ABM Industries Incorporated

Greetings and welcome to the ABM Industries third 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. As a reminder, this conference is being recorded. I would 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 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 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 silence 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 solutions, and education segments. For comparative purposes, we have provided historical comparisons 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 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 top-line 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 gap EPS of 55 cents and 60 cents 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're reaffirming our EPS guidance outlook of $1.70 to $1.80 per share on a gap 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 groups 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, costs 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 our contracts are fixed price. The pricing environment has not yet caught up to the incremental wage pressures that have been occurring since early 2018. In many cases, we are still seeing regional competitors bid on work using estimated wage rates that are not reflective of the current market conditions and future expectations. While this has caused retention pressures for us as we rebid work, our margins reflect estimates that emanate from our operators' responsible and sustainable pricing. In fact, in some instances, we have seen clients return to ABM as they've experienced how non-sustainable low bids can impact service and quality. We're also beginning to see uncertainty with the economy impact client decision-making. There are instances where award cycles are more prolonged as clients want time to assess the rising wage environment and see clarity on whether there will be a downturn in the U.S. economy. All of these factors have contributed to a difficult retention year for us in 2019, and based on what we're seeing today, and as I discussed last quarter, we do not expect these dynamics to change in the near term. To mitigate these challenges, we've been managing what is in our control. We have steered our business strategically by reviewing our legacy contracts to see price escalations where and when appropriate. We adopted a disciplined approach to pricing new business as we balanced pursuing profitability and growth with managing risk. We instituted acute labor management practices to increase productivity and defend against compression, and we've invested heavily in our human resources team to improve recruiting and onboarding. Across ABM's size and scale, these actions can and have served us well. B&I's performance this year is a great example. Our diversified portfolio has also benefited us. Technical Solutions continues to capitalize on the demand for energy efficiency and has driven growth across all of their offerings, including bundled energy solutions, EV charging installation, and data center power testing. In fact, our entire energy and power services group is experiencing phenomenal growth as demand shifts towards sustainability. Technical solutions have certainly become a critical part of the AVM brand offering. It's a foundational component of cross-selling, and we are leveraging our talent and sales expertise to augment other areas of our business. For example, over the past three months, we have appointed key sales leadership from the technical solutions group to senior roles within our education industry group. During the recent buying season, our education group's bid acceptance was low. The heavily non-union environment and the ability for regional competitors to make wage assumptions that don't forecast what we see as a reality of rising wage rates impacted our retention in new sales. The new sales leaders in this group are building a go-to-market strategy to differentiate ABM from those competitors. We intend to change the narrative around pricing to demonstrate to clients the value we can create for them by bundling energy programs along with our leading position in custodial, groundskeeping, and maintenance. Generally speaking, cross-selling will be at the core of our approach. We are actively adding salespeople and account managers for retention and implementing cross-selling trainings. We believe in the potential for increased outsourcing in the education sector as schools review their aging operations. And as we've envisioned when first acquiring GCA, we are determined to incentivize new and existing clients to outsource by capitalizing on our unique facilities maintenance and energy bundling capabilities in the way only ABM can. Our year-to-date enterprise progress has shown us that focusing on our team members is the key to unlocking greater potential for the firm. We have invested in people to instill a sales culture that is on pace to achieve a billion dollars in new sales this year, which would be another record year. We have introduced new tools to help our operators manage their labor more effectively, and we continue to invest by adding HR team members to support the growing needs created by the current environment and the need to use speed to hire and best-in-class onboarding as a competitive weapon. In addition to adding HR team members, we are making planned corporate investments in an HR structure that centralizes and, more importantly, standardizes hiring and training practices. Remember, when we started 2020 Vision, we inherited our legacy distributed approach across our 300 branches with no leverage from standardization. We are fostering a data-driven model that measures key metrics such as retention and labor performance to inform decisions and ultimately contain costs. With the investments we've been making in our HR technology platform, this is becoming possible. I just returned from our quarterly business review meetings with our industry group president, and they were enthusiastic about the expanded engagement and increased productivity from their HR business partners. As we've been rolling out our new HR model, we are starting to see open positions being filled more quickly. This will lead to reductions in overtime, which, as you can imagine, is pressured when job sites have team member vacancies. And investments in HR are not solely about reducing overtime or speed to hire. We believe that supporting the team member experience can drive longer-term value through improved retention, higher quality talent acquisition, and reduce reliance on temporary workers, which are a higher cost. And don't forget, these are all elements which enhance the client experience. In fact, we recently conducted an enterprise-wide client survey, and reducing employee turnover was one of the central requests we heard across all of our clients. A higher cost model has been necessary to grow and offset margin compression. With no near-term change on the labor front, a similar level of attention will be required going forward in order for us to maintain our business with the same core principles. The investments in our HR organizations and systems will prove out to be the game-changer for ABM over the next two to three years. As an organization, we're really proud of where we've been heading over the past four years. It's certainly not easy modernizing an ingrained process and systems of a 110-year-old company, and if that weren't enough, throw in the worst labor crisis in modern history. Fortunately, we have an amazing team, and our confidence has only grown stronger for the long term. Now, before I turn the call over to Anthony, I'd be remiss if I didn't congratulate our finance and shared services teams for successfully closing our first quarter with a new ERP system in the UK. We still have a long road ahead of us, but our UK launch in May and now our first UK close is a milestone that will benefit the entire organization for years to come and help provide a roadmap for our US ERP upgrade. I want to thank Anthony and his teams for anchoring our business as they close off financials quarter after quarter on multiple systems. Anthony?