Greetings and welcome to the ABM Industries Fourth Quarter and Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Susie Choi, Investor Relations and Treasurer for ABM Industries. Thank you. You may begin.

Thank you all for joining us this morning. With us today are Scott Salmirs, our President and Chief Executive Officer; and Anthony Scaglione, Executive Vice President and Chief Financial Officer. We issued our press release yesterday afternoon announcing our fourth quarter and fiscal 2018 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 in our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the company’s website under the Investor tab. I would now like to turn the call over to Scott.

Thanks Susie and congratulations on your new role as Treasurer and Vice President of Investor Relations, couldn't be happier for you. Good morning everyone. And thank you for joining us today as we discuss our fourth quarter and full year earnings release, which we issued just yesterday afternoon. It's hard to believe fiscal 2018 has already come to an end. When we began the year, we’d just closed on our GCA acquisition, opening a new chapter in ABM’s future. What followed was a monumentally year for us on several fronts. In addition to adding more than 30,000 new team members from GCA, we also faced one of the toughest labor markets in American history and the acute impact of Brexit on our UK retail business, all while keeping our clients happy and team members engaged. At no point during the year were we deterred from achieving our goals of accelerating organic growth through new sales, integrating GCA successfully, protecting margins and driving free cash flow generation. I'm so proud of the team's ability to navigate the challenging macroeconomic environment while delivering against our short-term plans and progressing towards our long-term goals. To summarize our performance for the year, we concluded 2018 with record revenues of more than $6.4 billion driven by 4% organic growth. Our GAAP continuing EPS was $1.45 per share, or $1.89 per share on an adjusted basis. And our adjusted EBITDA margin was 5.1% for the year. We also generated a record level of free cash flow of more than $200 million. These results are consistent with what we outlined in the second half of the fiscal year and I'm pleased that overall the team has delivered on their commitments. Let me dive into some of the drivers of these results. And let me start by saying…

Thank you Scott and good morning everyone. Before I review our results please keep in mind, the results presented in this release reflect our acquisition of GCA, which closed on September 1, 2017. Therefore the financial results and associated year-over-year comparisons discussed today reflect 12 and two months of GCA operations for fiscal 2018 and fiscal 2017 respectively, which includes the related revenue and profit contribution as well as higher amortization, interest expense and share count. For fiscal 2017 the fourth quarter and full year results also reflect the transaction, acquisition cost. Additionally, our fiscal 2018 results for the quarter and year reflect the benefits of the US Tax Cuts and Jobs Act of 2017. Now onto our results for the fourth quarter. Total revenues for the quarter were $1.6 billion up 10.1% versus last year driven by incremental GCA revenues of $88 million and 4.2% organic growth within the business and industry, technical solution and technology and manufacturing segments. On a GAAP basis, our income from continuing operations was $8.9 million or $0.13 per diluted share compared to a loss of $2.5 million or $0.04 from last year. This quarter's results reflect a non-cash impairment charge of $26.5 million which resulted from our revised outlook of our Technical Solutions business in the UK which I will discuss in more detail shortly. On an adjusted basis, income from continuing operations for the quarter increased 65% to $38.8 million or $0.58 per diluted share compared to last year. During the quarter, we generated adjusted EBITDA of approximately $90 million at a margin rate of 5.5% compared to $70.8 million at a rate of 4.7% last year. I'll now turn to our segment results which are described on Slide 12 of today's presentation. As we've noted all year, our 2018 operating segment…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

I wanted to dig into I guess factors driving the top-line here in fiscal ‘19. I guess maybe starting with, I think Scott you had a stretched goal of $900 million, you hit that. But it sounds like you guys talked out some moderation in the organic growth rate year-over-year. I guess it sounds to me like maybe the missing hole there is retention rates. Can you talk maybe about some of the dynamics that you're looking at and you also had -- are annualizing the contract in TfL. But can you just talk about some of the dynamics that you're seeing in terms of top-line in general but maybe retention specifically, maybe it’s falling out of the discussions you're having on price and cost dynamics from labor?

Sure. That's great, Andy, and that's right on, we feel like we're going to be able to replicate if not overachieve what we did this year in new sales, so all’s well on the top-line for expanding with our customers and cross-selling and bringing in new business. I think for us this is the year of having a keen focus on retention rate because we have had some pricing pressures as we know because of the wage rates and the current labor market. But I think this is a time where we're going to begin to make some strategic decisions about accounts that aren’t performing to our expectation level. And as we look -- we don't think there'll be a dramatic difference in retention rates, we're talking about toggling a point or so. So I do think it's something that's going to have added pressure, especially as we have mid-cycle conversations with clients where we're not performing.

Yes, I guess that makes sense. I mean just in terms of visibility you have into that, that point or so that you're identifying here, I mean have those accounts that need to have those tougher conversations already been engaged and identified that gives you confidence in that point or do you feel like you still need to work through your overall portfolio to develop some confidence as ‘19 proceeds?

Yes, as we planned 2019, we looked at every account, we developed account plans. So we feel like we've identified the accounts where we're having more challenges and we’re going to be strategic about it too, right? Because if it's a large scale client that we have the opportunity to continue to expand with and move through the cycle, it'll be a very different decision than a client maybe that has just one asset and is more price focused than nearly buying into our platform. And that's the way we're thinking about. And just to give you some idea of how we're thinking about it when we planned our escalations for 2019 we’ve budgeted into our guidance about 25% increase year-over-year. So that's not necessarily a number you put in your models but you should just understand directionally that we feel that we're going to have some good success but just there is some risk with that.

Got it, okay. The other thing I heard in the prepared remarks that was kind of interesting was the number of IT systems that you're putting in HR, EPAY and then combining your financial systems. I think in ‘18 you also had some systems implementations. I guess I've no doubt that they're baked into guidance Anthony. But most of these systems are SaaS type of things that do get expensed and pressure the P&L. Just maybe we can get a sense of what this margin guidance you gave us here today really represents. Can you talk about what the cumulative headwind to margins is from all these systems implementations?

Sure Andy. And you’re exactly right. Our strategy over the last call year and a half has been to move more of our infrastructure and software to the cloud. So over time, you should see a reduction in the CapEx associated with IT system, and then the corresponding increase in our OpEx. And then we’re expecting obviously efficiencies from these new systems on the labor side, as well as from the back office perspective. From a total cost year-over-year, we’re anticipating the increase in IT spend to be approximately $10 million on a year-over-year basis and that will be primarily reflected in our corporate segment.

And Andy, if you think about 2020 Vision and the cadence of the transformation, the part one was to change our operating model and be more solution provider, right, bringing more services to bear for our clients. And then part two of it was working through our shared service center, right, of procurement, all the things that we’ve talked about. This is the stage now where we are investing in the platform to enable a lot of the best practices that we outlined through our 2020 Vision program. So it’s really exciting because, in our minds the ABM of 2020 is going to be more data-driven analytic company as a result of all these investments. And that’s just going to help us drive our business and ultimately accelerate in the future. So this is kind of right in line with where we want to be.

Yes. No doubt, this is that vision. I guess, Anthony, given that some of these are not implemented, I guess there are some that you did say are in effect today, but some are coming in over the course of the year. If it’s $10 million costs for this year, what’s the annualized run rate, because presumably there’s some carryover that’s going to get lapped in the 2020 that we want to be aware of, as well?

Yes, I think the way to look at it Andy is the cost increase year-over-year can be primarily the result of the SaaS model, as well as the beginning depreciation of the CapEx associated with putting in place these systems. On a go forward basis, we’re not anticipating incremental, so the run rate on operating expense should be in line with what we forecast or what we’re anticipating fiscal ‘19 to be. The biggest difference is going to be the switch between depreciation and OpEx over time becoming much more an OpEx with most of our systems. Although they are deploying throughout fiscal ‘19 from a software as a license perspective, they’re fully expensed in ‘19. So you’re not going to see a lot of year-over-year going in ‘20.

And then just I’m going to finish up here, at least for just going around on tax rate. So you just went through a lot here pretty quickly, but you guys give this guidance of 30%, but obviously the number that’s going to be in there in the income statement is going to be a little less, because WOTC is the big one. And I think you said it’s going to be down like to what $7.5 million from was it $11 million last year. Is that right, Anthony?

Yes. so the way to look at it is really in two components. Our discretes are primarily going to be WOTC and FAS 123R and then we have 179B which are associated with our energy efficient projects, which is the one that we frankly don’t have a very good visibility, because it’s project dependent. So when you look at WOTC and 123R we had roughly $11 million in fiscal ‘18. We’re anticipating $7.5 million in fiscal ‘19. So WOTC should be relatively consistent, the biggest driver is going to be the drop in 123R and that’s really a function of the share price as well as the exercise option value when these options were -- options or stock based comp were put in place.

Okay. So then the 30% really turns into something closer to like 25% or 26%?

Yes.

And then you would also get the benefit of the non-deductible -- or the deductibility of stock compensation which would lower the tax rate a little bit further, and that would get you to your adjusted EPS range. I just want to make sure that the people listening to the call that this is all very clear, the tax rate that they're actually going to see is not 30%, it's going to be something closer to 25%?

Yes, if you look at it, the 30% is reflective of the full year of the US Tax Cut Act. But it has incremental increases for provisions that didn't impact us in ‘18. So on a year-over-year basis, purely from the tax rate, we would have an increase which is not intuitive. And I think I've been signaling that since Q3 of last year around making sure our investors understand that tax is just comparable, are going to go up year-over-year. And then exactly to your point what offset that will be the benefit from these discretes.

Okay, I think that's helpful. I'm going to leave it there for now. Maybe I'll buzz back in later. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from line of Marc Riddick with Sidoti. Please proceed with your question.

I wanted to touch a little bit on the CapEx guide and wondering if you could parse out for us, what is it -- how much of that would be considered sort of growth CapEx if you will, and what would be maintenance CapEx for '19 and how we should think about how that might evolve beyond '19?

Sure. So CapEx in general should be roughly about 1% of our sales, that's the way we look at it internally and then that the split of that is going to be -- $45 million to $50 million of that is going to be the maintenance CapEx and that will be for equipment. Historically that would be for systems implementations as well as our software when we would host it. As we look forward, I would bake in 1% of being the right run rate. It's hard for me to say that number should materially differ from what we've historically seen given the growth in the business and some of the CapEx associated with that growth.

Okay, great. And then I wanted to shift over to a little bit of -- if we can sort of get some thoughts and updates around the pricing discipline and go-to-market strategy benefits and how -- what differences that you're seeing by segment a little bit because I think certainly there's this quite a bit going on and of course you're going to be layering on the technology changes. But I did want to get a sense of maybe the receptivity that you're seeing and the differentiation by -- from one thing to another that might be helpful?

So I think the pricing impact on business is universal, it's not in any particular industry group. This is a situation that’s facing each of our segments and really facing each of our clients as well. And I think that's what has gotten us in a good place because you have these quarterly conversations with clients. So it's not the first time they're hearing about it and they're facing the same challenges. So that's why we think there's going to be more receptivity this year on escalations as we go forward and why we felt comfortable budgeting higher. And as I said earlier, there is no questions there's risk with that and will be more discerning but it's nice to have something impact you that if this is one way misery loves company because you have a narrative that everyone can share and that's why we're getting the reception that we’re getting.

Okay, great. And then one other thing I was thinking about as far as the -- as you go through the year with the technology and enhancements throughout the year, I was wondering if you could touch a little bit on where you feel you are on the analytic side, I suppose, and if you if you feel as though you have that capability in-house to take advantage, or what you'll be deriving during the course of a year from your technology improvements or whether we should see an update in some of the analytic needs within the company?

So it's early on, right, we're in the point now where we're just starting to deploy all this technology. So I think from a pure analytics and data from these systems, it's really going to be a 2020 story, because that's when we'll start to be able talk about year-over-year changes. However we still have the infrastructure like for example, one of the things that we're very focused on is managing daily labor, right? So it's a manual process right now and it's getting done. So when we enable the technology, it's going to just make us more efficient. And it's going to free us up to do some of the other things we'd probably like to be doing. But the reality is we're still focusing on all the key things we have to do in this labor environment. It's a technology that's going to enable us. So it's an evolving story. These systems are all starting to come online throughout the year, but in terms of having true data analytics, that's not going to be more manually derived. That's really something that we're going to feel comfortable in 2020.

Okay. That makes sense. And then one last thing for me, I was wondering if you can give maybe some thoughts as to some of the things that you've learned initially as to the strategic service line enhancements within Aviation? And then maybe some of the things that you've learned from there, is that something that you can see in taking into the other segments as far as expanding service line opportunities? Thanks.

Yes. I think the main thing we learned is that clients appreciate when we come to them with solutions, right? We've historically been a single service company and we are just starting on this path, right? By now as our teams are getting adept at talking about cross-selling, like this year was our best cross-selling year ever, we did close to $100 million of cross-selling services. And we see that happening in unique places in our Education line, we're expanding with Healthcare. So a lot of the universities will also have hospitals as well. So it’s something that we can talk to with clients now and still it's a long-term process to get our people skilled at cross-selling. But to think that we did close to $100 million this year, we were pretty encouraged by that, but we still feel like we have a lot more runway. So being a solution provider is going to prove out as part of our long-term thesis. And you enable that with the technology and account plans and standard operating practices. And we just think we have a winning combination in the future.

Thank you. At this time, I'll turn the floor back to management for any final comments.

I just want to thank everybody for following us and participating throughout the year. And I just wish everybody a happy and healthier holiday season and a prosperous 2019. We look forward to updating you at the end of Q1. Thanks, everybody.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.