ABM Industries Inc (ABM) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries' second quarter 2015 conference call. This conference is being recorded.

Thank you, Ben. Welcome, everyone. I'm David Farwell, Senior Vice President Investor Relations. Here with me today are President and Chief Executive Officer, Scott Salmirs; and Anthony Scaglione, Executive Vice President and Chief Financial Officer.

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 events. Please select this tab and click view presentation.

Now turning to slide 2 of the presentation is our agenda. 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.

I would now like to turn the call over to Scott.

Thanks, David. Good morning, everyone, and thanks for joining us. I'm excited to be conducting my first quarterly call as ABM's CEO.

It's great to be able to start by delivering another quarter of solid performance. We're pleased with our growth in sales, margins and earnings. Our business fundamentals continue to be solid and our outlook remains unchanged for the fiscal year.

As you can see on slide 3, our adjusted earnings per share are $0.37. That's an increase of 12% year over year. From a revenue perspective, we grew 3.2% Company wide. While our organic growth was low for the quarter, it may be more insightful to look at growth without the anomaly of the large on-site job we exited in December, which you will have all heard about before.

When accounting for that, we are showing approximately 2.5% organic growth. That's still on the lower end of where we'd like to be, but we have some timing issues on our project work in the BESG segment. We spoke about that on last quarter's call and signaled that we didn't expect there would be a pick up until the third quarter, so I don't think this is going to surprise anyone.

We feel good about this segment and believe we will track to plan in Q3 and Q4. Actually, the team believes that if we hit on all cylinders, we may even make up for the deficit in Q1 and Q2. That's the goal they're driving for and they're pretty passionate about it.

Contributions from acquisitions were roughly $23 million. Our UK acquisition of GBM this past October was the primary driver.

We've been really pleased with the progress we've made in the UK not only with GBM but also in the aviation market through our OmniServe business. I've had the good fortune of spending a fair amount of time in the UK over the past six months and can tell you firsthand that we have a terrific team there and they're excited about leveraging our US based customers and our scale.

From an enterprise-wide perspective, our adjusted operating margins were 7.6% year over year and that's after adjusting for our joint ventures. Our Onsite organization showed margin improvement through operational efficiencies and the continuing benefit from our in-year risk management and safety programs.

Our other category, which is our Aviation group, grew their operating profit 25% year over year, largely due to strong organic growth. I was with the senior team two weeks ago at their annual operations summit, this group is really energized. They're growing fast and they're building density in key markets.

Just to give you an example, after some sizable wins in the past couple of months at the three New York area airports, these locations have grown to over $120 million in revenue and 3400 employees. This is really impressive and density stimulates margin, as you know.

Outside of operations, we've been keeping pretty busy working on our strategy, repurchasing stock and launching an insurance captive. Anthony will provide some color on our stock repurchase and insurance captive, and also in a few moments give you some more color on the general financial condition. But before I turn it over to him, I want to share some observations since the announcement of my appointment as CEO in January.

I spent a considerable amount of time on the road, meeting with our employees across the Company and conducting town halls. The conversations and interactions have increased my confidence in the strength of our organization. I now have a much deeper appreciation for the talent across the country and I firmly believe we have the unique opportunity to take the foundation we've created and build on it.

As many of you on the call from the investment community know, from day one in January I've stressed that defining our strategy would be of paramount importance. I've taken that commitment very seriously.

In April we launched a broad strategic review to build a comprehensive long-term plan. As part of that process, we engaged the Boston Consulting Group to assist us in developing the framework for that initiative. We wanted to enlist a leading thought partner with deep business services expertise and we certainly got what we asked for. We're fortunate to be undertaking the strategic review from a position of strength as an industry leader.

Our focus is going to be to drive profitable, sustainable growth. We're generating a great deal of energy and enthusiasm around the process across the Company and that's because we're taking a collaborative approach and creating touch points at all levels of the Firm as well as with our customers. We're in the early stages and we plan on finalizing our review in the fall, so there'll be more details to come on that.

But I will say it's going to be our culture that's going to see us through. You can't have a winning strategy without the right culture to support it. Our culture here is so rich and what I see clearly is that people here want to win. And they don't want to win as individuals, they want to win as a team. And in essence that's our culture and I believe that's what sets us apart and I'm confident that our culture will be the engines that will drive our growth going forward.

And when we marry that culture with a focused strategy, we are going to get incredible trajectory. So big picture, I'm excited about our future. We have an amazing group of people and a Board that is super supportive.

Now I want to say a few words about our new CFO who is sitting right in front of me. I've had the opportunity to work with Anthony since he joined ABM in 2009. I've always had a deep respect for his financial acumen and his M&A capabilities.

But now that I've had a chance to work closely with him, I'm confident that his energy and insightfulness are going to be what defines him and he's going to do an outstanding job in his role. So I'm setting the bar high, Anthony, so no pressure at all.

Thanks for the vote of confidence, Scott, and good morning, everyone. I'm so excited about my new role in the CFO seat. I'll mention more on that at the conclusion of my prepared remarks. Moving along, I just want to state that all financial results are year over year unless otherwise noted.

Now two points from slide 3. We had record revenues for the quarter of $1.27 billion, an increase of 3.2%. Adjusted net income rose 13% to $21.3 million while adjusted EPS improved 12% to $0.37 per share.

A portion of this overall increase is related to actuary determined insurance rates established in the third quarter of FY14. These rates continue to favorably impact ABM's insurance expense in the quarter. I will refer to this item as insurance benefit for the following segment discussion.

Now let me highlight what drove the quarterly results. Moving to slide 5. Janitorial revenue increased 4.4% primarily due to $17.8 million of additional revenues from the acquisition of GBM, organic growth and additional tag revenue. Organic growth was 1.6%. As Scott mentioned, excluding the termination of a large, multi regional contract in December 2014, organic growth would have been approximately 3.9%.

Moving to operating profit. Operating profit increased by $2.7 million, or 7.3%, with margins increasing roughly 20 basis points to 6.1%. The increase in operating profit margins was primarily due to the insurance benefit, the termination of a large low margin, multi regional contract and operational efficiencies which included a property sale. This increase was partially offset by one more working day during the quarter and additional personnel to support our selling and safety initiative.

Moving to Facility services. Revenues decreased $3.7 million, or 2.5%. Approximately $10 million of low margin business was either cancelled or lost. Partially offsetting this was new sales and increased scope with existing clients.

Operating profit for Facility service increased by $1.6 million, or 32%, with margins expanding by roughly 120 basis points to 4.5%. The increase in operating profit margin was primarily driven by the contribution from the cancellation or loss of low margin business, the insurance benefit and lower legal fees.

Looking at Parking. Revenues were essentially flat. Management reimbursement revenues decreased by $2 million to $75.1 million. Excluding management reimbursement, Parking revenue was actually up $2.9 million, or 3.8%.

Operating profit increased by $0.7 million, or 11.7%, with margins increasing by 50 basis points to 4.4%. The increase in operating profit margins was primarily related to the insurance benefit.

Rounding out our Onsite results. Security had flat revenue. Operating profit increased by 30% to $2.6 million, and margins improved by roughly 70 basis points to 2.8%. Our short-term objective is to move the margin profile towards the 3% range by managing our labor cost better.

Turning to slide 6. BESG revenues were up 2.5%. This was lower than what we had expected. With the BESG team, Scott and I reviewed in detail our pipeline of business, new sales and backlog and feel that there are no systemic issues that created the shortfall.

Operating profit decreased by $0.3 million, or 8.6%. Operating profit margins decreased by roughly 40 basis points to 2.6%, primarily driven by higher investment in selling and one-time items.

Partially offsetting the decline was income from our unconsolidated affiliates. Although there is some risk with the plan, we feel confident with BESG's ability to achieve double-digit growth by the end of the fiscal year.

Moving to AirServe. We had another quarter of exceptional growth with a 12.8% increase in revenue. The focus of this vertical continues to drive multi service wins in both our US and international operations. Operating profits for AirServe increased by $0.6 million or 25% with margins increasing by roughly 30 basis points to 3.1%.

The increase in operating profit margin was primarily related to lower amortization and insurance benefit. The increase in operating profit margins was partially offset by higher labor costs associated with a scope increase which we fully expect to recoup by the end of the fiscal year.

In reviewing our corporate expenses, they were up approximately $3 million excluding items impacting comparability. For the full year we continue to expect this 7% to 9% increase year over year as we communicated last quarter.

Looking to slide 8. Cash generated by operating activities for the quarter ended April 30, 2015 was $71.4 million. Days sales outstanding at quarter end were 53 days, unchanged and down 3 days sequentially.

Now I'd like to say a few words about the Company's leverage profile. Please turn to slide 9. We ended the quarter with approximately $307 million of debt under our $800 million line of credit. Including letters of credit of approximately $116 million, we ended the quarter with a leverage ratio of [1.93] times EBITDA.

Turning to slide 10. During the quarter we repurchased 313,000 shares at a cost of $10 million, leaving $20 million outstanding under our previous authorization. Working closely with our Board, we will continue with a capital allocation strategy that takes into consideration the use of capital alternatives when measured on a risk adjusted basis. And yesterday I am pleased to announce the Company approved it's 197th consecutive dividend at $0.16 per share.

Please turn to slide 11. I'd now like to make a few comments regarding insurance which is a significant part of ABM's business. In reviewing ways to holistically manage the Company's insurance programs and more effectively deal with unfavorable trends and developments, the Company formed an insurance captive.

One of my immediate objectives is to take a longer term view of our insurance program and we will use the captive as a catalyst for change. Over time, our insurance strategy through the captive should provide ABM with increased flexibility in the end-to-end management of its insurance programs and drive greater accountability for risk and safety across all levels of the enterprise.

The last point on insurance. For FY15, the Company anticipates a cash tax benefit of $15 million to $20 million relating to the captive.

Moving to slide 13. As noted, we are reaffirming guidance for FY15. Before I turn it over to the Operator, I would like to say a few words.

I am truly excited about the future of this Company. I have a great team, and along with Scott and the senior leadership, I am very confident that the goal of our strategic review will be to evaluate all options and prioritize when, where and you how we should pursue different avenues of growth to increase long-term shareholder value. Operator?

(Operator Instructions)

Our first question comes from the line of David Gold of Sidoti.

Welcome to you both on your first call, always nice to see a little upside certainly versus our EPS estimate, so we'll take that. Couple of questions for you. First, speak a little bit if you can on the BESG side. Essentially where you expect to see the upside come from and then you had level of confidence that second half of the year we might make up that first half, as you mentioned was a possibility.

Hey, David, this is Scott. As I said -- on my opening remarks, as I said, we have so much confidence in this group. And if you look at the history of how they performed quarter by quarter, Q3 and Q4 is significantly more revenue generation and profit generation than the first two quarters.

There's a lot of weather in there. We do a lot of school work that you have to wait until school is in recess. So we feel strongly that we're going to track to plan in Q3 and Q4. And as I said, these guys are so fired up and they believe they're going to make up Q1 and Q2 and they're working towards that.

So the way I would look at this, first is it systemic? Is there a problem? And there is absolutely not. And the one metric that is so insightful to me is the fact that if you talk to the guys about the near-term pipeline over the past three months and who was on it and what they're targeting, they would say nothing has dropped off, not a single opportunity has dropped off of that pipeline. So it's a timing issue. So that's where we are. So hoping to make up the whole year, very, very confident that we're going to track to plan in Q3 and Q4.

Perfect, that's helpful. And then on the Facility services side, speak there to growth trends and what went on in the quarter versus what maybe you might have expected and outlook there from a revenue perspective.

For us, the way we look at this, we're encouraged. We're on our plan and if you saw what's happening here, it's about exiting low margin business and trying to be more strategic about how we approach the market. And as we go through and we do our more comprehensive strategic review, we're going to be focused on identity and how we're going to move forward in this space.

But we think if you look at our revenue in context to the broader facilities market, talk about white space. There is significant upside for us. So this is about figuring out where we want to play.

Got you. So presumably could there be more revenue runoff there as you exit more low margin business, if you will?

Look, in any operating business there'll be runoff but there's nothing that today, as we looked at our portfolio, there is nothing that we are targeting to exit. This is all about moving forward now.

Got you. Got you, okay. And then on the captive insurance company side, couple of things. One, cash tax benefit this year, is that something that we would expect to be ongoing or is that one time?

I'll let Anthony handle that one.

Sure. So as mentioned, we implemented a captive insurance this quarter which will provide the $15 million to $20 million. So currently we haven't decided upon the internal funding levels for next year's program. That will be part of the broader strategy.

So once we have a long-term plan in place, I'll be able to provide more color on the recurring benefits that the captive could provide. But this year we feel confident with the $15 million to $20 million that we've listed.

Got it, okay. But presumably you'd expect some annual benefit, it's just a question of how much?

Yes, it's all if you know how the captive works it's all about --

Yes, I'm not as familiar, so there's a little bit more education.

And we can talk about it offline. I'd be more than happy to provide you more color on that.

Perfect, perfect. But then second, more strategically, speak a little bit on the captive about some of the flexibility that that gives you.

Sure. So as I mentioned, insurance is a significant part of our operating expenses and we're going to use a captive as that catalyst for change. So we formed a cross-functional team of our Senior Leaders to build out the strategy. And that's going to really help us operate more like an insurance Company, taking a longer term view of risk.

And my real goal is to ensure that the insurance allocations we have to the operating units are representative of the true long-term costs for underwriting that risk. So my goal is to have the right pricing for the long term and it's really too early to put any cost or savings associated with that.

Got you. Perfect, that's helpful. Thank you both and welcome.

Good hearing from you, David.

Thank you.

Our next question comes from the line of Andrew Wittmann of Robert W. Baird.

Scott, I wanted to dig into the strategy review with Boston Consulting Group. And I completely recognize that this is an ongoing process, but I wanted to get your sense of the goals of this. Is this focused around the strategy of how you're selling?

Is it really targeted more at the cost structure that you have in place? Is it as comprehensive as looking at the allocation of capital? Giving some of your goals for the process and some of what the scope is included with this Consulting Group would be helpful.

Sure and thanks, Andy. So I think comprehensive is the key term here. We're really looking at everything. We're looking at capital structure, businesses, operating models.

This is all about providing growth on the top line, but margin growth. And you know I've been consistent about that, about providing margin expansions for the Firm.

So we're looking -- our hypothesis going into this, Andy, is a customer-centric view and how best to organize our operating model to get efficiencies on that. So we will look at SG&A, but it won't be SG&A through the lens of how could we cut. It's going to be SG&A through the lens of how do we deploy our cost structure to best fuel our growth going forward.

So I suspect there'll be areas of opportunity and areas that we're going to need to enhance as part of this review. So this is going to be as holistic as possible and that's why we're taking until the fall to make sure the review is thorough.

Got it. So does that -- does the comprehensive review include the way the Board looks at the governance issues? In other words, the Company was born out of a family-owned structure. As part of that there was a classified Board and three classes.

It seems like really more of a relic of a past and something that's relevant and I think is fairly outdated. Is the Board looking at itself and its structure and is the declassification of the Board one of the areas that you're investigating with the consultants as well?

That's not part of the consulting review but I would say that's always part of the Board review, governance. I just went through my first Board meeting and I can tell you governance is incredibly important to this Board and everything is constantly under review. And we look at this as a fluid process. So I think there's more to come on that.

Got it. And then maybe you mentioned a couple of times that you've walked away from some work. It seems like there's a first step which is you go to the customer and you're asking for better pricing or renegotiation of contract terms. Can you give us an update as to where you are on that overall process of reviewing your portfolio of work as well as the outcomes of some of the conversations you've had for looking at those contracts that are less profitable?

So I don't view this as a new initiative. And I won't take credit for this. I think it's a culture that's been evolving over the last two or three years of examining margin profile more closely and having these conversations. And our feeling as a Firm is if you're doing a good job for a customer, never be afraid to have the conversation. And that culture is being inculcated more and more over time here.

And again, as I said, step one, do a good job for your customer. Step two, start having the conversation and work through a plan. And you know what, if step three doesn't work out then you exit or you ask for them to put it out to bid and you reprice and you put it at the price that you want and if you're successful, fantastic. If not, you're -- I wouldn't say you're happy to walk away, but you're satisfied that you walked away.

And opportunities where you have rebid it, have you been a able to come in back at your pricing yet or is that not something that's happening in the organization right now?

Look, we've had good success because one of the foundations of ABM for literally the 100-year history has been having relationships with customers. So we've been having tremendous success either in initial conversations or through a bid process. And where it doesn't work, it's probably just about the alchemy between us and the customer and again, not happy, but you're pleased that you parted because there's no upside here in doing work for free.

And way back in the day, probably even before I joined, it was more about revenue growth, top line, top line, and less of a conversation about margin. And now as we continue to evolve our culture, it's -- you don't have a revenue conversation at ABM anymore without having a margin conversation.

Okay. Anthony, I had a couple for you, if you'll afford me a couple more here. There's two discrete items that I wanted to dig in. Maybe the first one is in the quarter I think there was a mention of a gain in the Janitorial segment. Can you talk about -- can you quantify what that gain was and maybe was it in the Janitorial segment or was it in the Corporate segment?

No it was in the, I believe you're referring to the Janitorial segment, we had a $1.4 million gain associated with some operational efficiencies. We're looking at our total portfolio and in the quarter we had that $1.4 million gain associated with a sale of a building.

Okay. So it would be really more of a one-time thing, not a recurring saving?

It's so funny, Andy, this is Scott again, I don't look at it as a one-time thing. One of the things that we're focusing on is our workplace strategy and how we occupy real estate. And the bid and the ask of this is office for executive versus being an open plan and how you could change your (technical difficulty) continually under review. So the concept of selling a building in quarter may be a one-time, but we will continue to look at our real estate and how we can optimize it.

Yes, that makes total sense. And then thank you for that, Scott. So last one, I promise and then maybe I'll go back in queue.

Anthony, if you could remind us, last third quarter of -- so last year's third quarter had a benefit from the release of insurance accrual. I think it was $6.1 million, but can you confirm that? I just want to make sure that we get the year-over-year margin growth correct as we model the third quarter.

Yes, absolutely. So last year we had a Q3 adjustment which was roughly $6.2 million. So if you would have reallocated that Q3 from a cumulative adjustment perspective, then you can do the proper year-over-year analysis, Q2 over Q2.

Okay. Yes, go ahead.

No, no, that was it.

Okay, great. So thanks, I'll jump back in queue if I have any more.

Our next question comes from the line of Saliq Khan of Imperial Capital.

Couple questions we had on our end is with the consolidation that we're seeing within the healthcare industry and the operations behind it, what types of benefits are you seeing right now as a result of that shift?

Well, I think you have to put our healthcare business in context to the market. So we are -- we're a healthcare organization now that's tracking to annual revenues in the $150 million range, and you look at some of the bigger players and you know the names but there's the big three. They all have a B in front of their number, we have an M. We're $150 million and they're in the billion dollar range.

So for us, we're not as concerned right now about consolidation and what it means because we have a lot of runway. I'll put it to you this way, a lot of runway on the revenue side right now and for me, what's so exciting about this, is this is an area where we are truly providing end-to-end services.

I was in Cleveland two weeks ago visiting with one of our major hospital accounts, 350-bed hospital, and boy I have to tell you, you walk in and you see from -- you can see the concept of going from valeting someone's car to wheelchairs to maintenance to taking care of some of the devices, whether it's the small equipment, which we do, I just think that this is going to be an area of real focus for us going forward. So consolidation, again, [in context] to where we are, not an issue.

And Scott, on the same token, from the business that you had with the employees around the globe, what gaps are you finding right now within your talent pool that you believe needs to be filled, either from a cross-selling perspective or anything else that you could think about?

So when we look at cross-selling, we look at what kind of services obviously that we can complement with our customers. And as we start developing a more vertical focus, I think that's when the cross-selling gaps will come into play. We'll start looking by industry and seeing what services are essential, if we're going to be in that industry and that's where we'll see gaps.

Right now, our cross-selling has been more tactical. It's been looking at existing clients and seeing if we can get one more service. Our tag line is Solve One More, which essentially means can we have one more service. So what I would like to say is that on a high level right now our Solve One More selling is more tactical, and going forward you're going to see a more strategic focus as we start thinking about verticals.

And as we look at the M&A opportunities that are ahead of you, what solutions do you need under your umbrella to better position you over the next 12 and 24 months? Is there something that the consultants that came up to you and said this could be better direction, are there opportunities available to you? If you could broadly speak to that, that would be great.

Yes, what I could say at this point, is that's part of the scope. So we're in early days of our strategic review. We're -- fundamentally we're in the data gathering stage, fact finding stage. So we haven't seen those themes come across just yet.

And the last question I had for you was as you look at the capitalization of the overall Company, does the lower interest rate that's out there in the marketplace right now, does that entice you to increase your overall debt reliance or is the fact that it comes with a lower tax benefit as well because of the lower interest rate, are you less likely to bring on more debt?

We have fluid conversations with our banking group all the time and there are a number of theories out there as to where interest rates are going. I'll let Anthony speak to that a little bit more, but I can tell you it continues -- our capital structure as a whole continues to be, again, a very fluid conversation for us at the Firm. But Anthony, why don't you give us some more color on that.

Sure, so if you look at our capital structure, as I mentioned in my prepared remarks, we ended the quarter with roughly 2 times leverage. We feel the capital structure we have in place today gives us enough flexibility to ensure that we have the growth opportunities be it either investing in our business, M&A, dividends, share buyback, we have enough flexibility to look at all those areas along with the Board to ensure that we're deploying that capital in the most efficient way.

So in the short term, I don't think you're going to see any major changes in our capital structure. But as Scott alluded to through both our analysis and we're looking at a lot of trends, a lot of trend analysis as well, we're going to determine whether we can -- whether there will be a shift in our capital structure as well.

Great. Thank you, guys.

Our next question comes from the line of Joe Box of KeyBanc Capital Markets.

So I want to dig into the Janitorial margins a little bit further. If we add back the $4 million headwind from the extra day that you had in the quarter and then we take out the $1.4 million gain that you guys said came from the sale of a building, we still get operating margins of 6.4% which is -- that's really the highest number that I could find in my model for 2Q. Can you maybe put some more context around how you guys got to that type of margin? Was it mostly just from stepping away from that low margin big contract and maybe how sustainable these margins are?

So let me answer a little color around the margin story. So the exiting of that multi regional account contributed roughly 20 basis points -- 13 basis points to the margin improvement. So that's as Scott mentioned some of the efficiencies that we're looking at that will drive margin improvement going forward.

We had the year-over-year insurance benefit which I discussed and the offset as obviously I alluded to is additional one working day. So effectively the contribution margin we see going forward will be in line with what we've historically have achieved which is around that 6% range. So Scott, you can add more color there.

Yes, I -- look, this is a high performing group for us in terms of operating efficiencies. And as you guys know it wasn't too long ago that I was in the field in the day-to-day combat, working on the Janitorial side as well as other of our Onsite businesses. And if you look at -- having a six in front your operating margin in the Janitorial space in this environment, we're just more than pleased. It's just, again, a very high functioning group.

Understood. Scott, you mentioned earlier some of the benefits of density in the New York airport market. I think you called out about 3400 employees at the three airports. When you get to that level of density, I'm just curious how the margin profile compares there versus, say, the average at Air Serve.

It's hard to say that because when you look at the Air Serve business there is no kind of commonality. Every assignment of ours is unique because it's a combination of passenger services and it's also we'll do cabin cleaning, we'll do some security. So it's -- I'm struggling to provide you clarity.

The best way I could say it is that what density does for you it allows you to cross-utilize labor more efficiently and the name of the game in our business going forward is going to be about labor efficiency. And we think about that all the time and Air Serve has some phenomenal technology that lets us maximize the way we deploy labor.

So it's less about creating an average in an airport versus a dense. It's more about a mix of services and densities and we're just trying to optimize our labor. And that's really been the winning move for us.

Understood. So I can imagine that labor is obviously your biggest expense there, but can you maybe take it one step further and say density gives us 100 to 300 basis points of margin expansion or it's north of that? I'm just trying to understand the magnitude of what density can do.

Yes, I just don't think at this point I can give you that level of detail. I could just tell you that we see a difference in the margin profile but, again, we haven't done the analytics that I would feel comfortable giving you any more color on that.

Understood completely, okay. At this point I think you guys are still clearly getting traction on bundling your products. I'm curious how your customers are valuing the bundle and how that translates to price. So maybe hypothetically if you guys were to win a bundled Janitorial and Security contract, does the pricing end up being accretive to the segments or is it dilutive?

And maybe just how your view has changed on how you bundle these products and how you price it. Obviously you're putting more emphasis on the margins now. Or has the strategy remained very similar to the prior regime?

Look, clearly bundling is a plus for us on the margin standpoint. And it's really in a couple of ways. You get a little bit of throughput on overhead because you're taking your managerial labor and focusing it on one account. So maybe have less supervision per capita or per person, I should say.

But also for us, it creates a certain stickiness with the customer, because now when you start adding on services and you're creating a story and you're creating a theme and an end-to-end experience in a particular property, you end up staying in that account longer. And the longer you're in an account, the higher your margin profile goes. So for us, it's just -- it's a combination of factors and Anthony, I know you wanted to give some chore color on that.

Yes, so I think to Scott's point, our over-arching goal is to come with a solution-based approach for our customers and not a service line approach. So over time with a strategic review one of my hopeful outcomes of that is that solution-based approach which should lead to, as Scott alluded to, longer term stickiness and a better margin profile going forward.

Great. And then one last follow up for you on the modeling side, Anthony. I know your other income tends to jump around from the JVs, but any reason why we shouldn't see that other income migrate back down to the $1.5 million range next quarter?

Yes, I think we had some acceleration this quarter related to the JV and that was due to some of the start up of our international JV, specifically the [Qatar] Airport work we're doing there. So effectively I would say you should look for that JV income to normalize in the second half to our normalized run rate.

I appreciate it. Thank you both.

Our next question comes from the line of Michael Gallo of CL King.

My question is -- I know you're not ready to comment on the specifics related to the captive, but I was wondering what is your total insurance expense currently on an annualized basis?

We typically don't disclose the details just for competitive reasons. We don't try to give that level of detail, but I could say it's a large number and it gives us ample opportunity to take a look at it holistically. It's one of the reasons or one of the drivers of why we've launched a captive, A, and B, why we're taking a much longer term view around insurance going forward.

And just so I understand the captive, do you plan to put all your claims in the captive or will it be workers' comp or will it be certain state by state or is that still to be determined?

The current year I can speak to and then obviously as I mentioned earlier, we're still looking at the longer term strategy. So current year, we've transferred our workers' comp and GL programs into the captive for the current year. It's not the whole program, but it's the majority of that program's going in and that's what's really driving the current year tax benefit. So it's not a loss portfolio transfer for the prior years but that's something that we're looking at as well.

Right, but that's the one-time benefit. But do you have any benefit embedded into the guidance for this year in terms of savings or you just assume it's awash in terms of the numbers?

It's awash, there's no adjustment to our EPS guidance.

Right. But in terms of as you go forward, as you get -- depending on obviously how you underwrite it, if you can underwrite it breakeven even given the fees as I understand them, it should be nicely accretive at some point.

Yes, I think -- let me make it clear, we're not changing at the current point, we haven't changed our retention level or our risk profile. So effectively from a risk transfer perspective, nothing's changed within the Company's risk profile. So that's typically where you'll start to drive some savings.

But as I mentioned as part of the broader strategic review and you how we're going to operate the captive going forward and what exposures go into the captive and then how those exposures are risk transferred externally, it's something that we're looking at holistically. So ultimately can't given you any clarity now and there's nothing in our guidance reflecting any costs or additional savings related to the captive, but it is a longer term lens that we're taking with the captive and look forward to providing more clarity as the quarters go on.

So it sounds like you're still figuring it out, there probably will be some savings but until you work out all the different permutations, it's too early to say.

That's correct. And just so we're clear, we are going to generate the $15 million to $20 million of tax savings, cash tax savings.

Right and when will those come in, will those come in in early 2016 or later this year?

It's in our 2015 plan.

So it'll come in later this year in terms of the cash impact?

Yes, we had a little bit of the cash impact this quarter, roughly $6 million, and then the balance will come in the second half.

Right, okay, thanks very much.

Our next question comes from the line of Dan Dolev of Jefferies.

It looks like ex that contract or even ex that contract in Janitorial, you had about a 40 basis point deceleration. If I see the numbers correctly, compares were easier. What was the reason for that? And what would it take to get back to mid single-digits organic growth in that segment? Thank you.

When we look at organic growth in that segment, we've been pretty clear at targeting in the 2% to 4% range in growth. So we're at the low end of that range right now.

But again, I think, Dan, the biggest key here and something that I just want to make sure gets reiterated is there's nothing systemic there. And that's why we stay away from quarter-by-quarter revenue comparatives, because it could be misleading. So I think we're at the lower end as I said of the range we'd like to be in, but we're comfortable.

And I think, Dan, by the end of the year again excluding the impact of the large multi regional contract that we exited, you'll see our Janitorial move back in line with what we expected. So this quarter was a bit of anomaly, but we're hopeful that by the end of the year they should be back within the range that we expected.

Okay, thank you. And then one bigger picture question. Clearly Henrik was great and he's been leading the Company for many, many years, but if you had to think about the one to two things, biggest things that you would do differently than him, what would they be?

I don't look at this as a versus or it's differently, I look at this as an evolution. If you look at what Henrik's done for this Company in setting up a platform over time and how this Company has changed. When I came 12 years ago we were predominantly a Janitorial Company and now we are truly an integrated facility services Company, So he's put us on this amazing path.

And now to think what's going to happen is focusing more on strategy on how we take this platform that we have and focus it and allocate resources, allocate energy and enthusiasm around finding the areas where we can best win in. So it's part of an evolution and that's what his aspiration for us was as well, is to continue to evolve this Company and that it to take it to the next level.

Thank you very much, guys.

Our next question comes from the line of George Tong of Piper Jaffray.

Welcome, Scott and Anthony, to your new roles.

Thank you.

Thanks, George.

I'd like to talk a bit about margins. You saw benefit this quarter and in earlier quarters from insurance, risk management. Can you talk about the potential for further margin improvement from this area and how this compares to other drivers of long-term margin expansion such as mix away from lower margin contracts and operating efficiencies?

Okay, so let me answer the question on insurance and then Scott will provide color on the margin profile. So from an insurance perspective, as you recall, the way we manage our insurance programs is we perform an actuarial review at the end of April 30 with data claims of data through April 30. And then in Q3, Q4, we present the information or the feedback from that actuarial review.

So from a year-over-year perspective, as discussed earlier, we have the benefits of continued favorable actuarially determined rates that were determined at the end of 2014 flowing through Q1 and Q2. Our expectation is we're in the early stages of providing the data to the actuaries and our expectation is to be on the same time line in terms of what that information comes back to in Q3 and Q4. So it's hard for me to speculate around the in-year.

And the color I would add on a high level, as we look at margin profile going forward, it's less about an absolute number that we're heading to and it's more about a glide path forward and how we get there. And that's really -- you look at the foundation of this comprehensive review that we're going through and it's creating those pathways for that glide path. And that's what we're heading towards.

Got it. And going back to the topic of managing lower margin contracts, can you talk about whether there are large or larger contracts in Janitorial that are opportunistic to either exit from or negotiate improved pricing for?

I wouldn't say that's something that's -- that's not -- I'll tell you, I'm going to answer that in a different way because that's not what's first and foremost on our mind because we have such amazing operators and we feel like that's, again, part of what we do every day, focused on contracts, how to optimize them and having conversations as I alluded to earlier.

But I think the key here is in terms of scale, not necessarily the contracts we want to exit, it's about the opportunities in front of us. And just talking to Jim McClure the other day, he would say the number of opportunities that we're seeing in the $25 million to $40 million range are just astounding. And when you look at how that shifted over the past few years in terms of scale of opportunity, it's pretty dramatic.

And I'll give you another quick metric. Three -- we have a national account group that manages accounts that go across our different regions. Three years ago we 55 national accounts that equated to $250 million in revenue. Today, we have 100 national accounts that are over $500 million in revenue. So that speaks to scale and it also speaks to our opportunity in the market, because our clients are looking to us for scale.

And you guys have all seen the broader consolidations in the managing agents and what they're doing. That's going to play to our strength because as they're trying to create efficiencies within their own organizations, they have a choice. They can deal with 40 regional firms and scale up their organizations to manage those 40 regional firms, or they can come to someone like ABM and say how do you guys provide a geographic solution for us. And we're having a more and more of those conversations every day.

Got it, that's helpful. And then lastly, as you think about performance in the BESG segment this quarter, can you talk about the top two or three factors that may have surprised you in how you're evolving your execution to drive improved performance in the segment?

Just to highlight a few things that happened in the quarter, this is Anthony. So there are a few one-time items that I wanted to call out. And that impacted our healthcare group which we don't expect still to impact and that hurt our bottom line by approximately $1 million, which were, again, one time. So there's -- part of the bottom line story for the quarter were one-time items.

As far as the second half story, some of the positives to note is we're fully committed to BESG's ability to outperform in the second half. As Scott mentioned, the pipeline is strong. It's really the delays in terms of those projects starting and when we expected them to start, but we have full faith in that group to outperform the second year -- the second half of the year.

We've had delays and notices to proceed in the Government group, so we've be been awarded. But it's those delays and the notices to proceed that also impacted the quarter. So when you sum those two things up or those few things up, as Scott mentioned earlier, we feel real comfortable with the second half being a strong. And referring to (inaudible) specifically, we feel good about their ability to hit their plan and hopefully outperform.

Very helpful. Thank you.

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

Scott, you talked about operating margins in the Janitorial segment. You said 6% continues to be a good margin for that segment. My question is can the other segments trend toward 6% or are those just different businesses?

So they're different businesses and that's not necessarily in our line of sight right now. I think if you looked at the different Onsite businesses, they have a range of margin expectation right now. And I think in large measure, that's one of the catalysts for why we're going through this comprehensive review.

And who knows, we may be talking less in the future about segment results in term of service line and more about vertical as we kind of focus our energy in different areas. But we don't believe that each one of those segments are going to have an aspiration of 6%.

Got it, okay. And then I wanted to ask about the CTS acquisition. You made a couple acquisitions now in the HVAC service business and I'm curious what about that business is attractive to you guys?

So if you look at the margin profile of those high technical services businesses, you're talking about 30% margins. And what our strategy has been, and will continue to be, is to find those types of opportunities with companies like CTS that center around our Onsite businesses so we can sell through those higher margin businesses to our Onsite customers. And when you start looking at an Onsite margin profile in stasis and then you add in some project work from those technical services sides, you can have a huge margin, huge margin expansion. So for us, it's all about clustering of assets and figuring out how to create almost a little ecosystem by geography where you're centered with Onsite businesses and you satelliting around these high margin technical services businesses.

And another nice thing about the CTS acquisition, its expands our technical capability as Scott mentioned in the DC area where we have an Onsite presence. But it also gives us additional technical capabilities in mission critical facilities. So as we look at the tech vertical lack of a better word, it gives us additional credibility in that space.

Okay. And then Scott, you mentioned by projects you're talking about more repair work, not new construction, right?

Yes, repair work, exactly. And energy retrofits, so less about longer term services and more about finite beginning and end projects which, again, have the higher margin profile.

Okay. And then lastly, the consulting strategic review, the cost associated with that, that's -- I assume that's included in your plus 7% to 9% SG&A guidance for the year?

We've included that cost in how we look at the rest of the year and factor that into our guidance, yes.

Okay, great. Thanks a lot.

Our next question is a follow-up from the line of Andrew Wittmann of Robert W. Baird.

Anthony, for you on the tweak in the expected full-year tax rates, you took it down at the midpoint 200 basis points. Can you talk about where that came from or what's changed, if anything?

Yes, Andy, let me give you some color on that. So we analyzed our discrete items for the balance of the year and we feel there's opportunity in the second half to benefit from those items. Offsetting that from an EPS perspective are other costs and that's one of the reasons why we did not adjust our overall EPS guidance as noted.

Got it. Can you give a little detail on the types of discrete items that are affecting that?

It's primarily related to some of the NOLs from previous acquisitions and the positions that we've taken, beginning to reverse themselves out from a tax perspective.

Got it. Okay, that's all I had. Thank you.

Thank you. And that does conclude our question-and-answer period for today. I'd like to turn the conference back over to Mr. Salmirs for any closing remarks.

So I just want to thank everyone. This was our first call and we're excited to be here and hopefully we answered all your questions. We're always available offline for any more color that you need.

But thanks very much for hanging in there with us and supporting us through this, we're real excited. Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.