ABM Industries Inc (ABM) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the ABM Industries Q4 fiscal year 2016 conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Susie Choi, head of Investor Relations. Please go ahead.

Thank you all for joining us this morning. With us today our Scott Salmirs, our President and Chief Executive Officer, and Anthony Scaglione, Executive Vice President and Chief Financial Officer.

We issued our press release yesterday afternoon announcing our fourth-quarter and fiscal 2016 financial results. A copy of this result and an accompanying slide presentation can be found on our corporate website.

Before we begin I would like to remind you that our call and presentation today contain 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 a slide that accompanies our presentation.

During the course of this call 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 investor tab.

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

Thanks, Susie. Good morning everyone and thank you for joining us today.

By this point I'm sure you've had a chance to review our fourth-quarter and full-year results for fiscal 2016. I am pleased to report that we continued to navigate change and transition successfully while managing our business at the high level we've come to expect from our management team. Anthony will have much to cover on our financials, but let me give you a couple of highlights.

We grew revenues to $1.3 billion for the quarter and $5.1 billion for the full year. This represents a 3.5% quarterly increase and a 5% annual increase. We also maintained solid organic growth of 2% for the quarter which translates to closer to 3% when normalizing for foreign exchange with our UK operation.

For the full year we grew 3% organically or 3.3% excluding the foreign exchange impact. Given the backdrop of our continued shift towards being more discerning about the margin quality of the work we take on, I'm unquestionably satisfied with our growth. We delivered adjusted EBITDA margins of 4.6% for the quarter.

And in line with our previous guidance, full-year adjusted EBITDA margin was slightly greater than 4.1%. As you may remember, we finished 2015 with a recasted 3.8% margin. So we are trending up and just as important we are delivering as we had outlined.

These results led to GAAP EPS of $0.16 for the quarter and $1.09 for the full year. The GAAP figures were impacted by our decision to exit our Government Services business which we stated in yesterday's press release. On a non-GAAP basis we delivered adjusted EPS of $0.51 for the quarter and $1.74 for the full year, which is at the high-end of our previously issued guidance range.

Now let me explain our rationale for exiting our Government business. Last quarter I alluded to the relatively small size and scale of our Government segment as compared to our competitors in this industry. I also pointed out its disproportionate impact on the BESG segment profitability.

As we undertook our 2020 organizational realignment we stood up our industry group verticals and we worked on plans for 2017 and beyond. As part of that process we came to the conclusion that our current Government business wasn't a strategic fit for our long-term goals. While we believe that the core competencies of our Government business gives us the ability to compete we felt a Company with scale that can fully leverage the group's capabilities and provide an infrastructure that would foster its growth would better serve the business.

Allocating capital to this segment doesn't fit where we were heading as a firm. Therefore, we are in the midst of evaluating a plan for its sale and we will provide an update when appropriate. Until such time we will report our Government business as held for sale in continuing operations.

So I'm pleased to say that we are now into fiscal year 2017 and Phase 2 of our 2020 Vision is well underway. In mid-November we held our Annual Leadership Conference where we focused on a number of initiatives including defining our industry group's strategic priorities, the development of standard operating practices for how we will run our day-to-day business and tools to enhance employee engagement. These initiatives will center our activities for the fiscal year.

Just to make it a bit more tangible, let me highlight one of our standard operating practice initiatives as an example. Let's take labor management. We have more than 200 branch offices across the US managing over 100,000 service workers.

We believe we are adept at managing labor but we also recognize that as ABM grew both organically and through acquisitions we didn't apply any standardization to managing our workforce. As a result, everyone manages labor a little differently from office to office. We believe we will see significant benefits from codifying the best practices that already exist in certain pockets around the country and then implementing those practices across our entire platform.

While it's too early to quantify the financial upside, I would point out that labor is our number one organizational spend. So we are optimistic that there is value to be captured. Right now we are in pilot stages of implementing those standard operating practices, and not just for labor management but also for our safety programs, employee engagement and our approach to managing our client assignments and our overall client relationships.

These programs will be foundational to our approach in 2017 and beyond. It's encouraging to us that with each day we have greater visibility into our business and the tools we need to deploy. Part and parcel to that we recognize that we need to accelerate our technology initiatives.

We will be focusing on HRIS systems to enhance our human resources area, analytical tools to help us mine data as well as client facing technology which will deepen our relationships with our customers. We have made technology a core tenet of our 2017 plan and you will see that reflected in our capital expenditures budget.

Now that we have set the foundation for long-term profitable growth we see that the 100 basis points of adjusted EBITDA margin accretion is achievable and we feel confident in ending fiscal 2017 with a run rate that captures that baseline. In fact, we believe there is opportunity to capture margin beyond the 100 basis points we originally outlined.

Digging deeper into what we have learned in Phase 1 combined with what we are discovering in Phase 2 we have uncovered areas for additional margin. To help determine the potential we have tasked the Boston consulting group to assist us in this evaluation with a focus on driving margin expansion into 2018 beyond.

Just to give you one example, procurement remains an area of margin opportunity as it impacts approximately $1 billion in annual addressable spend. In Phase 1 we only concentrated on $200 million of this pool. Anthony will discuss our procurement efforts in more detail, but be assured we remain on track for delivering the 12 to 15 basis points of margin improvement on a run rate basis and now we see additional opportunity that will extend past 2017.

It would be premature to specify a new margin target range at this point. For me, 2020 Vision has always been a plan to discover potential beyond the 100 basis points, but we are committed to maintain our discipline of not getting ahead of ourselves until we have greater definition of what is achievable.

15 months ago we launched our 2020 Vision, the most compelling multiphase, multiyear strategy in the history of the Company. This has led to some tremendous undertakings. Among them, the sale of our Security group which allowed us to focus on more margin accretive services, the acquisition of Westway Services in the UK which added to our higher-margin technical services offering, the realignment of our organization from a services-based approach to market to an industry group vertical approach to market, initiating a true shared service center for centralized processing of our core back-office functions, creating a procurement group to develop best-in-class programs across key categories, a focused effort on talent development and employee engagement and beginning a process to develop standard operating practices through our newly formed center of excellence.

Our 2020 Vision initiative was not just about 100 basis points of margin, it was a catalyst for change that has now permeated our entire organization. The enthusiasm and the confidence amongst our employees continues to grow. ABM is no longer the service provider of the past.

Today we are a dynamic industry-focused solution provider. And nothing speaks to the quality of this organization like the fact that during this year-plus journey we haven't lost a single client due to the transformation.

Our ability to navigate and execute I would daresay is unparalleled in our industry. As part of this journey we will continue to take a hard line on the contracts we want to win, those we want to optimize and those we may elect to exit.

Before I turn the call over to Anthony I want to thank our employees for their commitment, their endurance and excitement around our shared vision. Our entire organization should feel an immense amount of pride as we delivered on our financial promises and set the stage for long-term profitable growth.

Our success in 2016 is the starting point down a path of fulfilling ABM's Company vision of being the clear choice in the industries we serve through engaged people. We will do this by achieving our mission of making a difference every person, every day. Staying true to our vision and mission will ensure another 100 years of being the benchmark in our industry and fulfilling our purpose of taking care of the people, spaces and places that are important to you, you who are our employees, our clients and our shareholders.

So thank you all for your continued consideration and support. Have an amazing holiday season and rest up for an exciting 2017. With that I would like to turn the call over to Anthony.

Thank you, Scott, and good morning everyone. I'd like to reiterate Scott's sentiment about our performance in fiscal 2016. Our entire organization executed admirably during a highly complex and transitional year.

We are pleased to have delivered and even exceeded in some respects our initial plan while managing all the complex changes associated with standing up our verticals from both an operational and financial standpoint. As I will discuss with you in more detail, preparing to report under our new vertical structure has been a tremendous task, and I'm especially proud of the finance team for navigating this incredibly complicated project amidst our typically intense year-end close processes.

I will now review our fourth-quarter results and summarize our full-year performance which are described in today's earnings presentation. As outlined in our press release we made a strategic decision to exit our Government business during the quarter to better align our operations with our 2020 Vision.

As a result we recorded a non-cash pretax impairment charge of $22.5 million during the quarter which you will see reflected in items impacting comparability. This change considerably impacted both our GAAP results on the quarter and full-year basis.

Now onto our performance for the fourth quarter. Please note I will be referring to results from continuing operations which continue to exclude the sale of our Security business. However, the operations of our Government business were not material and therefore are not classified as discontinued operations for financial statement purposes.

Consolidated revenues for the quarter were up 3.5% versus last year including organic growth of 2%. Excluding the impact of FX our organic revenue would have been 2.7%, a good indication of the continuous execution of our business which was driven by Janitorial, Parking and Other for our Air Serv segment. In addition, acquisitions provided approximately $19 million of incremental revenue to the quarter which are reflected in our Building & Energy Solutions segment.

Before I move on I would like to remind everyone that as expected the fourth quarter was impacted by higher expenses related to current-year insurance and one additional working day. These expenses were partially offset by savings related to our 2020 Vision initiative.

On a GAAP basis, our income from continuing operation was $9 million, or $0.16 per diluted share. The decrease versus last year was primarily driven by the impairment charge in our Government business. On an adjusted basis income from continuing operations for the quarter was $29.2 million $0.51 per diluted share.

Now turning to our segment results for the quarter. Please turn to page 5 of today's earnings presentation. As mentioned earlier higher current insurance expense, one more working day in Janitorial and 2020 savings contributed to our segment operating results.

For Janitorial revenues increased 2.3% versus last year to $704.5 million and operating margins were 5.5%. Revenues benefited from organic growth driven by the expansion of existing accounts including additional tag revenue. Margins benefited from strong domestic tag sales which partially offset the negative impact of certain year-end adjustments in both inventory and for our UK operations.

Facility Services revenue increased 2.9% to $149.6 million and operating margins expanded 16 basis points driven by new business and contract mix including tag revenue. Parking generated a 6.8% increase in revenues versus last year. However, we experienced certain margin erosion stemming from startup costs associated with new jobs and less profitable legacy contracts.

Our Parking business remains a key service for our vertical strategy and is a key area of opportunity as we enter 2017. Building & Energy Solutions revenues increased 2.9% versus last year which includes approximately $19 million in revenue contribution from our Westway acquisition. As I have previously discussed last year our Technical Service ABES business was a back-half story and this year's Q4 year over year was in line with our expectations but essentially flat for this business.

We continue to be very pleased with ABES and it was a primary driver of BESG in 2016. On an annual basis, BESG closed the year up 15.3% to primarily from our ABES business where we continue to see strong future pipeline. Operating margins for the quarter reflected $22.5 million impairment charge related to our Government business.

Lastly, revenues for our Other segment or Air Serv increased 8.3% despite FX degradation of approximately $4 million. Excluding FX growth would have been approximately 12%, another outstanding quarter with consistent execution in our cabin cleaning and wheelchair services. Operating margins increased 51 basis points to 4.9% versus last year.

Now for a quick recap of our annual results. Overall revenues increased by $246.9 million or 5% compared to last year. The increase in revenues was attributable to organic growth of 3% or 3.3% excluding FX and $102 million of incremental revenues from acquisitions.

Our GAAP income from continuing operations for fiscal 2016 was $62.3 million or $1.09 per diluted share. A benefit for taxes and net savings related to our 2020 Vision initiative more than offset the impairment expense related to the Government business and higher expenses related to current-year insurance.

On an adjusted basis income from continuing operations for the year was $99.2 or $1.74 per diluted share. Adjusted EBITDA grew to $212.2 million and we ended the fiscal year with an adjusted EBITDA margin of 4.13% versus our 2015 recast margin rate of roughly 3.8%.

Turning to liquidity, we ended the year with total debt including standby letters of credit of $399.2 million and our total debt to pro forma adjusted EBITDA was roughly 2.2 times. Our operating cash flow for the full year was $110.5 million, slightly impacted in the last quarter due to timing of collections as we migrated certain billing processes to our shared service center and longer billing cycles for one of our Government contracts.

During the year we repurchased approximately 1.4 million shares of common stock for roughly $46.6 million at an average price of $33.48. As of October 31, 2016 there was approximately $142 million of availability remaining under our 200 million share repurchase program. In addition, for the year we distributed approximately $36.9 million to shareholders in the form of dividends.

Finally, I am pleased to announce the Board has approved a 3% increase to our quarterly dividend to $0.17 per share. This marks our 203rd consecutive quarterly cash dividend payable on February 6, 2017 to shareholders of record on January 5, 2017.

Now I will turn to our adjusted guidance outlook. Given the transitional nature of 2016 I would like to bridge our 2017 guidance and explain some significant items that impacted fiscal 2016 and the drivers and its implications to fiscal 2017.

First, as a reminder we benefited from a retroactive reinstatement of the 2015 Work Opportunity Tax Credit which had a one-time impact on Q1 and the full year of 2016 of roughly $0.09. Second, we saw a roughly $0.09 benefit related to the timing of investments in people and projects with our 2020 savings initiative. For fiscal year 2017 we no longer anticipate a material benefit from this timing.

Lastly, as it relates to our 2020 Vision initiative we realized a little over $22 million in savings in fiscal year 2016 related to our organizational design and initial procurement work. In fiscal year 2017 we expect to yield additional benefits related to operational improvement of $18 million to $22 million and we continue to expect run rate operational benefits at the high-end of our previously discussed $40 million to $50 million range by the end of fiscal year 2017. This includes our current procurement work which targeted approximately $200 million related to janitorial supplies and other corporate expenses.

Beyond this, as Scott alluded to earlier, we are excited about discovering additional opportunity beyond the initial phase as we target the remaining amount of addressable spend. However, we believe these benefits will impact 2018 and beyond and thus are not reflected in our guidance.

Accordingly we are introducing a fiscal 2017 GAAP guidance outlook range of $1.40 to $1.50 and on an adjusted basis $1.80 to $1.90 per share. With the exception of the 2017 Work Opportunity Tax Credit this guidance does not include any potential benefits associated with certain other discrete tax items and other unrecognized tax benefits.

In addition, we are not expecting any material contribution from our Government business in continuing operations for the fiscal year and in our guidance range. The delta in GAAP versus non-GAAP guidance for fiscal 2017 includes charges related to BESG's evaluation of our additional margin opportunity beyond the 100 basis points we previously announced, charges related to our continued execution of our 2020 Vision and general amount of $20 million for other potential one-time unknown charges in line with previous years.

Our guidance also contemplates capital expenditures of $60 million to $70 million and depreciation and amortization of $57 million to $61 million. Given the transitional nature of 2016 we reevaluated the type and timing of some investments. The increase you are seeing in our CapEx and D&A for 2017 is primarily driven by a pause in some of our IT investments and the initiation of some actions that are essential to the acceleration of our 2020 Vision.

As it relates to IT we are now ready to make the necessary improvements to our systems and processes. These projects revolve around aspects that Scott alluded to earlier including labor management and talent development, pricing and data analytics and sales acceleration. In addition, in our goal of being more efficient and profitable we've begun the consolidation of some of our offices such as our shared service center which contributes to the year-over-year increase in CapEx.

Finally, we will now report new operating segments beginning in the first quarter of 2017. The 2017 outlook section of today's presentation contained an early look at our new reporting structure. Business & Industry, Aviation, Emerging Industries, Technical Solutions and for now Government will be our five standalone verticals moving forward.

To provide greater clarity on the financial profiles associated with these new segments today's presentation provides a general outlook on the revenue side and operating margin by segment. For Business & Industry this encompasses much of our legacy business including commercial real estate, sports and entertainment and industrial and manufacturing. In 2016 revenues were approximately $2.9 billion and this business will generally have low to mid 5% operating margins.

Everyone should be familiar with the Aviation segment as it was really our first standalone vertical. You'll see that the new breakdown incorporates the legacy on-site business associated with janitorial work at airports and shuttle parking services which have historically been lower margin businesses. This segment now stands at approximately $850 million of revenue and we anticipate a mid to high 4% operating margin in the near-term.

Emerging Industries is an aggregation of our operations in the education, high-tech and healthcare sectors. This vertical had a size of about $800 million in revenue and we have an operating margin profile in the mid to high 6% range.

With the current status of our Government business I will skip to our Technical Solutions segment which is a reflection of our ABES business and our UK technical arm. We are excited to finally be able to show you our Technical Solutions business on a standalone basis.

Revenues in Technical Solutions were approximately $430 million and we expect mid to high 7% operating margin range. Our goal is to be as transparent as possible and assist in any way as we manage through the changes that are still to come. As such, we are in the early stages of planning an Investor Day in early spring and we look forward to announcing a date in early 2017.

Thank you. And, operator, we are now ready for questions.

(Operator Instructions) Michael Gallo, CL King.

Hi, good morning and congratulations on a successful first year, Scott.

Thanks very much. I appreciate that, Michael.

I have just one, I guess, key question. Scott, I know you glazed over quickly in the prepared remarks, but it would strike me that the opportunity in implementing best practices on the labor side is potentially enormous. Can you give us just some high-level viewpoints on what you've seen so far, how unstandardized things are across the organization, and I know you're not ready to put numbers on it but just some high-level thoughts on how big this could potentially be?

Because as you mentioned it is, obviously, the single biggest expense in the Company. And I was wondering just how inefficient you think things are from a best practices perspective based on what you've seen to date so far? Thanks.

I appreciate the question. It really is hard for us to quantify right now. One of the things that we've been true to and committed to is until we get a line of sight on something we don't want to get over our skis.

I will tell you that we've done well over 100 site visits across the country. And I think more than anything what we're seeing is that people approach this differently and we found pockets of real excellence.

We are calling them bright spots in the organization. And we are going through and codifying right now and we are just initiating our pilots right now. So it really is hard to tell.

This could have significant upside for the firm. From what we've seen in talking to BESG who have worked on these kinds of processes with other services firms there could be some good trajectory here.

But it is early days and the truth is we weren't very standardized across the country. And that gives us we think good opportunity in the future. But I just don't want to get out there and throw out numbers yet until at least we get through the pilot stages which are going to happen in the next three to six months.

And then just as a follow-up to that, Anthony, is there anything in the 2020 Vision savings for standardization of best practices or whatever you find in this program would that be 100% incremental to that? Thanks.

Yes, if you think about the buckets of our initial 100 basis points roughly is coming half is coming from org, maybe a third from procurement and the rest is what we are codifying the initial stages of, the standard operating procedures, the vertical acceleration, etc. So there is some line of sight to the initial amount in our 100 basis points.

What Scott is alluding to is really what that upside potential could be as we look at it in more detail. And we look at it across the enterprise that's a little harder to quantify. But for the bright spots of the pockets where we have done the analysis we do see an ability to capture that and it is in our 100 basis point trajectory.

And I would add, this is a huge priority for us. So these pilots are going to be great. We are branding them internally our quick wins, so we are going out there and we are trying to capture savings, see what we can learn as quickly as possible so we can finalize these.

So when you think about 2017 for ABM think about standard operating practices across all of our work streams. That's where we're heading operationally and, frankly, culturally as a firm.

Thanks very much.

Joe Box, KeyBanc.

Good morning. Anthony, can you maybe just give us a goalpost or give us a little bit more color on revenue growth that's factored into the fiscal year 2017 guide?

I guess aside from the Government Services business I'm curious if you are still rightsizing some of your customers and if we maybe could see a little bit of a lower growth rate because of that? Or if we are at the point where your sales org is set up, the industry verticals are in place and we could start to see accelerating growth?

I think it's too early for 2017 to anticipate much of a delta from what we have historically been able to accomplish on a service line basis. If you think about it, Joe, we've remapped the business, we are standing of the verticals. This is the first year that the operators are really going to be operating under the new vertical structure.

To think that that's going to accelerate it's really more of a 2018 and beyond plan. So for expectations as we've committed to we're going to look at contracts across the enterprise.

We are going to continue to be very diligent from a margin perspective. But overall we are still seeing the growth in 2017. But I would not anticipate an acceleration of that growth or material difference in what we've historically been able to accomplish as an enterprise.

Okay, perfect. That's helpful. Thanks.

And then a big part of your value proposition was moving up the chain and extracting better price from your customers. So I guess to that point, could you maybe just deconstruct the 2% organic growth that we saw in the quarter and maybe help us understand how much of that was price versus volume?

Yes, so for the pricing that exercise is actually something that we are going to address in what we are calling the next phase of the evaluation with BESG. So if you think about what Scott alluded to that we see good opportunity both in pricing and in procurement, the pricing side we haven't really addressed it from a systemic process. So this is part of our standard operating procedure.

It's not so much about the fact that we are going to look at a customer and say we are going to be able to charge more. It's how do we operationalize the best practices, how do we ensure that when we are in a customer site we are looking at it consistently in terms of how we are pricing the square footage, how we are pricing the tag so that we are able to extract more value from those propositions versus doing it in pockets and doing it independently we may not have the same consistency.

So the growth that use all in Q4 it's more same business as usual from a volume perspective. And recall it's closer to 3% when you exclude FX. So good mix of both volume, I wouldn't say that there was really a concentration yet on the pricing side.

And just to add onto that and why I think we're optimistic about where our pricing could go for us and, again, it's really a 2018 story as we start going through the process of figuring this out is the fact that we don't have that standardization from market to market.

Take something as simple as carpet cleaning, how we price it, how we construct the price, how we bake in our cost, we just think there's going to be a lot of ability to capture value by standardizing that. So I will go back to my earlier comment about standard operating procedures, just in pricing I think there's going to be great value. But, again, it's aggressively a back half of 2017 story but realistically a 2018 story.

Understood. And then maybe just one last quick one for you.

Scott, I'm assuming that the Government Services business, all those attributes were largely available to you back when you guys did your strategic review over a year ago. So I guess I just want to understand why now? Are there some tentacles in this business where you just have to provide the services maybe to win other businesses or really what was your reluctance to exit this business before?

I think it's like everything else, we have our priorities and the cadence of our transformation. And as you can see it had a very low revenue profile in the firm, we are talking about $120 million odd in revenue and the concept of bigger fish to fry.

And I don't think we were completely resolved early on that we were going to exit this business. I think we saw a trend over 2016 that just really solidified for us that if we weren't going to invest and grow to scale it just wasn't going, it wasn't going to be a good long-term move for us.

So this was one where Security for us was pretty black and white. This was one early on where it wasn't as black and white but shaped up that way over time. So it's just the right time now.

Thanks.

Andy Wittmann, Robert W. Baird.

Great, thanks and good morning. I guess, Anthony, could you help us just decompose the margins a little bit that were reported in the quarter? You mentioned the day, I think that's about 30 bps, you tell me.

Insurance, Vision 2020, I also think that maybe last year had an incentive comp reversal. Margins were down but you've got a lot of good things going on, so I think some details to quantify the moving parts would be helpful for us to understand better.

Yes, sure. I think you nailed all of the major items, so if you decompose the upside is primarily from 2020 Vision and some operating mix we had some performance challenges in our Parking business and it really related to start-up costs associated with a very large contract in Aviation on the West Coast. And then we had some margin compression on some of our legacy accounts which we're actively looking at as part of our overall process.

So when you isolate that for Parking and in Janitorial two items impacted the quarter. One was a review of our inventory which is the normal course and tightening up. Then there is also a review of our UK operations as we've merged the operational context under one leadership through the Westway acquisition and that occurred throughout the year.

When you isolate those two items and the bonus reversal, the rest of the operations were at or exceeded plan from our anticipation. So really it's 2020 Vision plus the impact of loss and other things from a net income standpoint offset by the increase in insurance, the one additional working day and then the operational factors that I just alluded to.

Okay. So the day, 30 bps insurance about 30 bps, what were the inventory and UK transition costs? How much was that as an impact to margin?

It's roughly $3 million plus or minus.

Okay. And then (multiple speakers)

And then Parking was another call it $2 million.

Okay. And so I guess you said Parking was mostly start-up costs but you also mentioned some operational issues. How much of this do you think would be between you mentioned some underperforming customers, Parking, how much of this do you think might stick around as we move here into 2017?

I think you know if you look at our Parking business and as you recall it's really two components, there's the management side and the lease side. This is predominantly on the lease side, and that's a little bit harder to predict exactly the cadence of how parkers and how that revenue steam and the profitability of that revenue stream translates.

We don't anticipate continuing degradation but it's difficult to say how many parkers are going to park in a particular parking lot in a particular market. But we have our operators looking at things with an attentive eye and trying to drive more volume and value in that chain.

Okay, that's helpful. Then I wanted to talk a little bit about the tax rate guidance here. Obviously, you got the headline number 42.

You've got WOTC quantified in cents per share. I guess by my calcs I think the reported number for the full-year basis would work its way down probably closer to 37% if you include the ASU 2016-09 and the WOTC. I guess I wanted to confirm that.

And how can you help us? It seems like this number is going to be bouncing around quarter to quarter a little bit more. I think you talked about this when you first talked about the ASU change.

Can you help us quantify it quarter to quarter? And also I think previously you mentioned that there would be on offset to the tax rate benefit from the ASU that would maybe be a result of higher share count and then it wouldn't be an actual net EPS effect now. I could be wrong on that, so I wanted to give you a chance to address that factor again.

Yes, I don't think that's technically correct. But in terms of the tax benefit in our numbers, right now what we are predicting is $0.11 impact from WOTC and $0.04 as you mentioned from our stock-based compensation, which is a known number at this point.

If you recall, it's really predicated on a calendar year and based on how our fiscal years we pretty much know that number in advance. So the $0.04 we feel pretty good.

Could there be variability slightly? Sure.

The other thing that makes it very difficult to project the effective tax rate is we do have other discrete that potentially could impact our tax rate. And those could include 179D, additional WOTC. So we've tried to provide a best case testament and that is what we are doing with the annual guidance.

How it breaks down per quarter and then how that, obviously, translates for the full year we will keep you abreast. But, Andy, it's a hard task with those unknowns.

Okay, great. And then maybe I guess my final question, Scott, I wanted to get you involved here a little bit too. Just thinking beyond the 100, we heard procurements and a new bucket there that you are going after that you had previously addressed.

What do you think of the primary buckets that will allow you to drive beyond the 100? And it sounds like the piloting is the next three to six months, is that, do you think that's the right time frame to have a more solid outlook as to how far beyond the 100 and where it will come from should we be thinking mid fiscal year?

Yes, I think it's more a back half of the year story because it's going to take us to really get the right kind of learnings it's going to take six months because there's a continuous improvement process with this and refinement that happens. So I think we will be at you with better line of sight in Q3, Q4.

But I have to tell you, the labor management area is so exciting. And the other area that we have haven't talked a lot about is our account management area in terms of how we manage our client relationships, whether or not we are instituting quarterly business reviews across the platform, how we are thinking about engaging with our clients, how we are thinking about cross-selling on a more tactical basis about having those conversations and raising opportunity.

So I think that's going to be an area that maybe longer term. But I think it's just going to help us with retention and it's going to help us find margin over time.

So I think there's new initiatives, which is going deeper into procurement and exploring pricing that are really exciting to get us past the 100 basis points, but I think the stuff that we put in place now through Phase 1 as they mature are also going to give us great opportunity. So I think it's really those two things, the stuff we already initiated in Phase 1 getting more mature over time and the new stuff that we are initiating in Phase 2 which is procurement and pricing.

Great, thank you.

Jeff Kessler, Imperial Capital.

Thank you for taking the question. In talking about standardization, which is going to be a big priority of yours over the next 12 months, are you going to be looking at what is there, if you want to call it, the standard operating rate or the standard operating performance measurements that you have average company-wide? And taking a look at the bottom performing divisions, I should say bottom performing offices branches and looking at those variances and trying to get those variances up to average, is that part of --

That's one of the core functions of what we are trying to do. And when you get the standardization, you start creating benchmarks and you start creating averages, you create these metrics. And I think that's one of the core principles of this is how do we help optimize accounts and that's the key.

Now through the standardization and getting data to help us figure this out I think that's going to be the huge trajectory. So for us it's all about how can we optimize the bottom.

And it doesn't mean that we are operating them badly or we that have less than capable managers just they haven't had the tools, they haven't had the insight and they haven't had the resources of having standard operating practices. And that's what's going to make this so powerful.

And some of the variability is going to be expected variability by market. It's really driving within a particular market why one branch is operating differently than the other branch to try to get that lower performing branch up to that mean. You can't look at it enterprise wide and say well X is the right percentage and that's what the whole enterprise because there's going to be variability of that market that may be known.

And I think just to finish this concept, I think it's even not even branch by branch, it's account by account. So I don't think and we don't believe that there are holistic branches that are operating below the mean. We just think maybe within a branch there may be particular accounts that may not have gotten the focus it needed to or, again, they didn't have the standard operating practices to help them manage them up to the mean.

Okay. Following on to that question, with regard to your new segment structure are you going to be looking at the same types of standardization procedures as they pertain to these divisions and what the, if you want to call it again, getting the lower performing accounts in those divisions up to what would be average or typical for that division and where can you -- amongst those segments where do you think the biggest opportunities are?

So I don't necessarily think there's any one segment that has more opportunity than the other with standard operating practices. I think there are certain elements that run across every segment. So if you look at labor management, the basic concept of are you scheduling the day's labor and do you have the tools to appropriately schedule the labor, well, that can run across every one of our industry groups but there will be nuances between doing it in a wheelchair format in an airport and possibly janitorial in an educational facility.

So there will be, again, little nuances between the services in those but everyone should think about scheduling their work at the start of the day, everyone should have the opportunity to have a tool that helps them do that. Everyone should have the opportunity to understand how similar accounts are performing so they can figure out how to get up to that or exceed that. So I think there's tenets that run across but there are also specifics that will have to be figured out industry by industry.

Great. Final question, that is historically the Company has sought, and this goes we're going back 20 years now, to try to develop some type of cross-selling programs between the segments as they existed then.

Now you are looking at trying to cross-sell across new, I guess, they are not completely new, obviously, they are just segmented differently. Is there any strategic difference in the way you're going to try to go about cross-selling amongst the new segment structure?

Yes, there is, I think. And it really stems from something I talked about earlier which is our account planning process.

So here's the way you could think about it. For many of our accounts of any kind of scale they are going to have a fully built-out account plan that's going to look at it. And one of the key tenets is going to be cross-selling.

How many services do you have? So picture you are a project manager of a large-scale account and every month when you are looking at your account plan you are looking at how many services you have and you are going to be metricked on that, you are going to be benchmarked on that across the organization. So it's going to be front and center to how you are managing that account.

And with our newly formed center of excellence they are going to have all these protocols on how you go about cross-selling and tools to help them do that. So, I think, when it's front and center and you know you are getting metricked based on it and then you additionally have the resources to help you do that, that's a dramatic shift than where we've been in the past. And so we are really hopeful over time you are going to see us move up in terms of how many services per client.

Okay. Is there a time frame which we can hope for to hear you begin to talk about guidelines or results towards this? Are we talking again around 2018?

Yes, it will be only because we are going to almost need a year of baseline information to really understand where we are starting from. So I think part of it is the fact that we are just initiating these metrics now, and they take time to get going and to get acculturated. That's number one, but then you also, again, you need a baseline so that you can show where it's heading.

And we are hopeful that as if you recall historically if you were in Janitorial there was really light incentive to selling the other service. And now if I own an education customer I'm owning the customer. So the incentive to try to sell more to that customer is in my best interest from a revenue and a profitability standpoint.

So we are hopeful that we see some of that in 2017, but we are not, it does not reflect our guidance in terms of that multiple sale to Scott's point. It will be more of a I think a with data a focus area for 2018 to really start to drive that measurement going forward.

And that's not a minor point that Anthony is making. Because in our old format if you were in the Janitorial segment you always wanted to cross-sell Engineering but you weren't incented to do it. It wasn't going to be captured on your P&L, and so much of what we do we look at our P&Ls and we want to maximize our P&L.

Now in this new format as Anthony points out you own the customer. So when you are cross-selling in services you get that on your P&L, you are responsible for it, you are responsible for the execution of it. So it's a big shift.

George Tong, Piper Jaffray.

Hi, thanks, good. Scott, can you elaborate on your immediate next steps in your 2020 Vision strategic plan over the next two to three quarters which areas are priorities for you and assess the potential sales risk of realigning your salesforce by vertical?

Yes, so I'm not concerned about the sales risk of realignment. We've had that in place now for a few months and things are going really well. And so I'm not worried about that.

I think there's two things I would think about that are on my mind in the near term. One is the standard operating practices across the work streams of labor management, how we manage our accounts, safety and risk and then, lastly, employee engagement because employee engagement is the other piece of it. So I look at 2017 and what immediately comes to mind to me are standard operating practices and employee engagement, how we get our 100,000 workers activated and being promoters of everything we are doing engaged.

We work really hard at crafting our purpose, vision and mission to get people's the hearts and minds with ABM and how we make them feel like valued employees, valued part of our proposition to our client. So I am so excited about where we are heading in terms of employee engagement, so a big focus for us outside of the standard operating procedures.

Got it. Very helpful. Anthony, given your workers comp claims experience over the last 12 months, can you discuss trends you see in insurance expense and how you expect insurance expense in 2017 to compare to 2016?

Sure. So if you recall in 2016 we took a large increase in our insurance expense with the premise or the backdrop of until we see sustainable long-term trends either way not to adjust the rate. And we are committed to that, so we are heading into 2017 with an accrual similar to 2016 from a work comp and general liability perspective.

Some of the trends that we are seeing with some of the standard operating procedures and consistent excellence on the day to day is starting to have initial impact. There's a huge focus. It's one of our key tenets of our 2020 Vision.

It's one of the key tenets from Scott and the executive management team to make that a clear focus. Not only for the short term, it's not a 2020, but this is for the health and the long-term objectives of the Company.

So you shouldn't see any current-year changes in our accrual rate in 2017. It's a similar year over year.

Got it. And then lastly, Anthony, you've guided to $18 million to $22 million of anticipated incremental 2020 Vision savings in fiscal 2017. Can you talk about how much of that you expect to flow through to drive margin expansion, taking into account potential margin offset such as reinvestments?

Yes. Sure. So if you think about we ended the year with roughly $22 million of realized savings and a run rate of $34 million. So the targeted amount that we are looking at from purely 2020 is really coupling our additional procurement, the full run rate of org and the beginning stages of our consistent excellence which are some of our standard operating procedures.

So we have good line of sight into those three metrics. As it relates to the rest of the business as we mentioned earlier, when we stood up these verticals and we stood up the industry groups in terms of the operational performance they pretty much were operating and put together from a budget perspective as they performed in 2016.

So not a lot of margin accretion or degradation in any of the metrics from what we expected. So what you're looking at as the 2017 plan is really a continuation of our 2016 progress we've made in addition to the 2020 savings that will come in over the next 12 months.

Very helpful. Thank you.

Marc Riddick, Sidoti.

Hi, good morning. So I wanted to just ask about the revenue growth and the impact of and/or effects of tag revenue during the quarter and then also maybe what you see going forward there as far as contribution? And then I have a quick follow-up on those efforts.

Sure. So for tag it continued to remain a focus area for the organization and we had a good Q4 tag penetration.

As we alluded to tags typically run around 6% to 7% of our Janitorial and Facility Services. Those are the two primary areas where tag really has a benefit and where it's really a focus. And that's where the margin accretion could occur.

So we had a good execution in 2016. We expect the same level of momentum heading into 2017 and it is a focus area for the organization and is one of the key components of our metric dashboard around penetrating and ensuring that it continues to be a focus area for the firm.

And then maybe can you share a little bit as how that bridges with some of the commentary around best practices? I wanted to get a sense of maybe where you were currently with pursuing that revenue, whether you were in the early stages or maybe compared to some of the other businesses where you were as to (multiple speakers)

Yes, sure. So tag for us, if you think about it it's always been a part of our business model. What we've done as part of the 2020 Vision and starting the discussion around the margin projection it really goes to the account plan.

And when you look at an account that has scale what you're doing in that account? Are you selling additional services? Have you penetrated the right amount of tag?

So we are not expecting significant tag increases in 2017 because we think it has historically been a good focus area. Where I think there's benefits in tag over the long term is when you look at the standard operating procedures and where a customer says, hey, I have a tag job related to a carpet cleaning we may have not priced that consistently between accounts.

So when we are looking at that pricing methodology and the consistency across we see benefits in just making that standardized. But in terms of increasing our tag penetration, obviously that's an objective, but I don't want it to seem like we haven't had a focus on tags in the past. It's always been a focus and it continues to be a focus going forward.

And then as a quick follow-up, maybe if you can give us a quick overview on where you see Westway and how that's progressed during the course of the year and what expectations we may see from there?

Yes, so Westway is performing as planned. So our objectives when we acquired Westway was to provide a complement to our cleaning business that we had acquired back in 2014 to give the technical component a higher-margin business. And we've seen initial stages of those two businesses coming together and really the cross-selling aspect of taking the Technical Solutions and putting it into the GBM business or the historical B&I business we've seen some good progress there.

So it's operating as intended and as planned. And we see good prospects going forward.

Yes, and I would just add one of the things we are so excited about is now we have this full IFS offering in Europe and we had our first contract we talked about last quarter and we have a good pipeline of accelerating that offering. So it's quite exciting.

Okay, excellent. Thank you very much.

Thank you. That concludes our question-and-answer session for today. I'd like to turn the conference back over to Scott Salmirs for closing remarks.

Okay, thank you. So, listen, thanks everyone for your support and interest.

You need to know we really appreciate it and wish everybody a happy holiday. We look forward to reporting back in Q1.

And just know that as a firm we are so excited about 2017 and really energized about what's possible with this firm. So thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.

You may all disconnect. Have a great day everyone.