Q4 2019 Earnings Call

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We have question answer session will follow a formal presentation.

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Please note this conference is being recorded.

At this time I'll turn the conference over to host Susie Choi destroying you may now begins.

Thank you all for joining us this morning.

They are Scott Salmirs, our president and Chief Executive Officer, and Anthony Scaglione, Executive Vice President and Chief Financial Officer, We issued a press release yesterday afternoon announcing our fourth quarter fiscal 2019 financial results a copy of this really an accompanying slide presentation can be found in our corporate website.

Before we begin I would like to remind you that are calling presentation today contain predictions estimates and other forward looking statements are used the word estimate.

At the more expressions are intended to identify these statements.

These statements represent our current judgment of what the future hole.

Well, we believe that'd be reasonable these statements are subject to risks and uncertainties that cause our actual results to differ materially.

Doctors are described in the slide that accompanies our presentation as well as in our filings with the FTC.

During the course of this call certain non-GAAP financial information will be productive reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and all the copies website under the Investor Tab I would now like to turn the call over to Scott.

Thanks, Uzi and thank you all for joining us this morning, as we discuss a fourth quarter and full year results as well as our outlook for 2020.

Our performance during the fourth quarter represented another period of progress as we reported $1.6 billion or revenue and higher GAAP and adjusted EPS of 71 cents for sure and 66 censorship, respectively compared to last year. We also expanded adjusted EBITDA margins 10 basis points.

5.6%.

This performance enabled us to meet our full year guidance across our key metrics and wisdom without the impact.

Yes sees six so six any 53.

Full year revenues were $6.5 billion as we completed a record $1 billion new sales bookings.

This helped to offset or the starting approach to retention and repricing of existing work and allowed us to land at 1.6% organic growth.

Our GAAP continue at U.P.S. was $1.91 cents for sure or $2 a garage that's for sure on an adjusted basis and our adjusted EBITDA margin was 5.2% for the year.

We also generated $200 million and free cash flow and ended the year with leverage of 2.8 times, which hit our target range below three times.

Operational highlights include the sustained robust pipeline within our technical solutions group as they achieved outstanding growth of 26% for the quarter and 92% for the year.

I would urge you all to visit our IR homepage and see first hand the work. They just for the right now refer observatory in Los Angeles Super Complex project. We recently finished.

This is an interesting also demonstrated continued strength by expanding margins, while navigating and in many instances absorbing the effects of a still unfavorable wage environment, given where the labor markets remain.

In addition to the work or being high team is adding in their core office market. They're wanting work, that's some exciting sports venues as well.

During the quarter, we started engineering and maintenance work at the Chase Center in San Francisco, The brand New home of the Golden State Warriors.

And then it was expected to host 200 events every year and he'd be up was down to support its first concert ever as was the warriors first home game.

I only point that out because opening that arena, such a trusted position and critical to the impression that one day.

The quarter's results or technology or manufacturing segments, performing as planned in keeping with their solve a full year performance.

Our education and aviation segment continues to be pressured from the labor markets more than any of our groups as they have a higher proportion of both non union and lower wage team members and the greatest staffing variability due to seasonality with holiday travel and aviation and the cycling of semesters and recession.

And education, all the factors, we've been discussing with you over past quarters.

Anthony will take you through a deeper discussion a segment performance and financial but at what took what our overall is also perspective for a moment given we are now through fiscal year 2019.

We first announced or 2020 vision and strategy in late 2015, which began a multi year a transformational journey for the entire firm.

What's hot or revenues were $4.9 billion, our adjusted EBITDA margins with 3.8% and adjusted EPS was $1.62 per share.

For years.

Weve grown revenues by more than 30% organically and acquisitive, we expanded margins by roughly 40% and increased earnings by nearly 30%.

The structural changes to our business as part of what 2020 vision strategy provides a springboard for these results.

Our organizational realignment form of so I load and regionally autonomous structure to essentially was industry focused operational framework has an enabled us to pursue and achieve greater operating leverage.

Conjunction with implementing our industry to restructure we created a formal procurement division to further leverage our scale today, we've achieved more than $50 million in savings and deferred increasing cost across our direct indirect had a subcontractor spend.

And supporting 140000 employees and all literally thousands of clients is our enterprise shared services center, we central watch the work 14 nationally distributed counting sensors and today the shared service center handle those more than 4000 journal entries manages more than 30000 clients.

Invoices and processes 80000 payments every single month.

We are so proud that this group of stood up and this high functioning in such a short period of time.

Another aspect of our 2020 vision was accelerating standard operating practices known as the being way over the years. Archie every is a focus have included sales strategic account management and labor management, while we've made progress. These are areas, where we are investing to accelerate further.

Including bringing on a new head of strategy and transformation, which I'll discuss in a minute.

We've made significant progress and some of these areas as demonstrated by creation of our new sales organization as well as through the institution of weekly operating reviews to manage labor with more agility.

This year's performance in both technical solutions and be alike are great. Examples of how best practices and standardization can yield results.

But in order to truly capture full potential of our size and scale. We must continue to deepen the reach of the easier way across more areas of the enterprise it will be critical to our growth and achieving our long term target of 5.5% to 6% adjusted EBITDA margins.

This is why we will continue to focus on investing and enable us to win on growth and productivity.

Our primary areas of focus will be to optimize revenue management increased client retention improved labor estimate through process and technology and reinforcing team members as our competitive advantage.

We will build upon a strong sales momentum by adding salespeople and investing in the continued professionalization of ourselves approach.

Well plans also include corporate investments in our HR structure to centralize and standardized hiring onboarding and training practices. We will also leverage nexgen data platforms to modernize our infrastructure and accelerate our technology and digital capabilities.

During the quarter, we announced some key leadership changes that underscore our commitment to aligning our organizational structure with our strategic priorities.

Scott you Cobi previously our Chief operating Officer is now our Chief revenue Officer and is responsible for all revenue generating functions to drive growth, including sales and marketing and continued oversight of our technical solutions group.

Rene Jacobson previously the president of being I like has been named Chief facility Services Officer, and we'll continue to be responsible for being a high but also at aviation education and technology and manufacturing.

In the current operating environment, it's necessary to create a focused effort to drive organic growth, while expanding segment margins to shoot operational attention.

Scott and where they have been instrumental in formulating our strategies on these funds and I believe that new walls will lead to even greater contributions.

We also recently announced the addition of Josh Feinberg to AB as our chief strategy and transformation officer.

Josh joins us from the Boston Consulting group. He was part of the original consulting team that helped develop our 2020 vision architecture of back in 2015.

At BCG, he's worked with over 30 different service companies across a variety of businesses and this deep experience will be valuable as we focus on where we compete and how we will continue to win particularly as we explore both organic and acquisitive investments.

Josh Rene and Scott will be working closely together to advance the ATM way.

Looking ahead, the midpoint of our guidance does not exhibit our historical year over year expansion rate.

Our guidance incorporates the lower pull through of revenue into this year as a result of our retention in 2019.

This magnifies the impact of a higher cost model due to the continued investments in sales HR and I see that we believe are essential to achieving greater growth in higher operating leverage in the future.

And based on what we've seen all year, we continue to believe the operating environment will remain labor challenged in the foreseeable future. As a result, we took a responsible approach to setting our guidance.

Once we make it through this next cycle and we complete our core investments, we expect to return to double digit EPS growth in 2021.

So while our balanced results from 2019 serve as a reminder of where do we weren't just a few years ago or acceleration work continues with forever and passion I want to thank our team members forgetting a b M to this point and helping us fulfill our short and long term goals.

I would also like to thank wallboard, including our newest director Jill Golder as well as our analysts and shareholders to supporting our strategies as we seek to unlock greater value.

It's clear that he be has a proven track record of achievement, regardless of the macroeconomic environment and I'm confident our diversified business model will thrive even more with our continued evolution Anthony.

Thank you Scott and good morning, everyone.

It isn't de hard to believe that 2020 is already upon.

We have made such important progress since our journey just a few short years ago. Today, we are stronger company and our position as a leading facility service provider is unparallel I'm extremely proud of our team members and I look forward to the next phase of our evolution.

Now onto result.

Throughout 2019, we've seen very impact from the adoption of 86, six and 853.

Lower revenues of approximately 12.5 million for the quarter and 48.69 for the year associated with assay, a 53 related to severance concession arrangement, primarily reflected in our aviation segment.

The deferral of profit on uninstalled material associated with our technical solutions project work with approximately 1.3 million for the quarter and approximately a happening for the year.

They'll commission costs did not have a material impact during the quarter, but how to approximately 6.7 million impact for the year due primarily to the exceptional growth we've seen from our technical solutions segment all year.

For the fourth quarter total revenues were 1.6 billion, reflecting organic growth of 0.6%, excluding the adoption of 88 53 and six wells there.

Organic growth was primarily driven by the technical solutions segment during the quarter.

Overall revenue also reflect the impact of our decision to exit lower margin contract and other contract losses.

On a GAAP basis, our income from continuing operations were 40.19 or 71 cents per diluted share compared to 8.99 or 13 cents last year.

This quarter's results reflect a 5.4 million benefit from prior year self insurance adjustment the second consecutive quarter, where we have seen favorable impact.

If you ever it was among our key areas of focus when we launched our 2020 vision transformation and I'm pleased to see continued progress in this area.

And as a reminder, last year's results reflect a 26.5 million noncash impairment charge related to our technical solutions segment in the UK.

On an adjusted basis income from continuing operations for the quarter with 44.79 or 66 cents per diluted share an increase of 15.2 per cent compared to last year.

On both the GAAP and adjusted basis, our results reflect higher revenue contribution from the technical solutions segment and higher overall segment margin mix, including the benefits of improved labor management, primarily within the business and industry segment.

During the quarter, we generated adjusted EBITDA of 93 million at a margin rate of 5.6% compared to approximately 90 million at a rate of 5.5% last year.

I'll now turn to our segment results, which are described on slide 16 of today's presentation.

Please keep in mind with the exception technical solution topline results across our industry groups reflect the exiting of underperforming contracts and other retention losses from throughout this year.

Being I reported revenues of 807, nine and operating profit of 51.19 for a margin of 6.3%.

During the quarter being I continue to overcome some of their losses by pursuing expansions key national account, a strategy, where we continue to gain traction.

Tack during the quarter also performed well driven by new repair construction in the northeast as well as certain project at very important venue.

For the full year being I delivered operating margins of 5.6% compared to 4.8% last year.

Being <unk> been a strong example of how the keen focus on labor management, along with optimizing our reporting analytics has had a material impact on our operation and result.

Standard operating practices, such as weekly labor reviews, and strategic account management have driven solid performance improvements this year.

Aviation reported revenues of 251 name, which reflect a 12 million negative impact from Contra revenue associated with HC 853.

While this segment has performed below our expectation our two tiered approach of diversifying service offerings and expanding opportunities with local and regional carrier continue to during the quarter as beginning to take hold.

We also recently announced growing fueling partnerships with United Airlines and jet Blue in the U.S.

Internationally, we continue to expand business with carriers such as Ryanair.

These efforts contributed the aviation positive organic growth for the full year.

Operating profit for the quarter were 3.9 million compared to 2.6 million last year.

For the full year aviation ended with an operating margin of 2.1% as we continue to overcome persistent labor related challenges.

Moving forward our teams are working towards our goal to expand margins in 2020, as we will anniversary some key losses from 29 team, while continuing to target underperforming contracts.

Monitoring insourcing and outsourcing trends across the aviation industry as well as understanding infrastructure improvement and expansion trends across National Airport will be key to our future strategic direction.

Moving to technology and manufacturing CNN reported revenues of approximately 239 for the quarter versus 234 million last year.

Operating profit was 18.19 versus 17.5 million last year for margin rate of 7.9% this year compared to 7.5% last year.

In addition to expansions with high Tech and logistic business expansion manufacturing clients specializing food production and aerospace contributed revenue during the quarter.

For the year operating margins were 7.9%.

Moving forward, we're looking to make some of the practices, we have built into the United segment to expand with strategic Cal while also pursuing increasing efficiencies through labor productivity and tax.

Revenue in education with 249 with operating profit of 5.69 for 2.6% margin.

For the year Education's operating margin was 4.6 for that.

Education's results reflect the impact of the more rational pricing approach we took during the most recent buying season.

Similar to our expectations radiation, we're planning for margin expansion within education, and 2020 as our new go to market strategy of bundling technical solution, driven an energy programs with custodial routes, keeping and maintenance work will go into effect. We are excited about the new sales strategy and the value proposition, we can bring our clients.

Lastly, technical solutions reported revenues of 175.5 million a year over year increase of 25.5% for the quarter.

Operating profit was 20.1 million from margin rate of 11.5 per cent compared to a loss of 7 million last year.

Again last year's results reflected 26.5 million impairment charge related to our UK business.

Growth during the quarter, both from a topline and bottom line perspective continued to be driven by core project building energy solution project and easy charging win.

Full year operating margin came in at 9.3%.

Margins in this segment can do continue to be the highest across all of our portfolio and we're very excited about our future as we continue to win in both the private and public sector.

Our project backlog down from a historic high at the end of Q3, but ended the year up more than 50% on a year over year basis.

We are committed to continue investing in this business both organically through additional salespeople as well as through opportunistic M&A.

Turning to cash and liquidity.

Cash flow from operations was approximately 149 million for Q4.

As I've discussed throughout 2019, we had been experiencing higher working capital needs for some of our expansion clients and our air balances in aviation were higher than expected due to billing reconciliation throughout the year.

However, our team remain committed to our year end goal and pushed during the fourth quarter to overcome some of these challenges with a focus on collections, which led to a sequential DSL improvement of two days.

We also benefited from timing related to payable this combination led to annual free cash flow over 200 million.

We ended the quarter with total debt, including standby letters of credit of approximately 966 nine not bank adjusted leverage ratio of 2.8 times.

I'm pleased with how we have achieved our target leverage range of two and a half the three time in two short years, following our GC acquisition and inline with our long term target, we established with our 2020 vision.

We consider this an optimal range that allows us to remain flexible and our capital allocation strategy.

During the quarter, we paid a quarterly cash dividend of 18 cents per common share for a total distribution of 12 million to stockholders and I'm pleased to report that our border group, our quarterly dividend increased to 18 and a half done.

In addition, as part of our longstanding commitment to return value to shareholders. Our board has authorized a new share repurchase program of 159 as stated in our press release.

Now for a quick recap of our annual results total revenues were approximately 6.5 billion an increase of 56.49 versus last year. The increase in revenues was attributable to organic growth of approximately 1.6%, which excludes an unfavorable impact of 47.6 million due the AC six.

Six and a 53.

Organic growth was driven by our U.S. technical solutions and aviation business offsetting lower retention across all other industry group.

Our GAAP income from continuing operations for fiscal 2019 was 127.59 or $1.91 per diluted share on an adjusted basis income from continuing operations for the year was 137.2 million or $2.05 per diluted share.

Adjusted EBITDA for the year grew approximately 349, and we ended the fiscal year with an adjusted EBITDA margin of 5.2%.

Now turning to our guidance outlook.

We are introducing a fiscal 2020 GAAP guidance outlook range of $1.65 to $1.85 and on adjusted basis, a $1.90 to two tempur share.

Although we previewed many of the dynamics that will contribute to our 2020 expectations during our third quarter call I'd like to expand on our assumptions are a bit further.

In 2019, we thought roughly nine cents positive impact as a result from our adoption of the new revenue recognition standard 86 effect and I see a 53, primarily related to the deferral of commission that were previously expensed when incurred we do not expect us to repeat and 2020.

While we do not give specific revenue guidance our outlook for 2020 contemplate the same operating environment as we experienced in 2019 and you annualize effect of contract losses from this past year.

We have remained disciplined in our expansion efforts and I commend team for taking a longer term view for a healthier business mix.

As a result, the midpoint of our guidance assumes muted growth for the full year with the first half of the year exhibiting a higher comparability impact due to a greater degree of contract losses from later in fiscal 2019.

As a result, we expect the cadence of earnings will be more back half weighted than we saw in 2019, given the timing of losses as well as the shift in working days in Q2 in Q4.

Q2, we'll see an extra working day, while Q4 will see one less day. Each working day has historically represented roughly 7 million of labor expense.

Additionally, our guidance does not include any potential share repurchase activity, which we will balance against market condition liquidity and investment.

Adjusted EBITDA margins are expected to be in the range of 5% to 5.2%, reflecting the aforementioned pull through impact of revenue and higher corporate expenses related to our HR operating model change in addition to ongoing investments in our IP infrastructure.

We're also investing salespeople and strategic account managers across all of our industry group.

As it relates IP, let me provide an update on our ERP implementation I'm pleased to share that we went live in Canada. This month, there's very early as we are still closing the month on our legacy system given the timing of the launch but data is currently being transferred it will start operating the system in Canada fully over the next coming week.

The you can't Canadian implementation, Mark the decommissioning of our legacy ERP in the U.S., which is our largest and most complex operating base. We continue with our implementation I'd like to depend upon out of that.

The complexity in the U.S. conversion includes not only replacing our core financial system like we did in the UK in Canada, while also ensuring all of our boundary application such a payroll work order and time and attendance are configured correctly and set up to drive the productivity and enhances we're envisioning.

We're also managing our overall costs and expenses prudently and currently continue to be in line with the year over year increase I mentioned on previous calls.

While we continue to work towards the U.S. implementation in 2020 that will yield enhanced functionality, we will not rush to go lives.

Moving to taxes, we expect our 2020 tax rate to be approximately 30%.

This rate excluding discrete tax items, such as the work opportunity tax credits and the tax impact of stock based compensation Awards, which we currently expect will be approximately 7 million for 2020 compared to approximately 8 million fiscal 19.

More specifically, we are assuming a roughly 10 cents unpack the guidance compared to 12 cents impact in fiscal 19.

We also expect cash taxes to be higher in 2020 compared to 2019, given the full utilization of net operating losses credit Carryovers in 2019.

Capital expenditures in fiscal 2000 funny are anticipated to be between 45 to 55 million and we expect depreciation of 50 to 55 million.

Due to some of the aforementioned factors, we're guiding to free cash flow of approximately 175 million plus or minus any timing related to working capital needs.

Finally, with the investments we have made and our continued disciplined approach we expect our segment operating margin the whole even expand in many areas.

Ultimately once we navigate the upcoming year, we expect to see a measurable impact to both our operational and corporate results in 2021 and beyond operator, we're now ready for questions.

Thank you at this time will be conducting a question answer session.

If you like to ask a question. Please press star one on your telephone keypad and a confirmation tell indicate your line is the question Q.

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Participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.

One moment, please poll for questions right.

Thank you. My first question is from the line of Sam 'cause <unk> with William Blair. Please proceed with your question.

Hey, guys I was gone.

Good morning or that.

Now that you're almost two months into fiscal 2020, I was hoping you able to go into your estimate for new sales grew up this year.

So.

We don't obviously give revenue guidance, but from a sales perspective, we're Rob we're really optimistic we crossed over the 1 billion dollar Mark This year and if you would ask me two or three years ago, if that was possible would've been such a stretch target. So we've now set that as the benchmark we continue to add in salespeople.

And.

We see our new sales booking in the high single digit area and I'm really enthusiastic about even what we're seeing at the start of the new year and our pipeline so sums up in that area for us.

Awesome are there any part of your end markets or geographies that are having an outsize impact on that new sales.

What we always try for across the board and and we allocate resources Accordingly, but Ats will continue to be strong trust and if you think about the dynamics in that end market rate with sustainability and energy.

It's where we have our largest proportion of salespeople and.

Look at this year right I mean, we will not necessarily expecting to replicate what we did this here, but you know we were as we said in the release, we were 19% growth for the year. So we're really optimistic about the HTS market.

Excellent well best of luck in the next year here. Thanks.

Thank you.

[noise] next question is from the line of David Silver with T. Okay. Please proceed with your question.

Okay.

Yeah, Hi.

I had a couple of well I have one question I guess on the adjustments and then I had a more of a strategic question and I.

The truck because they had to step out for a couple of minutes I apologize. If some of this was covered and I make you repeat yourself.

But.

The last couple of quarters, you've had this self insurance adjustment several million dollars.

And.

You know, it's treated as an adjustment for.

Analyzing the quarter's results that applies to a previous period, but.

You know it is money I think that Oh.

Works to your advantage. So I was just wondering if you could maybe talk about that general book of business, So, but sort of insurance business for yourself and.

Whether it's been looked at and whether there is.

No significant further.

Positive adjustments I guess overtime.

In other words is that a hitting hidden source of cash short.

GAAP earnings going forward.

Great well and welcome to the team David This is Anthony So we're very encouraged and proud of the dedicated effort. We made in both the pre and post loss management.

If you you know the balance sheet amount, it's a highly subjective actuarially determined and now and we look at.

That that down on a quarterly basis and the adjustment that you're seeing or are related to the actuarial estimate it long term estimate of where those liabilities land. So what our goal is to try to reduce the volatility of both positively and negatively, especially with a bounce and were star.

And to see some of that volatility come down as it relates and those are noncash charges as to be clear.

These are long term will tail off type liabilities.

As we look forward there's opportunities obviously with a continued success that we're having on pre loss, which is the safety side to influence. The go forward with who could result in lower.

The lower expenses on a go forward basis, but at this time, it's too premature.

Okay, and so just to clarify the 5.4 million dollar adjustment that's on a mark to market basis, that's not just.

No one quarter analysis of.

The reserves that you took some time ago versus actual experience. So that that's a 5.4 million it's true truing up the our entire portfolio that's true, but every last year from 29 2018 and prior so at that time.

Our.

Yeah, sorry, thank you for that.

One of the a in issuing your initial.

2020 guidance.

You cited incremental I T spending and incremental human resource spending so on the I.T. side.

Could you.

I was wondering if you could maybe characterize the incremental spending you're saying in terms of what the.

Spending that was originally considered part of vision 2020, and maybe just wasn't captured through that period or is it incremental spending that may be went a little over budget tied to 2020 or is that spending that is maybe.

Characterize it as a vision 2025 program in other words, you're already moving beyond the targets or the functions that were captured envisioned 2020 and you've already.

Moving beyond that you're setting your targets for I T capabilities higher thank you.

Great Okay.

I'll take that question and the handed over to Scott So our guidance and results fully incorporate both the Capex development and ongoing operating expenses associated with the subscription model. So just for context, we're moving from a primarily on premises model to more of a cloud based on earth across all of our major work streams, including HR finance and time.

In attendance so one of the pillars of our 2020 vision with the modernization of our IP infrastructure at the time when we first initially launched 2020, we realize there and need for that I see investment.

But while we were bit higher on the development of the Capex. We stepped still remain in line with our previous estimate on savings and on an ongoing operating expense, while we probably haven't yet quantified the full benefit that will accrue once all the systems are alive, and we expand that functionality, yeah, and what I would just say more strategically.

Is.

For us.

You think about the fact that we've we've been clear overtime that weve under invested in this area and to to bring us up to speed now and get ready for kind of the digital evolution. That's happening in our business I think I think it's just it's the right time to make the right investment have best in class systems.

It's really for us, it's going to help us leapfrog into in the future.

Okay, and then just one last question and I apologize I know you've touched on this in your.

Prepared remarks, but the bringing on a.

First and then a brand new role as the chief strategy and transformation officer.

You know I I understand that you have certain.

Targets and he brings something to the table from his previous work with your company, but if we were to have this conversation maybe a year from now we're looking out you know December 2020, well.

One or two.

Achievements are accomplishment measurable.

Would you Scott could you want to see you know from that.

In addition to your strategy team.

In other words, how should we what might we look at maybe an interim milestone or two to see if you know if that's a strategic addition is having the desired.

In fact on on your.

Structure and on your your operations.

Sure so.

So couple of comments first.

When you currently have actually held delighted we weren't to actually.

Bring on one of the top partners BCG to come and help us with what we're doing and and I think the best way to start just like the things that we'll be working on one that's going to be our our business mix and strategy going forward I'm now that we're kind of coming towards the end of 2020 vision right. So I think he's going to be b.

Looking at the strategic direction for the firm and then you know managing all the transformation that's going on at the from between the I T systems being implemented and best practices.

That's going to be a core area, but where we will see the most foundational change quickly I think is implementing best practices, we bought and what we call the avian way off where.

Core operational excellence and taken the things that we've seen that we've been rolling out like labor management and building on that and creating form and function across all the other industry groups hopefully, we'll see a tightening of some of our labor controls labor percentages, how we schedule.

Labor is is a very complicated area. It's what we do right. There's so many some work streams within labor again, how he's schedule people. How you staffs are job how you source flavor.

So I think you know across those different work streams, it's going to be.

He is going to have just a foundational impact and he is building a team around that.

So as we go from 2020, M. and and beyond.

I got it couldn't be more excited.

Okay. Thank you.

Our next question comes from the line of Justin Hauke with Baird. Please proceed with your question.

Yes, hi, good morning.

I guess I wanted to hopefully get a little bit more color around the margin expectations for 2020, and maybe you can you help us get some confidence around them.

So maybe just starting on the corporate line I guess, Anthony if you could quantify for us whats the year over year Delta on the spending for the I.T. and an HR.

Investments that you highlighted.

The our corporate line overall.

From a outlook perspective going up roughly 25 million of that half that's going to be in HR related.

And then the rest is going to be associated with items.

Associated with the corporate our stock based compensations and corporate across the enterprise.

So half of that increase is related to our IC and HR and the other is gonna be sprinkled around other corporate initiatives and development.

Okay. Good the that's helpful and then I guess.

For for the segment guidance I guess, the two areas, where maybe we'd appreciate a little bit more color on how you get there, but aviation and education or the two markets, where you've had the most labor market pressure the difficulty hiring people and bottone, they're looking for it pretty meaningful margin expansion next year. So.

If you could you know Bucketed I know, you've got a little bit less amortization expense in education, that's going to benefit there and and you mentioned anniversary.

Some of the lost contracts.

Maybe if you could just quantify the margin impact from those two and then how much is left from the internal initiatives that you guys are launching.

Yes.

I'll take it in two buckets aviation and education for Aviation Hey, maybe a different story then education for aviation 2019, we were out we were really calling the portfolio. We were looking very hard at nonperforming contracts and made some tough decisions that I think we'll end.

Good morning to a higher margin and Weve bake that in so that the aviation.

On top of we expect you know better and better operating discipline of course, you do that for every area on top of out I think it's the business mix in terms of clients. So.

So we'll see a lift there and on the education for the list is really going to be come from our go to market strategy. We made a change from mid year last year about how we're going to approach the market, how we're going to be more focused on the technical solutions offering and how we could bundle that into our core.

They have janitorial and it's early on right, but we are seeing some good results, we like the pipeline and we believe they have gotten in addition to the amortization and operational excellence that we're expecting we believe the go to market strategy and the change that we articulated last year is going to have a meaningful impact or.

Turning on that.

Okay. Thank thank you.

I guess, maybe my last question then here would be just on the free cash flow and the balance sheet. You guys mentioned, you're you're kind of in your your target range now EBITDA, it's going to be kind of flattish next year. So you won't do you ever from pretty growth and I'm, just trying to think how you're.

Thinking about allocating that free cash flow is it still the priority to bring leverage down a little bit more or is.

Is the balance sheet open enough, where you know with the new buyback program and you talked about some M&A.

That's back on the table in 2020.

Yeah, I think a dozen our current leverage and continued strong cash flow provides really the optionality as it relates to our capital allocation strategy, allowing us the ability to look at M&A and share bye bye buybacks and 2020, but a lot of factors going into that though I think you'll see a continued focus on deleveraging.

And with the Optionality for share buyback and if our opportunistic M&A presents itself, we have the ability as well.

Great. Thanks, that's all helpful.

Thanks.

Our next questions from the line of Marc Riddick with Sidoti and company. Please proceed with your question.

Hi, good morning.

Good morning, Mark.

Just wanted to sort of follow up on the back of that and sort of maybe talk about the.

Potential acquisition target areas, or you know a or whether or not that's something that you've already begun to embark on and how should we should be thinking about where those parties may lie. Thanks.

Sure. The good question. So we've talked in the past about the fact that we were going to start targeting some of the Ats.

Segments like energy and sustainability in power and we're going to continue to look at that.

I think having Josh come on now as our head of strategy is going to help US you know being more focused and refined in terms of M&A approach, whether it's whether it is acquisitive or even organically. So M&A is a lever that we have the.

Ability to Paul and and and just to be clear aside from.

The.

You know the focus on Ats and sustainability or we will have the opportunity to do synergistic transactions in our core we wouldn't shy away from that as long as I've made financial sense. So I think for US where are we just for us it's all about being purposeful and playing into the strategy that we set forward.

Definitely something that we can leverage in 2020.

Okay, great. Thank you very much.

Thanks Mark.

Oh I.

Actually this from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Hi, Thank you I've a couple of follow up some Anthony first on the interest expense guidance for fiscal 20, I mean, just making sure I have it right 45 to 50 down slightly from fiscal 19, and that's after a meaningful pay down debt in the last quarter.

Are there other consider it does that imply less of it that came out down based on your previous comments on receivables and aviation maybe or can you get more context that please.

Yeah, it's in line with our expectation that you know.

If you look at our composition of our that the proportion that fixed at a higher interest rate as well as a proportion that floating and our expectations of where we see the interest rate curve based on market conditions. That's how we come up with our interest expense, but it's all in line with our deleveraging profile as well as our outlook.

Our cash flow and the timing of cash flow.

Okay and thank you next out what has to change I apologize if I missed what what changes in fiscal year 20 to get to double digit EPS growth in school 21.

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

Great. Thank you in terms of.

You mentioned a bit on health care and you moved it I think it was last quarter previous quarter. They help shouldn't be an I was that still somewhat for dragging though in the most recent quarter and could that be a drag from lost contracts in fiscal year 20.

No actually surprisingly is performing well it is now that its nbn I had its getting some of the operating leverage of our branch network in the proximity of the MBS <unk> offices to where our health care assignments are we're actually seeing that is a nice little surprising uplift. So we're pretty excited.

What about that move it's worked out.

Thank you and last from me and thanks for the detail is any I thought I heard you mentioned a corporate line item increase and I saw the press release comment and then previous question I 10, HR increases, but did you quantify that increase I missed that please.

Yeah, I I quantified earlier, a year over year, we're expecting overall $25 million increase in corporate line items half of which is going to be not I THR investment.

Okay. Thank you very much of the rest of the day.

Thank you.

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

Okay, well, thanks, everyone and I just want to I just wanted to close out this fiscal year with it for the big Thank you to not only our management team for a bit everyone. On this call who's had interest and following up soon and participate in this journey.

And I hope everyone has a happy and healthy holiday season with family and friends and look for which the him back in the first quarter to update you on the progress and all the excitement that we have here at eight P.M. about the future weeks just couldn't be more pumped up so.

Enjoy and be safe. Thank you.

This concludes todays conference you may disconnect your lines at this time. Thank you for your participation [noise].