ABM Industries Incorporated

Greetings. Welcome to ABM Industries' second quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Suzy Kim, Investor Relations and Treasurer. Ms. Kim, you may begin.

Thank you all for joining us this morning. With us today are Scott Salmers, 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 perform 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 ASCs 606 and 853. This is particularly commendable given our exceptional organic performance last year, which set up a tough year-over-year benchmark 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 sought 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 they continued to win business at an unprecedented pace in municipalities and the education segment. During the quarter, we announced some great wins, including two energy projects with Bryan County, Georgia, and the El Paso Independent School District. We're now focused on churning through the robust pipeline in this segment. Given our year-to-date performance, we are raising the low end of our EPS guidance outlook to $1.70 to $1.80 per share on a GAAP basis and $1.95 to $2.05 per share on an adjusted basis. Now let me provide you with an update on our progress against our key priorities for the year, which include growing our business through new sales while managing retention, continuing to navigate the difficult labor environment, optimizing our business through technology and data, and generating consistent free cash flow. New sales and retention continue to be an important area of focus. We achieved a record $590 million in new sales bookings for the first half of 2019, compared to $460 million at this time last year, which itself was a record. I'm thrilled about this momentum. We are well on our way to replicating the $900 million we achieved in 2018, an amazing accomplishment and validation of the sales investments we made last year, particularly in technical solutions. While we're on track to achieve our new sales targets, managing retention is a separate and distinct endeavor that has required a great deal of planned focus. If you recall, we were prepared for a challenging retention year as we've been dedicated to seeking pricing escalations given the labor environment. It's always been difficult to command price for the services we provide, but we are committed to pursuing the right decisions for our business. We developed an internal pricing council to increase the rigor around our internal processes and tie strategy to not only grow revenues, but margin quality as well. We have seen mixed results so far this year. Our overall retention rate is 1% to 2% of points lower than our historical average, which you'll remember we mostly anticipated. Many of our clients have been receptive to discussions around market pressures, but in some cases, we've had to be disciplined and more discerning about the contracts we choose to retain based on the labor shortage we began experiencing last year. Our B&I segment provides a good example of how growth could moderate, but you can maintain and even grow margin and operating profits. There are some segments that are more challenging than others, such as aviation, which we saw the biggest decline in retention. Some loss of work was due to pricing. We were also impacted by Delta's decision to insource some of their contracts. And remember, higher wages and shortages of labor affect this group more than others, due to the protracted time applicants have in getting through the TSA background vetting. Speed to hiring is imperative in this market. That being said, our aviation segment has a more robust pipeline than they've ever had. And as we continue to focus on business development and building a high-talent organization, we see a path back to our original growth and margin vision for aviation over the next 12 to 18 months. Now let me spend a few minutes on the current labor environment. It's been a year since we first started seeing and discussing pervasive labor challenges as a result of the decline in supply of qualified applicants. Since then, it has become a widespread and highly publicized topic of discussion across industries and regions. By this time, we would have hoped for more improvement in labor market conditions, but we are not seeing any meaningful change, which is disappointing. And frankly, we don't see any improvements in the near term, which is also disappointing. This is why we are so focused on quality of earnings and choosing our clients wisely. As we consider a variety of labor and macroeconomic conditions, it's also important for us to ensure our entire portfolio is best positioned to provide superior service. Since the beginning of the year, we've been making structural changes to our healthcare division, including a change in senior management. After careful evaluation with the new leadership team, we have collectively concluded that remapping and realigning the healthcare business within our other segments, primarily BNI, will provide the infrastructure necessary to support the efficient growth of this business. Of the roughly $250 million in business in this segment, two-thirds of the services are core to BNI. Of the specific acute business, we are maintaining a strong network of subject matter experts to provide expertise to support and grow with our clients. We're all excited about this move and how it will enable us to leverage our scale and strengths and capture the long-term potential of this end market. Anthony will discuss the financial and synergistic implications of this realignment later on the call. Improving our infrastructure is a theme for 2019, particularly on the IT and data front. As you know, we went live with our new HRIS and time and attendance systems in the last six months. In May, we went live with our ERP system in the UK and we're slated to go live in the US later this year. As each system gets implemented, we are learning more and more how we can apply these tools to maximize efficiencies and gain insights into our business. While still early, we are seeing how building the necessary data history over a period of time can provide benefits long term. I'm reminded of when we first began our transformational journey in late 2015 and what we've accomplished in less than four years. We have grown annualized revenues to $6.5 billion, more than 30%. We've expanded our margins 40 plus percent from 3.8% to above 5%, and we've delivered 20% adjusted EPS growth. And the work we've embarked on in 2019 is a continuation of this journey as we build an ABM that is positioned for an even stronger and more prosperous long term. I want to thank our entire organization for making all of this happen and for another quarter of excellent execution. I'd now like to turn the call over to Anthony.