Susie A. Choi - IR Scott Salmirs - President and CEO Anthony Scaglione - EVP and CFO.
Mike Gallo - CL King & Associates Andrew Wittmann - Robert W. Baird Joe Box - KeyBanc Capital Markets Marc Riddick - Sidoti & Co..
Ladies and gentlemen, welcome to the ABM's Fourth Quarter 2017 Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to Ms. Susie A. Choi. Please go ahead..
Thank you all for joining us this morning. With us today are Scott Salmirs, 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 fiscal 2017 financial results.
A copy of this release and an accompanying slide presentation can be found on our corporate Web-site. Before we begin, I would like to remind you that our call and presentation today contains 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 a slide that accompanies our presentation. 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 Web-site under the Investors tab.
Now before I turn the call over to Scott, I would like to apologize in advance for any background noise due to construction on the floor above us.
Scott?.
Thanks Susie. Good morning everyone and thank you for joining us today. By this point I'm sure you had a chance to review our fourth quarter and full year earnings release. Fiscal 2017 was a momentous year for ABM. I want to congratulate and thank all of our employees as we celebrate the conclusion of our first year as the new ABM.
It was certainly a complex one, filled with a lot of hard work that yielded a substantial amount of progress over a relatively short period of time. We operated for the first time under our new vertical industry group organizational structure, while consummating the largest acquisition in the Company's history.
We navigated change and managed our business successfully, maintaining solid organic growth of approximately 3%. 2017 was also a year where we had the courage to make hard choices by being more discerning with our business. Our decision to exit a large contract in our Aviation business is just one example of this discipline.
There were challenges as well, with hurricanes Harvey, Irma, Maria, displacing thousands of our employees and clients over the past several months. I believe our execution through the prolonged turmoil shows the character of our organization.
We continue to rebuild after these natural disasters and our thoughts remain with all those who have been affected, particularly during the holiday season. In the face of all this, we earned $1.34 per share, or $1.75 on an adjusted basis, and achieved an EBITDA margin of 4.3%.
Our 2020 Vision ABM Way operating protocols continue to be on everyone's mind and our culture is beginning to shift towards operating in a standardized format. We capitalized on our Phase I momentum by accelerating our newly centralized procurement initiative.
I'm pleased to report that we exceeded our in-year target in this area by delivering $10 million in savings and we have a path to increase that in fiscal 2018. Simultaneously, we pursued innovation to support the ABM Way through new technology.
We developed and deployed tools to optimize our business, contracted for a new HRIS system to enhance human resources and employee engagement, and we piloted client-facing technologies that will better enable client engagement and stickiness. 2017 was also a year in which we continued to strengthen our team.
Among others, we appointed our new Chief Operating Officer, Scott Giacobbe, welcomed Andrea Newborn, our new General Counsel, and announced Sean Mahoney in the newly created role of President of Sales.
And as part of our path, we continued to execute against our long-term vision with the divestiture of our Government business and the acquisition of GCA Services group. Amidst these accomplishments, we have learned a great deal as well.
During this pivotal first year as the new ABM, we identified areas of opportunity that we attempt to address in fiscal 2018 in order to fulfill our 2020 Vision. Let me take you through one example.
With quantifiable experience now under our belt, we see an opportunity to refine and make adjustments that will accelerate the deployment and adoption of the ABM Way enterprise-wide.
We have reorganized the governing body of the ABM Way, known as the COE or Center of Excellence, to better align with our needs and we embedded the ABM Way into our industry groups more acutely. There will now be dedicated leadership within each industry group focused entirely on accelerating and ensuring the adoption of the ABM Way.
These individuals will report in to industry group presidents while working in tandem with the COE to deliver value in the areas of labor management, pricing, safety and account planning. We found it was necessary to embed ownership of the ABM Way within each industry group in order to ensure implementation, integration and compliance.
Operating the COE separately from the industry groups in 2017 wasn't optimal. We believe this new model will be essential to standardizing the service delivery and process established by the ABM Way. We also modified our compensation structure to better align with the results we are seeking to achieve.
This stresses our commitment to being a pay-for-performance led organization. Our agility, as we continue to evolve, will be the key to our success as we make continuous improvement in one of our core operating tenets. To further support our path to profitable growth, we are making foundational investments to operate more efficiently.
At our upcoming Investor Day on January 18, we are eager to discuss some of the tools that we have deployed to underscore our focus on service delivery. A great example is our tag pricing tool, which we created in the latter half of fiscal 2017 to drive pricing consistency and bolster data analytics.
After 15 weeks of development and the pilot with input from over 100 operators, we have launched our tag pricer. This tool enables our operators to price, sell and manage tags in one mobile tool. Rollout began last month with our B&I branches and training will continue through the first half of 2018.
A tag process that took two to three days now takes half the time, and with future enhancements and modifications our plan is to cut the end to end cycle time to less than one hour. This technology tool will simplify and accelerate how we capture higher-margin work orders.
We are confident this will pave the way for ABM to continue pursuing consistent profitable growth over time. In fiscal 2018, Scott Giacobbe and his teams started shaping how we can initiate a cross-selling of our existing services more effectively.
Through the ABM Way, we will assess our existing account plans and identify high-growth opportunities where we can solve more for our clients. Our sales team will be launching targeted campaigns to specific clients during the first quarter.
As an example, selling our Technical Solutions services to our existing custodial clients in the education industry is a clear opportunity throughout entire fiscal 2018, with specific K-12 and university clients being identified. Higher growth while being discerning is an absolute focus for us as we continue operating as the new ABM.
It was one of the reasons why we pursued our industry group structure and the basis for many of our strategic decisions in fiscal 2017. Scott Giacobbe and his teams are reigniting a sales culture across ABM and the energy is palpable. We are committed to driving organic growth and delivering more services.
Now as you can imagine, 2018 will be heavily focused on the integration of GCA. We spent the past three months developing an organizational structure that aligns with our synergy targets and accelerates our goal of driving long term profitable growth.
We are already operating internally to reflect our new GCA business and as such I'm excited to formally introduce our new Technology & Manufacturing industry group. This new vertical incorporates our High Tech industry group with ABM's legacy Industrial & Manufacturing business and GCA's Industrial & Manufacturing business.
The majority of ABM's legacy business came from within the B&I group. These markets often require highly specialized capabilities and aligning them to one industry group allows us greater scale to support specialized areas like manufacturing facilities, data centers and biopharmaceutical centers.
This approximately $900 million business will be led by Brant Miller, who is an SVP of Operations for GCA's commercial division. Slide 11 shows our industry group structure. In addition to integrating GCA's clients into our new industry group mix, we are discovering ways of unlocking greater value by leveraging GCA's expertise.
Our review of GCA's internal processes compelled us to focus on our process remapping within our broader organization. We are dissecting our end to end processes that underpin our business and are mobilizing a team to improve, standardize and enable efficiencies in our day to day management.
Their efforts in 2018 will be focused primarily on three areas. The first will be how we identify, qualify and win customers. The second will be how we set up new accounts, execute the terms of the contract and bill our clients. And the third will be how we recruit, manage and pay our employees.
You can think of this initiative as the ABM Way for our back of the house processes. So, while we are working diligently to target growth more aggressively and profitably, we are equally focused on operating efficiently. I'd like to thank everyone for your support during 2017.
It was an exciting and challenging year that motivated us to work harder than ever. While the path that we laid out in 2015 may not be as linear as we originally thought, it's certainly every bit as real as we anticipated in 2015. Our confidence grows every day as we find new and exciting ways to unlock long-term value.
We are early in our transformation and the work that lies ahead of us will lead to the discovery of our full profitable potential. Today, we are a stronger ABM and we can't wait to expand on the many topics we have discussed today at our Investor Day on January 18 in New York City. With that, I'd like to turn the call over to Anthony..
Thank you, Scott, and good morning everyone. Before I summarize our financial results for the year, I want to thank all of you, our analysts and shareholders, for navigating the year with us. 2017 was a major turning point in our organization, both operationally and financially.
We introduced a new reporting structure that aligned our internal view of our business with the external reporting view. Part of this process was undertaking the complex task of remapping and recasting the current year and prior year contracts and overhead business allocation.
Throughout 2017, year-over-year comparisons on a segment basis were challenging and we worked hard to provide meaningful insights into our business to underscore our commitment to transparency. From inception to completion, we overcame a tremendous amount of change.
So, once again, thank you all for working with us through 2017 and I also want to convey my deep gratitude to the entire finance and operations team for continuing to deliver throughout this journey.
Now for the fourth quarter performance, which is described in today's earnings presentation, please note the fourth quarter was the first full quarter which excluded our divested Government business and it includes two months of GCA operation.
Commensurate with the GCA acquisition, our GAAP results for the quarter reflect approximately $24 million of transaction and integration related expenses. Consolidated revenues for the quarter were up 13.3% versus last year, including organic growth of approximately 2%, which is adjusted for acquisitions and divestitures.
Our organic growth for the quarter was primarily driven by our Aviation and Business & Industry segments. In addition, acquisitions provided approximately $179 million of incremental revenues through the quarter, which is predominantly reflected in the GCA segment.
On a GAAP basis, we reported a loss from continuing operations of $2.5 million, or $0.04 per diluted share.
These results reflect the as-expected acquisition costs associated with the GCA transaction as well as other items impacting comparability, including litigation and other settlement costs, primarily related to two localized lawsuits in the Seattle aviation market, a large portion of which we expect to be reimbursed for in the future quarters.
On an adjusted basis, income from continuing operations for the quarter was $23.5 million, or $0.37 per diluted share. Operationally, our adjusted income from continuing operations for the fourth quarter was impacted by increases in reserves associated with historical union benefit audit as well as higher costs in our Aviation segment.
Please also note all per share amounts for the quarter reflect additional share count dilution and higher amortization expense as a result of GCA. During the quarter we delivered adjusted EBITDA of $70.8 million. Our year-over-year EBITDA contribution was primarily driven by higher revenues, higher procurement savings and the contribution from GCA.
Partially offsetting these results was the impact of the cost associated with the aforementioned items. Adjusted EBITDA margin for the quarter was 4.7% versus 4.6% last year. Now turning to our segment results for the quarter, please turn to Slide 6 of today's earnings presentation.
For B&I, revenues increased 1.8% versus last year to $755 million and operating margins were 5.1%. During the quarter, growth was primarily driven by expansion with existing clients and tag revenue.
The underlying business for B&I remained solid, overcoming the impact of an increase in union benefit reserves and slower than anticipated adoption of the ABM Way, which as Scott discussed we are addressing.
As it relates to the union benefit plan reserves, B&I was negatively impacted by roughly $2 million and we are putting processes in place to minimize the future impact of these adjustments, including automating certain aspect of the process.
Our Aviation business maintained its strong top line, delivering over 17% growth for the quarter to $265 million. Operating income for the quarter was impacted by higher overall labor cost.
As it relates to our contract exit that we described last quarter, we were able to successfully transition the majority of that business by the end of the fiscal year.
Results in our Emerging Industries Group were not far from our internal expectations, considering certain large contract losses in High Tech and Education, which we've detailed earlier in the year. Revenues for the quarter were approximately $194 million and operating profit for the quarter was $9.9 million.
Beginning with the first quarter of fiscal 2018, this segment will be remapped, given our GCA acquisition. Education will be a standalone reportable segment. High Tech will become part of a new standalone segment, Technology & Manufacturing.
Although the Emerging Industries reportable segment will no longer exist, I would like to provide some additional insights into performance of each specific industry group. As you know, our Emerging Industries segment is comprised of Education, High Tech, and Healthcare.
Education and High Tech both navigated large contract losses during the year but were able to recoup some of this through new business wins and expansion.
Healthcare saw some challenges during the quarter with a slowdown of new business and we are building a stronger pipeline for this industry group through the targeting of non-acute facilities within specific regions as well as University and midsized hospital systems.
We ended the year with some good momentum and I am encouraged by Dan Bowen, who leads that group, and his team's outlook for fiscal year 2018. Technical Solutions revenues year-over-year during the quarter were flat. We ended the full year with growth primarily stemming from our U.K. operations.
For the quarter, this segment reported $114 million of revenue with operating income of $10.4 million. Margins remained robust for both the quarter and full year. Although U.S. revenues were slightly below our expectation, most of the shift was due to timing and we continue to maintain a strong pipeline and backlog.
As we discussed in the past, there is some cyclicality in this business, specifically in the education sector, which we continue to expand. We expect our project and revenue churn to normalize in 2018, particularly in the back half of the year, in line with our historical levels.
We continue to be excited about this group's prospects and I'm pleased to say that we've already identified a number of opportunities through GCA's client base where we see the potential for cross-selling our Technical Solutions services.
Regarding liquidity, we ended the fourth quarter with total debt including standby letters of credit of roughly $1.3 billion, the increase reflecting our GCA transaction. I am pleased to state that we ended the quarter below 4x leverage, at 3.93x, pro forma lender adjusted EBITDA, as defined by our new credit facility.
During the quarter we paid a quarterly cash dividend of $0.17 per common share for a total distribution of $11.1 million to shareholders, and also our Board has approved a 3% increase to our quarterly cash dividend to $0.175 per share. This marks our 207th consecutive quarterly cash dividend. Now for a quick recap of our annual results.
Overall, revenues increased $308.9 million, or 6% compared to last year. The increase in revenues was attributable to organic growth of approximately 3% and $208 million of incremental revenues from acquisition. Our GAAP income from continuing operations for fiscal 2017 was $78.1 million, or $1.34 per diluted share.
On an adjusted basis, income from continuing operations for the year was $101.9 million or $1.75 per diluted share.
Our adjusted results exclude items impacting comparability, predominantly related to an impairment recovery related to our Company's Government Service business, a lower self-insurance adjustment, acquisition costs related to the GCA acquisition, and lower restructuring and related expenses.
Operationally, the Company's adjusted income from continuing operations were driven by procurement and organizational savings stemming from our 2020 Vision initiative, which was partially offset by results within our Aviation segment, which I've discussed.
Additionally, income from continuing operations for the quarter on an adjusted and non-adjusted basis reflects GCA related share count dilution of approximately 3% and higher amortization expense. Adjusted EBITDA grew to $236.7 million and we ended the fiscal year with an adjusted EBITDA margin of 4.3% versus 4.1% last year.
Now turning to our guidance outlook, we are introducing fiscal 2018 GAAP guidance outlook range of $1.33 to $1.43 and on an adjusted basis $1.70 to $1.80 per share. As a reminder, our 2018 guidance outlook contemplates several aspects related to our GCA acquisition. We have provided a breakdown of the specific elements but let me summarize it briefly.
From a revenue standpoint, we expect GCA to contribute between $950 million to $1.05 billion in fiscal 2018, at EBITDA margins of approximately 9% to 9.5%.
Our overall amortization guidance of approximately $60 million to $70 million is predominantly associated with $40 million to $50 million in amortization primarily related to the customer intangibles for GCA.
As a result of this projected increase in amortization, year-over-year EPS comparisons are not indicative of the long-term true earnings growth of our business. For example, at the estimated midpoint, GCA related amortization in 2018 would have an approximately $0.40 diluted EPS impact.
However, on a cash EPS basis excluding such amortization, our adjusted growth year-over-year would be approximately 20%. Although we are not providing additional EPS metrics, I do believe investors should review the business result with this measurement over time.
Our guidance also contemplates approximately $50 million to $53 million in interest expense, also driven primarily by our GCA acquisition.
As it relates to taxes, with the exception of the 2018 work opportunity tax credits and the tax impact of stock-based awards, our guidance range of 38% to 40% does not include any potential benefits associated with certain other discrete tax items or other unrecognized tax benefits.
In addition, our guidance does not contemplate the positive or negative impacts of any new tax legislation that is currently making its way through Congress. We expect capital expenditures in fiscal 2018 to be between $55 million to $65 million, and depreciation of $50 million to $60 million.
In 2017, we began a deliberate approach to IT investments, including assessing internal development and cloud-based solutions for our organization. Project's base, scope and timing resulted in lower than anticipated CapEx spend in 2017. In 2018 as we continue to progress with our project, our capital expenditures will reflect those investments.
However, over the long term we expect our IT capital investments to normalize. 2018 maintenance CapEx is in line with historical amounts and it includes GCA. Finally, as Scott mentioned, we will announce our new reportable segments at our Investor Day in January and begin reporting under these segments for the fourth quarter of 2018.
We are still mapping the last components of our business overhead and expect to announce our segment operating margin guidance at our Investor Day, so you can appropriately track our performance versus our expectations, just as you did in 2017.
Our current industry groups are Business & Industry, Aviation, Education, Healthcare, Technology & Manufacturing, and Technical Solutions. Additional revenues from GCA will be allocated to Education, B&I, Technical Manufacturing, and Aviation.
At our upcoming Investor Day, we intend to share the market characteristics and business dynamics of each of these industry groups and how we believe that 2020 ABM can compete and prosper. Please reach out to Susie if you'd like additional details about our Investor Day in January. We look forward to seeing you all there.
Operator, we are now ready for questions..
[Operator Instructions] Our first question comes from the line of Michael Gallo with CL King. Please proceed with your question..
I just want to dig in a little bit on the 2020 Vision and how you are tracking versus that, forgetting for a second about GCA. If I just kind of take the guidance on GCA and I look back at the original 100 basis points, I think you were planning to improve the margins, going back to 2015.
That would have implied kind of a 4.8% EBITDA margin for the core business. It looks to me, if I just take GCA out of your guidance, that that number is more in the 4.3% to 4.4% area. And again, correct me if I'm off on any of these numbers.
I guess my question is, has anything changed in terms of your ability to get that margin improvement, are there other costs that have come along that you didn't anticipate, or is this simply a function of timing, and I know you have a lot going on with the integration of GCA and you still believe those are ultimately good and attainable targets, it might just take a little longer to get? Thanks..
So, Mike, the way I would look at it, so when we outlined the $40 million to $50 million of savings related to 2020, if you look at it and the components, we achieved a bit more on the org, call it $27 million, $27.5 million related to org, and we are at the higher end of our procurement savings, roughly $10 million delivered in fiscal 2017.
And on the ABM Way, which is really encompassing the standard operating procedures, probably slower than what we had initially anticipated, so we recognized roughly $3 million in fiscal 2017 but we have a path forward. And I think one of the things that you should look at is the profitable growth over time.
We are still very much committed to that process, but we are also investing in other areas of the business, which will have an impact in fiscal 2018..
Yes, and I think if you look forward in 2018 versus where we were in 2015, Michael, we were just firming up how we were going to approach technology, and kind of legacy ABM was all about really developing our own Technology Solutions, which was a capital expense.
And as we have evolved and as we have matured in the marketplace, we feel like the best way to deploy technology is more software-as-a-service, right, enterprise-wide applications, and when you look at that, that's more ends up being an operating expense.
So, for us, we see kind of like a 20 basis point impact just from that shift of saying, rather than be developing different software tools we need to be outsourcing them. So, that's something that over the next year or two you'll see embedded in the numbers..
That's helpful. Thank you..
Our next question comes from the line of Andrew Wittmann with Robert W Baird. Please proceed with your question..
I'm just going to start out with a couple of clarifications here. And first of all I guess to Anthony, so on GCA, you guys gave a revenue and EBITDA margin.
Are the synergies included in that EBITDA margin or are they incremental to the EBITDA margin of 9% to 9.5% you've got in the deck?.
They are incremental to the – that's pure GCA contribution, so it's incremental..
Got it, thanks. And then, just using the components of your guidance, EPS and all the stuff below EBITDA, you can kind of back into I know EBITDA, but using that margin you can back into revenue.
So I guess I wanted to understand what you guys are thinking about in terms of organic revenue trends for the business in total and what segments are going to drive that? It seems to me by backing into it that it looks like organic growth is expected to accelerate in fiscal 2018 compared to at least the 2.3% that we saw this quarter, but I guess a little bit more detail on how you guys are thinking about organic revenue trends would be helpful..
Andy, we are going to dive into that a lot deeper at Investor Day and what we're going to try to do for you guys is break it down by segment. So we'll have an enterprise view at that time but also segment by segment to kind of give more clarity about how we see it.
So, I think if you could bear with us till mid-January, we'll give you some more insight on that..
All right. And then the next one I wanted to dig into was about kind of the margin gains implicit in the business for fiscal 2018. I heard that there is further procurement savings. Certainly that back of the house comment that you made, Scott, seems like there is a little bit more there. Then ABM Way.
In total, what do you think the impact of those items are going to be in I guess on the organic business in 2018, how much is there to be captured?.
So the way I would kind of bucket it Andy is, ABM Way is embedded in our margin profile. So, one of the learnings of 2017 is, we had it centralized and as we went through our budget process and really took those learnings, we really embedded that process.
So, the margin profiles by industry group segments, which we'll provide guidance to at Investor Day, and the reason why we're not providing guidance now, we are still remapping a lot of the costs integrating 40,000 employees and $1 billion of revenue. So, ABM Way will be embedded in that process.
As it relates to the procurement savings, those additional savings that we anticipate – but some of the savings that we achieved in 2017 are one-time, so it's not incremental per se. It will be higher than the run rate, but it's not an incremental per se on the $10 million.
So, effectively the $10 million goes down to run rate of $8 million, but then we have additional amounts going in. So from a year-over-year comparison, you may not see as much of an incremental but we still have good momentum in that space.
And then on the back of the house, that's really I would say latter half 2018 but truly a 2019 opportunity there, and really the opportunity comes from taking the learnings through the GCA and the simplification of how they have approached certain elements of their business and trying to apply those learnings on to our business from back of the house.
So, we see efficiencies but that's probably longer term in nature..
Okay, great. That's helpful. Maybe I'll come back with one last one in this round and maybe buzz back in later, but I guess I just wanted to look at GCA and I guess the accounting around that. The intangible amortization came in kind of heavier than we thought it was going to be.
I guess I wanted to get your sense on the intangible amortization, the burn-off rate of that over time and as you look at it on a net basis, including the depreciation which you didn't quantify for GCA, how are you looking at the accretive dilutive effect of GCA here as part of your EPS guidance in fiscal 2018?.
Yes, and I alluded to this in my prepared remarks, but effectively I think longer term we are looking at our business on a cash EPS basis excluding components like amortization. It's going to really drive the true health of the business over time. The intangibles are primarily related to customer relationships and customer contracts.
So, the allocation there is going through our normalized process and valuing those customer intangibles. And we have a pretty what I would say burn in some process in terms of how we allocate or amortize those balances over time.
We use the sum of the years' digits, which provides a higher amortization in the earlier years and then a burn-off in the later years at a much lower rate. So, in the next couple of years you can expect the 10% degradation in that amortization burn.
Next year outside of the dilution I mentioned $0.40 in prepared remarks, that's on a fully dilutive basis. On an anti-dilutive basis, it's roughly $0.49. So, you can expect a 10% degradation going forward after 2018..
Okay. I guess I'm going to lie and give one more this round, I don't think I'll be wrapped up, and Scott, this one is for you.
I wanted to get your sense of the new business pipeline, if you could frame it maybe in terms of the net new business and how you are entering fiscal 2018 with your net new business that's in the hopper versus how you entered the year in fiscal 2017, just to get a sense about how some of these selling processes and customer retention are working out as you are thinking about the businesses?.
So, I mean I guess it is industry by industry, but I would say enterprise-wide we are really encouraged. We started this culture of driving organic sales in a big way, I want to say three, four months ago with Sean Mahoney coming on.
And if you look at some of the pipelines, Aviation has a really strong pipeline, we believe Technical Solutions is going to get back to kind of the historic growth rates based on some of the pipelines we are seeing. So, just a lot of energy and momentum in the business. So we are quite excited.
Again, we'll give more detail in January, but for now, again, I'm seeing momentum, I'm seeing enthusiasm, and we are still challenged, right. It's hard finding really good sales people. We are out in the market, we are looking to increase organically our sales team, and that's very much on our mind as one of the key initiatives for 2018.
But even then, Andy, it takes time, like a salesperson comes on, and depending on what industry group they are in, it could take anywhere from three to six months, maybe a little bit longer for them to become efficient and really start selling. But short-term, medium-term and long-term, I'm pretty excited..
Our next question comes from the line of Joe Box with KeyBanc Capital Markets. Please proceed with your question..
So, just going back to Michael's initial question, rough math that I am coming up with on adjusted EBITDA margins for legacy ABM is about 4.2% for FY 2017.
Is that fair?.
That's correct..
Okay.
So, Anthony, just kind of looking at all the costs that were maybe somewhat unusual but were included in the adjusted EBITDA number, like the Aviation contract, the hurricane disruption, and then the pension items, what do you think the right kind of margin number should be for legacy ABM?.
So if you look at those what we would consider one-time items, Aviation had a roughly 10 to 15 basis point impact for the full year, and as I mentioned we have exited that troublesome contract at the end of the fiscal year. There's a little bit overhang in Q1 but that was immaterial in the grand scheme of things.
When you look at the one-time events, again classifying the union audits, some of the year-end cleanups, that's again 5 to 6 basis points on a combined basis. And then really the other what I would say miss for the full year is, we had a higher expectation on our higher-margin Technical Solutions business and that's again a shift to the right.
So, from a pipeline backlog, still very robust, but we had a higher target in fiscal year 2017 than what was delivered, and that had a slight impact on our margin profile.
So, when you take a step back, I think you really have to isolate those events, including ABM Way being less than what we anticipated, being the key impetus or key catalyst for where we ended the margin profile. But your math in terms of the 4.2% excluding GCA is right on..
Okay. And so I guess just kind of adding back some of those items, we are talking more about 4.35 to 4.4, not accounting for the push-out of part of your business into next year.
So, I guess with that said then, why would margins in ABM or legacy ABM be flattish next year? I get that there is some ABM Way issues, but I guess I'm just struggling to see why legacy ABM would be flattish..
I think the biggest one is what Scott mentioned earlier, is IT. We are putting investment in our IT platform, both for back of the house efficiencies, HR efficiencies, as well as customer facing, and when we looked at where we thought those deployments and what does that capital to be deployed was going to look like, we had more of a CapEx approach.
Now we are going more towards an operating expense approach. So that's going to be the major delta from an EBITDA margin standpoint..
And that's about 20 basis points, give or take..
Okay, got it. So that definitely helps bridge some of the gap. Okay.
And then what was free cash flow in 4Q and how should we think about that in FY 2018 I guess relative to what's earmarked for debt paydown?.
So, the way I would look at our free cash flow, obviously this year with the transition to the shared service center was a little bit muted from what we would have expected.
So we feel like we are going to be normalizing our cash flow over the next 6 to 12 months as the migrations complete and as we get to a more normalized billing cycle from a free cash flow perspective.
On a CapEx standpoint, a little higher than what we would have historically been at, and that's both maintenance CapEx as well as investments that we're making specifically on IT projects. So, when you look at it from a capital expenditure standpoint, it's higher from overall free cash flow.
It should be in line with 2017, slightly higher on a year-over-year basis..
So, what was it in 2017? I know we'll get the K here at some point, but what's the baseline number?.
The baseline number for 2017, what we have for 2017 would be roughly $100 million-ish, and for full year basis it's roughly $160 million for next year on an operating cash flow..
$160 million in operating cash flow..
And the CapEx guidance is in the outlook deck..
Okay, yes, got it. Okay.
And then what's earmarked for debt paydown?.
I mean we don't have any earmark outside of the term loan amortization, which in fiscal 2018 I believe is roughly 5%. Other than that, we are going to be managing our debt appropriately as cash flow to other investments. So I would look at it as earmarking our cash flow for dividend, CapEx, and then debt paydown would be the remaining..
Okay, great.
And lastly for me, can you just give us a progress update on the recent Transport for London win?.
So that's going really well. We are probably three or four months into this right now and everything is going as planned, and they see line of sight for bolstering on extra services. So, good news on that front..
Is it a margin drag at the beginning or are we kind of in line, any update there?.
So, it's definitely a lower margin business to begin with, right, because again you have some startup costs, and when you have large-scale contracts like that, you will always get something like that at a lower margin profile than maybe a small assignment, but we see ways to, as part of our account planning process when we took this on, we see ways to accelerate that margin.
But yes, definitely straight out of the box it's lower, and it's baked into our estimates though, that's for sure..
Okay. Thank you..
Our next question comes from the line of Marc Riddick with Sidoti & Co. Please proceed with your question..
I wanted to follow up on the conversation that you had about the rollout of the tag revenue of mobile effort and wanted to get a little more detail around that as far as the timing, the region, the scope, and maybe what type of goals that you have with that as far as being able to, is it really more of an execution thing or more of a tool to drive greater engagement, maybe we could put a little more around that? Thank you..
It's really both and I'm excited for Investor Day because we are actually going to even give you a demo of it, but it's both. I think it's going to drive business and it's also going to be for execution.
So it's going to shorten the cycle between when you first give a quote for a tag and you execute on it, it's a big process between, manual process between filling out the orders, getting the approvals, and now we are kind of doing it all in one mobile handheld. So it's just going to increase efficiency. We believe the customers are going to love it.
So, I think it's going to help the stickiness with our clients and will differentiate us. We don't know anybody that has a tool like this. So, we just started rolling it out this quarter. We are going to be rolling it out all through the first half of 2018.
So, it's something, we'll tell you, we've had a lot of initiatives here and there are always mixed reception, right. And this is one where there is kind of universal excitement about it because it's going to help our operators be more efficient and it's going to drive sales. So, can't wait to show you this on Investor Day..
Okay, great.
And then I know it's fairly early, but I was wondering if you could give us a sense of as far as the integration, maybe some of the initial thoughts around the employees that are joining the firm on the GCA side of things, and then maybe some initial thoughts as to how that part of the integration is going from a human resources standpoint? Thanks..
So it's going really well so far. And think about the context, right, $1 billion in business and 40,000 people across multiple industries. So, it's a big, heavy lift but it's going well. We have retained all the talent that we wanted to retain through our process, which is good.
Our synergies right now are tracking on the high end of the range that we outlined, so all well there. We have gotten our industry group presidents in place, particularly in Education and our Technology & Manufacturing group, which is the bulk of where the GCA revenues landed. So, we have got that in place.
And we are in the final stages of remapping the accounts into the industry groups. So, really good news to report there on all fronts, and we know there will always be bumps in the road, as there are for a large-scale integration like this, but so far there haven't been any.
So, we are kind of knocking wood here and we'll see what happens, but good news so far..
Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks..
Sure, thank you. So, I do want to give a thank you to everyone for your support during the year, and I think it's really important as year-end to put the year in context, like move away from the quarter for a second and think about what we accomplished here.
It's the first year we restructured the entire organization into industry groups, which was a monumental task, right. We started deploying standard operating practices across the platform. We migrated shared services from 14 different accounting centers into one site in Houston. We started a procurement group that overdrove.
We launched technology tools. We started refining our strategy by selling our Government Services business, which really it didn't make sense for our platform.
We bought GCA, which really solidified the industry group thesis and how we can accelerate, and now again be number one in Education, be number one in B&I, and be number one in Aviation, Technical Manufacturing.
It's really what we have done this year, all in the backdrop of having three massive hurricanes, is pretty impressive, all while delivering growth, 3% growth, and growing our margin. So, we still have plenty of work to do here and I hope that's always the theme at ABM, but we are all working hard on your behalf and we just wanted you to know that.
So, we are enthusiastic about where we ended this year. We are enthusiastic about 2018. We are looking forward to Investor Day.
But between now and Investor Day, what I really hope most is that everyone has a really happy holiday season and get to enjoy themselves a little bit, because there's tons of work to do and tons of progress ahead of us here at ABM. So, thanks everybody..
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..