Greetings and welcome to the ABM Industries Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Susie Choi, Investor and Media Relations 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 second quarter 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. Additionally, today’s accompanying presentation includes a historical segment recap for fiscal 2017 to reflect the new business segments we introduced earlier this year as a result of our acquisition of GCA. During the course of this call, certain non-GAAP financial information will be presented as well. 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.

Thank you, Susie, and good morning, everyone. I'm sure you’ve all had an opportunity to read our earnings release. I'd like to cover the quarter, give you an update on the GCA integration, and discuss our outlook for the remainder of the year. I'm pleased with our results for the second quarter. We have strong top line organic growth of 4.5% driven by new business wins and expansions with key clients, all anchored by steady retention. Our sales initiatives are gaining traction, and we are showing good momentum in attracting and hiring sales talent. So far this year, we've onboarded 62 new salespeople, and we continue to train and manage our teams towards a higher bar for performance so we can achieve profitable growth. And I think it's important to add that it's not just our salespeople that bring in our new business. Our operational team brings in a good portion of our new growth as well. They do this through their strong customer relationships, and they too are becoming more sales-focused as we continued with our broad-based sales initiatives and messaging. To give you a flavor of some of our progress, for the first six months of our fiscal year, we were awarded $460 million of annualized bookings. We are fortunate to be growing off a larger base of business this year with GCA and this demonstrates our ability to integrate sales and operations and remain focused on growth, even during a time when we were adding 40,000 new employees and hundreds of clients. Our GAAP EPS on a continuing basis for the quarter was $0.38 or $0.47 on an adjusted basis. Our enterprise performance for the quarter and for the first half of the year has essentially been as expected driven by B&I which is our largest segment.…

Good morning, everyone. Before I dive into the details of today's call, I'd like to preface my review by reminding everyone that our overall results for the quarter reflect higher amortization, interest expense, and share count dilution resulting from our September 2017 acquisition of GCA Services Group. On a segment basis, GCA impacted all of our industry groups except for Technical Solutions. In addition, our second quarter results do not include the contribution from our Government Services business, which we sold in May 2017. Turning to results. Total revenues for the quarter were $1.6 billion, up 20.6% versus last year, driven by GZA revenues of roughly $256 million and good organic growth within the Business & Industry and Aviation segments. Specifically, our 4.5% organic growth was driven by low to mid 90% retention and realized revenue stemming from expansions and new business which we measure by tracking new sales throughout the year. For the first half of fiscal year, we had approximately $460 million in annualized new bookings which is comprised of new business and expansions. In addition, approximately $17 million of our growth was due to higher management reimbursement of revenue primarily in our Business & Industry and Aviation segments. On a GAAP basis, our income from continuing operations was $25.4 million or $0.38 per diluted share versus $31.6 million or $0.56 per diluted share last year. The reduction of our federal corporate income tax positively impacted the quarter by approximately $4 million or $0.06 per share. Our results also reflect the following items and are predominantly related to our acquisition of GCA. Higher amortization of approximately $11 million which is embedded within each impacted reportable segment, higher interest expense of $10.8 million, and an increase in weighted average shares outstanding on a diluted basis to $66.2 million. Excluding…

[Operator Instructions] Our first question comes from the line of Michael Gallo with C.L. King. Please proceed with your question.

I might have missed it but the organic growth of 4.5% in the quarter, was that a function of some of these issues allowing you to gain share or is there something unusual that drove that?

Yes, there was nothing unusual that drove that as part of our normal business. We had a good acceleration from the TSL contract in the UK towards the end of last year but no anomalies in the business. This is just business as usual.

But in terms of just cycling contractor assuming the labor environment is not going to improve, how long do you think it will take to kind of get to around where between the mitigating and other issues that we'll be able to start to see some of the margin progress obviously of the synergies coming through from GCA? But at what point will you actually be able to see margins progressing forward? Is that sometime next year or what would you anticipate?

Yes. So the way we're thinking about that, Mike, is that our contracts, on average, are three-year contracts so they have normal cycle periods. So if you think about that, you kind of could take this midpoint of 18 months, right, between starting on some contracts that are coming due right now to contracts that are coming due in three years. But on top of that, we're just not waiting for the contracts to expire. There are some contracts that we're being more aggressive about going after price now. We're always in conversations with our clients through our quarterly business review process. So we're taking a very prescriptive look at all of our contracts and who we can have near-term conversations with and who – it just doesn't make sense to have conversations with right now. So I say, on a high level, kind of 12 to 18 months where we'll start seeing that pick up once the markets normalize.

Our next question comes from the line of Andy Wittmann with Robert W. Baird. Please proceed with your question.

Anthony, some of the numbers that you're giving in your script were a little fast there. I just want to understand the quantification that you gave on some of these labor headwinds. The one I picked up was there’s 80 basis points headwind to the second half but for the full year something and something else. Can you just kind of go through that more slowly so that we can all understand a little bit better?

Sure, no problem. So we're facing labor and related cost pressures, and on an absolute basis, it’s roughly 60 basis points for the year. And the 80 basis points referred to in the script was for the second half. And that’s pre-mitigation efforts that we have in place, which include labor costs, speaking with our customers ensuring that we have the escalations in place as well as being more diligent from an HR onboarding standpoint to try to mitigate some of these costs. So, for the full year, our expectations right now, on a full year basis, is roughly 20 basis points.

Net-net. Yeah.

20 basis points net of when – after you take mitigation efforts. So, it’s like – it was 60 basis points for the year, how do you get them to 60 basis points? What’s sort of the difference between the 60 basis points for the year and the 20 basis points for the year, the 40 basis points of mitigations to the full year?

40 basis points of mitigation and some of that is going to also be holding on some SG&A costs as well. So, it’s not just all labor related. We do have some mitigation efforts in our SG&A areas to help mitigate some of the pressures.

And then the quarter then with the revised view of the year, I heard there was $1.4 million in reversal to incentive comp but there’s one other factor in there too? Can you – what was that other one that you mentioned?

It was a client KPI. It was a reversal of effectively a rebate from a client for roughly $2 million.

$2 million reversal and a $1.4 million pick-up on the incentive comp. Okay. And then Scott, just on the – Yeah.

Andy, on the incentive comp, that should double for the full year given the trend, so this is just the half year impact. So, you could anticipate that being doubled for the full year.

You'll get another maybe like $700,000 and $700,000 in the last two quarters, something like that?

That's right.

Then on sales force investment, Scott, I think the organic growth rate pick-up is notable here. When you look – are we seeing returns from the new hires yet or is this stuff that was kind of in the pipeline? I mean, it sounds like transportation for London was a lot of it. But are you getting the productivity out of the hires is I guess the question, and where do you think the organic growth rate can go from here?

Yes. So with the productivity, I mean, it's mixed, right? 35% of our new hires, or I should say 35% of our total workforce in terms of sales are that what we call the rookies. The people that are anywhere from new to nine months in and they’ll typically be less productive, right? But if you think about our overall headcount, we're up 17% year-over-year and we are being really prescriptive about the bottom, the bottom portion of that and managing out. So we're really raising the bar on performance. And when you look at the overall organic rate year-to-date, we're at 3.7%. And we're optimistic that we're going to be able to maintain that range through the rest of this year. Our pipeline is really strong. We brought in $460 million of new accounts in the first half of the year, which is an incredible pace. That's up 16% from this time last year. So I think the investment in sales, I think the investment in sales tools, and just the overall messaging that's happening in the firm, I think it's really starting to gain traction. And unfortunately, we are seeing it in the numbers as well.

And then just on the implementation of the 2020 vision and all the strategies that you're now taking down to the field level, you've talked about, I think in the script here, going to the centralized shared services center for a lot of those things. Sounds like you're making some progress on your billing. I know that's a big hurdle there. Through all of these changes, I guess the two constituencies that I wanted to hear about were your employees and your employee turnover that you've had. I think you changed a lot of people's job descriptions, in other words. I want to understand how that's affected the franchise. Also want to understand, if these things – if the slower billings, or the more challenging billings or just the changes in billings and things like that have affected your customers and their level of happiness with you and their levels of retention that you’re able to maintain.

So, I would look at – I think there really is a bifurcation between staff and management in the field. And from a turnover standpoint, our staff and management is much less in terms of absolute turnover versus the field. And just to give you some perspective on field turnover and what we're seeing in the marketplace, if we will look at turnover in the field back in November which is just a few short months ago, year-over-year there was no difference in turnover in the field. Right now, if you look at April's numbers we're talking about a 20% difference in turnover. So, this has happened pretty dramatically. It hasn’t affected the customers because we're - everyone in our business is in the same boat, right? I think we have a little bit of a competitive advantage here because of our scale versus our competitors. But this is not - anything that's happened here as a result of this labor environment is not translating into customer dissatisfaction or anything with our retention rate. And Shared Services is making really good progress. We just are in the early innings of standing it up and it's just – and we still have a long way to go which is exciting, right, because we see upside.

And just as it relates to how you're talking to your customers about this, I appreciate the fact that you got three-year contracts. Some of them – given that they are – I mean, I guess technically most of your contracts are cancellable on 30, 60, 90 days something like that. So, that does give you the opportunity to have a conversation earlier. In those initial conversations where you've had them or you're trying to recover some of the labor costs, how have those been met so far and what source of optimism or lack of optimism have you gained from those conversations so far?

So I think it's mixed, right, and it depends on the client and the situation. There are some accounts that are impacted but are still really profitable, right. So you don't want to get into a situation where you're going to force a bid if you're still over market, right, even though you're having labor pressures. And then there are other conversations where we can be a little bit more forceful because it's putting us in a position where you never want to say you're indifferent to something going out to bid, but you're willing to roll the dice on that because you're seeing those kinds of pressure. So I think the good news for us is that when we have these conversations, everybody is in the same boat. I've gone around and I've talked to global heads of some of the most renowned facilities, people that are working for the biggest firms and they're having the same problems with their own staff. So when we have these conversations, they get it, and they're trying to work with us. But like everyone else, Andy, like they have their budgets, they have their procurement process. So it's not an uncomplicated issue, but the first piece of this which is the important piece is they’re aligned. They understand it. So I think it's just something that we're going to have to make our way through client by client where it makes sense.

I might have a couple of more, but I'll yield the floor for now and maybe jump back in later. Thank you.

Our next question comes from the line of Marc Riddick with Sidoti & Company. Please proceed with your question.

A couple of things I wanted to start with. I guess if we're looking at the $0.15 change in guidance. How do you see that flowing as far as the last two quarters of the year? Are we looking at about an equal mix there or is there any seasonality that we should be aware of?

There's no particular seasonality you should be aware of. I think we don't break out the quarters but if you look at it from a pure where operations contribution, it's always heavily weighted in Q4. So, I would disproportionately weigh the $0.15 in the fourth quarter.

And then going back a little bit touch – to follow up on the pricing conversations having – to be had with customers going forward. And I can understand that it'll be a various range and depending on the type of customer. But ballpark, how should we be thinking about the types of price increases that you're looking to secure in order to not only mitigate the labor cost pressures but also to get a nice return going forward?

So, I think it's really – the way I would look at it is, it's affected by geography, right? So, in the kind of the lower waged geography, the nonunion geography, it could be more pressured, right, and there's different conversations to be had versus a union environment. And then we also look by contract type. So, on the cost plus contracts, it's easier to have that conversation and pass through, although there are still some guardrails on cost plus contracts. But for the most part, that's 25% of our business and again easier pass through. On the fixed price stuff, which is about half of our contract base, that's where it ends up being a more protracted conversation. And it does depend on geography and industry group type. But what we do is we look at our increased cost base. We look at it based on local statistics that we can back it up so we can have some data. We just don't go to clients and say, hey, our costs are going up. We’re striving to be a data-driven company, so we have a whole playbook on how we have these conversations with clients. And a lot of them do start when we have our quarterly business review. So, this won't be - when we're talking to clients now about price increases, this won't be the first time they're hearing from us, right? There's a cadence to this and you don't just show up and start talking about it. You make it as part of a process. And thankfully, we've baked in labor cost increases in our guidance for – original guidance for 2018 so we were ahead of this and we feel like we're on good pace to have these conversations with clients. But I just want to make sure I'm clear. This does take time and there's just again, a natural cadence to this.

And the last one for me is I was wondering about – there was a commentary around the, I guess, getting recruiters involved and what have you. I just wonder if could dig in a little bit more of that and where we might see that and maybe what segments we might see that usage? Thank you.

So, one of the things that we've been hiring is more recruiters oddly enough, right, hiring recruiters. And when we've done it, it's just we're not necessarily just peanut buttering at all over the portfolio. We're looking at those geographies that are more pressured in the industry groups like we talked about in the prepared remarks with Aviation and Education. They tend to have higher turnover because of the dynamics of those markets. So that's where we'll embed more recruiters. So, we're being very strategic about where we place these recruiters because that's key because you want to get people into the funnel and you want to get them through the background check. We background check all of our employees. It's a real process, right? So, we're just putting more kind of feet on the street right now to increase that pipeline.

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

I just want to say thanks to everyone and we look forward to updating you in the third quarter and have a great summer. Thank you.