ABM Industries Inc (ABM) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries Q1 FY14 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, this conference call is being recorded. I would now like to introduce your host for today's conference, Henrik Slipsager, President and CEO. You may 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 Vice President and General Counsel.

Today I'll provide an overview of the 2014 first quarter that ended January 31. Jim Lusk will discuss the details of our financial results. Jim McClure will provide an update of our Onsite businesses. Tracy will comment on the Company's operational results for Building & Energy Solutions, as well as our sales and marketing initiatives.

I will then comment on Air Serv's performance for the quarter and then conclude our prepared remarks and update on 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 will see the Events & Presentations 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 the Investors tab.

Thank you, Sarah. Now please turn to slide 4 for an overview of the first quarter. Operating results for the first quarter, in general, exceeded our expectations. Revenues for the quarter were in excess of $1.2 billion, a record for the quarter, and up nearly 4% from the same period last year.

Janitorial posted top line growth of 4.6%, Building & Energy Solution had an exceptional first quarter, both in revenue and operating profit. BESG achieved top line growth of 60%, of which organically was 13.6% and added $2.8 million in operating profits.

For the first time in over a year, revenue from our government business, when comp -- on a comparative basis, posting an increase of 10%. Security was able to achieve another quarterly improvement on a year-over-year basis, both in revenue and operating profit, increasing 3% and $0.50 -- 55%, respectively.

Adjusted operating profit before taxes was up 19%. Adjusted EBITDA was up over 7% to nearly $42 million and yesterday, we announced a cash dividend for the same quarter of $0.165 per common share. This marks our 192nd consecutive dividend.

Now I'd like to turn the call over to Jim Lusk for a financial review of our first quarter. Jim?

Thank you, Henrik. Good morning, everyone. Turning to slide 5.

As Henrik noted, revenues of $1.23 billion for the first quarter were up 3.8% compared to the prior year. This was due to net sales contributions of $37.8 million from organic growth and $6.6 million from acquisitions. Gross margins for the 2014 first quarter were 9.63%, down 3 basis points compared to the first quarter of 2013, primarily attributable to slightly lower profit in Janitorial & Facility Services, partially offset by contributions from newly awarded contracts within our Building & Energy Solutions segment and savings realized from our organizational realignment.

SG&A expense for the first quarter decreased $0.3 million, or 0.4%, to $87.4 million, primarily as a result of a $1.3 million less in depreciation, mostly associated with our enterprise resource planning system and $1.1 million reduction in costs in the realignment of our Onsite operational structure. These items are partially offset by a $0.9 million increase in sales and marketing expense and a $0.8 million increase in share-based compensation expense.

Amortization of intangible assets for the first quarter decreased by $0.5 million to $6.7 million. Interest expense decreased $0.6 million to $2.7 million from $3.3 million in the 2013 first quarter. The decrease is from lower average borrowings and a lower average borrowing rate.

The average outstanding balance of the Company's line of credit was $355.6 million during the quarter compared to an average balance of $447.4 million in the prior year ago quarter.

Our effective tax rate for the three months ended January 31, 2014, and 2013 were 42.5% and 22.2%, respectively. The year-over-year difference consists primarily of the $2.9 million retroactive restatement of the --reinstatement, excuse me, of the 2012 Work Opportunity Tax Credit, or WOTC, that occurred during the first quarter of fiscal 2013 and the expiration of WOTC as of December 31, 2013. Without these discrete items, income taxes were significantly higher in the first quarter of fiscal 2014.

Net income for the first quarter was down $0.3 million, or 2.2%, primarily due to the lower benefit from WOTC of $3.4 million compared to the prior year, partially offset by $3.1 million in higher profits, net of tax. Adjusted operating profit, which excludes items impacting comparability, was up $4.1 million, or 19.1% to $25.6 million for the first quarter.

Profits from new business in the Building & Energy Solutions, Parking, Security and Air Serv businesses and organizational realignment savings were partially offset by higher costs from one significant Janitorial contract. Adjusted EBITDA, which excludes items impacting comparability, was $41.5 million for the 2014 first quarter, up $2.9 million, or 7.5% year-over-year, as contributions from our growth initiatives and realignment savings drove the increase.

Now turning to slides 6 and 7. Day sales outstanding at quarter end were 56 days, up 4 days both on a sequential and year-over-year basis. This was higher than we anticipated and it's primarily due to the timing of client receivable collections. We continue to expect our DSO to be 52 days for the year and cash flow from operations to improve throughout the fiscal year.

As is typical for the first quarter, cash used in operating activities ended January 31, 2014, was $38.9 million. This was an increase of cash used of $27.4 million compared to the same period in fiscal 2013 primarily due to lower collection of receivables.

Turning to Insurance. Total insurance claim liabilities at December (sic -- see slide 6, "January") 31, 2014, were $356 -- $357.6 million compared to $358 million at the end of fiscal 2013. For self-insurance claims paid during the quarter, the total expenditure was $23 million compared to $20.1 million for the first quarter of 2013.

As Henrik noted earlier, we announced our 192nd consecutive dividend, continuing the long-established pattern, as evidenced by the chart at the bottom half of slide 7. I would now like to turn the call over to Jim McClure.

Thank you, Jim. Please go to slides 8 and 9, I'll now provide some operational highlights of our Onsite services for the first quarter before turning the call over to Tracy for an update on Building & Energy Solutions. Janitorial top line growth for the quarter was exceptional at 4.6% compared to 2013 and revenue of $637.1 million, a record for a first quarter.

We continued to make good progress on initiatives associated with our operational realignment program and in general, we are on schedule. We remain intensely focused on driving top line growth and during the quarter, we scored some contract wins in key verticals, such as sports and entertainment, high tech and industrial. In addition, we had a significant increase in discretionary tag spending that helped to offset in part of the tag business generated in the first quarter of fiscal 2013 from Hurricane Sandy.

Client retention remains a focus and on a rolling four-quarter basis, we are at approximately 93%, better than the historical average of 92% but our long-term client retention target remains at 95%.

The Janitorial segment earned $29.1 million in operating profit for the first quarter of fiscal 2014. Expenses associated with a significant job we started in the third quarter of fiscal 2013 was a primary contributor to the 1% decline from a comparable period.

We have taken specific steps effective March 1 in one region to improve the margin for the significant job. In addition, the absence of higher margins that were associated with the clean-up from Hurricane Sandy adversely impacted year-over-year comparisons.

Moving to Facility Services. As previously communicated, we expected revenue to be lower based on the loss of one significant contract that was the way of a global bid which prevented us from retaining the business. Revenue for the segment was down 3% to $151.7 million. Operating profit for Facility Services decreased 10.2%, or $0.6 million, primarily due to the timing of a bi-annual performance-based award.

For Parking, revenue was $150.3 million, down about 1% compared to 2013. The decrease was primarily related to the termination of certain lower margin contracts, which was partially offset by additional revenues from new business. Management Reimbursement revenue was up $0.4 million to $76.3 million.

Despite the slightly lower revenues, Parking operations managed meaningful improvement in their operating profit, achieving a 17.1% increase of $5.7 million. Better mix of contracts and a reduction in expenses as a result of the realignment of our Onsite operational structure drove the improvement in margins.

Turning to Security. The team accomplished another quarter of top line growth with a 3.2% increase on revenue of $99.7 million. As I have mentioned on the previous call, Security has probably benefited the most from our Onsite bundled sales approach and the team continues to take market share.

For the first quarter, Security generated operating profit of $2.6 million, an increase of 55.5% compared to fiscal 2013. The improvement in operating profit came from higher revenue and a reduction in expenses as a result of the realignment of our Onsite operational structure. With that, I will now turn the call over to Tracy.

Thank you, Jim. Continuing on slides 8 and 9, I will provide an update on our Building & Energy Solution segment, which includes ABES, Government Services, and ABM Healthcare Support Services. This was another very good quarter for the team and we're pleased to share these results.

Starting with revenues, we accomplished a 16% increase to $102.1 million. Excluding acquisitions, we achieved organic growth of 13.6% as we benefited from an increase in energy retrofit projects, service and maintenance contracts and an improvement in our government business; another great quarter for the ABS team and reflective of the record backlog in sales we mentioned on our previous calls.

Revenue from our ABM Healthcare Support Services was up over 25% compared to the first quarter in fiscal 2013 continuing its momentum. And for the first time in many years, our government operations grew on a year-over-year basis, achieving top line revenue growth of 10%. We were, however, notified late last week by the US government that the protester on our Fort Benning contract win was successful. We are currently looking into options we can pursue to overturn that decision.

With year-over-year growth in revenue by ABS, contributions from ABM Healthcare, Government Services and BEST IR, BEST generated operating profit of $2.7 million. These are outstanding results and based on the strength of our pipeline, we remain well-positioned as BEST moves further into fiscal 2014.

Turning to slide 10, I want to mention a few of the sales and marketing highlights for the past quarter. Sales momentum in a number of key verticals continues. We have recently been awarded business for a couple of significant sports and entertainment stadiums. In our aviation business, our Omniserv unit was awarded a key transportation job at a major airport in the United Kingdom, which we anticipate will start later in the fiscal year.

This win is an excellent example of the synergistic benefits ABM can deliver by leveraging our aviation knowledge and transportation expertise in the US and UK to develop an industry-leading solution and be able to self-perform these services. We were selected by several educational institutions to implement bundled energy solutions projects, including Franklin City, Virginia Public Schools where we will execute a district-wide energy and facility improvement project.

In addition, we were awarded our first commercial real estate job, utilizing Property Assist Clean Energy, or PACE funding. There continued to be keen interest in our bundled energy programs and we remain very positive about the long-term growth prospects for this type of business.

Turning to sales, our organic growth initiative, Solve One More, continues to gain traction and foster collaboration across ABM service lines. On an annualized basis, sales exceed $40 million and keep in mind, this program was launched less than a year ago and is still being rolled out. 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, like as others in our financials, had revenue of $85.6 million, up $5.3 million or 6.6% compared to the first quarter of fiscal 2013. The Blackjack acquisition contributed revenue of $4.5 million. Operating profit increased $300,000, or 19%, to $1.9 million due to growth in our UK operations.

As Tracy mentioned, we recently were notified that we won a large transportation contract for a major UK airport. This contract win as well as the strong pipeline should help Air Serv generate top line growth organically as expected. Please now turn to slide 12 for a review of our financial guidance for 2014.

The Company continues to expect the following: $1.38 to $1.48 net income per diluted share; $1.58 to $1.68 for adjusted net income per diluted share. Adjusted guidance reflects the exclusion of charges consistent with our past practices and it's based on an effective tax rate for fiscal year 2014 in the range of 36% to 38%.

We continue to anticipate the depreciation and amortization expense in the range of $60 million to $62 million. Please review the other items listed on slide 12 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. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Joe Box of KeyBanc. Your line is now open.

Hi, good morning.

Good morning.

Jim, can you just put some color around the tag increase? I'm curious how much of that was snow removal and maybe weather related as opposed to just customers feeling better about their business? I mean, do you think that this is a start of a trend or does it tend to be maybe one-time in nature?

This is Jim McClure. The tag increase was partially snow removal, but the snow impact for the quarter was, in fact, a negative aspect to our bottom line of about $570,000. So the Sandy impact in 2013 was just over $5 million and organically from the group, we were able to achieve and basically have the same $15 million for the quarter in tag sales. So we're very bullish on discretionary spend, and I can't predict the future, but I feel good about our organizational structure and how we're out there selling and gaining tag revenue.

Good, good, that's good to hear. This is probably another question for you, Jim. It sounds like the government is actually looking to consolidate building maintenance and janitorial vendors for some of their properties. I think they're going from about 1,000 vendors down to 20.

I would think this would be a benefit for ABM given your presence, but they did say they want to stress small and local business owners. Is this something that would have any impact on your business?

Well, a lot of times you see there's a certain time lag between what government says and what actually happens. In this particular case, I think it's the same thing. I have not seen this particular one with Janitorial contracts moving from 1,000 to 20 but obviously, if that's the case and it happens, it will benefit us dramatically.

Okay, understood. Question for Jim Lusk on WOTC. Can you just give us a sense of what was previously factored into guidance, just from an EPS standpoint?

Yes, from -- are you -- Joe, are you talking year-over-year or are you talking for the whole year?

For the entire year.

Yes, for the entire year. The WOTC for the entire year that we are expecting for fiscal 2014 is about $0.08, give or take, it depends on our hiring, et cetera, but it's about $0.08. As of right now, if you listen to what's coming out of Washington, you can hear anything from a total tax code rewrite where they get rid of the stuff, to a more likely outcome where these things will be reinstated. They even reinstated retroactively for many, many years in a row but that's what's kind of factored in right now, so we'll see what happens there.

Let me add to that, Joe, because I think the key thing is and it might be tough to see out of the numbers. But if you do a quarter year-by-year comparison, we had a $0.05 pickup last year associated with exactly what Jim was talking about, a delay in WOTC credits from the government where we picked up a full year for 2012.

The $0.02 difference this year in WOTC credit where we had a $0.02 benefit last year and nothing this year. So year over year, there's a $0.07 negative impact on us from taxes for the quarter.

Understood, thanks, guys.

Thank you. Our next question comes from the line of Andy Wittmann of Baird.

Hi, guys. Good morning.

Good morning.

So Henrik, you just talked about the UK contract for Air Serv. Can you give us a size and kind of timing of when we should expect to see that through the income statement?

I believe it's around $8 million a year; it's a five-year deal and I believe we start in May or June.

Great.

I'm sorry, I don't have the exact month but it's either May or June.

Got it. That's helpful, and then digging into another one. It sounds like there was a protest in your Government business that Tracy mentioned in his comments. Can you talk about how much longer you're up on that and what -- maybe what the trailing 12 revenue contribution was from that one?

Yes, I can tell you, let me start with the trailing 12. That was zero. Let me tell you also about my current expectations for this year was zero, but nonetheless, we were awarded for maintaining a $45 million a year contract.

In a normalized world, we would have gotten a job we believe, it was process that -- the process that was accepted by the government and now we are finding, trying to look at ways where we can process this particular decision. But to make a long story short, it's not in our number.

Got it. Got it. And did -- I think you talked about this one at Journalist Day but did you quantify what the expected contribution from that one was going to be?

Yes, I think for the year, it was somewhat immaterial. I think we said around $500,000 or $600,000 for profit for the year was expected in our original budget, somewhat immaterial if you look at the overall numbers.

Okay, good and then just more generally speaking, obviously, the growth rates in Janitorial have been improved. Some of these things we were expecting because a year ago or so, maybe a few quarters ago, you guys talked about the fact you're having these successful wins.

At some point here in the next quarter or two, do comps start getting more difficult when some of these things annualize themselves? Or how should we be thinking about the growth rates for that core segment as we move through the year?

I think we have been anticipating this growth for quite some time now and I think we've communicated this to the investors last quarter and the prior quarter to that. We can only look at our pipeline and opportunities going forward. I think I said last quarter we see better and bigger opportunities than we've seen in the past, so it is our hope and belief that we can get to that mid-single digit growth in Janitorial, hopefully, not only for two or three quarters looking forward, but for a long period of time.

Okay and if I might I'd like to slide one more in here. I think Jim referred to the bi-annual contract based award in Facilities Management. I have to admit I don't know what that is, so maybe some color as to what that is, why that happens, and the impact to the income statement would be helpful.

Yes, this is Jim. Basically, the timing adjustment, so to go back the second payment of the performance award for 2012 was realized in January 2013. The second payment for 2013 was realized in October 2013 and that will be a more normalized expectation of the timing of this award. So that had a quarter-over-quarter impact, but going forward, we feel that the customer has made this adjustment in timing and it will be reflective of two awards that will be more mirroring our fiscal year than the calendar year.

So these are like incentive awards for doing your job well, essentially?

This is based on excellent performance.

Okay, so these are kind of one-time pick ups that you -- they're not amortized over the life of the contracts. They're just -- when they're -- when you get them, you recognize them to the income statement and you get a one-time but recurring one-time benefit?

Yes, sir.

Got you. Okay, thanks guys.

Thank you. Our next question comes from the line of Michael Gallo of CL King & Associates.

Hi, good morning. Just wanted to drill in the cross-sell. I think you noted getting some meaningful traction on the Security business. So I was wondering if you could, one, elaborate on that and, two, if you could talk about how you use some of the learnings that you're seeing in the benefit of how you're cross-selling Security effectively and how you tie that in with some of the other areas, you really start to get that bundled approach? Thanks.

Okay, I will have Tracy talk about the general sales margin program as we are selling more than and Jim will talk about Security, in particular.

Sure. Thanks, Henrik. I think the exciting thing that's happening for ABM is as a result of the restructuring, there is a different, more collaborative feel taking place across the board. I think Jim earlier stated that one of the benefactors has certainly been Security, because they've been pulled close to the vest and made feel like they're part of the team, and that collegial environment here is certainly being fostered.

Relative to kind of changing the orientation of how ABM goes to market, a couple things have happened. One, we unified under a new branding, which I think has been well received by our teams. Two, we've implemented some professional marketing programs, purchase systems to help create visibility and track leads better.

Three, that integrates directly into our CRM system, which creates the ability for us to track the pipeline better and know what's happening in real-time with existing customers, as well as new opportunities. We've embraced a challenger sales methodology. That training is being rolled out across the country and really, the evolution of the business has been to go from more of an RFP response-based environment to proactive sales and more of a trusted advisor mentality amongst our teams.

I think it's being incredibly well embraced and pushed out to our clients and appreciated. So we're able to do more services with same clients in a fashion that reduces their costs and adds tremendous value to what we're doing.

To add, simply said, today Securities feels like they're part of a great team. A big team in the past, they might have felt they were more an isolated silo. So we're -- they're gaining the benefit of all of the points that Tracy noted and they're feeling better about themselves. You've seen that in bigger and better opportunities.

Okay, thank you.

Thank you. Our next question comes from the line of David Gold of Sidoti. Your line is now open.

Hi, good morning.

Good morning.

A couple of questions on the growth in Janitorial. First, Henrik, can you speak a little bit about what you're seeing by way of the new contracts? Two, would you -- I think I know the answer, but do you attribute it to recovering market, market share gains or a little bit of both?

Well, I --

I know you love that question. (laughter)

Yes, yes, yes, I always love that question. Let's start with the growth that we've seen in Janitorial. I think it is a combination of the expected bigger job being offered and thereby, us, in some instances, being one of one out in the marketplace because we are the only one who can actually meet the customers' expectations.

I think we are benefiting, again, tremendously from the new organization. It seems to be much more one effort team. So I believe also we are actually taking market share right now and Janitorial is, as usual, doing a fantastic job in that area and if I look forward, again, as I talked about earlier, we're seeing some great opportunities in the pipelines.

Nothing is signed and sealed but it all starts with opportunities and the opportunities are bigger and better and again, with bigger and better, we hope to be in a position of being one of one, because nobody else can match us on a geographical footprint.

Got you and based on the opportunities that you're seeing, can you give us some sense for what your outlook is on, say, office occupancy? Does it appear as though there will be increased opportunities, say throughout the year or two where things are getting much better?

Again, I've said it before. Building occupancy or especially commercial building occupancy has maybe a slight impact on our numbers but very minimal. I think it's more if the occupancy is improving or the vacancy is dropping, it's more I think a result of better business and better business environment. The better business environment is leading to exactly what Jim was talking about before, which is excess tax sales.

We are happy to actually say this for we saw excess tax sales of $5 million year over year but we are not ready, I think to say this is the new level. We want to see it continue for one, two, three, or four more quarters but nonetheless, it's very encouraging what we see in the marketplace.

Perfect. Then one other. On the tag sale side, can you give us a sense for what sort of -- what kind of work you're doing, number one? And number two, what you think the longer-term potential as of that business, and it's nice to see it back on the $5 million level but where do you think it could go?

David, I think what we see is just across all of the super regions, an organic spend increase that touches all aspects of the tag business. There's not one piece of tag work where, be it carpet cleaning or specialty cleaning, that has led the way.

It's just been organically from the bottom and it's really a concentrated effort by the team to achieve a certain element of tag sales in the compares to their overall revenue goals. As you push that down into the system and you have more people out there with those targets and initiatives that are well defined, you get those results.

Perfect. Perfect. Just one last one and I'll get off. Can you talk a little bit about, I know you hit on the realignment, but sort of where we are in the process or how close to done are we?

On the operational realignment?

Right.

I would say -- and Jim can jump in if you want to but I think in general, we are 80% to 90% there. There are still some offices that need to be closed down but I think the leadership has been communicated throughout the organization.

I'm very, very pleased to say that in the process which you do reorganizations, we did not lose one person that we didn't want to lose. We have a theme that's very enthusiastic about the new organization. So I believe I could say, as of now, the operation was a success.

Excellent, thank you.

You're welcome.

Thank you. Our next question comes from the line of George Tong of Piper Jaffray. Your line is now open.

Hi, good morning. Could you provide us with some additional details on the higher operating costs you noted associated with the large Janitorial contract and what plans you have to bring those costs down over time?

Yes, I'll be happy to. This is a very sizeable contract and I would like to start by saying, fixed as of March 1 and we expect profits to in the third quarter to be substantial for this particular contract, but nonetheless, when you start big contracts, you make big proposals, you have a lot of assumptions in that proposal. We made some miscalculations and some wrong assumptions and we dealt with the issue and it's been solved.

It's not unusual when you have jobs with this particular job by saying employees between 2,000 and 2,500 people, it's a sizeable business. The good news is we, with our retention rate, we expect to have this job with us for the next 15 to 20 years, profitable.

Got it, that's very helpful. To the extent that you've done the math or thought through the potential impact could you walk us through implication of minimum wage increases on your business?

Yes, in general, I've been -- I'm old. I've been through many minimum wage increases and in general, I can just tell you that it really has no impact -- or if there is an impact, it's a positive impact. The key thing is the minimum wage increase hits everybody.

It's much more difficult when you're dealing with a union increase in a mixed market, with the union and non-union and the non-union part of the market doesn't have increases. So in this particular case, the minimum wage increase, we do not expect any negative impact on the Company's performance. It's going to have a positive impact, of course, on revenue. Overall, based upon our historical knowledge, if a minimum wage increase comes through, we normally see a positive impact to the bottom line as well.

That's very helpful and then last question. You noted some positive trends in healthcare, sports and entertainment verticals. Could you elaborate on that in terms of what you're seeing and how these trends will translate into bookings and revenue performance?

Yes, let's start with healthcare, and I'm so proud of what Tracy and his team has done with healthcare. Healthcare, we -- as you know, we bought HHA a year ago, or a year and three months ago and a relatively small organization, $50 million to $55 million of business and we merged into the old healthcare businesses, which was primarily Clinical healthcare. Now we are on a sales basis, including our HPSA acquisition, which was our healthcare [audit group] and that team, combined, really, really hitting it out of the ballpark in my mind.

We expect double digit growth this year for top and bottom line. Not only double-digit growth but sizeable double-digit growth. When we made those acquisitions, aviation as well as healthcare, I think I made it very clear that we do expect the vertical focus to create and achieve higher growth rate than we've seen in our regular business and if this continues, at least I can tell you I was very right.

On the other verticals, it's primarily a sales vertical when we talk about stadiums and arenas. Again, you are looking at double digit growth, you're looking at growth not only here, you're talking about growth also in the UK, tremendous success in the way they are approaching the market. I really believe we are one of the top notch providers of services in that commercial stadium world.

That's very helpful, thanks so much.

You're welcome.

Our next question comes from the line of Adam Thalhimer of BB&T Capital Markets.

Hi, good morning guys. Nice quarter.

Well, thank you.

Just curious. You said in your commentary that Q1 came in a little better than your internal expectations. Where were you surprised on the upside, Henrik?

I was surprised in -- it's a very good question by the way. First time I got that. I was surprised that we were able to see growth and deliver it in BEST, as we talked about before.

Security was better than I expected. Janitorial did pretty much what I expected, because I knew about that one job. Parking did much better than I expected, considering I knew they were going to be -- hit the snow as well as the revenue growth is not as great there as other places.

So I would say that the good news is this was not like a one-time New York Lotto award but truly throughout the business, I saw a little here and a little there and from the best point of view, I think that's what you also prefer because it's not a one-time type of situation. In my opinion, I think in general, we see an optimistic organization and we see a pipeline of new business that exceeded at least my expectations.

Great, and then if you get the WOTC credit, I mean, do you -- given your optimism and good results in Q1, does that make you more confident maybe in the high end of your guidance range?

I would like to talk guidance after the second quarter. This quarter, as an example, I could not predict the snow, so Jim -- you heard Jim had a little hit on the snow. Living in New York, believe me, we've seen snow this year and I'm not ready to say it's over yet.

So there's so many things that can still happen, but in theory, the first quarter is in the books and I'm very pleased with the first quarter. So let's talk about that in the second quarter.

Okay and then just one knit-picky. The corporate expense in the quarter was down year over year, and you gave a couple reasons for that, but it didn't seem like those reasons were necessarily going away, so is there any chance that, that line item is down year over year this year?

I think that is a good reason to believe it's going to be hopefully flat year over year or slightly up. There are some temporary things that takes place in that particular line. We have our IT group in Atlanta and we are trying to hire people all the time but we are a little behind hiring the people, so that is bad news.

The good news is we save a lot of money. So I think we are controlling that line very tightly and flat will be a good year, up 2% or 3% would be acceptable in my mind, but it's -- we don't expect anything. I'm not planning to lower that by $10 million, but keep it flat.

Okay, great, thanks. Good color, appreciate it.

Thank you.

(Operator Instructions)

Our next question comes from the line of Michael Kim of Imperial Capital.

Can you guys hear me?

I can hear you.

Good morning, guys. So for customers where you've had greater success in bundling Onsite services, how has that benefited pricing, like at least on the Janitorial side or versus selling individual services?

The pricing side?

Correct.

It has very limited impact on the pricing side. I think in general, you will see the bigger the jobs are, the pricing is a little tighter going into the job, for that while we get it back to the average of the overall business, so it really has no major impact on the pricing.

Okay, and then client retention, 92%, is pretty good. How do you guys get to your 95% target and how much, how important is pricing to that, or are there other factors that weigh into that number?

First of all, it was 93%. Second of all, the way to get to 95% is lose less accounts. The way Jim has done it is a very targeted approach towards every -- pretty much employee in the Company, for people to understand it's much more important to have a happy existing customer than to grow with a new customer.

I think Jim has overall been very successful with that program. It is moving in the right direction and I'm pretty sure he's going to hit 95%, maybe not this year but hopefully soon. [We're all hopeful].

Great, then just turning to the government side, what was the overall contribution from government in the quarter? With the recent budget deal, are you seeing some larger scale opportunities emerge that could drive for fiscal 2015 type opportunities?

[The overall numbers, just one second]. Let me answer about the opportunities. I think basically what you see with the government right now is that, let me give you the numbers here. It's profit-wise, they made $2.6 million approximately with sales of around $32.5 million for the quarter.

On -- I would say -- and Tracy feel free to jump in here, but the budget side is -- I would say there's noise out of the system by actually having a budget that's approved. So hopefully they will see that this is the amount of government that we expect.

I would just like to say we've a very good start to the year with government and it probably is a reflection of a more stable situation than we've seen in the past. You want to add anything?

Yes, I think if you look at the performance in that business unit, where they've really had kind of stalwart activity is in the medical piece of the business and that's consistent with the vertical strategy that we have in healthcare. So the medical and O&M business is doing very, very well. We've had new awards in that piece of the Company as well and the project work is about similar to activity it was last year.

I think, all in, we see pretty normal operations. Obviously, the government is pulling back from its war footing, so any contracts related to international ambitions in the Middle East have been generally pulled back. So our focus continues to be on the things that we do very well domestically, with some opportunistic contract potential in Eastern Europe as a result of geopolitical activities.

Thank you.

Great and then are you starting to see a little more frequency in protest activity, just given the budgetary environment or is it fairly similar with recent years?

I think the protest activity has gone up each of the last three or four years. So it's very rare when you have significant contracts that aren't protested, and it just has become a real drag on the velocity of that business. Conversely, we've had four or five different contracts this year that we've anticipated ending, that have all been extended through the end of this fiscal year, so it goes both ways.

Great. Then on aviation, what kind of opportunity are you seeing outside the UK, in the Middle East, especially, and can you beverage some of those capabilities into Continental Europe or do you also need to make an acquisition there?

Well, I think you'll see aviation eventually spread its wings throughout Europe and hopefully, also in the Middle East and other places. It's somewhat of a long-term process. We have grown dramatically in the UK this year and I see growth going forward in the UK as well, so an acquisition naturally would help that growth vehicle and if something comes along, I might look at it.

Okay, great. Thank you very much.

Thanks.

Thank you. Our next question comes from the line of Andy Wittmann of Baird.

Thanks for taking my follow-up, guys. Tracy, the Building & Energy Solutions business and the backlog business you've been talking about that it's kind up, maybe record. Can you give us what the backlog is today, how it maybe compared to last quarter and maybe last year, just so we can get a sense of that glide path?

Yes, I can tell you that the backlog last year compared to this year at the same time, is 3 times what it was and that's prior to landing the big Wright State job, which really pumped up our backlog. However, we have kind of a clear line to maintaining that level of backlog going forward, without having large Wright State projects. So I think we feel very, very good about how that business is working and what the long term prospects are as we continue to build that footprint out.

Does that backlog pertain to the entire Building & Energy Solutions reported segment in your segment reporting or is that just the part where you're actually doing [NEG] efficiency work. In other words, you've got, I guess, governments in BES segment, but is the backlog just the mechanical projects part of BES?

The backlog would be pertinent to everything under our ABES banner so Mechanical, Electrical and Building Energy Solutions.

Okay, I just didn't want us just to get confused and say, okay, backlog is up 3 times, that means that segment revenue is up 3 times because it's not. It's just a portion of that segment is up 3 times.

The backlog gets worked off over time. So what we see is we're in a very good position compared to where we were at the same time last year.

For perspective, maybe can you give us a sense of how big -- how much of the reported segment of BES is ABES? Does that -- do you see what I'm saying there?

Yes, about 45%.

Okay, great. That's really helpful. Then, final question, Jim, just on the cash flow. You mentioned timing. Is it fair to assume that to close the books at the end of February, that DSOs started working themselves back, since it was a timing issue, or are there large contracts that maybe are being disputed or kind of hanging things up?

Clearly, for -- they will get better. Clearly, for the year, they will be better. So it's always an issue of individual customers, but they will get better.

Our cash flow expectation for the year has not changed.

Okay, great, thanks.

Thanks.

Thank you. I'd like to hand the call back over to Mr. Slipsager for any further remarks.

Okay, thank you very much. Thanks very much for listening to our first quarter call. I'm sure I'll talk to all of you in 90 days. Have a beautiful day. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.