Able Service, Inc. (ABM) Earnings Call Transcript & Summary

Greetings and welcome to the ABM Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your Mr. David Gold. Please go ahead.

Thank you for joining us today. With us today is Scott Salmirs, our President and Chief Executive Officer; Earl Ellis, our Executive Vice President and Chief Financial Officer, will join for Q&A. We issued a press release earlier today announcing a definitive agreement to acquire Able Services. A copy of this release and an accompanying slide presentation we will be referring to can be found on our corporate website under the Investor Relations section. 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. Statements represent our current judgment of what the future holds. But 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. I would now like to turn the call over to Scott.

Thank you, David, and thank you all for joining us to discuss ABM's pending acquisition of Able Services, a transaction that we believe will create significant value for all of our stakeholders. There was a slide presentation posted on our website under the Investor Relations center that I'll be referring to. We're very pleased to announce this acquisition, and there are several key takeaways that I want to highlight. First, we are buying quality. Able is a leading provider of janitorial and engineering services with more than 90 years of operating excellence. They have an impressive client roster, a national footprint and more than 13,000 employees. It's a company that we've long admired and one that will increase our scale, expand our capabilities and accelerate our long-term growth. Second, this jump starts the new strategic plan that we've developed to accelerate our revenue growth and margin expansion in the coming years by strengthening our engineering capabilities and expanding our janitorial services in attractive geographies and at a time of heightened demand for extra cleaning and disinfecting services. Third, we expect the transaction to be accretive to adjusted EPS from day 1, and after completion, we'll have a very manageable leverage ratio of approximately 3x. With both companies having strong free cash flow generation, the ratio should decline in short order. And fourth, this acquisition clearly demonstrates how attractive ABM is as a potential acquirer when high-quality assets become available. Now let's take a closer look at the strategic importance of the transaction. Please turn to Slide 3. The combination of ABM and Able is a compelling, strategic and cultural combination, joining 2 trusted and experienced providers of building services. Starting with culture. We are excited to find the company that is such a strong fit. We share many core values with Able as well as a long history born from both companies' family-founded roots in San Francisco. Like ABM, Able has grown and succeeded over many decades through a commitment to integrity and a focus on delivering exceptional service to clients. Able bring significant scale to our core service lines, expanding both our engineering and janitorial capabilities, two areas that we see as key long-term growth drivers for ABM. In fact, our combined stationary engineering capabilities, together with our technical solution services will represent revenues of close to $2 billion. With this increased scale, ABM will be better able to address heightened client focus on sustainability and energy efficiency as well as the need to maintain cleaner, healthier and more productive environments. Additionally, we'll gain approximately $400 million of revenue in janitorial services at a time when safety and health are of primary importance to commercial clients. As you know, our EnhancedClean is a comprehensive service that provides rigorous cleaning and disinfecting by trained professionals. Our ability to rapidly deliver virus protection services developed by our Advisory Council of infectious disease and industrial hygiene experts has distinguished ABM during the pandemic and underscored the unique value that we can provide. We believe that our combined Janitorial business can leverage the well-recognized EnhancedClean brand to meet continued demand for safer and healthier environments in a post-pandemic world. Able also boosts our presence and capabilities in attractive geographies while offering margin enhancement opportunities as we move forward with plans to accelerate integrated facility services and bundled service offerings to our customers. Slide 4 provides an overview of Able. Founded in 1926, Able Is the largest family-owned building services provider in the U.S., serving more than 3,500 customer locations in over 1 billion square feet of building space. Able's services network extends nationwide with an emphasis on 3 major geographies: the West Coast; the Metro Chicago area; and the East Coast. The company's highly regarded engineering services focuses on maximizing operational efficiency and cost effectiveness for facilities and related fixed assets while balancing the need for environmental comfort, convenience and safety. Able also provides a comprehensive range of janitorial services for a blue-chip roster of Fortune 500 clients across a diversified range of end markets, including commercial real estate, health care, technology, leisure and hospitality, Able's long history and deep client relationships in janitorial services reflects the dedication of its team members and consistent focus on providing outstanding service. Turning to Slide 5. Let's discuss the terms of the transaction. In 2020, Able generated revenue of $1.1 billion, with engineering services accounting for approximately 60% of their revenue and janitorial services accounting for the remaining 40%. Approximately 80% of the company's workforce is unionized, mitigating the risk of wage inflation and labor shortages. The acquisition is accretive to adjusted EPS from day 1. We expect to realize total annual operating synergies of approximately $30 million to $40 million over time with the majority to be achieved in the first year after closing. We also see the potential for revenue synergies over time as we deepen our client relationships and realize cross-selling opportunities. We have not included any revenue synergies in our calculations. With a purchase price of $830 million, the transaction values Able at approximately 8x its estimated annual adjusted EBITDA, including projected synergies of $35 million, the midpoint of our estimated synergy guidance range. This is an attractive valuation multiple given Able's significant scale, marquee client roster, broad service capabilities and strong financial profile. And while subject to customary closing conditions, including regulatory clearance, we expect to close the transaction by the end of September. Turning to Slide 6. The acquisition of Able is aligned with our strategic priorities and M&A strategy, which is designed to complement organic growth through acquisitions that expand our capabilities, increase efficiencies through greater scale and enhance our long-term growth potential. The addition of Able significantly strengthens ABM's core janitorial engineering services, which remain priority growth areas for ABM. By joining together, we have the opportunity to expand our client relationships and more fully address our customers' needs for innovative and cost-effective solutions that align with their sustainability and energy efficiency objectives. Supported by long-standing relationships with many prestigious corporate clients, Able significantly expands our client base and our geographic footprint. This will enable ABM to more easily capitalize on above-average growth in certain regions. And we also have identified opportunities to capture revenue synergies as our expanded capabilities enable us to deepen our engagement with clients and more broadly cross-sell complementary solutions and services. Specifically, our enhanced scale and engineering services will be critical as we execute our new 5-year growth plan, which we will communicate to investors in the coming months. These services are an important accelerator for integrated facility services and multiservice bundles, which we already are performing for certain clients. In addition to enhancing our growth and margins, these service offerings create significant value for our clients by reducing costs, enhancing safety and maximizing the operational efficiency of their real estate. On a long-term basis, our increased scale will further enhance our efficiency as we increase our investments in IT systems and implement new client-facing and workforce technologies. The combination of the 2 firms will also provide additional opportunities for employees of both organizations to step into leadership roles. We are excited about the value this acquisition will create for all of our stakeholders. The acquisition builds our scale in priority growth areas while broadening our capabilities, offerings and geographic footprint. Combination creates a true industry leader in the facility services and solutions space. In the coming months, we will share our new 5-year growth plan with the investment community, along with our growth and margin expansion targets for the years ahead. You will be able to see firsthand how well Able fits with our strategic priorities and what it brings to ABM with respect to scale, capabilities, geographic footprint and margin expansion. Able's an outstanding company with a strong financial profile, deep client relationships, extensive capabilities and a dedicated and talented team. Together, ABM and Able will be uniquely positioned to serve our customers with a broader portfolio of services and solutions customized to meet their evolving needs. We look forward to welcoming enables employees to ABM and to our future together as 1 company. Operator, I'd now like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Tim Mulrooney with William Blair.

I just have a few here, and I'll hop back in queue. But can you talk a little bit about Able's historical revenue growth rate? What your sense is for how fast they were growing for the few years heading into the pandemic? We're trying to understand what the normalized growth rate for this business would be.

Yes. So look, I think on a high level, you're going to hear this thematically through this call. It's like when you think of Able, think of ABM, right? So -- but I will tell you, it's like -- not all services are created equal. Their engineering side has grown in some years, double digit, right? So they are really strong on the engineering side, strong on janitorial too. But it's kind of on an enterprise level, emulated our growth, but particularly strong on the engineering side.

Okay. Yes, that's what I was asking. I know cleaning services is more of a low single digit, but given 60% of the business was engineering, I thought maybe growing a little faster, which it sounds like it probably is, all else equal. When you say Able's EBITDA is about $65 million normalized, was that for 2020? Or is that more of an LTM figure or a forward-looking figure?

Yes, that was -- as we looked at 2020. But we -- and we looked at what happens for ABM, and we kind of took those same principles and put it towards Able.

You mean the principles when you talked about adjusting for normalized, Scott?

Yes.

Yes, just -- it's Earl Ellis on the line. So yes, think of the $65 million as more of a run rate going in as we take over the business. What we did is we normalized a couple of things. So knowing that this is a family-owned business, we actually did adjustments to get the EBITDA comparable to the way we actually report EBITDA. We also did some adjustments with regards to just hedging back some of the tailwinds associated with COVID. So you can think about the $65 million as what we would actually be taking on this business as with before we actually add on any synergies.

That's perfect. Earl, you anticipated my next question. For most people, when they're normalizing EBITDA for COVID, they're bringing their numbers up because COVID hurt them. In this case, you're actually taking Able's numbers down a little bit because of the COVID-related tailwinds.

That's exactly right.

Yes. Okay. Just one more from me, and I'll hop back in line. Can you guys talk a little bit about the potential revenue synergies associated with the transaction? I'm thinking about 2 potential ones, which are cross-selling EnhancedClean into Able's customer base, but also potentially cross-selling technical solutions across each other's customer bases. Am I thinking about that correctly? Or am I off base here?

You're not supposed to ask a question then answer it. Because you actually got that right. Yes, we're excited about EnhancedClean. Able had a product they "ReliAble", right? But it's probably not as well developed as EnhancedClean, right? We have an advisory council, and it's just a different sell-through, right? So we think we're going to have an opportunity to do that. And the nice thing about this is that -- I shouldn't say the nice thing, that sounds terrible, but like we see that there's going to be a longer tail to COVID, right? So I think we're going to be able to jump on this and maybe sell them EnhancedClean. I think Technical Solutions is going to be key because we're taking out so much more stationary engineering. So I think that's going to be big. But I think the other thing too, Tim, is that, when you look at these facility assignments, usually engineering is kind of the value play. It's the catalyst to solidify a our's relationship. So we actually believe, and we've put none of this in the numbers, we actually believe having such prowess now on the stationary engineering side by having like $1.4 billion in stationary engineering combined, is kind of the stickiness for our relationship to cross-sell some of our janitorial services as well. So we think the revenue synergies are going to be great, and we love the fact that we did not have to put them into the numbers to make this work.

Yes. Well, we like that, too, Scott. Congrats on the deal.

Your next question comes from the line of Andy Wittmann with Baird.

I guess, just given that COVID had a lot of impacts on the business in 2020, and I appreciate you guys try to normalize that ticket to the 65% in 2020. But for a different baseline, could you maybe talk about what the business was doing before COVID to start out with, just so we can kind of assess it in that greater context as well?

No. I mean, listen, I think we can -- we'll be sharing some of that stuff as it goes. But for right now, we're going to stick with 2020 as the baseline. I can tell you, and I'll go back to what I said before, Andy. I think of them as kind of a carbon copy in a lot of ways of ABM and kind of use that. But look, they're a private company, and there's not a lot of that stuff that we can share right now. And remember, the deal hasn't closed.

Yes. Okay. That's fair enough. Okay. Just a couple of other things maybe for Earl. In the calculation of the -- in the enterprise here, the purchase price, was there any assumed contribution to that enterprise value for unfunded or underfunded liabilities associated with pensions. I think, particularly relevant given the heavy union presence here and/or for liabilities that are associated with pending litigation? These things can be notable from time to time. So I was wondering if there's anything else in the enterprise value that's maybe not immediately apparent, but probably relevant to the discussion and to what you're actually acquiring here?

Sure. Yes. So things like pension, liabilities, insurance, we've actually treated those as debt-like items. And therefore, as we've actually done the adjustments off of the $830 million price, we're taking on the cash on the balance sheet, and then we're netting that against the debt-like. So that is a netted number, which has taken off of the 8.

Taken off of the 8. I'm sorry. So to put it another way, Earl, is that -- are you saying the $830 million is fully loaded with the net impact from these sorts of balance sheet adjustments? Is that another way of saying what you just said? I just want to make sure I was clear on that.

Exactly. Correct. Yes.

Got it. Okay. And then, I guess, maybe my final question, and this is one that's more subjective, so I guess maybe for Scott. Just in terms of -- I mean, it sounds like -- good client base here. It sounds like you're pretty excited to have this customer base. What kind of underwriting or due diligence have you been able to do in this transaction to really understand how tight those relationships are that you're acquiring so that you can be assured that they are in place and ready to grow with you once you take over the ownership of the company?

Yes. So we have -- I guess, in the acquisition diligence, we had an unfair advantage to everyone else is that we've been interacting with these guys for -- I mean, I'll say, 90 years, right? But like in the last 10 years, right, just because that's more relevant, we've been interacting with them in the same markets. So like we know these folks really, really well. We know the clients. And by the way, Andy, a lot of these clients are shared clients that we have. So this is -- it's just super powerful. Like when you do this due diligence and you kind of know the team, you know what they have, even if it's not in the clean room as part of due diligence, you only have it because you're interacting in the market. You can literally walk down the streets of L.A. and San Francisco, and you know you probably competed for a particular property that they have right now. And you know those same clients from the BOMA and industry events. So we feel really good about having a deep understanding about these clients. And the other thing, Andy, is this is our wheelhouse, right? This is like -- this is -- as you can imagine, I don't know what the percentage, 80% is B&I, right? That's going to fall in there. So like we feel super comfortable if that makes sense.