Abm Industries Inc (ABM) Q1 2021 Earnings Call Transcript

Greetings. Welcome to ABM Industries First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Susie Kim, Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Thank you all for joining us this morning. With us today are Scott Salmirs, our President and Chief Executive Officer; and Earl Ellis, our new Executive Vice President and Chief Financial Officer. We issued our press release yesterday afternoon announcing our first quarter fiscal 2021 financial results. A copy of this release and an accompanying slide presentation can be found on our corporate website. Before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the words estimate, expect, and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation, as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the Company’s website under the Investors tab. I would now like to turn the call over to Scott.

Thanks, Susie. Good morning. And thank you all for joining us today to discuss our first quarter results. As you read in yesterday’s press release, 2021 is off to a tremendous start. Total revenue was approximately $1.5 billion, representing a 7.5% decline versus last year, which exceeded our expectations and reflects continued sequential improvement. As anticipated, our Aviation segment remains the primary driver behind the revenue decrease. On both the GAAP and an adjusted basis, earnings grew by 160% or more year-over-year. GAAP continuing EPS grew to $1.10 per share or $1.01 per share on an adjusted basis. Adjusted EBITDA margins expanded more than 400 basis points to 8.3% compared to last year. Anchoring these results was elevated demand for higher margin work orders for virus protection, as well as our EnhancedClean services, which are longer term in nature. Effective labor management continued to be a lever for profitability. As you may remember, the majority of our contracts are performance-based. So, any efficiencies we find in staffing as the occupancy drops or schools are in a hybrid situation inures orders to our benefit. This is the advantage of having a flexible labor model. Earl will discuss our segments in more detail, but overall, our industry group drivers are similar to what we saw during the balance of last year. Not surprisingly, our Aviation and Technical Solutions segments were challenged by the pandemic, due to decreased global travel and limited site access for retrofit projects and educational facilities. Education is a segment though grew top and bottom line during the quarter, which shows how well our team has adapted operationally to the hybrid learning system. And Business & Industry and Technology & Manufacturing are still strong outperformers. They’ve been able to offset COVID-related revenue compression with higher margin work orders, EnhancedClean contracts, and labor management. Now, we’re now almost at the one-year mark since the start of the pandemic, and I’ve just summarized our fourth consecutive quarter of strong results. This sustained performance suggests that we have reached a level of consistency in our results and stabilization across our client portfolio. Let me now provide some thoughts on where we believe the operating environment is headed, especially in light of our full year guidance. Before I dive into what momentum to normalcy looks like in 2021, I want to underscore that normalcy does not imply less vigilance around virus protection. Over the past several months, there have been countless news and scientific journals reminding us that COVID-19 and its after effects will continue for the foreseeable future. Many believe it will be a permanent fact of life with people getting regularly vaccinated, similar to how we handle flu vaccinations. We’re enthusiastic that vaccine rollouts are underway across the country. Most importantly, the vaccines will save lives, but the rollouts will also lead to momentum back to work, school, travel, and attending entertainment venues. However, vaccine rollouts have not been uniform on a state-by-state basis, nor have state policies on masking, public gatherings, and other factors that impact infections and new cases. These factors, as well as the ongoing discovery of new variants, highlight how societies need to respond to COVID-19 on this elevated level, which will not end in the near term. This is why it’s so critical for us to partner with our clients and assess their evolving needs and engage our expert advisory panel. In B&I, the vaccines will spur momentum back to work, which for us means a return of more traditional janitorial work, as well as the continuation of disinfecting, given higher occupancy. Currently, average occupancy across the country is approximately 15%. We anticipate this could increase to 25% by Labor Day and grow to over 50% through the calendar year end. As clients begin to plan their returns, they are focusing on building trust in their facilities through health and safety protocols. Rigor around cleaning, disinfecting, and especially physical spacing will be incorporated into their plans. For this reason, we do not anticipate a near-term reduction in space utilization across commercial real estate, especially with Class A buildings and blue-chip clients. For a sector like education, we believe the hybrid model will be in effect for at least the rest of the school year. Soon, if not already, institutions will start planning for the fall 2021 semester with a push for more in-person learning in the K-12 segments and higher education. How this unfolds could vary by region. We should have a better line of sight when we speak to you after Q2 earnings. And I’m sure as vaccine adoption continues to expand, there’s probably no sector more poised for a robust volume recovery than aviation. We are definitely hearing about pent-up demand for personal travel and minimally a modest return of business travel. For ABM, our business portfolio consists of both airlines and airports. As airports were opened during the pandemic, operations in areas like terminal cleaning, transportation, and shovel service enabled us to mitigate reduced volumes on the airline side. And ultimately this diversification helped us break even last year, which was a major achievement. On the airline side, current travel volumes are approximately 50% of pre-COVID levels. Assuming vaccines will allow traction, we believe we could see that grow moderately by year end. As both airlines and airports see increased traffic, the need for disinfection, virus protection, and EnhancedClean will grow. On an enterprise level, we conducted a pulse survey of approximately 200 clients last month that largely aligned with our own full year expectations. Most respondents are expecting that facilities to more fully reopen and their companies to be endorsing re-occupancy in varying forms by September. And they plan to continue taking multiple measures to protect spaces against COVID-19 as they reopen, primarily in the areas of surface and air disinfection. And even with the increase in flexible work schedules and work-from-home protocols, the vast majority of our clients say that they expect the total amount of space utilization to remain largely the same. Now, the size of our survey is just a subset of our client base, but it supports what we are hearing more broadly as we communicate with our customers on their future plans. It also speaks to our confidence in providing full year guidance today. For fiscal 2021, we’re introducing full year guidance of earnings per diluted share of $2.85 to $3.10, or $3.00 to $3.25 on an adjusted basis. Our outlook for adjusted EBITDA margins is 6.6% to 7%, which compares to 6% last year. We also expect a return to growth by the second half of this year and consistent demand for high-margin work orders and EnhancedClean services through year-end. We also anticipate retaining most of our labor arbitrage through year-end. And our success will not translate to complacency. Based on how the pandemic has changed our trajectory, we think capitalizing on our momentum to elevate our brand and business. At the end of February, we launched ABM’s first national TV commercial. It was a celebratory moment for the entire firm, and we could not be prouder. If you’ve not seen it on CNBC or Bloomberg TV, you can find it on our IR website today. As we discussed last year, we are going to be investing in our clients, team members, and infrastructure. We’re focused on providing technology and data analytics capabilities to enhance client and team member experiences. We’re also prioritizing areas like talent development to further empower our people and create even more consequential relationships with our clients. We are committed to building upon our strong culture and fostering a community of belonging where team members feel connected, valued, and inspired. This reinforces our mission and vision as an organization and will have significant long-term commercial outcomes for us. Internal initiatives, such as our culture and inclusion council, are dedicated to driving meaningful social change and cultivating an inclusive environment for everyone at ABM. And we’re taking active steps to turn this vision into reality. I’m excited to share that we have entered into partnerships with organizations that are focused on building a more equitable society. ABM has made a commitment to support the NAACP Legal Defense and Educational Fund, the Hispanic Scholarship Fund, the Afterschool Alliance, and the Thurgood Marshall College Fund. We are partnering with these organizations in an effort to make a difference in the areas of advocacy and civil rights, basic human needs, education, and workforce development. Before I turn the call over to Earl, I want to look back at this time last year, during our first quarter earnings call of 2020. We were just starting to discuss the coronavirus and its impact on the economy. At that time, I reiterated how our diversified portfolio, coupled with our nimble operating model, were hallmarks of our long-term success over the past 110 years. Our results over the past 12 months have proven this beyond a doubt. And with our solid liquidity and leverage, we are better positioned than ever to pursue growth and profitability that will unlock even greater shareholder value. I want to thank our employees for another quarter of absolutely incredible execution, particularly those who were impacted by the recent winter storms in the south. The dedication of the ABM team continues to fuel our performance quarter-after-quarter. We have a culture like no other in our industry. In addition to our team members, I’d like to thank our Board of Directors, including our newest Director Quincy Allen, for their guidance and encouragement. I also thank you, our analysts and shareholders for your support during a time when the environment was particularly opaque. I’m proud that our results have been the greatest proof point of our resilience, agility, and excellence. I’ll now turn the call over to Earl.

Thanks, Scott, and good morning, everyone. Let me start by thanking all of my fellow ABM team members for the warm welcome I’ve experienced since joining the organization. Today marks my 100th day at ABM, and my early impressions about the organization’s drive to collaborate and execute have only grown. As I continue to evaluate and assess our business needs, my main area of focus will be on helping to determine the appropriate enablers for both strategic growth and continuous improvement. As I will discuss in more detail shortly, our strong results over the past several quarters, coupled with our leadership position in the marketplace, provides us with a great opportunity to invest in our future growth potential. I look forward to finalizing our thoughts on areas such as our internal investing strategy and sharing with all of you over the course of the year. Now, onto the results. Revenue for the quarter was $1.5 billion, a decrease of 7.5% compared to last year. The decrease in revenue reflects the continued impact COVID-19 has had across our business segments. As a reminder, the pandemic had not yet impacted operations significantly until our second quarter last year. And as such, this quarter reflects the full year-over-year impact. Partially offsetting this revenue decline was the ongoing demand for higher margin disinfection-related work orders and EnhancedClean services. Work orders were particularly strong within our Business & Industry and Technology & Manufacturing industry groups. On a GAAP basis, our income from continuing operations was $74.6 million or $1.10 per diluted share compared to $27.9 million or $0.41 last year. In addition to our strong operational performance, the increase versus last year was driven by favorable developments in prior year self-insurance adjustments. We saw an $11.4 million benefit this year compared to $6.6 million in the first quarter of fiscal 2020. Additionally, we saw our second consecutive quarter of current year positive insurance trends, recording a benefit of approximately $3 million. On an adjusted basis, income from continuing operations for the quarter increased to $68.3 million or $1.01 per diluted share compared to $26.2 million or $0.39 last year. Our GAAP and adjusted earnings growth versus last year continued to be driven by significant increases in higher margin work orders and EnhancedClean services. As our clients have incorporated health and hygiene services such as disinfection into their operations at higher levels, we continue to experience higher margins as a result of direct labor efficiencies as our operators proactively manage the deployment of labor commensurate with COVID-19-related revenue declines. Additionally, results also reflect one less working day, which amounted to labor expense savings of approximately $6 million. Other items such as corporate discretionary expense, amortization, and interest were also lower compared to last year. These results were partially offset by our plant infrastructure and organizational investments in areas such as IT. However, I want to note that our investment spend for the quarter was approximately $4 million, which was lower than originally anticipated. During the quarter, we generated adjusted EBITDA of approximately $124 million for a margin rate of 8.3% compared to $68.8 million or 4.3% last year. I will now discuss our segment results. As I referenced earlier, these results reflect the ongoing impact of COVID-19, which has resulted in revenue compression across our services. As Scott discussed, our diversified segment structure has been a strength for us during the pandemic as each segment has been impacted by the pandemic in different ways, both positively and negatively. In most cases, though, with perhaps the exception of Technical Solutions, our segment results reflect some combination of a mix shift towards higher work orders and EnhancedClean services, labor modulation on lower service demand, as well as operational investments in areas such as EnhancedClean. B&I revenue was $809.4 million, which was down just $11.5 million or 1.4% versus last year. The parking and sports and entertainment businesses were the predominant drivers of the revenue decline due to the ongoing pandemic. Almost entirely offsetting this decline was increased demand for higher margin work orders and EnhancedClean services at our national accounts and certain clients in corporate sectors, such as financial institutions. Operating profit for the quarter reflected this more favorable mix of business, resulting in $85.7 million or a margin of 10.6% compared to last year’s $38.2 million and 4.7%, respectively. Technology & Manufacturing remained one of our most resilient segments. T&M produced solid results for the quarter as it has since the beginning of the pandemic. The segment reported revenue of $249.2 million, an increase of 6.5% versus last year with an operating profit of $26.9 million or a margin rate of 10.8%. Work orders and EnhancedClean services drove demand for T&M, particularly within the industrial manufacturing, pharmaceuticals, and high-tech sectors. We also experienced growth with our logistic clients as we supported them during the peak holiday season. Our Education segment grew revenues to $209.4 million with operating profit of $21.5 million or 10.2% margin. We believe these results reflect some stabilization as schools have continued the hybrid learning model that has been in effect since the back half of last year. Performance was primarily attributable to direct labor management due to modified staffing levels and other expense savings as a result of decreased demand for disinfection and COVID-related work orders. Looking ahead, we anticipate some reinstitution of a traditional selling season in 2021, which did not exist last year, due to the pandemic. We continue to monitor how schools are going to evolve their approach to teaching in the current environment, particularly as vaccination rollout progresses. Aviation reported revenue of approximately $143 million with operating profit of $3.2 million. As anticipated, this segment remained most impacted by COVID-19 and its effect on global travel. The quarter saw a modest sequential increase in travel due to the holidays, but also reverted quickly due to lockdowns in areas such as the UK. We continue to operate according to flight and passenger demand, providing higher tech services, such as electrostatic spraying, as we manage variable costs and expenses on a real-time basis to match demand. Finally, Technical Solutions reported revenue of $113 million versus $142 million last year. This decline was driven by site access issues at clients, such as in education, which continued to limit traffic into their facilities to protect administrative staff, teachers, and students. However, backlog remains healthy, above $150 million, and we remain focused on churning through these projects as soon as possible. Operating profit was $6 million or 5.3% on a margin basis. Turning to cash and liquidity. We reported positive cash flow during the first quarter, despite this traditionally being a cash flow negative period. This even includes a deferral of approximately $31 million in payroll taxes from the CARES Act. We generated more than $45 million in cash flow from operations and free cash flow of approximately $39 million for the quarter. Our strong performance enabled us to end the quarter with total debt, including standby letters of credit of $851 million and a bank adjusted leverage ratio of 1.8 times. Additionally, we ended the quarter with cash and cash equivalents of $378 million. Given the consistency of our leverage and cash position over the last several quarters, we believe we have reached a point of stability, both operationally and financially. As a result, we are evaluating our capital allocation priorities. In addition to organic investments in our business, we are also exploring the M&A market for potential targets to drive growth and build on our current momentum. While remaining cognizant of our reentry into M&A, we will also consider share repurchases opportunistically. We currently have approximately $145 million remaining in our authorized share repurchase program, and we'll balance any potential activity with our M&A effort to ensure maximum flexibility. During the quarter, we paid our 219th consecutive quarterly cash dividend of $0.19 per common share for a total distribution of $12.7 million to shareholders. And as stated in our earnings release, our Board of Directors approved our 220th consecutive quarterly cash dividend. Now, turning to a guidance outlook. We are introducing a fiscal 2021 GAAP guidance outlook range of $2.85 to $3.10, and on an adjusted basis, $3.00 to $3.25 per share. Scott shared with you some great context from an operating perspective that supports our guidance. So, let me now provide some additional assumptions behind our guidance. Given our performance during the first quarter, we believe revenue will continue to improve sequentially with a return to growth in the back half of the year. And as growth improves and turns positive, we will have to staff back up accordingly. Therefore, there may be a partial reduction in the level of labor efficiencies we have experienced over the past year. But make no mistake. We do expect to retain a portion of these savings based on new opportunities and labor management practices we have adopted during COVID. Regarding higher margin work orders and EnhancedClean services, we do not anticipate a material slowdown in demand for the balance of the fiscal year. We expect our investments to pick up throughout the remainder of the year, as we support the strategic initiatives, namely in our IT transformation. On a year-over-year basis, we do expect an increase in corporate expenses for the year. Although timing may vary from quarter to quarter, as you saw in the first quarter. Additionally, as a reminder, we undertook furlough and expense reduction efforts during the third quarter of last year, and as such, expect to see year-over-year increases in expenses as we have resumed a portion of those expenditures. We are still in the planning and design phase of our technology roadmap. And we will update you as we finalize our plans. I'd also like to remind everyone that we will see an extra working day in Q2 and one less working day in Q3. Each working day should represent approximately $6 million of labor expense, similar to Q1. Moving to taxes, we continue to expect an effective tax rate of approximately 30% for 2021. This tax rate does not include discrete tax items, such as the Work Opportunity Tax Credit and the tax impact of stock-based compensation awards. At the end of December, WOTC was formally extended by Congress through 2025. And current estimates suggest a $5 million or $0.07 impact on 2021. And finally, while we are not guiding to free cash flow until we can finalize the impact of our tech transformation on capital expenditures, I want to express my enthusiasm for the strong start to the year. Given our strong cash flow performance to date, we believe we'll be able to achieve a range above our historical $175 million to $200 million and look forward to updating you as we finalize our longer-term plans. In closing, we're excited about our performance for the quarter, as well as our outlook for the year. And we look forward to updating you on our continued progress next quarter. Operator, we are now ready for questions.

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

Hi team. It’s definitely a strong beginning to the year and quite impressive. With that in mind, my first question is regarding the annual guidance. You appear to be off to a strong start in the first quarter, achieving around 30% of earnings compared to a high-teens average over the last decade for this quarter. I’m curious about where you might need to exercise some caution with this strong start. Is it primarily related to labor efficiency as revenue increases? Or is it about the ramp-up of technology investments? Any insights on that would be appreciated.

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

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

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

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

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

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

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

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

I understand. Thank you for providing the physical occupancy data, showing an increase from 15 to 25 by Labor Day. It seems that by the end of the calendar year, we will see more normalcy. While this indicates a recovery in physical occupancy, it doesn't imply a rapid turnaround or major changes occurring quickly. Considering that Labor Day marks most of the remaining fiscal year, and after going through your guidance, it appears that the EBITDA margins have decreased significantly year-over-year but have actually increased in comparison to a strong performance in the first quarter. My calculations suggest something in the mid-6s for the remainder of the year, which indicates a substantial change. I would appreciate it if you could provide more detailed insights beyond what you've already mentioned to help assure us that this margin level is appropriate for the coming months.

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

I have one final question regarding the fundamentals of the business and demand. Last year was characterized by extremely low customer loss and high retention, as everyone seemed to prefer staying put and not making changes. You have mentioned that ABM is well positioned in the industry with its processes and leadership to capture market share. I would like to know, Scott, if you could discuss the current dynamics as we begin to consider reopening. Are more customers looking to change providers now that the situation is more stable? Additionally, as they contemplate switching, are they interested in including more consistent work orders as part of their base contracts? You offer EnhancedClean as a more thorough cleaning option. Are customers inclined to switch, and if they do, are they seeking to integrate more content into their contracts? What would the impact on margins be if they do? Thank you, and I apologize for the lengthy question.

Yes, I understand the main point. Q1 showed excellent retention for us, around 92% to 93%. Initially, we were cautious due to numerous rebids. Education seems to be the key area since school budgets are tight, and they'll be searching for opportunities. We anticipate more bids in education, which also presents a positive aspect. There's additional work that will go up for bid that we currently don’t have. We are confident in our EnhancedClean platform. Although retention may be slightly pressured, we could see benefits on the sales side. EnhancedClean is not included in the initial scope of work, and as bidding starts over the next couple of years, the volume of activity might not be very high. My concern stems from the fact that our clients are adjusting their space needs to accommodate distancing and determining use cases for when staff returns. Therefore, I don't foresee an immediate rush to bid until they have clarity on occupancy. However, as these changes settle into contracts, I believe our margins will hold steady. EnhancedClean supports better training, utilizes different chemicals, and involves expensive equipment. With the investment in our advisory panel, we expect to maintain a significant portion of our margins when everything is fully integrated. Yet, I don't anticipate this happening quickly due to other factors that may slow bidding activity.

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

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

That's a great question. Before COVID, we aimed to reach the 5.5% to 6% range over the next few years. We believe the pandemic and rising virus awareness have placed us firmly within that 5.5% to 6% range. Looking ahead, we plan to invest in our business over the next five years with the goal of moving beyond that range. Our objective is always to exceed expectations. Right now, we feel we've arrived in that range a couple of years sooner than anticipated. As we conclude our current five-year vision, the next phase will provide a roadmap for us to escape that zone.

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

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

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

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

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

Yes, that's great. I have a quick question and then a strategic one. The quick question is about the CARES Act. Last year, it allowed you to defer approximately $100 million in employment taxes. Could you provide an update on how that has progressed in the first quarter? Also, for fiscal year 2021, will any of that accumulated deferral need to be repaid? An overview of the fiscal year 2021 cash flow impact related to the CARES Act would be appreciated. Thank you.

Yes. David, it's Earl. Let me address that. For starters, if you look at the cash flow from operations this quarter, we landed at about $40 million, which is probably the first time in recent history that Q1 has actually generated positive cash instead of being a net drop on cash. $31 million of that cash flow came from the CARES Act. Last year, it was about $130 or $131 million; this year, it’s about $161 million. That will be repaid in two halves: the first half being next fiscal, which is really the end of December 2021, and then the balance in the following fiscal year.

I appreciate that. My last question is for you, Scott. When I think about your company, I see a significant opportunity that you are actively investing in related to the post-pandemic business environment. Additionally, within the last year, you've also started another major long-term initiative focused on your transformation programs. I'm curious, as you guide the company, can both of these high-priority efforts continue smoothly without conflicts? Is there competition for resources internally? How does human resources approach filling senior positions for one project versus the other? Also, how do you manage your attention between these two important and relatively new initiatives compared to the company's positioning over the years? Thank you.

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

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

That's great. Thanks.

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

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

Sure, we take great pride in having a national TV commercial for our company. It was executed exceptionally well, and we've received fantastic feedback. It's beneficial on multiple levels. From a commercial perspective, we've seen web traffic increase by over 10% as a result of the ad, demonstrating an impressive return on investment. Branding-wise, it enhances our image and emphasizes that we provide essential services, functioning as first responders. For example, hospitals cannot open until we've completed our cleaning services. Overall, this commercial significantly benefits us across various dimensions, and the financial return is evident with the boost in web traffic converting into actual business.

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

It's just been out for like two weeks?

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

Yes, Marc, let me address that. When we examine the technology spending, part of it involves planning and designing for our future IT infrastructure, which will commence with the rollout of the ERP system across the organization. We have decided not to implement this in a single major launch, but rather through a series of rollouts. However, you could expect to see some deployment by the end of this year, continuing into fiscal year 2022.

That's helpful. One of the surprises from the call is the comments about acquisitions and viewing them as a potentially more immediate use of cash than some of us anticipated. I appreciate the insight on prioritizing which acquisitions you may pursue. Is it too soon to start considering the pricing for these types of assets, or how should we think about the range of opportunities available to you?

Yes, it's probably a little early to assess this. Different assets have varying price ranges; for instance, the ATS assets tend to be more expensive than janitorial services due to their higher growth potential and margins. We need to combine all these factors in our analysis. Additionally, we consider strategic elements, like with ATS, where we discussed broadening our presence and addressing gaps we have across the country. We take all of this into account, but it's still early for us. We hope to have more updates to share soon.

Okay. The last thing I wanted to ask is, a year ago, EnhancedClean was not in existence, and we were clearly in a different situation. I'm curious about what EnhancedClean could develop into in the long term. It appears that there will be a certain flow based on our customer types. The survey data presented in your slides seems encouraging. I would like to know about the survey work and the feedback you've received; how recent was it? Do you think that some broader issues, like the stimulus, are beginning to show up in the comments from customers? Thank you.

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

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

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

Thank you.

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