Greetings, welcome to the ABM Industries Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.

At this time I will turn the conference over to your host Susie Choi. Ms. Choi, you may begin..

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 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 could 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 $0.71 a share and $0.66 a share respectively compared to last year. We also expanded adjusted EBIDA 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 re-pricing 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 market they are 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 was 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 for our technology and manufacturing segment was performing as planned and keeping with their solid full year performance.

Our Education and Aviation segments continued 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 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're now through fiscal year 2019. We first announced our 2020 Vision strategy in late 2015 which began a multiyear 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 a $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 provides a springboard for these results. Our organizational realignment from the 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 the subcontractor spend.

And supporting our 140,000 employees and our literally thousands of clients is our enterprise shares services center.

We centralize 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're so proud that this group has 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're 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 in enablers [ph] to win on growth and productivity. Our primary areas of focus will be to optimize revenue management, increased client retention, improved labor 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, on-boarding and training practices we will also leverage NextGen 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 Giacobbe 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.

Rene Jacobsen previously the President of B&I has been named Chief Facilities Services Officer and will continue to be responsible for B&I 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 Rene 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 has worked with over 30 different service companies across a variety of businesses and the steep 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, Rene, 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 to 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're a stronger company and our position as a leading facilities service provider is unparallel.

I'm extremely proud of our team members and I look forward to the next phase of our evolution. Now onto the 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 0.5 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 Solutions 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 Solutions segment during the quarter. Overall revenue also reflects the impact of our decision to exit lower margin contracts and other contract losses.

On a GAAP 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.

ABM's [ph] risks was among our key areas of focus when we launched our 2020 vision transformation and I'm 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 UK.

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 with key national accounts, a strategy where we are continuing to gain traction. CAG [ph] during the quarter also performed well driven by new and repair construction in the Northeast as well as certain projects at various sports venue.

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 reflects a 12 million negative impact from constant 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 carrier continued during the quarter and is beginning to take hold. We also recently announced growing fueling partnerships with the 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 were 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 continued 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, in-sourcing, and outsourcing trends across the aviation industry as well as understanding infrastructure improvement and expansion trends across natural 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 234 million last year. Operating profit was 18.1 million versus 17.5 million last year for a margin 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 fuel production and Aerospace contributed revenues during the quarter. For the year operating margins were 7.9%.

Moving forward we're looking to mimic some of the practices we have instilled in the B&I segments to expand with strategic accounts while also pursuing increasing efficiencies through labor productivity and tax. Revenue and education was 214 million with operating profit of 5.6 million or 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're 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're excited about the new sales strategy and the value proposition we can bring our clients. Lastly Technical Solutions reported revenues of a 175.5 million, a year-over-year increase of 25.5% for the quarter. Operating profit was 20.1 million or a margin rate of 11.5% compared to a loss of 7 million last year.

Again last year's results reflect 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 wins. Full-year operating margins came in at 9.3%.

Margins in this segment continued 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 sales people as well as through opportunistic M&A. Turning to cash and liquidity. Cash flow from operations was approximately a 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 reconciliations throughout the year.

However our teams remain 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'm 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 long standing 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 a 127.5 million or a $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 GAAP guidance outlook range of a $1.65 to a $1.85 and on an adjusted basis a $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 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 sales people 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 and it's very early as we're 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 ERP. In the U.S. which is our largest and most complex operating base, we continue with our implementation and I'd like to expand upon that a bit. The complexity in the U.S.

conversions includes not only replacing our core financial system like we did in the UK and Canada but also ensuring all of our boundary applications such as payroll, work orders, and time and attendance are configured correctly and setup to drive the productivity and enhancements we're envisioning.

We're also managing our overall cost 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 to 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 losses and credit carryovers in 2019.

Capital expenditures in fiscal 2020 are anticipated to be between 45 million to 55 million and we expect depreciation of 50 million to 55 million. Due to some of the aforementioned factors we are guiding to free cash flow of approximately a 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're now ready for questions. .

[Operator Instructions]. Our first question is from the line of Sam Crusmer [ph] with William Blair. Please proceed with your question. .

Hey guys, how is it going. .

Good morning. .

Now that you're almost two months in the fiscal 2020 I was hoping you are able to go into your estimate for new sales growth this year?.

So, first we don't obviously give revenue guidance but from a sales perspective we are really optimistic. We crossed over the billion-dollar mark this year and if you would ask me two or three years ago if that was possible it would've been such a stretch target. So we've now set that as the benchmark.

We continue to add in salespeople and 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 and our pipeline. So 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 as you think about the dynamics in that end market rate with sustainability and energy it's where we have our largest proportion of salespeople.

Look at this year right, I mean we we're not necessarily expecting to replicate what we did this year but 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. .

The next question is from the line of David Silver with CL King. 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 a more of a strategic question and I just to [indiscernible] I had to step out for a couple of 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 several million dollars and it's treated as an adjustment for annualizing the 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 GAAP 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 wealth management. As you know the balance sheet amount is 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 estimated long-term estimate of where those liabilities land.

So what our goal is to try to reduce the volatility of 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. These are long-term tale 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 a 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 one quarter analysis of 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. So, it is mark-to-market. .

Yes, 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 could you -- I was wondering if you could maybe characterize the incremental spending you are 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 you are setting your targets for IT capabilities higher? Thank you.

.

Great, yeah, 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 are moving from a primarily on-premises model to more of a cloud-based servers 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 realize their 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 alive and we expand that functionality. .

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 just the right time to make the right investments, 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 of the Chief Strategy and Transformation Officer, I understand that you have certain targets 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 are looking out December of 2020 what one or two achievements or accomplishments measurable would you -- Scott would you want to see from that addition to your strategy team, in other words how should we -- 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 so couple of comments. First, you can only imagine how delighted we were to actually bring on one of the top partners of BCG to come in help us with what we're doing.

And I think the best way to start this like the things that he will 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, right.

So I think he is going to be looking at the strategic direction for the firm and then 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 will see the most foundational change quickly I think is in implementing best practices.

We bought him what we call the ABM Way or core operational excellence. And taken 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 will see a tightening of some of our labor controls, labor percentages, how we schedule.

Labor is a very complicated area, it's what we do, right. And there's so many sub work streams within labor. Again how we schedule people, how you staff the job, how you source labor. So I think across those different work streams it's going to be, he is going to have just a foundational impact and he is 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 Hauke with Baird, please proceed with your questions. .

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 delta on the spending for the IT and HR investments that you've highlighted?.

The air 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 or stock-based compensations in corporate across the enterprise.

So half of that increase is related to 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 are 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 in education that's going to benefit there and you mentioned anniversarying 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 will 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 will end up enrolling to a higher margin and we've baked that in.

So that aviation -- on top of we expect 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 will see a lift there. And on the education front the list is really going to be coming from our go-to-market strategy.

We made a change midyear 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 it's early on, right but we are seeing some good results with like the pipeline and we believe in addition to the amortization and operational excellence that 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 and I'm just trying to think how you're thinking about allocating that free cash flow, is it still the priority to bring leverage down a little bit more, or is the balance sheet open enough where with the new buyback program and you talked about some M&A 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 that go into that so I think you'll see a continued focus on deleveraging with the optionality for share buyback and if opportunistic M&A prevents itself we have that ability as well. .

Great, thanks that's all helpful. .

Our next question is from the line of Marc Riddick with Sidoti and Company. Please proceed with 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 something that you've already begun to embark on and how should we be thinking about where those priorities may lie? Thanks. .

So it is a good question. So we've talked in the past about the fact that we were going to start targeting some of the ATS 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. So M&A is a lever that we have the ability to pull.

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 makes financial sense.

So I think for us we just -- 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 2020. .

Okay great. Thank you very much. .

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

Hi, thank you. A couple of follow-ups. Anthony first on the interest expense guidance for fiscal 2020, I mean just making sure I had it right, 45 to 50 down slightly from fiscal 2019. And that's after a meaningful pay down of debt in the last quarter.

Are there other -- does that imply less of a debt pay down based on your previous comments on receivables in 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 is fixed at a higher interest rate as well as the proportion that is floating and our expectation of where we see the interest rate curve based on market conditions that's how we come up with our interest expense.

But it's all in line with our deleveraging profile as well as our outlook for cash flow and the timing of cash flow. .

Okay and thank you. Next, what has to -- I apologize if I missed this.

What changes in fiscal year 2020 to get to double-digit EPS growth in fiscal 2021?.

So for us it's about getting back to historical growth rate averages right. We talked about 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 is absolutely no reason why we won't be double-digit EPS going forward. .

Great, thank you.

In terms of you mentioned a bit on health care and you moved it, I think it was last quarter or the previous quarter to help create B&I 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 B&I and it's getting some of the operating leverage of our branch network and the proximity of the ABM B&I 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 then last from me and thanks for the details I thought I heard you mentioned a corporate line item increase when I saw the press release comment and then a previous question on IT and HR increases but did you quantify the increase I missed that please?.

Yeah, I quantified it earlier. Year-over-year we are expecting overall $25 million increase in corporate line item half of which is going to be in that IT HR investments. .

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

Thank you. .

Thank you. I will 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 has 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.0.