Greetings, and welcome to the ABM Industries Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I will now like to turn the conference over to your host Susie Kim, Vice President of 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 third quarter fiscal 2019 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 the 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 also like to remind everyone that this quarter’s results reflect our updated five segment structure with healthcare remapped and integrated into our business and industry, technical solution, and education segment. For comparative purposes, we have provided historical comparison in the Appendix section of today’s presentation. I would now like to turn the call over to Scott.

Thank you, Susie, and good morning everyone. As I’m sure you read, we announced another solid quarter of performance in the yesterday’s earnings release. We expanded our business both organically and profitably against last year, and our organization is delivering on the commitments we made to manage our business discerningly as we pursue topline new sales growth and remain disciplined on margins, themes you have consistently heard. Specifically, we recorded a record revenue quarter reflecting organic growth of 2.3% with an adjusted EBITDA margin at 5.6%. Our earnings per share also grew to a GAAP EPS of $0.55 and $0.60 on an adjusted basis. ASC 606 and 853 had a minimal impact on these results, which Anthony will discuss in greater detail. We are on pace to end the year in line with our expectations and we are reaffirming our EPS guidance outlook of $1.70 to $1.80 per share on a GAAP basis and $1.95 to $2.05 per share on an adjusted basis. And as a reminder, last quarter, we narrowed our range by raising the low end by $0.05 a share. I want to thank our team members for their relentless dedication through another quarter of persistent labor challenges and economic uncertainty. Unfortunately, the operating environment continues to be extremely difficult for our industry group as we have not yet reached an inflection point in the current cycle. Unemployment remains at historic lows and labor supply remains exceedingly tight with a more competitive hiring landscape and higher turnover, cost pertaining to recruitment, training and onboarding are increasing. The immigration narrative is likely contributing negatively to wage pressure and supply as well, and unfortunately, we are not expecting any near-term changes to ease pressures. As you know, in our business, wage inflation affects us more dramatically as the majority of…

Thanks, Scott. Before I recap the quarter's results, I would like to provide my customary synopsis of the impact of ASC 606 and 853. Given we are three quarters into the year, I also wanted to discuss how the new accounting rules has developed throughout the year. Our quarterly results reflect lower revenues of approximately 12.5 million associated with ASC 853 related to service concession arrangement, primarily reflected in our aviation segment. The deferral profit on unsold materials associated within our technical solutions project was approximately negative 0.7 million. Lower sales commission, which are now deferred and recognized over the expected customer relationship period was approximately 2.2 million, primarily impacting technical solution. Our initial guidance range anticipated an impact due to 606, which at that time was primarily related to unsold materials that where a carryover of amounts previously recorded in fiscal 2018. Moving to Q3 and our earnings per share outlook for the full-year, the predominance of the 606 impact has stemmed from the sales commissions cost, I want to point this out, but as the year progressed, tremendous growth within our technical solutions segment has enlarged this impact. While for transparency, we have delineated these accounting items, I want to note that the sales commission piece is more operational in nature versus the carryforward of prior years’ unsold materials. Now, onto the quarter. Revenues were [1.6 million], driven by our Technical Solutions and Aviation segment. On a GAAP basis our income from continuing operations was 36.5 million or $0.55 per diluted share, compared to 33.7 million or $0.51 last year. Before moving on, I am pleased to report that these results reflect a 3.7 million favorable impact from insurance. A material improvement since we launched our comprehensive safety and risk program exactly four years ago. Year-after-year we have…

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Andy Wittmann with Robert W. Baird. Please proceed with your question.

Great, and good morning. I have a few questions here to start out with, but I guess the first one is for Scott. I wanted to kind of get a sense from you as to the outlook here. Obviously, I think the exits that you've made in parts of your business, including B&I and other segments as well, are clearly contributing to the margin performance that you're seeing in those segments. Given that it sounds like the labor market continues to be challenging for you guys, it sounds like basically some potential for more exits to continue. So, with that in mind, Scott, I wanted to get your sense as to what the revenue trends could look like in your key segments over the next several quarters? Obviously, you walked away from some business that's going to weigh on the revenue trends into next year, but how should we be thinking about that in general, given the challenges that you're facing there and the discipline that you've gone to here in the last couple of years?

We don't give revenue guidance, but I will tell you, well, we think next year will look pretty similar to this year. We don't expect any dramatic change. I think the discipline that you pointed out is not going to change, but we will be adding salespeople. We're going to continue to grow the business. We're on record pace this year, and hope to beat next – last year's performance. So, still healthy on the new business front, but I think next year will look a lot like this year.

Okay. That's helpful. I think it's probably a similar question, but in a little bit different vein on the Technical Solutions portion here. I mean, obviously, this is the segment that carried the quarter. This is probably the area that most people will be surprised with even if you guys aren't internally, but we heard Anthony's commentary, I guess, about this is not the way we should be thinking about the long-term, but can you just talk about the backlog of work that you have there, if that gives you confidence for at least high single-digit growth here as we move into 2020? And then just, this is a project business, that means, it could be more economically sensitive. And I wanted to understand, if you guys are seeing any cracks in the foundation given everyone's concern about the economy and how that could be affecting that project-based business?

Andy, I'll take the first part of that question. So, our revenue continues to really benefit from a robust backlog, the churn, which is the project conversion rate in our pipeline, which is translating into the growth that you're seeing and we continue to see a great amount of growth in that – in the short-term. As I mentioned previously, when we see backlog and churn of roughly 150 million at 20%, those are healthy indicators of the business and our backlog is well in excess of those amounts. So, for the short and medium-term, we don't see any real change in terms of the trajectory for the business. But as Scott mentioned in his prepared remarks, it is a business that is project-based, and therefore, we have to continue to invest into the salespeople. But it's resonating quite dramatically with our customer base. And we don't see anything that should impact that in the short-term.

I mean, look, and for us, Andy, this is – I’ll tell you, like, if we talk about potential slowdown, if you think about how we performed in the last recession, which was the great recession, which was pretty dramatic, we did well as a firm. We didn't have Technical Solutions then. We didn't have that lever. And if you think about it from a firm standpoint, we were organized by service line back then. So, when we were helping to solve problems with clients back then, it was kind of a one solution thing, right? If it was a janitorial assignment, we talk about how that helped them through the recession from janitorial. And you know how well we performed relative to others as a firm last time. Well, now, we can talk to them because of the way we structure our Industry groups, hopefully, we can provide solutions with other service lines, but on top of that, we have the Technical Solutions lever that, as you know with these project-based capital, they're not operating in terms of an impact to a client in a recession. So, it's capital and it reduces operating costs. So, we think the Technical Solutions team should be really well positioned if the economy turns down.

That's helpful. I have one other question for now, and I might jump in the question queue later, but it has to do with cash flow, and you guys mentioned that DSOs were up a little bit. You had a big target for free cash flow this year that you previously articulated. It seems like the fourth quarter would have to be unusually strong to get to that $200 million level free cash flow. Anthony, how should we be thinking about the free cash flow here for the year?

Great. So, our free cash flow for the year-to-date, as I mentioned, is somewhat disappointed due to a few reasons, DSO slippage, primarily in our Aviation, but a little slippage across all of our industry group and nothing systemic, but slippage, and due to a larger project-based work with some working capital tie up. That's the type of tie up that I like, right, at the end of the day because it's indicative of us growing that pipeline and growing that business. But given all those factors and given where we stand at the end of Q3, and along with our outlook for the remainder of the year, we expect our free cash flow will be closer to the $175 million mark versus the $200 million plus mark that we achieved in 2019. So, a little bit down, but we're constantly focusing on it, on this. And we are also [indiscernible] looking to improve the DSO in Q4 and beyond.

Cool. Thank you very much.

Thank you. Our next question comes from line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Hi, team. Thanks for taking my questions. I guess first one from me is just reading between the lines on the prepared remarks. It seems like assuming the status quo in the current operating environment that it's going to be pretty tricky to expand margins in fiscal 2020. Am I thinking about that correctly? And secondly, it would be helpful at this point to just round up some of the headwinds and tailwinds as we think about next year just in terms of maybe some non-recurring items, the discrete tax items, where the level of IT spend is going, things like that, just so we can think about some of the puts and takes really out here.

Sure. Good question. So, I think when we look at margins, we look at it in the operating segments and then you could look at the bottom-line EBITDA. So, for us, it's so core in this market to protect the operating margins in the segments. And, we've done a really good job of that. I think surprising a lot of folks, to be quite honest, right, on how well we've done and we expect to be as disciplined next year to protect those margins. As it flows through to bottom line margins, yes, that can be pressured because we are making investments in our IT systems and HR. And, Sean a lot of this was planned starting back in 2016, when we said, how do we accelerate this company? We said right out of the gate that our systems were not where they need to be, our process wasn't where we need to be. So, these were all planned investments that have come into fruition. And it has been a little bit more acute on the HR side, because we had to react to this environment, right. We hire 70,000 people a year, right. So, we have to make those investments. So, you will see incremental year-over-year in that corporate side related to HR and systems that will pressure the flow through on the bottom-line margins, but we would encourage everyone to look to the operating segments.

Okay. So, I mean all in, does that mean margins might actually tick down next year? Just trying to get to – just make sure we're thinking about things correctly.

Yes. I mean, look, we're still racking up the budget. We are just entering into the fourth quarter, but there is a chance that it will head down next year, all things being equal.

Okay. Got it. That's helpful.

And again, I would say, look at our operating segments versus bottom line EBITDA. The operating segment is the health of what we're doing.

I get it. And I guess another question is just, this year you put the HR system in place. You've got the card-based time and attendance system in place. The ERP backup consolidation is underway. I'm wondering, where the incremental IT investments are going next year exactly?

Yes. Sean, it's not incremental. So, some of the systems that we're investing in today go live in the next fiscal year. So, take our U.S. ERP that [card access] [ph] become part of the operating environment next year. So, it's all in line with my previous remark in Q2 in terms of the year-over-year impact related to IT and it's really just a deferral of expense that we expected this year being deferred into the next fiscal year. So, from a cash flow perspective, the investments that we're making should temper off because some of that – as we get the systems up and running and then, we move to a more operating environment in terms of the expense.

Yes. And the incremental side, if there's going to be incremental side, that will be really around HR, because we think we're going to continue to invest in. It's so critical for us, right, hiring, speed-to-hire in this market. We've said this for a while now, someone comes in and fills out an application, you want to close him in that day or the next day. You wait a week, they're going to have a job somewhere else, right. So, we're bringing on recruiters, we're enhancing our systems and we're standardizing practices. Sean, if you were to go back to 2016, everything in this firm was distributed into the field. We have 300 branches. They all have their own hiring practices, their own ways of doing things. We're centralizing now into more of a corporate orientation where hiring practices, onboarding, training, all are going to be standardized with best practices, which was really the theme of 2020 Vision. So, there will be some incremental cost, but you'd expect that because we don't believe the labor crisis is going abate in 2020. I don't think anyone does.

Yes. It makes a lot of sense. And last one from me just on free cash flow outlook, revised down a little bit for fiscal 2019, but I'm wondering how to think about next year? Will some of the Aviation receivables unwind, should we see receive decent free cash flow growth next year in your view? Maybe it’s a good one for Anthony?

Yes, I think it's a little too early. And at year-end, we will provide the outlook. In terms of the Aviation, it's a challenging, consolidated customer base that I don't think it’s – I don't think we're any different than any supplier that deals with the aviation, big clients and big customer base in terms of their ability to drag out their table. So, we're working actively to ensure that where we work with them and ensure that the DSOs are a focus area and they have been a focus area. But we also have some incremental costs, as Scott mentioned, but offset by investments that we're making today in our systems, that should abate next year. So overall, we see continued good cash flow generation for the future.

Okay. And I will just sneak one more in. Apologies to the other people on the call, but maybe you could just update us on the anticipated deleveraging trajectory and whether you guys think you might be back in the market for an acquisition at some point in FY 2020?

Yes. I mean, that's always been the plan. We did the GCA acquisition in September 2017. We said, we're going to take a pause on acquisitions for the next 18 months, 24 months because, first of all, we had to integrate GCA. We were over four times levered. And we said, we want to get under 3 times lever before we go back on the market. So, that's where we'll be in 2020. And we expect if there is an opportunity that makes sense for our strategy, that we'll be acquisitive in 2020 for the right opportunity.

Thanks so much, gentlemen. I appreciate it.

Thank you. Our next question comes from line of Tim Mulrooney with William Blair. Please proceed with your question.

Good morning.

Good Morning, Tim.

Can you guys dive a little deeper into the conversation that you're having with clients these days? I mean, it sounds like maybe they're incrementally more cautious than maybe they were six months ago. Is that a fair characterization, and is there any more color you can share with investors this morning?

Sure. That's good. Yes. I think everyone's more cautious, right because, I mean, I don't have to tell you, right. We could take one of these today, is there tariffs or there are no tariffs, right, what's going on with trade wars, with the potential recession. So, everyone is in this mode of what's next, but we still have really good traction, good conversations with clients. And I think they appreciate what we're doing and the data that we bring. We are different than many competitors because we do think we have better analytics. So, a lot of times they look to us for insight of what we're seeing with other clients, which is where our scale helps because we could rationalize what's going on in the market across different regions. But they are active conversations and everyone's just curious about what everyone else is doing and where the economy is going.

Okay. Thanks. Kind of along that same line, Scott, given all the changes that you've made in the portfolio, you and Anthony, and the operational changes you've done over the last couple years, I mean, would you expect the business to perform differently in the next slowdown as compared to the last several recessions?

I would have to say yes, and it's what I alluded to earlier. Now, that we're an industry group format and not selling single services, hopefully, we have more solutions to bring to the clients to get better traction. We like to think we have better data now, better analytics to help clients understand what their options are from a cost standpoint, from an efficiency standpoint, if they make specification changes. We have Technical Solutions now. We have this extra component to say, look, we know you're pressured on cost, here's an opportunity to reduce energy, right, and become more efficient. So, we think we are much better positioned in a recession as a firm. And again, I'll read it back, it was a terrible period for our economy in 2008 and 2009 last time, and we did, relatively speaking, pretty well. So, hopefully, that'll prove out again and with a little plus sign next time.

Okay. Thank you. And then, Anthony, just one more for you. ASC 606 and ASC 853, I think, you said that could be a favorable $0.05 impact for the full-year. Where are we today, what's the impact today so that I can understand the implied impact for the fourth quarter? Thank you.

Yes. Year-to-date, we're roughly $0.07 of a positive impact. And if you recall, when we initially gave guidance back in December of last year, we had anticipated $0 to $0.05. And now it's primarily related to the uninstalled component, which was the carryover from fiscal 2018. So, at this point, we continue to feel it's going to be closer to that $0.05. It's, obviously, going to be somewhat contingent on operations, but that's what we're going with in terms of our guidance for the full-year.

Got it. Thank you.

Thank you. Our next question comes from line of Tate Sullivan with Maxim Group. Please proceed with your question.

Hi. Thank you. Thanks. Good morning. First on Education, I mean, the revenue was up 4% year-over-year, but you mentioned some aggressive bidding, and then, I think you indicated slightly higher margins in Education. I mean was it below planning, or did you lose bids you thought you'd win, or can you just give more context to that comment, please, because it seems it certainly performed better than some of your other segments?

Yes. Thanks for the question. Generally, we were disappointed with the buying season, the execution, and that was really a function of two things. One was the pricing environment, as well as the realization on new sales and retention. That being said, the operating profit came in line. We were able to offset our labor costs by good overhead savings and other savings within the mix, but clearly disappointed by the buying season, which really impacts half the business. It's really the K-12. The other half on the university, or higher res side, that buying season is throughout the year. So, to Scott's earlier remarks around our new go to market strategy and leading with solutions, we remain optimistic that the next 12 months will produce a better operating environment and hopefully, a better margin pull through than we've seen this year.

Okay. Thank you. And well, switching to Aviation real quickly. Did I hear you say organic growth rate of 5.7% in one of the segments in Aviation, or can you just go back and review that comment, please?

We've had organic growth in Aviation, but we've also had some contraction in the U.S. business. So, when we look forward, while new sales and retention have been somewhat of a challenge, we're seeing good opportunities as it relates to specifically our fueling and catering in our UK operations, and I believe that comment was in relation to our service concessions.

Service. Okay. Thank you. And then last for me. And then in Technical Solutions, can you just give some context, what specifically do you do in EV charging?

So, in EV charging we will actually do the installation, we will partner with the actual hardware companies, and then, we'll go to big manufacturers, someone like a BMW or Porsche, and we'll say, look for all your dealerships or in all the locations you want in North America, let's plan that out, and then we do kind of a full turnkey installation and then try to lock in the servicing after that. This business has grown for us dramatically. We are the clear number one now in this segment and it's getting more traction and we haven't even scratched the surface yet of cross-selling this to our clients. We're just starting, but this is kind of kudos to our ATS team. This is all organic growth that they're finding out there. And it's been spectacular for us. And as we all know; the trends are heading in such a positive direction. So, really going to be a good platform for us.

Just quick follow up on that. Do you currently do the EV charging service for any of clients and janitorial service, for instance, or does that go to your point about starting that effort?

We do, but it's more spotty than we like, right. And that's part of really for us getting more mature at cross-selling.

Okay. Thank you for those comments.

Thanks.

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

Hi. Good morning.

Good morning.

I wanted to touch on – a lot of my other questions are already answered. I just wanted to touch on maybe some of the progress or some of the areas that you're looking at as far as new service offerings. You touch a little bit on some of those earlier, but I just want to get a sense of where you're seeing opportunities and some of the initial benefits. Whether it's the airplane fueling assignments or some of the other things that we might look forward to support for new services? Thanks.

Yes. So, I think we've seen what we could do with fueling and catering. And that's really just – you're talking about something that really over the last 12 months to 18 months has really started taking off, no pun intended, in the Aviation sector. So, as we look and build on that and let's go back to the ATS Group and how really EV charging started organically outside of the core projects. We were starting to look at how much work we're doing in data centers and kind of mission critical stuff. I think that's an area that we're going to be exploring over the next 12 months to 24 months, how this could really turn into something, because if I were to give you the list, and I'm not allowed to, but if I were to give you a list of the Silicon Valley based firms that we do work for their data center and their power testing and have been, think about what's going on with cloud, right, which is essentially data centers, right? The expansion plans for our clients in terms of opening and lighting up data centers is actually mind blowing. And we're right there with them. So, I think there is opportunities for us. What we do is kind of, we think about leveraging the adjacencies, right. We have our core businesses. What are the adjacencies and how do we leverage them, and that's kind of all wrapped into our strategy for next year and the next three to five years.

Okay. Great. Thank you very much.

Great. Thanks Marc.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll now turn the floor back to management for any final comments.

Yes. I just want to thank everybody for the call. Sadly, summer is over and we are charging into fall here. But we're excited to come back to you in Q4. We'll have our budgets all wrapped up. We'll talk about how we finished the year. Hopefully, we are going to have some good announcements on our sales trajectory, which we've been spending so much time on and so much focused on. So, looking forward to the follow up conversations. Thanks to everyone. And again, I just have to thank my team for everything they've done to get us to this point. It's really proven our team. And thank you.

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