ABM Industries Inc (ABM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ABM Industries Q3 fiscal year 2011 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Mr Henrik Slipsager, President and CEO of ABM Industries. Sir, you may begin.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive VP and CFO, and Sarah McConnell, our Senior VP and General Counsel. Today I'll provide an overview of the 2011 third quarter that ended July 31. Jim will discuss the details of our financial results and I'll conclude our prepared remarks with a summary of the Company's operational achievement and highlights for the quarter as well as provide an update of our guidance for the remainder of fiscal 2011. In addition, there is a slide presentation that accompanies today's prepared remarks. You may access this presentation now by going to our website at www.ABM.com and on the Investor Relations tab you'll see the Presentation tab on the left hand side of the page. Today's presentation will be the first listed. Sarah.

Thank you, Henrik. Please turn to slide 2 of the presentation. Before we begin, I need to tell you that our presentation today contains predictions, estimates and other forward-looking statements. Our use of the words estimates, expects and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies this presentation. During the course of this presentation, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the Company's website under Investor Relations.

Thank you, Sarah. Now, please turn to slide 3 for a review of our financial highlights for the third quarter. We delivered solid financial results for the third quarter, revenue grew approximately 24% to $1.1 billion, and income from continuing operations increased over 33%. On a per share basis, we achieved $0.51 for the quarter. We continue to focus on adjusted EBITDA, as we believe this is one of the critical factors in evaluating our progress toward the long-term goals we established and communicated earlier this fiscal year. I'm pleased that adjusted EBITDA was up nearly 20% for the third quarter.

All four of our operating divisions, janitorial, Engineering, parking as well as security produced higher revenues and operating profits year-over-year from the acquisitions we made as well as new business. Cash flow remains strong. The cash flow from operations contributing $51 million for the quarter for the 9-months ended July 31, 2011, cash from continuing operations was $82.6 million compared to $73 million in the prior year. During the quarter, we reduced outstanding borrowings by $31 million. We continue to reward shareholders through the distribution of our quarterly dividend. Yesterday we announced our quarterly cash dividends of $0.14 per common share which marks our 182nd consecutive dividend.

Now I'd like to turn over the call to Jim for a financial review of our third quarter and for the 9-months ended July 31. Jim?

Thank you, Henrik and good morning everyone. Turning to our third quarter of fiscal 2011 results on slide 4. As Henrik mentioned, revenues for the third quarter were $1.08 billion, up 23.8% from the prior year, primarily due to acquisitions and revenues from new business. The Linc, Diversco and L&R acquisitions combined contributed nearly $200 million while organic revenue was $8 million. Gross margins for the 2011 third quarter grew to 11.5% from 10.7% in the prior year period. The year-over-year increase in gross margins is largely a result of higher margins at Linc, partially offset by higher state unemployment insurance and fuel costs.

Our SG&A expense for the third quarter increased $21.7 million to $76.4 million, from $54.7 million. The year-over-year increase is primarily due to expenses attributable to the acquisition, and the operation of the Linc Group and $3.6 million increase in share based compensation expense, partially offset by a $2.7 million settlement received related to a dispute that arose in connection with the L&R acquisition. The increase in share base compensation expense was primarily due to the absence of a $3.4 million expense reversal recorded in the same period last year. Due to the change in our assessment of the probability of achieving the financial performance targets established in connection with certain performance share grants.

Amortization of intangible assets for the third quarter increased $3.5 million, to $6.3 million, primarily related to the amortization of intangible assets acquired from the Linc acquisition. Interest expense increased $3 million to $4.1 million, reflecting higher average borrowings and average interest rates under the line of credit as a result of the financing for the Linc acquisition. For the full year, we expect an increase of $11 million to $12 million, due to higher leverage ratio and borrowing rates. The average outstanding balance on the Company's line of credit was $373.5 million during the quarter ended July 31, 2011, compared to an average balance of $148.2 million in the prior year ago quarter due to the acquisition of Linc. Our effective tax rate on income from continuing operations for the third quarter of 2011 was 26.1%, compared to 38.6% in the prior year period. The year-over-year decrease reflects a $4.7 million tax benefit. For the full year we are anticipating an effective tax rate of 37% to 38%, exclusive of discrete tax items. Our cash tax rate for 2011 is forecasted to be approximately 15%, primarily due to the utilization of the OneSource tax assets. This is slightly better than we had originally expected.

Net income for the third quarter of 2011 was $27.9 million, or $0.51 per diluted share, compared to net income of $21 million or $0.40 per diluted share in the prior year period. Adjusted income from continuing operations for the third quarter was also $27.9 million or $0.51 per diluted share, as the net effect of items impacting comparability was minimal. This compared to $22 million or $0.42 per diluted share in the same period last year. The year-over-year increase of $5.9 million was primarily related to contributions from the companies acquired in 2010 and a $4.7 million tax benefit slightly offset by an increase in share based compensation expense and higher interest expense.

Adjusted EBITDA which excludes items impacting comparability was $54.9 million for the 2011 third quarter, compared to $45.9 million in the prior year period. This is a 19.7% increase from the same period last year, and reflects our recent acquisitions partially offset by higher state unemployment and fuel and related costs. Adjusted EBITDA margin for the quarter as depicted on slide 4, was 5.1% compared to 5.3% for the third quarter of 2010, primary reason for this decrease was the increase in selling, G&A expense related to the acquisitions we made.

Looking at our financial results for the 9-months ended July 31, 2011, also on slide 4, revenues were $3.2 billion, up 22%, from $2.6 billion the same period last year. Net income for the first 9-months ended July 31, 2011 increased 19.2% to $50.5 million or $0.93 per diluted share from $42.3 million or $0.80 per diluted share in the prior year period. Adjusted income from continuing operations for the first 9-months of fiscal 2011 was $54.6 million, or $1.01 per diluted share from $47.9 million or $0.91 per diluted share in the first 9-months of fiscal 2010. Items impacting comparability represented a total net expense of $4.1 million or $0.08 per diluted share for the first 9-months of the year compared to a net expense of $5.5 million or $0.11 per diluted share in the prior year period. For the first 9-months ended July 31, 2011, adjusted EBITDA was $132.7 million, an increase of 22.9% from $108 million the same period last year. Acquisitions made in 2010 drove the year-over-year growth in adjusted EBITDA which more than offset the higher state unemployment taxes, fuel costs and unanticipated weather-related costs experienced in the first quarter.

Now turning to slide 5. We ended the quarter with $322.7 million in working capital, a $47.8 million increase from $274.9 million at the end of fiscal 2010. The increase in working capital is primarily related to the Linc business. Net trade accounts receivable at July 31, 2011 were $565.3 million, versus $450.5 million at October 31, 2010. Days sales outstanding at quarter end were 50 days, up 2 days on a sequential basis and up 1 day compared to the third quarter of 2010. The year-over-year increase in DSO is attributable to Linc which has longer collection period as the result of government receivables. Cash flows from operating activities were $84.8 million for the first 9-months ended July 31, 2011, compared to $80.3 million in the comparable prior year period. This increase is primarily due to the timing of payments made on vendor invoices, partially offset by the timing of collections received from Linc's government business.

Total insurance claim liabilities at July 31, 2011 were $341.8 million, compared to $348.3 million at the end of fiscal 2010. Self insurance claims paid during the quarter totaled $19.6 million compared to $17.9 million in the third quarter of 2010.

I would now like to turn the call back to Henrik who will provide his perspective on the third quarter operational performance and conclude with our outlook for the remainder of the year.

Thank you, Jim. Turning to slide 6. All of our operating divisions posted year-over-year top line increases, primarily driven by the acquisitions we made. And we continue to see slight organic growth as well. However, in the short term, the current economic environment is impacting not only the growth rate of our janitorial sales but also the level of tag activity compared to our expectations. Despite these factors, janitorial revenues were up 4% to $599 million.

Engineering revenue grew 150% to $236 million, benefiting from the business gained in the Linc acquisition. Revenue growth was less than anticipated in the third quarter due to delays in the federal government awarding new contract and postponed start dates of currently awarded contracts as well as the loss of a couple sizable contracts in the legacy ABM Engineering business that occurred earlier in the fiscal year. Combined, these unanticipated events are causing organic sales in Engineering to be flat. However, we recently have secured a number of meaningful wins with the government including the opportunity along with 5 other contractors to bid on task orders issued under a $9.7 billion Department of Defense contract to provide Language Support Services for US Troops worldwide.

Parking benefited from L&R acquisition as well as seasonal patterns from lots associated with travel and entertainment. Year-over-year revenue increased 34% to $153 million. In the quarter, parking revenues related solely to the reimbursement of expenses from managed lots totaled $74 million. Security revenue grew 3% year-over-year, as this segment benefited from Diversco acquisition as well as new business.

Now to operating profits on slide 7. Operating profits excluding corporate was up approximately 15% from the same period last year, largely due to the successful acquisitions we have made. However, as previous noted, the operating environment remains challenging, competitive, and pricing pressures, commodity inflation and state assessing higher unemployment taxes to pay interest on federal loans made under the Recovery Act continue to impact the performance of all segments. Janitorial operating profits increased nearly 5% from $1.8 million to $40.1 million. Despite year-over-year increases totaling $1.5 million for state unemployment insurance expenses and fuel. [Higher] expected greater growth in both revenue and profits for the janitorial segment, yet we still achieved growth despite absorbing a number of costs greater than originally anticipated.

In Engineering, profits were up 61.5% of $3.8 million to $9.9 million, reflecting the contribution from the Linc operations. Since the December acquisition of Linc, The Linc Group Engineering teams have worked diligently to integrate operations, maintain existing client services, grow our energy services and execute our integrated facility service business model. While this segment's overall performance has been impacted by the federal budget delays, for the year we expect Linc to be slightly accretive as originally communicated.

Our parking segment achieved year-over-year growth of $1.3 million or 23.1% to $7.2 million. Primarily related to operating profit with lots acquired in the L&R acquisition. We benefited as expected from some seasonality associated with L&R lots located primarily in the Midwest as the warmer weather increased traffic. Security achieved a 39% increase in operating profits on nearly $1 million primarily from reduction in G&A expenses.

Looking at our recent operations highlights on slide 8, we continue to secure contracts across all divisions in key verticals. During the third quarter, in addition to the previously mentioned Department of Defense joint contract for Language Support Services, Engineering also won a multi-year contract with the US Army in Europe to conduct training at the site of historic battlefields. This particular training contract is our fifth consecutive award. Additionally, we are now providing integrated Facility Services at the National September 11 Memorial and Museum at the World's Trade Center and are extremely proud to serve the high profile historic location, especially as we mark the Tenth Anniversary on Sunday.

Before moving to guidance, I want to summarize our operating results year-to-date. Janitorial, while I'm disappointed with the growth in revenues in janitorial year-to-date, the segment is up nearly 4%, both top and bottom line. Despite significantly higher state unemployment costs and higher fuel and related costs which were all beyond our original expectation. Engineering, successfully integrating the legacy ABM Engineering business into Linc was key. I'm very pleased with our progress. Year-to-date, revenues are up 130%, and operating profit up 47% despite higher costs and the loss of a couple legacy ABM Engineering clients.

Parking. We ended the year focused on integrating operations from our acquisitions of L&R. Here too I'm pleased with the efforts we've seen, not only integrating the existing operations but also improving profitability of certain acquired lots. While we initially dealt with some issues associated with the transaction, those have been resolved now. Parking now has a stronger geographic footprint and deeper presence in key vertical markets. Year-to-date, parking's revenue is up nearly 36%, while profit's up nearly 5%.

Year-to-date these combined operational achievements along with security's results have generated nearly 23% increase in adjusted EBITDA despite the expected and unexpected costs we've absorbed. Finally, cash flow from operating activities up over 13.1% to $82.6 million. We've reduced our outstanding debt following the acquisition of Linc by $87 million year-to-date.

Turning now to fourth quarter guidance on slide 9. In summary, through the first 2 quarters our performance was essentially in line with our own expectations. But during the third quarter it became clear that the US economic recovery had stalled. Like many other companies, we were anticipating a better second half of 2011. At the same time we also faced a shift in government contracts from fiscal 2011 to fiscal 2012 and expense increases in the form of higher unemployment insurance and commodity inflation.

We are maintaining our original guidance for income from continuing operations per diluted share for the 2011 fiscal year of $1.23 to $1.33, and expect to be in the low -- even though we expect to be in the lower half of this range. Based on economic pressure and current outlook for revenue growth, we are revising our guidance for adjusted income from continuing operations per diluted share to $1.32 to $1.42. As a reminder, the fourth quarter will be negatively impacted by one more workday compared to the same period last year which increases pretax labor expense by approximately $4 million. As always our guidance is exclusive of any new acquisitions.

At this time, I would like to open the call for questions. Operator?

(Operator Instructions) David Gold, Sidoti & Company.

Henrik, was hopeful that you could give a little more color as we think about the change in guidance. How much of that is related to the delays in the Linc contracts versus the softness that you're seeing in janitorial?

I think if I have to look at it from that perspective, David, I think if I look back to June, July, we probably looking at the perfect storm. I think we got hit from all sides. You had the economy which we haven't seen a major impact the first two quarters. There was a lot of activity in the third quarter where a lot of contracts were renegotiated, a little more pressure on our margins. The government business, which is very, very difficult for us to predict, was delayed a little more than we expected originally. But hopefully everything is calm going forward. So hopefully 2012's going to be more normalized. So I'd just say, David, it's a little of everything and the way we do our guidance, right or wrong, is we communicate with every single division on every single action or movement they've seen in a particular quarter and unfortunately this particular quarter everybody saw there's more pressure than they've seen in the past. So I don't expect this to be a long-term situation. I think it's a one or two quarter situation but at the same time, it's our job and duty to communicate when we see changes to the market during the third quarter.

Sure. On the government piece of it, then, do you see it then as more delays than cancellation? In other words, are we going to pick that back up?

During the month of September, David, we see starts probably middle of August or beginning of August through the end of September is what we define as a bid season. In other words, all contracts are pretty much bid, long-term contracts are bid in that particular season. So by the end of September we can give you a much better and much clearer answer to your question. If in fact and how much we expect in government growth and business next year. Up to this point, the only thing I would communicate is it looks promising.

All right. I see. Okay. So let me just see if I'm catching that appropriately. So to date there were contracts which you expected to have either won or been financed and that really hasn't happened to date, is it that, but they're still out there?

Yes, they're still out there. A lot of the work that has been delayed -- essential work that needs to be done eventually. There are a few cancelled contracts as well. But in general, most of the work has to be done anyway.

Okay. Then one other question. On the janitorial side, obviously that business has been pretty stable over the years. But you speak -- you mention in the release about cost containment issues at clients. Can you give some more color on that? What's really happening there?

Well, I think -- and it's very -- I'm very careful in drawing total conclusion, but I think again, you're then dealing with somewhat of the perfect storm. Last time we had a recession it was like -- I knew, I felt it prior to the whole situation. This time I feel I see a lot of preemptive moves among our clients where they're trying to lower or are lowering the prices, are lowering the specifications earlier than we saw last time which has resulted in numerous renegotiations with clients which unfortunately also resulted in lower profits in certain areas. The good news, though, is we've been able to renew those particular clients maybe at a lower profit level, but again, being in the portfolio business the key thing for us is maintaining customers a long period of time and over time most of those clients will be more profitable in it.

David, even in that whole environment that Henrik just described, we are seeing organic growth. It's not as much as we had wanted but we're still seeing organic growth.

Right. But I mean I guess what I'm trying to understand better, Jim and Henrik, is along those lines, I mean, essentially should we think about this as hey, some contracts came up during the summer and you had to price more aggressively or folks are aggressively coming back to you and saying, hey across the street they're willing to do it a lot cheaper and so play ball. In other words, are you growing revenue at the expense of margin?

I'm not -- I don't think we grow revenue at the expense of margin. It's very difficult to make general statements like this when you have more than 40,000 contracts out there.

Right.

But in general terms, I would say that we have been able to secure contracts long term. Some of them with a lower profit level as of right now, but again, I'm looking at that as being one or two quarter impact and hopefully our budget is still so different for 2012.

And David, our operating margins in janitorial are kind of where they were last year, so I mean, we're maintaining those really good operating margins so that overall will tell you we're -- overall.

I need to say this also, David, that the operating margin that you see in our janitorial division is unheard of in this business. I've been in the business, you know that, too many years, and to be very close to 6% in that business is remarkable and only possible because we've got the best damn team out there to run our business and I'm very proud of what they're doing, even in tough times, even when they go through this, what they're going through right now. We have the winners out there and I'm not concerned about 2012 or 2013 or 2014 at all when it comes to the janitorial division. Also if you really go back and see what has been accomplished primarily driven by the janitorial division, 8, 9 years ago, David, we had EBITDA of $60 million plus. Today we hope to get EBITDA probably between $180 million and $190 million over an 8-year period. You know what? Could not have been done without the janitorial group. So triple -- the stock hasn't tripled, I know that, but performance has. That's the only thing I can do from my seat.

Okay. And just one last one, if I could sneak it in. In Linc, what percentage of that business is government?

It's relatively small. If we look at the overall percentage of business excluding the joint ventures which we don't recognize on the revenue side, it's less than 10% of our overall business.

I've got you. 10% overall ABM or overall Engineering?

Overall ABM. I think it's around $300 million, give or take.

Say that again, I'm sorry? Around --

It's around $300 million give or take, historical.

300 --

$300 million a year historical numbers on the government side, before the joint ventures, which is another $200 million.

So that's $300 million plus $200 million, that's total ABM, that's not just Linc, obviously.

That's Linc and ABM, $300 million. We don't have -- ABM didn't have. So pretty much $300 million, which is recognized in revenue and another $200 million recognized under joint ventures, where we just take the equity share in under earnings.

Michael Gallo, CL King.

Couple questions. Henrik, when I look at the range for the fourth quarter, unusually wide given certainly what you've seen historically, $0.10 range is used to what we're seeing for the year. You're halfway through the quarter. Is the variability between the high end to the low end just some government stuff or help me just -- very wide range of expectations for the fourth quarter? Thank you.

Michael, first of all I don't want to miss. Second of all, there are government business that could start at the beginning of next month and I don't want to have a situation -- because of the size of those particular jobs, it could impact plus or minus. So it's a key thing for me to have the range large enough. The other reason which is more particular reason unfortunately is that due to the fact that we're maintaining our guidance on EPS, the old range was a wide range so in the reconciliation of these particular numbers I have to keep the same range as I have under the old guidance. So the $0.10 plus, minus $0.05, whatever the way you look at it, is a result of those two issues.

Okay. But just if you're looking at them in -- generally speaking, so the low end of the range it sounds like none of that government stuff happens. Is that a reasonable assumption, some of those projects that maybe are on the fence in terms of when they --

I would say the low end of the range, everything goes wrong.

Okay. That's helpful context. Second question for Jim, the repricing of the credit facility today, what's the new grid?

Basically, we dropped a 0.5 point on the credit facility. And from what we heard from our banks, we're one of the only companies that actually started the process in August and actually closed it. So just shows you the good creditworthiness. But we're saving a 0.5 point of interest on our spread.

Okay. Great. Then final question. When I look at the Engineering business and the integration with Linc, I think you talked about the opportunity of $12 million in synergy ultimately. I think you said $5 million by the end of this year in terms of a run rate basis. Where are you with respect to that? I guess if I look at the margins at Linc, and just backing out the core Engineering business, adjusting for purchase accounting, it seems like it's been running about 5%-ish this year, versus, I think your road map of 6% to 7%. So help us bridge for how you get from the 5% to the 6% or 7%. Is it just the synergies or is it just some of these contracts coming back or some other factors? Thank you.

Again, I'd like to make it a very simple answer but it's not. It's a combination of factors, let me just get some of the facts right. We expect to have $7 million of synergies year one and rolling $12 million into next year, so another additional $5 million next year. That was the plan. And I'm happy to report we're right there. The Linc management -- and we took the Linc management to run that whole business. And has again, done a great job in getting the old ABM Engineering under the fold. We hopefully will go through a new branding, coming the beginning of next fiscal year, where we're looking to have one name going forward. But I'm amazed about how they've been able to do this in a relatively short time and I think that the fact we're getting them stock certified by the end of the fiscal year, a lot of our people deserve a pat on the back because that was not easy. It was a very complicated situation but they've done a great job. When it comes to -- what was the other question, Mike? Oh, the Linc and the 5%.

Yes, the Linc versus the 5% versus 6% to 7% on the operating margin side.

If you look at our overall gross profits kind of improvement year-over-year, that's -- a piece of that growth is being driven by higher gross profits at Linc. You combine that with the additional synergies and you'll get above where we are right now. I don't think we've said 6% to 7%, per se, but we'll definitely get up higher than where we are.

Right, okay. So some of it's just the SG&A, maybe some stickiness, some of that will come out as you integrate the two businesses.

Right.

Yes and the other thing, that's why I'm preaching EBITDA and I'm preaching our debt. Our debt is now very close to two times EBITDA if I look at where we are and that I'm proud of in itself. But at the same time, EBITDA is a key because the amortization of goodwill, which is in my opinion -- some countries do it. Others don't. Some does it equal number every year. We do it very aggressively with high numbers in the beginning of cash flow basis, and that's why EBITDA for me is key and if you see the relation between EBITDA and our cash generation, that makes me very happy and smiling and crying sometimes because we're doing a good job there.

No, the cash generation has and continues to be impressive, despite obviously some of the difficulties. So congratulations.

(Operator Instructions) Andrew Wittmann, Robert W Baird.

Henrik, I was just wondering if you could talk little bit about any actions that you have taken or maybe plan to take on the cost and/or investment side, given your reduced outlook for the economy and a little bit for the Company here? Is there anything specifically that you're looking at here today?

You know what? If it was a symptomatic thing or have a very poor division or somebody not doing performance very well, et cetera, et cetera, yes, I would act. But in this particular case, I'm looking at a year the way I look at the year, all my divisions will be up. All -- the Company overall will be up. I'm looking at EBITDA, will be up double digits. It's very difficult to go out and do some head hunting based upon pretty [damn] performance in a very difficult economy. I know that we expected and you probably also expected more but I can't close my eyes for our performance in a difficult environment. And you know what? Everybody out there deserves a pat on the back because they've done a fantastic job.

When the economy gets a little more calm, when the government gets a little more calm, I have no doubt that the profits will be back up to where they should be and again, go back, look at our EBITDA over the next 10 years, very few people can show you a track record with increasing EBITDA over every single year and it's going to be inclusive of this year and tripling the EBITDA over 9, 10 years is speaking for itself. And I didn't create that. The people out there created that. So you won't see any short-term head hunting from my side because of numbers.

And as we said earlier, the one specific thing that's going down next year is interest expense because of the renegotiation we just did. So that's a very specific thing we've done.

Yes, that makes sense. And then just kind of to build on the credit facility, new credit facility, got some acquisition capacity in it. With multiples coming down across the markets, should we read anything into that credit facility as preparing for or seeing maybe a better pipeline than maybe you saw a few months ago in terms of acquisitions?

I have a principle I'm not going to talk about things that hasn't happened yet. We're always looking for accretive acquisitions and I hope short term, long term, I hope I can report that to you but it has to be accretive and has to be a company that fits into us both ethically, culturally and we're always looking and, again, you will be the first to know.

Okay.

Yes, we have capacity and we have the organization and, again, I really think you have to go back again and look at what we're good at. We just -- 2007, 2008 we did OneSource which was the biggest acquisition we ever did. We did that without a blip. Now we've done Linc and Linc's management and all of their management has done a fantastic job in introducing that to the ABM way of doing business. We learned something over across the way but overall implementation of acquisitions I think we're pretty damn good at.

Just in terms of since you've been looking and you're always looking, is it fair to say though that you are seeing multiples coming down a little bit at least in the stuff that you've looked at so far? Is it still premature to say that?

It differs from lines of business to line of business, the energy segment and such is very hot right now. I don't think we could buy Linc at the multiple we bought it at because it's going to be much more expensive. That was just a fantastic buy. Security, very active. I think janitorial is stalling and may be a little better right now and parking pretty flat.

That's very helpful. Thank you.

We have plenty --

Sorry, Jim?

No, I'm good.

Okay. Plenty of capacity to do deals if you see them come across?

Yes.

Yes. Exactly.

Adam Thalhimer, BB&T Capital Markets.

I guess the one question I had, sorry if this is repetitive, I had to jump on late, was has there been any changes in your expectation for Linc accretion in fiscal 2012. I think at one point we were thinking $0.25. Has there been any change to that, given macroeconomic shifts?

Come to 2012, I can't wait to talk to all of you in our December conference call. We're in the process of finalizing our budgets. I'm overall optimistic but I'm always optimistic, but I am not committing to anything for 2012 until I have the facts in front of me and those of you who say well, you just lowered the estimate. Obviously the facts always doesn't always come true. But this is the way we do it and I need some guidance from the field.

Just seems like to me that a lot of the -- I'm just wondering -- obviously the end game is to find out what the total of estimates are but a lot of the 2012 growth was the Linc accretion. It seems like, and I guess maybe the question is better asked, what -- it seems like the weakness you're seeing is not on the Engineering side. You had a good quarter in Engineering. It doesn't seem like where you're seeing softness is the Linc business.

No. You're right. Let me respond to that. Linc as a matter of fact overall has produced very well. We've seen slight weakness in the fourth quarter but overall it's been performing very well. We've seen some weakness in the government business which we explained many times but hopefully that's history and maybe we can go of course and say in the third quarter where we might even get a piece of the big contract we're talking about which is not -- which we're hoping for but there's no guarantees for that. There are some weakness and I talked about that on the janitorial side. But overall, if I look at my plan for the year and where I think janitorial's going to end up, they're going to be off on the bottom line between 3% and 5%. You know what? If that's a disaster, I can deal with disasters. They're doing very well.

Michael Kim, Imperial Capital.

Just going back to janitorial, given some of the pushback you're getting in pricing and relative to the operating margins that you've posted in the third quarter, is it your sense you're going to start to see -- or is it your sense you will see more headwind in the fourth quarter or do you expect to largely maintain your operating margins and what steps you can do to accomplish that?

We feel pretty certain that the negativity we saw in the third quarter is already included in our forecast for the fourth quarter. So we are assuming it's going to continue, not getting worse but stay at this level in the fourth quarter, and I hope -- we all hope here that we're going to be out of it in the first or second quarter of next year and again, janitorial will grow this year, year-over-year, and I should expect them to grow year-over-year next year. If you look at janitorial year-over-year, with growth, including an extra day which costs around $4 million, I wish I had crisis like that everywhere.

And then just generally on the pricing environment, are you starting to see similar pushback in Engineering or parking or other parts of your business? Or are customers also becoming more proactive in taking steps to contain their own costs?

Engineering I think the biggest thing we see and the biggest concern we have is on our energy job side. We see some very long decision processes, primarily associated with people not being able to finance it. So we hope the government at one point in time comes up with a financing suggestion to support energy jobs or green jobs, as you can call, whatever you want to call them. That's where we see the biggest pressure in Engineering going forward. I think year-over-year, 2012 looks very good on the activity level, both on the energy side and on the contract side. Overall, I see less competitiveness from that perspective in Engineering division than in janitorial division, parking I don't think is really impacted by this and security is under pressure like janitorial.

Okay. And then just switching to the federal business, and just to clarify the delays that you're seeing there, are these primarily contracts that you've been awarded and not yet received a notice to proceed? Essentially not started? Or are these new procurements?

Yes, yes, and yes.

Okay.

It's a combination of all and unfortunately that's the way the government works. But it seems like the government is back on track and it seems like with the awards we have received already, if we are lucky it could be a wonderful year next year.

Okay. And then just stepping back on the guidance, can you quantify or provide a relative contribution in terms of the impacts on fuel costs and [SOUE] expense and pricing, can you break that out in a little more detail, what the relative impact is from each of those items?

I think you'll see similar kinds of fuel and commodity based things like plastic bags and that kind of stuff like we saw this time and SOUE. Those are not letting up. So you'll see similar kinds of numbers that we mentioned earlier on the call continuing at this point in time.

2 or 3 things.

Okay. And just specifically on SOUE, normally I think you'd see more expense in the earlier part of the fiscal year. Is that -- would that be consistent for next fiscal year as well?

Yes. The difference this time, is SOUE was pretty much as expected. What we did not expect was the federal government charged the states with interest for the money loaned over the period of time a year, two years ago. And what the states did, they turned around and charged us with interest. We're not the only ones being charged. You hear more about it with us because we have more employees but that was a surprise. We did not know about this and as you might know, a lot of those monies was not supposed to be in the state unemployment fund. They ended up there. We did not know we were responsible for the interest. And I think and I believe it's being challenged, different states. We have decided to book it because we don't see how we will be able to get it back from the states but it's being challenged.

Mr. Gold, Sidoti & Company.

Just one quick one. On the $9.7 billion opportunity that you mentioned, I do remember seeing the release on that, can you give a sense for what type of opportunity that could truly be to Linc and ABM?

Yes, $9.7 billion. (laughter)

I see, so you're closing down everything else.

The problem that you're going to have is the $9.7 billion is going to be spread out into, let's say 200, 300, 400, 500 task orders. We will bid each task order together with the 5 other successful bidders. It's pretty unlikely that they're not going to spread out that $9.7 billion among the 6. In our own internal calculations we're very conservative because we really don't know what it means but if we're lucky, we're able to and we can manage a very sizable piece of that cake because we have the organization in place to handle it but I think internally we are looking at maybe over a 5-year period, $250 million benefit. But I have nothing to support that with, David, other than that's my internal calculation, and that equals pretty much 2% of the whole package and on [one-sixth]. And now your next question is going to be why don't you get one-sixth? Why do you expect 2%? Because I'm conservative. I don't know.

Got you. Okay. Fair enough.

All right?

Yes. Good luck. We're going to hope for a sixth.

Yes. Wouldn't that be nice.

Thank you. I'm showing no further questions at this time, sir.

Okay. Thank you very much. As most of you know, 9/11 is coming up on Sunday and it's an unfortunate anniversary that means a lot for ABM. We did lose 17 people. I'm very proud about the fact that we got the Memorial Services, we got the new Memorial at 9/11, at the site, it means a lot to us. But for ABM and for some of my long-term shareholders, this marks a very, very special day for us and hopefully you all remember the 17 people we lost. So thank you very much. I'll talk to you in December. Hopefully with a great budget in hand. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.