ABM Industries Inc (ABM) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to ABM Industries fourth-quarter fiscal year 2013 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. Now I'll turn the conference over to your host, President and CEO of ABM Industries, Mr. Henrik Slipsager, please begin.

Thank you, good morning. Joining me today are Jim Lusk, Executive VP and Chief Financial Officer; Jim McClure, Executive VP; Tracy Price, Executive VP; and Sarah McConnell, our Senior VP and General Counsel. Today I'll provide an overview of the 2013 fourth quarter and fiscal year that ended October 31. Jim Lusk will discuss details of our financial results. Jim McClure will provide an update of our onsite businesses. Tracy will then comment on the Company's operational results for Building and Energy solutions as well as our sales and marketing initiatives. I will then comment on the Air Serv performance for the quarter and then conclude our prepared remarks with our outlook for fiscal 2014.

There is 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 the tab investors, you'll see the events 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 slides that accompany 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 the investors tab.

Thank you, Sarah. Now please turn to Slide 4 for an overview of our fourth quarter and fiscal year. Operating results for the fourth quarter and for fiscal year 2013 exceeded our expectations. Revenues for the quarter were $1.2 billion, a record for the quarter and up approximately 14% from the same period last year.

Organic growth for the quarter on a consolidated basis was 3.3%. Janitorial posted topline growth of 4.1%, consistent with the comments we made in our third-quarter call. Building and Energy solutions had an exceptional quarter both according to operating profit. Excluding revenue from acquisitions and the government, B has achieved top line growth of nearly 27%, and Security was able to achieve another quarterly improvement on a year-over-year basis in revenue and operating profit, increasing 4% and 70% respectively.

Adjusted EBITDA was up nearly 16% to $58 million. On a sequential basis, we reduced outstanding debt by $34 million. When we announced yesterday a 3% increase in our quarterly cash dividend which will be a $0.155 per common share, this marks our 191st consecutive dividend.

Before turning call over to Jim I would like to make a few comments about fiscal 2013, which by all measures was a very successful year and a transformational period for ABM. Our strategic focus in verticals combined with our fixation to an onsite, mobile, and on-demand operational model has significantly improved our growth prospects and competitive position. In doing so, we achieved a number of milestones in this Company's 104 year history.

Here are some highlights. Revenues exceeded $4.8 billion, $85 million in adjusted earnings, adjusted EBITDA of $206 million, the first time we surpassed the $200 million threshold. Acquired and integrated five companies this fiscal year. With the acquisition of Air Serv, ABM has a platform to expand our services globally. Won and commenced work on our largest energy retrofit project, Wright State University, and we achieved our fifth year of free cash flow exceeding $100 million. Now I'd like to turn the call over to Jim Lusk for a financial review of our fourth quarter and our fiscal year. Jim?

Thank you Henrik and good morning everyone. Turning to Slide 5. As Henrik noted, revenues of $1.24 billion for the fourth quarter were up 13.5% compared to the prior year. This was due to sales contributions of $110.8 million from our 2013 acquisitions, which continued to exceed our initial expectations, and organic growth on a consolidated basis of 3.3%. Jim McClure and Tracy Price will provide some additional comments behind the continued improvement in our topline growth.

Gross margins for 2013 fourth quarter were 10.93%, down 22 basis points compared to the fourth quarter of 2012. This is primarily due to costs associated with the continuing ramping up of new jobs in Janitorial in Air Serv, which began in the third quarter as well. SG&A expense for the fourth quarter increased $11.1 million to $90.7 million, primarily as a result of $4.5 million of increased SG&A costs from acquisitions, and a $2 million increase in payroll expense associated with bonuses due to improved performance.

Amortization of intangible assets for the fourth quarter increased by $1.8 million to $7.1 million. The increase was primarily related to intangible asset amortization expense from the November acquisitions. Interest expense increased $0.9 million to $3.2 million from $2.3 million in 2012 fourth quarter. The increase was from higher average borrowings to fund the November acquisitions. The average outstanding balance of the Company's line of credit was $390.9 million during the quarter, compared to an average balance of $269.2 million in the prior year ago quarter.

Our effective tax rate on income from continuing operations for the fourth quarter of 2013 was 33.9%, compared to 21.8% in the prior-year period. In fiscal 2012, the Company had an $0.11 benefit from a discrete tax item, compared to a $0.04 benefit for discrete tax items in the 2013 fourth quarter. Net income from continuing operations for the fourth quarter was down $3.5 million or 12.6%, primarily due to the lower benefit from discrete tax items compared to the prior year.

Adjusted EBITDA, which excludes items impacting comparability, was $58.1 million for the 2013 fourth quarter, up $7.9 million or 15.7% year over year as contributions from acquisitions and new business drove the double-digit increase.

Regarding year-to-date financial results, I'd like to focus on adjusted income from operations and adjusted EBITDA. Both measurements demonstrate the continued improvement we are seeing in our fundamental business and the trends that continued in our operations. Adjusted income from continuing operations for the 12 months ended October 31 was $85 million, up 11.7% while adjusted EBITDA as Henrik mentioned earlier was $205.9 million, up 16.7%.

Over the past five years, adjusted EBITDA has increased 54%. We are very pleased with this accomplishment, especially since we've had a number of headwinds to deal with, including the fact that stock-based compensation during that timeframe has gone from $7.2 million in 2008 to $13.3 million in 2013.

Now turning to Slide 6. Days sales outstanding at quarter end were 52 days, up 1 day on a sequential basis and 3 days year over year. This was one day more than we anticipated and is primarily due to timing and higher receivables at Air Serv, resulting from a systems change. For fiscal 2014, we expect DSOs will be about 52 days. Cash generated in operating activities for the quarter ended October 31, 2013 was $51 million, down 15.8% compared to the same period in fiscal 2012. This decrease is primarily due to the timing of collections and receivables.

Turning to insurance, total insurance claim liabilities at October 31, 2013 were $358 million, compared to $343.8 million at the end of fiscal 2012. For self insurance claims paid during the quarter, the total expenditure was $25.1 million, compared to $22.5 million for the fourth quarter of 2012. I'd like to now turn it over to Jim McClure.

Thank you, Jim. Please go to Slide 7 and 8, I will now provide some operational highlights of our onsite services for the fourth quarter before turning the call over to Tracy for an update on Building and Energy solutions.

Janitorial accomplished 4% growth compared to 2012, with revenue of $628.7 million, a record for a fourth quarter. I'm very encouraged with the progress made this year in driving sales growth, and we ended the year with the best momentum I've seen in the Janitorial business since 2006. We recently were awarded some new jobs, which should help sustain our revenue growth into fiscal 2014 assuming the client retention rate remains near internal goals.

The Janitorial segment earned $34 million in operating profit for the fourth quarter; expenses associated with new jobs started in the third quarter were the primary contributor to the 8% decline from the fourth quarter of fiscal 2012. The $34 million of profit was below my expectations, but as we move into fiscal 2014, I anticipate we will see improvements in productivity and benefits from our reorganization that will yield gradual improvements in our Janitorial operating margins, especially in the second half of the fiscal year.

Moving to onsite Facility services, revenues were up about 1% year over year to $152.9 million, below their 6% to 8% run rate in prior quarters. This lower revenue growth is primarily the result of losing one large job. The Facility service team is continuing to do a good job of adding new business, and just recently won a contract with a premier European automotive conglomerate. However, for the next couple of quarters the year-over-year revenue comparisons will be challenging. Even though the revenue growth rates were below recent quarters, the Facility service team did an exceptional job generating profit and managed a 19.3% increase to $8.1 million, compared to the fourth quarter of 2012, a great effort.

For Parking, revenue was $152.2 million, down 1% compared to 2012. I expected to see some topline growth by the fourth quarter. I have the Parking team refocused in some areas where I feel we can improve the sales effort. As we enter fiscal 2014, we should see increased good opportunities on our current visibility. Renewed efforts on sales will be a 2014 focus for Parking. Despite the slightly lower revenues, Parking's operations managed to meaningfully improve their operating profit, achieving 11.8% increase to $8.5 million. I'm really pleased with the teams efforts here and I feel good about Parking's prospects for fiscal 2014.

Turning to Security. The team accomplished another quarter of topline growth with a nearly 4% increase on revenue of $97.1 million. As I mentioned on previous calls, Security has probably benefited the most from our bundled sales, and I anticipate this trend will continue into 2014. Security managed a 70% increase compared to fiscal 2012 and posted $5.1 million of operating profit for a margin of 5.3%. This is the first time Security has surpassed the $5 million mark in a quarter. For those of you who have followed ABM over the years, you will realize just how significant an improvement we've made in this line of business, a great job by the team.

Before turning the call over to Tracy, just a quick closing comment. We continue to consolidate onsite operations where appropriate and develop processes to reduce operational costs, which will generate additional savings in 2014, consistent with the numbers we provided earlier this year. I remain confident with our ability to execute on our plan. In concluding, I want to acknowledge my team for their efforts in fiscal 2013 to deliver the level of growth in sales and profits while dealing with a significant reorganization is testimony to their capabilities and commitment. With that, I will now turn the call to Tracy.

Thank you, Jim. Continuing on Slide 7 and 8, I will provide an update on our Building and Energy solutions segment, which includes ABES, government services, and HHA Services. This was truly a breakout quarter for my team, and I'm pleased to be able to share these results.

Starting with revenue, we accomplished a 33% increased to $114.8 million. Excluding acquisitions and the government business we achieved organic growth of nearly 27% as we benefited from an increase in energy [repgrid] projects, service and maintenance contracts, and our franchise business. Another excellent quarter for the ABES team, and reflective of the record backlog and sales we mentioned on our previous calls this year. In fact, all of our ABES business service lines have achieved roughly 20% combined annual growth rate on both the top and bottom line since being acquired by ABM.

With year-over-year growth in revenue by ABES, contributions from HHA and continued improvement in margins associated with our government services, Building and Energy solutions generated operating profit of $8.6 million, which included depreciation and amortization expense of $2.9 million. This was the second consecutive quarter where we achieved an increase of over 80% on a year-over-year basis. These are outstanding results, and based on the strength of our pipeline, we believe we are well-positioned as BEST moves into 2014.

Even when our government business continues to face challenging revenue environment, they continue to deliver solid operating earnings that are in line with expectations. Recent awards reflect positive momentum for this business unit.

Pertaining to recent acquisitions, HHA and Calvert-Jones contributed $18.7 million to this quarter's revenue; we continue to make excellent progress integrating the HHA acquisition, and remain very pleased with the amount of business they have added since we have acquired them. Their client retention has remained at 100%, a significant accomplishment, and reflective of the quality of the people in our healthcare services organization. With the recently announced formation of ABM healthcare support services, there is significant opportunity to grow this vertical in coming years, as the combined HHA, ABM Health, and Healthcare Parking Systems of America Business has evolved and leverage each other's domain expertise.

Our vertical strategy in healthcare and aviation were anchored by our acquisitions of HHA and Air Serv. Each company has exceeded our expectations. In the case of Air Serv when we acquired the company, their revenue run rate was $312 million. Using their results for the fourth quarter their annualized revenue number is $342 million. For HHA when we acquired the company the revenue run rate was $42 million. Using their results for the fourth quarter, the annualized revenue number is $56 million. Compelling results for each company and part of the reason behind our excitement with the initial results of the vertical strategy we discussed in March at our analysts and investors conference.

Turning to Slide 9, I want to mention a couple of the sales and marketing highlights for the past quarter. We recently announced that BMW of North America selected ABM as its preferred electric vehicle charging station, installation, and service partner for its BMW i Centers across the US and Canada. With federal, state, and utility incentives along with consumer demand driving the build up of America's EV infrastructure, ABM is one of the few companies that are well positioned to meet this growing demand for the installation, service, and maintenance of charging station. We continue to feel this is a very good long-term opportunity for us.

In October we announced that the Harris County Public School District in Georgia selected us to install energy-efficient lighting, improve indoor air quality, install energy management control systems, and increase water conservation. As a result of the improvements, Harris County is expected to save more than $10 million in energy and operating cost over a 20-year period. And just recently, we announced that ABM's energy business has successfully commissioned a 1.2 megawatts solar array in Baltimore, Maryland, representing one of the largest solar installations to date in the Baltimore metropolitan area. In addition to being responsible for construction, ABM will also maintain the 4,150 panel array under a long-term contract.

We continue to make significant progress on our sales and marketing initiatives, and the enthusiasm and collaboration continue to remain high, as investments we've made in helping to drive the increase in our revenues and profitability are evidenced in our results. And with that, I'll turn the call back to Henrik.

Thanks Tracy. Before discussing our outlook for fiscal 2014, I want to say a few words about Air Serv. This segment listed as other in our financials generated $90.9 million in revenues and $3.9 million in operating profit, both of which exceed our initial expectations for the quarter. The operating profit includes amortization expense of $1.6 million and depreciation expense of $0.3 million. Just an outstanding job by the Air Serv team here in the states and in the UK. In the fiscal 2014 we have a number of solid opportunities to expand their presence in the Asian vertical.

Please now turn to Slide 11 for a review of our financial guidance for 2014. Based on the strength of fiscal 2013, the Company's providing guidance as follows: $1.38 to $1.48 for income from continuing operations per diluted share, $1.58 to $1.68 for adjusted income from continuing operations per diluted share; the adjusted guidance reflects the exclusion of charges consistent with our past practices, as well as the absence of $2.9 million or $0.05 per diluted share benefit in retroactive employment based tax credit realized in the first quarter of fiscal 2013.

Labor work days for fiscal 2014 are 261 days, this is identical to fiscal 2013 on a quarterly and on an annual basis. We expect our effective tax rate for fiscal 2014 to be in the range of 36% to 38%. This assumes that Congress will extend the Worker's Opportunity tax credit, it is important to recall that the fiscal 2013, the first quarter had a $0.05 per diluted share pick up from the retroactive application of the employment based tax credit from calendar 2012.

Depreciation and amortization expense is expected to remain consistent with fiscal 2013, and we are providing a range of $60 million to $62 million. Please review the other items listed on Slide 11, which contribute to the EPS guidance we have provided. And as is customary, our guidance is exclusive of any future acquisitions. At this time, we would like to open the call for questions. Please.

(Operator Instructions)

Michael Gallo, CL King and Associates.

Good morning and good results. Couple of questions, what is the outlook for [suey] next year Should we expect to see a leveling out there or do you think it will be moderate increases, or any chance you might think of even getting a decline?

We have assumed that it is going to be pretty flat overall, if the unemployment continues to develop as the way we've seen it the last couple of quarters, you might see some benefits, but not until 2015 or so. It takes time before it is reflected in the rates.

Okay great. Second question I have just on the Facility and Services comments and GM indicated some headwinds due to a loss of a contract there. How much do you expect those headwinds to be in the first half? And it sounds like you've got some others things going that you hope to be able to replace the level of business in the second half?

Yes, we are -- the headwinds should be not as severe as we saw in the fourth quarter, and we are very positive about our pipeline opportunities that we have in the Facility Service group. So, they had a tremendous year and I think you will see them return to growth range that you've seen in the past years.

And I think we -- I expect on a year-over-year basis still to see growth in that segment for the full year.

Right, okay. And then just final question for Jim, how much do you expect total amortization to be in fiscal '14?

We have -- I think as we said in here, the depreciation and amortization is combined will be in the range of $60 million to $62 million.

Okay, and how much is the amortization of that?

About 50%.

Okay. Thank you.

Joe Box, KeyBanc Capital Markets.

Just a question on the new contract wins, you guys clearly had some real nice success over the last few quarters in securing new business. I'm just curious, do you see this as maybe the beginning of a cycle where you're going to win a lot more than you are losing? And then secondly, are you becoming more optimistic on the macro here, or is it still purely a function of your new strategy?

I think it is a little of all the things you mentioned. I think the economy right now is probably better than I've seen it in a long time. I also believe with a little luck we will see this trend of new jobs continue at least from an activity level. We probably have never seen as much activity on bigger opportunities as we see right now. It doesn't mean we are going to close them all, but when we close them it is going to have an impact.

So basically and lastly on the organization, Jim and his team have done an excellent job in reorganizing the business, and the opportunities that is coming out of that has I think exceeded everyone's expectations. So it is a little of all those things, but very difficult not to be optimistic about the future.

Understood. And Jim, you had mentioned earlier that you expect gradual improvement in Janitorial margins throughout 2014. Can you put a little more color on this? I know the first half is seasonally lighter, so on a year-over-year basis are you looking at margin contraction in the first half and then expansion in the back half? Any color there would be helpful.

Yes, I think when we focus on our reorganizational plan as we outlined earlier last year to you, we are very confident that we are going to meet those expectations and those numbers, and will simply drive the margins as they are implemented, and that will be focused mostly in the third and fourth quarter as we implement and see the results of those.

Okay, and maybe just to get specific, when you look at the added cost that you had within Janitorial, can you just flesh out how much of that actually stemmed from your new contracts?

Yes, the start up cost that we had was substantial. It was substantial. I don't have that exact number for you, but it was a primary driver in the results compared year over year.

Would you say it was north of 50% of the incremental expense or --

Let me step in on this one. It was as Jim said a substantial number plus in addition to the start up cost, we didn't make the expected profit on the job, so those two things combined was probably more than 50% of the shortfall year over year.

Okay, and maybe just to that point then Henrik, when you look at these contracts I know they are long-term contracts, there's initial start up expenses. Two, three, four quarters from now, where do you think that these contracts are going to shake out relative to the corporate average? Are these contracts going to shake out and be more profitable or are these not quite as profitable?

I think this contract is a little unique, we've probably had more start up expenses than we originally believed we were going to have, so we had some challenges, but right now it seems to be running pretty smooth. I would say on an overall basis, the profitability of this job is going to be equaling average of what we see in the rest of the business. It is not lower, it is not greater, but pretty much average.

Okay, great. I appreciate the comments and thanks for the questions.

Justin Hauke, Robert W Baird.

Good morning guys and thanks for taking us through all the color. I have a couple of questions, but going to try to combine it into one, here. So I guess the question is, if we do the math on the guidance, it seems like the growth rates you are talking about, which is sustainable with where you are now, that the EBITDA margins would be more or less flat next year. And so the first part of the question is, is that what you are implying in your guidance?

And then the second part of the question would be, relative to your restructuring programs that you outlined earlier this year, I think the implication of that was 10, 15 basis points margin improvement a year. I guess if you could talk through that and maybe give us an update as to what was achieved this year in '13?

That was a long question. Let me start with the EBITDA percentage. There's no doubt that we are long-term targeting growth and hopefully we'll hit the 5% plateaus sooner rather than later. A lot of that has to also do with job mix, if we keep growing in the high profitable areas the way we've seen in the past, particularly ABES, it is going to be a little easier to hit the 5% than if we grow in the lower profit areas.

When we do forecasting, the world ain't perfect, and when we do our forecasting we are of course expecting to -- our target is to get in with a higher EBITDA percentage, but I think it is fair to say we are forecasting -- are expecting just a slight increase in it as a percentage of revenue. I can do the same math as you can, so I know you are right about that.

So it's a forecast that is based upon I think the real world. Some things are going to be better and some things are going to be worse, but we feel very comfortable with the numbers that we presented today.

And the cumulative synergies from your restructuring, I think you talked about $9 million to $10 million cumulatively by the end of '14, is that still what you are thinking?

The goal is $9.9 million.

Okay.

Just slightly below $10 million.

Slightly before $10 million. And then I guess this one more of a housekeeping question. On government just to help us think about where that is today, what is the revenue contribution from government today in the fourth quarter, and what was that versus a year ago and maybe last quarter?

I would (inaudible) of the government on a year-over-year basis, government now represents around $125 million of business, which is down pretty dramatically year over year.

The good news is with the kind of awards we've seen going forward, we do expect a sizable growth, but again we're dealing with the government, so we might have been awarded a number of jobs, doesn't mean we started. But if we start it, it will be a very, very interesting good year for government.

At the same time, I would like to make a comment about government, I think they've done a tremendous job with the revenue shortfall to be able to come in with profit at the same numbers last year, that was pretty amazing to me.

Okay. And I guess just my final one here, on Air Serv, clearly it is been a good year for you with that one. I know you had the Heathrow contract, which obviously I think was a big win, but as we start to model that one going forward since we will actually have year-over-year comparisons, what is your thinking about sustainable organic growth for that business? Is it mid-single digits or what are you thinking?

High-single digits for sure, that's our internal goals, and our internal goals you can -- it's going to be 10%, but the problem -- not the problem, but the interesting part about Air Serv, and our aviation business is the fact that we have seen these major mergers and that means we're going to see some major opportunities, and so some of those opportunities are going to fall in '14 and others are going to fall in '15, and sometimes you're going to see maybe 3% or 5% growth, and other times you're going to see 12% to 15% growth. But overall the target is 10%.

Great, thank you very much.

David Gold, Sidoti and Company.

Good morning. So, let's see, little bit of follow-up on the Janitorial side. Couple of things, first, can you give us a sense for what the pricing environment is out there? And with that, part two, as you talk about the little bit of taking extra costs that we didn't expect, would you attribute that more to pricing or the timing of the start up expenses? In other words, did we price it properly or was it just that some of these expenses fell into a period that we did not expect them to?

First of all, let me deal with the pricing environment. The pricing environment is not worse, it's not better than we've seen in the past. I think our strategic position in the market is different than I've seen in the past, and that is why we see some of these major opportunities that we haven't seen before, and there is no doubt that Jim and his team are very well-positioned to add some major opportunities and major jobs these coming years.

Point two is the start up -- I can be very short and sweet, we expected the start up to be done in the third quarter; it was it was not, it was delayed for a lot of reasons. But part of it was us underestimating the start up expenses associated with the job. So it is more a boo-boo on our side, but that doesn't change the fact that it's going to be a very good long-term job that -- and the that's the wonderful thing about our business, and hopefully we are going to keep the average number of years which is 15 to 20 years.

Got you. Okay. And then just jumping back to your first comment on taking a different approach to pricing, is -- that's got to be to say that we are looking at things, we are taking a more aggressive stance.

No, I don't think I said that. I said that we see some major opportunities I think due to our reposition in the market that we haven't seen before, I don't think we are taking a more aggressive stand on pricing.

We are still the good old conservative guys that believe that we need to make money in the jobs we get, and we are very much focused in getting those percentages up on the bottom line.

Got you, okay. So I'm not sure I understand. I guess you said on the pricing environment it's no different than the past, but Jim and his team are doing things a little bit differently, what are they doing differently?

Well first of all we have the onsite organization which we didn't have before, I think we made that pretty public.

And the other thing that we see is, pretty much a reflection on the customers that the customer opportunities are greater than before, so where we in the past maybe were bidding on five regional jobs, we are now bidding on one nationwide job. When we bid on one nationwide job, of course that job is so much bigger than the regionalized jobs; not only that, but it limits the competition from the perspective that we are the only one who has the branch network to support it. So that is what I'm talking about in new opportunities, which has nothing to do with pricing as such, but has more to do with volume and the ability to serve the client.

Got you, perfect, that is helpful. And then one more Henrik, anything to talk about, I know you've hit on a couple, but in particular market segments where you are seeing that new success on the wins?

Market segments were -- our electric or the ABES this year has been in my opinion outstanding; if you look over the last three years, we are dealing with growth rates of an average of 20% growth top and bottom line, which I think is pretty unique in any business, especially in our world. So we believe great growth is going to come out of that.

On the government side, and I'm not trying to hurt people in the government business here, but it is at such a low level that I can't see how we can't grow; even we can grow there now. So that represents some great opportunities, as I mentioned before I've not seen growth like this before in the janitorial world.

We have some international expansion opportunities through our aviation business that I haven't seen before. And last but not least, our healthcare services are hitting on all cylinders. It is going to be a wonderful year to follow those guys, because the growth you will see there in my opinion will be at least double-digit, and with a little luck might be even beyond that. So I really think we will be -- we are right in front of a growth period that ABM has not seen in my time here.

Perfect. And if I can just one last on the reorganization, what is left to do there?

Real estate. So part of the reorg is we have some adjustments still to be made in the back office, but the major number is real estate, and we can't take the benefit of real estate until people move physically out of the building, it takes a little longer than we expected, but the overall numbers are exactly in the levels that we communicated to the market.

Perfect. Thank you much.

George Tong, Piper Jaffray.

You are now several quarters into implementing your One ABM initiative, can you give us a further update on how that is going and what metrics you use to measure success and how those metrics are performing?

Yes, this is Tracy, I'll respond to that. So, One ABM is our internal marketing play, it is not the external one. The external guidance that we give is about our end-to-end strategy and how we are taking care of the customer echo system, and what we are doing in the verticals and how we are leveraging technology to drive productivity, specifically at the point of service.

But internally, with the marketing programs we put in place, the sales leadership we put in place, and the restructuring to combine the mature businesses into the onsite business, and then focus on verticals in the higher growth initiatives and mobile businesses, we are seeing increased activity across the board in virtually all verticals. We have our pipelines being measured and scrubbed. We have our Solve One More program where we are not asking our salespeople or marketing folks to go sell another service, we're asking them to solve another problem on the customer's behalf. That has been very well received, we've generated $25 million plus just in collaborative sales in the last 12 months through the Solve One More program.

So what you're seeing is a Company that is transforming itself into a sales-driven, operations-checked business, and we've said this before and Henrik has as well, I think you'll find that ABM has the best operators anywhere. We are now putting a sales head or an engine at the front of this Company, and while we are probably in the second inning of the game, the results are pretty eye-popping, and internally there is tremendous traction.

And I think we are at an inflection point in terms of our capability or capacity to drive sales across all the different business lines and the verticals. So I don't think we're seeing any particular business line or vertical that we aren't reasonably sanguine about our growth potential, and we do have better tools to measure, drive backlog, review pipeline, lead the sales focus, and help deliver better results.

Got it, that's very helpful. As you think about start up costs, not just in Janitorial but in Air Serv and other Facility services, as they begin to moderate, how much upside does that present for margins for the total Company in fiscal 2014?

It is not material, it is always material when it happens in a quarter for the quarter, but overall I'm not going to say it's going to be material. Start up costs normally will last 90 days or so, and it reflects the additional training of the supervisors, maybe additional people on the job site to get started, because we all want to start -- you want to make a difference on the job start from the get-go. But it is not a meaningful change.

Got it. You delivered very nice revenue acceleration in the Janitorial segment this quarter. Now that growth has broken above 4%, how should we think about growth going forward?

Above 4% -- no, I'm kidding. We believe that at least for the next couple of years, if things are developing the way we see it now, that we can maintain mid-single digit growth, it could be 4%, could be 5%, could be 6% if we're real lucky.

But the advantage we have with our portfolio business is of course that if we don't lose anything as Jim I think mentioned earlier, if we are able to keep our attention at those very, very exceptionally high rates, you can see that we have a good reason to believe that this year's growth should be between 4% to 5% at least.

That's helpful. And then last question, cancellation of a large job impacted growth in Facility services this quarter; looking forward into the pipeline, are there any large contracts coming up for renewal or ones that you see as a particularly large renewal risk?

Not as much, there are always renewal risks and there is always risk of losing jobs, and often you can lose job over change of ownership considered among the customers.

But Facility services has one or two challenges this year, they had a number of challenges last year. At the same time they have a number of opportunities this year as well, so I think going back to what Jim said earlier, we believe that first half is going to be under a little pressure in Facility services, but overall year over year, we are very pleased with where we are.

Great, thanks very much.

Dan Dolev, Jefferies.

Thanks for taking my question. I've got a few quick ones. First thing, can you quantify actually the growth just in the retrofit part of BE&S this quarter, and how it trended over time? Maybe the organic growth --

I can characterize it from a sales perspective. Our sales plan number was in the mid-$80 millions, we sold $140 million.

So -- I will come back to you with that number; I only have the combined number with that whole team.

Okay. Second question, Blackjack seems to have contributed about $5.3 million to revenues, that is incremental, right, to that Air Serv? What was the profitability in this business in that -- up for that $5 million?

One second. Again, when it is inside the segment, I need to find the numbers.

But it was profitable, right?

It was profitable, but I don't remember how profitable it was. I know we lived up to our expectations, that is all I can give you right now.

Okay, because I remember you mentioned that Air Serv is higher profitability than the rest of the business, so I was just wondering was it in line with Air Serv or but we can catch up off-line. Two quick last questions. Cash flow if I'm calculating correctly, free cash flow in the quarter was a little bit light if you compare it to the last 4Q, is there anything particular that is going on there?

Yes, that was in Air Serv we moved them to our main systems on JD Edwards, and because of that we had some delay in collections. We will catch that back up in the beginning of the year here so that was really -- that was the main issue?

And let me give you a number, the year-to-date numbers on the project, the BES projects, they went from $24 million in 2012 to $42.5 million in 2013 annually.

That's pretty good news. One last question if I may, you mentioned -- I think you mentioned earlier in the call I just want to make sure I understand the $0.05 per diluted share in retroactive employment-based tax credit, was that part of EPS last year or was that also excluded? Was the benefit included in EPS in adjusted EPS last year or was it included?

We always include the tax items in adjusted EPS.

So that $2.9 million, that should be excluded from just so I understand, it's a negative?

The $2.9 million we won't give one more time, it was -- if you remember back, we -- you might not remember it, but nonetheless, the tax credit was not decided upon until the beginning of 2013 or the end of 2012. So that particular first quarter last year we had the benefit of a prior year of tax credit, so that is reflected in the tax percentage of the first quarter of 2012 and benefited that first quarter by $0.05, which we called out.

Understood, okay. Great, thank you very much.

Michael Kim, Imperial Capital.

Looking at Janitorial, you called out south central and midwest regions as being particularly strong. When you look at your pipeline of new jobs that you expect to add next year, is that primarily in those same regions or do you see opportunities to expand or replicate the sales strategy in other regions?

This is Jim, we have both strong regional opportunities across all four super regions, but we are seeing a lot more national opportunities as we roll out the onsite model, and so we are seeing much larger opportunities and our pipeline is more robust than I've seen in years. So it's across the teams and it is on a higher level, so more national, so we are very positive on that.

And could you refresh me for national-type jobs, is the client retention rate generally or historically better or worse than maybe your smaller opportunities?

It's in line with our -- with the regional jobs. The larger the job, the greater the opportunity for a long-term relationship. People don't normally like to go through that process, it's very labor-intensive for the sake of doing it. So as you go multi-regional, national opportunities, as long as we perform, we have a very long life contract longevity.

And then also similar on the operating margin side, I guess historically are the national accounts similar to the regional jobs that you normally would deliver?

Yes, like all jobs, you get into a new job time, it takes a while to create a run rate profitability level, but they tier out to a point to where they are in line with what our position is on a regional basis as well.

And I don't know if I heard, but can you articulate what the TEGG business was in the quarter?

Quarter over quarter it was up, but I don't have that number but we can get that to you, it was a positive number.

And with the weather now are you seeing so far this quarter a tick up in TEGG business again this quarter?

Well the weather just hit --

So expectation?

As long as the snow stays out of New York and keeps hitting Philadelphia and Washington DC, we are very happy with where the snow is falling. (laughter) I'm more concerned with my travel home than I am with the number of the snow, but it is just I think what you saw in the midwest and through Colorado and as we see storms, is pretty light early on in the season and light snow and light storms, and now we are seeing a little bit of snow, so that's something that we have an expectation baked into our numbers. But yes, it seems like it is good.

Fair enough. And then just lastly on capital allocation, it has been about a year at least on the acquisition side of that equation, it has been about a year since your last series of acquisitions. Can you talk a little bit about the acquisition strategy and the balance of your capital allocation priorities?

Yes, the acquisition strategy hasn't changed; we've always done acquisitions on an opportunistic bases, so it is not something that we're aggressively out getting, but when we have opportunities to do it as long as the price is right.

And we will still be looking. We as you know, we did five -- what was it, beginning of last year and I'm very proud to say that not only did we go through those five, it was five very good acquisitions, and they all integrate into the business. And with the right opportunity we are ready to do some more, but I'm not and will never project future acquisitions to the market.

You have given the integration, the ramp up with those acquisitions. Is it your sense then you will focus primarily on a vertical basis on healthcare and aviation, or add another vertical?

Well I think if you look at where we've been successful, I think the vertical strategy and if there is vertical opportunities to kickstart new verticals is always something we look at and will be looking at. There will be some filler acquisitions on the technical side, they are the smaller acquisitions, but will help on our footprint on a nationwide basis to support the energy jobs and some of the high profitable areas that you see we are in.

So it is a combination of the strategies, but again it is opportunity driven. I know, at the right time, at the right place, and we will allocate the appropriate amount of dollars to do the acquisitions, and I think we proved we're pretty good at it. So again, I won't project anything, but we are not changing any strategy at all other than as you mentioned yourself, the vertical clearly has a high priority as well as the smaller acquisitions on the technical side.

And absent any acquisitions it looks like you are delevering, do you have a target leverage in the near-term that you have in mind?

Well it is very clear that probably we are running 1.5 times at the end of the fiscal year, and if we generate say $100 million plus of cash next year, I think we can do the math say we are going to be very close, very close to 1 times EBITDA by the end of fiscal 2014. I want to tell you we'll be at two or three with the right acquisitions, but I'm not going to commit myself.

Okay, very good. Thanks very much.

(Operator Instructions)

I'm showing no further questions at this time. I would like to turn the call over to Management for any closing remarks.

Yes, it is Henrik and I want to thank our investors for supporting us this year, our shareholders, et cetera as well. It was a very good year for the Company.

But the most important thing is I want to thank our employees for doing a wonderful job for us in 2013. Thank you very much. Unfortunately, this world is pretty short term, so we expect the same effort for 2014, maybe a little better even, but thank you very much, we could not have done it without you. And happy holidays to everybody. Thank you.

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