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Edited Transcript of ABM earnings conference call or presentation 7-Sep-17 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 ABM Industries Inc Earnings Call

NEW YORK Sep 13, 2017 (Thomson StreetEvents) -- Edited Transcript of ABM Industries Inc earnings conference call or presentation Thursday, September 7, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Diego Anthony Scaglione

ABM Industries Incorporated - Executive VP & CFO

* Scott B. Salmirs

ABM Industries Incorporated - President, CEO & Director

* Susie Choi

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Conference Call Participants

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* Joe Gregory Box

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* Justin P. Hauke

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Marc Frye Riddick

Sidoti & Company, LLC - Research Analyst

* Michael W. Gallo

CL King & Associates, Inc., Research Division - MD & Director of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the ABM Third Quarter 2017 Conference Call. As a reminder, today's call is being recorded.

I would now like to turn the conference over to Susie Choi, Investor and Media Relations. Please go ahead, ma'am.

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Susie Choi, [2]

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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 third quarter fiscal 2017 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 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 also 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.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [3]

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Thank you, Susie, and good morning, everyone. While the purpose of our call is to discuss our earnings, I want to take a moment and recognize those who have been impacted by Hurricane Harvey. During times like these, I'm confounded by the power of what we often cannot control and equally inspired by the strength of character and people. This unprecedented event is no exception. As some of you may know, we have offices throughout Texas and a large concentration of business and people in and around Houston. This disaster has hit home for many ABMers and clients as well. I need to stop and thank our amazing employees who have banded together to provide ABM business continuity even as they face their own personal losses. They are providing donations and support for those affected on the ground while working to make sure our critical services are in position to support our impacted clients. Thank you for your selfless dedication and commitment as we continue to recover from the storm and its aftermath. Individually and as a firm through our ABMCares program, we have donated to the American Red Cross and other local charities and are exploring other ways to assist the community.

Now turning to the quarter. Total revenues for the third quarter were $1.3 billion. The quarter's revenue was driven by organic growth of 2.8%, when excluding Government Services and FX. We continue to grow through our transformation. Even as we are incorporating a more refined lens to our growth, we are targeting business that has the potential for true margin growth over time and the opportunity for cross-selling our services. This is the basis of our account planning processes within our ABM Way initiative.

Strategic selling is a key initiative for the firm. Just last month, we welcomed Sean Mahoney to ABM in a newly formed position as the President of Sales. Sean joins us from Honeywell, where he spent many years as one of their seniormost sales executives. Working alongside Scott Giacobbe, our newly appointed Chief Operating Officer, they will ensure that we accelerate growth in the face of being more discerning. I'm pleased to welcome Sean to the firm as we continue to build an amazing team.

Our adjusted EBITDA margin for the quarter was 4.3% versus 4.7% last year. As expected, we were impacted by 1 extra working day, which has an approximately 30 basis point impact to the quarter year-over-year.

Operationally, we are in the process of rolling out our ABM Way initiatives around labor management, account planning and field-based training. Our ABM Way team has a methodical process, and the first geographical pass across the country will culminate in November. The events start on the secondary and tertiary markets. As we mentioned last quarter, this is a process that must be well planned, and execution takes time. There's a tremendous amount of energy organizationally to have this become part of the ABM playbook and is a key differentiator for our firm going forward.

During the quarter, we benefited from our ongoing procurement initiatives in areas such as fleet, telecom and supplies as well as the organizational savings related to our 2020 Vision and the longer-term ramp-up of our staff. These results led to GAAP EPS from continuing operations of $0.58 per share for the quarter and $0.51 per share on an adjusted basis.

As you read in our press release a few days ago, we are thrilled to have successfully closed the GCA transaction. GCA is expected to deliver $1.1 billion in revenue and adjusted EBITDA of approximately $100 million. Since the announcement of our 2020 Vision, we have taken several important structural steps towards becoming a company led by our industry expertise. These steps provided the impetus for our GCA acquisition as we can now leverage our industry group structure and merge GCA into ABM. Prior to our 2020 Vision, when we were organized by service line, I don't believe this acquisition could have had the same upside value to our clients or our shareholders.

Our Education business is now poised to go from an industry group with $250 million in revenue to over $850 million in revenue and adding an amazing roster of new clients. Our other industry groups will gain approximately $500 million in new revenue, and we now have good scale in our Industrial & Manufacturing business. Our industry group prominence will give us great opportunity to cross-sell our Technical Services to our new clients and provide a more integrated value-add offering as we come together as one firm.

Planned integration is a key step in the process of bridging our 2 firms together, and we have formed an integration management office, which consists of representation from both companies. Over the next 90 days, that group is tasked with developing a detailed organizational structure for the combined entity. This will yield a best-in-class organization that is aligned with our synergy targets and our acceleration goals. We will be able to provide more detail on our next earnings call as we've only been combined for a week at this point.

So we enthusiastically welcome the GCA team into the ABM family as well as our 2 new shareholders, Thomas H. Lee Partners and Goldman Sachs Merchant Banking Division. We are excited to begin the integration phase and unlock the value of this combination for our clients, our employees, and our shareholders.

We continue to implement and embrace our 2020 Vision. As you know, Phase 2 is all about the ABM Way. As I alluded to earlier, our lens on profitable growth is more refined, and the critical exercise of developing account plans for our medium and large clients remains heavily underway. As implementation continues, we're discovering more opportunities within our business every day. Some opportunities are near term, and some have to be cultivated over time.

New business wins with a clear, defined path for greater profitability are our priority. A great example of a new win we are so proud of is our recent agreement to service London's mass transit system. This 5-year contract for Facility Services with the Transport for London is the firm's single biggest award and will bring ABM to all of the tube stations, trains, bus depots and head office buildings for this major international transit hub. While our core service on this assignment is janitorial, we will now be in a great position to cross-sell Technical Services as the Transport for London performs their planned retrofit projects throughout the transit infrastructure. It demonstrates how we are establishing ABM as a strong integrated facility and management company, and we are focusing on accounts that have planned forward trajectory.

Our approach to retention is no different. You'll recall in the past I've shared with you instances where we have purposefully not pursued projects because we did not see a path to profitability. As a result of the ABM Way processes and the cultural changes that are occurring within our 2020 Vision, we have a more disciplined approach to how we move forward with our existing businesses. And this includes strategically pruning business over time when we can't see our way to profitable growth. This quarter, we made the decision to terminate a large contract in our Aviation business as we were not able to come to an agreement that would have provided a path to profitability. We continue to value our partnership with this client and remain committed to the many other outstanding services we provide them. If we can't create a win-win situation, we have to have the strength to make a good long-term decision for our shareholders and our clients. Anthony will give you more detail on this contract when he reviews the financials for the quarter.

We are as dedicated to our 2020 Vision as we have ever been and will continue to embrace the ABM Way in order to build and protect a sustainable path for our future. As you can see, through the ABM Way and now our GCA acquisition, we are focused on driving long-term profitable growth. We are no longer approaching our business with a one-size-fits-all strategy. Client segmentation, account planning, IT and HR investments are all an instrumental part of 2020 Vision's Phase 2. This is a multipronged approach that takes good planning and patience, and the results will not be linear. No transformation is linear, but I am confident that the changes we are making will continue to drive the future of ABM.

We are laying the groundwork for managing the organization for the long term. We are confident in our execution ability and our extraordinary team. These are tremendously exciting times for ABM. Today, we are a company with more than 130,000 employees that is heading into next year with more than $6 billion in revenue and a blue-chip client base that is unparalleled. We couldn't be more enthusiastic about how our 2020 Vision will reach new heights and scale as we continue our journey.

I'll now turn over the call to Anthony, who will review our financial results in more detail. Anthony?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [4]

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Thanks, Scott, and good morning, everyone. I would also like to welcome GCA to the ABM organization and thank all parties who were involved in this monumental transaction. From inception to completion, it has been an exciting but demanding few months, especially within the finance and legal organization. I'm grateful for the dedication of our entire team.

As stated in our September 1 press release, we completed the purchase of GCA Services Group for $1.25 billion, consisting of approximately $851 million in cash and 9.5 million shares of ABM common stock.

Before I move on to the third quarter results, I would be remiss if I did not share Scott's sentiment on the deep impact Harvey has had on so many. As many of you know, we recently began the migration of our shared service center to the Houston area, and what we have experienced firsthand is this impact of this natural disaster. We have mobilized business continuity plans and set up both satellite and regional office to minimize Harvey's impact on our business. But the road to recovery has just begun, and there's still unknown work ahead of us. I am grateful for our organization's ability to band together and collaborate during this time.

Now for the quarter. Total revenues were $1.3 billion, up 1.7% versus last year, which reflected only 1 month of our now sold Government Service business versus a full quarter of operations last year. Excluding the divestiture, organic revenue grew 2.3% or 2.8% excluding the impact of FX. This growth was primarily driven by Aviation and B&I. Acquisitions added approximately $9 million of incremental revenues during the quarter, which are primarily reflected in our Aviation and Technical Solutions segment.

Our income from continuing operations was $32.9 million or $0.58 per diluted share versus $32.9 million or $0.58 per diluted share last year. On an adjusted basis, our income from continuing operations was $29.1 million or $0.51 per diluted share versus $30.6 million or $0.54 per diluted share.

During the quarter, we delivered adjusted EBITDA of $57.3 million at an adjusted EBITDA margin of 4.3% compared to 4.7% last year. Our year-over-year results were primarily driven by higher revenue contribution and the continuation of 2020 Vision initiatives, offset by 1 more working day and the impact of a contract termination within our Aviation segment.

Turning to Slide 6 of today's presentation. I will now discuss our operating segment performance. As a reminder, these operating results reflect 1 more working day, which predominantly impacted the Business & Industry segment. For B&I, revenues increased more than 2% to $750 million versus last year, primarily driven by organic growth stemming from expansion of jobs with existing clients in the U.S., including additional tag revenue. Operating profit for the quarter increased approximately 4% to $42 million, leading to operating margins of 5.6%, which was driven by higher-margin revenues and cost controls due to our 2020 Vision initiatives. This was partially offset by 1 additional working day.

Before I move on, I want to acknowledge how proud I am of the operating results in this segment because as our largest, B&I has continued to execute amidst significant process optimization and change, such as the beginning implementation of the ABM Way. For the full year, we still believe this segment will produce operating margin in the low to 5% range.

Our Aviation business continued to see strong top line growth, with revenues up over 18% to $259 million. This growth is primarily attributable to organic growth in our U.S. and U.K. operations. While we remain excited about the growth potential of our Aviation business, as Scott mentioned, our operations for the quarter were negatively impacted by the termination of an unprofitable contract. To provide you with some context, we worked diligently over the last few months to address the requirements of this client. Unfortunately, we were unable to come to a mutually acceptable long-term agreement and therefore made the decision to exit this contract. As a result, costs incurred through July 31 were not fully reimbursable, and we expect some of these costs to impact us through the first quarter of fiscal 2018 as we work with this client to transition these services smoothly.

Results in our Emerging Industries Group continue to reflect the impact of contract losses within High Tech and Education from earlier in the year. Revenues were $191 million, and operating profit for the quarter was $11.6 million for a margin rate of 6.1%. As a result of the relatively lower number of contracts in this segment, wins and losses have a higher proportional impact on results. We now anticipate this segment to provide operating margins in the low 6% range for the full year.

Finally, Technical Solutions revenue for the quarter was $107 million with operating margins of 9.2%. The quarter's performance reflect the conclusion of a large lower-margin energy savings performance contract that ended last quarter. In addition to this project, lower overhead drove the quarter's performance. Acquisition revenue of $3 million also contributed to our Technical Solutions results for the quarter. While the quarter was a bit soft from a top line perspective, we continue to have a good pipeline. And for the full year, we anticipate Technical Solutions will produce margins in the mid- to high 8% range.

Regarding liquidity. We ended the third quarter with total debt, including standby letters of credit, of roughly $392 million. While our leverage for the third quarter was approximately 2.1x, given the closing of our GCA acquisition on September 1, our leverage will increase to roughly 4x pro forma lender adjusted EBITDA as defined by our new credit facility. This amount also includes our second payment related to the Augustus settlement, which took place on August 29.

As it relates to capital allocation. We did not repurchase any shares during the quarter. And in light of the GCA acquisition, we do not anticipate any additional repurchases in the near future as we will focus on using our free cash flow to deleverage to more historical levels over time.

During the quarter, we paid a quarterly cash dividend of $0.17 per share for a total distribution of $9.5 million to shareholders. And our board has approved ABM's 206th consecutive dividend of $0.17 per share. We do not anticipate the GCA transaction to have an impact on our current dividend policy.

In addition to the impact to our liquidity and share repurchases, I would like to share a few more details regarding the GCA transaction. As you read in our press release, we have removed our guidance outlook since we have not completed the purchase accounting process. We are using third parties to conduct final assessments, such as valuing intangibles. As one would expect, processes such as these are especially important for a transaction of this size. And until they are complete, it will not be possible for us to determine an appropriate guidance outlook. In the absence of any EPS context, we are removing all aspects of our guidance outlook. Without the GCA acquisition, we would have reiterated the non-GAAP EPS range. As we evaluate the full financial impact of this historic transaction, we will begin to integrate GCA into our industry group model.

Now that the deal is complete, let me take you through some additional financial considerations. GAAP and adjusted EPS will contain significant amortization expense associated with acquired intangibles, which will be finalized once purchase accounting is complete as well as other purchase accounting items. We expect annualized interest expense of approximately $50 million to $60 million in the near term to decrease over time as we delever. We estimate onetime transaction synergy and integration-related expenses of approximately $70 million, the majority of which will be incurred in fiscal 2017 and fiscal 2018. And shares outstanding will reflect the issuance of an additional 9.5 million shares as a result of this transaction.

We have an exciting and fruitful journey ahead of us as we continue implementing and realizing the benefit of the ABM Way while carefully and methodically integrating GCA into our organization. We thank you for your support. And as always, please reach out to Susie with any questions if they are not addressed during Q&A.

Operator, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Gallo with CL King & Associates.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [2]

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Yes. Just a couple of questions. I guess, first question, I know you mentioned -- you called out some disruption to your Sugar Land, Texas shared services center due to Harvey. I mean, where does that stand at this point? And I was wondering whether there might be some tag opportunity that you think will come out of this unfortunate disaster.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [3]

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Yes. So we just started over the course of 2020 Vision consolidating our shared service in Houston. And fortunately, for us, we have contingency plans, all right? So we have people working, but I think it's still unknown as to what the effects could be. Just as an example, clearly, we're getting payroll out, we're getting invoices out. But maybe where the bumps in the road could be on something like this, Michael, is with some of our clients, when we send out an invoice, they require extensive backup, right? And a lot of that backup may be in that Sugar Land office, which is closed. So we'll still get the invoices out. As to whether or not the clients are as sympathetic as we all are and are going to pay on time without the extensive backup, that kind of remains to be seen. We think that'll be just a small bump if that happens. But for the most part, we're up and operating our shared service, again -- but distributed right now. So more to come on that. And then from a tag standpoint, again, that's also unknown because when you talk to people on the ground there, what they would say about Harvey is it was a residential disaster, not necessarily a commercial disaster. So while we do think some of our clients are going to need extra help, and we're going to be there for them, and we've had those discussions, I think, again, when you look at Harvey, we think more residential than commercial.

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Michael W. Gallo, CL King & Associates, Inc., Research Division - MD & Director of Research [4]

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That's helpful. And then perhaps I missed it in the prepared remarks, but do you still expect $20 million in savings this year from the 2020 initiatives? And what did you get? Where are you at year-to-date in Q3? Or are you sort of rethinking that target now as you fold in GCA?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [5]

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No, I think, Michael, we're still on track with the outline of the realization of the $20 million in fiscal '17, the components of which have shifted, so we're outperforming on procurement. ABM Way is taking a little bit longer. So the realization of what hit the quarter was lower than what we expected, but for the full year, we're still at the $20 million outline that we put forth at the beginning of the year.

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Operator [6]

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Our next question is from Joe Box with KeyBanc Capital Markets.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [7]

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Can we just go back to the contract termination that you called out in Aviation? It sounds like the impact is non-reimbursable over past services. I'm curious, is there anything else in there, like an impairment or a financial penalty from canceling your contract? Ultimately, what I'm trying to understand is, how much of that 140 basis point hit to Aviation was due to the contract termination?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [8]

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Yes. So we exited that contract. The costs incurred through the quarter were unreimbursable, so there is no impairment from an asset perspective. Primarily, we had put labor to address the terms of what the ultimate client was looking to accomplish with a longer-term solution, trying to work towards a longer-term solution. When we thought that the longer-term solution wouldn't reach our profitability goals, we decided to exit the contract, at which point our costs were not reimbursable. So it's primarily due to higher labor that we put on the contract. And going forward, we are transitioning that contract, so we expect some impact over the next, call it, 60 to 90 days as we continue to transition the services over to a new provider, but it was primarily excess labor placed on the contract.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [9]

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Okay. And then how much of that excess labor was the 140 basis point margin hit?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [10]

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So in the quarter, roughly $4 million was specific to this particular contract. And the contract, just to give you some context, was operating at a loss, slightly breakeven to a loss quarter-over-quarter. And as we were looking forward, we were trying to work very diligently with the specific client on a longer-term solution that would both meet their needs and also drive the margin that we were looking to drive for this particular contract. So ultimately, the additional labor was roughly $4 million in the quarter.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [11]

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Okay. So effectively, the margins would have been up on a year-over-year basis in that segment ex that particular contract?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [12]

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Exactly.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [13]

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Okay. Anthony, your adjusted operating income was $41.2 million. Can you just walk through how that breaks out on an adjusted basis by segment? I'm just trying to understand how to allocate the insurance reserve and compare the segments on an apple-to-apple basis versus last year.

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [14]

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Yes, absolutely. So from an insurance standpoint, that's a prior year. So ultimately, from -- it's actually in our gross margin, but it's held in corporate. In the current year, we saw some good trending, and we did not take any adjustment from a current year perspective. And we're looking pretty solid in terms of the insurance expense that were impacting the operating groups on a go-forward basis. But when you look at it from an operating profit perspective, the way I would look at it, Joe, is B&I, as our prepared remarks, we are very pleased with their results. Given that they had the additional day, and the additional day primarily impacted them, they were able to execute. And even though their revenues were in line with our expectations, they were continuing to drive that margin profile. Aviation, as discussed, it was primarily that contract that drove the quarter, and that was an isolated area. And we're continuing to look at the Aviation mix of business going forward to ensure that profitability continues to grow over time. When you look at the Emerging Industries, I'd say, outside of High Tech, which we've called out prior, and that was really a loss of a profitable contract that started the year, and we're continuing to see the impact of that lost contract year-over-year, and the new business that we've won takes time for that margin profile to grow. So that was really the highlight from the emerging industry standpoint. Education and Healthcare were right at our expectations from a quarterly perspective, and we still anticipate good growth going forward. As you look at Technical Solutions, I think the story there, we had a lighter-than-expected bookings quarter in Q2 that translated into less top line churn for Q3. The good thing there is we're back up to our historical levels from a pipeline perspective. So we think this is more of a shift to the right, and they were able to hold their margins even though the top line was a little weaker, and they actually exceeded their margins because they had good expense control. So that's how I would summarize the quarter by industry group.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [15]

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Okay, I appreciate that perspective. Just to maybe drill into organic growth, I mean, you had a bit of a stepdown in organic growth this quarter versus where it had been over the last several quarters. And candidly, I'm a little surprised that it's happening at this point in -- within your vision 2020. I guess I would have expected that earlier in the process. Is that stepdown -- I mean, is there anything that we could specifically point to? Or is it maybe just contract duration, and all the turnover in sales force and the changes that you're making, it's just starting to creep into the business now? Or am I looking at it incorrectly?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [16]

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No. We don't see any specific discerning concerns regarding the growth, and in fact, I think it's the opposite. I think the discerning nature of looking at new customers and new opportunities with an eye towards margin has probably a cascading effect in terms of the types of business that we're pursuing and the growth that we're expecting. So it's probably the opposite in terms of when you would see this in our cycle. I think it's an indication that our businesses are being much more discerning on where margin opportunities exist, and that is translating into growth that we feel is right in line with our expectations. And over time, as we have a new Head of Sales coming on board, we do expect higher growth profiles going forward. Scott?

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [17]

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Yes, and that's what I was just going to say. We -- as we go forward and we think about our trajectory and where we're heading, this was a great pivot for us to bring on somebody who's just focused on kind of revenue growth. And Sean was a really senior guy at Honeywell, and he's excited to be here and all the things that he could do. And his particular background is on the technical services space as well, which is really going to help with our cross-selling, especially as we take on GCA. And we have such high hopes of cross-selling Technical Services into our Education business. So we really feel like in a lot of ways, as it comes to sales and growth, the stars are aligning for us. And really excited about fiscal year '18 and really even beyond because obviously, this stuff isn't something that happens over 2 or 3 months, right? But yes, we're pretty charged up about where we're heading from a sales perspective.

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Operator [18]

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Our next question is from Justin Hauke with Robert W. Baird.

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Justin P. Hauke, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [19]

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I guess going back to the Aviation contract, thank you for quantifying that, Anthony. That's helpful for our modeling. But just maybe just a little more context on, was this a legacy contract that was up for rebid? Was this one of the newer ones that was a start-up cost last quarter, and maybe it just didn't make sense? And I'm just trying to understand what exactly changed in the profit profile that made this no longer something viable that you wanted to do.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [20]

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Yes. So it was a legacy contract, and we've had it for a while. And contracts are dynamic, right? And this is one that turned unprofitable for a whole host of reasons that we're not to get into. But it turned unprofitable, and it was something that we tried to work out with our client through a process and through a protracted process because it's a very valuable client for us. We have a tremendous relationship. But sometimes it's just -- moving forward is not a win-win for both sides. And for us, it's real important that we continue to move forward with the cultural message that if we cannot see a path to profitability, we just cannot stay on. And we made the decision to exit and still do many, many services for that client. But I think it -- I think ultimately, this is something that's going to be a very healthy outcome for us and for the client. Because you know what, if you're operating in a unprofitable way, your service is never where it should be. And that's really the reality of it. So I think long term, this is going to be really positive for the firm.

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Justin P. Hauke, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [21]

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Okay, great. That's helpful. I guess my second question is just on the guidance commentary that the adjusted EPS guidance would have been unchanged ex GCA, kind of a 2-part question on that. So obviously, the Aviation loss was not contemplated, so that's a negative, and you quantified the $4 million of costs that you had. I guess on the flip side, it looks like tax was a little bit of a benefit. I mean, the question, I guess, is, is that how we should think about it, is that those 2 were essentially offsetting each other, and that's why things are unchanged? And then the second part of the question would be, obviously, you've had a lot of tax items this year. And how should we think about the sustainability or what the tax rate should be as we look into '18?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [22]

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Sure. So that's exactly how I would characterize the quarter. So from a tax perspective, we had slightly better-than-expected WOTC, which was primarily a timing issue. So we expect for the full year our WOTC tax to be in the $0.10 to $0.12 range, and that's what we guided towards. From a share-based comp standpoint, we're slightly better as well. We have anticipated $0.04, and now we're closer to $0.06. And then the 179D, so the first 2 items, the WOTC and share-based comp will continue from a 2018 -- fiscal 2018 perspective. 179D was not renewed, and these are projects that we completed by 12/31 last year, and this is just really a timing of getting the paperwork in and submitted from a reimbursement standpoint. So we do not expect any impact from 179D because it's an unknown, and we're roughly at -- in the $0.03 to $0.04 range for the full fiscal year. So when you look at 2018 and beyond, I think the WOTC and share-based comp will continue, and WOTC -- I mean, the share-based comp does have an element of where the share price is and how options and stock-based compensation gets recognized. So you can never pinpoint the exact amount until you're actually looking at the outlook, but those are items that would continue in 2018.

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Operator [23]

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(Operator Instructions) Our next question is from Marc Riddick with Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Research Analyst [24]

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So I wanted to touch on -- I'd venture we're updating everybody on where you stood and how things are in Texas. I was wondering if you could give a brief overview of our other trouble spot as we have the hurricane approaching Florida, if you have exposures there that we should be thinking about with the storm coming in this weekend.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [25]

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Yes. So you know we do, right? And it's really hard to tell because if I told you over the last couple of days how we've been thinking about it with the path of the storm and where it's going to hit, but we have a fair amount of business in Puerto Rico, right, in San Juan area, but now it looks like it may not hit that area, and we have business in Miami. So I think it's hard to tell where it's going to be. I think for us, the more important thing is, do we have a preparedness plan? And the team and a contingency plan. And unfortunately, hate to say this, but the truth is we've been through this drill before in this part of the country, right, with hurricanes. So our team is battle tested, and we started 2 days ago with our contingency calls and updates. So I think it's still early to see what the effect will be, but I feel really good about our planning to this point.

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Marc Frye Riddick, Sidoti & Company, LLC - Research Analyst [26]

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Okay, great. And then talking about the -- I mean, we've gone over the airport contract. But I was wondering if it would make sense to sort of think about the possibility of once you go through the process over the coming months or quarters, if we should be sort of rethinking the potential for margin goals for these segments that -- you've put those out before, and it seems you thought it would be something that might make sense to sort of revisit over the next couple of quarters. So I was wondering if it's sort of too early to think about it that way or if you think that will continue to stay in place.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [27]

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Yes. I think it's too early to think about that. We are in the process now across the organization of putting together our account plans and thinking about the trajectory of accounts. And I don't think that we have a holistic view of what this all will mean. I think for the most part, what happened in Aviation is it's not a one-off event, right? We have multiple conversations over the year with clients about working out profitability, and the majority of time it works out in our favor. So it's really hard to tell whether or not something like Aviation is going to have a broader impact on our margins or our growth. We don't see that right now. And again, there's been a lot that's come out of the account planning process that's been really positive in terms of going back to clients and having productive discussions. For us, it's just about getting the account plans in place, getting them rolled out. And that's kind of what's taken time, and that's what we've been talking about. It's -- I think probably initially, when we started on our ABM journey, we were really ambitious about how quickly this all can happen. And then the reality sets in, that it is a longer process to get to every market, get to every account, to get people mentored on how to put together account plans and move forward, and then tying it into a pay-for-performance culture where people understand that part of running a business is growing a business, growing a business profitably, and compensation is tied into that. And so it's all part of a bigger process that we're in the middle of. And so directionally, couldn't be more enthusiastic, and again, we're still going through the process.

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Marc Frye Riddick, Sidoti & Company, LLC - Research Analyst [28]

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Okay. And then last one for me is, certainly, there's been key leadership additions over the last few months. And I wanted to get a sense of where you feel you stand now on that front and if there are any areas that you think need to be sort of filled and addressed that we should be thinking about?

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [29]

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So I think the last piece of the puzzle -- it's a dynamic process, right? And we'll always think about, do we have the right organizational structure? Do we need to course correct? And I hope we're always thinking that and I hope that this answer -- we'll always have the enthusiasm to have the answer that we're never settled, right? But for us, the last piece of the puzzle to accomplish what we need to accomplish was to bring on a Head of Sales with Sean Mahoney. So we have a really solid management team. We've brought on a new General Counsel last quarter, which is really shaping up in a positive direction. So anyway, we're really excited. As we look at 2018, we're going to be focusing a lot on integrated facility services, and whether or not we have the right structure in place to kind of bundle services and kind of control the spend of our clients, that's ongoing. So we'll always continue to look at areas, look at different parts of the organization that we can opportunistically accelerate. But on the seniormost levels right now, as we stand, we're really pleased with the latest addition in -- on the sales side.

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Operator [30]

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And now we have a follow-up question from Joe Box with KeyBanc.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [31]

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So can you guys just help us -- help me understand your GCA integration road map and expectations for timing there? Is it a quick integration done by FY '18 with legitimate opportunities to densify your business? Also curious if you're planning to retain the brand or if this is going to become a part of ABM.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [32]

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Look, so this is a -- it's a large-scale integration, right, where it's going to be over 30,000 people. So it's an integration that's going to happen across FY '18, but we have a really well-thought-out plan that goes in multiple work streams in multiple steps. So we -- and it's -- as we think of kind of fiscal year '18 and what our core objectives are, we obviously have our sales growth, which we've talked about, and the ABM Way, right? But the third leg of that stool is the GCA integration and making sure this has our full attention. And so for us right now, it's -- I want you to think about this over the course of the next year. It's going to happen in phases, and we have a lot of good talent, a lot of good clients. So it's been early on. We closed last week, so it's early days. But from a planning perspective, I'm quite pleased.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [33]

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And then on the brand?

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [34]

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On the brand, now we'll transition to the ABM brand. And I would tell you that, that decision, interestingly enough, wasn't just an ABM decision, it was actually from the GCA folks as well. They thought the power of the ABM brand would be more compelling.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [35]

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When you do deals in this space, do you typically see customer attrition?

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [36]

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We haven't. I'll tell you, I could think back even to the OneSource days. Back then, I was running the Northeast, and we were kind of proud that we hadn't lost a single client. This happens to be what we are good at. I think one of the things that we spoke about during the early days of the 2020 Vision is how we got through Phase 1 and we haven't lost a single client even as we were transitioning from a service line to industry group and restructuring and changing account managers. I think when you think about ABM, kind of the first thing you think about is relationship management. And that's an area where we just happen to excel. Will there be some attrition? I think from a planning standpoint, you'll always think that there's a certain amount of attrition. That's normal. From my seat, I feel like we'd lose one client, and it's a tragedy. And I want to feel that way, but realistically, it could happen. But so far, so good.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [37]

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And then I guess, Anthony, switching over to the financials here. Historically, you guys have lumped in purchase accounting into your non-GAAP guide. It sounds like that's going to be the case for GCA. Is that right?

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [38]

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No. So we plan on, obviously, highlighting the impact of amortization given it's going to be such a large impact to our both adjusted and GAAP numbers. So we'll highlight it, but we do not plan on excluding that from our adjusted EPS guidance next year. The only costs that we would be excluding are acquisition costs, integration costs, which we outlined when we announced the deal.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [39]

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Okay, got it. So when we build out our models for next year later today, obviously, we don't have a guide for purchase accounting, but we should plan on including that into our numbers so that it kind of reconciles with your guidance.

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [40]

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Absolutely. I think, as you know, it's a noncash charge, so appropriately looking at other metrics like cash EPS will be prudent as well.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [41]

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Sure. And maybe -- I don't know if you plan on giving any other metrics, like an EBITDA metric to get around that.

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [42]

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We plan on -- consistent with the past is to provide ranges for how we're looking at the business, which EBITDA would be one of those metrics as well.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [43]

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Okay. Lastly, maybe just to switch back over, I hear you, Scott, that Houston was more of a residential disaster than commercial. But if you guys aren't operating at full speed out of your location, I'm curious, how many of your customers in the market are actually kind of in a similar camp and not operating at full speed? Should we think about that being a near-term drag then because services aren't being provided in those buildings?

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [44]

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Yes. So again, I will qualify that it is an unknown. Many of the buildings are back up and running right now, and most of our people are back to work. So we're still in the cleanup phase, but there was a portion of time when the buildings weren't occupied. And so we still have to work all that out, the puts and the takes, before we can figure out whether or not, from a financial standpoint, this will be positive or negative between that and then wrapping back in our shared service center and the fact that we have an obligation to process thousands and thousands of transactions every month.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [45]

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And then I guess, Scott, this is probably near and dear to you given you're in the Northeast. I mean, can you remind me, how did Sandy end up shaking out? Because I think you had at least one building that was shut down for an extended period of time, and there were -- I think [Sandy ended] being a negative.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [46]

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Yes. Well, some of it is negative, but we also -- we did have a tremendous amount of tag work back then. But if you think back to Sandy and you think the core of it, Manhattan, especially lower Manhattan was tremendously affected, right? So we had cleanup work that went on literally for weeks and weeks and weeks. So a very different situation because as much as -- Sandy was more balanced between residential and commercial, right? So there's a -- it was pretty devastating effect to lower Manhattan. If you remember all the images where, uptown, there were lights on, and downtown, you thought there was nothing there, that Manhattan ended at midtown. So a very, very different situation here. You can go to our offices at [11-11 Fan] and look around, and you probably wouldn't even know that there was a hurricane. And that's in the heart of the CBD there. So I think, again, a lot of puts and takes, and it's stuff that we're going to have to add up over the next few weeks.

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Diego Anthony Scaglione, ABM Industries Incorporated - Executive VP & CFO [47]

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And just to add to that, there's also insurance that has to be reviewed and how that works throughout the whole process in terms of the contingent business interruption, what qualifies, doesn't qualify. So there's a lot of moving parts, and it's too early to really put our thumb on the exact impact at the end of the day.

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Operator [48]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Scott B. Salmirs, ABM Industries Incorporated - President, CEO & Director [49]

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Thanks, everybody. And I appreciate your interest, and I appreciate everyone listening in on the call and asking these good questions. We're excited to move into the fall right now and integrate GCA, continue on our ABM Way. And for those of you who are listening in Florida, in Puerto Rico, we're just wishing you to be safe. And remember, safety first, right? That's the culture of ABM here. It's what we said throughout our whole Hurricane Harvey from day 1 or minus day 1. Safety first. So be safe, and we'll talk to you all on the next earnings call. Thank you.

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Operator [50]

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