Greetings, and welcome to the ABM Industries, Inc. Quarter One 2020 Earnings Call. At this time all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Treasurer and Head of Investor Relations, Susie Kim..

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 first quarter of fiscal 2020 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..

Good morning. Thanks Susie and thank you all for joining us today to discuss our results for the first quarter of the fiscal new year. As stated in our press release yesterday afternoon, we are off to an encouraging start for the new year. Total revenue, which is now all driven organically, was up slightly at $1.6 billion.

Our GAAP continuing EPS was $0.41 per share or $0.39 per share on an adjusted basis. Adjusted EBITDA margin held at 4.3%. All this enabled us to achieve leverage below three times for the second consecutive quarter. As always, our results were anchored by our operations.

While our performance on the top line was impacted by the lower pull-through of revenue as a result of our selective approach to retention last year, we are experiencing the corresponding positive impact on our operating segment profit even though our mix now includes the loss of certain lower-margin contracts.

Our Business & Industry segment had another good quarter and our scale continues to strengthen our positioning with national accounts. Also driving B&I’s performance was an increase in activity with our Sports & Entertainment division as we helped our clients put on some exciting events.

We’re so proud that we had up to 300 ABM team members at Levi’s Stadium throughout the San Francisco 49ers’ incredible season and post season run. Our Technical Solutions Group saw strong growth on the heels of our robust pipeline from last year, and we continue to see demand for energy and sustainability-related projects.

Both operationally and financially, our results would not have been possible without our team members who keep delivering across the board. As we’ve discussed, our goals for this fiscal year involve business investments that will enable our team to accelerate growth and productivity.

And we’re striving to become a more data-driven company to enhance our ability to help our clients gain insights into how to make their facilities more efficient. Optimizing revenue management has been a key theme for us since we began prioritizing growth with our 2020 Vision strategy.

We’ve built a powerful sales force with a professionalized program that has led us to now target $1 billion in new sales annually. And while we do not disclose our new sales bookings until the second quarter, I’m pleased that we’ve kept the momentum going into 2020 by meeting our first quarter internal expectations.

Another cornerstone of our sales approach is cross-selling. Internally, we’ve put a spotlight on cross-selling across all industry groups. We’ve developed new training and tools to prepare our teams for finding ways to meet the needs of clients through our ability to self-perform and subcontract a wide range of solutions.

It’s an expanding part of our revenue base but not anywhere near its potential, which is very exciting. We’ve been actively recruiting salespeople. And while we are net growing our team, the hiring environment remains highly competitive.

As you know, since 2018, we’ve been adding human resource recruiters throughout our entire platform, which has been critical to our success. Each department and segment now has permanent dedicated recruiters to fill vacancies more productively. Our growth is also dedicated to client retention.

We ended last year with retention lower than our historical norm as we navigated rising wages and the necessity for contract escalations. We pursued a discerning rebid and pricing strategy to ensure we are making responsible decisions for the long term.

As a result, retention landed at 90% for fiscal 2019, down from the 92% to 93% range, which is indicative of a normalized environment. During this fiscal year, we are standing up a new strategic account management team to focus on client retention, and we believe this will have a foundational effect over the long term.

And while we saw a sequential improvement in retention during the first quarter, I want to reiterate the labor markets and associated wage escalations and acceleration have not eased, and we will continue to pursue responsible price escalations where appropriate.

One of the keys to minimizing the impact of this labor market is to be as efficient as possible on how we schedule and deploy our team members in the field. The next phase of our transformation will include channeling even greater resources to improve labor management through process and technology.

EPAY, the upgraded cloud-based time and attendance system we implemented last year, is deepening our ability to manage our distributed workforce. Data is now being incorporated into our weekly operating reviews, and we are driving productivity improvements. It’s been one of our primary factors in our ability to achieve margin stability in this market.

And of course we are committed to reinforcing our team members as our competitive advantage. Our mission is to make a difference every person every day, and we take this very seriously, and it starts with our people.

You’ve heard us talk about investing in talent with our salespeople and recruiters to improve speed to hire and resources towards training and onboarding. We’re also investing in the team member experience to improve employee retention and attract higher-quality talent.

We are igniting a number of programs around team member engagement and are energized about how we will continue to evolve on the talent front. Also, part of our evolution is the modernization of our IT infrastructure, which began in earnest in the last 10 months.

As part of our IT road map, we initiated a phased approach to our fusion ERP implementation in 2019. After launching in the U.K. early last year, we went live in Canada this past December. It’s been three months, and I’m pleased that we are now closing our books with our new financial system for both the U.K. and Canada.

Given the complexities of the systems that speak to our fusion ERP like our HR system and EPAY, our priority is to make certain we are fully tested and trained to be ready for U.S. rollout. The deployment in the U.S.

is complicated, and we’ve increased our investment in organizational change management, project teams and consultancy to safeguard continuity and conduct readiness assessments. Our target for the U.S. remains calendar 2020, but we will adjust our time line to early 2021 if it’s sensible for a successful implementation.

The key is to ensure that our clients aren’t affected once we make the switch. Looking ahead, we are reiterating our guidance for the year given our solid first quarter performance. That being said, it’s important that we address the global crisis surrounding coronavirus COVID-19.

At ABM, we have no direct exposure in countries like China or other level 2 geographies and our business has not seen any real impact yet from COVID-19. But it would be imprudent if we didn’t consider all aspects of our business and the potential for any future effects.

Our first priority is the safety of 140,000 employees who serve at thousands of job sites across the U.S. and U.K., including airports and health care facilities. We are monitoring where cases have been reported and following the safety protocol of the World Health Organization and the Center for Disease Control.

Based on the current market reaction, the business scenario seem endless. On one hand, the travel slowdowns, supply chain disruptions and office closures could have ramifications on business conditions, market demand and client decisions. On the other hand, we could see an increase in demand as clients enforce more preventative sanitizing measures.

So for us, it’s still early, and we haven’t seen any meaningful impact to our business at this point. We’re staying close to our clients, and we will ensure that we are working as solution partners as events unfold. Times like these underscore how our underlying business fundamentals are sound and resilient.

Remember, we’re predominantly domestic with a highly diversified portfolio that has proven to be more stable than other sectors. We remain well positioned to pursue growth and profitability throughout our service mix and scale.

And with our current leverage profile, we have an attractive capital structure that allows us to be opportunistic with share repurchases and M&A as well. ABM stands as proud today as we ever have, and we are confident that we’ve built a business model, a strategy and a team to win.

I want to thank our entire organization through a strong start to the new fiscal year, and we look forward to continuing our execution for the remainder of fiscal 2020. With that, let me turn the call over to Anthony..

Thanks, Scott. Good morning everyone. Before I dive into the quarter, I want to remind everyone that our results will be entirely organic. If you recall, we instituted ASC 606 and 853 last year that caused some adjustments between total revenue and our organic revenue calculation.

We have comped those adjustments and our revenue base should be considered all organic at this time. On November 1, we also adopted ASC Topic 842 regarding lease accounting. This adoption primarily impacted the balance sheet, grossing up both assets and liabilities. The adoption had no material impact on net income or cash flow. Now on to our results.

Total revenues for the quarter were $1.6 billion, up 0.3%. Revenue was primarily driven by the Technical Solutions segment, which was partially offset by lower Aviation and Business & Industry segment revenue, primarily as a result of lower fiscal 2019 retention.

On a GAAP basis, our income from continuing operations was $27.9 million or $0.41 per diluted share compared to $13 million or $0.20 last year. The significant increase versus last year was primarily driven by favorable development and prior year self-insurance adjustment.

We saw a $6.6 million benefit this year compared to a negative impact of $5 million in the first quarter of fiscal 2019. On an adjusted basis, income from continuing operations for the quarter increased to $26.2 million or $0.39 per diluted share compared to $20.8 million or $0.31 last year.

On a GAAP and adjusted basis, income from continuing operations for the quarter reflect a higher margin mix across most of our segments, led by B&I. We also saw a lower amortization as well as lower interest expense. These results were partially offset by our ongoing infrastructure investments in sales, HR and IT.

During the quarter, we generated adjusted EBITDA of approximately $68.8 million for a margin rate of 4.3%. I will now discuss our segment results. Keep in mind, as we expected, revenue across the majority of our segments was impacted by our retention rate in 2019, a concept we talked about heavily throughout last year.

B&I had another strong quarter performance, particularly in light of their good results last year. While revenues of $821 million were slightly lower than last year, these results exceeded our internal expectations. We expanded strategically with higher margin national accounts and also benefited from some delayed losses.

This led to operating profit expansion to $38.2 million for a margin rate of 4.7% for the quarter compared to 4.4% last year. In addition to the mix being favorable overall, we also continue to see positive impact of our decision to integrate the healthcare division primarily into the segments.

We are seeing a variety of improvements across both our acute and non-acute business in areas such as pricing, contract extensions and productivity as we leverage the B&I branch network. Sports and entertainment also saw margin growth for good activity during the quarter. Aviation reported revenues of $239 million versus $252 million last year.

Operating profit for the quarter was $5.6 million versus $3.9 million last year. Business mix, including the exit of a large unprofitable contract in the U.K., along with higher margins new wins at airports drove operating profit.

As with our other segments, we are reiterating our full year expectations for Aviation, but we are being particularly vigilant with this segment given its vulnerability to the broader coronavirus concerns occurring in the macro operating environment.

Technology & Manufacturing reported revenues of $234 million with an operating profit of $16.7 million for a margin rate of 7.1%. While we saw a slight uptick in reserves due to the longer payment cycles from certain clients, T&M met our expectation due to wins across all revenue channels, including high-tech and food production facilities.

Revenue in Education was essentially flat at $208 million with operating profit $11.2 million versus $10.3 million last year. Lower amortization offset the year-over-year increase in labor and related expenses that we continue to face as a result of the ongoing labor environment.

Currently, our teams are laser-focused on the upcoming selling season as we pursue new business, as well as the extensions and price escalations. Finally, Technical Solutions reported revenues of $142 million, up 22.4% versus last year as our record performance in 2019 provided a strong tailwind for this segment’s easier compare for the quarter.

Growth was attributable to an increase in our mechanical business, which includes bundled energy solutions and power projects. Offsetting some of these results was a loss of certain contracts within our U.K. business. Overall, operating profit for the quarter was $8.3 million compared to $6.8 million last year at a margin rate of 5.9%.

As expected, amortization of commission expense was higher this year by $2.4 million given they were capitalized last year due to the adoption of ASC 606. Operating profit and margins also reflect higher volume and related mix as our strategy last year included winning job across a relatively broader range of margin profile.

Technical Solution margins remain among the highest across our segments. Turning to cash and liquidity, as you know, the first quarter of the fiscal year is typically our lowest cash flow quarter due to the timing of certain working capital requirements. As such, cash flow was negative this quarter.

We ended the quarter with total debt including standby letter of credit of $1 billion and a bank adjusted leverage ratio of 2.97 times. In Q1, we did not purchase any shares, and as of January 31, 2020, we had $150 million of availability remaining under our share repurchase program.

We will continue to manage our overall capital allocation program taking into consideration all uses of cash including share repurchases and M&A. During the quarter, we paid our 215th consecutive quarterly cash dividend of $0.185 per common share for a total distribution of $12.3 million to stockholders.

And as stated in our earnings release, our board of directors approved our 216th consecutive quarterly cash dividend. Finally, as you saw, we are reiterating our financial outlook for fiscal 2020. Although there are no changes, I’d like to provide some additional context based on developments in Q4 including our Q1 results.

Given our performance during the quarter, we believe the cadence of earnings will be less back half weighted than originally expected. In the quarter, some client transitions on losses have been extended longer than originally expected, which benefited us modestly.

Having said that, the second half of the year contemplates many variables that we shouldn’t take for granted.

These include the achievement of overall higher retention, the delivery and timing of new sales equal to or higher than last year, traction from our new strategy in education, including performance during the critical buying season, continued back half momentum for the Technical Solutions business.

And the largest uncertainty at this point, no material impact of the coronavirus on our operations or client demand. I’d also like to remind everyone that we will see an extra working day in Q2 and one less working day in Q4. Each working day has historically represented roughly $7 million of labor expense.

Moving to taxes, we continue to expect the 30% effective tax rate for 2020. The tax rate does not include discrete tax items such as the Work Opportunity Tax Credit and the tax impact of stock-based compensation award.

As we’ve previously shared, we believe this impact will be approximately $7 million or $0.10 in 2020 compared to $8 million or $0.12 in fiscal 2019. Almost immediately following our Q4 earnings call in December, WOTC was formally extended by Congress for another year.

But I wanted to remind everyone that our guidance already contemplated the expansion. So to summarize, we started the year positively with good momentum across all our operating segments. We will continue to manage our business dynamically to sustain our progress. Operator, we are now ready for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Sean Eastman of KeyBanc Capital Markets. Please proceed with your question..

Hi team, nice quarter. Thanks for taking my questions. Just to start for me, it would be helpful to get some more color just around the decision to keep guidance intact here after the stronger than expected start to the year. It sounds like a lot of moving parts to be thinking about around the coronavirus in the background.

But just some thoughts on where there might be cushion built into the outlook as we stand today would be helpful?.

Sure. So look, as you can imagine, every quarter we contemplate what to do with guidance. And the way we’re viewing it is, it’s simply look, we’ve had a really good start to the year, it’s early. But as you point out, there are unknowns with the coronavirus, right? And I’m sure we’ll get into that a little bit more detail, but there are unknowns now.

If you think about it, the majority of our earnings are on the back half because of the way our business are. We are looking at this as the first quarter derisking that back half for now. And we’ll see in Q2, we look forward to coming back and updating. But we just don’t want to get ahead of ourselves after Q1..

Okay. That’s fair. And the retention, repricing element has been a big theme over the past 12 months or so.

I was hoping maybe you could give us an update on how those discussions with clients have gone here in the first quarter? Maybe how much work still needs to be repriced? And how you’re feeling about those comments last quarter that we should see a return to double-digit EPS growth profile in the out-year?.

So retention, we’ve seen a little bit of an uptick in retention. And again, another place we don’t want to get too ahead of ourselves because it is a trailing 12-month calculation. But the conversations have been going well with clients.

I mean at this point, everybody understands what’s going on with wage rates and clearly rising ahead of what our contract escalations are, whether our contracts – escalations are fixed for silent, right, We’re still – wages are growing ahead of that. But over the last couple of years, we’ve had a significant amount of conversations with clients.

There was a lot of weeding out, which is why you saw our retention rate trail down last year. So look, I think it’s a little easier than it was in 2019, but it’s still early. We still have conversations to be had. But I guess what – the sentiment I want to leave you with is that we’re encouraged.

We’re encouraged because again, it’s a conversation that it’s not far into anybody at this point. And we’re optimistic about the future. We still see the double-digits in our line of sight as we go through Q1. So a lot of optimism here right now..

Okay, great. And last one for me. Just curious with the U.S. ERP upgrade getting under way here, it sounds like still quite a bit of work to do.

Just curious about the appetite for acquisitions while that process is under way?.

Yes. So that won’t really inhibit our M&A appetite. Even when you look at it with GCA at the start, we left them on two separate ERP systems. So you don’t have to necessarily integrate from day one. So if there is something of interest, something we like, we’d be game for it even with the ERP..

Okay. Really helpful. Thanks for the time..

Thank you..

Our next questions come from the line of Sam Kusswurm of William Blair. Please proceed with your question..

Good morning, everyone..

Good morning..

I understand it might be hard to quantify some of the possible effects of the coronavirus right now, but even a qualitative perspective would be helpful, especially as it relates maybe to the effects on each segment?.

Yes. So it’s hard to give a tremendous amount of insight. This is still at the beginning stages. But let’s look at kind of what ABM does, right? First and foremost, we are at the center of this because people they hire us for a hygiene basis, right, for our janitorial segment or service lines.

And the way we’re thinking about this is that in our kind of more traditional facility services segments like our Business & Industry segment or our Technology & Manufacturing segment, our Education segment we see that there will be an appetite for more visibility from the property facility operators to get people out there, cleaning, sanitizing.

We’re starting to see requests that are coming in and that will translate into some work orders. So for us, that’s a real nice tailwind. But on the Aviation segment, which is a $1 billion in revenue, we’ll probably see a headwind there, right, as flights ramp down, as traffic ramps down. So I think for us, it’s early to quantify.

And it does remain an unknown. So there are absolute segments of our business where we will see an uptick. How meaningful? We don’t know. But again, the same thing with Aviation. We’ll definitely see downtick. How meaningful? We don’t know.

And that’s why when we think about guidance and how we thought about everything, Q2 is going to be the right time to come back and kind of iterate on this because it will be three months from now. And I think there will be a lot more information and a lot more trending on how it’s going. So that was my long-winded way of saying it’s too early..

No, great color there. Maybe just to clarify then for Aviation and Education segments.

How much impact do volume changes have on kind of contracted rates, for example, in fewer flights or if schools start to close here?.

Yes.

No, again, I hate to do this, but it is hard to tell because if you look at our Aviation segment, we do a wide range of services, right? We’re putting meals on planes, we’re cleaning cabins, but – and you’d say, "Well, flights are down, will that iterate down?" Yes, possibly, but we’re also cleaning terminals, right? So will we have an increase in work orders to sanitize bathrooms and terminals? So the answer is yes there.

We do wheelchair pushes, right? That’s something that could ramp down, and a good portion of our business is in the UK. And I think that’s – we’re watching that closely, too.

So I think for Aviation, we’ll have a more – I would say it’ll have a larger effect on that segment than Education will have in terms of the positives because I think it’s less about school closings. It’s going to be more about sanitizing. Right now, we have seen some isolated school closings. Nothing that has yet affected our portfolio.

But I think if it stays on this kind of normal trending, we’ll probably see an uptick in work orders for, again, more about visibility and frequencies for sanitizing..

Awesome, I appreciate the context guys..

Great..

Our next questions come from the line of Andrew Wittmann of Robert W. Baird & Co. Please proceed with your questions..

Yes, great. Good morning. I guess I just wanted to get a little bit more detail on some of the investments in ERP. Obviously, you guys coming into this year, you talked about a number of different kind of investments that you were making, including HR, IT, kind of the ERP that you mentioned here earlier on the call as well as in the sales force.

I think all of those coming into the year, as the total number, it’s going to be about $25 million. But specific here to the ERP, I wanted to get a little bit more detail because it sounded, Scott, like you’ve had to put a little bit more resources at that. And you said, "Hey, we’re going to do the right thing for the business.

We’re not going to risk the customer. If that pushes that out, so be it." And that obviously makes sense.

But, I guess, on the financial impact of this, how should we think about it? Is the spend going to be up? Is that a mitigating factor to the – maybe what would have otherwise been a raise in the guidance here? Or is it – if you delay it, is that a benefit to the P&L this year? I just wanted to understand how that factors into the numbers?.

Yes, let me take that, Andy. This is Anthony. Most of the cost to be incurred for this year will be really onetime in nature. We’re adding additional resources, primarily program management, chain management. And that should not have an effect to our adjusted guidance.

So our guidance currently reflects the anticipated go live later in this year, and any additional delay will have a nominal effect in terms of any anticipated depreciation. So it will not have a material impact to what we previously guided to..

Great. And then just in terms of – just trying to get a sense here on the top line, recognizing, obviously, that the detail and appreciating the detail on the retention rate.

I guess, Scott, as you’re going through your reviews of sales productivity and your retention rates here, it kind of feels like kind of that majority of the – I think you used the term weeding out might have happened in 2019. I know there’s always a factor that goes on here.

But do you feel like you’re on the right side of that? And that with the sales productivity that you’re seeing out of the organization after the comps on the revenue side lap late this year, do you feel like the top line can get back to more of what we’ve seen from ABM in the past, a couple points higher?.

I mean, there’s no question. It’s just a delayed effect, right? It doesn’t happen overnight, right? Because we’re as – we’re increasing our sales force. I think that the good news for us is, even from when we talked to you all about it at year-end, we’re probably up 5% in sales people. Our target is to get to 10%.

And remember, you got to overhire for that, right, because we do have attrition, either self-selecting or performance-based. So we’re on a good path for hiring salespeople. And there’s no question that we’re going to be back to where we were. I think the good news is we are optimistic about retention and where it’s heading.

And that’s as – it’s funny, Andy. That’s as powerful as bringing on new sales, right? So all in all, we absolutely believe we’ll get back to where we are. And it’s not just hiring salespeople. It’s getting them trained. It’s working with operators.

As you know, in this business, as much as the business comes through salespeople, it comes through operations and clients wanting to grow with us. So we’re energized by it..

Got it, okay. And then just my final question here is a little bit more of a modeling question. So I apologize if it’s more detailed.

But just given that the cost buckets on the face of your P&L have moved around a lot, I mean, your segment margins are clearly benefiting from the issues that you did and the things that you addressed with the customer base. But obviously, your corporate investments have ramped up as a result of that.

So, Anthony, I was just hoping you could help us understand the cadence of that unallocated corporate segment as the year plays out here? At least versus our numbers, you came in under on the corporate segments this quarter. And it kind of feels like that’s going to ramp as the year goes on.

But any help you could give just trying to help us understand how that line, in particular, that might trend as the year goes on would be helpful..

Yes, it will ramp up as the year progresses. So we were right in line with expectations for Q1. And our guidance, as I mentioned earlier, continue to be in line with what we previously articulated.

So you’ll see a ramp-up in the corporate investments, and that will be a component part of the investments in IT, HR as well as the salespeople as Scott alluded to..

Would you have a number or range just on that line since it is kind of changing by a decent amount year-over-year that we should be thinking about for that line?.

It will be an equal progression by quarter. I can provide that offline, Andy..

I’ll leave it there. Thanks, guys..

Thanks..

Our next questions come from the line of Tate Sullivan of Maxim Group. Please proceed with your questions..

Hi, thank you for the comments on the – on top of mind, coronavirus.

But what are – I mean, you mentioned – do work orders for sanitation work? Does that – is that on top of current contracts? Or just some of your contracts across end markets include, I mean, periodic sanitation?.

Yes. My comments were really about incremental work, right? So picture being at a property.

Let’s say, it’s an office building, and you have a scope of work, right? That includes how often you police a bathroom, and police means refreshing it, right? How often you police a bathroom, how many people you keep in the public spaces like a lobby and the stairwells, right? So you’ll have a scope of work.

And that’s true of educational facilities, manufacturing facilities. You have a scope of work. And then what happens is when you have something like COVID-19, you get called then by the facilities, people and say, "Look, how do we do more?" And usually, it’s one of two ways either kind of reshuffling the staff and reprioritizing what they do.

But in this case, it’s probably going to be more like adding bodies. Because I think the important thing – there’s a couple of things about what’s happening right now from a landlord’s perspective. One is you’d like to sanitize more.

But we all know that’s no surety for, like, solving this problem, right? So – but you want to sanitize more, but also, you want to create visibility for your tenants, for the employees of your firm if you’re running a – if you’re a corporate facilities person.

So you want that visibility, really see a brand, right? You want employees, you want tenants to feel comfortable, students to feel comfortable that you’re doing everything you can. So a combination of sanitizing to try to do whatever you can to lessen the effects or the contamination is one thing.

And the second thing is just from a branding standpoint, which we understand. That makes good sense. So our comments, again, are more about incremental revenue and profitability as a result of this.

Is that helpful?.

Yes, thank you.

And then on the other side, too, is there any – have you seen or in past circumstances, pressure on costs for janitorial supplies?.

No. Anecdotally, you hear about like places like Amazon and other places where prices have perked up a little bit, but we have national supplying agreements. We’re on the phone – we’re not dealing – we’re dealing directly with manufacturers.

And they’re doing the right thing by a company like ABM because if you think about it, when it comes to janitorial supplies, right, which is what we’re talking about here, who’s a larger purchaser? Who’s a more important relationship than ABM? So we feel like we’re in pole position as supplies come about, and we have an amazing procurement team here that are on the ball with this.

So we feel good about it..

Okay, thank you, Scott. Shifting to Technical Solutions. I mean, year-over-year revenue growth, again, in the quarter of 20%, more than 20%.

What is the sales cycle in Technical Solutions if we do have a temporary slowdown here? And can you comment on how sustaining a rate of revenue growth going forward if you can?.

Yes. I mean, traditionally, if you look over the years, it’s more back half weighted in the summer months with the air conditioning, right, if you think about it. But I think now, like, we’re seeing first quarter results are really strong. And we don’t see any slowdown in clients’ appetite for energy projects, sustainability.

So I think if there’s going to be any impact at all on the Technical Solutions side, and we haven’t seen it yet, but if there is, will there be a slowdown in the ability to get equipment for large renovations that we do as we refurbish projects? Where is the equipment coming from? Where are the component parts coming from, from a manufacturing standpoint.

But I’ll tell you, we talk to the team, and as of right now, they haven’t seen any effects of maybe production in China ramping down. So – but I think it’s still an evolving story right now. But I wouldn’t even put a cautions line up right now. But I do want to just flag it as something that we are equipment heavy in that, right? But for now, nothing..

And I would just add to that. We saw significant growth last year.

So when we look at the second half, just the compares are going to get tougher just because of the second half, the overdrive in fiscal 2019 when we compare it to 2020, it’s just going to be a harder second half compare, but we’re still anticipating year-on-year high single-digit growth..

Yes. And that’s the right point, right? Because we don’t want to get in the back half and say, "Wow. You’re only growing 1% year-over-year." You’re like, "Well, no, that’s because we grew 22% last year." So we have to – let’s – we have to keep that in mind. That’s not a negative. It’s the fact that we’re just overdriving on that.

So what Anthony points out is exactly right. We still feel confident we’re going to end up in the high single digits..

Okay, great. Thank you for all those comments..

Our next questions come from the line of David Silver of CL King. Please proceed with your questions..

Yes, hi. So I had a quick question about the income statement items. And this is maybe related to contract structure or contract type within your portfolio. So – anyway, if I look at the first two lines of your income statement, so revenues less operating expenses, to me, I don’t know what you call that margin, but I’ll just call it contract margins.

And this quarter, I mean, it was kind of noticeable, but the operating expenses as a percentage of revenues improved by 100 basis points year-over-year. And I’m wondering if you could point to what the sources of that were.

Is this just better bidding or better bidding strategy? Or what is going on there that led to that meaningful year-over-year improvement, I guess, in what I’ll call contract margins?.

Yes. I think you’re referring to what we view as gross profit. So that includes both the contract margins in addition to the indirect cost. From a GAAP basis, which is what you’re referencing, that also includes items impacting comparability, which is the biggest driver in the year-over-year is going to be the self-insurance adjustment.

So we had $11 million swing between fiscal 2019 and fiscal 2020 as it relates to the self-insurance. So it’s not a fair compare in terms of looking at it on an absolute basis. If you strip that out, the driver’s going to be a better mix in fiscal 2020 as it relates to fiscal 2019..

Okay. I was half-wondering if the self-insurance was a factor there. More kind of qualitative question about your contract portfolio. But you bid on contracts that are offered or with the terms stipulated by your potential customers. And I’m just wondering, Scott, I mean, it’s been persistent for a while.

But on this call, at several points, you reiterated the ongoing upward pressures on wage rates and the tightness of the labor availability.

From your perspective, are you seeing a transition or a shift to more fixed-price contracts as opposed to cost plus? And if there is a shift that’s noticeable, I mean, how – I imagine that there are higher implied contract margins on fixed-price contracts, and that’s to compensate you, the service provider, for taking on additional risks.

So is this just kind of a balancing act, I guess, between risk and reward? But from your perspective, is there a customer – increasing customer preference for risk shifting by asking for fixed-price bids to a greater extent?.

No, we really haven’t seen a differentiation from what’s been before. And as you know, we’re about 25% cost plus. And we like the fact that we have some diversity in our portfolio mix. We’re about 45% fixed price, 25% cost. We have project revenues, which is 10% and then some management reimbursements on the parking side.

But we want to be careful because we wouldn’t want it shifting to cost plus because it would feel good right now, right, because maybe we have a little bit less risk in the portfolio.

But, like, the performance management side is great for us because as we invest in labor management tools and productivity and efficiency, we’ll reap the benefits of that, right? So I think it’s important to have a good shift. And remember, we don’t necessarily dictate that. That comes from the client. They make that decision.

So for us, the diversity is great. And again, we always think about that depending on different cycles.

Don’t you wish you had more cost plus? In the last two years, we wish we were 100% cost plus, but then be careful because when the market comes back and we have all these new labor management tools, you’re going to be like, "Man, we really can’t get an upgrade." So I think we were happy that there is diversity in the product mix..

Okay. And then last one would be kind of more of a inorganic growth, I guess, or use of cash flow question.

But in my opinion, I mean, there are ways to add value to your company and to your stock price across the business cycle and painting with a very broad brush, I mean, operationally, is – operations take precedence during robust markets, but during decelerating markets or soft markets, maybe inorganic or company directed efforts take precedence.

So compared to three months ago, I mean, your stock price is down, borrowing costs are down. I’m guessing the asking price for M&A in your project funnel might be a little more attractive.

What kind of tools or how do you view the current market in terms of favoring, let’s say, share repurchases or refinancing your debt or perhaps being able to complete some acquisitions at a more attractive multiple than you might be able to in a more robust environment? In other words, what are the opportunities or the levers that you think you have here that become more likely in the current environment? Thank you..

Okay. So I’ll need about two hours to answer that. I’m kidding. It’s a – that’s a hardy question. I think, look, one of the things that we’re pretty good about is staying disciplined on our capital approach and not look at like three-month market swings, and we’ve been good about that. So we have a share repurchase program that’s out there.

We have – we’re under 3 times leverage, which is pretty encouraging for us in terms of M&A. So we have a dedicated M&A team now that are looking at opportunities, we’re engaging in conversations. And with interest rates so low, there’s definitely competition from private equity to purchase some of these operating companies that we’d be interested in.

So I think we’re taking – again – and I want to go back to that. We’re disciplined. We’re going to do the right thing. We’re going to make sure that it makes sense for us strategically, right, because there are certain segments that are very attractive to us. And we’ve talked about areas like Technical Solutions.

We’ve talked to you about highly synergistic opportunities, which are good. So I think the key for us right now is, again, to stay disciplined..

Our last questions come from the line of Marc Riddick of Sidoti. Please proceed with your questions..

Hi, good morning, folks..

Hey, Marc..

So I wonder if we could spend a little time focusing on Education for a moment. There was some comments made during the prepared remarks as we’re sort of – I know it’s a little early, but approaching sort of the high season, if you will.

I was wondering if you could spend a little time, focus on talking about that as – this will now be kind of either second year post acquisition.

I was wondering if we could sort of talk about where you are in some of the, I don’t know, progress made and where you’re thinking opportunities are? And maybe whether you’re looking at some new go-to-market offerings or what we may be in store for going into that important season. Thanks..

Sure. And just to reground the conversation, remember, this was a segment that was particularly challenged over the last couple of years because the predominance of the contracts were in non-union markets that were subject to the higher kind of wage increases. So we had to go back and get escalation increases. So it’s been more challenging.

I think what we’re really pleased about is the first quarter met our internal expectations. So we’re encouraged by that. We’re about to go into some of the buying season on the K-12, which is going to be happening.

And we put a new Head of Sales in, I guess, six months or nine months ago, that’s looking at the market from a perspective of how do you combine the traditional janitorial landscape and offering we have with our ATS segment and create real value and differentiation for our customers versus our competitors, right, like our – the visualization we have is we’re going in to pitch a client for janitorial.

So I’m going to say, " Hey, by the way, we think we can help you by doing a retrofit of your air conditioning and lower your utilities as well as the janitorial." And the client saying, "Wow, no one else has talked about that because you have a more broad service offering." So we think there’s good tailwinds for us in the future.

It’s just – the reality, Marc, is these things do take time, right? So – but so far, so good. And again, we’re really pleased with how we landed in the first quarter..

And there was comments around some of the hiring that you’ve done so far. Is there any particular segment which had a greater amount of early hiring? I think there was a little bit of a commentary you mentioned around between 5% or 10% growth year-over-year.

But I was wondering if there’s any particular segment that had a greater concentration of new hires or whether it was broad-based. Thanks..

Yes. The 5% was in relation to our salespeople. And I think for us, I think as it goes to hiring, it’s just – it’s a very difficult market. It’s challenging. It’s a – we have 140,000 people, right? So we’re a hiring machine. Last year, we hired over 70,000 people with turnover.

So I think we see pressures all across the board, but it hasn’t inhibited us from performing. It’s just we look at HR as one of our strengths, right, based on what we do, and we’ve been standing up a new HR organization. We have a new model that we’re rolling out in the field on how we approach HR.

And that’s been – so far, early signs are super, super positive on the strategic approach we’re taking to that. So I think high level, very challenging to hire people in this market, but we’re doing as good a job as possible. So we’re pleased..

Okay, great. Thank you very much..

Got it..

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks..

Well, thanks, everybody. And look, we look forward to Q2 probably more than any forward-looking quarter just because of everything that’s going on right now. And also again, we’re pleased on how we performed in Q1. And – but the bigger message here is, listen, the coronavirus, COVID-19 is a real thing.

And for anyone listening on this call, just do yourselves a favor, stay informed, go to the CDC website. You can go to our website. We think we’re doing a pretty good job of keeping people informed. And I’m going to sound like everyone’s mother here, but wash your hands, wash your hands often, and we look to forward to updating you with Q2.

So thanks, everybody..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day..