ABM Industries Incorporated

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

Thank you all for joining us this morning. With us today are Scott Saunders, 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 fourth quarter and 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 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 thank you all for joining us this morning as we discuss our fourth quarter and full year results, as well as our outlook for 2020. Our performance during the fourth quarter represented another period of progress as we reported $1.6 billion of revenue and higher GAAP and adjusted EPS of 71 cents a share and 66 cents a share, respectively, compared to last year. We also expanded adjusted EBITDA margins 10 basis points to 5.6%. This performance enabled us to meet our full-year guidance across our key metrics, and with and without the impact of the ASCs 606 and 853. Total full-year revenues were $6.5 billion, as we completed a record $1 billion in new sales bookings. This helped to offset our discerning approach to retention and repricing of existing work and allowed us to land at 1.6% organic growth. Our GAAP continuing EPS was $1.91 a share or $2.05 a share on an adjusted basis. And our adjusted EBITDA margin was 5.2% for the year. We also generated $200 million in free cash flow and ended the year with leverage of 2.8 times, which hit our target range of below three times. Operational highlights include the sustained robust pipeline within our technical solutions group as they achieved outstanding growth of 26% for the quarter and 19% for the year. I would urge you all to visit our IR homepage and see firsthand the work they did for the renowned Griffith Observatory in Los Angeles, a super-complex project we recently finished. Business and industry also demonstrated continued strength by expanding margins while navigating and, in many instances, absorbing the effects of a still unfavorable wage environment given where the labor markets remain. In addition to the work our B&I team is adding in their core office markets, They're winning work at some exciting sports venues as well. During the quarter, we started engineering and maintenance work at the Chase Center in San Francisco, the brand-new home of the Golden State Warriors. The venue is expected to host 200 events every year, and ABM was there to support its first concert ever as well as the Warriors' first home game. I only point that out because opening an arena is such a trusted position and critical to the impression it will make. The quarter's results saw our technology and manufacturing segments performing as planned in keeping with their solid full-year performance. Our education and aviation segments continue to be pressured from the labor markets more than any of our groups, as they have the highest proportion of both non-union and lower-wage team members and the greatest staffing variability due to seasonality with holiday travel and aviation and the cycling of semesters and recesses in education. all of the factors we've been discussing with you over past quarters. Anthony will take you through a deeper discussion of segment performance and financials, but I'd like to put our overall results in perspective for a moment, given we are now through fiscal year 2019. We first announced our 2020 vision strategy in late 2015, which began a multi-year transformational journey for the entire firm. At that time, our revenues were $4.9 billion, our adjusted EBITDA margins were 3.8%, and adjusted EPS was $1.62 per share. In four years, we have grown revenues by more than 30% organically and acquisitively, expanded margins by roughly 40%, and increased earnings by nearly 30%. The structural changes to our business as part of our 2020 vision strategy provided a springboard for these results. Our organizational realignment from a siloed and regionally autonomous structure to a centralized industry-focused operational framework has enabled us to pursue and achieve greater operating leverage. In conjunction with implementing our industry group structure, we created a formal procurement division to further leverage our scale. To date, we've achieved more than $50 million in savings and deferred increasing costs across our direct, indirect, and subcontractor spend. And supporting our 140,000 employees and our literally thousands of clients is our Enterprise Shared Services Center. We centralized the work of 14 nationally distributed accounting centers, and today the Shared Service Center handles more than 4,000 journal entries, manages more than 30,000 client invoices, and processes 80,000 payments every single month. We are so proud that this group was stood up and is high functioning in such a short period of time. Another aspect of our 2020 vision was accelerating standard operating practices known as the ABM way. Over the years, our key areas of focus have included sales, strategic account management, and labor management. While we've made progress, These are areas where we are investing to accelerate further, including bringing on a new head of strategy and transformation, which I'll discuss in a minute. We've made significant progress in some of these areas, as demonstrated by creation of our new sales organization, as well as through the institution of weekly operating reviews to manage labor with more agility. This year's performance in both technical solutions and B&I are great examples of how best practices and standardization can yield results. But in order to truly capture the full potential of our size and scale, we must continue to deepen the reach of the ABM way across more areas of the enterprise. It will be critical to our growth and achieving our long-term target of 5.5% to 6% adjusted EBITDA margins. This is why we will continue to focus on investing and enable us to win on growth and productivity. Our primary areas of focus will be to optimize revenue management, increase client retention, improve labor and management through process and technology, and reinforcing team members as our competitive advantage. We will build upon our strong sales momentum by adding salespeople and investing in the continued professionalization of our sales approach. Our plans also include corporate investments in our HR structure to centralize and standardize hiring, onboarding, and training practices. We will also leverage next-gen data platforms to modernize our infrastructure and accelerate our technology and digital capabilities. During the quarter, we announced some key leadership changes that underscore our commitment to aligning our organizational structure with our strategic priorities. Scott Giacobi, previously our Chief Operating Officer, is now our Chief Revenue Officer and is responsible for all revenue-generating functions to drive growth, including sales and marketing and continued oversight of our technical solutions group. Renee Jacobson, previously the President of BNI, has been named Chief Facility Services Officer and will continue to be responsible for BNI, but also add aviation, education, and technology and manufacturing. In the current operating environment, it's necessary to create a focused effort to drive both organic growth while expanding segment margins through acute operational attention. Both Scott and Renee have been instrumental in formulating our strategies on these fronts, and I believe their new roles will lead to even greater contributions. We also recently announced the addition of Josh Feinberg to ABM, as our Chief Strategy and Transformation Officer. Josh joins us from the Boston Consulting Group. He was part of the original consulting team that helped develop our 2020 vision architecture back in 2015. At BCG, he's worked with over 30 different service companies across a variety of businesses, and this deep experience will be valuable as we focus on where we compete and how we will continue to win particularly as we explore both organic and acquisitive investments. Josh, Renee, and Scott will be working closely together to advance the ABM way. Looking ahead, the midpoint of our guidance does not exhibit our historical year-over-year expansion rate. Our guidance incorporates the lower pull-through of revenue into this year as a result of our retention in 2019. This magnifies the impact of a higher-cost model due to the continued investments in sales, HR, and IT that we believe are essential to achieving greater growth and higher operating leverage in the future. And based on what we've seen all year, we continue to believe the operating environment will remain labor-challenged in the foreseeable future. As a result, we took a responsible approach to setting our guidance. Once we make it through this next cycle and we complete our core investments, we expect to return to double-digit EPS growth in 2021. So while our balanced results in 2019 serve as a reminder of where we were just a few years ago, our acceleration work continues with fervor and passion. I want to thank our team members for getting ABM to this point and helping us fulfill our short- and long-term goals. I would also like to thank our board, including our newest director, Jill Golder, as well as our analysts and shareholders for supporting our strategies as we seek to unlock greater value. It's clear that ABM has a proven track record of achievement, regardless of the macroeconomic environment, and I'm confident our diversified business model will thrive even more with our continued evolution.