Greetings and welcome to the ABM Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
David Gold. Please go ahead.
Thank you for joining us today. With us today is Scott Selmers, our President and Chief Executive Officer Earl Ellis, our Executive Vice President and Chief Financial Officer will join for Q and 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. 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. 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 is a slide presentation posted on our website under the Investor Relations header 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. 1st, we are buying quality. Abel 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. 2nd, 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 at a time of heightened demand for extra cleaning and disinfectant services. 3rd, 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 3 times.
With both companies having strong free cash flow generation, the ratio should decline in short order. And 4th, 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 Abel as well as a long history born from both companies family founded roots in San Francisco. Like ABM, Abel has grown and succeeded over many decades through a commitment to integrity and a focus on delivering exceptional service to clients. Able brings 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 $2,000,000,000 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 $400,000,000 of revenue in janitorial services at a time when safety and health are of primary importance to commercial clients. As you know, our enhanced clean 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 Enhanced Clean 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 1,000,000,000 square feet of building space. Cable 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, healthcare, 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, Abel generated revenue of $1,100,000,000 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 $30,000,000 to $40,000,000 over time with the majority to be achieved in the 1st 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 $830,000,000 the transaction values Abel at approximately 8 times its estimated annual adjusted EBITDA, including projected synergies of $35,000,000 the midpoint of our estimated synergy guidance range. This is an attractive valuation multiple given Abel'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 and 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 multi service 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 combinations 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 is 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 Able's employees to ABM and to our future together as one company.
Operator, I'd now like to open the call for questions.
Thank you. At this time, we'll be conducting a question and answer Your first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Good afternoon, Scott.
Hey, thanks for being on. Sorry for the late hour or 2.
It's all good. Thanks for taking my questions. 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 a 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're really strong on the engineering side, strong on janitorial too, but they've 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 probably is all else equal. When you say Able's EBITDA is about $65,000,000 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 look and we looked at what happened 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. Just to add it's Earl Ellis on the line. So yes, think of the 65% 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 $65,000,000 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 Abel'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 enhanced clean and the Abel'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 and answer it. Because you actually got that. So yes, we're excited about enhanced cleaning. Able had a product they call reliable, Able, right, reliable. But it's probably not as well developed as Enhanced Clean, right.
We have an advisory council and it's just 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, it 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 enhanced clean. I think technical solutions is going to be key because we're taking on 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 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 1,400,000,000 dollars in stationary engineering combined is kind of the stickiness for a 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. So, thanks for taking my questions. Congrats on the deal.
Thank you so much.
Thanks, Tim.
Your next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.
Great. Thanks for taking my questions this evening. Hello to you both. I guess just given that COVID had a lot of impacts on the business 2020 and I appreciate you guys try to normalize that to get to the 65 in 2020. But for a different baseline, could you maybe talk about what the business is doing in 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 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, 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 $8.30 price, we're taking on the cash and on the balance sheet, and then we're netting that against the debt like. So that is netted number, which is taken off of the 8¢.
Taken off of the I'm sorry. So to put it another way, Earl, is that are you saying the 8.30 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.
That's 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 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 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 know you have it because you're interacting in the market and you can literally walk down the streets of LA and San Francisco and you know you've 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 and I, right, that's going to form in there. So we feel super comfortable, if that makes sense.
Yes, it does. I'm sorry, if you'll afford me a last, last question. I guess I just wanted to ask one more, sorry, maybe for Earl. You didn't mention any cost to achieve the $30,000,000 to $40,000,000 of cost synergies and or deal closing costs. Sometimes those are relevant and so I thought I'd ask if you have an estimate for what those are going to be for you?
Yes. So there will be some one time costs associated with that. And I guess what we're doing is looking at which ones of those are truly one time that will actually be noted as items for non comparability. But as far as anything that is ongoing, it's very, very material.
Yes. Okay. Thanks guys. Have a good night.
Thank you. Thank you.
Your next question comes from line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.
Hi, guys. Big deal. Congratulations.
Thank you.
First question for me is, I don't know if you have this at your fingertips, but how does Abel convert that EBITDA to free cash flow relative to ABM? I'm just trying to get a sense for maybe how accretive to free cash flow per share you anticipate the deal to be? And how quickly do you think you can get that pro form a 3 times net leverage down to the targeted level?
Yes, absolutely. Thanks for the question. So a couple of things. When we look at the free cash flow, we are estimating that in year 2, we'll actually have free cash flow from this acquisition of approximately $60,000,000 But you can see that their converting EBITDA to cash flow is quite liquid in that they do not have a lot of capital expenditures. With regards to our leverage, so as Sada Doropje pointed out, we peak at 3 times.
Based on the cash flow that we generate, standalone as well as this incremental cash, we can see ourselves ticking down the leverage rate by about half a turn per year. So we quickly get down below 2, 2.5 within a 12 month period.
Yes. And to that point, we've always said our comfortable range is 2.5% to 3%. So like what's so outstanding about this transaction is we're consummating it and we're staying in our target leverage zone. So we have integration stuff that we have to do, but we're still in that zone where we can continue to deploy capital if we want.
Okay. That's really helpful. And just in light of everybody being very concerned about labor availability, I mean, clearly this transaction helps in terms of acquiring these customer relationships, but kind of acquiring these labor union relationships, is that a meaningful kind of element around the transaction as well in the context of investor concerns about labor availability?
Yes, that was super, super important attribute of this transaction. 80% of their work is unionized. And so Sean, the way to think about that, that means above scale wage rates and union benefits, right. So like we don't see nearly the turnover on union assignments that we do not in union. So to us, this really this transaction insulates our issues with the labor crisis out there, right?
So this was a fantastic, fantastic attribute of this acquisition from a risk mitigation standpoint.
Okay. I think that's important. And then we've kind of discussed historical normalized growth rate. The business kind of mimics ABM, but it also seems to be a bit of a play on sustainability, energy efficiency, which is kind of a secular driver that seems to be ramping. So have you seen those types of drivers impact Able's backlog?
And what does Able's backlog look like year over year or sort of sequential growth over the past couple of quarters?
Yes, I can tell you like on the engineering side in 2020 that it's super strong growth. We love that aspect. And let's look at ABM from a business service mix standpoint, right? When before this transaction between our technical solutions group and our stationary engineers, it probably made up about 18% of our revenue mix. We're going to about 30%.
So we're changing a little bit of the character of the firm towards energy efficiency, sustainability, climate change, everything that we've been thinking about that is so important to society right now. We're heading in that zone and it's a value play too, right? So we look at this as there's so many amazing financial aspects to this firm that happened immediately. But to me, I look at this as a major strategic acquisition to bolster our engineering and technical capabilities and start changing the character of the firm and really excited about that. And these guys, there's a reason why in years they've grown double digit in engineering.
They put a lot of focus and attention on 60% of their business, right. It was like stationary engineering was probably like 7% or 8% of our business. So it's quite exciting.
Okay, great. That's all I have for today. Thanks guys.
Thanks.
Thanks, Your next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.
Good evening, everyone.
Hey, Mark. How are you?
Very good. Yourself?
You believe we have David Gold on the line, the ex alumni?
Don't figure, right?
So I wanted to and I'll be honest, it's not just going to be one question. I wanted to just maybe start with and without maybe stealing thunder from what you talked about as far as talking about your upcoming 5 year growth plan introduction. So why don't you talk a little bit about maybe what type of technology opportunities or needs you might see coming either to bridge this particular acquisition or sort of just in general, what types of opportunities you might see there as far as bulking up or any key areas that you can see improving?
Yes. So look, I think we've done some pretty good due diligence, but we haven't gotten to the details of the systems that they have yet, like in terms of client facing. And I'm particularly excited about what they may have on the engineering side. So like there's this whole narrative about what do we get on their platform in terms of technology for running the business. And then you look at ABM's technology platform, we're going to be spending a great deal of energy and effort upgrading our platform.
And to me, this gives us a better base to spread it out across, right? And I know that's happy talk for Earl, who gets to amortize our technology spend over a greater platform. He is the guy with the biggest smile that they sell. I think this is it suits multiple purposes, right? It makes our investments in technology more affordable per revenue dollar and we may get some hidden gems on the Able side on the engineering.
Excellent. And then one of the things that seems to jump out and I'm glad you spent some time going over the talent and labor side of the equation, but also it seems to me as though from a competitive standpoint for those who are not part of the organization looking in, it seems as though it would have made this combined entity a better destination for others who may be considering changing courses given the platform. I was wondering if you could talk about maybe how that might play into the recruitment of adding additional talent and how that might spread throughout from a geographical mix perspective?
You must have been listening to my town hall to the firm earlier today because that was the center point of it. This is people want to be part of a company, right? And there is this labor crisis, we are trying to retain and attract talent. And there's no better catalyst for that than a growing successful company. And I think that's the greatest attribute about this to be able to talk about what we're doing and then to be able to continue to invest into the company over the next 5 years, which again we'll be sharing with you guys in the next few months.
So I mean you're spot on like from a pure strategy standpoint. It's great and it takes there's a scarcity of assets in our business and to take the crown jewel off the table and put that chip over on in our side, big deal for us.
Okay, great. And then one of the things there's 2 more for me. One, I wanted to touch on the maybe you could talk a little bit about sort of how this came about. One of the things I did sort of come across was it seems as though, while you have done business against each other for many years, it also appears as though the 2 year 2 companies were part of that founding group of the Clean Coalition that was formed last year. And I was wondering if you could talk a little bit about how has that did that sort of accelerate the pace of getting to know each other a little bit?
Maybe you could sort of take us through that acceleration of this process.
Well, we have not been shy over the last few months about saying we're in the acquisition mode, right? So that message was out there to the investment community, right? So people knew we were after assets. And what was so nice is outside from the fact that our teams in the field have known Abel for years and interacted with them, our executives got more comfortable with their executive team through the cleaning coalition. So that just created a bond because as you can imagine, the able folks have a choice, right?
They go through this dance with potential suitors and we become a very attractive acquirer because our culture is a soul locked together and we got to know each other. So I think it's a confluence of the fact that we put it out there that we are in acquisition mode, the fact that our people in the field knew them really well and then on an executive level, we got to know them really well.
Excellent. And then the last one for me. And there's a lot of detail as far as some of the potential overlap and customer and some of the regional. One of the things I don't think I saw was focus around airport, airline customers. Is there any way we should think about that?
Or is there a similarity? And then I lied, I just thought of another question following that.
So they only have a couple of airport assets. So it's really this is a B and I play more than anything.
Okay, excellent. And then the one that I recall, is there a way to think about them? Should we view them as a similar as far as revenue SKU and sort of the flow throughout the year? Should we think about them as a similar seasonality to yours? Or is there any particular reason to think that it might be a little different?
Thanks.
Yes, they're similar. And in D and I, there's not a lot of seasonality. It's pretty straightforward.
Okay, great. Thank you very much.
Thanks, Mark.
Ladies and gentlemen, we have reached the end of the question and answer session. And I'd like to turn the call back to Mr. Scott Salmeres for closing remarks.
So thank you very much. Listen, I'm so glad you guys made the time to do this. Sorry, it was a little late in the evening, but hopefully you can sense how powerful it is, how excited we are about this transaction. We'll be talking about this for a long time to come because we think this is game changer for the firm. So got a lot of time to spend to close this out by the end of September and we'll be speaking to you all just in a couple of weeks with our Q3 earnings.
So, thanks for making the time and we'll chat soon everyone. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.