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.

Anthony? Thank you, Scott, and good morning, everyone. It is indeed hard to believe that 2020 is already upon us. We have made such important progress since our journey just a few short years ago. Today, we are a stronger company and our position as a leading facility service provider is unparalleled. I'm extremely proud of our team members and I look forward to the next phase of our evolution. Now onto results. Throughout 2019, we have seen various impacts from the adoption of ASC 606 and 853. Lower revenues of approximately $12.5 million for the quarter and $48.6 million for the year associated with ASC 853 related to service concession arrangements primarily reflected in our aviation segment. The deferral of profit on uninstalled materials associated with our technical solutions project work was approximately $1.3 million for the quarter and approximately a half a million for the year. Sales commission costs did not have a material impact during the quarter. but had approximately $6.7 million impact for the year, due primarily to the exceptional growth we have seen from our technical solution segment all year. For the fourth quarter, total revenues were $1.6 billion, reflecting organic growth of 0.6%, excluding the adoption of ASC 853 and 606. Organic growth was primarily driven by the technical solution segment during the quarter. Overall revenue also reflects the impact of our decision to exit lower margin contracts and other contract losses, On a gap basis, our income from continuing operations was $48.1 million, or $0.71 per diluted share, compared to $8.9 million, or $0.13 last year. This quarter's results reflect a $5.4 million benefit from prior year self-insurance adjustments, the second consecutive quarter where we have seen a favorable impact. Safety and risk was among our key areas of focus when we launched our 2020 vision transformation, and I am pleased to see continued progress in this area. And as a reminder, last year's results reflect a $26.5 million non-cash impairment charge related to our technical solutions segment in the U.K. On an adjusted basis, income from continuing operations for the quarter was $44.7 million, or $0.66 per diluted share, an increase of 15.2% compared to last year. On both a GAAP and adjusted basis, our results reflect higher revenue contribution from the technical solutions segment and higher overall segment margin mix. including the benefits of improved labor management, primarily within the business and industry segment. During the quarter, we generated adjusted EBITDA of $93 million at a margin rate of 5.6%, compared to approximately $90 million at a rate of 5.5% last year. I'll now turn to our segment results, which are described on slide 16 of today's presentation. Please keep in mind, with the exception of technical solutions, top-line results across our industry groups reflect the exiting of underperforming contracts and other retention losses from throughout this year. B&I reported revenues of $807 million and operating profit of $51.1 million, or a margin of 6.3%. During the quarter, B&I continued to overcome some of their lost business by pursuing expansions of key national accounts, a strategy where we continue to gain traction. Tags during the quarter also performed well, driven by new and repaired construction in the Northeast, as well as certain projects at various sports venues. For the full year, B&I delivered operating margins of 5.6% compared to 4.8% last year. B&I has been a strong example of how the keen focus on labor management along with optimizing our reporting analytics has had a material impact on our operations and results. Standard operating practices such as weekly labor reviews and strategic account management have driven solid performance improvements this year. Aviation reported revenues of $251 million, which reflect a $12 million negative impact from contract revenue associated with ASC 853. While this segment has performed below our expectations, our two-tiered approach of diversifying service offerings and expanding opportunities with low cost and regional carriers continued during the quarter and is beginning to take hold. We also recently announced growing fueling partnerships with United Airlines and JetBlue in the U.S. Internationally, we continue to expand business with carriers such as Ryanair. These efforts contributed to aviation's positive organic growth for the full year. Operating profit for the quarter was $3.9 million compared to $2.6 million last year. For the full year, aviation ended with an operating margin of 2.1% as we continue to overcome persistent labor-related challenges. Moving forward, our teams are working towards our goal to expand margins in 2020 as we will anniversary some key losses from 2019 while continuing to target underperforming contracts. Monitoring insourcing and outsourcing trends across the aviation industry, as well as understanding infrastructure improvement and expansion trends across national airports, will be key to our future strategic direction. Moving to technology and manufacturing, T&M reported revenues of approximately $230 million for the quarter versus $4 million last year. Operating profit was 18.1 million versus 17.5 million last year for a marginal rate of 7.9% this year compared to 7.5% last year. In addition to expansions with high-tech and logistics business expansion, manufacturing clients specializing in food production and aerospace contributed revenues during the quarter. For the year, operating margins were 7.9%. Moving forward, we are looking to mimic some of the practices we have instilled in the B&I segment to expand with strategic accounts while also pursuing increasing efficiencies through labor productivity and tax. Revenue in education was $214 million, with operating profit of $5.6 million for a 2.6% margin. For the year, education's operating margin was 4.6%. Education's results reflect the impact of the more rational pricing approach we took during the most recent buying season. Similar to our expectations for aviation, we are planning for margin expansion within education in 2020 as our new go-to-market strategy of bundling technical solutions, driven energy programs with custodial, ground-keeping, and maintenance work will go into effect. We are excited about the new sales strategy and the value proposition we can bring our clients. Lastly, technical solutions reported revenues of $175.5 million, a year-over-year increase of 25.5% for the quarter. Operating profit was $20.1 million for a margin rate of 11.5% compared to a loss of $7 million last year. Again, last year's results reflected a $26.5 million impairment charge related to our UK business. Growth during the quarter, both from a top-line and bottom-line perspective, continued to be driven by core projects, building energy solution projects, and EV charging winds. Full-year operating margins came in at 9.3%. Margins in this segment continue to be the highest across all of our portfolio, and we are very excited about our future as we continue to win in both the private and public sector. Our project backlog is down from a historic high at the end of Q3, but ended the year up more than 50% on a year-over-year basis. We are committed to continue investing in this business both organically through additional salespeople as well as through opportunistic M&A. Turning to cash and liquidities. Cash flow from operations was approximately $149 million for Q4. As I've discussed throughout 2019, we have been experiencing higher working capital needs for some of our expansion clients, and our air balances in aviation were higher than expected due to billing reconciliation throughout the year. However, our teams remained committed to our year-end goals and pushed during the fourth quarter to overcome some of these challenges with a focus on collections, which led to a sequential DSO improvement of two days. We also benefited from timing related to payables. This combination led to annual free cash flow of over $200 million. We ended the quarter with total debt, including standby letters of credit, of approximately $966 million and a bank-adjusted leverage ratio of 2.8 times. I am pleased with how we have achieved our target leverage range of 2.5 to 3 times in two short years following our GC acquisition and in line with our long-term targets we established with our 2020 vision. We consider this an optimal range that allows us to remain flexible in our capital allocation strategy. During the quarter, we paid a quarterly cash dividend of $0.18 per common share for a total distribution of $12 million to stockholders. And I'm pleased to report that our board has approved our quarterly dividend increase to $0.185. In addition, as part of our longstanding commitment to return value to shareholders, our board has authorized a new share repurchase program of $150 million, as stated in our press release. Now for a quick recap of our annual results. Total revenues were approximately $6.5 billion, an increase of $56.4 million versus last year. The increase in revenues was attributable to organic growth of approximately 1.6%, which excludes an unfavorable impact of $47.6 million due to ASC 606 and 853. Organic growth was driven by our U.S. technical solutions and aviation businesses, offsetting lower retention across all other industry groups. Our GAAP income from continuing operations for fiscal 2019 was $127.5 million, or $1.91 per diluted share. On an adjusted basis, income from continuing operations for the year was $137.2 million, or $2.05 per diluted share. Adjusted EBITDA for the year grew to approximately $340 million, and we ended the fiscal year with an adjusted EBITDA margin of 5.2%. Now turning to our guidance outlook. We are introducing a fiscal 2020 gap guidance outlook range of $1.65 to $1.85, and on an adjusted basis, $1.90 to $2.10 per share. Although we previewed many of the dynamics that will contribute to our 2020 expectations during our third quarter call, I'd like to expand on our assumptions a bit further. In 2019, we saw a roughly $0.09 positive impact as a result from our adoption of the new revenue recognition standards, ASC 606 and ASC 853. primarily related to the deferral of commissions that were previously expensed when incurred. We do not expect this to repeat in 2020. While we do not give specific revenue guidance, our outlook for 2020 contemplates the same operating environment as we experienced in 2019 and the annualized effect of contract losses from this past year. We have remained disciplined in our expansion efforts, and I commend the team for taking a longer-term view for a healthier business mix. As a result, the midpoint of our guidance assumes muted growth for the full year, with the first half of the year exhibiting a higher comparability impact due to a greater degree of contract losses from later in fiscal 2019. As a result, we expect the cadence of earnings will be more back half-weighted than we saw in 2019, given the timing of losses, as well as the shift in working days in Q2 and Q4. Q2 will see an extra working day, while Q4 will see one less day. Each working day has historically represented roughly $7 million of labor expense. Additionally, our guidance does not include any potential share repurchase activity, which we will balance against market conditions, liquidity, and investments. Adjusted EBITDA margins are expected to be in the range of 5% to 5.2%, reflecting the aforementioned pull-through impact of revenue and higher corporate expenses related to our HR operating model change, in addition to ongoing investments in our IT infrastructure. We're also investing in salespeople and strategic account managers across all of our industry groups. As it relates to IT, let me provide an update on our ERP implementation. I am pleased to share that we went live in Canada this month. It is very early as we are still closing the month on our legacy systems, given the timing of the launch, but data is currently being transferred, and we will start operating the system in Canada fully over the next coming weeks. The UK and Canadian implementations mark the decommissioning of our legacy ERPs. In the U.S., which is our largest and most complex operating base, we continue with our implementation and like to expand upon that a bit. The complexity in the U.S. conversion includes not only replacing our core financial system like we did in the U.K. and Canada, but also ensuring all of our boundary applications, such as payroll, work orders, and time and attendance are configured correctly and set up to drive the productivity and enhancements we are envisioning. We are also managing our overall costs and expenses prudently and currently continue to be in line with the year-over-year increase I mentioned on previous calls. While we continue to work towards a U.S. implementation in 2020 that will yield enhanced functionality, we will not rush the go-live. Moving to taxes, we expect our 2020 tax rate to be approximately 30%. This rate excludes discrete tax items such as the work opportunity tax credit and the tax impact of stock-based compensation awards which we currently expect will be approximately $7 million for 2020 compared to approximately $8 million in fiscal 2019. More specifically, we are assuming a roughly $0.10 impact to guidance compared to $0.12 impact in fiscal 2019. We also expect cash taxes to be higher in 2020 compared to 2019, given the full utilization of net operating loss and credit carryovers in 2019. Capital expenditures in fiscal 2020 are anticipated to be between $45 to $55 million, and we expect depreciation of $50 to $55 million. Due to some of the aforementioned factors, we are guiding to free cash flow of approximately $175 million, plus or minus any timing related to working capital needs. Finally, with the investments we have made and our continued disciplined approach, we expect our segment operating margins to hold or even expand in many areas. Ultimately, once we navigate the upcoming year, we expect to see a measurable impact to both our operational and corporate results in 2021 and beyond. 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, and a confirmation tone will indicate your line is the 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 keys. One moment, please, while we poll for questions. Thank you. Our first question is from the line of Sam Kusmer with William Blair. Please proceed with your question.

Hey, guys. How's it going? Good morning. Good morning. Now that you're almost two months into fiscal 2020, I was hoping you'd be able to go into your estimate for new sales growth this year.

So, you know, we don't want to obviously give revenue guidance, but from a sales perspective, we're really optimistic. We crossed over the billion-dollar mark. And if you would have asked me two or three years ago if that was possible, it would have been such a stretched target. So we've now set that as the benchmark. We continue to add in salespeople. And, you know, we see our new sales booking in the high single-digit area and really enthusiastic about even what we're seeing at the start of the new year in our pipeline. So, you know, thumbs up in that area for us.

Awesome. Are there any particular end markets or geographies that are having an outsized impact on that new sales?

Look, we always strive for across the board, and we allocate resources accordingly, but ATS will continue to be strong for us. And if you think about the dynamics in that end market, right, with sustainability and energy, It's where we have our largest proportion of salespeople. And, you know, look at this year, right? I mean, we're not necessarily expecting to replicate what we did this year, but, you know, we were, as we said in the release, we were 19% growth for the year. So we're really optimistic about the ATS market.

Excellent. Well, best of luck in the next year here. Thanks. Thank you.

Thank you.

The next question is from the line of David Silver with Teal Game. Please proceed with your question.

Yeah, hi. I had a couple of... Well, I had one question, I guess, on the adjustments, and then I had more of a strategic question. And I... Just to preface, I had to step out for a couple minutes. I apologize if some of this was covered, and I make you repeat yourself. But... The last couple of quarters, you've had this self-insurance adjustment of several million dollars. And it's treated as an adjustment for analyzing a quarter's results because it applies to a previous period. But it is money, I think, that works to your advantage. So I was just wondering... if you could maybe talk about that general book of business, book of insurance business for yourself, and whether it's been looked at and whether there's significant further positive adjustments, I guess, over time. In other words, is that a hidden source of cash or gap earnings going forward?

Great, and welcome to the team, David. This is Anthony. So we're very encouraged and proud of the dedicated effort we made in both the pre- and post-loss management. As you know, the balance sheet amount is a highly subjective, actuarially determined amount, and we look at that balance on a quarterly basis, and the adjustments that you're seeing are related to the actuarial estimates you know, long-term estimate of where those liabilities land. So what our goal is to try to reduce the volatility both positively and negatively associated with that balance, and we're starting to see some of that volatility come down. As it relates, and those are non-cash charges, just to be clear. You know, these are long-term tail type liabilities. As we look forward. There's opportunities, obviously, with the continued success that we're having on pre-loss, which is the safety side, to influence the go-forward, which could result in lower expenses on a go-forward basis. But at this time, it's too premature.

Okay. And so just to clarify, the $5.4 million adjustment, that's on a mark-to-market basis. That's not just you know, one-quarter analysis of, you know, the reserves that you took some time ago versus actual experience. So the $5.4 million is truing up your entire portfolio. That's true.

It's every loss year from 2018 and prior. Thank you.

Yeah, sorry. Thank you for that. One of the – in issuing your initial – 2020 guidance, you cited incremental IT spending and incremental human resource spending. So on the IT side, I was wondering if you could maybe characterize the incremental spending you're seeing in terms of was this spending that was originally considered part of Vision 2020 and maybe just wasn't captured through that period? Or is it incremental spending that maybe went a little over budget tied to 2020? Or is this spending that is maybe characterized as a Vision 2025 program? In other words, you're already moving beyond the targets or the functions that were captured in Vision 2020, and you're already moving beyond that. setting your targets for IT capabilities higher. Thank you.

Great. I'll take that question and then hand it over to Scott. So our guidance and results fully incorporate both the CapEx development and ongoing operating expenses associated with the subscription model. So just for context, we're moving from a primarily on-premises model to more of a cloud-based service across all of our major work streams, including HR, finance, and time and attendance, So one of the pillars of our 2020 vision was the modernization of our IT infrastructure. And at the time when we first initially launched 2020, we realized there was a need for that IT investment. But while we were a bit higher on the development of the CapEx, we still remain in line with our previous estimate on savings and on an ongoing operating expense. What we probably haven't yet quantified is the full benefits that will accrue once all the systems are live. and we expand that functionality.

Yeah, and what I would just say more strategically is, for us, you think about the fact that we've been clear over time that we've underinvested in this area, and to bring us up to speed now and get ready for kind of the digital evolution that's happening in our business, I think it's the right time to make the right investment, have best-in-class systems. It's really, for us, It's going to help us leapfrog in the future.

Okay, and then just one last question, and I know you've touched on this in your prepared remarks, but bringing on a person in a brand-new role as the Chief Strategy and Transformation Officer, I understand that you have certain goals and he brings something to the table from his previous work with your company. But if we were to have this conversation maybe a year from now, if we're looking out December of 2020, what one or two achievements or accomplishments, measurables, would you, Scott, would you want to see from that addition to your strategy team? In other words, what might we look at, maybe an interim milestone or two, to see if this strategic addition is having the desired effect on your structure and on your operations?

Sure. A couple of comments. First, what You can only imagine how delighted we were to actually bring on one of the top partners at BCG to come and help us with what we're doing. And I think the best way to start is like the things that he'll be working on. One is going to be our business mix and strategy going forward now that we're kind of coming towards the end of 2020 vision. So I think he's going to be looking at the strategic direction for the firm and And then, you know, managing all the transformation that's going on at the firm between the IT systems being implemented and best practices, that's going to be a core area. But where we'll see the most foundational change quickly, I think, is in implementing best practices. You know, we brought him on. We call it the ABM way or – We call it operational excellence. And taking the things that we've seen that we've been rolling out like labor management and building on that and creating form and function across all the other industry groups, hopefully we'll see a tightening of some of our labor controls, labor percentages, how we schedule. You know, labor is a very complicated area. It's what we do, right? And there's so many sub-work streams within labor. how you schedule people, how you staff a job, how you source labor. So I think across those different work streams, he's going to have just a foundational impact, and he's building a team around that. So as we go from 2020 and beyond, again, we couldn't be more excited.

Okay, thank you.

Our next question comes from the line of Justin Hawk with Baird. Let's just see what your question is.

Yes, hi, good morning. I guess I wanted to hopefully get a little bit more color around the margin expectations for 2020, and maybe you can help us get some confidence around them. So maybe just starting on the corporate line, I guess, Anthony, if you could quantify for us, what's the year-over-year average delta on the spending for the IT and HR investments that you highlighted?

Yeah, our corporate line overall, from an outlook perspective, is going up roughly $25 million. Of that, half is going to be IT and HR related, and then the rest is going to be associated with items associated with corporate – our IT and HR, and then the other is going to be sprinkled around other corporate initiatives and developments.

Okay, good. That's helpful. And then I guess for the segment guidance, I guess the two areas where maybe we'd appreciate a little bit more color on how you get there, but aviation and education are the two markets where you've had the most labor market pressure, the difficulty in hiring people, and both of them you're looking for a pretty meaningful margin expansion next year. So if you could bucket it, I know you've got a little bit less amortization expense and education that's going to benefit there. And you mentioned anniversaring some of the lost contracts. Maybe if you could just quantify the margin impact from those two and then how much is left from kind of the internal initiatives that you guys are launching.

Yeah, so I'll take it in two buckets, aviation and education. For aviation, I think maybe a different story than education. For aviation, 2019, we were really calling the portfolio. We were looking very hard at non-performing contracts and made some tough decisions that I think we'll end up ignoring to a higher margin, and we've baked that in. So that aviation, on top of we expect, you know, better and better operating discipline. Of course, you do that for every area. On top of that, I think it's the business mix in terms of clients. So we'll see a lift there. And on the education front, the lift is really going to come from our go-to-market strategy. We made a change mid-year last year about how we're going to approach the market, how we're going to be more focused on the technical solutions offering and how we could bundle that into our core offering of janitorial. And, you know, it's early on, right? But we are seeing some good results. We like the pipeline. And we believe, again, in addition to the amortization and operational excellence that, you know, we're expecting, we believe the go-to-market strategy and the change that we articulated last year is going to have a meaningful impact, and we're counting on that.

Okay. Thank you. I guess maybe my last question then here would be just on the free cash flow and the balance sheet. You guys mentioned you're kind of in your target range now. EBITDA is going to be kind of flattish next year, so you won't delever from growth. I'm just trying to think how you're thinking about allocating that free cash flow. Is it still the priority to bring the leverage down a little bit more or – You know, is the balance sheet open enough where, you know, with the new buyback program, and you talked about some M&A, that that's back on the table in 2020?

Yeah, I think, Justin, our current leverage and continued strong cash flow provides really the optionality as it relates to our capital allocation strategy, allowing us the ability to look at M&A and share buybacks in 2020. But a lot of factors are going into that, so I think you'll see a continued focus on the leveraging with the optionality for share buyback, and if opportunistic M&A presents itself, we have that ability as well.

Great. Thanks. That's all helpful. Thanks.

Our next question is from the line of Mark Riddick with Sedonia Company. Please pursue your questions.

Hey, good morning. Good morning, Mark. Just wanted to sort of follow up on the back of that and sort of maybe talk about the potential acquisition target areas or whether or not that's something that you've already begun to embark on and how we should be thinking about where those priorities may lie. Thanks.

Sure. That's a good question. So we've talked in the past about the fact that we were going to start targeting some of the ATS targets segments like energy and sustainability and power, and we're going to continue to look at that. I think having Josh come on now as our head of strategy is going to help us be more focused and refined in terms of M&A approach, whether it is acquisitive or even organically. M&A is a lever that we have the ability to pull, and And just to be clear, aside from the focus on ATS and sustainability, we will have the opportunity to do synergistic transactions in our core. We wouldn't shy away from that as well if it made financial sense. So I think for us, it's all about being purposeful and playing into the strategy that we set forward, but definitely something that we can leverage in 2021.

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

Our next question is from the line of Tate Sullivan with Maximum Group. Pleased to see you with your question.

Hi, thank you. A couple follow-ups. Anthony, first on the interest expense guidance for fiscal 20, I mean, just making sure I have it right, 45 to 50 down slightly from fiscal 19, and that's after a meaningful pay down of debt in the last quarter. Are there other considerations? Does that imply less of a debt pay down based on your previous comments on receivables and aviation maybe? Or can you give more context to that, please?

Yeah, it's in line with our expectations. If you look at our composition of our debt, the proportion that's fixed at a higher interest rate as well as the proportion that's floating and our expectations of where we see the interest rate curve based on market conditions, that's how we come up with our interest. cash flow and the timing of cash flow.

Okay. And thank you. Next, what has to change? I apologize if I missed this. What changes in fiscal year 20 to get to double-digit EPS growth in fiscal 21?

So for us, it's about getting back to historical growth rate averages, right? You know, we talked about, you know, 20 being kind of more of a muted growth. So Once we get back to our historical growth rate, once we get back to historical retention rate, there's absolutely no reason why we won't be double-digit EPS going forward.

Great. Thank you. You mentioned a bit on health care, and you moved it, I think it was last quarter, the previous quarter, the health care and the BNI. Was that still somewhat of a drag in the most recent quarter, and could that be a drag from lost contracts in fiscal year 2020?

No, actually, surprisingly, it's performing well. Now that it's in BNI and it's getting some of the operating leverage of our branch network and the proximity of the ABM BNI offices to where our healthcare assignments are, we're actually seeing that as a nice little surprising uplift. So we're pretty excited about that move. It's worked out.

Okay, thank you. And last for me, and thanks for the detail, is I thought I heard you mention a corporate line item increase, and I saw the press release comment in a previous question on IT and HR increases, but did you quantify that increase? I missed that, please.

Yeah, I quantified it earlier. Year over year, we're expecting an overall $25 million increase in corporate line items, half of which is going to be in that IT HR investment.

25, okay. Thank you very much. Have a good rest of the day.

Thank you.

Thank you. I'll now turn the call back to management.

Okay. Well, thanks, everyone. I just wanted to close out this fiscal year with a big thank you to not only our management team but everyone on this call who's had an interest in following us and participate in this journey and hope everyone has a happy and healthy holiday season with family and friends and look forward to being back in the first quarter to update you on the progress and all the excitement that we have here at ABM about the future. We just couldn't be more pumped up. So enjoy and be safe. Thank you.

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