Greetings. Welcome to the ABM Industries Second Quarter 2019 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Susie Kim, Investor Relations and Treasurer. Ms. Kim. 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 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 now like to turn the call over to Scott.

Thanks, Susie. And good morning to everyone on today's call. We issued our press release yesterday afternoon announcing our fiscal second quarter results. I’ll review a summary of these results and provide an update of our strategic progress as well. Our ABM team continues to rise to the occasion as we performed quarter-after-quarter, while simultaneously managing through our new system deployments, as well as the difficult macroeconomic labor environment. I'm pleased with our strong results for the second quarter, which met and in some cases exceeded our expectations. We grew our business to a second quarter record of $1.6 billion in revenues. This was driven by 1.7% organic growth, which adjusts for the adoption of ASC 606 and 853. This is particularly commendable given our exceptional organic performance last year, which set up a tough year-over-year benchmarks for the team. GAAP continuing EPS was $0.45 a share, or $0.47 a share on an adjusted basis and our adjusted EBITDA margin was 5.3% for the quarter. These metrics were also positively impacted by ASC 606 and 853 modestly. From a segment perspective, underpinning our operational results were the Business and Industry and Technical Solution segments. B&I our largest and most scalable segment continues to highlight how we can protect and grow margin when managing our business strategically and discerningly in the current labor environment. We expanded business with our large national accounts. As our clients grow, we continue to grow with them. We were also more disciplined about pricing, particularly as we saw escalations to account for the labor pressures we have been experiencing. Technical solutions, our most profitable segment from a margin perspective, had another home run quarter as we continue to win business at an unprecedented pace in municipalities and the education segment. During the quarter, we announced some…

Thanks Scott and good morning everyone. Before I expand on Scott's overview of our second quarter performance. I would like to quickly review the impact of ASC 606 and 853 on our reported results. In summary, the detail changes that most impacted us in the quarter were lower revenue associated with service concession arrangement of approximately $12 million reflected predominantly in our aviation segment. Lower sales commission, which are now deferred and recognized over the expected customer relationship period, primarily impacted technical solutions by approximately $3.5 million and the deferral of profits on uninstalled materials associated with our technical solutions project was approximately negative $1.4 million. As you all know these new accounting adoptions are not the only change we are managing this year. In addition to the launch of our cloud based human capital management and time and attendance systems in Q1, we are now in the deployment phase of our ERP implementation. I too am excited that we launched the first phase of our ERP rollout in the UK last month. The product [ph] approach and phasing will benefit us as we continue with our deployment strategy. I know all of our team members are looking forward to having a unified system, where we can finally combine our legacy GCA and our legacy ADM financial environment. With each quarter these new systems will help us evolve our processes such as our monthly calls. Change management is never easy and I commend all of our teams who are working through our complex project plan to implement our new system while continuing to manage our day-to-day operation. As we go live we will also be amassing the data history necessary to truly impact our decision-making in the future and that is an exciting prospect for all of us as this…

Thank you. [Operator Instructions] Our first question is from Sean Eastman with KeyBanc Capital Markets. Please proceed.

Hi, team. Thanks for taking my questions. For me first, it's great to see the strong new sales bookings in the first half. It would be great to get a better idea of the margin profile embedded in those wins, relative to historical norms. And whether there's any concentration from an end market perspective, just to get a sense for where you guys are really having some success there.

Yeah, so for us -- I don't know there is specific analytics. But I will tell you, we have been so much more discerning on the kinds of business we're taking on and looking at that margin profile. And I think we said it before we look at margin in two ways. One, what's the margin expectation going in, and then what's the trajectory potential, right? So there's difference between taking on a cost plus account versus the account, where you have a kind of fixed price and the ability to accelerate through efficiency and some of the deployments that we're making on the technology side. So for us, we think that we're starting to see good traction on margin right at the outset, and with our plans. And first, the focus, if there was one area I would highlight from a growth standpoint, or margin standpoint, it would be our ATS business, everything around energy and sustainability right now, has just been particularly hot for us. So that's been the area of focus that I would point out.

Okay, and then for TS clearly very active. But you guys seem to be sort of cautioning that this 2Q trajectory is not really kind of a sustainable rate. But maybe just to get a better sense, it would be great to get a bit of a better sense on how you characterize visibility there maybe just how far the backlog gets you, maybe the visibility on how that backlog is going to be translating to revenues in the next couple of quarters.

Sure, Sean, and I think to put the comment in context, so we see great -- the pipeline is the strongest it's ever been. Our backlog is at a record, and our churn, which is the conversion of that backlog into revenue continues to hover around the 20%, which is the historical, little lighter than the historical or right around the historical average. So we see great prospects over the next six to 12 months. My comment was really intended to provide some guidance around longer term 18%, just a record phenomenal growth. We expected to be in mid-digit single -- high-single digits, low-double digit teens range. So don't take the comments out of context. We see great prospects over the next six to 12 months based on the backlog and our ability to churn that backlog.

Yeah. And the other comment, I would say too is one of the things we're seeing larger scale projects, too, which is really encouraging. So if you kind of look at -- if you were to look two years ago, at our average project versus today, you're just going to see that we're gravitating to bigger more complex projects, which we're really excited about as a firm.

Okay, great. And then last one, for me, clearly B&I and T&M margin performance was well above expectations for the quarter. And then also well above the full year segment margin targets. And it seems like that's the case, even if you take out some of the one-time benefits in the quarter. But it seems like you guys are stopping short of raising the annual target for those segments. So I'm just wondering about some of the moving parts in there, and why we shouldn't be thinking about that as the new norm for margin profile.

Well, we did, we actually did raise B&I, our operating margin trajectory for the rest of the year. So we are seeing improvement. And for us, it really comes down to kind of the discipline in these groups, about managing labor and just all the things that we've been talking about over the last two years about standard operating practices and just being -- taking the best of what we have and applying it across the board. So it's something that's been real helpful. And don't get me wrong, we are still super cautious about the labor environment right now. And you heard it in my prepared remarks, we had hoped that things would be better by now. It's been, it's been a year or more, since we've seen these labor pressures. And you can read it in the papers, right, there's been no real progress on the immigration front. Supply continues to shrink. And it is disappointing, right. We're a labor business. And we'd hoped we'd see just a little bit of moderation to the positive now and there really is no catalyst at this point, to see a turn in that. So that's the disappointing thing for us. But the good news, and you're seeing in our results, is, if you stay disciplined on how you’re managing the business, and you put a lot of rigor around the day-to-day you could mediate it, which is what we've been doing. But make no mistakes. We're Labor Company, and we are cautious about the labor market.

Helpful. Thanks for the time.

Sure.

Our next question is from Andrew Wittmann with Baird. Please proceed with your question.

Hey, great, thanks for taking my question. Anthony, I guess in your commentary, you talked about some of the delays in some of the IT spend, which is kind of helping this year's guidance. I guess that means there's a little bit more of an impact probably to next year. And I was just wondering, as you guys roll out some of the particular that ERP later this year, what's the incremental cost is going to be maybe on a gross and maybe also, considering there probably will be some netting effect. Just any kind of visibility you can help us as we look into 2020 on this and it seems like this may have some kind of impact?

Sure, yeah. Our IT spent was projected to go up and we anticipated to continue to increase. These are investments that we had planned out as part of transforming both our front end time and Attendance all the way to our ERP. And over time, all of these are going to have an ROI associated with it as we get more efficient on the front end, as well as the back end. And some of that front end, to Scott's earlier point around the labor management, is really being enabled by the technology we've put in place and the discipline around that technology. So from a sequential standpoint, some of this obviously can be CapEx spend that becomes amortization. So from a sequential standpoint, year-over-year, you've seen a roughly a $6 million increase in IT spend. Some of that, again, is going to be hammered into [this appreciation of the billed] [ph], as well as moving to Software as a Service license agreement, which we outlined late last year, our approach. As it relates to 2020, the incremental, we see a roughly another $6 million or $7 million of incremental IT expense, but that's on a growth basis. We have not yet outlined the netting, that's going to be part of the efficiencies from the back office. So you have to take into context that’s the growth.

Okay, that's helpful. And I guess my last question here is on the new wins that you announced, always good to see new wins being part of the equation here. And sounds like the sales efforts are really working. Those have historically been very tilted. And I guess you guys kind of alluded to the fact that those are tilted towards technical solutions. But Scott, as you look at the annuity type business, that's in those new wins. And compared to the growth rates here in the quarter. I mean, what do you see in terms of like a net new or kind of, I don't know how you want to - I guess it implicates on – it’s got implications on organic growth. But what's the view on organic growth been as this quarter was a little bit more subdued, and the wins look good. But I don't know how much the annuity can just talk about that dynamic here as the rest of the year, which you're seeing for the rest of year playing out?

Sure, I'm not sure you're going to see much of a difference that then where we are right now, Andy. And I do want to go back to the scenes we've been talking about, which is organic growth, as a metric kind of, I think will lead to a false kind of evaluation of where we're going. I would just really encourage everyone to look at the two pieces of organic growth, which is new sales and retention. And clearly the numbers speak for themselves on new sales. Like, I can tell you being very transparent, if you told me three years ago, that we were going to sell $590 million in new business in a six month period, that we -- I know how I would answer that, right. So what we're doing here and kind of the investments we're making is really paying off and absolutely more tilted to Technical Solutions, which by and large is a good thing, right? So highest margin business, so we're excited about it. But I think it's really about retention. And we're trending a little lower than historical again, which we've talked about in the past as well, and I'm not sure that's going to change over the next six to 12 months, because we really want to keep the discipline of not taking and renewing business, that's so far from where we're trying to take this firm, right. So I wouldn't suspect there’s going to be much of a change. But I'm biased, but I'd like to think that is healthy versus unhealthy. So we're going to keep to that, we're going to keep to the rigor around our pricing council and how we're going. I think for us, it's that piece of keeping the new sales machine going. And getting the bookings going, and just continue to stay disciplined on the retention front. And I will point out, and this is an important thing. We are looking into this is kind of spreading the concept like peanut butter, right? There are strategic accounts, that we have big, large enterprise strategic accounts where we will moderate on margin, if we have to retain that. It's more about the less strategic accounts, where we're making those tougher decisions. And it doesn't feel good for anybody, nobody likes losing business. But we're changing the profile how we look at things and we want to feel good about what we're doing. And if it doesn't feel great when you doing work for free.

And Andy, the only thing I would add to that is if you look at B&I their discipline around calling the lower margin business and where they're growing in the margin business that they're bringing on, on average is better margin business than what we've historically seen. So to Scott's point, it's the discipline and the maturity that we've come a long way over the last couple of years, that's really starting to bear some fruit.

Our next question is from Mark Riddick with Sidoti and Company. Please proceed.

Hi, good morning. First of all, I appreciate the pricing discipline commentary. So thank you for that. One of the things that I did want to touch on switching gears a bit is to go into the debt reduction, you mentioned coming down about 3.3 times, I'm wondering if you had a sort of a near term target there, and what that might do as far as your current acquisition appetite?

Sure. 2019, we laid out a strategy that internal investments in IT A&A, we're going to take a beat [ph], and continue to be focused on our working capital management to drive down our leverage. And our plan is to drive that leverage down to somewhere under three times by 2020, early 2020. And that will give us an opportunity to really look at opportunities in the marketplace, either organic opportunities or inorganic opportunities. And we continue to be focused on managing the DSOs to get back to the full year targets we initially put out at the end of this last year.

Okay, great. And is there sort of a general view or maybe update that you can give as to what the acquisition pipeline might look like? Or least the general view is to maybe what you're seeing out there as far as attractiveness and valuations, things like that. Thank you.

Yeah. So we stay pretty active in looking at opportunities. And we feel like we're in the narrative of everything that's in the market. And also being more strategic there, there are people out there that have feelers out for us, knowing how we're thinking about it. But going back to Anthony's point, right now, this year 2019 is about paying down debt, and getting to the point where we will have that proverbial dry powder in 2020. So we think the pipeline is good, we think that there's going to be some terrific opportunities for us in 2020, when we get to the place where we're ready to do acquisitions again. So it is quite encouraging. There are opportunities in the market.

And the only thing Mark, I would add to that is, your question on the valuation, valuations I think are still fairly high. And I think that's really a function around the resiliency of our underlying business, when you look at our business, and you compare what the opportunities for us. For the markets that we are in, it's really a resilient business. So as you start to look at the potential for slowdown in the economy, its businesses like ours that generate the free cash flow conversion, that remain sticky, that are driving a lot of attention and a lot of interest, both on private equity as well as other investors, that has created a little bit of a dynamic around pricing from a valuation standpoint, but we're going to remain disciplined when the time is right for us to look at opportunity.

Okay, great. Thanks for taking my question.

Sure.

We have time for one more question, and that will be Tate Sullivan from Maxim Group. Please proceed.

Hey, thanks. Couple of quick questions. [Technical difficulty] is this the first year-over-year comparable metric you released for new bookings since the November ‘17 GCA acquisition?

No, we started with our bookings last year, Q2 of last year, and then we're updating it on an annual basis at the end of the year. So you can expect mid-year update, both at the Q2 and year end, as far as where we stand as well as the outlook for the upcoming year. And obviously we will continue with that trend.

Okay, but this mid-year update the year-over-year growth was the highest in your history that what you mentioned earlier.

Yeah, that's right. And last year, it was the highest in our history. And, we -- and I will tell you candidly well like, wow, this is going to be a tough comp when we do this again in 2019. So to be $130 million more than our record of last year it's just astronomical. So really pleased about that.

Thank you. And real quickly on the healthcare comments is, will you -- of health care going to B&I or did you say earlier, Anthony, that'll be mixed into different segments, and how will that work potentially?

It'll be predominantly into B&I, but we're also looking at the portfolio specifically on the clinical engineering side, as well as the hospital systems that are attached to universities. And they could be split into both APS and education. We just haven't finalized the numbers, but I anticipate the majority predominantly will be B&I education, and our technical solutions business will also receive a portion.

Okay. And just to follow-up on that, I think you mentioned maybe a $1 million cost associated with that reorganization effort. And with that -- and your previous guidance captured between the GAAP EPS and operating EPS guidance.

It was, yes.

And it was $1 million. Okay. And then real quick, just last, aviation margins, I think you touched on a little bit earlier, first half of the fiscal year, they're around 2% versus the 3% guidance, what can help that business in the second half?

So from a revenue standpoint, I think for us, we're seeing the biggest pipeline we've had in years in terms of aviation. So that's really encouraging. And what's interesting is, it's not only the US, but it's the UK as well. So we're seeing great growth, we're actually seeing been seeing double digit growth on the aviation side in the UK, which is great. As I mentioned, in my prepared remarks, Delta made the decision to in-source some of our contracts. And this could be a cyclical business and we've talked about this few years now, they are big chunky contracts, and we see it moderate. So I think we're going to have some headwinds on the growth side, calling into the rest of this year, just as a result of the annuallization of the some of the Delta losses. But the team has been working so hard over the last 12 months, about diversifying our portfolio. So it's not just dealing with the big three, right, United, Delta and American, we're doing business now with Jet Blue, Alaska Airlines, Scandinavian Airlines, like, so those across the board. And we're also we're also differentiating our offerings, getting into catering and fueling. So teams doing a good job about making sure that no one client is overrated. But historically, Delta's been one of the larger pieces of our portfolio. And don't get me wrong, it's still under 10% of what we do. But I think we're going to be very discerning about diversifying.

Okay, and then thank you for all the detail earlier on technical solutions to and that's it for me. Thank you.

Thank you. This concludes our question-and-answer session, I would like to turn it back over to management for closing remarks.

Well, thanks, everybody. And again, I just want to reiterate how encouraged we are about where we are from an execution standpoint, in this really tough labor market. You think about what we're doing here. And again, you think about four years into this and the growth we've had in our margin profile. And the growth that we've had on our margin profile in context, to the fact that we are in the worst labor market in modern history. I'm just so proud of the team and IT is going to be the big piece for us over the next couple of years, right? We're going to get these systems implemented this year. And you're going to see the ABM that when look at a year ago versus what's going to happen in the next year when we are going to have a new HR system, a new time and attendance system, a new ERP system, a new purchase order system, a new T&E system, like we are modernizing our IT platform. We're making investments, and they will give us some headwinds, as Anthony talked about. But we are playing for the long term here. And to think about towards the end of 2020, 2020, having a new operating model focused on industry groups, having a back office that's modernized with a shared service center and national procurement, and then finishing off the last leg of 2020 vision with a modernized IT platform that's going to give us data analytics, to have insights into our business and to leverage the standard operating practices we're doing, we just think it's spectacular. And I didn't want to end this call without saying how encouraged I am about where we are and how excited I am about all the changes that are happening in the future because they're foundational to our success long term. And as you can tell, pretty excited. So thanks for spending the time on the call and we look forward to the next quarterly update. Have a great summer, everybody.

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