ABM Industries Inc (ABM) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to ABM industries first quarter FY15 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would like to turn the conference over to Henrik Slipsager, President and CEO. You may begin.

Thank you. Good morning. Joining on the call today are Jim Lusk, Executive VP and Chief Financial Officer; Scott Salmirs, Executive VP and incoming CEO; and Sarah McConnell, our Executive Vice President and General Counsel. Today I will provide a brief overview of the 2015 first quarter that ended January 31. Jim Lusk will discuss the details of our financial results, and I will do an operational summary before concluding our prepared remarks with an updated outlook for FY15.

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. Under the tab Investors you will see the Event tab. Today's presentation will be the first listed. Sarah?

Thank you, Henrik. Please turn to Slide Two 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 our first quarter. I'm very satisfied with our performance this quarter, as results were in line with our expectations. Revenues were a record for the first quarter, and up just over 5% from the same period last year. Highlights for our Air Serv was up over 13%; BESG was nearly 17% growth, Janitorial topping 4%, and Parking breaking through at the 3% level.

For the quarter, operating profit excluding the corporate statement was up approximately 12% compared to FY14. Adjusted net income increased over 52% to $21.5 million as we benefited from higher margins and tax credits. We will provide more color on the drivers later in our prepared remarks. In January ABM won a unanimous reversal of the $94-million adjustment in the wage-and-hour class action suit. Now I'd like to turn the call over to Jim Lusk for a financial review of our first quarter. Jim?

Thank you, Henrik, and good morning everyone. Moving to Slide 5. On the top line, we achieved revenues of $1.29 billion for the first quarter, up 5.1% compared to the prior year, including organic growth of $38.9 million, or 3.2%. In December, our Janitorial segment exited a large contract, as we believe the price concession required to maintain the job would have caused it to be unprofitable. Excluding this contract, organic growth would have been 4.4% on a year-over-year basis.

As a percentage of revenues, gross margins increased by 30 basis points to 9.9% for the 2015 first quarter compared to the prior year. The increase in gross margin was primarily attributable to lower payroll and related expenses, as a result of one less working day, lower insurance expense due to enhancements to our risk management safety programs, and realignment savings. This increase was partially offset by higher startup costs for certain newly acquired contracts and non-recurring costs associated with certain clients.

SG&A expense for the first quarter increased $15.4 million, or 17.6%, to $102.8 million. The increase was primarily in corporate expenses, which grew by $10.2 million. This includes approximately $3.1 million of expenses to support sales and IT personnel working on growth initiatives, as well as professional fees for employee tax credits. Corporate expense also includes $6.6 million of items impacting comparability. For this fiscal year, we expect a 7% to 9% increase in corporate SG&A, excluding items that impact comparability, compared to FY14. Amortization of intangible assets for the first quarter decreased by $0.5 million.

Our effective tax rate for the three months ended January 31, 2015, and January 31, 2014, were 1.7% and 42.3%, respectively. The decrease was primarily from $4.8 million in 2014 WOTC and other employment-based tax credits. For the year, our estimate of our annual effective tax rate will be in the range of 34% to 38%, which assumes Congress will not re-enact the WOTC prior to October 31, 2015, for calendar 2015.

Adjusted net income of $21.5 million, or $0.38 per diluted share, was up 52.5%, compared to $14.1 million, or $0.05 per diluted share, in FY14. The increase is the result of the retroactive re-enactment of the 2014 Work Opportunity Tax Credit, a decrease in labor expense due to one less working day, lower in-the-air insurance expense as a result of safety initiatives, and new business. Partially offsetting these items were higher compensation costs associated with sales and IT staff to support growth initiatives.

Turning to Slides 6 and 7. Day sales outstanding at quarter end were 56 days, flat on a year-over-year basis, and up three days sequentially. Cash used in operating activities for the quarter ended January 31, 2015, was $32.4 million. This was an improvement in cash used of $6.5 million compared to the same period in FY14, primarily related to the timing of collecting receivables.

Turning to insurance, total insurance claim liabilities at January 31, 2015 were $343.9 million, down $13.7 million compared to January 31, 2014. For self-insurance claims paid during the quarter, the total cash paid was $22.9 million, down $0.2 million year over year. During the quarter we amended our credit facility for a one-time increase to the leverage ratio from 3.25 to 3.5 times in the event of a material acquisition. We continue to have $30 million outstanding under our previous share repurchase authorization.

Yesterday we announced our 196th consecutive dividend, at $0.16 per share, continuing the long-established pattern, as evidenced by the chart at the bottom half of Slide 7. I'd like to turn the call back to Henrik.

Think you, Jim. Please go to Slide 9 and 10. I will now provide some operational highlights for the first quarter, starting with our on-site business. In total, top-line growth for the quarter was 4.5% compared to 2014, with revenue of $666 million. Organic growth of 2.1% combined with approximately $60 million of revenue from our acquisition of GBM.

As Jim mentioned earlier, Janitorial exited a large contract for pricing reasons. Excluding the contract, organic growth for Janitorial would have been up 4.4% compared with the first quarter of FY14. Tag revenue was very strong in the quarter, and compared to FY14 grew 8.5%. For the first quarter the Janitorial segment earned $34.9 million in operating profit, an increase of $4.6 million, or 15.2% compared with prior year. Operating margins increased 40 basis points to 5.2%, primarily from a $3.9-million benefit associated with one less working day in the quarter.

Moving to facility services, revenue on a year-over-year basis increased by $4.5 million, or 3%, to $156.2 million, as Tag revenue is exceptionally strong in December. The operational profit increased nearly 16% to $5.9 million compared to prior year -- a solid effort by our On-Site Facility Service team.

Parking revenue was $155.7 million, up $5.4 million or 3.6% compared to 2014, as we are benefiting from new jobs and an improving economy. Parking operating profit increased by $1.3 million, or 25%, to $6.5 million, compared to FY14. Nice start by the guys in parking.

Turning to Security, as we previously communicated in the first half, the year will be challenging on a comparative basis. Revenue was $94.9 million and operating profit was $1.9 million, down $4.8 million and $400,000, respectively, compared to 2014. We continue to expect an improvement in the second half, and we are working on successful closings and larger cross-selling opportunity.

Looking now at BESG segment, with revenues $119.4 million, our team had another strong quarter of growth by achieving a 17% increase compared to 2014. However, operating profit of $1.2 million was down $1.5 million, resulting from a $1.2-million expense associated with settlement of two client disputes, and $700,000 increase in the settling of business development cost. We're very confident that the BESG team will deliver double-digit growth in revenue and operating profit compared to FY14, with the one-time cost behind them, and a pipeline that remains very strong.

Before discussing our outlook for the remainder of FY15, I want to say a few words about Air Serv. This segment (inaudible - background noise) an outstanding quarter, with revenue increasing 13.6% to $97.2 million, up $11.6 million compared to the first quarter of FY14. We continue to benefit from significant growth in our UK business and from recent contract wins for the US commercial carriers.

Operating profit of $2.6 million was up $700,000, or 36.8% for the quarter compared to FY14. With our expanding UK operations and recent sales wins, we continue to believe our innovation vertical is set up for a very successful FY15. I will now turn the call back to Jim for a review of our financial guidance for FY15. Jim?

Thanks, Henrik. Let's please turn now to Slide 13. With the passage of the 2014 WOTC, the Company is raising guidance as follows: $1.75 to $1.85 for adjusted net income per diluted share, and $1.55 to $1.65 for net income per diluted share. This guidance excludes potential benefits associated with the 2015 Work Opportunity Tax Credit. If Congress were to extend the WOTC for calendar 2015 before October 31, our fiscal year end, the Company would have a further benefit of $0.08 per diluted share.

The second quarter will have one more work day compared to the prior year. This will increase labor expense by approximately $4 million on a pre-tax basis. Please review the other items listed on Slide 13 which contribute to the EPS guidance we have provided. As is customary, our guidance is exclusive of any future acquisitions. Operator, at this time Henrik, Scott, and I are ready to open the call to questions.

Thank you.

(Operator Instructions)

Michael Gallo, CL King.

A couple questions. I want to -- good quarter, congratulations.

I just want to drill in to building and energy solutions a little bit. You had obviously strong revenue growth. I know you had the two items you called out. Even excluding that, it doesn't look like you would have had much growth in the operating profit line. Was there something else about the composition of that revenue growth? Is there some start-up costs? Walk me through why you think that will get back to growing more in line with revenue as you get into the back half? Thanks.

Mike, I'm not overly concerned about that, because we're dealing with the first quarter, which is a quarter where we have relatively few project-type jobs. There was some start-up associated with our government business that's included in numbers. The good news about start-up costs is their revenue and income will come later. I'm not concerned about it. The growth, I think, is very impressive. Knowing Tracy and his team, I know the profit will follow that growth. No reason for concern on that one. I'd be more concerned if revenue was not up.

Right, okay. Fair enough.

Second question I have was on security. I know there's been a couple of tougher quarters there. Obviously that was one of the areas that should benefit from some of the cross-sells. I was wondering if you can give us an update on security, which has been challenging for a few quarters now, and what your thoughts are there going forward? Thanks.

Security will be challenged, I think, for most of the year. I think we're going to see some rebounding in the second half. It is very much associated with also one or two major jobs early -- late last year, I guess it was, or middle of last year. They are clearly benefiting from the cross-selling. We see a lot of bidding activity and hopefully also some closing activity. I don't even want to think about it if we didn't have that. We're clearly benefiting from that. Security had a couple or three very good years. Now we are limping a little bit, but I don't think -- we're not bleeding, we're just limping.

Okay, fair enough. Thanks.

George Tong, Piper Jaffray.

Good morning. Let me first say, Scott, welcome to your upcoming new role; and Henrik, you certainly will be missed.

My first question, you made investments in the quarter in sales and IT personnel working on growth initiatives. Can you discuss areas you think the incremental hires will be focused on, how they evolve your growth outlook for the Company, and when you expect them to ramp to productivity?

I think it's -- let me give you a little more sophisticated answer, a little more detailed answer, on that one. First of all, the IT folks that a lot of them were hired, were simply shortages we have realized the last year. If you compare it to the first quarter of last year, this is primarily shortage of people. To reflect on where we stand on this, this is pretty much on our plan, so we expected this. As a matter of fact, I'm happy to see it be fully staffed finally, so we don't have any holes in our IT department.

I see the department is very much associated with our overall business to make sure we have the technology as a leading part of our service provider provision. The best part, the business development part, and the other thing Jim was talking about is sales and business people. We always load up in the first quarter. We've loaded up in the first quarter. As you can see the past couple years, that's why we realized growth we haven't seen in the past. It's somewhat associated with the hiring of sales people.

Right, makes sense. We've seen several quarters now where your margins have benefited from reduced insurance expense related to enhancements to your risk management and safety programs. Can you talk about how long you expect to continue to seek margin upside potential from this?

If you have -- if you think about it, starting in the third quarter, primarily the third quarter of this year we had a huge benefit. That benefit in the third quarter, we had some benefits from the first and second quarter of FY14. Comparable, I think we're going to see a benefit in the second quarter of FY15. You're going to see a -- we're going to be a little behind on the insurance on third quarter FY15. That's associated with a pick-up we had last year in third quarter 2015.

Overall, we are pleased with our progress. We have, as you might know, hired a lot of safety people and have a safety program. Hopefully, the improvement's going to continue for years to come, but short term, second quarter will benefit from it and third quarter will have a deficit from it.

Great, then last question. You've previously highlighted parking as a notable beneficiary of cross-selling initiatives under One ABM. Can you discuss other potential sources of revenue up side from cross-selling in metro areas?

Yes, I think security for sure -- maybe not metro areas, but security for sure. On the industrial side we see some references right now taking place. Parking is somewhat a great story, in my opinion, because parking was pretty much the only company the last couple years to have not seen the growth. Finally I'm seeing growth both in the top and bottom line. It was a somewhat tough quarter, because we did have a lot of snow in January. If you live on the East Coast, you know February is going to be tough for us, as well. We got a lot of snow, and that does affect parking. Parking is still benefiting from the relationship in particular in the janitorial area. A lot of good activity in parking taking place right now.

Thank you.

Joe Box, KeyBanc Capital Markets.

Henrik, congratulations on the retirement.

Thank you.

I wanted to ask about the margin expansion in the janitorial business. Over the last few quarters we've actually seen some nice margin expansion. I'm trying to discern how much of that is maybe the new contract up-front expenses normalizing, versus maybe your high-margin tag business that seems to be picking up? Any color on that would be helpful.

I think this quarter clearly benefits from one less day compared to last year. It's going to clearly impact the margins overall. The tag sales, for sure, is at much higher margins than any other sales. But other than that, the key number we are focusing on and will keep closing on -- also after my retirement, they promised me -- is safety and the association of insurance expenses with the safety investment. We're making the investment now. We do believe long term we will get some nice pay-back, which also is a very good competitive tool, as well. I would say looking at it from 10,000 feet, the margins - with the exception of that one day -- in janitorial, is very close to be flat.

Can you put some parameters around the success that you called out on the West Coast? I know you are deploying your Solve One More out there, and you've got some alignment initiatives that you're doing in that region. I'm just curious what the success has been, and maybe how that might compare to some of your other regions as you deploy it elsewhere?

I think the west is clearly something that proved to me, and I think proved to Scott, that the value of a strong leadership team cannot be underestimated. We have a very strong leader. His name is Brendan Jacobs, he's doing a great job. In Southern Cal you've got Arnold Klauber. He's doing a fantastic job.

I think we were -- we saw the talent, and we picked those two guys to lead the effort. They have been instrumental in improving, increasing communication between the different lines of business. If we can copy that success to other areas, we're going to see growth like this pretty much every place.

Also, the last thing I want to mention is, the depth of services we have in Southern Cal is much greater than any place else. You have to remember -- you might not know this, but originally most of the services -- I'm talking about parking, security and others -- we're started in Southern Cal. That is still the area where we have the deepest penetration.

Understood. Thanks for that. Jim Lusk, when we look at the corporate expense being up 7% to 9% for the full year, just curious, is that off a GAAP number or a non-GAAP number?

That basically is a non-GAAP number. If you look at our SG&A run rate and corporate for this quarter, and you do the 7% to 9%, you're pretty much at the run rate. That's pretty much what it does. As Henrik described it, had a lot of vacancies last year, especially in IT. Those vacancies were filled the latter half of the year last year. We have added a few sales people, so you're pretty much at your run rate right now.

Great. Thanks.

Andrew Wittmann, Baird.

I wanted to understand a little bit about the lost contract in the janitorial business. Just doing simple math here, it looks like roughly 2% growth for the quarter implies 15% for the quarter -- is that a $60-million contract for the year? Maybe more importantly, was this a contract that was in the middle of its duration that you decided to get out of as a review of the contract, or did this one come due and go out for re-compete?

This was the contract that I've been talking about indirectly for a very long period of time with a very long implementation schedule where the start-up cost exceeded our expectations, and as a matter of fact was not profitable into -- and very little profitable into the second or third quarter of FY14. Then we ended up in some price disputes with the particular client, and we decided to leave the relationship that was not very profitable for us by the -- I would say by November of 2014. It was an account at the level of around $4 million a month.

You left in November. Really, the janitorial -- you were starting it up last year but you signed off in November where you started walking away from it. In other words, you've got another couple of quarters here where it's going to be a tough revenue comp as a result of this? Is that a fair way of looking at it, Henrik?

I think from a result bottom-line point of view it's not going to be very tough, because we didn't make that much money, if any. I think if you see our growth, it's pretty impressive, because we more than absorbed that in our janitorial segment and still were up net organic growth by more than 2%, which is -- you remember back, Andrew, is still a good number for us to be up 2% in a market that has been flat or below at my competitors. Without it I'm up 4.5%, with it I'm up 2%. The sales activity in janitorial is still very impressive, so I don't foresee any issues in that respect.

Yes. Okay, that's helpful. Maybe one for Scott here is related to that. As you look at the Company margins here today, Scott, and the opportunity -- I know you've been doing your listening tour going to your different offices and understanding the businesses -- but is there an opportunity to look at more of contracts like that one? Maybe that was -- that's obviously a large contract, but are there more opportunities you think in the portfolio of ABM to look at contracts with more scrutiny, potentially walk away? Maybe it's an expense of top line and improve the overall bottom-line results? Is this something you think is on your priority list? Just curious of your thoughts around that?

I think this is something we do well as a firm, and I think we've been doing well for quite a while. The operational discipline that we have in the field, I think is unparalleled. If you remember, it wasn't too long ago I was running the northeast, so I had a very micro window into this. That was always the theory. We don't work for free, and that translates to pride in our people, and it also says a lot to our customers. I think as we go forward, this is going to be the same operational discipline that we have always had.

Okay. Scott, given that this is your first conference call, it's probably fair to ask you what are some of the things that you are looking at today, potentially, to put your stamp on? If you give priorities one, two, three, what are some of the things that are formulating in your mind as things you want to after to drive the future of ABM?

For us, and it's something that we've spoken about before, it's the customer focus. We're going to continue on that. It's a position we've had as a firm, and I think we need to drive that deeper and deeper and turn it into a true operating strategy. That's something you're going to see a lot of, and you're going to hear a lot about from us. And more collaboration as a team.

We started it with Solve One More on the sales side, and we've been doing it for a while now with our on-site restructure that we started a couple of years ago. Now we're going to look to our Air Serv division, our BESG division, our On-Site division, and bring those three areas closer and closer together to have the true one ABM. That's where a lot of the focus is going to be.

Good. I think I'll leave it there for now. Thank you very much.

Thank you.

(Operator Instructions)

David Gold, Sidoti.

Henrik, it's been a pleasure working with you for about 15 years.

Thanks, David, a pleasure working with you, as well.

Scott, obviously welcome to the new role, or upcoming.

A couple of quick fill-ins. One, when we come back for a second to the large contract, when you think about that one, I just want to go over for a second the take-away of the lesson learned. Was it a function of mis-pricing, or was it a function of in the implementation things changed, and it became more expensive to you then than you expected it to be?

I'm sure it's a mistake Scott will never make, but I made it. I think sometimes when you start, you look at this wonderful big job, great opportunity, I think we got somewhat carried away with the opportunity, and didn't scrutinize the job deep enough before we said yes to the contract.

Looking back, the screening process has to be stronger and better in that process. Because one thing is what you see is the direct expenses associated with it. But there's also a lot of indirect expenses and frustrations associated with a job like that, as well, where we just don't see the cost, but we have to allocate Management resources to a job like that that exceeds what you would do to a normal job. The lesson learned is, if it looks too good to be true, it is too good to be true. Scott will absolutely not make that mistake.

Thank you, Henrik.

Got you, okay. Fair enough.

When we think about the pick-up in tag work in the Northeast, which obviously was impressive tag work. Being a side margin, presumably you're pretty focused on doing what you can to spur that on. What does it take for other areas, say the West, to catch fire on that?

You have to understand the difference in contracts between the different areas of the country. Especially the west, there are very few extras associated with it, because the contract you have with a client is pretty much an all-inclusive contract. You can have some extra work, some extra cap possibly improving, et cetera. But in New York, you're dealing with a minimum spec, and you have diverse contracts with each tenant that drives a lot of these tag sales.

You really can't draw parallels between areas, and make conclusions based on areas. Give you an example: In New York, snow is unfortunately included in the pricing, but if you go to Washington, DC, it's an extra. Every area is different, so I really can't give you the model, other than saying to you that we know the difference in the market places. We're focusing on it.

Based on the pipelines that you're seeing, how aggressive, or how much stronger do you think the growth there gets?

I'm encouraged by it. We have a lot of very attractive offers in front of us -- not offers, but bids in front of and negotiations in front of us. I really believe that the growth is now. It's been now for six to eight quarters, and I think it's sustainable. It's my hope again that Scott will take over something that will even grow more. Because I think we've been through some of the growing pains, we've been through the re-org, and things take time. That's why I feel it's the right time for me to get out of here and leave it for a very talented man who is extremely marketing and sales-focused. I'm sure he will do a fantastic job for you.

Got you, perfect. One last, if I can sneak in there. Looking at the growth in Air Serv, the other line, obviously very impressed by it. Just wanted some thoughts there on -- it sounds like there's strong momentum. Is growth like this sustainable?

I believe when we bought the Company that we could see 10%-plus growth in that company. I did that based upon the leadership, the talent we see, plus the market opportunities are endless. Again, with that leadership and the direction that Tom has taken this company - Tom Marano. It is very impressive.

My hope is that on an average basis that you will see double-digit growth in the long run. That doesn't mean -- could be next year will be 7% and the year after 15%. I can't say it's going to be 10% every year, but on average I really believe that this is going to be a double-digit growth, and it's going to be a long-term success story for Scott and the team.

That's more a function of market-share gains or new contracts?

It's market-share gains. There might be some new airports opening up, but in general it's market share.

Perfect. Thank you all.

Thank you.

Jeff Kessler, Imperial Capital.

Thank you. Congratulations, Henrik. It's been 20 years.

I know, Jeff. I know this.

That was going back when you were with a competitive firm. Taking a look at the -- you've made some specific references to where, one, ABM was beginning to take hold with regard to parking. But if I could get an idea from you for the rest of the fiscal year and into next fiscal year, how do you see this playing out in terms of which areas of the Company are going to be at most benefit? Where are we going to see it a little bit more lagging, in terms of being able to integrate these pieces together under one roof, so to speak?

Jeff, I would love to say that now Scott is the leader, he's going to grow 22% everywhere. But that's unfortunately not the case. I think the small divisions will always benefit more, because the (inaudible) being the Big Kahuna here, has more relationships, has more contracts. The referrals will clearly benefit all the other divisions. As I said earlier, finally see it on parking. That was, in my opinion, a very good quarter for parking.

Security, I think, is truly a short-term hiccup. Facility services had a good quarter, but probably not sustainable in the second quarter, but will have a good growth year. In janitorial, I really believe the facility, the major jobs in janitorial, they are picking up, and you will see growth in janitorial. If you look at the growth without that big job that we talked a lot about today, if we can see growth between 3% and 5% in janitorial, it's on a big base, and it's taking nice market share out there. I feel very good that you're going to see long sustained growth throughout the Company, but I'm not going to put a number on each area.

With regard to both janitorial facility services, what is the current tenancy rates going? Are they continuing to improve? Is this the type of thing where improvement in the percentage of buildings that are occupied fully or partially, or at least partially fully, are going to drive this for an extended period of time? There's a tail to this, obviously.

Jeff, I think the occupancy rates in buildings have very little to do with our growth. I've said that before and I really believe it. I think the vacancy rates or the occupancy rates -- if the occupancy rates are high, that means the economy is good. I think you're going to see some effects now because of the economy. But the rates in itself, outside the reflection of the status of the economy, really doesn't have a major impact on our sales.

All right. What has to go on in building energy solutions to pick up the margin there? While the organic growth looked really good, operating profit obviously you had a couple of disputes. Were those the major reasons why the margins were as they were, or are there other things that are holding it back that could perhaps dissipate over the course of the next fiscal year?

No, I think you're dealing with two things here. You're dealing with a first quarter that is historically -- the first two quarters historically in BESG are the weaker quarters. That has a lot to do with our [image of retrofits], which normally takes place in the third and fourth quarter. As you could imagine, we do a lot of schools. That is often done in the summer break. You cannot make any conclusion based upon this quarter, in my opinion. We did have a couple of one-time hits, which is not something we expect for the rest of the year.

The cost increase we had on the sales and business development people in that particular segment is of course something I expect is going to show or mean that we are going to have the double-digit growth in BESG for the year. I also am very certain they're going to have double-digit growth on the EBITDA level. I'm very proud of what they're doing, what they have accomplished, because they have pretty much a very strong machine going right now, and they are hitting on all cylinders. Outside the hiccups in this quarter, which truly are one-time in nature, and unfortunately happens in all divisions. We're not perfect.

Okay. Finally, with regard to health care support services, this has been a smaller part of that division. It started out I think a little bit slowly. What are you doing at that point -- what are you doing at this point to really build that up, because there's obviously a tremendous amount of potential there?

We have invested in a very good team. We have seen pretty dramatic growth there on the top line. We are picking up new business as we speak. They've had -- as I said, one of two of those hiccups we talked about earlier did happen in the health care business, and we did lose one of the jobs, or we resigned from a job.

I think again you're going to see high-double-digit, high-teen growth in health care both this year and these coming years. We are a very small player in the market place. P&E's an are where I would very much look at smaller acquisitions, but it's not my call any more. But I am going to inspire them to look at small acquisitions, because it is a healthy market segment. It is higher profitable than the rest of our Business. Again, I got great leadership there.

Finally, Scott, I know that you have answered this question before, but I'd like to hear, perhaps, from a different point of view. That is, one of the things that a lot of companies that are involved in services, whether they're in security services or integration services, or for that matter, facilities services are doing, is trying to become as focused as possible on margin and business process integration, so to speak. That part of it, as opposed to just revenue. In fact, walking away from and trying to be as disciplined as possible with revenue.

What are you -- I know you have -- again, you've partially answered this question already -- but can you give out what your view is as to what your tolerances for margin versus revenue, and how you're going to look at the two, and make sure that this trend that seems to be slower revenue growth with higher margins may affect you folks?

First of all, I think they're equally as important, right? Revenue helps drive EBITDA and margin. You're right, I have spoken about it before that this is going to be one of our organizing themes as we go forward, which is to drive margin.

I think that's going to come from the vertical or customer focus. We've seen that in the aviation business, we have seen it in the health care business. When you focus on a customer rather than just a service you drive higher bottom line. We are very hopeful that's going to continue.

The first thing that comes to mind to me, as well, is what we're doing around insurance and risk mitigation. We're seeing the results of it changing our culture in the field. That's going to help our bottom line, as well, but we are very much going to be focused moving forward on enhancing our margin.

Okay, very good. Thank you very much, and welcome, Scott.

Thank you.

Dan Dolev, Jefferies.

A question on organic growth in janitorial. What should we expect in terms of organic growth for the balance of the year? Is it going to be in that 2% range going forward, or higher?

Dan, you know I'm not going to give guidance on revenue. I think you can conclude based upon what I said earlier that I don't expect it to be higher than 5%, and I don't expect it to be lower than 2%.

Okay, understood. On the incremental cost, what percent or portion of those incremental IT costs were planned versus, I would say, more of a surprise to you?

Every dime was planned.

Every dime was planned. Okay.

We are -- on our internal plans, both top and bottom line, we are ahead of where we expect to be for the quarter, so I'm very pleased with the quarter. We had a very, in my opinion, a very strong start to the year.

Okay, understood. Then last question on M&A, Henrik. You mentioned in the past that evaluations where one of the things that hindered you for making acquisitions were evaluations. Can you comment on how the M&A landscape looks like this day? Has it come down, or is it still very difficult to make M&A?

I think it's not easy for us to make M&A because we are also somewhat picky, have to be an area that fits our strategic view, which means we very much like to look at verticals. As you've seen in the past here, Tracy has been making some fill acquisitions in his area.

But if you go to the medium-size to sizeable companies, you will see private equity being very aggressive out there. I would say that the multiples are still one or two, three times more multiple higher than what I've seen in the past; but we could look at a six, seven multiple in the past, you're probably looking at an eight, nine multiples now.

Okay, great. Thank you very much, and good luck in your retirement.

Thank you, sir.

Thank you, and I'm showing no further questions at this time. I'd like hand the call back over to Mr. Slipsager for any closing remarks.

Thank you. I want to first of all thank everybody for listening to our first quarter. I want to say thank you to the employees, the analysts who are listing today, and the shareholders for the support I've received over the years. I'm very proud to welcome Scott here. I think it is going to be a heck of a move for the Company. I'm as proud as I can be. I think we're leaving on top. At least that was my top; that's probably Scott's bottom, but that's your up side. Scott?

Thank you, Henrik.

My message is I just want to make sure everyone understands how excited I am to lead this organization. When you look at the components that it takes to run a company successfully, it's your Board, it's your support team, and your operators. I have a Board that is rich in experience, that is supportive, that's going to be guiding me. I couldn't be more thankful.

My support team here at 551 that I interact with day to day has been so helpful, and I'm excited to work with them in the future. They are so talented. Finally, you talk about operators and operational excellence, and look to Jim McClure, Tracy Price, and Tom Marano -- you're talking about the A Team. I think they've been showing it in the field. It's a lot to rally around.

This is as much about Henrik as anything else. What do you say about a person that's been here for 17 years, 14 years of which running this organization. This has literally transformed the Company from when I started 12 years ago, which was a janitorial-centric firm, to an integrated facility service company that's global. It's hard to believe what this man has accomplished in 14 years, and he is leaving us a tremendous platform.

Henrik, the way we will honor you is to move forward with the vision that you have developed with this Company of customer focus, leading with character and ethics, which you have always done, and continuing to drive performance and value to our shareholders. We know you will be watching over us as a shareholder, but I'm confident we're going to be able to meet and hopefully exceed your expectations. Thank you for your years of service, Henrik.

Thank you, Scott. By the way, those were not prepared remarks. I'm sitting here crying. Thank you very much for listening. Bye.

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