, over time, EnhancedClean will become part of our clients' permanent scope and not just a tag or work order.

Our view is that virus protection will be a lasting change well past COVID.

We've also become a leading voice for our industry.

In April, we announced our partnership with 6 of the largest privately owned cleaning contractors to form the Cleaning Coalition of America.

As a founding member and with our Head of Strategy as President, ABM is committed to representing an industry with more than 1 million workers who are on the front lines of this pandemic across the country.

Our coalition represents the needs of an industry that has been playing a vital role in keeping essential services operating as the country works to recover from this pandemic.

So clearly, we've delivered in an incredibly tough and unpredictable environment.

But I'm sure the question on your minds is about what we are seeing today, and how we anticipate broader economic recoveries to occur.

First, let's all remember, it's only been 3 months under this new operating environment.

So for us to say we have clear insight would be a mistake.

Market dynamics keep changing, and there are still too many unknowns today.

Will schools reopen?

How quickly will air travel start returning?

Will there be a COVID spike in the fall or will the curve continue to flatten and people return to their offices?

All unknowns and clearly out of our control.

So for us to estimate guidance for the remainder of the year doesn't make any sense given so many near-term variables.

However, I'll take you through some of the longer-term fundamentals we see in our end markets that should give you perspective as we navigate the next year or 2.

So let me set the framework.

Today, clients are starting to look ahead and explore how and when they will reenter the workplace in the new normal.

In preparation for this, we see a shift towards wellness and sustainability clearly happening, and our clients are intensely focused on providing their stakeholders with a safe environment, and they want to provide transparency about what they are doing to achieve this.

So our services are going to move to the forefront rather than behind the scenes.

Access to staffing of supplies is also a top priority with a new realization that cost is only one component of the decision tree, given their experience over the last few months.

Service providers with a robust supply chain at scale will be prioritized.

With what ABM brings as a holistic solution versus our fragmented regional competitors, we believe we will undoubtedly become the clear choice in the future.

In the short term, it still comes down to when will people be ready to return to their spaces and more normalized daily life and what will that mean.

Depending on the industry, there are a variety of factors spanning a wide spectrum of possibilities.

So let's go through our end markets, and let's start with B&I and T&M.

Pre-COVID B&I and T&M had been stable performers, growing with strategic accounts while driving profit through strategic labor management.

With the pandemic, we saw clients overdrive COVID-related tag orders as they engaged in crisis response modes to protect their occupants.

We're currently within the peak period of site closures and work-from-home protocols, so daily services have modulated down with reduced occupancy since that initial period.

Despite the downturn, we're starting to see clients plan workplace reentries as markets reopen.

And as a result, we believe EnhancedClean interest will build as well.

This could result in additional tag work and longer-term scope changes.

Because EnhancedClean is a higher margin offering, we see long-term incremental margin capture in both of these segments, and we believe organic growth has the potential to move from GDP to GDP plus as indications are that many clients will be spending more for cleaning.

Again, we're only 3 months in, but this is what we are surmising at this point.

Aviation and Education are probably the 2 segments that have been and will be the most volatile operationally in the near term.

For Aviation, passenger air travel has declined dramatically, and it's uncertain when both domestic and international travel will return to anywhere near its pre-COVID volumes.

Prior to the pandemic, we had begun shifting our business mix, prioritizing airport opportunities over airlines.

We believe this will serve us well as we see opportunities at airports around the country with investments in infrastructure and facility upgrades still planned.

You may have seen the unveiling of Terminal B last week at LaGuardia Airport, where we are the primary service provider.

Now that being said, recovery in the Aviation sector will still be longer term.

Within Education, I'm sure many of you have personally experienced how K-12 and higher education institutions have moved to remote learning formats in the short term.

During the second quarter, we saw Education clients who are very loyal to their extended staff at ABM, accelerate summer cleanings to the spring.

And we are cautiously optimistic that our work will continue through this intermittent phase as infection control is a top priority for educators and parents.

But full returns in both K-12 and universities have not yet been defined.

Some schools in the South are talking about full returns, including intramural sports, while schools in the Northeast have discussed delayed returns.

Many of the decisions for the fall will come to a head in mid-July.

So we will have a far better outlook by the end of Q3.

But one thing we are certain of, once back, our EnhancedClean disinfection control will be front and center in the Education space.

Technical Solutions exists right in the middle of the spectrum for us.

We have a strong backlog coming into the year.

And that fortunately remains so today, which is the takeaway for our investors.

Projects were paused, not canceled.

Return in Q2 was impacted by the decreased ability to access project locations.

With Technical Solutions primary end market in the Education sector, school administrators were operating in crisis mode, and retrofit projects weren't top of mind in the second quarter.

Student safety and future planning was.

Therefore, we're seeing a short to medium-term impact.

With that said, Education clients will be looking at their budgets and seeking ways to ease constraints especially through a slowdown or a recession.

Across the country, we have seen school budget cuts ranging from 7% to 25%, and this plays right into the compelling cost savings offering that our Technical Solutions business has been built on, retrofit projects, our capital expenses and energy savings of 30-plus percent which translate to operate budget savings and allow schools to retain teachers and fund after-school programs.

We had a big energy project win in the South just 2 weeks ago, a $6 million capital retrofit project translated to energy savings that allowed 15 teachers targeted to exit to remain on the payroll and all after-school programs to stay in place.

So we believe 2021 could see some strong wins in ATS.

So when you package all this up, while we are operating under conditions that can't be estimated financially with any degree of certainty over the next 6 months, the long-term fundamentals for our business are stronger than they've ever been, having ample liquidity and the flexibility to invest in growth areas such as EnhancedClean will allow us to capitalize on a range of opportunities in a post-COVID world.

As we sit here in June, we're moving from the period in the March-April time frame that, for us, was critically reactive into a period that is far more prescriptive and planned, and we couldn't be more ready.

Finally, I want to address Anthony.

As many of you know, Anthony and I began this journey together 5 years ago.

And over that time, ABM has transformed to become the powerful enterprise it is today.

Anthony has been instrumental in creating our strategy, executing our goals, supporting our culture and developing so much of the talent that makes ABM what it is today.

And when it comes to talent development, that includes Dean Chin, who will be named our interim CFO.

Anthony has not only been among my most respected colleagues, but he is my friend as well.

So this is really bittersweet.

I know I speak for everyone at ABM when I express our gratitude for Anthony's contributions over his 11 years of service.

And we wish him the absolute best of luck as he pursues the next phase of his personal and professional journey.

He will always be an indelible part of ABM's past and future success and a permanent member of the ABM family.

With that, I'll turn it over to Anthony one last time to cover our financial results.

Anthony?

Thanks for those kind words, Scott.

It has been a privilege to be part of the ABM team over the last 11 years.

Scott has always said, the foundation of ABM's strength is our people, and that is what I will miss the most.

At ABM, I've been granted so many opportunities, specifically over the last 5 years as CFO.

Among the most special was spending time with our extraordinary teams, across our front lines and throughout our corporate offices, both in the U.S. and internationally.

I can attest that we have the most passionate teams or often the unsung heroes of some of the country's most important facilities.

And of course, everyone I have worked with on the finance team over the years has impacted my life, both personally and professionally.

While I'm excited for the next phase of my professional journey, I am sad to leave the amazing people here at ABM.

I have the utmost confidence that this team will lead ABM into an even brighter future and continue to unlock great success, which I'll always cheer on.

Now onto the second quarter.

Revenues for the quarter were $1.5 billion, a total decrease of approximately 6% compared to last year, reflecting the COVID-19 operating environment predominantly within Aviation, Technical Solutions and Education.

Partially offsetting the revenue decline was record work orders, or as we call them, tags.

Tags were a strength in the quarter for B&I, Technology & Manufacturing as well as Education.

During the quarter, we also recorded an impairment charge.

We typically perform our annual assessment of goodwill during the fourth quarter, unless there's a potential indicator of impairment.

As a result of the impact COVID-19 had on our industry group, notably within Aviation and Education, we performed the assessment of our goodwill and intangible values during the second quarter.

With the assistance of third-party valuation experts and factoring in the impact of COVID-19 on the more sensitive end markets impacted by the pandemic as well as higher overall discount rate, we recorded a pretax noncash charge of $172.8 million or $2.55 per diluted share.

Therefore, on a GAAP basis, we reported a loss from continuing operations of $136.8 million or $2.05 per diluted share.

On a year-over-year basis, I'd also like to remind everyone that the second quarter saw a 1 extra working day, which has traditionally equated to approximately $7 million in additional labor expense.

And given the variability during the quarter, we estimate that this had an approximately $6 million impact during the quarter.

On an adjusted basis, income from continuing operations for the quarter increased to $40.4 million or $0.60 per diluted share compared to $31.5 million or $0.47 last year.

Our year-over-year growth was driven operationally by our higher-margin tag revenue as well as lower expenses associated with reductions in discretionary spend, share-based comp reversals and the timing of IT project expenses.

Partially offsetting this quarter's performance was an increase in bad debt expense of approximately $9 million due to specific reserves established for client receivables in certain industries.

We will continue to monitor client receivables and overall credit conditions and feel this reserve was prudent at this time.

We also do not see any further increases.

Our strong performance during the quarter led to adjusted EBITDA of approximately $91 million at a margin rate of 6.1% compared to $84.7 million or 5.3% last year.

Now turning to our segment results.

As a reminder, these results reflect the impact of COVID-19 on revenues and operating profit across most of our industry groups.

Additionally, at the operating profit segment level, these results also include the noncash impairment charge related to goodwill and intangibles within Aviation, Education and Technical Solutions.

Moving to B&I.

B&I delivered $785.6 million in revenue, and operating profit grew more than 20% to $59.2 million for a margin rate of 7.5%.

Despite the modest decline in revenue, which was driven by less work in parking and facility services, B&I experienced a rise in janitorial demand.

More specifically, tags and expansions with national clients grew immediately as they sought our assistance during the onset of the pandemic and throughout the quarter.

We also exited some lower-margin accounts in our U.S. business.

And as a reminder, apart from our relatively small presence in sports and entertainment arenas and consumer-related parkings, we are not heavily exposed to industries that may have had a more challenging operating environment during the pandemic such as hospitality and retail.

Technology & Manufacturing reported revenues of $233.7 million, up 4.2% versus last year.

Operating profit was $19.7 million for an operating margin of 8.4%.

New business with manufacturing, logistics and high-tech clients enable T&M to offset any business declines from COVID disruptions and certain contract losses from last year.

The clients in T&M look to ABM ensure their continued operating environment in many critical end markets like food processing, industrial manufacturing and utilities.

Janitorial, including higher tag demands and facility services all grew versus last year.

Operating profit margins were impacted modestly by higher reserves for client receivables mainly associated with the pandemic as well as the lingering impact of lost accounts from last year.

Aviation reported revenues of $185 million, an impairment charge of $61.1 million led to an operating loss of $60.5 million.

As we discussed on last quarter's call, we expressed Aviation's vulnerability to COVID-19, and our results for the quarter demonstrate the unfortunate developments that have occurred in the broader macro operating environment since then.

We have been able to implement cost and expense actions aggressively to mitigate pandemic-related effects.

For example, dynamic labor reportings allowed us to reduce labor that aligned with client demands.

We believe EnhancedClean services such as electrostatic spraying could be part of the new norm in this segment given the heavy impact that the pandemic has had on the travel industry.

While we see headwinds and significant uncertainty in this segment and are monitoring passenger travel data and statistics and gauge future demand, we are repositioning the portfolio to better align ABM in this segment going forward.

Revenue in Education was $200.1 million, down $9 million from last year, reflecting pandemic-related school closures.

An impairment charge of $99.3 million related to both our legacy and GCA portfolio led to an operating loss of $85.8 million.

Excluding the impairment, operating profit would have grown by 28.6% to $13.6 million from an operating margin of 6.8%, higher than our expectations for Q2 given the timing of summer cleans.

While we continue to see tremendous opportunity for long-term outsourcing trends in this segment, the current pandemic has shifted demand, and it's unknown when and to what degree schools will reopen in the fall.

Finally, on to Technical Solutions.

Technical Solutions reported revenues of $122.3 million, down from last year's $135.9 million due to lower project churn.

As Scott mentioned, the pandemic prevented access at certain project sites, mainly during the latter part of the quarter.

A $12.4 million impairment charge related to our U.K. operations led to an operating loss of $8.4 million.

Excluding the impairment, operating profit would have been $3.9 million or an operating margin of 3.2%.

Also impacting this quarter's results was the negative impact of higher commission expense from the amortization of commissions that were capitalized last year due to ASC 606.

Turning to cash and liquidity.

Cash flow from operations was approximately $162 million during the quarter and free cash flow was approximately $155 million.

As Scott touched on, the liquidity office we mobilized in nearly at the onset of the pandemic was instrumental in achieving these results.

We implemented acute trackings related to the critical accounts receivables and payables across all main drivers, including billing and collections, direct and indirect payroll, procurement and taxes, among other aspects.

The work of all these cross-functional teams in conjunction with the strategic March drawdown of our credit facility enabled us to end the quarter with record cash and cash equivalents of $556 million.

To strengthen our liquidity even further, we recently negotiated our credit facility.

This was a preemptive measure intended to allow us maximum flexibility as we navigate the coming quarters during the pandemic.

As you will see in the full amendment filed with our 10-Q later this week, some of the changes in the credit facility include: Favorable max leverage limits, especially over the next 4 quarters; out of an abundance of a caution given the trailing calculation of our bank-defined EBITDA; the ability to net up to $100 million as part of our max leverage calculation; revised fixed charge coverage ratio that reflects the potential for additional borrowings and associated interest; and provisions that protect our Board's ability to continue ABM's long-standing dividend policy.

In addition, the amended facility bears interest at a higher cost of borrowing and also contains other negative covenants given the flexibility provided by the aforementioned provisions.

As evidenced by our pre and post amendment covenant achievements for the second quarter, these actions were precautionary, and we remain committed to using our strong cash flow generation and balance to delever and continue to invest in our growth.

We've ended the quarter with total debt, including standby levers of credit of $1.4 billion and a bank-adjusted leverage ratio of 3.68x or 3.97x under our preamended facility.

We also repurchased approximately 200,000 shares of common stock for $5.1 million.

And in March, we suspended all further share repurchases as we focus on prudent liquidity management throughout this crisis.

During the quarter, we paid our 216th 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 217th consecutive quarterly cash dividend.

During the quarter, Congress enacted the CARES Act, and in the U.K., a similar active pass which provides certain stimulus measures to the broader economy.

We have adopted some of the business tax provisions that were permitted under this new legislation.

This includes a refundable credit for employee retention, primarily in the U.K. as well as the deferral of certain U.S. payroll tax remittances through December 31, 2020, to the future years with 50% of the deferred amount due in calendar 2021 and the remaining due in calendar 2022.

While we're on the topic of taxes, I also want to note that before the pandemic, we had originally anticipated $7 million related to discrete tax items such as the work opportunity tax credit and the tax impact of stock-based compensation awards.

Given the disruption to traditional hiring practices due to the pandemic, we currently believe WOTC will be lower this fiscal year as a result of the current environment.

And as I mentioned earlier, just as we saw at the extra working day in Q2 this year, we will see 1 less working day in Q4.

Finally, I'd like to reiterate Scott's statement that we have withdrawn our annual guidance outlook.

Despite the immeasurable nature of current events, I did want to provide some additional financial context of actions that have been taken after the second quarter.

These actions may modulate over time as we align client demand for our services during the pandemic and beyond.

At the project level, as discussed, we have instituted several measures to better match revenue changes with labor.

We have implemented temporary reductions in salary across certain staff and management, temporarily furloughed and reduced hours for certain corporate staff, while continuing to provide full benefits to those impacted.

We have reduced or suspended certain benefits such as our 401(k) matchings.

And while these actions were difficult, we felt they were the right actions to help us manage through this uncertain period, while providing us enough flexibility to manage back up as we see demand and the general market and operating environment stabilize.

In conclusion, I will echo Scott's pride in our team for the execution and determination this -- during this very difficult time.

Under unprecedented conditions, we've risen once again to achieve and even exceed our goals.

I remain excited about the momentum ABM will continue to build into the future.

Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Congratulations on a good quarter.

And Anthony, congratulations on what seems to be an exciting new opportunity.

So first one for me is, clearly blowout margin performance in the quarter, helped in part by the tags.

And I'm just curious how that -- those type of work orders trended into the third quarter as we moved into sort of this peak facility closure environment.

And I guess more broadly, what we're trying to flesh out is how sustainable this margin performance was this quarter?

And whether there is a structural change in margins in effect here?

Yes, I'll take that.

So I just want to frame this whole conversation by -- this is still really early on, right?

And we did see great tag performance in Q2.

And we believe there's an opportunity for it to continue into Q3 as offices reopen and the economy reemerges.

Our longer-term goal, Sean, is to convert those tag work orders into permanent scope changes and hold that margin percentage, right?

So they are higher-margin services.

Because if you think about it, right, we have to train our people in virus protection.

The equipment is more costly.

The chemicals are more costly.

So it justifies a higher margin.

So for us, the trick is going to be how do you convert these tag work orders to see them come down and become more permanent, and ultimately shift our margin mix up on a more permanent basis.

So I think the way we're looking at the phasing over the next 6 months plus is that when offices reopen and people are coming back, there will be a sustained tag level.

Because if you're a facility manager, here's the way you're thinking about the reopening.

You're saying, I have to bleach the place as people come back.

And I don't have the time right now to think more thoughtfully, more prescriptively about how I'm going to reengineer the longer-term scope.

So we think kind of Phase 1 of reopening, you'll still see elevated tag levels.

And kind of Phase 2, and whenever that happens, 6 months from now, 12 months from now, you'll start seeing a drop-off in tags, and you're going to see the shift towards scope adjustment.

And so that's the way we're thinking about it.

Is that helpful?

Yes, that's helpful.

And I guess the other dynamic it'd be helpful to get some color on is, there are some scope modulations around this.

Any sense at all on how many of those or to what magnitude of those are going to be permanent changes in terms of how your clients are approaching office life?

And I'm just curious also how competitors are responding to some of those scope modulations.

Has there been any pressure on pricing on just a normal janitorial contracts during the quarter, like outside of tags?

Yes.

So I think, again, I will say it's early on, but every facility manager that we've talked to has talked about the fact that they have to have virus protection now as a long-lasting scope enhancement.

I mean can you imagine just even you going back to your office and you see the building manager and you say, "Hey, what's different about cleaning now?" And they're like, "Well, nothing much." That couldn't happen, right?

So there has to be permanent change in virus protection.

So that's going to happen, and that's going to be higher margin.

And I think what we're hearing too and what we're seeing is that there has to be more transparency around these cleaning programs, with signage or what have you.

So this all plays to our benefit for the long-term, and why we do think this -- it will be lasting.

We've had advantage over our competitors.

Because if you remember, our competitors have set all the smaller fragmented companies, and they haven't had the access that we have had to supply chain.

Anecdotally, I don't have statistics for you, but I've heard of us picking up work from other clients that we didn't have because their contractors didn't have access to supply chain.

We've always talked about how scale is an advantage for ABM.

This pandemic certainly proved that out, just again, just because of how robust our supply chain was.

And our ability to train and have the resources, have an advisory panel.

So we haven't seen pressure on pricing, right, we haven't -- because everyone's very intent on having this virus protection.

But we do think over the long term, this is going to help us, and we did mention in prepared remarks, there is an opportunity to move up our growth levels in B&I, which we've always said with GDP to start knocking on the door of GDP plus.

So I just think everything is -- the fundamentals are just pointing up.

Our next question comes from the line of Andrew Wittmann with Baird.

Great.

There's a lot to unpack here.

And Anthony, before I forget, I want to say it's been a pleasure and best of luck.

But yes, so just -- you're -- in the prepared remarks, I heard 3 things that I thought I wanted to drill into a little bit more.

I heard first that obviously, tags were great in the quarter.

I heard in the prepared remarks, they declined somewhat, but it sounds like you still expect those to stay high, which I guess makes sense.

But the second thing I heard is that you had a $9 million bad debt write-off in the quarter.

I wanted to just confirm that, that was not excluded from adjusted EPS.

That was it.

Actually, the quarter would have been better if not for that.

And then I heard that there actually were several and significant, sounds like, margin-related actions post the quarter that you mentioned kind of at the end of your prepared remarks that presumably were not part of the reason the margins were so good in the quarter that you just reported.

So those all seemed fairly significant to me.

I guess the question is, did I understand those things correctly.

And then I guess, from there, the question is, the margin performance, particularly in B&I and Education, how sustainable do you think the mix will be to allow you to keep those margins elevated?

In other words, is this a fair way to think about in the near term?

Or do you think you maybe over earn from very heavy tag work in the quarter?

Sorry for the long question.

No problem.

I'll try to answer the component parts, Andy, and thank you for the kind words at the onset.

So from the standpoint of a margin, most of that is going to be driven by the gross margin expansion as well as some corporate actions that we took that were unique in the quarter like the share-based comp, all within our adjusted, and that's going to be offset by the working day as well as the bad debt.

So we did not exclude any of those items to the reported number.

And then there are going to be pluses and minuses across other core categories.

When you speak about the actions that we took after the quarter, really, those actions out there is direct labor because I think one of the things that you saw in the quarter as our revenue modulated down, we were able to take corresponding actions on the direct labor side to maintain.

And in some cases, even improve the margin profile at the site level.

But those actions out there of direct labor are really intended to manage expenses, a process of various unknown and to offset certain costs that we anticipate to increase mainly around PPE, supplies as well as some overhead costs that are embedded in some parts of the business are difficult to take out like in Aviation.

And we took out a lot of costs, but there's a certain level of overhead that you have to maintain.

So when you look at that and you look at what -- those are really preemptive in nature, Andy, and we expect as conditions begin to improve going forward, we will begin to bring back some of those costs, specifically the reduction of salaries and the furloughs, et cetera.

But we've done this as a preemptive measure.

To your question around the margin profile in B&I and T&M, both of those margin profiles benefited obviously from tags.

And as you can imagine, Andy, some of our tags are pass-through margins, very similar to the base contract.

But what we saw in the quarter was what we really were excited about, which were the higher-margin tags that really became a focal point as the pandemic began to spread.

And it's one of the reasons why we set up the program around EnhancedClean because we do believe this is not something that's going to be temporary.

We believe there is a lasting effect as it relates to the importance of sanitation, the importance of what we do on a day-to-day basis.

So we do expect some continuation as it relates to whether it's going to be tags or embedded in the contract, to Scott's point, that things that we're working on a go forward.

And Scott, I don't know if you want to add anything else.

No, I think you got it right.

The long term is that the facilities business has forever changed.

And the stuff that we did and we specialized, and that was always back to the house behind the scenes is front and center.

Because when people return to their offices, it's all of the -- about creating a sense of trust and safety, and the way you're going to do that is by visibility of the staff.

So I think these are all incremental positives for us over the long term.

Great.

I just had 2 other, I think, quicker follow-ups here that I wanted to ask.

And just for -- so we can understand greater context.

I think typically, you guys have said that your tag revenue is around 20%, say, of the B&I segment, like that's just kind of an average.

I know it's not exactly that.

But given that the mix shift was pretty significant here, I was wondering how much of the revenue this quarter was driven by the higher-margin tag.

I think that would just help us understand exactly how this all unfolded in the quarter a little bit better.

Yes.

I don't -- I'm not sure where you got your 20% from, typically our tags on an enterprise basis, average around 4% to 5% on an annualized basis.

And that's across all categories, B&I being the largest the benefit given its concentration on the janitorial side, followed by T&M.

What we saw in the quarter, if you would analyze is probably trending closer to a 7% of overall revenues being tags.

And again, those are obviously higher margins to the point I made earlier.

For B&I, it really led the growth in the quarter, we saw approximately a more than 50% growth in the quarter year-on-year from tags.

And then overall, we had significant growth across all of the end markets, but B&I has led the way in terms of that growth.

Sorry for misquoting you.

That's really helpful context and I appreciate that.

Scott, the last one that I have is for you.

It has to do with the $541 million of new business sold in the first half of the year.

Thank you for disclosing that again.

I guess 2 questions on that.

One is, how much of that is in Technical Solutions versus in the annuity?

I know in the past, and you've required that when you've mentioned this number in the past, it's been -- it's combined both businesses, both the annuity businesses, if you will, as well as Technical Solutions.

So I was hoping you could help us separate that a little bit.

And then if you could talk about the other side of this equation, which is the retention rates through all of this, and how this could translate into net new business.

Andy, let me take the first part.

So on the bookings, a really solid story, as Scott alluded to, great growth from a revenue standpoint in the first half.

And the story, it's quite interesting, and you point out the right point.

So in 2019, our first half, a little over 50% of that bookings was ATS.

And that really led to the strong backlog, led to where we stand from an overall revenue growth perspective in that industry group other than what you saw over the last 12 months.

And that was really followed by B&I of roughly 20% in the bookings, and then the rest is going to be scattered across all the other industry groups.

As we fast forward into this year, close to 50% of the bookings is in B&I.

So the story has changed quite a bit year-on-year.

And you would expect that, right?

You would expect given some of the challenges of accessing the sites, given some of the challenges and disruption in some of the end markets that are very exclusive to ATS that you would have expected a slowdown.

That being said, there's still 30% of the total, which is significant.

And we are excited about the prospects of ATS on a longer-term basis.

But it is a year-over-year dynamic, which really points to the diversification strength of our business model.

And then on the retention, Scott, if you wanted to add on retention.

Yes.

Look, retention was really strong in the quarter, 94%.

But I think I'm less interested in quarterly retention.

I'm more interested in the longer term.

And Andy, I can only speak anecdotally about this, but I've been talking to operators around the country.

And if I have $0.05 to every time a client has said us, you will never lose our business, right, after this.

Because you have to remember, you put this in context, right, these clients are in crisis.

And I think what people forget is that when COVID first hit, nobody thought we were going to move to work from home, right?

Everyone was thinking, hey, this could be a week, this could be 2 weeks or we're going to stay in place.

We have to do extra virus protection.

And we like mobilize so fast, and we had extra labor there.

We were doing disinfecting.

And we were kind of the Calgary coming to the rescue for a period of time.

And then because we had the PPE, because we were able, because of our procurement, to get with the supplies they needed, I truly believe that this is going to inure to our benefit over time from a retention standpoint.

And look, will people have short memories?

We're all realist about this, too, right?

Could there be cost pressures down the road if we move into a recession?

Yes.

But I think in terms of our brand with our clients, I don't know how it's ever been stronger than it is today.

Our next question comes from the line of Tim Mulrooney with William Blair.

First, I'd like to say congratulations to Anthony in a very successful tenure at ABM, and good luck to you in your future endeavors, Anthony.

Thanks, Tim.

That really means a lot.

Yes, absolutely.

So I'd like to ask about your contracts.

We've talked about the upside potential from scope modification.

But I'm looking for a little bit more color on the flip side of that, the downside with scope modification, which is a good thing, I understand.

But I just want to talk about it with respect to your Aviation business.

Can you just tell us what you're seeing?

What clients are doing to reduce the scope of their contracts with you in Aviation, maybe with an example or 2?

And if those are temporary or permanent changes?

Yes, I'll take that.

So the Aviation business, it's really -- it's challenging right now because Aviation is all about volume, right, and traffic, and it's been so far down.

And our revenues actually have been modulated down as much as the air traffic has because airports still have to stay open.

And their -- the airlines themselves are doing much more virus protection.

So I think you're going to see a shift again, no different really than any of the other industry groups.

You're going to just see the shift towards higher -- for us, higher-margin services in the virus protection because it's going to be part of every end markets' protocol.

And again, we've heard people say that if you have a choice between going to a supermarket or going to an airport and getting on a plane from a pure safety standpoint, you'd rather choose the latter because of how much they're doing in terms of sanitizing and cleaning at airports and planes.

So that's going to just be a last thing to change, but revenue absolutely down until passenger traffic picks up.

But again, just a final point on that, passenger traffic won't pick up until word of mouth starts happening, where the people that start flying go back and tell their friends and family and business associates, like, I have to tell you, planes are cleaner than ever.

We've got to tell you, they're really prepared.

So it'll -- right?

But it will be a longer period.

Again, it goes to that same thing, Tim, of like people have to feel safe and secure in their spaces, right?

And it's the new normal.

It is not about lobby finishes or how pretty the airport is.

It's about the cleaning program and again, how transparent you are about it.

How much you're talking about it, the signage, the visibility of our people.

It's pretty exciting for us.

That does sound exciting, Scott.

So what would be an example of that, like with your Aviation business?

Does that mean employees will be cleaning the planes in between flights in addition to just going through and quickly cleaning up the garbage?

Are they going to be wiping down services?

What's the practical application of this enhanced focus on cleaning with respect to Aviation?

Sure.

The best way I could describe it to you, and it was interesting for me as I transitioned into this role a few years ago and started really understanding about Aviation.

In between flights when they're cleaning the plane, we would say it was less about actual cleaning and more about logistics, right?

You start at the back of the plane.

You -- our people are getting the seats upright, so they're uniform across.

They're fixing the magazines.

They're putting the pillow in place, right?

They're putting the trays back.

So it was logistics first, cleaning second.

Now it's going to be about cleaning first.

It's going to be about electrostatic spraying.

It's like if you don't go on to that aircraft, and it doesn't feel like you're in an operating room, their brand is going to be deteriorating.

So I think the shift has gone again from logistics to cleaning.

Okay.

That's very clear.

But that's what I was -- that's exactly what I was curious about.

Maybe one more question from me.

Just touching on the competitive environment.

We talked to a number of small local providers in different regions around the country.

And everybody sounds, frankly, very busy right now.

But in thinking about this longer term, do you think there are market share opportunities with larger potential customers who maybe want to step up their hygiene programs and switch to a more sophisticated provider like ABM?

And if so, what does that sales process look like?

What can ABM maybe bring to the table that many of the smaller players cannot?

Look, so let's think about EnhancedClean, which is what we're rallying around, right?

So EnhancedClean isn't just virus protection.

It's not just taking an electrostatic sprayer and dispersing disinfectant.

And I think that's what a lot of our smaller regional companies will do.

Here's what EnhancedClean is for us.

Training our employees, giving them the proper PPE, giving them standard operating practices on how to act in the space.

Giving full robust signage to our facilities partners that they can display.

We put together an advisory panel of external experts as well as our internal experts from our health care division to opine and certify the program.

So like when you walk into an ABM facility and you're doing our enhanced cleaning program, there's going to be literally that sticker on your front door that's says, this property is EnhancedClean-certified, right?

And we're also going to be doing evidence-based testing where we're going to be swabbing after we've done the virus protection and documenting and proving that we've killed the virus.

Like our smaller competitors, they just don't have the resources or the depth of scale to do that and then also guarantee that they're going to have the supplies and the PPE.

So if you're a Fortune 500 company and you're using a smaller regional company, your brand is going to be based on your cleaning protocols and your holistic program.

We haven't seen anybody in the market have anything near the EnhancedClean program.

So we think that's going to allow us to pick up market share.

And again, it's doing the digital marketing, our salespeople are tracking down leads that are coming through our website.

We're putting money around digital outreach.

I mean our smaller competitors, regional competitors.

I mean you're probably chuckling now, but you think they have like a digital marketing department with digital outreach?

So I think we're going to be attacking all these different platforms.

So I just think if we play this thing right, I think it's going to be quite compelling.

Our next question comes from the line of David Silver with CL King & Associates.

Yes.

So I had maybe a comment and then one question and the comment would be related to Anthony's tenure there.

And I think back to and, I guess, the number of the initiatives that the company -- your company has put in place over the last -- just over the last couple of years and maybe the strategic procurement function that theoretically what really didn't exist before.

And then the more recent investments in upgraded IT designed to create a national customer database and then enhanced HR capabilities.

And I don't know, I kind of think everything came together in a very, very nice package.

And I know Anthony wouldn't take all the credit for it.

But based on your long history at the company of the relatively recent vintage of those enhance capabilities, I mean, I really think you -- it came together very nicely.

And I wonder if you could have executed as well in the current environment without all those proactive steps that were put in place over the last couple of years.

Yes.

So I mean, I would take that.

And what Anthony has been just foundational to our success, and he's going to really be missed.

But that being said, what Anthony would say is this team, right?

He's put together an amazing team of people.

And these kinds of actions, even if it's something like a financial system or any of these protocols happens across -- they don't happen in silos.

So we have a really amazing team.

Dean Chin, who's going to be appointed, our interim CFO has worked closely with Anthony.

And a lot of the things that you mentioned, they've been side-by-side on.

So I'm preempting, Anthony, but all he would continue to say is that we just have this amazing, amazing team.

I was just going to add, the investments that you alluded to set us up for success today.

So if you think back when we made the investment in HR, when we made the investment sale, a lot of questions around how much were those investments?

Why were you making it?

And if you recall, there was some consternation, I would say, in terms of our ability to execute.

But if you fast forward it today and you look at what those investments have allowed us to accomplish in this environment, had we not made those investments and had we not been had the fortitude to make those investments, it may have been a different story this quarter.

So really proud to Scott's point about the collective team effort across the enterprise and the ability to execute in good times and in bad times, which has had allowed us to be where we are today.

Okay.

And now my question, and I hope I get this out clearly.

But I'm going to maybe do a little pushback on technical solutions and decline that were there and I guess the impairment charge.

But I kind of wonder about whether there is kind of trade-offs, right, between an elevated level of tag work or an elevated -- a higher than traditional amount of effort and budget committed to the cleaning function.

And I'm just wondering whether you think during, let's say, a, like during the current quarter, some of that elevated tag work came out of the same budget that normally would have gone to a Technical Solutions project.

So in other words, Technical Solutions, you try to cross-sell into the customers that you've already performing cleaning services for and this quarter's results indicate that per customer, there's a greater emphasis and more budget dollars committed to cleaning.

Yes.

The way I would answer that is, it's really mixing and matching.

It's apples and oranges because the ATS work is project work and it's capital, it's not operating.

So -- and so that was the real issue.

And with ATS, the slowdown is they didn't have access to the facilities because when the facilities were shut down -- they shut them down, and that was really the delay.

I think they're starting to see access open up now.

And when you think about it, their end market is education.

So if you're a school administrator and you're going through this crisis, the last thing you're thinking about right now is giving the tech level team the access to shut down the school and shut down the systems.

You're thinking about getting these kids to an e-learning platform.

So they were very distracted.

Now they're starting to come up for air.

And the really -- the pivot point here and why we think there's so much opportunity in the ATS division is because school budgets are being cut around the country.

Everyone's seeing it in their own community.

And the way you get around that is you save money on energy.

And it plays right into our sweet spot.

So we think ATS is going to have an amazing trajectory.

But trading, the trade in dollars, you're talking about capital versus operating, we don't really see that.

Okay.

No, that's very clear.

And last question, but with your enhanced cleaning program that you're offering and using as a lever to gain market share.

Does that commitment, like when a customer agrees to an EnhancedClean type of service, does that come with a warranty or a guarantee of any kind?

Or something that in effect might create a liability for your company in the event that the service doesn't reach expected standards, anything like that to know about EnhancedClean?

Yes.

No, that's a great question.

Now the answer is it doesn't.

We're very prescriptive even in our contract language that it doesn't.

Because this is the one thing like nobody knows where it's coming from.

And people come to an office, but they could be bringing it with them.

And the one thing we know, at least for now, about once you do virus protection, it doesn't last for 30, 60, 90 days, right?

So we don't -- we absolutely don't make those guarantees.

What we do, though, with our EnhancedClean, which is different than everyone else is that we will do evidence-based testing.

So we'll go in, we'll do electric static (sic) [electrostatic] spraying and then we'll test on the spot to show that we've actually killed the virus.

But then once we're done, we were -- there's no liability at that point, and clients understand that.

Our next question comes from the line of Tate Sullivan with Maxim Group.

And thanks for all that detail on the new technology that you can introduce to clients.

Do you have to buy different types of equipment going forward?

Or are you pretty well set to fulfill extra demand for enhanced cleaning services, please?

Yes.

So the equipment that you use for EnhancedClean is very different then what any janitorial provider has now like an electrostatic spraying machine, which is -- we kid around, but if you think out like Ghostbusters, right?

It's literally like the spray on and when it sprays, it electrostatically sticks to the surfaces.

That kind of equipment is quite expensive.

It could be $3,000 or $4,000 per machine, which again plays to ABM's strength, right, because we have the capital to make these investments.

And even the disinfectants that we're buying are more expensive.

So very, very different.

We've preordered multimillion dollars’ worth of equipment now to make sure that our supply chain is secure.

And again, with our scale, it's been amazing because we get the access that others don't.

So yes, very, very different type of application for the virus protection.

And one more for me, if I may.

In Technical Solutions, have you done historically or you've received incoming client requests to study air quality or an improved air quality with your work on HVAC systems?

Yes, we do.

And it's been in heightened demand.

Not -- it's not the same level as EnhancedClean.

But I don't want to get too technical, but there's such thing is like MERV filters that you can put on your HVAC system that filter out viruses.

People are talking about using UVC light in air conditioning systems, which has been known to kill virus.

But this is such an emerging thing, right?

It's -- we've never seen anything like this before.

So a lot of people are studying and sticking their toe in.

And so it's early on, but our Technical Solutions outside of just energy efficiency, people are looking at things like, again, filtration and UVC lighting to kill the virus.

Ladies and gentlemen, we have time for one more question.

Our final question comes from the line of Marc Riddick with Sidoti & Company.

Anthony, congratulations.

Thank you very much for all your help and assistance over the years and certainly wish you the best in your near future endeavor.

Thanks, Marc.

I wanted to sort of focus with my -- 2 questions really more on strategy and timing and kind of how certain things came to be.

I think in the prepared remarks, you may have mentioned as far as the cleaning program development beginning in March.

Maybe you could sort of take us through sort of the time frame?

And then when that particular offering began to be put in front of potential customers and maybe kind of the dynamic and the feedback there.

I just wanted to get a little bit more of a scope around kind of -- because it's been certainly a very dynamic time for everyone but -- for you guys over the last several weeks.

So I was wondering if you could take us through that, then I have 1 last follow-up.

So the way to think about it is, right, we start hearing words of COVID in February.

And in March, it was all about which we were calling our tag works for disinfection, but that wasn't our EnhancedClean program.

So wave 1 of this was go kill the virus, right?

We wouldn't have electrostatic machines.

We were doing hands with hand labor, right?

So wave 1 of this was just kill the virus with disinfectant.

And during that wave 1, we say, this is long-lasting.

This has changed the facilities industry forever.

We need to develop something more programmatic, and that's where we came up with EnhancedClean, which I said, has everything from standard operating procedures to PPE to an advisory panel, this holistic program with signage.

That all came together in really March to mid-April, and we just really started rolling it out over the last couple of weeks, and we haven't even rolled it out yet.

Holistically, we're really focusing on our larger enterprise clients right now.

So the evolution went from pure disinfection, reactive, go clean it to this big holistic offering that's really, really in early, early stages right now.

Okay.

That's very, very helpful.

So now that actually kind of leads a little bit into the follow-up, which is, I was wondering if you could spend a little time on the development of the cleaning coalition and kind of how that came to be because there seems to be -- there also seems to be very new as far as timing.

But I want to get some thoughts as to the development of it, kind of how that came to be?

And then sort of the goals in that process because it seems as though that's going to have the opportunity to be -- kind of drive the conversation, not just for themselves, but for the entire industry.

So I was wondering if you could talk about that a bit.

Yes, it's great.

We actually were really proud to have taken the lead on that.

We -- this crisis was happening.

And all of a sudden, we see in Congress, people lobbying on their behalf, it started with the aviation industry, right?

And there was this recognition that we don't have a voice in legislative matters.

The industry doesn't have a voice in legislative matters.

So we dialed up our 5 or 6 bigger competitors, if you will, in the markets that's largest scale cleaning companies, said, do you want to get together and pull our voices for what's important going forward, and create a coalition?

We'll hire a lobbying group, a media publicity group and see if we can get stuff done because we represent over 1 million workers.

Again, that didn't have a voice in -- as the CARES Act program was coming together, we said, there's things that we have to focus on like getting priority on supplies is -- there was no priority after the health care providers.

And we were sitting there saying, "Hey, listen, even health care providers can't do their work unless we get to clean.

America can't reopen unless we're cleaning those spaces and places, right?"

So we put this together, and we said we're going to lobby Congress.

We're going to talk about basically having our voice heard.

And literally, everyone was really excited about this.

We think that this is something that can have legs past COVID, and we can start having more of a voice in legislative matters.

But that's also going to depend on whether or not the things that we're advocating for can get some traction, right?

Because we're still probably small compared to some of the other bigger lobbying groups.

So we're going into this eyes wide open, but I think we're pretty excited about this initiative of pooling what's important to the industry.

And I would add, Marc, as you think about the front lines and having them understand the precautions we're taking, and some of this is also marketing.

Because as you know, what was a headwind for us for the last couple of years in terms of a labor pool -- access to labor pool recruiting, where unemployment is and where we see opportunities from a labor standpoint, that headwind goes away.

It doesn't mean they necessarily cost associated with the per hour charge, necessarily dissipates.

But the increase in cost that we saw, we see that as no longer as a headwind and potentially as a tailwind going forward.

Ladies and gentlemen, that concludes our time allowed for questions.

I'll turn the floor back to management for any final comments.

Okay.

I just wanted -- first of all, thanks, everyone, for joining.

But before I hang off, I just have to tell you, I said it in my prepared remarks, I just can't thank our team enough for everything they've done through this crisis.

This has literally been 24/7, and you think about what we do.

Our teams are on the front line fighting the virus, right?

If it's a fire, we are the firefighters.

And it's just -- I just don't have the words to articulate what our folks have done and accomplished on behalf of our clients.

And safety is the most important thing, and our people have stayed safe, and we've given them the training, and they feel good about what they're doing because we are actually helping society.

It's just been phenomenal.

And again, one last shout-out to Anthony.

He's been an amazing partner to me over the last 5 years.

We're going to miss him, but excited about his next venture, and he's going to be -- where he's going, he'll make a foundational change there as well.

So really excited for him.

Look forward to updating you all in Q3.

I think we're going to have a lot more insight to what's going on with this pandemic over the next 3 months.

So we'll chat then.

Stay safe and don't let your guard down.

It's not over yet, everybody.

Thanks so much.

Thank you.

This concludes today's conference.

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Thank you for your participation.