Q1 2020 Earnings Call

Greetings and welcome to the Haiping M. industry think quarter, one 2020 earnings call.

At this time, all participants are and I'll listen only mode.

A question and answer session will follow the formal presentation.

He wants to require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Now I'll turn the conference over to your hosts Treasurer and head of Investor Relations Susie cap.

[music].

Thank you all for joining us this morning with US today are Scottsdale marriage, or President and Chief Executive Officer, and Anthony Scaglione Executive Vice President and Chief Financial Officer, We issued a press release yesterday afternoon announcing our first quarter fiscal 2020 financial result.

Yeah. This relief and accompanying slide presentation can be found in our corporate website.

Before we begin I would like to remind you that our call and presentation today contain predictions estimates and other forward looking statements are used the word estimates expects and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future hold while we believe them to be reasonable.

These statements are subject to risks and uncertainties that could cause our actual results could differ materially. These doctors are described in a fly that accompanies our presentation as long as in our filings with the FCC.

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

Good morning. Thanks, Uzi. Thank you all for joining us today to discuss our results for the first quarter fiscal year.

They do a press release yesterday afternoon, we're off to an encouraging start for the new your total revenue, which is now all driven organically was up slightly a $1.6 billion or a gap concerning your E. P. S was 41 cents per share were 39 cents per share on an adjusted basis.

Adjusted EBITDA margin held a 4.3% all this enabled us to achieve leverage below three times for the second consecutive quarter.

As always our results were anchored by our operations well outperformance on the topline was impacted by the lower pull through of revenue as result of our selective approach to retention last year, we're experiencing the corresponding positive impact or operating segment profit given to our mix now includes.

Also certain lower margin or contracts.

Our business and industry segment had another good quarter as our skill continues to strengthen our positioning with national accounts.

Also driving being nice performance was an increase in activity with our sports and Entertainment Division as we help our clients Kellogg's from exciting events were so proud that we had up to 300 M. team members at Levis Stadium throughout the San Francisco 40, Niners incredible season and post season one.

Our technical solutions group, so showing growth on the heels of our robust pipeline from last year, and we continue to see demand for energy and sustainability related projects.

Both operationally and financially our results would not have been possible without our team members, who cheap delivered across the board.

As we've discussed oracle's for this fiscal year involve business investments that will enable our team to accelerate growth and productivity and we're striving to become more data driven company to enhance our ability to help our clients gain insights into how to make their facilities more efficient.

Optimizing revenue management has been accused theme for us since we began prioritizing growth with our 2020 vision and strategy. We've built a powerful sales force where the professionalize program that has led us to now target $1 billion, a new sales annually.

Well, we do not disclose on the sales bookings until the second quarter I'm pleased that we've kept the momentum going into 2020 by meeting our first quarter internal expectations.

No the cornerstone of ourselves approaches cross selling.

Internally, we've put a spotlight on cross selling across all industry groups.

We've developed new training and tools to prepare watches for finding ways to meet the needs of clients. So our ability to self perform and subcontract a wide range of solutions, it's an expanding part of our revenue base, but not anywhere near its potential which is very exciting.

We've been actively recruiting salespeople and while we were a net growing our team the hiring environment remains highly competitive as you know since 2018, we've been adding human resource recruiters throughout our entire platform, which has been critical to our success.

Each department and segment now has permanent dedicated recruiters to fill vacancies more productively.

Oh growth is also dedicated to client retention.

We ended last year with retention lower than our historical norm as we navigated rising wages and the necessity for contract Escalations.

Pursued or discerning rebid and pricing strategy to ensure we are making responsible decisions for the long term as a result retention landed at 90% for fiscal 2019 down from the 92% to 93% range, which is indicative of a normalized environment.

During this fiscal year, we're standing up a new strategic account management team to focus our client retention and we believe this will have a foundational effect over Walter.

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

What are the keys to minimizing the impact of this labor market is to be as efficient as possible on how we schedule and deploy our team members in the field.

The next phases of our transformation will include channeling, even greater resources to improving labor management through process and technology.

He pay the upgraded cloud based time and attendance system, we implemented last year is deepening our ability to manage our distributed workforce.

That is now being incorporated into our weekly operating reviews, and we are driving productivity improvements. It's been one of our primary factors and our ability to achieve margin stability in this market.

And of course, we're committed to reinforcing our team members as our competitive advantage.

Our mission is to make a difference every person everyday and we take this very seriously and it starts with our people you've heard us talk about investing in talent with our salespeople and recruiters to improve speed to higher and resources towards training and Onboarding. We're also investing to the team member experience to employ.

You've employee retention and attract higher quality tell where igniting a number of programs around team member engagement and energized about how we will continue to evolve on the tell front.

Also part of a evolution is the modernization of our IP infrastructure, which began in earnest in the last 18 months.

As part of our IC roadmap, we initiated a phased approach to our fusion ERP implementation in 2019.

After launching in the UK earlier last year, we went live in Canada. This past December it's been three months and I'm pleased that we are now closing our books with our new financial system for both the UK and Canada.

Given the complexities of the systems that speak to our fusion ERP like our HR system and easy pay our priority is to make certain we are fully tested and training to be ready for U.S. rollout the deployment in the U.S. as complicated and we've increased our investment and organizational change management project teams.

And consultancy to safeguard continuity and Kentucky readiness assessments.

Our target for the U.S. remains calendar 2020, but we will adjust our timeline to early 2021, if it sensible for a successful implementation. The key is to ensure that our clients aren't affected once we make the switch.

Looking ahead, we are reiterating our guidance for the year, given our solid first quarter performance that being said, it's important that we address the global crisis surrounded corona virus Covance 19.

At Abiam, we have no direct exposure in countries like China or other level, two geographies and our business has not seen any real impact yet from Colby. Thanks, it but it would be a prudent if we didn't consider all aspects of our business and the potential for any future effects.

Our first priority is the safety of 140000 employees, who serve at thousands of job sites across the us in UK, including airports and health care facilities.

We are monitoring where cases have been reported and following the safety protocols of the World Health organization and the center for disease control.

Based on the current market reaction the business scenarios seem analysts on one hand travel slowdowns supply chain disruptions and office closures could have ramifications on business conditions market demand and client decisions on the other had we can see an increase from the men as clients and force more preventative.

Sanitizing measures.

So for US it's still early and we haven't seen any meaningful impact to our business at this point, we're staying close to our clients and we will ensure that we are working as solution partners as events unfold.

Times like these underscore how our underlying business fundamentals are filed and resilient remember were predominantly domestic with a highly diversified portfolio that has proven to be more stable than other sectors, we remain well positioned to pursue growth and profitability throughout our.

Service mix and scale.

And with our current leverage profile, we have an attractive capital structure that allows us to be opportunistic with share repurchases and M&A as well.

M. stands as proud today as we ever have and we're confident that we've built a business model a strategy and the team to win I want to thank our entire organization for a strong start so the new fiscal year and we look forward to continuing our execution for the remainder of fiscal 2020.

With that let me turn the call over the Anthony.

Thanks, Scott and good morning, everyone before I dive into the quarter I want to remind everyone that our results will be entirely organic if you recall, we instituted ASV close six and 853 last year that cost them adjustments between total revenue in our organic revenue calculation.

We have comp those adjustments in our revenue base should be considered all organic at this time.

On November 1st we also adopted assay topic, a 42 regarding lease accounting.

Option, primarily impacted the balance sheet grossing up both assets and liabilities. The adoption had no material impact on net income or cash flow.

Now onto our results.

Total revenues for the quarter were 1.6 billion up 0.3%.

That is primarily driven by the technical solutions segment, which was partially offset by lower aviation and business and industry segment revenue, primarily as a result of lower fiscal 2019 retention.

On a GAAP basis, our income from continuing operations with 27.9 million or 41 cents per diluted share compared to 13 million or 20 cents last year.

The significant increase versus last year was primarily driven by favorable development and prior year self insurance adjustment.

We thought 6.6 million benefit this year compared to a negative impact of 5 million in the first quarter fiscal 2019.

On an adjusted basis income from continuing operations for the quarter increased to 26.2 million or 39 cents per diluted share compared to 20.8 million or 31 cents last year.

On a GAAP and adjusted basis income from continuing operations for the quarter reflect the higher margin mix across most of our segments led by being high.

We also saw lower amortization as well as lower interest expense.

These results were partially offset by our ongoing infrastructure investments in sales HR and IP.

During the quarter, we generated adjusted EBITDA of approximately 68.8 million for margin rate of 4.3%.

I'll now discuss our segment results.

Keep in mind as we expected revenue across the majority of our segments was impacted by our retention rate in 2019, a concept we talked about heavily throughout last year.

Being I had another strong quarter performance, particularly in light of their good results last year.

While revenues of 821 million were slightly lower than last year. These results exceeded our internal expectation.

We expanded strategically with higher margin National account and also benefited from some delayed losses.

This led to operating profit expansion to 38.29 for margin rate of 4.7% for the quarter compared to 4.4% last year.

In addition to the knick being favorable overall, we also continue to see positive impact of our decision to integrate the health care division primarily into the segment.

We're seeing a variety of improvements across both our Q and non acute business in areas such as pricing contract extensions and productivity as we leverage the denied branch network.

Sports and entertainment also so margin growth for good activity during the quarter.

Aviation reported revenues of 239 million versus 252 million last year.

Operating profit for the quarter with 5.6 million versus 3.9 million last year.

This is nick including the exit of a large unprofitable contract in the UK, along with higher margin new win at airports drove operating profit.

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

Technology and manufacturing reported revenues of 234 million with an operating profit of 16.7 million for a margin rate of 7.1%.

While we saw slight uptick in reserves due to the longer payment cycles from certain client CNN met our expectation due to wins across all revenue Chow, including high Tech and food production facilities.

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

Currently our teams are laser focused on the upcoming selling season, as we pursue new business as well as expansions and price escalation.

Finally, technical solutions reported revenues of 142 million up 22.4% versus last year as our record performance in 2019 provided a strong tailwind for the segments easier compare for the quarter growth was attributable to an increase in our mechanical business, which includes bundled energy solution and power projects.

Offsetting some of these results was a loss of certain contracts within our UK business.

Overall operating profit for the quarter with 8.3 million compared to $6.8 million last year at a margin rate of 5.9%.

As expected amortization of commission expense was higher this year by 2.4 million given they were capitalized last year due to the adoption of ft 6006.

Operating profit and margin also reflect higher volume and related Nick as our strategy last year included winning job across a relatively broader range of margin profile technical solution margins remain among the highest across our segments.

Turning to cash and liquidity as you know the first quarter of the fiscal year is typically our lowest cash flow quarter due to the timing of certain working capital requirements.

Such cash flow was negative this quarter.

We ended the quarter with total debt, including standby letter of credit of 1 billion in a bank adjusted leverage ratio of 2.97 times.

In Q1, we did not purchased any shares and as of January 30, Onest 2020, we had 150 million of availability remaining under our share repurchase program.

We will continue to manage our overall capital allocation program, taking into consideration all uses of cash including share repurchases and M&A.

During the quarter, we paid our 215 consecutive quarterly cash dividend of 18, and a half cents per common share for a total distribution of 12.3 million to stockholders.

And as stated in our earnings release, our board of directors approved or 216 consecutive quarterly cash dividend.

Finally, as you saw we are reiterating our financial outlook for fiscal 2020, although there were no changes I'd like to provide some additional contact based on developments in Q4, including our Q1 results.

Given our performance during the quarter, we believe the cadence of earnings will be less back half weighted than originally expected.

In the quarter, some client transitions on losses have been extended longer than originally expected, which benefited up modestly having said that the second half of the year contemplate many variables that we shouldn't take for granted these include the achievement of overall higher retention, the delivery and timing of new sales equal to or higher than last year try.

Action from our new strategy and education, including performance during the critical buying season.

Continued back half momentum for the technical solution business and the largest uncertainty at this point no material impact of the Corona Vivek on our operations or client demand.

I'd also like to remind everyone that we'll see an extra working day in Q2, and one less working days in Q4, each working day has historically represented roughly $7 million of labor expense.

Moving to taxes, we continue to expect that 30% effective tax rate for 2020 I.

That's right does not include discrete tax items, such as the work opportunity tax credit and the tax impact of stock based compensation awards. As we previously shared we believe this impact will be approximately 7 million or 10 cents in 2020 compared to $8 million or 12 cents of fiscal 19.

Almost immediately following our Q4 earnings call in December last year was formerly extended by Congress for another year, but I wanted to remind everyone that our guidance already contemplated the extension.

So to summarize we started the year positively with good momentum across all our operating segment, we will continue to manage our business dynamically to sustain our progress.

Operator, we're now ready for questions.

Thank you at this time, we will be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

The confirmation Tony will indicate your line is in the question Q.

You May press star too if you would like to remove yourself from the Q.

One moment, please while we poll for questions.

Our first questions come from the line of Sean Eastman of Keybanc capital markets. Please proceed with your question.

Hi, Tim.

Quarter, Thanks for taking my questions.

Just to start for me.

And be helpful to get some more color just around the decision to keep guidance intact here after the stronger than expected start to the year sounds like a lot of moving parts to be thinking about around the corona virus in the background.

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

Sure.

As you can imagine every quarter, we contemplate what to do with guidance and the way. We're viewing it is it simply look we've had a really good start to the year. It's early but as you pointed out there are unknowns with the grown a virus right and I'm sure, we'll get into that a little bit more detail.

There are on those now.

If you think about it the majority of our earnings on the back half because of all the way our business or we're looking at this as the first quarter de risking that back half for now and we'll see a Q2, we look forward to coming back and updating but we just don't want to get ahead of ourselves after Q1.

Okay, that's fair and and the retention repricing elements been a big team over the past 12 months or so.

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

Yeah.

So the retention, we've seen a little bit of an uptick in retention and again another place we don't want to get to ahead of ourselves as it is a trailing 12 month calculation.

But the conversations have been going well with clients I mean at this point everybody understands what's going on with wage rates and clearly rising ahead of what our contract escalations, our whether our contracts escalations are fixed for silent right. We're still wages are growing ahead of that but over the.

The last couple of years, we've had a significant amount of conversations with clients. There was a lot of weeding out which is why you saw our retention rate trail down last year.

So look I think it's it's a little easier and then it was in 2019, but it's still early we still have conversations to be had but I guess what.

Sentiment I want to leave you with is that we're encouraged we're encouraged because.

Again, it's a conversation that it's not far into anybody at this point, so and we're optimistic about the future we still see the double digits and our line of sight as we go through Q1, so a lot of optimism here right now.

Okay, Great and last one from me just curious with the U.S. ERP upgrade getting underway here it sounds like still quite a bit of work to do.

Just curious about the appetite for acquisitions, while that process is underway.

Yes, so that won't really inhibit our.

M&A appetite that even when you look at GCA at the start we left them on two separate ERP system. So.

Don't have to necessarily integrate from day, one so if there's something of interest something we like we would be we began for even even with the ERP.

Okay really helpful. Thanks for the time.

Thank you.

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

Good morning, everyone. Good morning.

I understand it might be hard to quantify some of the possible effects to the current an Irish side now, but even the qualitative perspective would be helpful, especially as it relates maybe two effects on each segment.

Yes, so it's hard to give a tremendous amount of insight. This is still at the beginning stages, but let's look at kind of what Abiam does right first and foremost we're at the center. This because people they hire us for hygiene basis, right for our janitorial segment or service line.

The way, we're holding about this is that in our kind of more traditional facility services segments like our business and industry segment, our our technology and manufacturing segment. Our education segment, we see that there will be an appetite for more visibility from.

The property you know facility operators to get people out there cleaning sanitizing, we're starting to see requests that are coming in at that will translate into some work orders. So that's that's it for us that's a real nice tailwind.

But on the aviation segment, which is a billion dollars in revenue.

We'll probably see a headwind there right as flights ramp down as traffic ramps down so I think for US it's early to quantify and it does remain an unknown. So there is absolute segments of our business, where we will see an uptick how meaningful we don't know.

So, but again the same thing with aviation will definitely see a downtick how meaningful we don't know and and that's why when we think about guidance on how we thought about everything you know Q2 is going to be the right time to come back and kind of it or rate on this because it will be three months from now and.

I think there'll be a lot more information.

And a lot more trending on how its going so.

That was my long winded way of saying it's too early.

No great color there.

Maybe just to clarify then for aviation and education segments, how much impact you volume changes have on on kind of contracted rates. For example, if your flights are now if school will start to close here.

Yes, no again.

I hate to do this but it is hard to tell because if you look at our aviation segment, we do a wide range of services right, we're putting meals on planes for cleaning cabins, but and you say well flights are down will that it or eight down yet, possibly but we're also cleaning terminals right. So will we have an increase in where.

Orders to sanitize bathrooms and terminals. So the answer is yes, there we do wheelchair pushes right, that's something that could ramp down and.

A good portion of our business is in in the UK and I think Thats you know we're watching that closely to so I think for aviation, we'll have a more I would say you'll have a larger effect on that segment and education will have in terms of the positives because I think it's less about school.

Closings, it's going to be more about sanitizing right now we have seen some isolated school closeness nothing that has yet affected our portfolio, but I think if it stays on this kind of normal trending we'll probably see an uptick in where orders for again more about visibility and frequencies.

For satisfies.

Awesome appreciate the context guys.

Right.

Okay.

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

Yeah, great good morning.

I guess I, just wanted to get a little bit more detail on some of the investments in the RP. Obviously, you guys coming into this year you talked about a number of different kind of investments that you may you were making including HR I'd see kind of the ERP that you mentioned here early on the call as well as in the Salesforce I think all of those and coming into the year as the total number it's going to be.

$25 million, but specific here to the ERP I wanted to get a little bit more detail because it sounded Scott like you've had to put a little bit more resources at that.

And you said Hey, we're under the right thing for the business, we're not going to risk the customer if that pushes that out so be it in that.

Obviously makes sense, but I guess on the financial impact of of this how how should we think about it.

It is is the spend going to be up is that in mitigating factor too.

The the though maybe what would have otherwise been a raised the guidance here or or is it if you delay or is that a benefit to to the piano. This year I just wanted to understand how that factors into the numbers.

Yeah, Let me take that Anthony Anthony you most of the cost to be incurred for this year will be really onetime in nature, we're adding the additional resources primarily program management change management.

And that should not to have effect to our adjusted guidance. So our guidance currently reflects the anticipated go live later in this year.

And any additional delay will have a nominal effect in terms of any anticipated depreciation. So it will not have a material impact to what we previously guided to.

Great.

And then just in terms of.

Just trying to get a sense here on on the topline recognizing obviously the detail and appreciating the detail on retention rate.

I guess, Scott as you are going through your reviews of your sales productivity in your retention rates here.

Got it feels like.

Kind of view that the majority of the.

Thank you use the term weeding out might have happened in 19, I know theres always a factor that goes on here, but do you feel like you're on the on the right side of that and that with the sales productivity that you're seeing out of the organization. After the after the comps on the revenue side lap.

Late this year.

Do you feel like the topline can get back to more what we've seen from maybe I'm in the past couple of points higher.

Oh I mean, there's no question, it's just a delayed effect right. It doesn't happen overnight right because we are.

As you know, we're increasing our Salesforce I think the good news for us even from when we talk to you all about at year end, we're probably a 5% and salespeople our target is to get to 10%.

Remember you got to over higher for that right because we do have attrition either self selecting.

More performance based so.

We're on a good path for hiring salespeople and there's no no question that we're going to be back to where we were I think the good news is we're optimistic about retention and where it's heading in that says you know, it's funny or the that's as powerful as bringing on new sales right.

So.

And all that we absolutely believe we'll get back to where we are and you know it's not just hiring salespeople, it's getting them trained it's working with operators.

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

Got it Okay and then just my final question here is a little bit more of a modeling question. So apologize if it's more detail, but just just given that.

The cost buckets on the face of European All has moved around a lot of and your segment margins are clearly benefiting from from the issues that you did in the things that you addressed with with the customer base.

But but obviously your corporate investments have have ramped up as a result that so Anthony I was just help open you can help us understand the cadence of that unallocated corporate segment as the year plays out here at least versus our numbers you came in under on the corporate segments. This this quarter and it's kind of deals like that.

Going to ramp as the year goes on but any help you could give just trying to help us understand that line in particularly my trend as the year goes on would be helpful. Yes, It will ramp up as the year Progressive. So we were right in line with expectations for Q1, and our guidance as I mentioned earlier continues to be in line with what we previously.

Articulated so you'll see a ramp up in the corporate investment than that'll be a component part, though the investment and I see HR as well as the salespeople as Scott alluded to.

Would you haven't number or a range just on that line since it is kind of changing but a decent amount year over year that that we should be thinking about for that line.

Yeah, it'll be an equal or progression by quarter, I guess I can provide that offline Andy.

Yeah I'll leave it there thanks.

Thanks.

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

Hi, Thank you for for the comments on the on top of mind Krona virus, but what are you mentioned do work orders to Sanfer sanitation sanitation work does that is that on top of current contracts or do some of your contracts across end markets include periodic sanitation.

Yeah, well my comments were really about incremental work right. So you know picture picture being out of property, let's say, it's an office building and you have the scope of work right that includes how often you police of bathroom and police means refreshing it right how often you police a bathroom how many people you keep.

In the public spaces like a lobby in the stairwells right. So you'll have you'll have a scope of work and that's true of educational facilities for manufacturing facilities. You have the scope of work and then what happens is when you have something like Cove at 19, you get called them by the facilities people say, what how do we do more wood and you.

Usually it's one of two ways, either kind of reshuffling, the staff and Reprioritizing, what they do but in this case, it's probably going to be more like adding bodies is I think the important thing. There's a couple of things about what's happening right now from landlords perspective, one is you'd like to say.

Lets highs more but we all know that's no surety for like solving this problem right. So, but you want to south has more but also you want to create visibility for your attendance for the employees have you from us to Europe, if you're running a I'm sure a corporate facilities person. So you want it you more visibility real.

Let's see your brands right you want your employees you want tenants to feel comfortable students to feel comfortable that you're doing everything you can so a combination of sanitizing to try to do with every account into to lessen.

The the effects or or the contamination is one thing on the second thing is just from a brand new standpoint, which which we understand that makes good sense. So oh, our comments again or more about incremental revenue and profitability as a result of this.

Is that helpful.

Yes. Thank you and then on the other side too is there any have you seen or in past circumstances pressure on costs for janitorial supplies.

No you know you anecdotally you hear about like places like Amazon.

And other places where prices have have.

Perked up a little bit, but we have national supplying agreements were on the phone, we're not dealing with wins when dealing directly with manufacturers and yes. They are doing the right thing by a company like ATM because you know if you think about it when it comes to janitorial supplies right, which is what we're talking about here who's a larger purchase.

There is a more important relationships and Amy and so we feel like we're in pole position as a.

Supplies come about and we have an amazing procurement team here that are on the ball with us. So we feel good about it.

Okay. Thank you Scott shifting to technical solution some year over year revenue growth again in the quarter 20 more than 20% what is the sales cycle and technical solutions. If if we do have a temporary slowdown here and can you comment on how sustaining or array to revenue growth going forward. If you can yes, yes.

I mean, I mean traditionally if you look over the years, it's more back half weighted in the summer months, we able with air conditioning right. If you think about it but I think now that we're seeing first quarter results are really strong.

I don't see any slowdown and clients the appetite for energy projects sustainability. So.

I think if there's going to be any impact at all on the technical solutions side.

And we haven't seen it yet, but if there is as we will there be and a slowdown in the ability to get equipment for large renovations that we're doing that as we refurbished projects.

Where it whereas the equipment coming from where the component parts coming from some of the manufacturing standpoint, but I, probably don't talk to the team and as of right now they have been seen any effects of maybe production in China ramping down so.

I think it's still an evolving story right now, but I wouldn't even put a caution slide up right now, but I do want to just flag. It is something that we are equipment heavy on that right, but for now nothing.

I was just add to that we saw significant growth last year. So when we look at the second half just the compares are going to get tougher just because of the second half the older drive and fiscal 19, when we compared to 2020, it's just going be a harder second half compare but what we're still anticipating year on year high single digit growth, yeah, and that's the right point.

Right, because we don't want to get in the back half will say value all the growing 1% year over year like well know that's because we grew 22% last year. So we have to lists we'd have to keep that in line. That's not a negative. It's a it's the fact that we just overdriving of that so what Anthony points out is exactly right. We still feel confident we're going.

They end up in the high single digits.

Okay, great. Thank you for all those comments.

Our next question has come from the line of David Silver of C.L. King. Please proceed with your question.

Yeah, Hi, too.

I have a quick question about the income statement items and this is.

This is made maybe related to contract structure or contract type within your portfolio. So so.

Anyway, if I look at the first two lines of your income statement. So revenues less operating expenses to me I'm I don't know what you call that margin, but I'll just call it contract to.

Contract margins and this quarter I mean, it was kinda noticeable but the the operating expenses as a percentage of revenues improved by one.

100 basis points year over year.

And.

Im wondering if you know if you could point to what what the sources of data where is this just better bidding or better bidding strategy or what is go going on there.

That led to that no meaningful year over year.

Proof and I guess and what I'll call contract margins.

Yes, I think you're referring to what we view as gross profit. So that includes both the contract margins. In addition to the indirect costs, Oh, My God basis, which which is what you're referencing that also include items impacting comparability, which the biggest driver and the year over year is going to be to self insured.

Adjustment. So we had 11 million dollar swing between fiscal 19 at fiscal 20 as it relates to the self insurance, that's not a fair compare in terms of looking at it on an absolute basis. If you strip that out the driver it's going to be a better mix in fiscal 2008 as it relates to fiscal 19.

Okay I was half wondering if the self insurance was supposed to factor there.

[music].

More more kinda qualitative question about your contract portfolio, but you know you bid on contracts that are offered or with the terms stipulated by your potential customers.

And I'm just wondering you know Scott I mean, it's been persistent for awhile, but on this call. It several points you know you reiterated the ongoing upward pressures are on wage rates and the tightness of labor availability.

From your perspective are you seeing a transition or shift.

Two more fixed price contracts as opposed to cost plus.

And you know if if there is a shift that's noticeable I mean, how are you imagine that there are higher implied contract margins on fixed price contracts and that's too.

Compensate you the service provider for taking on additional risk. So this is kind of you know a balancing act I guess between risk and reward but from your perspective is there a customer increasing customer preference for.

You know risk shifting bye bye.

You know asking for fixed price bids.

To a greater expense.

No we really haven't seen differentiation from what's been before and as you know were about 25% cost plus and you know we let the fact that we have some diversity in our portfolio mix were about 45% fixed price 25% costs. We have you know project revenues, which is 10% and then some.

Measurement reimbursements or on the parking side, but.

We want to be careful because you know we wouldn't want it shifting to 'em, we wouldn't want it shifting to two to cost plus because it would feel good right now right because maybe we'd have a little bit less risk in the portfolio, but like you know the performance management side is great for us because as we.

Reinvest in labor management tools, and productivity and efficiency will reap the benefits of that right. So so I think it's important to have a good shift and remember we don't necessarily dictate that that comes from the client they make that decision so for us the diversity.

Great and again, we always think about that depending on different cycles. You know don't you wish you had more cost plus in the last two years, we wish we are 100% cost plus but they'd be careful because when the market comes back and we have all these new.

Labour management tools, you could be like men, we really can't get an upgrade.

So I think we're where we were happy that there's diversity in the product mix.

Okay, and then last one would be kind of more of a.

Inorganic growth I guess, we're used to cash flow.

Question, but you know in my opinion I mean.

There are ways to add value to your company into your stock price.

Across the business cycle and painting with a very broad brush I mean operationally.

Hi operations take precedence during robust markets, but during decelerating markets are soft markets, you know, maybe inorganic or or company directed effort you know.

They take precedence <unk> compared to three months ago, I mean, your stock prices down borrowing costs are down.

I'm guessing the.

I'm asking price for you know Aquas M&A in Europe in your project funnel, you know might be a little more attractive what kind of a tools or how do you view the current market in terms of.

You know favoring what's a share repurchases or refinancing your dad or perhaps you know.

You know being able to complete some acquisitions that at a more attractive multiple than you know then you might be able to at a more robust environment in other words, what are the what are the opportunities or the leavers that you think you have here that that become more likely in the current environment. Thank you.

Okay. So I'll need about two hours to ask what I'm getting that's it that's a hearty question I think look one of the things that we're we're pretty good about is staying disciplined on our capital approach and that you know look at like three month market swings and we've been good about that so we have a share repurchase program.

That's out there we have we're under three times leverage which is.

Pretty encouraging for us in terms of M&A. So we have a dedicated M&A team now that are looking at opportunities. We're engaging in conversations and you know with interest rates solo there's definitely competition from private equity to to purchase some of these operating companies that.

Yeah, we'd be interested in so I think we're taking I don't want to go back to that we're disciplined we're going to do the right thing we're going to make sure that it makes it makes sense for us strategically right. Because there are certain segments that you know very attractive to us and we've talked about areas like technical solutions, we've talk to you about.

Highly synergistic opportunities, which are good so.

I think that's the key for US right now is again to stay disciplined.

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

Hi, good morning folks.

Hey, Mark.

So what does it get spent a little time focusing on the education for a moment there was some comments made and during the prepared remarks.

So were you know sort of I know, it's a little early but approaching sort of the high season. If you will I just wanted to get spent a little time.

Focus I'm talking about that its with you. This will now be kind of hit your second year post acquisition as wondering if we sort of talk about where you are some of the Oh, well address made is and where you're thinking opportunities are and maybe a whether you're looking at some new go to market offerings are what we what we may be instead.

Before going into that that a important season. Thanks.

Sure and just to Reground the conversation you know remember.

This is this was a segment that was particularly challenged over the last couple of years because the predominance over the contracts were in non union markets that were subject to the higher kind of wage increases. So we had to go back and get escalation increase so it's been it's been more challenging I didn't work.

Really pleased about is the first quarter met our internal expectations are encouraged about that we're about to go into some of the buying season on the K through 12, which is going to be happening and we put a new head of sales in.

I guess six or nine months ago, that's looking at the market from the perspective of how do you combine the traditional janitorial landscape and offering we have with our Ats segment and create real value and differentiation for our customers first of all competitors right like are you know the.

Visualization. We have is you know we're going into pitch a client for John It's what else I must say hey by the way. We think we can help help you by doing a retrofit of your air conditioning and lower your utilities as well as the janitorial and and the clients, saying Wow you know nobody else has talked about that because you have them.

Our broad service offering so we think there's good tailwinds for us in the future is just the reality is mark as these things do take time right. So, but so far so good and again, we're really pleased with how we landed in the first quarter.

And there was comments around some of the hiring that you've done so far is there any particular.

Segment, which had a a greater amount of early hiring I think a there was a little bit of commentary mentioned there I'm between five.

<unk> under 10% growth year over year, but I was wondering if there was any particular segment that had a greater concentration of new hires or whether it was broad based thanks.

Yeah, that's a 5% was a in relation to our salespeople and I you know I think for US I think as it goes to hiring it's just it's a very difficult market, it's challenging and so we have 140000 people right. So.

We are we're a hiring machine last year, we hired over 70000 people with turnover so.

I think we see precious all across the board, but hasn't hasn't inhibited us from performing it's just.

We look at HR is one of our one of our stress right based on what we do and that we've been standing up a new HR organization, we have a new model that we are rolling out in the field on how we approach or HR and that's been so far early early signs are super Super positive on the on the stuff.

Dziedzic approach will take into that so I think high level, a very challenging to hire people in this market, but we're doing as good a job as possible. So while we're pleased.

Okay, great. Thank you very much.

Got it.

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

Well, thanks, everybody and we look forward to Q2, probably more than any forward looking quarter of just because of everything that's going on right now and also again, we're pleased about how we performed in Q1 and but but the bigger message here is listen the Corona virus. You know covert 19 is a real thing.

And for anyone listening on this call. Just you know just do yourself a favorite stay informed you know go to the CDC website. You can go to our website. We think we're doing a pretty good job of people keeping people informed and I'm going to sound like everyone's mother here, but wash your hands wash, our hands off and and we look forward to lift.

Oh, it's updating you a Q2 so thanks everybody.

This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great. Thanks.