ABM Industries Inc (ABM) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries Q3 full year 2012 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 turn the conference over to your host, Mr. Henrik Slipsager, President and CEO. Please go ahead.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today is Jim Lusk, Executive VP and Chief Financial Officer; Jim McClure, President of ABM Janitorial; Tracy Price, President of ABM Facility Solutions Group; and Sarah McConnell, our Senior VP and General Counsel.

Today I'll provide an overview of the 2012 third quarter that ended July 31. Jim Lusk will discuss the details of our financial results. I will then comment on the Company's operational results for the Parking and Security segments before turning the call over to Jim McClure who will discuss our operational results for Janitorial Services, and then Tracy will discuss our results for the Facility Solutions segment. I will conclude our prepared remarks with an update on guidance for fiscal 2012.

There is a slide presentation of the Company's call. You may access this presentation now by going to our website at www.abm.com and under Investor Relations you will see the event presentation tab. 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 "estimate," "expect" and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies 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. Our revenue was relatively flat year-over-year at $1.1 billion. We achieved top line growth in our Janitorial, Parking and Security segments, as well as in our Energy business. We expanded our client base in a number of vertical markets, and sales to high technology firms were particularly strong, but not strong enough to offset the unfavorable results from our government business.

Consolidated results were below our expectations, primarily due to a shortfall in anticipated revenue of $25 million from our government business for the quarter. The continued uncertainties surrounding the federal business again cost [relating] contract awards and in contract funding. These events, combined with the previously announced cancellation of a contract for base operating support in Iraq due to the early withdrawal of US troops, are the primary reasons for the lack of revenue growth. Tracy will provide further color on the performance and opportunity in Facility Solutions.

Adjusted income from continuing operations was down nearly 27% compared to the third quarter of fiscal '11. While we expected a decline year-over-year primarily because of the additional work day, lower contributions of our government business and high operating costs caused our results to be below our expectations. Cash flow from continuing operations was nearly $28 million for the third quarter. Cash flow for the nine months ended July 31 was $82 million, essentially flat year-over-year.

We continue to strengthen our balance sheet, reducing our outstanding debt levels by $14 million during the quarter, and for the nine-month period ended July 31 we reduced debt by $48 million. We also continue to reward our shareholders and announced yesterday our quarterly cash dividends of $0.145 per common share. This marked our 186th consecutive dividend. And yesterday, the Board authorized up to $50 million a share repurchase program. Now I'd like to turn the call over to Jim Lusk for a financial review of our third quarter and for the nine months ended July 31.

Thank you, Henrik, and good morning, everyone. Turning to our third quarter of fiscal 2012 results on slide 4. Revenue for the third quarter were up approximately 2.1% sequentially and essentially flat with the prior year at $1.08 billion. We achieved slight growth in revenues in our Janitorial, Parking, and Security segments, while revenues from Facility Solutions were down, primarily due to lower contribution from our government services business, $13.6 million.

Gross margins for the 2012 third quarter were 10%, a decrease of 150 basis points from 11.5% in the prior year period. The year-over-year decrease in gross margin is a result of a $13 million increase in insurance expense, primarily due to a $9.5 million charge of self-insurance reserves related to claims from prior years. Also included in this quarter was one additional working day which increased labor expense by $3.7 million. I will address our self-insurance reserves later.

SG&A expense for the third quarter increased $2.7 million, or 3.6% to $79.1 million. The year-over-year increase was primarily related to the absence of a $2.7 million settlement received in the prior year quarter, related to the L&R acquisition. Amortization of intangible assets for the third quarter decreased $1 million to $5.3 million. The decrease was related to certain intangible assets being amortized using the sum-of-the-years digits method, which results in declining amortization expense over the asset's useful life.

Interest expense decreased $1.7 million to $2.4 million, from $4.1 million in the 2011 third quarter. The decrease was from lower average borrowings and average interest rates under the line of credit. The average outstanding balance on the Company's line of credit was $283 million during the quarter, compared to an average balance of $374 million in the prior year-ago quarter. Our effective tax rate on income from continuing operations for the third quarter of 2012 was 41.3%, compared to 26.1% in the prior year period as a result of the expiration of employment-based tax credits as of December 31, 2011, and the prior year quarter included a discrete tax benefit of $4.7 million.

Adjusted EBITDA, which excludes items impact to comparability, was $49.8 million for the 2012 third quarter, down $5.1 million from the prior year period. The benefits from new and expanded business were offset by lower than anticipated contribution from Facility Solutions, primarily due to the early termination of government contracts and a $3.7 million increase in payroll related expenses from the additional working day in Janitorial.

Looking at our financial results for the nine months ended July 31, 2012, also on slide 5. Revenues were $3.2 billion, up 1.4% from the same period last year. The increase in revenues is the result of organic growth, acquisitions and expanded services for the existing clients, offset by lower revenue from government business and job losses. Net income for the first nine months ended July 31, 2012 was down 30.8% at $34.9 million, or $0.64 per diluted share, from $50.5 million, or $0.93 per diluted share in the prior year period.

The decrease of $15.6 million after-tax is the result of the following; higher self-insurance expenses of $7.8 million, primarily from claims related to prior years, increase of $3.2 million in payroll cost from higher federal and state unemployment insurance rates, and a $2.2 million increase in labor cost from one additional working day in our Janitorial segment. Adjusted income from continuing operations for the first nine months of fiscal year 2012 was $48.4 million, or $0.88 per diluted share, compared to $54.6 million, or $1.01 per diluted share. The decrease of $62 million after-tax is primarily the result of an increase of $5.4 million in payroll and payroll-related expenses associated with higher federal and state unemployment insurance rates and one additional working day.

Now, turning to slide 5. Days sales outstanding at quarter end were 51 days, up one day both on a sequential and year-over-year basis. The increase compared to the prior year period is primarily due to the timing of collecting receivables in the Facility Solutions segment. Cash provided from continuing operating activities for the nine months ended July 31, 2012 was $82.2 million, essentially flat compared to the same period in fiscal 2011. Free cash flow, defined as net cash from operations less capital expenditures, was $60 million compared to $68.3 million in 2011, reflecting higher capital expenditures of $7.3 million in fiscal 2012, compared to 2011.

Turning now to insurance. As noted in our previous call, the third quarter marks the period in which we perform a thorough review with the assistance of external professionals of the ultimate costs for self-insurance reserves. Actuarial valuations completed during the three months ended July 31, covering certain self-insurance programs of the Company, resulted in a non-cash increase in the self-insurance reserves of $9.5 million pertaining to claims from years prior to fiscal 2012. Please refer to the table headed self-insurance reserves on slide 5.

As you can see, over the past five years, we have recorded adjustments, both increases and decreases, to the self-insurance reserves for claims related to prior years ranging from a low of $1 million to a high of $22.5 million. The cumulative adjustment over this five-year period is a decrease of $1.5 million in the self-insurance reserve, related to claims from prior fiscal years. ABM does no discounting of its self-insurance reserves. We book it at gross, not net, to the actuarial point estimate. This is a consistent process that we have historically followed. Moving to self-insurance claims paid during the quarter, the total expenditure was $20.4 million, up $800,000 compared to $19.6 million for the third quarter 2011. I would now turn the call back over to Henrik.

Thank you, Jim. Please go to slides 6 and 7. I will now provide some brief highlights of our Parking and Security operating segments for the third quarter before turning the call over to Jim McClure for an update on Janitorial Services and Tracy Price for an update on Facility Solutions. Parking managed slight organic growth for the quarter compared to the prior year, as sales in our aviation vertical continued to perform well and we benefited from increased revenue from management reimbursement contracts. These were partially offset by termination of certain unprofitable contracts. Operating profit was up over 8% as margin expanded 30 basis points compared to the third quarter of '11. Parking benefited from higher margin jobs and effective management of operating costs.

Security had another very good quarter continuing to post year-over-year gains in its top and bottom lines, as the segment benefited from new business. Sales activity continues strong, so we expect Security to have a successful fourth quarter. Operating profit was up over 5%, but margin remained flat at 3.2% compared to '11. Effective management and pricing of [rebates] and considering the string of recent contract wins will be critical to maintaining momentum as Security (inaudible) into 2013.

I would now like to introduce Jim McClure. Since 2000 and during some challenging economic times, Jim has done an excellent job of leading the Janitorial segment. We felt it is important for Jim to share his perspective on the Janitorial business and review the operational results for the third quarter. Jim?

Thank you, Henrik. The Janitorial business this year, and, frankly, since 2008, when the recession started, has dealt with compression of job, scope and price. Initially, we were able to effectively manage job costs as we were able to leverage the consolidation of the OneSource business and branches acquired in fiscal 2008. As the recession continued, we remained diligent at managing job productivity and dealing with our clients' request to reduce job scope. The challenge over the past couple of years has been managing in an operating environment where clients are unwilling to accept all the costs that were historically passed on.

Price compression, understandable given the uncertainty caused by the weak economic recovery, and the competitive nature of our business, has continued to pressure our margins and adversely impact our growth. In addition, Janitorial has absorbed approximately $8 million of higher labor costs since 2010, because of additional work days in fiscal 2011 and 2012, as well as increases in payroll costs exceeding $3 million from higher rates for state unemployment insurance in 2012.

We have focused on a number of initiatives to combat the forces impacting our Janitorial business, including a focus on retention, and on client verticals where our skills and resources offer a competitive advantage. Janitorial has increased client retention this fiscal year. To date, our retention is 95.8% compared to 93.2% for the first nine months of fiscal 2011. Historically, Janitorial was running around 92% on an annual basis. I am very pleased with the progress on retention and we will continue to focus in this area.

Another initiative we have focused on is leveraging our technology and expertise with clients, where we believe we have continuously demonstrated the ABM service difference. We all know cleaning in the commercial spaces is extremely competitive. Over the past few years, we have been continuing to concentrate on marketing our services to high-tech companies and industrial firms who place a higher value on services, especially when we can demonstrate the advantages of using ABM. During the quarter in high-tech, we were successful in adding Apple, expanding our business with Amazon, and benefited from additional sites with Microsoft. These wins are in addition to a tech portfolio that already includes Google, Cisco, Facebook and many others. Janitorial revenues for the third quarter fiscal 2012 were up approximately 1% to $603 million, as recent client gains offset the compression in job scope and contract losses. Tag revenue was essentially flat year-over-year at $39 million. Year-to-date, tag revenue is up 1% compared to fiscal 2011. The sales pipeline for Janitorial remains solid.

Turning to operating profit. There were a few factors during the third quarter that contributed to the $5.3 million decline compared to prior year. First and foremost, we had an additional work day that increased our labor costs by $3.7 million. Secondly, we were impacted by an increase in benefit costs resulting from (inaudible) increases in the Midwest and West regions. Recovery from clients was limited in the quarter due to the timing of the increase in Chicago, and the late resolution of bargaining in northern California.

On a go-forward basis, we will be recovering a majority of these increases. The third item impacting operating profit was higher insurance rates, which increased Janitorial costs by $2.3 million in the quarter compared to 2011. The operating environment is challenging, I expect competitive pressures to continue. We will remain focused on initiatives we have underway to improve management of our job costs and will continue to focus on increasing our client portfolio and verticals that offer higher margins. The Janitorial Company is producing above industry standard results and that will continue in the future. With that, I will now turn the call over to Tracy.

Thanks, Jim. I'm going to provide an update on the Facility Solutions group. Q3 was mixed compared to last year's quarter at the same time, essentially, because the government departure from Iraq and the cessation of our related contract. The loss of that revenue and related profit, along with some margin compression in our traditional commercial facility services unit, continues to overshadow the record performance we are having in our Building and Energy Solutions business which is our mobile platform.

For the third quarter, the fiscal 2012 revenue was $229.9 million, down $6.3 million, or 2.7%, compared to the third quarter of fiscal 2011. Lower revenue of $13.6 million, or 27%, in our government business caused the third quarter decline of $6.3 million. The decrease, again, was primarily related to the early termination of Iraq-based US government contracts due to the withdrawal of our troops. While I remain frustrated with the opaqueness of the government business, I want to highlight the fact that we have expanded three existing contract vehicles in the past quarter and believe we will have better year-over-year performance in 2013.

Our Facility Solutions team started up a large contract in mid-July which will contribute $20 million annually in revenue, and we continue to achieve solid growth in our bundled energy services group, as evidenced by our winning a number of energy retrofit projects in Q3. Looking at operating profit for Facility Solutions, the segment generated $9.5 million for the quarter, $1.6 million or 14.2% lower than 2011. The government business year-over-year for the third quarter was down $2 million in operating profit, which, again, more than offset the significant improvement in operating profit from our building and energy solutions business.

During the quarter, we continued the integration of TEGG Corporation. And while the revenue contributed from the acquisition is small in scale relative to ABM, the benefits of the acquisition will come in higher margins and an improved mobile service platform. When we add our franchise locations and their sales headcount to our direct sales team at ABM, we now have over 400 people armed with the ability to sell our products and services and essentially solve one more discrete service problem for our clients.

Our model now has end-to-end capability and we can deliver consistent quality and service in urban, suburban and rural markets, which we believe gives us a truly legitimate platform from which to address current and future client needs across the building trades [sector.] And with that, I'll turn the call back over to Jim Lusk.

Thank you, Tracy. Moving now to guidance on slide 8. Based on the shortfall of revenue and operating profits from our government business, and weaker growth in the US economy, we are lowering our 2012 fiscal year adjusted income from continuing operations per diluted share to $1.36 to $1.42. We are also lowering our guidance for income from continuing operations to $1.08 to $1.14 due to higher settlement costs, increase in our self-insurance reserves related to claims from prior years, and the shortfall in our government business. As always, our guidance is exclusive of any new acquisitions. At this time, we would like to open the call to questions. Operator?

(Operator Instructions)

Our first question comes from Joe Box of KeyBanc. Please go ahead.

Hi, good morning, everyone.

Good morning.

A question for you on some leading indicators. Can you maybe just talk to where property vacancy levels have been trending within some of your core markets and verticals?

Yes. I would say the vacancy rates in general, even though it's a regional phenomenon, have been pretty flat recently. But the vacancy rate had a slight impact on our business, but not the greatest impact. On the verticals, what was the question about the verticals?

I was just asking for vacancy rates within some of your more pressing verticals like offices.

Well, the biggest vertical we have is commercial properties and commercial business. And, as I said, that vacancy has been pretty flat. I wouldn't say the vacancy in itself has any major impact on our numbers for the quarter or for the year.

Okay. Well, I guess, what I was trying to get at, was if it's flattish or even potentially improving in some markets that I am looking at, can you maybe just put some color around why we are seeing either job reductions or the aggressive pricing environment that you guys called out?

Well, I think the recession has been prolonged a little bit, or the fact of life we are not out of what we call the tough times, have people focusing on commodities like our Janitorial Services, in particular. Unfortunately, we continue to see price pressure, in particular, in that segment. I think it's going to continue for a while, until the time where we truly are out of this sluggish economy so people can focus on growth and a lot of other positive stuff. The other thing I want to mention is, I really don't think that the vacancy rate has any major impact on neither our -- the price pressure we feel and/or revenue growth. I think we have seen -- it's pretty flat. But certain markets are doing decent and other markets are just getting along. I don't think that's going to change in the near future, maybe even not in the long future.

I appreciate your comments there. A question for you on your implied 4Q guidance. Can you maybe just talk to what's included in your new guidance for the Facility Solutions or the government business? Are you looking at a 3Q type run rate, or are you baking in some potential new government projects for your implied 4Q guidance?

In our guidance, we are not including anything -- no home runs included. I would love to take a home run. I'm very open for home runs. But nothing is included. We are basically expecting the run rate to be pretty much the same as it was in the third quarter on the -- pretty much on most of our businesses. As Tracy mentioned, we expect a little uptick on our energy -- the on-site business due to the fact that we started a sizable contract in July. It's going to have some impact, but nothing major. What's also included is an expected one-time benefit of $0.11 for the quarter on tax-related items.

Okay. One more question and then I will turn it over. Question on your go-to-market strategy in Facility Solutions. It's certainly understandable that you guys have more market touch points and you've got a broader product platform. I guess, what I'm trying to understand is does that mean we are looking at maybe lower incremental margins until you bring enough volume to cover the cost? Or is the cost structure variable enough to where we would see typical incremental margins as you bring in some incremental volume?

Yes, I would tell you that the cost structure is variable, and that it increases at a decreasing rate relative to revenue. So it actually puts us in a better position the more of that mid-market business we go after. It's generally speaking much higher gross margin business than the traditional on-site business. It also requires a much higher SG&A to capture it. But for us, it's a blend and extend play, where the more of the mobile business and the more of the on-demand business that we add, the better the margins are going to be overall for Facility Solutions.

Great. Thanks for your time, guys.

Thank you.

Our next question comes from David Gold of Sidoti. Please go ahead.

Hi, good morning.

Good morning.

I wanted to follow-up with you a little bit more on the commentary on the run-off from the terminations in government business. So a couple of things I could use some color on. One is, can you give us a sense for how much more of that may be out there in front of you? In other words, I think this quarter, you said we were $25 million short of the expected to be. But as we look forward, how much more serious risk do we have in front of us, I guess, is the first question?

Before I give the call over to Tracy, I think I have some good news. We can't get out of Iraq more than one time. We can't get hurt more with that particular area. So, Tracy, please give a little color.

Yes, and to that point, we can only depart a country once, which inures to our benefit.

When did that officially happen?

January.

Okay, got it. So it wasn't all that surprising to you in the quarter?

No.

Okay, go ahead.

It hasn't been for the last two quarters. It's frustrating, but not surprising. What has been a benefit to us is within the last quarter, and specifically in the last 35 to 40 days, we have seen an uptick in contract wins, and primarily adds to existing contracts. And just so that you understand the government business, there is really two components. There's the kind of core competency in operations and maintenance contracts and things that we do day in and day out, and then there's the expeditionary business that we tend to do in war theaters.

That's where the variability comes in. It can be a great windfall and it can be disappointing, but it is geopolitical. We really have zero control over what happens there. We can deliver the services deftly as we possibly can, and if the politicians make a decision to go elsewhere, our contract ends.

But in the recent times, we've had expansions on our supply support activity contract of 21 additional FTEs. We've had improvements in our coalition joint task force contract of another 24 FTEs. We had a recent win, the BOS contract at Camp Leatherneck for another 22 FTEs. We got word that we will be re-engaging on a contract in Egypt that we'd had in the past, and we also recently got a domestic award with the Navy that bodes well for us. So it's not all doom and gloom. We do think that 2013 will be better than 2012 because we don't have that large hole to dig out of.

Okay. Got you. Then, just following up on that. There's a comment in the release, I think, attributed to Henrik, about the large issue being a shortfall of $25 million in expected sales in the quarter for the government business. So presumably, if that's not Iraq, because we knew that we were already out of Iraq starting in January, where did that come from?

Well, it is Iraq. It is from our regional expectations. It is also areas like the DLITE contract. As you know, we are one of six companies selected for this $9.7 billion contract. So when we made our plans a year ago, we thought it was pretty reasonable to include the $25 million or $50 million in DLITE revenue. That didn't come.

As you might also know, a lot of the government business that we receive is -- some of the business Tracy just mentioned. That is, you get a phone call on Monday, you start on Friday and the revenue comes in. It's very difficult to project. But when we talked about our shortfall, it's based upon a shortfall versus original expectation, not what we expected 60 days ago.

Okay, okay. And then, one other -- sort of more broadly, Henrik, and maybe Jim can help on this. I wanted to get a sense -- how do you think about go-to-market pricing in this environment from a couple of perspectives. One is, presumably if we find out -- it takes a little while to find out what the actual insurance cost is, if you will, given the adjustments that have to be made each year. But also, it's sort of, the tough market broadly. How do you think about it, basically, ensure that the contracts you're putting out right now will definitely be profitable to us?

Well, first of all, I would say there's one thing we are pretty good at and that is not losing money on particular contracts. We have very, very good management out there in all segments that knows how to bid a job. What I can't change is the competitive environment. It's always a question of time, that I've discussed a lot with McClure, we are the leader in this business.

When do we say, hey, let's get these increases or disappear from the market or [change] of contracts. But as long as they are profitable, and as long as most of our business is viewed by the third party as a commodity, you have to be very, very careful in these particular times of having an aggressive pricing strategy and an aggressive cancellation strategy. So we have chosen to be very aggressive in our renewal of contracts, long-term renewals. And I think there is one number that I'm particularly proud of for the Janitorial division and that is their renewal rate. Close to 96% is unique.

I would say of an average lifetime of 25 years per contract, which is absolutely unheard of in this business. At the same time, we might have a tough time, but medium-sized contractors are having a very, very, very difficult time. At one point in time, there's going to be some very attractive businesses for sale that are not making the same amount of money they are doing today. And at one point in time, a lot of these contractors won't have a chance of surviving this particular economic climate.

So I think we are in a very good precision long term. Unfortunately, Jim has to go through some of these difficult quarters where there are some pressures on margins. But at the same time, by renewing a huge amount of clients, we are looking forward to a steady revenue stream for the coming years.

Got you. Perfect. That's helpful. Thank you.

(Operator Instructions)

Our next question comes from Adam Thalhimer of BB&T Capital Markets. Please go ahead.

Hi, good morning, guys.

Good morning.

I wanted to make sure I understood the guidance here, Jim, and your -- we have a GAAP EPS range, we have an adjusted EPS range. Did both of those include this one-time benefit of $0.11?

Yes, sir.

Does that feel like something we should take out of the adjusted range?

That's why we mention the range and the one item. The one positive item of $0.11, it's not a slam dunk in this potential fourth quarter. It could happen. It's either going to happen or not happen. So the range, you can include it or exclude it.

So we gave you both pieces of information. But it's just not a slam dunk. That's why we called it out directly. Does that make sense?

Okay. Well, sort of, I just wondered why. I can understand why you would put it in GAAP. But if it's one time, I would think that -- I would think that your adjusted guidance would be kind of $1.25 to $1.31.

I think, Adam, on this particular asset we typically put above the line. That's the only reason. But that's why we called it out, so you can do it either way that you choose is the right way to do it.

Got it. Okay. And with regards to the guidance, I think earlier this year, and this is probably true for more people than just ABM, but there was certainly the hope that there would be some kind of back half pickup. Henrik, does it feel like the economy, as a whole, does it feel like it's gotten worse in the last couple of months or has it just not gotten better? What is your take on the macro situation out there?

I feel that it's just not gotten better. I think it's coming along. In our business, in segments of our business, the uncertain political environment we live in is not helping us. So I feel that there is more uncertainty out there than I've seen in the past. I think a lot of our clients are not making the long-term investments until they feel more safe and secure about the economic environment.

At least that's how we feel. In one area, we can measure activity, and also Parking, and Parking, as you can see, is pretty flat on the top line. We did a pretty good job on the bottom line, but pretty fair on the top line. That normally is our indicator of activity levels. The economy is hopping along and nothing -- I would not call this exciting times.

And if you notice our comment earlier, we will, over the next period of time, change our strategic view a little bit and focus much more on the mid-market business. But we have experienced tremendous growth from a very talented group in our Company. More emphasis on our growth areas and accepting the economy the way the economy is.

Okay. And then, last question, maybe for Jim McClure. You talked about the Janitorial -- the challenges in the Janitorial business. But when you look at the margins for that business, the operating margins, they are pretty close to peak levels. I just wonder, if you were in a better environment, where do you think that operating margin for Janitorial could go?

Well, like I stated, we are at the upper end of the range in the industry. We have been able to sustain that by aggressively working with our clients to retool our contracts. So that has a negative effect on the top line, but we have been able to preserve the bottom line through aggressive management in the field. In better times, they would be better.

We'll continue to strive for that, but the elongation of this recession creates an environment where my customers don't like to pay for things they usually pay for. So it becomes a negative, so it's tougher to manage, but we are managing aggressively through it.

Got it. So in a recovery, you'd stop [accelerate] and then maybe [maintain] or slightly grow the margins from where they are today?

One would think, yes.

Okay, great. Thank you very much.

Thank you.

Our next question comes from Michael Kim of Imperial Capital. Please go ahead.

Hi, good morning, guys. Just turning back to the government business, what have you seen in the past with administration changes? Does that impact the timing of contract awards of funding as new personnel come in, or what has been the experience that you have seen in previous changes?

So what was experienced in the last change of administration was a complete stop of all activity. It really took six months to nine months for them to start getting any normalcy back into the bid process. It's been slow ever since. So the anticipation is, if there's no change in the current administration, we wouldn't see much of any change in the pace of contracts.

As evidenced by different pockets around the country, we have talked to surety bonding people who say that their client base is down 40%. We are thankful that we have what we have. If the administration changes, I think you will see some time for people to get their sea legs and it probably could be three months to five months before you'd see contracting pick back up. But, again, for us, the real issue is, what's happening with the expeditionary and the training work, as opposed to the core business that we have. We are seeing an uptick in that. So barring any additional unforeseen circumstances, I think we are pretty sanguine in the fact that we are going to be able to do better than we did this year.

And just specific on the expeditionary work, how much exposure do you guys have in Afghanistan? And do you see sort of a similar impact on a withdrawal scenario?

Significantly less impact there than we had in Iraq. Very different [op] tempo associated with that contracting activity, as well. The contracts are shorter in duration. There not as sizable. I think what we are optimistic about is that, to date, Henrik alluded to it earlier, we have a part of a $9.7 billion contract that we put no revenue against. We are currently bidding three different contracts under that vehicle and there are seven more pending. At some point in time, you would like to believe that we will get our share of that business. It's just a matter of when, not if.

And, specific to that, the DLITE contract, why do you think -- why hasn't there been any activity there at this point, I guess, there was some bid reevaluations. But is it something that you are expecting to see by the end of this year? Or sometime early next year?

Yes, I can't speculate on why it has taken so long to affect any of the contract results that we are looking for, only that it has. The current contracts that we are bidding, one is for CENTCOM, that's a $40 million a year contract for three years. We have another OSC [RTOP] contract that is $11 million for three years that we are bidding on. We have and OSI contract, $4 million for three years. So they are starting to trickle out. And the real question is, are they going to continue to be bid at the same pace that they were, which was really slow to get started. And once we get past the initial uncertainty with the election, is this going to speed up the pace at which we see contracts coming out? We sure hope so because it's been an anomaly, I would say, for the last several years, in terms of uncertainty dictating the pace of contract solicitations in the government space.

And assuming a reasonable win rate, would that get you to that $25 million to $50 million in revenues that you had previously, sort of, dialed in for the DLITE contract?

Assuming standard or traditional win rates, yes.

Okay. Great. Thank you very much.

Thank you.

I'm showing no further questions at this time, and would like to turn the conference back over to Mr. Henrik Slipsager for any closing remarks.

Well, thank you very much, and thank you very much for listening to our call this morning. I look forward to talking to you at the end of our fiscal year in December. Have a nice day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.