Greetings, and welcome to the ABM Industries First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Susie Kim, Vice President of Investor Relations and Treasurer. Please proceed, ma'am.

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 first 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 slides 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. Good morning, and thanks for joining us for our first quarterly call of the new fiscal year. By now, I'm sure you've had a chance to review the corresponding press release we issued yesterday afternoon. I'm pleased that our first quarter performance signals a good start to the year as the results met our expectations. This was particularly encouraging given the tough comparison we were facing due to our organic outperformance last year. The execution of our entire organization has been tremendous as we've been driving our business during this challenging labor environment and also preparing for the rollouts of our many critical IT implementations that are occurring throughout the year. The amount of effort and focus needed is like nothing I've seen in my career while team continues to rise up. And outside of operations, there were a number of accounting changes that began this quarter as well, namely the adoption of ASC 606 and 835 as well as our new presentation of the intersegment revenue. Anthony will discuss the implications of these in greater detail shortly, but we've been very busy, to say the least. To summarize, revenue grew to $1.6 billion for the quarter, an increase of 1.2% or approximately 2% on a more normalized basis when adjusting for the aforementioned accounting changes. Our GAAP continuing earnings per share was $0.20 or $0.31 on an adjusted basis, and our adjusted EBITDA margin was 4.3% for the quarter, which also reflects some incremental positive impact from those accounting changes. A few highlights from the quarter included sustained momentum within Business & Industry and Technology & Manufacturing, as both of these segments expanded with strategic national accounts and drove bottom line results. We've been focusing on maximizing our scale and building on these large multisite clients since…

Thank you, and good morning. I'd also like to commend our team for executing during the first quarter, while simultaneously working towards launching our many transformational IT projects. With any major system and process implementation, change management is a key component. And as we deploy our system, we are also carefully assessing and identifying the necessary updates and modifications we must make to fully take advantage of the technology we are putting in the hands of our employees. With the projects that have gone live thus far namely HCM and e-pay, we are encouraged by what these systems have to offer in terms of productivity and consistency in data capture and analytics. But we realize these benefits will take time to fully mature across our employee base. As Scott mentioned, our next major project is our cloud-based ERP system rollout, which we anticipate will begin in the second half of this year and begin to streamline our back-office function, create a more efficient control framework and provide a scalable platform for our future. As you can imagine, there is much work involved but we are very excited about the potential of a more integrated financial system and end-to-end process. Regarding our retiring board members, I'd like to thank them as well. In particular, as the Chairman of our Audit Committee, Tony Fernandes has provided a great deal of guidance since my appointment as CFO, and I've valued his perspective and advice over the years. Now before I dive into our results, let me provide you with a few notes. Our first quarter results reflect GCA's complete embedding into our organic base. As Scott mentioned, our results now reflect our adoption of accounting standard topic 606 and 853. These changes are as follows: Impact of revenues associated with service concession arrangements…

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Great. Good morning, and thanks for taking my question. I guess, I wanted to start a little bit, I guess, with education. Thank you, Anthony, for the detail talking about kind of the explanation of the growth rate, it sounded like last year’s retention was kind of which – what’s driving the growth rate to be negative. But I guess on the longer-term basis, I still think that this is probably the – and you’ve mentioned this in your script, and this is probably the best secular opportunity for first-time outsourcers though. Given that GCA is now in the base and an extra quarter as well, Scott, how should we evaluate your success in growing that business from here? What is the target? Or maybe what’s the growth rate that you’re happy with and not happy with? I think GCA’s history has been pretty growthy company over time, and undoubtedly, when you bought it, you expected that to continue to be the case. So I want to understand how you – what you would consider to be the successful growth rate coming out of Education?

Yes. Thanks, Andy. I don’t think anything has changed. We’ve continued to say we think this will be a GDP-plus business, and we still feel strongly that it will. And you have to remember, we’re still early on, right? We’re just putting our teams together. We – from a cross-selling standpoint, we’re just starting to get traction now. And I think a lot will be told as we head into the buying season. As you guys know, the buying season is really in that April, May, June, July period, and we feel good about our pipeline going into it. So we’re super positive about Education. And to your point, it is – for us, we look at this as a $25 billion potential market, and a lot of it is still in-sourced. And we have projects going on internally to target outsourcing some of those in-sourced accounts but that’s a longer-term initiative for us. So again, we feel really positive about this segment.

Okay. That’s helpful. I guess, I wanted to dig next into – let’s talk about Aviation and the Healthcare segments. I guess I’d like to understand both of these segments kind of started the year slow in terms of the margin performances versus where you expect them to end the year, based on your segment margin guidance, and even those margins are up pretty significantly, I think, year-over-year basis as well. So I guess my question here is, what’s going to change in Aviation and in Healthcare in particular, to help you achieve the margin targets that you laid out?

Yes. So Aviation and we know this, right, from history, it’s a cyclical business, and you have these large scale contracts. For us, right now, the biggest – I guess, the biggest impediment in Aviation is still the labor market, the things that I talked about in my script, right? It’s just a longer hiring process, and we are typically on the lower scale in terms of wages for the services we do, which is why we’re looking at things like catering, logistics and airplane fueling, which could – and having higher pay rates. So for us, it’s as much a labor story as anything else. And top line, it’s in and out there. There are cycles where the airlines will take certain of our services and move them in-house and we’ve seen that, and there are other times where they look to outsource. So when we look at Aviation, we tend to look at it in kind of two to three-year trenches because of the cycles of the airlines and how big they are. But we still feel really strong about that segment long term. And then with Healthcare, just to bring that aligned, that’s – it’s a small segment. We had – recently, we had a leadership change, someone that’s come from our Technical Solutions business. We think there’s opportunity as we look at our mix of business to have more critical services there, which tends to be higher margin, and we’re pushing along in that area of Healthcare. We feel good about Healthcare as well. And Anthony, I don’t know if you wanted to add.

Yes. The only thing I would add, Andy, is on Aviation, as you recall, last year, we had some startup cost that from a margin perspective impacted us in the second half, and we were clear around that impact. So as you look at the margin progression throughout the year, assuming from a comparability standpoint, that doesn’t lapse. We should have some expansion on the margin side just from the comparability issue.

Okay. That’s helpful. And then just a point of clarification here. There was a lot of, I think, important numbers on the accounting that came out pretty fast. We’ll check the transcript on some of them, but maybe the most important one was, I think, around this 30 basis points, Anthony. This – I think, you said, had to do with state unemployment insurance and something else that I wasn’t familiar with. I guess my question is, can you explain that a little bit more? Was that 30 basis points benefit to the consolidated results? Or was that when you’re talking about B&I? I’m sorry what’s that I missed but I think is important.

Yes. Don’t worry, there’s a lot of changes in the quarter, so I understand the confusion. This is not an accounting change. This is a state unemployment change that occurred at the beginning of the year that predominantly benefited B&I just because of their presence in certain jurisdictions that had those changes and it’s predominantly in the payroll tax area. So when you look at B&I’s results, their results were favorably impacted by the FUTA, which is a federal unemployment tax, and SUI taxes, which as you know, are more first-half loaded than second-half loaded, but did have an impact on all segments but B&I predominantly.

Okay. So that’s 30 basis points to the company then?

30 basis points to the company, but to B&I. So 30 basis points to B&I would be less on a consolidated basis.

Okay, okay. And so did the unemployment insurance tax rates decrease, and you’re still able to bill at the same level? Is that what happened or what was typically – is that’s what happened?

That’s exactly right.

Okay, cool. Let’s see here, what else. So just last question for now. Maybe I’ll jump back in. But on software and IT, and clearly a lot of important initiatives that are – that you’re working all very hard on. And I think what you’re doing there was clear and the timing on those programs and what they’re supposed to do for you was also clear. But I guess Anthony, as you embarked on this cloud-based ERP or even as you still put out in the initial stages here of the other timekeeping thing, are you carrying extra costs today for change management consultants, just extra IT staff or other things? Can you get your arms around the magnitude of those? And when those might peel off? And then I think also important is your thoughts on when the efficiency benefits can be – can start to be realized and to what degree?

Yes. There are some costs that are being capitalized as part of the implementations that go through our CapEx budget, and we outline that at year-end in terms of the increase in CapEx associated with the investments. There are some duplicative costs that we’re capturing as part of the integration as we migrate over, and as we migrate away from legacy systems there’s some duplicative costs that we’re capturing as part of our transition. To your question around where the benefits, it’s really – it is going to be 2020 and beyond, Andy. These systems when they go live, it takes time from change management, exactly your point for us to start to realize the benefits. Some of them will be immediate from the back of the house perspective in terms of efficiencies. But when you look at the front line, which is where the price really is in terms of operating on a more efficient basis, that takes time. And I think that’s going to be a multi-year journey.

Yes. And the way I think about this, Andy, is that when you do these systems implementations, especially these more broad ones, I look at this in three phases, right? The first phase is changing behavior of our people to get them to use it and supply around with it, right? And you get through that phase. And then it’s the second phase, which is like you start getting learnings from it, and you start like understanding the data what it can mean and then really Phase three of this is how do you apply those learnings and actually get a move on operational efficiency where it hits bottom line. And there’s no – I don’t think there’s any set time line for each of these phases. So I think with some of them, we’re just in that initial phase of how do you change behavior like I look at the tag price, right, that we’ve put in over a year ago and our first phase of this was like getting adoption, getting usage, and we’re pretty much where we want to be. Now we’re in this phase where what are we learning from it? And ultimately, we’ll get to a point where it will actually have some significant impact. So it’s just – it’s a timing thing.

Okay. I’ll might jump back in later, but I will leave the floor for now.

Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question.

Hi, thank you. Good morning, and thank you for that detail on Technical Solutions on what helped that segment grow faster than your other segments. Just a couple of clarifications. When you said backlog is greater than $100 million in that segment, is that for all the business in Technical Solutions or just certain projects that you book as backlog?

That’s all the business.

And directionally, is that up from prior year or historically higher?

Yes, Tate. We have the largest backlog at the end of Q1 that we’ve had in our history, where we barometered $100 million that’s where we feel it’s a healthy backlog, and it’s really a function of backlog an churn. And we try to target a relative proportion in terms of how that ultimate backlog gets recognized, and we feel really pleased about that group’s execution on the piping as well as the execution from churning that backlog.

Yes. And I would just tell you – just to give you some color commentary on this, I would just add, one of our largest gatherings, we had over 1,400 people in the Technical Solutions space between our in-house people and our franchise operations and that group just got – has so much enthusiasm, so excited about everything that’s going on in the energy space right now and the power space. We’re really, really optimistic about the future of where this is all heading.

Okay. Thank you. Okay. And then Anthony, I think you mentioned to the growth in Technical Solutions is in line with historical growth rates but what are – I mean, are you referring post-GCA or how should I frame that comment?

Yes. I think Technical Solutions really continue to be the tale of two cities or two regions, the U.S. and the UK. From the U.S. perspective, it continues to be a growth area. We see a positive pipeline. Our growth has been close to double-digit, and as we mentioned, over $100 million of backlog. UK continues to operate in the challenge macroeconomic environment, as expected, so even though it’s down, it’s – what we expected, given some of the challenges that we outlined late last year on the macroeconomic front. So when we look at the Technical Solutions business in totality performing as expected. But in the regional perspective, the U.S. is clearly outperforming.

Okay. Is the UK – can you quantify or prefer not to as the UK majority of that Technical Solutions workers?

No, the UK’s roughly $29 million I think in the quarter for the total amount of revenue that we generate.

Okay. Thank you for that detail. And then last for me. You mentioned getting them to fueling in your Aviation business in addition of the catering service that you did before. Is your – do you experience meaningful upfront costs when expand services in one of your business segments?

Sometimes we had some upfront, what we call, start-up costs. For this particular, there was not material start-up cost that we would outline or call out given the small nature of the contract in totality.

Okay. Thank you very much all that detail. I’ll jump back in line.

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

Hi, good morning. I wanted to touch on the Education area for a moment and maybe if you could talk a little bit more about what you’re looking at going into the key selling season? If there’s a way to sort of – for folks to think about the changes in the go-to-market strategy or maybe some of the things that you think will be helpful in driving the Education sales that you see coming up in the seasonal time that would be very helpful.

Sure. I don’t know that there’s anything different than what our strategy was last year, right? We have – we’re expanding our sales force. We are being very strategic about how we’re hitting it, and when we went into the sales season last year, it was really – it was a point where GCA was just coming together, just getting integrated. And we would all say, we probably weren’t as aligned and ready for the season as we are now. I can tell you that our pipeline is up 20% year-over-year heading into the sales season, the big churn season for us versus where it was last year. So we’re optimistic about that. So I think for the fact that we have some more time with GCA integrated under our belt, we’re more prepared, we have more sales people, we feel good about it. So it’s less of the different strategic approaches, it’s more about getting one of our tactical ducks in line.

Okay, great. And then circling back on Aviation for a moment, looking at the opportunities that you’re pursuing in the catering and now with fueling, I was wondering if you could sort of touch a little bit about the potential scalability that you see with those? And also, and I don’t know how connected this is but how that may or may not tie into the technology upgrades that you’ve got going on this year? What type of opportunities you think might be available not just maybe with those service offerings but then other future service offerings within the Aviation group?

Yes. So I think it’s early on for us on some of these new service lines. It’s hard to kind of size the price when you’re so early in. I could tell you on the catering and logistics side, we are seeing much more opportunity in terms of RFP than we would have imagined last year. So it remains to be seen what our win rate will be clearly but definitely, a bigger pipeline of RFP, so that’s pretty exciting. Fueling, way too early to tell, we’ve just got our first contract. And then from a technology side, it’s less about technology. I think it’s more about some of the older initiatives like beacon technology and being able to be more efficient in terms of dynamically dispatching our people. And even that’s still kind of early on, but we are focusing on that and with our new e-pay system, time and attendance, our hope is that, that’s going to have some significant traction in the next 12 to 18 months in terms of scheduling. There’s – these scheduling dynamics in Aviation is very different than any of our other segments because if we think about it, being in an airport, it’s a very horizontal kind of campus-wide spread distributed versus more of a tighter vertical office building, if you will. So scheduling tends to be more important in the Aviation sector and more dynamic because you have heavy peak summer season and holiday season. So we’re hoping over time that will have traction for us.

Okay. And then last one for me. I was wondering if there are any – and it may be a little early for this but when you’re looking at some of the service line pushes that you’re utilizing within Aviation, is it possible that we might see similar types of things when there was some commentary around potential structural changes within Healthcare. So I was wondering if that’s kind of – if we could sort of see a similar blueprint within the Healthcare segment going forward? Thanks.

Yes. I think for Healthcare, it will be a little different. Healthcare will be more about focus. So in Healthcare, we do a wide range of services. This is one we are literally, if you think about in the acute situation, which in the hospital setting, we are valeting cars, we’re parking cars, we’re doing wheelchair pushes, we’re cleaning, and we are taking care of some of the small critical equipment now whether it’s an intravenous machine or what have you. And we even do some catering there. We have nutrition program. So I think for us, it’s not about getting into a new service line, it’s about where we want to focus and the critical equipment taking care of the small electrical and mechanical equipment, we think, has great opportunity for us, because it has margin potential. And again, we’re having a new leader that has experience in that area of focus, so could drive some real change. So it’s less about new service line and more doubling down on one’s that we’re already playing at.

Okay. That’s helpful. Thank you very much.

At this time, I would like to turn the call back over to management for closing comments.

Well, thanks, everyone, for joining. We’re – as you could tell, we’re off to a really good start for the first quarter. For us, we look at this as how our sales are doing and our sales are on track and keeping with our historic record of last year, we’re very focused on retention in this pricing environment, and we’re going to continue to manage labor with acute focus and we’ll be implementing our system. So we have a really busy year ahead of us in a dynamic environment, but as enthusiastic as ever about where we’re heading, and I just want to, one last time, commend the team for everything they’re doing, and thanks to everyone who are listening in. And we’ll see you in Q2. Thank you.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a great day.