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?

Thanks, Scott. Before I recap the quarter's results, I would like to provide my customary synopsis of the impact of ASD 606 and 853. Given we are three quarters into the year, I also want to discuss how the new accounting rule has developed throughout the year. Our quarterly results reflect lower revenues of approximately $12.5 million associated with ASD 853 related to service concession arrangements, primarily reflected in our aviation segments. The deferral of profit on uninstalled materials associated within our technical solutions project was approximately negative $0.7 million. Lower sales commissions, which are now deferred and recognized over the expected customer relationship period, was approximately $2.2 million, primarily impacting technical solutions. Our initial guidance range anticipated an impact due to 606. which at the time was primarily related to uninstalled materials that were a carryover of amounts previously recorded in fiscal 18. Moving to Q3 and our earnings per share outlook for the full year, the predominance of the 606 impact has stemmed from the sales commission's costs. I want to point this out that as the year has progressed, tremendous growth within our technical solution segment has enlarged this impact. While for transparency, we have delineated these accounting items I want to note that the sales commission piece is more operational in nature versus the carry forward of prior year's uninstalled materials. Now, on to the quarter. Revenues were $1.6 billion, driven by our technical solutions and aviation segments. On a gap basis, our income from continuing operations was $36.5 million, or $0.55 per diluted chair, compared to $33.7 million, or $0.51 last year. Before moving on, I am pleased to report that these results reflect a $3.7 million favorable impact from insurance, a material improvement since we launched our comprehensive safety and risk program exactly four years ago. Year after year, we have seen our prior year adjustments decrease, speaking to the success of the program and its results. It certainly continues to be a significant challenge due to the unpredictability of complicated societal forces. However, our aggressive procedures to resolve open cases as well as our continued focus and investment in safety personnel and programs has resulted in more stability than we have witnessed over the past few years. I'm cautiously optimistic that our results are demonstrating a sustainable pattern of decreased volatility. I'd like to thank Jessica Morgan, who leads our insurance group, and the whole risk and safety team for the progress we have made thus far. Moving to adjusted income from continuing operations. For the quarter, it was $40.2 million, or $0.60 per diluted share compared to $38 million or $0.57 last year. On both a GAAP and non-GAAP basis, our results were driven by a combination of higher margin revenue contributions from our technical solutions business segments as well as a higher margin mix and continued disciplined labor management within business and industry. During this quarter, we generated adjusted EBITDA of approximately $93 million at a margin rate of 5.6% versus $88.4 million and 5.4% last year. Now turning to our segment results. As Susie stated earlier, our healthcare segment was seamlessly integrated into our B&I, education, and technical solutions segments during the quarter. We are already starting to see some of the benefits from the new structure. For example, we have begun to pursue and have seen initial success with escalation and the optimization of route-based services leveraging the B&I network in healthcare accounts. Moving to B&I. B&I reported revenue of $807.9 million versus $822.6 million last year. The year-over-year decline in revenue is attributable to the loss of certain accounts, mainly lower margin and underperforming contracts that we did not retain given unfavorable pricing dynamics. B&I continues to expand with large national accounts that complement our growth strategy in the current labor market. Operating profit for the quarter was $45.3 million for a margin rate of 5.6%, reflecting an approximately 70 basis points increase versus last year. As Scott discussed earlier, our discerning approach to labor management and pricing renewals drove this increase, and B&I continues to perform well in this challenging environment. Aviation revenues were $263.3 million, reflecting a $12 million negative impact related to ASC 853 as a result of the accounting for public sector parking leases. These amounts were previously reported as rent expenses but are now classified as contract revenue. Organic growth for the quarter was 5.7%, reflecting new business including the continued expansion of our catering logistics services and a continued growth in our international operations. Operating profit was down approximately $1 million to $8.6 million for a margin rate of 3.3%. While we see a strong pipeline in aviation, the business continues to underperform versus expectations, as higher levels of overtime and tight labor conditions continue to negatively affect this segment. Technology and manufacturing reported revenues of approximately $227 million versus $231 million last year, with operating profits growing to $17 million for a margin rate of 7.5% versus 7.3% last year. These results reflect a loss of certain accounts partially offset by the addition of new business wins within high-tech and logistics clients. Operating margin expansion versus last year was driven by lower reserves established for client receivables and the loss of certain lower margin accounts. We continue to monitor the pace of expansion, particularly with our manufacturing clients, for any change in decision-making or scope. Revenue in education was $215.4 million and operating profit was $12.6 million for a margin rate of 5.8%, which expanded 24 basis points versus last year. As Scott noted, we are excited about our new go-to-market strategy, given the rationalization of our education portfolio, following some softness in the recent buying season. Technical Solutions reported revenues of $165.7 million, up 27.6% organically versus last year. This represents an all-time quarterly high since the reorganization of this business in 2017, driven by broad-based demand in the U.S. Energy projects continue to expand with municipalities and large school systems. We recently announced contract wins with Warren County, Pennsylvania, and Aiken County Public Schools in South Carolina. The two megaprojects that I highlighted in Q2 have also contributed to this revenue growth. Also, our EV charging business has also expanded aggressively this year with sales growth outperforming any other year. Clearly, we are all thoroughly excited about the growth of our technical solutions business and how well our solutions are resonating in the market. However, I would like to reiterate my sentiment from last quarter. Growth in this business is project-based and has historically grown in the high single-digit to low-teens range. Current performance does not necessarily signal a new long-term outlook. Operating profit for the segment was $17.9 million, at a 10.8% margin compared to 13.1 million and 10% margins last year. This reflects higher project revenue and lower amortization expense following the impairment of our UK business at the end of last year. Partially offsetting these results was the blend of our projects and related churn rates. And again, these results reflect a 1.3 million impact related to the treatment of commissions under ASD 606, given Technus Solutions' exceptional growth. Turning to cash and liquidity. Cash flow from operations was $57.6 million during the quarter. We have seen a slight increase in our DSOs over the last several months that is attributable to a few items, including working capital needs for our larger technical solutions projects and some delays due to unique billing reconciliations and ideations. For the remainder of the year, we remain staunchly focused on reducing our DSOs. We ended the quarter with total debt, including standby letters of credit of $1.1 billion and a bias-adjusted leverage ratio of approximately 3.2 times. During the quarter, we paid our 213 consecutive quarterly cash dividends for a total distribution of $11.9 million. Now turning to guidance. As stated in our press release, we are reiterating our guidance outlook for the year. We continue to expect GAAP income from continuing operations to be in the range of $1.70 to $1.80 and $1.95 to $2.05 on an adjusted basis. This guidance includes the impact from the new accounting pronouncements ASD-606 and 853. which we believe could be approximately $0.05 for the year. Looking to fiscal 2020, in line with Scott's commentary, we remain cautious regarding retention and continue to monitor labor carefully for the remainder of the year. Based on our visibility in the near term, we're expecting to go forward to have a very similar operating environment to this year and a corresponding level of pressure on retention. Additionally, while helping us navigate the current challenging environment, We continue to make investments in HR and IT projects as part of our commitment to elevating our people, processes, and systems. On the IT and systems front, as Scott graciously acknowledged, we just closed our first quarter under a new ERP system in the UK. This was the first step to our phased implementation roadmap. Our target dates have shifted slightly. Given our year end, and to ensure we have accounted for all the testing, training, and change management strategies necessary to launch in North America. We now intend to go live in North America in early 2020 rather than later this calendar year. Canada will be the first North American launch, and the U.S. will follow shortly thereafter. With all the changes we have implemented over the past several years and continuing in the foreseeable future, I have seen an admirable level of adaptability from the entire organization, and I thank everyone for enabling us to make the necessary progress to strengthen ABM for our future. Operator, we are now ready for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Andy Whitman with Robert W. Barrett. Please proceed with your question.

Great and good morning. I have a few questions here to start out with, but I guess the first one is for Scott. I wanted to kind of get a sense from you as to the outlook here. Obviously, I think the exits that you've made in parts of your business, including B&I and other segments as well, are clearly contributing to the margin performance that you're seeing in those segments. Given that it sounds like the labor market continues to be challenging for you guys, it sounds like there's at least some potential for more exits to continue. So with that in mind, Scott, I wanted to get your sense as to what the revenue trends could look like in your key segments over the next several quarters. Obviously, you've walked away from some business that's going to weigh in the revenue trends into next year. But how should we be thinking about that in general, given the challenges that you're facing there and the discipline that you've gone to here in the last couple of years?

We don't give revenue guidance, but I will tell you we think next year will look pretty similar to this year. We don't expect any dramatic change. I think kind of the discipline... that you pointed out, it is not going to change, but we will be adding salespeople. We're going to continue to grow the business. We're on record pace this year, you know, and hope to beat last year's performance. So still healthy on the new business front, but I think next year will look a lot like this year.

Okay, that's helpful. I think there's probably a similar question, but in a little bit different vein on the technical solutions portion here. I mean, obviously, this is the segment that carried the quarter. This is probably the area that most people will be surprised with, even if you guys aren't internally. And we heard Anthony's commentary, I guess. about this is not what we should be thinking about the long term. But can you just talk about the backlog of work that you have there, if that gives you confidence for at least high single-digit growth here as we move into 20? And then just, you know, this is a project business. That means it could be more economically sensitive. And I wanted to understand if you guys are seeing any cracks in the foundation, given everyone's concern about the economy and how that could be affecting that project-based business.

Andy, I'll take the first part of that question. So our revenue continues to really benefit from a robust backlog, the churn, which is the project conversion rate, and our pipeline, which is translating into the growth that you're seeing. And we continue to see a great amount of growth in that in the short term. As I mentioned previously, when we see backlogs and churn of roughly $150 million at 20%, Those are healthy indicators of the business, and our backlog is well in excess of those amounts. So for the short to medium term, we don't see any real change in terms of the trajectory for the business. But as Scott mentioned in his prepared remarks, it is a business that is project-based, and therefore we have to continue to invest in the salespeople. But it's resonating quite dramatically with our customer base, and we don't see anything that should impact that in the short term.

I mean, look, and for us, Andy, this is, I tell you, like if we talk about potential slowdown, if you think about how we performed in the last recession, which was the Great Recession, which was pretty dramatic, you know, we did well as a firm. We didn't have technical solutions then. We didn't have that lever. And if you think about it from a firm standpoint, we were organized by service line back then. So when we were helping to solve problems, with clients back then. It was kind of a one solution thing, right? If it was a janitorial assignment, we'd talk about how they helped them through the recession from janitorial, and you know how well we performed relative to others as a firm last time. Well, now we can talk to them because of the way we structure our industry groups. Hopefully we can provide solutions with other service lines, but on top of that, we have the technical solutions lever that, as you know, with these project-based, they're capital, they're not operating, in terms of an impact to a client in a recession. So it's capital, and it reduces operating costs. So we think the technical solutions team should be really well positioned if the economy turns down.

That's helpful. I have one other question for now, and I might jump in the question queue later, but it has to do with cash flow. And you guys mentioned that DSOs were up a little bit. You had a big target for free cash flow this year that you previously articulated. it seems like the fourth quarter would have to be unusually strong to get to that $200 million level of free cash flow. Anthony, how should we be thinking about the free cash flow here for the year?

Great. So, you know, our free cash flow for the year to date, as I mentioned, is somewhat disappointed due to a few reasons, CSO slippage, primarily in our aviation, but a little slippage across all of our industry groups, and nothing systemic, but slippage, and due to the larger... project-based work, there's some working capital tie-up, which, you know, that's the type of tie-up that I like, right, at the end of the day, because it's indicative of us growing that pipeline and growing that business. But given all those factors and given where we stand at the end of Q3, along with our outlook for the remainder of the year, we expect our free cash flow to be closer to the $175 million mark versus the $200 million-plus mark that we achieved in 2019. So a little bit down, but we're constantly focusing on this, and we have all cylinders looking to improve the DSO in Q4 and beyond.

Cool. Thank you very much.

Thank you. Our next question comes from the line of Sean Eastman with KeyBank Capital Markets. Please proceed with your question.

Hi, team. Thanks for taking my questions. I guess the first one for me is just kind of reading between the lines on the prepared remarks. It seems like assuming the status quo and the current operating environment, that it's going to be pretty tricky to expand margins in fiscal 20. Am I thinking about that correctly? And secondly, it would be helpful at this point to just kind of round up some of the headwinds and tailwinds as we think about next year, just in terms of maybe some non-recurring items, the discrete tax items, where the level of IT spend is going, things like that, just so we can think about some of the puts and takes for the out year.

Sure, sure. Good question. So I think when we look at margin, we look at it in the operating segment, and then you could look at the bottom line EBITDA. So for us, it's so core in this market to protect the operating margins in the segments. And You know, we've done a really good job of that. I think it's surprising a lot of folks, to be quite honest, right, and how well we've done. And we expect to be as disciplined next year to protect those margins. You know, as it flows through to bottom line margin, yeah, there can be pressure because we are making investments in our IT systems, in HR. And, you know, Sean, a lot of this was planned starting back in 2016 when we said, how do we accelerate this company? We said right out of the gate that our systems were not where they need to be. Our process wasn't where we need to be. So these were all planned investments that are coming to fruition. And, you know, it has been a little bit more acute on the HR side because we had to react to this environment, right? We hire 70,000 people a year, right? So we have to make those investments. So you will see incremental year over year in that corporate side related to HR and systems that will pressure the flow through on the bottom line margin. But, you know, we would encourage everyone to look to the operating segments.

Okay. So, I mean, all in, does that mean, you know, margins might actually tick down next year? You know, just trying to get a – just make sure we're kind of thinking about things correctly. Okay.

Yeah, I mean, look, we're still racking up the budgets. We're, you know, just entering into the fourth quarter. But, yeah, there is a chance that it will head down next year, all things being equal. Okay, got it. That's helpful. And, again, I would say look at operating segment versus bottom line EBITDA, you know, operating segment, kind of the health of what we're doing.

I get it. And I guess another question is just, you know, this year we've, you know, put the, HR system in place. You've got the cloud-based time and attendance system in place. You know, the ERP backups, consolidations underway. I'm wondering, you know, where the incremental IT investments are going next year exactly.

Yeah, Sean, it's not incremental. So, you know, some of the systems that we're investing in today go live in the next fiscal year. So take our US ERP. You know, that's CapEx that just becomes part of the operating environment next year. It's all in line with my previous remarks in Q2 in terms of the year-over-year impact related to IT, and it's really just a deferral of expense that we expected this year being deferred into next fiscal year. So from a cash flow perspective, the investments that we're making should temper off, because some of that is to get the systems up and running, and then it moves to a more operating environment in terms of the expense.

Yeah, and the incremental side, if there's going to be an incremental side, it'll be really around HR, because again, we're going to continue to invest in. It's so critical that for us, right, hiring, speed to hire in this market. You know, we've said this for a while now. Someone comes in and fills out an application. You want to close them in that day or the next day. You wait a week. They're going to have a job somewhere else, right? So we're bringing on recruiters. We're enhancing our systems. And we're standardizing practices. You know, Sean, if you were to go back to 2016, everything in this firm was distributed into the field. We had 300 branches distributed. They all had their own hiring practices, their own ways of doing things. We're centralizing now into more of a corporate orientation where hiring practices, onboarding, training, all going to be standardized with best practices, which is really the theme of 2020 vision. So there will be some incremental costs, but you'd expect it because, you know, we don't believe the labor crisis is going to abate in 2020. I don't think anyone does.

Yeah, that makes a lot of sense. And last one for me, just on the free cash flow outlook, revised down a little bit for fiscal 19, but I'm wondering how to think about next year. Will some of the aviation receivables unwind? You know, should that kind of – should we see, you know, decent free cash flow growth next year in your view? Maybe that's a good one for Anthony.

Yes, I think it's a little too early, and, you know, year-end will provide the outlook. In terms of the aviation, it's a challenging year. consolidated customer base that I don't think we're any different than any supplier that deals with the aviation, you know, big clients and big customer base in terms of their ability to, you know, drag out their payables. So we're working actively to ensure that, you know, where we work with them and ensure that the DSOs are a focus area, and they have been a focus area. But we also have some incremental costs, as Scott mentioned, but offset by investments that we're making today in our systems that should abate next year. So overall, we see continued good cash flow generation for the future.

Okay, and I'll just sneak one more in. Apologies to the other people on the call, but maybe you could just update us on the anticipated deleveraging trajectory and whether you guys think you might be sort of back in the market for an acquisition and at some point in FY20?

Yeah. I mean, that's always been the plan. We, we said, we did the GCA acquisition in September of 17. We said, we're going to take a pause on acquisitions for the next, um, 18, 24 months because first of all, we had to integrate GCA. We were over four times levered. And we said, we want to get to under three times lever before we go back in the market. So that's where we'll be in 2020, and we expect if there is, you know, opportunity that makes sense for our strategy, that we'll be acquisitive in 2020 with the right opportunity.

Thanks so much, gentlemen. I appreciate it.

Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Good morning. Morning, ma'am. um yeah can you guys dive a little deeper into the conversations that you're having with clients these days i mean it sounds like maybe they're incrementally more cautious than maybe they were six months ago is that a fair characterization and is there any more color you can share with investors this morning sure that's good um yeah i think everyone's more cautious right because uh

You know, I mean, I don't have to tell you, right, we could read the paper on a day and, you know, is there tariffs or they're not tariffs, right, what's going on with trade wars, with the potential recession. So, you know, everyone's in this mode of, you know, what's next, but we still have really good traction, good conversations with clients, and, you know, I think they appreciate what we're doing and the data that we bring. You know, we're different than many competitors because we do think we have better analytics. So a lot of times they look to us for insight of what we're seeing with other clients, which is where our scale helps because we could kind of rationalize what's going on in the market across different regions. But they're active conversations, and everyone's just curious about what everyone else is doing and where the economy is going.

Okay. Yeah. Thanks. Thanks. You know, kind of along that same line, given all the changes that you've made in the portfolio, you and Anthony, and the operational changes you've done over the last couple of years, I mean, would you expect the business to perform differently in the next slowdown as compared to the last several recessions?

You know, I would have to say yes. And And it's what I alluded to earlier. Now that we're in industry group format and not selling single services, hopefully we have more solutions to bring to the clients to get better traction. We'd like to think we have better data now, better analytics to help clients understand what their options are from a cost standpoint, from an efficiency standpoint, if they make specification changes. We have technical solutions now. We have this extra component to say, look, You know, we know you're pressured on cost. Here's an opportunity to reduce energy, right, and become more efficient. So we think we are much better positioned in a recession as a firm. And, again, I'll read it back. It was a terrible period for our economy in 2008 and 2009 last time, and we did, relatively speaking, pretty well. So hopefully that will prove out again with a little plus sign. next time.

Okay, thank you. And then, Anthony, just one more for you. You know, ASC 606 and 853, I think you said that could be a favorable five-cent impact for the full year. Where are we today? What's the impact today so that I can understand the implied impact for the fourth quarter? Thank you.

Yes. Year-to-date, we're roughly $0.07 of a positive impact. And if you recall, when we initially gave guidance back in December of last year, we had anticipated $0.05. And that was primarily related to the uninstalled component, which was the carryover. from fiscal 18. So at this point, we continue to feel it's going to be closer to that $0.05.

It's obviously going to be somewhat contingent on operations, but that's what we're going with in terms of our guidance for the full year.

Got it. Thank you.

Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Hi. Thank you. Thanks. Good morning. First on education, the revenue was up 4% year-over-year, but you mentioned some aggressive bidding. And then I think you indicated slightly higher margins in education. Was it below plan, or did you lose bids you thought you'd win? Or can you just give more context to that comment, please? Because it certainly performed better than some of your other segments.

Yeah. Thanks for the question. Generally, we were disappointed with the buying season, the execution, and that was really a function of two things. One was the pricing environment as well as the realization on new sales and retention. That being said, the operating profit came in line. We were able to offset our labor costs by good overhead savings and other savings within the mix. But clearly, disappointed by the buying season, which really impacts half the businesses. It's really the K-12. The other half on the university or higher ed side, that buying season is throughout the year. So Scott's earlier remarks around our new go-to-market strategy and leading with solutions, we remain optimistic that the next 12 months will produce a better operating environment and hopefully a better margin pull-through than we've seen this year.

Okay, thank you. And switching to aviation real quickly, did I hear you say an organic growth rate of 5.7% in one of the segments in aviation, or can you just go back and review that comment, please?

Yeah, we've had good organic growth in aviation, but we've also had some contraction in the U.S. business. So when we look forward, while new sales and retention have been somewhat of a challenge, we're seeing good opportunities here. as it relates to specifically our fueling and catering and our UK operations. And I believe the comment was in relation to our service concessions.

Oh, excuse me. Okay. Thank you. And then last for me, and then in technical solutions, can you just give some context? What specifically do you do in EV charging?

So in EV charging, we'll actually do the installation. We'll partner with the actual hardware companies, and then we'll go to – big manufacturers, you know, someone like a BMW or a Porsche, and we'll say, look, in all your dealerships or in all the locations you want in North America, let's plan that out, and then we do kind of a full turnkey installation and then try to lock in the servicing after that. This business has grown for us dramatically. We are the clear number one now. in this segment, and it's getting more traction. And we haven't even scratched the surface yet of cross-selling this to our clients. We're just starting, but this is kind of, you know, kudos to our ATS team. This is all organic growth that they're finding out there, and it's been spectacular for us. And, you know, as we all know, the trends are heading in such a positive direction, so really going to be a good platform for us.

Do you currently, just a quick follow-up on that, do you currently do the EV charging service for any of clients in janitorial service, for instance, or does that go to your point about starting that effort?

We do, but it's more spotty than we'd like, right? And that's part of, you know, really for us getting more mature across selling.

Okay. Thank you for those comments.

Thanks.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 at this time. Our next question comes from the line of Mark Riddick with Sedodian Company. Please proceed with your question.

Hi. Good morning. Good morning. I wanted to touch on a lot of my other questions are already answered, so I just wanted to touch on maybe some of the progress or some of the areas that you're looking at as far as new service offerings. You touched a little bit on some of this earlier, but I just wanted to get a sense of sort of where you're seeing progress opportunities and some of the initial benefits on, you know, whether it's the airplane fueling assignments or some of the other things that we might look forward to for new services.

Thanks. Yeah, so I think we've seen what we could do in fueling and catering, and that's really just, really, you're talking about something that really over the last 12 to 18 months has really started taking off, no pun intended, in the aviation sector. So as we look and build on that, and let's go back to the ATS group and how really EV charging started organically, too, outside of the core of projects. We're starting to look at how much work we're doing in data centers and kind of mission-critical stuff. I think that's an area that we're going to be exploring over the next 12 to 24 months as how this could really turn into something because, you know, if I were to give you the list, and I'm not allowed to, but if I were to give you a list of the Silicon Valley-based firms that we do work in for the data center and their power testing and how, I mean, think about what's going on with cloud, right, which is essentially data centers, right? The expansion plans for our clients in terms of opening and lighting up data centers is actually mind-blowing. And we're right there with them. So I think there's opportunities for us. You know, what we do is kind of we think about leveraging the adjacencies, right? We have our core businesses. What are the adjacencies and how do we leverage them? And that's kind of all wraps into our strategy for next year and the next, you know, three to five years.

Okay, great. Thank you very much. Great. Thanks, Mark.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll now turn the floor back to management for any final comments.

Yeah, I just want to thank everybody for the call. You know, sadly, summer's over, and we're charging into fall here, but we're excited to come back to you in Q4. We'll have, you know, our budgets all wrapped up. We'll talk about how we finish the year, hopefully going to have some good announcements on our sales trajectory and which, you know, we've been spending so much time on and so much focus on. So looking forward to the follow-up conversation in December. And thanks to everyone. And, again, I just have to thank my team for everything they've done to get us to this point. It's really proven our team, and thank you.

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