ABM
#Sure, <UNK>.
You're absolutely right, roughly $0.06 is included in our adjusted EPS, and that relates predominantly to an early adoption of an accounting standard related to stock-based compensation.
The majority of the other discretes, the largest being the passage of position that we had mentioned earlier at the end of last year is in IIC, and that was roughly $0.32.
Yes, absolutely.
So it's not a one-time item, but it's hard to quantify whether it will be positive or negative.
It's really dependent on the existing grants and the share price, that's a variable, but it is part of our normal operations, and we'll be providing guidance at year end related to what we expect that impact to be for next fiscal year.
No.
Again, we break it up into two buckets, consistent with prior years, prior periods.
So it was all prior year, the adjustment that you're referring to.
In the current year, as I mentioned in my prepared remarks, we are seeing some good indications that some of the initiatives that we started late last year are starting to provide some benefits, and we are, as you know, we are accruing at a much higher rate year-over-year.
So we are charging the business what we feel like is the right long term appropriate rate.
But that being said, we are seeing some benefits, but it's too early for us to move away from the higher accrual rate.
So ultimately, we feel like the current charge to the business is the appropriate charge, and we are still dealing with the prior period adverse development.
What I would say, <UNK>, too, just to chime in on that, I think what we are enthusiastic about is, there is stuff that we can control this year, because we have a good amount of control on what happens in the year, and the culture is changing and really being fortified internally around the safety programs.
We're seeing a decrease of frequencies across the board.
So much of this, for the long term, is about a cultural shift, and it's really taking hold here.
So again, enthusiastic about where we are, and where we're headed.
I think it's still early on in our 2020 Vision program, right.
We did get 30 basis points of benefit this quarter from having one less day, but these reinvestments are so important, <UNK>, because they're going to be the foundation for the future.
We set up our organizational design, and it's pretty ---+ I would say it's a quicker route to take cost out than it is to build cost in, because you're building a new structure.
One thing I would point out is we are developing a new talent organization, that's going to be focused on how we onboard the right people, how we do development training for people in the field, how we do performance management.
And that's a group right now, we just hired the head of that group, literally over the last couple of weeks.
So there's two people in the group, that could be as many as 10 people.
So I don't want to trade away short-term by not filling those positions.
So those are going to be again fundamental to the long-term success of ABM, and were' going to make those investments.
It's hard to predict the timing, but so it's early on in this.
And I think, <UNK>, from what we projected as the 100 basis points, we broke it out into components.
We said the org design was going to be roughly 40 to 50 basis points.
We said procurement is going to be roughly 10 to 15 basis points, and then the rest is going to come from account planning and the vertical acceleration.
I think what we're seeing is on the org design, we are trending at the upper end of our original 40 to 50, and maybe slightly exceeding that.
So I think it points to, we're headed in the right direction, but it's too early to tell whether the 100 basis points becomes 110 or more, or whether the 100 basis point is on track.
But we are trending a little bit higher on the org design.
This is <UNK>.
We look at our cash flow on an annual basis, and there's always going to be timing elements.
If you look at it from a year-to-date perspective, with the increase in severance payments, the increase in costs related to 2020 Vision, we are right on track with where we were last year.
So I wouldn't take this quarter as an indication of anything fundamentally changed in our cash flow outlook.
It's just a matter of timing.
I would look at it on an annual trailing 12.
It's hard to go down to that level of granularity, but what I can tell you is that TAG continues to be a focus in the organization.
I think, back to <UNK>'s point, culturally, the organization is starting to embrace the margin story, and TAG is one of the easiest drivers for that margin story, specifically in janitorial, and to a lesser extent in our facility services business.
So it continues to be a great story from a TAG perspective, and it continues to be a focus area for the firm.
I think when you think about TAG revenue, you can think that it has a margin profile, that's 2X our base contracts.
So as the margin story resonates in the firm, you will see that there will be a focus towards TAG, just because it's high value capture for the team.
So it all comes down to contract mix and blend and market segmentation, and again, we have the right trajectory into the higher margin.
That's going to be part of our account management process that we are initiating in our center of excellence.
So as we start standing up these industry groups and look at business by vertical, we will start creating detailed account plans for the future.
And there are some that will end up tailing off.
There are some that we'll actually put a plan together, to say ---+ it's not the kind of thing where something is not performing at the right level so you just send a cancellation notice, you actually put a plan together to accelerate margin.
And if you can't do that, that's when you make those tougher decisions.
But for us, if we have lower performing accounts that we can't put together a robust acceleration plan around, you will see us exiting those accounts.
It will typically, we're going to look at it from a renewal cycle.
So this is a very dynamic piece of our business, and as those accounts come up for renewal, to <UNK>'s point, either we're going to be able to put a plan in place to bring the margin up through TAG or through other operational levers, or we're going to bid the account at an appropriate margin, and if we lose it, then we're okay with that.
I think it's a combination actually of everything you said.
What we will be doing is, I can give you a good example of something that happened this quarter.
We were pursuing a very large contract with JPMorgan Chase and JLL, who is their managing agent, and it was for the commercial cleaning portfolio in the Northeast.
While price was very important to JPMorgan and JLL, workplace was as important to them, quality of sustainability, quality of our training, of safety, and we had as much conversation with them on that as we did on price.
And we ended up winning the entire portfolio, as I mentioned in my script.
We won the entire portfolio of business.
At the same time, we had a similar size opportunity with another institution which wouldn't be appropriate for me to name, but it was a similar opportunity, almost exact in scale and size, and their key driver was price alone.
And all the conversations were around price.
And they wanted to work with us, because they liked our organization and had a good history, but it was only a price conversation.
And we just couldn't get there.
We didn't see a trajectory to raise margins over time, we just said to ourselves, we're going to end up not making our client happy, and we weren't going to achieve our goals, and we actually passed on that opportunity.
It was something very new culturally for ABM to walk away from a large-scale revenue opportunity, because it didn't have the right margin profile, and it ultimately wasn't going to satisfy the client.
So I can tell you both of those assignments culminated at the same time at the firm, and there was as much excitement internally for us not pursuing that low margin price opportunity, as there was for us winning this large-scale high profile account.
I think it's mostly, in that case, it's us forcing the issue, in the example that I gave you.
But for us, it's going to be about our approach to market, and as I said, in our center of excellence, we have this account management work stream.
So what that's going to mean is that when we look at an assignment, especially a larger assignment, what we are going to be saying is okay, on this base assignment, what's the margin profile today, and where can it go.
But more importantly, what are the services that we can tie in from an IFS standpoint, right.
Integrated facilities standpoint.
What are the services that we can leverage.
And if you think about our education vertical.
We have been, and this is a really important point, prior to 2020 Vision, we had four different regions of the firm, each with about $60 million in education in a $1 billion portfolio that they were managing.
So it didn't really grab the attention that it should have.
Now, we have a $250 million education vertical, that we are looking at holistically in terms of IFS, and how we can bring the resources of ABM to bear, match that with our ABES technical services group that does a significant amount of business in education, and never really married it up with ABM internally.
So now you have a head of ABM education for facility services, partnering with an education person in our ABES technical services group, that does a 35% gross margin, and they are figuring out how to pull through the ABES technical services into education.
So in the future, when ABM looks at an account and potentially an education account, we're going to say, well we can capture the janitorial award here at a 7% EBITDA margin, but we're looking at their facilities, and we are seeing that the equipment, the mechanical equipment is aged, there is a great opportunity here to pull through our ABES technical services business.
So if we can execute, we're going to be able to pull that in and move the whole account up to maybe a 13% blend.
That's the kinds of conversations that are starting to happen at ABM, that never happened before.
And that's where the excitement is.
What I would say is, I think that for us presents an opportunity.
We have a person and a team in our center of excellence just working on parking innovation, and where the market is going, what are the latest trends.
And if you think about firms in the parking space, there's very few that have our scale, that have our balance sheet, to terms of investment in technology and innovation.
So I think for us, we look at change in the parking industry as a key way for us to accelerate, because when we are dealing with a small local company in a particular market, that doesn't have the ability to invest in innovation and technology, we think that's going to be a great opportunity for us in the future.
Parking, from an experience standpoint, what we're trying to do for the individual parking, if you look at our parking business and you map it, the majority of the parking business is going to be mapped to our aviation industry group or vertical, a good portion that's going to mapped to our healthcare group or vertical.
And then there's going to be a component that's going to be in B&I.
So when you look at those three segments and what we call the patient or passenger experience, we are working on the integration of parking as an end-to-end solution, so that when someone parks their car at an airport, we then can shuttle them to the front gate, we can do the wheelchair, we can do the baggage handling, we are cleaning the terminal.
So it's an integrated story, versus historically being run as a service line, which really was purely a price-driven model.
I think if you think about the future of ABM, going forward, there's going to be less conversation about janitorial or parking, because if you were to ask me in 2017 when you ask me a question about parking, I am probably going to say, which industry group are you talking about, aviation, healthcare, business and industry.
It's going to be less of a holistic business, and more focused practice area as part of an experience in that industry group.
Sure.
It's funny.
I hadn't thought about janitorial growth and pressures in the same sentence right now, because we are pleased with our organic growth.
We're having 2.2% organic growth, and our growth is seasonal.
So it happens around this time anyway.
So to be 2% organic growth, for us, wasn't a pressure story, it was a positive story.
Because you have to remember the backdrop of everything we are doing is around organizational transformation.
So you have this huge dynamic in the firm, where people are changing jobs, they are shifting clients around, and focusing on keeping the transformation together.
So to do that, and then to grow the business organically, is a home run, and last time this year, when we were looking forward to where we would be now, we have put some pretty aggressive targets in place, and the fact that we are meeting them and growing, we're pretty excited.
And we think that trajectory is going to continue.
We don't see any reason to think that it's going to slow down.
And again, especially as we start moving into this industry group format, and people in these industry groups are focusing on end to end ---+ the story, when we talk about janitorial, we're going to be talking about it by segment.
So we are encouraged.
Sure.
The majority of the savings at the end of Q4 should be at a run rate as we outlined initially.
So the organizational and procurement savings should be a full run rate by the end of FY17, which should be a dollar-for-dollar point-for-point contribution throughout the year.
As it relates to the account planning and vertical acceleration, as we initially indicated, that's a second-half FY17 story.
But overall, we're going to end the year at roughly 4.1%, 4.2% EBITDA margins, and we should end next fiscal year at 4.7% roughly EBITDA margin.
So we are well on our way with what we outlined as part of 2020, slightly ahead on the org, too early to tell on the other components, but based on the work we are doing in phase two, the account planning, labor management, and some of the COE, what's coming out of the COE, we're feeling pretty confident that we're on the right trajectory.
And I want to reiterate what we said earlier, is not necessarily a quarter-by-quarter story, it's a trailing 12 month story.
Because again, these transformations can be bumpy, in terms of timing of investments and when you deploy.
But in terms of where we are heading, and I guess I will always come back to the culture and the organization.
We're really encouraged.
Sure.
Let me break out all the components to our guidance beat.
We had roughly from 2020, if you think about it, we had roughly $6 million in the first half, first two quarters.
We recognized approximately $7 million in Q3, and we expect roughly $9 million more in Q4, which gets us to the $22 million upper end of the range.
And as I mentioned earlier, we've outlined 40 to 50 basis points roughly for org and we are heading towards the higher end of that range.
On timing, we recognized roughly $0.05 in the first half.
It's really hard to pinpoint timing, just given the dynamic nature of when we're going to make investments and how, but roughly $0.04 to $0.06 in the second half, so overall $0.09 to $0.11 on a full year basis is related to timing.
And the rest is the tax, which is $0.06.
I think overall from the org, when you outline the process, you have an estimate of what you expect to save for the org.
There are some things that we didn't necessarily factor one for one.
One being the share-based compensation expense associated with individuals, that may have been impacted through their redesign.
So that's, I would say, a new finding, but we are also benefiting from just overall lower T&E with those individuals that are no longer with the organization.
Those are things that are going to ebb and flow over time, but overall from an organization standpoint, we are a little bit higher than what we expected and outlined, and it was a very robust process, a long term process.
It was not just a percentage across the board.
We are designing to the organization of the future, and that's why some of the investments we haven't made are critical.
And then on the procurement side, early phases, we've hired a head of procurement.
He has put in place policies and practices.
His next phase is really going to be on the compliance of those policies and practices, so it's a sustainable savings going forward.
And we are well on our way, on the run rate that we've outlined on that front.
And on the other, outlined for 2020, currently in process, and we expect that to begin to accelerate in 2017.
So I think it's too early on for us to sketch out where we can be three or four years from now, but I can tell you, just the fact, if you think about it, that we are focusing as one unit and one enterprise going after the market, with some basic standard operating procedures that we never have, is just going to be huge for us.
And then pulling through our ABES technical services, we hired a gentleman named Dave Carpenter who was formerly of Aramark, where he ran their education business and the healthcare business, really, really tremendously experienced gentleman, and understands what is possible.
He is encouraged.
He came on board with us because he sees what the future can be in education, what the trajectory can be.
But it's less of probably a 2017 story than a 2018 story, as we start pulling the groups together.
I could just give you one example with Department of Education in New York City here.
It was a $20 million account that was already on our radar, because it wasn't performing well, and we were trying to put together an action plan as to how you can raise margin.
We didn't think it was going to pan out, and fortunately for us from a timing standpoint, they made the decision to go in-house.
So it was fortuitous event.
So even before we could take action, to start cleaning up and getting our focus right on education, we had this forced event, which was again, fortuitous.
Again, when we look at year-over-year comparisons, it will look like the education vertical is shrinking, but the quality of the education vertical is going to be stronger.
So, I am really enthusiastic about what this could be.
We are a $250 million vertical in a sea of some larger competitors that all have a billion in front of their number.
$1 billion, $2 billion in that market.
So I think we have great trajectory, and the right team to go after it.
Sure.
And I want to frame out what TAG revenue is and how you should think about it.
TAG revenue is not passive, right.
It is something that you go after.
It is something that you're soliciting.
So picture an office building, where we have a project manager there who is interacting with the client who would happen to be the building manager.
And this is where you're going around and creatively looking for ways to hopefully add value to the building, but also help us create revenue and margin story.
So you maybe, so there's different ---+ there's levers to pull but you had to actively go after it.
That's the buzz that's happening in the organization now.
We have our portfolio managers talking to our project managers in the field, and having them have these really deep conversations with the clients about how we can add to that TAG revenue.
So it's not something that just happens because the economy is good or what have you, you have to solicit it.
And so we're seeing that happen, and I think that's the key driver, because our managers know that there is a much higher margin capture in that area.
So that's been the key driver of this, it's been us actively pursuing TAG revenue.
When you look at the industry group itself, I think for the most part, we have our senior management in place.
We are looking to build our sales infrastructure.
We have a good one now, but that's going to be an area that you're going to see some build.
And then on the support services side, I mentioned some HR hires, we are also putting together a shared service center in Houston that's going to be the center of all of our financial transactions.
So we have some work to do in terms of hiring on the support side, as well, but I think in terms of our client-facing portfolio management and project managers, I think we're probably 90% of the way there.
Yes.
Well, I think so.
And I think it's going to come in that center of excellence that I'm talking about earlier in my script.
In terms of labor, let's take labor management.
We are a labor company.
At the end of the day, we have 100,000 workers in there, that are performing their tasks out in the field.
And right now, our approach has been pretty siloed.
There are things that we do in Chicago, that we are not doing in New York.
Things we do in New York, we're not doing in LA, and vice versa.
And we haven't codified best practices, and I believe that when we go through this consistent excellence, center of excellence process that we have going on right now, in labor management, and account management, in our approach to how we're going to manage a client account, I think there is just great promise over the long term.
We have brought some people into the organization that worked at other companies that put together standard operating procedures, and actually went through a program of what we're doing now, of again codifying best practices.
And they have talked to us about the trajectory they have seen internally.
As you know, we've been working with Boston Consulting Group that does this across hundreds and hundreds of organizations in the service business.
So I think we are enthusiastic about what this can lead to in the long term, but it's just hard, <UNK>, right now to say what this can do next quarter or even the next six months.
It's more about what is this going to be able to do for us in the coming years.
It's a great, great story.
I think we got through the biggest hurdle in terms of people knowing they have a seat at the organization.
We've done the exits already.
So all the tension that was built up in the organization prior to us making those announcements two or three months ago has been alleviated, because people know they have a role, they know they have a seat, and so that anxiety is past.
So now it's all about transitioning accounts, and we are probably 75% through the process at least, in terms of transitioning accounts.
In terms of actually putting together actual plans for each account, we are even farther ahead.
So I can tell you, and this is probably more anecdotal, but I can only think of probably even less than a handful of accounts where our team has come back and said, we're not exactly ready yet because it may be more than the client is ready to handle, because we just put this one person on the account.
To take them off right now is not great timing.
But I am telling you, less than a handful.
So for the most part, our clients have been really receptive.
They know us well.
And I said this before, this is not the first time we have transitioned managers from one account to another.
We always did that on a regular basis too, to refresh accounts.
So it's not like someone has been on an account as a project manager for seven years, and now all of a sudden we're taking them off and there's this dramatic shift.
So I will always say that there is caution, I will always say that there is risk, but I think so much of it, <UNK>, has been mitigated by the fact that people know that they have a seat, and they are working productively.
And frankly, in an organization that is accelerating, right.
If you think about what's happening here with our results, what's happening with our stock price.
It's a great atmosphere at the firm here, and to know that you are part of this has been palpable.
I just want to thank everybody for joining in.
I hope everyone had a good summer.
We are off to the fall, and good things ahead.
And we will keep you posted on phase two and everything we get accomplished over the next few months until our next call.
So thanks for the time, and for sticking with us.
We're excited about where we are going.
Thank you.
