ABM Industries Inc (ABM) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries fourth quarter 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 follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Henrik Slipsager. You may begin, sir.

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 and Tracy Price, Executive VPs of our operational part, and Sarah McConnell, our Senior VP and General Counsel. Today I will provide a brief overview of our accomplishments for fiscal 2012. Jim Lusk will discuss details of financial results for fourth quarter and fiscal year. I will then comment on the Company's operational results for the Parking and Security segment for the fourth quarter before turning the call over to Jim McClure who will discuss operational results for janitorial services, and Tracy who will discuss results for the Facility Solutions segment and comment on recent marketing achievements.

Jim Lusk and I will conclude our prepared remarks with a review of strategy and outlook for fiscal 2013. There's a slide presentation that accompanies today'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 and 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 4 for a review of our fiscal 2012 accomplishments. Although bottom line results for the year were adversely impacted by a sluggish economy, environment, and low government spending, ABM had number of significant achievements for the year that I would like to mention. We produced record revenues of $4.3 billion. We generated cash flow from operations of approximately $151 million. This makes the third consecutive year ABM's cash flow from operations were $150 million and above. Free cash flow, defined as net cash flow from operations less capital expenditures for the year, was approximately $123 million. Negotiated three sizable transactions which closed in the new fiscal year.

These acquisitions will enable ABM to expand our presence in two of our key verticals, aviation and healthcare. Acquired TEGG to help expand the Company's on-demand and mobile based businesses. Generated 18% top-line growth in our ABM Building & Energy Solutions business. Launched our new brand and OneABM campaign and strengthened our marketing capabilities, surpassed over 800 locations and 360 million square feet of green cleaning, reduced outstanding debt by $85 million, and returned over $31 million to shareholders in the form of dividends. Now, I would like to turn over the call to Jim Lusk for financial review of fourth quarter and for the fiscal year ended October 31st. Jim?

Thank you, Henrik. Good morning, everyone. Turning to our fourth quarter of fiscal 2012 results on slide 5, revenues of $1.09 billion for the fourth quarter were up approximately 1% sequentially and 0.8% compared to the prior year. We achieved slight growth in revenues in our Janitorial and Parking segments and 4.1% growth in Security. Gross margins for the 2012 fourth quarter were 11.2%, a decrease of 10 basis points from 11.3% in the prior year period. SG&A expense for the fourth quarter decreased $2.8 million or 3.4% to $79.6 million. The fourth quarter of fiscal 2011 included a benefit of $3.7 million related to a refund of health insurance premiums paid to one of the Company's health insurance providers. Amortization and intangible assets for the fourth quarter decreased $0.7 million to $5.3 million. The decrease was related to certain intangible assets being amortized using the sum of the year's digits method which results in declining amortization expense over the asset's useful life.

Interest expense decreased $1 million to $ 2.3 million and $3.3 million in the 2011 fourth quarter. The decrease was from lower average borrowings and average interest rates under the line of credit. The average outstanding balance of the Company's line of credit was $269.2 million during the quarter compared to an average balance of $346 million in the prior year-ago quarter. Our effective tax rate on income from continuing operations for the fourth quarter of 2012 was 21.8%, compared to 41.8% in the prior year period. As previously communicated, the tax provision for the fourth quarter of fiscal 2012 included a benefit from a one-time discrete tax item associated with a prior acquisition. Adjusted EBITDA, which excludes items impacted comparability, was $50.2 million for the 2012 fourth quarter, down $1.1 million from the prior year period. An increase of $1.8 million from Janitorial and Facility Solutions was offset by higher health and welfare expense at corporate.

Fiscal 2011 included a $2.5 million benefit related to a refund of health insurance premiums. Looking at our financial results for the fiscal year ended October 31, 2012 also on slide 5. Revenues were 4.3 billion, up 1.3% from the same period last year. The increase in revenues is the result of organic growth, acquisitions, and expanded services with existing clients partially offset by lower revenue from government business and job cancellations, some of which were voluntary. Net income for the fiscal year was down 8.6% at $62.6 million or $1.14 per diluted share from $68.5 million or $1.27 per diluted share the prior year period.

The decrease of $5.9 million after tax is a result of the following. Higher self insurance expense of $3.8 million from claims related to prior years, $5.5 million higher expenses associated with the settlement of certain legal cases, and a $2.5 million increase in labor costs for one additional working day in our Janitorial segment. These items were partially offset by lower interest expense at $3.5 million and a $3.2 million reduction in acquisition costs. Adjusted income from continuing operations from fiscal 2012 was $76.1 million or $1.39 per diluted share, essentially flat compared to $75 million or $1.39 per diluted share.

Now turning to slide 6. Days sales outstanding at quarter end were 49 days down two days on a sequential basis, flat year-over-year. Cash provided from operating activities for the quarter ended October 31, 2012 was $66.8 million, down $8.4 million or 11% compared to the same period in fiscal 2011. Income taxes paid increased $4.8 million in the fourth quarter of fiscal 2012. Free cash flow, defined as net cash from operations less capital expenditures for the quarter, was $62.5 million.

Turning now to insurance, final actuarial valuations were completed during the fourth quarter covering certain minor self-insurance programs of the Company. The results of the actuarial evaluations were a noncash decrease in the self-insurance reserves of $2.2 million pertaining to claims from prior -- from years prior to fiscal 2012. The aggregated adjustment for fiscal 2012 in self insurance reserves was an increase of $7.3 million or $4.3 million after tax. Moving to self-insurance claims paid during the quarter, the total expenditure was $22.5 million, up $2.1 million compared to $20.4 million for the fourth quarter of 2011. I will now turn the call back to Henrik.

Thank you, Jim. Please go to slides 7 and 8. I will now provide brief highlights of our Parking and Security operations segment -- operating segment for the fourth quarter before turning the call over to Jim McClure for an update on Janitorial and Tracy Price for an update on Facility Solutions. Parking revenue was essentially flat for the quarter compared to the prior year but operating profit was up nearly 2% due to higher margin job and effective management of operational costs. Security had another good quarter continuing to post year-over-year gains in the top and bottom lines as the segment benefits from new business. Revenues were up again over 4% while operating profit was up 2% despite higher legal expenses. Both Parking and Security ended the year with good momentum and I'm optimistic this will continue into fiscal 2013. Jim McClure will now discuss results for our Janitorial operations. Jim?

Thank you, Henrik. The Janitorial business ended the fiscal year on a good note with revenue up over 1% in the fourth quarter, operating profit up 4%, and margins exceeding 6%. These were the best quarterly results of fiscal 2012 as initiatives I mentioned on the third quarter call, vertical market focus, and client retention continue to benefit the Janitorial segment. We expanded our sales in high-tech, hospitality, and government verticals. Tag revenue for the fourth quarter was approximately $40 million, up $1 million on a sequential basis and down $1 million on a year-over-year basis. Moving to client retention for the fourth quarter, Janitorial achieved a rate of 94.2% compared to 93.2% for last fiscal year. Historically Janitorial was running around 92%.

I remain pleased with our progress on client retention but the Janitorial organization must continue to focus on this critical initiative and others as we look to ways to offset some of the anticipated increases in the state unemployment insurance rates for fiscal 2013 and other items that could adversely impact Janitorial operating results. Before turning the call over to Tracy, I want to make a comment regarding the impact of hurricane Sandy on Janitorial operations. As we have all seen, the devastation and destruction to private and commercial property was substantial. We feel for the people impacted and despite our large population of employees on the East Coast, only a few sustained severe property damage. The senior management team in the northeast took the lead in responding to a number of issues impacting ABM's portfolio of clients located in the regions hit by Sandy.

We have always maintained that one of ABM's competitive advantages is the size of our workforce and our ability to quickly respond to disasters. This unique capability enables ABM to work with our clients in quickly getting their property back to a safe operational state and minimizing the economic impact to their businesses. Our teams have done an outstanding job over the past seven weeks, and we are grateful for their efforts. We are still analyzing what the effect on operating results will be for fiscal 2013 but for the fourth quarter of 2012, there was no material impact. With that, I will turn the call over to Tracy.

Thank you, Jim. I will provide an update on the Facility Solutions Group. Q4 marked the turning point for FSG as we began to see improving trends in revenue and operating profit for the quarter as key contract wins I noted in the third quarter call are starting to contribute to results. While revenue of $238.2 million was slightly lower compared to the fourth quarter of 2011, operating profit of 10.4 million was up over 13%. Excluding the government business, revenue for FSG was up 8.2% compared to the same period last year. As anticipated, the government business was adversely impacted by the loss of projects early in the fiscal year and as outlined on the third quarter call. The unanticipated [swift] withdrawal from Iraq can only happen once and that anniversary date is January. In the fourth quarter, we saw an uptick in contract wins and we feel better about our backlog based on recent activity.

I'm optimistic about 2013 and expect our government team will grow revenue even if sequestration becomes reality. ABM Building and Energy Solutions business, or ABES, which is our mobile platform, had another strong quarter by posting an increase of 7.9% in revenue and a 7.3% improvement in operating profit. For the fiscal year, ABES achieved revenue growth of approximately 18% compared to 2011. With the recently announced acquisition of Calvert-Jones and the integration of TEGG, our ABES business is strategically positioned to broaden existing vertical and geographic market offerings and to continue capturing a share of the market for energy efficiency project record that's a market opportunity by some estimates which currently exceeds $5 billion per year in sales and is projected to grow to over $16 billion by 2020.

Turning to slide 9, 2012 is truly been a transformational year in terms of our rebranding and marketing initiatives. During the fourth quarter, we continued to gain exposure for our new brand and announcing key accomplishments including expanded relationship with AEG into Europe, the continued installation of EV Charging Stations, and we concluded the fiscal year by displaying our brand nationally when we rang the closing bell at the New York Stock Exchange. We begin fiscal 2012 with the goal of communicating through rebranding and marketing programs that the new ABM is people using their industry specific knowledge along with award winning technology to deliver a suite of services beyond just building maintenance.

We want our clients to see us as extending the life of their assets and continually adding new value. Despite economic headwinds and a year of uncertainty surrounding actions Washington will take, we continue to make the investments in our business and our brand and we launched key initiatives including our ABM energy group, the ABM On-Demand platform, our unified workforce technology framework, all to strengthen ABM's capability as a leader in integrated facility solutions and position ABM for the next phase of our growth. And with that, I will turn the call back to Henrik and Jim Lusk for an update on our strategic plan and outlook for 2013.

Thank you, Tracy. I feel it's important to spend some time on today's call sharing a few highlights from our updated strategic plan. We reached a very critical stage in our Company's evolution by continuously developing and improving our business primary to a traditional service line focused on growth strategy. This strategy has served the Company very well for many, many years and has brought us to places we could only have imagined years ago. Our service lines have now reached critical mass throughout the US. We've been working diligently to create a new brand, which I'm very proud of and have also focused on breaking down historical organizational walls to create OneABM.

Every day I hear success stories for key managers have reached across the aisle to help a colleague from another business unit become successful and nothing makes me happier than to see this collaboration take place throughout the organization. Our ambition is to become a company where collaboration is part of our DNA and our domain expertise and vertical market growth are generated through a strategic focus on geographical markets like never before. When updating our strategy, we again analyzed our marketplace, our competitors, and our strategic strength. What we determined is that while it's important to take advantage of our strength and position ourselves as a leader in integrated facility solutions as described in slide 11, we must also address areas that have impeded our growth.

We've embarked on a number of changes to reconfigure ABM's business model by focusing on a set of strategic levers which impact our operations and the enterprise itself. To provide a context, here are the factors impacting the near-term horizon for companies in the facilities service market and ABM. We have uncertain economic growth, we have market pressures and pricing pressures, and last we have consolidation of services and geography throughout both the country and the globe.

Operations. ABM's operations model has been trade based and servicing our clients locally, regionally, and in certain cases nationally. Operating under this model and expanding primarily through acquisitions over the past 10 years, ABM has achieved a 7.8% compounded annual growth rate for revenue and 11% for adjusted EBITDA in that time period. While these results, especially against some of the economic challenges we faced are good, we haven't been able to crack the code of marketing our services across all lines until recently. To try our OneABM initiative and ensure our clients and prospective clients know the full spectrum of ABM services and capabilities, we're doing the following to improve our long term growth prospects and operational results. Realigning the operational structure to accelerate the OneABM growth strategy by creating a market based organization. Integrating on-site service disciplines, and investing further in our ABM mobile network and ABM On-Demand which represents better long-term growth and higher margin opportunities as shown in slides 12 and 13.

Leading our On-Site services is Jim McClure. These services include Janitorial, Security, Parking, and On-Site Facility services. Tracy Price will continue to lead our ABM Mobile, ABM On-Demand, and government businesses. In addition to these businesses and corporate marketing, Tracy will take responsibility for corporate sales and other growth initiatives. Optimizing service delivery by deploying subject matter experts who collectively ensure standardized service and offer diverse client base and maximizing vertical market expertise to drive organic growth via targeted vertical segments where growth and margin profiles are greater than our commercial-based business.

Our recent acquisitions of Air Serv with revenues of approximately $300 million and HHA with revenues of approximately $50 million, [I'd say] of investments were made to increase our share of vertical market with better long-term growth profiles. With Air Serv, we acquired a business with an 11% compounded annual growth rate for organic revenue over the past five years and combining with our existing Aviation business, demonstrates to clients in this vertical our broad range of capabilities. Recently we were notified that we were in the final stages of a potential $25 million to $30 million contract for an energy project with one of the large US-based air carriers. In addition, we picked up a contract at Glasgow Airport which is a new location for Air Serv.

Our acquisition of HHA gives us a healthcare vertical with over $200 million in sales combined with our existing business. In addition, HHA provides ABM with an expanded portfolio of services and an entry point into the $64 billion hospital market for housekeeping and food service. Organic revenue compound annual growth for HHA over the five years exceeds 20% and we believe there will be some sales synergies when we market to our existing healthcare clients in clinical engineering, parking, and facility solutions.

At Enterprise. The next set of strategic levers will be a [work around] which complements the operational initiative focused on our Enterprise model. We made a number of critical investments over the past three years in our infrastructure such as operating our information technology systems, further consolidating back office operations, improving business analytics, and introducing biometric time-keeping programs.

To create additional efficiencies leading to improved productivity and integrated scalable system and processes, we plan on doing the following at the Enterprise level. Centralize up to 90% of the transactional activity and further consolidate back-office operations by creating an Enterprise service center. Increase field analytics in operational support for forecasting and bid preparation and improvement in multifunctional contract management system to automate existing processes as well as capturing key client information and billing parameters. Together these processes and system improvements are expected to deliver cost savings annually of $5 million to $7 million once fully implemented over the next 18 to 24 months. For fiscal 2013 though, all of those savings generated will be used to fund additional investments we're making in [jump in our] revenue and expand our vertical markets.

In summary, please turn to slide 14. Our goal is to market and deliver service at OneABM is well underway. Over the next two fiscal years, we will continue to utilize the significant cash flow we've been generating annually by making strategic investments to broaden services, improving client facing technology as well as internal analytics, expanding and entering into vertical markets with higher growth rates and margins, as well as leveraging our geographical footprint and skill set built over 100 years. We believe ABM is uniquely positioned to become the leader in the integrated facility services.

We are looking forward to providing an update on our plans and our processes we are making integrating recent acquisitions early next year when we host our investor day. We're hopeful at this point in time the fiscal cliff will have been resolved and with that the uncertainty and drag on the US economy will be put to rest. I will now turn the call back to Jim Lusk. Jim?

Please turn to slide 15. For today's call, I'm going to provide a list it of items that affect our current outlook for the 2013 fiscal year. The recent acquisitions are expected to be slightly accretive, excluding transaction and integration costs. Collectively, last 12-month revenue for the three acquisitions is approximately $350 million. Labor workdays are 261 which is one workday less than fiscal 2012. The second quarter of fiscal 2013 has one fewer labor workday. The Company estimates one workday of labor expense for the Janitorial segment is in the range of $3.5 million to $4.5 million on a pretax basis. To drive long-term growth and strengthen ABM's competitive position, the Company will be making additional investments in key growth initiatives identified in our strategy update. We anticipate the majority of these costs will be offset by operational and Enterprise initiatives to improve the expense to revenue ratio.

We're anticipating a $1.5 million to $2.5 million increase in state unemployment insurance on a pre-tax basis. This is expected to mostly impact the first half of the fiscal year. Annual depreciation and amortization expense because of the recent acquisitions is expected to increase from fiscal 2012 in the range of $17 million to $19 million. Interest expense is anticipated in the range of $14 million to $16 million. Capital expenditures are expected to be in the range of $39 million to $43 million. Cash taxes are expected to be in the range of $23 million to $27 million as the NOLs from the OneSource acquisition near full utilization. The effective tax rate is in the range of 38% to 40%. This assumes that the federal government extends the workers' opportunity tax credits retroactively. At this time, we would like to open it up to questions. Operator?

(Operator Instructions)

Joe Box, KeyBanc Capital Markets.

Question for either Jim Lusk or Tracy. If the government business was down 34% this quarter, can you just give us the percentage declines from 1Q through 3Q just to give us a sense of how it should comp next year? I guess I understand that comps are going to get easier in January, but just any color there would be helpful.

I think overall given the fiscal cliff we're not exactly sure what's going to happen with the government in general. We don't see too much of a short term impact on us but there are a lot of unknowns. That's one general surround about what's going to happen next year.

Let me just add one thing, and that is, I think the first quarter you will see pretty much the same decline year-over-year in the government business and come in the second, third, and fourth quarter year-over-year, you will see growth in the government business year-over-year, if that responds to the question.

That is helpful. Actually, I should have specified. I was looking for some backward lacking data. So what the percentage decline was in 1Q '12 through 3Q '12 so we could narrow down what the comps are.

All right. I don't have that in front of me. Jim?

Just don't have that in front of us. Don't have it at our fingertips right now.

Okay. I can just circle up with you guys after then.

Yes.

Sure. Sorry about that.

No worries. Tracy, you guys had good growth in the Facility Solutions business, ex the government business. Other than your energy portfolio that has been growing pretty well, can you just maybe highlight where you've seen some of the growth and how we should think about growth in some of those areas going forward?

Sure. So I think if you look at the platform business for mobile, four of the five businesses that we have in that group had record years. So if you look at our mechanical business, record year. Our lighting and electrical business, record year. Our franchise business, record year. So we're making investments in those groups. We have invested in sales headcount, as well as infrastructure as well as new locations. So I believe that's going to continue, and we feel very good about those mobile business platforms.

The franchise business is our highest gross margin business as a company with the acquisition of TEGG. We've been able to leverage across that enterprise, add additional services, bring a university system to TEGG that they didn't have before, so there's a lot of complementary elements there that are going to help grow that business group for us.

The ABM Health business with the acquisition of HHA is going to take a significant leg up next year. We have a broad-based service offering there that we didn't have in the past. So we've expanded beyond clinical engineering to get into the other elements of the healthcare business that are important to us from a facility solutions perspective. So I think if you look at the mobile platform and then us adding on our on-demand capability, we really have kind of completed the service ecosystem for the ABM client and we can provide the same level of services that we do in the on-site business across the entire enterprise and virtually every market that we're in. So I think it's going to be pretty broad based, and all of our projections for everything to do with our mobile service capability are showing growth for next year.

Excellent. Thanks for that. It looks like there is going to be a step-up in CapEx in 2013. Henrik, I know you talked about making some billing and technical investments. Other than that I guess, can you just flush out what's driving the increase in CapEx and maybe how much is coming from some of the recent deals?

Yes, a good piece of the CapEx and maybe one day we should separate it from the rest, is our expected investments in operational assets, such as buses and airports, et cetera, where it's basically a revenue driven CapEx investment. So that -- we're going to see an increase in that this year based upon the investment we made at aviation business with Air Serv. Other than that, it's pretty much standard. Some investments related to the back office on the IT side, but I would say, again, on a normalized annual year basis, a company like ours should be investing $20 million to $30 million. This year, we probably expect $40 million and that is associated with these extraordinary situations which I think are pretty good situations.

Sure. Very good, guys. Thanks for your time.

Thank you.

Andrew Wittmann, Robert W. Baird & Company.

Henrik, you kind of as you were going through the strategy review, you kind of identified that there's been some inhibitors to maybe better cooperation inside the Company, cross-selling, what have you. Can you just talk about, kind of give a maybe a little bit more detail on what historically some of the inhibitors have been and what you are doing today to break down those barriers to look more integrated?

Yes. I'll be more than happy to. As you can imagine, a company like ours, we went into the different business as a different times and there was probably a great will or tendency to try to separate yourselves from the janitorial business, which was our big -- the big engine in the Company, and if you were in the engineering world and parking world, et cetera, et cetera, I think you would try to get your own personality by getting as far away from janitorial as humanly possible, and that's why you had the different names and the different entities starting at different times. At the same time, people were compensated only based upon their own areas of success. So theoretically, if you're sitting in Chicago or New York, and you have a big janitorial contract, there's no incentive for this particular person to introduce his colleagues to that particular same job because the only thing they can actually do is putting his business in jeopardy and he will not make any more money by introducing new services to existing clients.

So what we're doing now is on a city by city basis, we're creating a market leader that will be responsible for all services. These subject experts below this market leader will all be compensated based upon the overall success of that particular marketplace so we are driving and pushing cooperation and collaboration between each of these different historically strong trades. We expect -- really, we expect both growth and we expect sizable synergies associated by eliminating a number of offices and create greater communication. This is on top of the vertical market strategy which I think is pretty obvious what we're trying to do there. So those are the two main focuses with respect to the on-site.

The last part of what you just heard Tracy was talking about is the on-demand side and the mobile side, which we have a proven track record of growth in, and we want to continue that growth, and we, as a matter of fact, hope we can accelerate that growth. So we're trying to focus on growth on three different areas, and I think we're going to be pretty successful in it.

To be clear, some of these market leaders and some of these other people that are kind of charged with selling across the platform, are these incremental heads, and is this part of the offset why we're not going to see any near-term accretion from some of the back office changes that you're making? I think you mentioned the $5 million to $7 million in the next 18 to 24 months. It sounded like you're kind of managing that for the near term expecting that kind of back end loaded. Are these incremental heads that take away some of those cost synergies that otherwise you would be seeing?

No, they're not because it's not in general, I'll never say never, but in general these existing individuals that will be picked based upon qualities and not based upon what division they're from. The key thing for us is finding the best person, the best individual, the best manager in a particular local market, local area, but things take time, and the reason why we don't expect a greater synergy in the short term is we already in December, and a number of these savings associated with leasehold and with branch offices, et cetera, et cetera, before we get it closed, it will be six or eight months into the year so there's some timing issues, not action issues that delay, but some timing issues with respect to realization of cost savings. So the cost savings will be there, but it's just a little slow to the fact that things take time.

Thanks. And then, Jim, I want to dig a little bit into the acquisitions that you announced subsequent to the quarter end. And really, I guess starting with -- I know you kind of outlined the kind of cumulative revenue that these three businesses delivered over the last 12 months. Can you give us -- we see that there are only, at least for the first year, modestly accretive. Can you just give us a sense of what maybe like the EBITDA margins are so we can kind of understand the overall contribution here and maybe some sense about when we are going to see some of the accretion, assuming that some of the amortization charges will be burning off here.

Yes. On the acquisitions I said will be slightly accretive. Kind of piggybacking on what Henrik said, it takes a while to integrate this stuff. Imagine we're on a sum of years digits for things like amortization so that tends to burden the first year more than the second year. These acquisitions have had really good revenue growth. They're profitable. We'll talk more about that probably at our analyst day once we get a little more integration going. But slightly accretive is definitely what they will be. You have things like you have to implement [Sox] the first year and stuff like that but these will be growth engines for us. They will -- they're focused on aviation and healthcare which Henrik talked about is some of our sweet spots. As we integrate that with our existing businesses, I think you will see higher than average growth and profitability there than you've seen in some of the other places that we've had.

Let me just add one thing. This is a 103, 104-year-old Company. I've never seen a [bust] like this before in the Company's history. I'm actually looking forward to these calls in three or four or five quarters because I think you are going to see growth that you haven't seen before. We are doing all the right things. Enthusiasm in the field is beyond my expectations.

Digging back into some of the growth that's embedded in some of these acquisitions, can you just talk about the kind of underwriting hurdles or maybe the IRRs that you're looking for? Clearly last quarter, you gave yourself another allocation opportunity with your own stock. Clearly at $20 and just using a $200 million outlay of capital here in the quarter, that could have been potentially a lot of shares, 15%, 20% of the shares given today's share price, which could have led to certainly near-term accretion. That doesn't necessarily mean it's best for the long term but could have been a lot more near-term accretion. Can you just talk a little bit about kind of how you look at the two opportunities and what maybe some of the IRR underwriting threshold that you're using as you do some of these acquisitions?

Absolutely. I'll be more than happy to. First of all, we're a dividend paying organization. We've done that for many, many years. We're trying to make sure that the shareholders do get returns before people can agree with that or disagree with that but at least when they buy an ABM stock, they know what to expect. Secondly, to buy back stock will give us a very nice short term effect but I have to, I think it's my job, I think the shareholders would like me to ensure long-term growth and long-term shareholder returns. And the IRR on those acquisitions will both, medium term and long term, way exceed the returns on buying back stock in my opinion.

I'll leave it there. Maybe I will jump back in later. Thank you, guys.

(Operator Instructions)

Michael Kim, Imperial Capital.

Henrik, could you talk a little about the pricing environment in janitorial and the level of client retention? How you're balancing that with the -- I think you talked a little bit about some of the voluntary job cancellations which I assume is related to some pricing.

Yes. I think the pricing pressure is still there. I think the -- especially in janitorial, I think the fact of life is that it's not only in pricing pressures, probably cost pressure where we get these 0.1% or 0.5% or 0.7% increases in [suey] and other places so it sneaks the -- the sneaky effect on the cost base of our business but I don't think the pricing pressure is worse than it's been. We've seen some growth in Janitorial. This is -- you're not going to see 60% growth in Janitorial in our size, but we are actually seeing growth that we haven't seen in quite a long time. So overall I think the competitive marketplace, if I should look across all lines of business is probably equal or maybe slightly better than we've seen the last two or three or four years.

Great. Just on the vertical market strategy, do you see an opportunity to leverage into adjacent verticals or is the primary focus in the near term on expanding your presence in your core verticals?

Well first of all, we do plan to expand into other verticals at a later stage. We have these verticals pretty much isolated and know exactly what will be next, but we want to see and also prove internally in the organization that these two verticals we're looking at focusing on right now will show growth at a level that we haven't seen in our standardized trade organizations. So it's a process where we're focusing on two, and then hopefully in '14 and '15, you'll see us going to two or three or four of the vertical markets.

Great. Switching gears to the government business, as you look at second quarter of next year through the balance of the year, are you assuming some improvement in the budgetary environment just in the face of sequestration, or do you have improved visibility just based on your backlog and recent contract wins?

It's a combination of a number of things, but I think we do hope that we're going to get -- first of all, a lot of what we talk about the government assuming the so-called fiscal cliff is not going to take place because I really don't know what's going to happen if in fact the fiscal cliff takes place. I hope you can understand and appreciate that because I don't think anybody else knows, either. And if they know, have them call me. But the key thing in what we see in government is the activity level is very high. We've been successful in a number of contracts, and we just hope that these contracts will go the normal way which means lead to an actual start-up and delivering of a service. If that's the case, we're going to see a very, very good year in our government business in a year or so. We're crossing our fingers for some normality in that different kind of world.

Okay. Any update specifically on the DLITE contract?

Yes, the update is we still haven't gotten anything. (laughter) So there's clearly an upside. Year-over-year the DLITE contract will not be lower. I can guarantee that.

Okay. Great. Thank you very much.

Michael Gallo, CL King.

Good morning. Perhaps I missed it. I joined a little bit late. Henrik, could you comment at all on what you are seeing near term on the non-government business as a result of the fiscal cliff? Is there a pause? Is there a reluctance to award contracts? Do you think it's kind of frozen up until we get more, or is the non-government stuff just kind of moving along steady as she goes? Thanks.

I think you will see a -- assuming there will be a fiscal cliff, I think of course there will be an impact in government. There will be an impact for us on taxes. We mentioned that earlier. Work tax credits because we don't know if that's going to be implemented at all. But if you look at the traditional services, I think you can go back to '09 and see what happens in '09 and '10 with the janitorial, our standard facility services, security and parking. Parking was somewhat impacted with the recession due to traffic when down, but unemployment went up. But the other services at least short-term was not very much impacted. There will be some pricing pressures but I don't think you are going to see any major impact in '13 in those services.

Clearly where we're going to see impact will be energy retro fits in other areas but people might not want to make an investment if there's no certainty in the marketplace. So overall, on our on-site businesses, I think very little impact on the mobile and the energy side, some impact in the government service, unknown government folks believe it's going to be relatively small impact in '13 and a big impact in '14 but again, we really don't know, but we expect later. That's why we don't want to give guidance because our guidance is going to be spread over $0.40, $0.50, $0.60. We can't do that. So lack of knowledge, and I think a lot of people are sitting in the same situation I'm sitting in right now that we really don't have the knowledge to give you more information. Sorry, but that's the way it is.

Henrik, just a follow-up to that. You talked a little bit more about the acquisition of Air Serv. Will that add some additional cyclicality to the business, given the size, or would you expect that that's going to be pretty steady as well? Assuming the environment gets more difficult.

I don't think it's going to be more cyclicality for the business because of Air Serv. Air Serv is still based upon the same fundamentals as our on-site services with some exceptions. We just mentioned in the call that we might have gotten a sizable energy job in the government business, and that is just an example of us going into a vertical and being able to introduce and utilize our capabilities and know-how to introduce new services to this particular vertical. But from a cyclicality point of view, it's not going to be different from what you've seen in the past.

Andrew Whitman, Robert W. Baird.

Can you just remind us, Jim, how big the government business was in terms of contribution to revenue in 2012, the contract there?

The government business was about $150 million round numbers, somewheres in that range.

Okay.

We have some income from some ventures we have that you won't see in the [revenue] line.

Those numbers are kind federal government business. We have other government business, if you will, but that's federal.

That's the business that's been the challenging part, the $150 million, plus most of that really that joint venture income. Right, Henrik? The majority of that is government business as well.

But it's also represents, in my opinion, the size of the government business, of course, down from when we bought it, but represents, in my opinion, humongous opportunities. Very limited downside now compared to where we were, and a humongous opportunity and upside. We've got a great team there.

So as you -- this is kind of asked before, but I'll just ask it a little bit more explicitly. Exclusive of the federal government exposed stuff, your business is probably one of the more visible businesses in terms of earnings outlooks than many companies that I cover. Can you talk about kind of the business outlook ex government in terms of what you see on the top line there?

Well again, I would be happy to. It is -- you're right about one thing. We are from that perspective steady eddy. Now we're trying to create a growth vehicle. So on top of being consistent on the earnings side, we also have growth built into the model. On the on-site services, you are going to see, again, very limited growth this year, in my opinion. You are going to see -- hopefully we're going to see this 2% or 3% growth in the old businesses. We hope there's going to be some higher growth in the old security and old parking business as well as facility services. The growth will come from our mobile and our on-demand business. We've seen growth this year. We've seen growth the year before. It's all been double digit. It looks very, very promising. So overall I think you are going to see, in spite of a very difficult climate, in spite of maybe a fiscal cliff, we do not expect a doomsday scenario. We just have no clue what the impact is going to be specifically on the government business and specifically on taxes, et cetera.

Very helpful. Henrik, thank you for that. The mobile and the on-demand, just to put that in context, can you talk about, maybe, Jim what that was in terms of percentage of revenue this past year? It's just hard to get this kind of detail in any of your filings so this is very helpful to us.

Revenue would probably be, what 5%, 10%. Somewhere in that range. 10%.

That's helpful. Thank you. And then on the healthcare, I think that's clearly one of the more attractive end markets, Henrik, and clearly you came in, in a pretty material way after the quarter. Can you just talk about the strategy for the healthcare business from here? Is that a business that you can kind of take that platform that you've now acquired and grow that organically, or is this probably an area for more acquisitions in the future?

Yes, yes, and yes. First of all, we had our own platform in the form of ABM Health which was developed in the old Linc Group, and relatively small but focusing very much on the clinical side. Probably doing last year $15 million. With a little luck, we should do between $30 million and $40 million in that segment this year because we are hopeful that we're going to get a sizable contract very soon. What we bought was primarily a business in the facilities side. What I mean by that is, it's taken over the hospital itself, but also included a very small piece but an interesting piece in the form of food service.

So for the first time, we will be able to provide a complete service package to hospitals. We've not done that in the past. And ABM historically by accident, I will be the first one to admit that, has been successful in getting some hospitals. So by merging all those three segments plus our existing parking operation, on the healthcare side, combined we will have a $200 million vehicle. Doesn't sound that big but at the same time it's big enough to be a player, and we will spend probably the first year in finding out how to put it together in the marketplace and create the platform for growth going forwards.

I would also like to say that the talent base we acquired when we bought HHA is very exciting, and our existing management in our ABM Health group is very talented as well, so we have a lot of talent with a lot of specific knowledge about this particular market. So again, I'm just asking for a little luck. We have all the -- the foundation is in place, the people we have. We have the technology to focus on the technical side, so again, a little luck and in two or three or four quarters, I think we're going to talk about a very successful growth story here.

Great. So on the acquisition strategy just in general, Henrik, you guys are always looking for deals. I think subsequent to the quarter, you have clearly been active here. Is this level of activity in the future? Is the pipeline still a little bit more robust today than it was six, nine months ago? Should we expect some of this acquisition activity to continue?

First of all, I want to say something because my risk profile, the client based profile I have communicated to the outside world is not changing. So if you do the math, you can see the room I have to do short term sizable acquisitions. Simply not there if I have to use existing liquidity or capital. So we've done three acquisitions. We are going through a major reorg. It is very important now that we focus on finalizing the reorg, putting these companies together, create the right growth base, and then we can go look at further acquisitions. I'll never say never but I wouldn't expect any major acquisitions in the next 12 months. But if something comes up that's incredibly accretive and valuable for our shareholders, of course, we will look at it, but prudence, I think is the right word for the next 12 months.

Thank you very much. Have a nice day.

I'm not showing any further questions at this time. I would like to turn the conference back to Mr. Slipsager for closing comments.

Thank you very much for supporting our Company in 2012. We are, as you hopefully can hear, very excited about 2013 and looking forward to talk to all of you in March of '13. Thank you very much.

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