David Farwell - Senior Vice President, Investor Relations Scott Salmirs - President, Chief Executive Officer, Director Anthony Scaglione - Chief Financial Officer, Executive Vice President.

David Gold - Sidoti Andrew Wittmann - Robert W. Baird Saliq Khan - Imperial Capital Joe Box - KeyBanc Capital Markets Michael Gallo - CL King Dan Dolev - Jefferies George Tong - Piper Jaffray Adam Thalhimer - BB&T Capital Markets.

Good day, ladies and gentlemen, and welcome to the ABM Industries Second Quarter 2015 Conference Call. This conference call is being recorded..

Thank you, Ben. Welcome everyone. I am 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 Investors, you will 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 am excited to be conducting my first quarterly call as ABM CEO. It is great to be able to start by delivering another quarter of solid performance. We are 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 is an increase of 12% year-over-year. From a revenue perspective, we grew 3.2% companywide.

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 have all heard about before. When accounting for that, we are showing approximately 2.5% organic growth.

That is still on the lower end of where we would like to be, but we had some timing issues on our project work in the BESG segment. We spoke about that on lasts quarter's call and signaled that we did not expect there would be a pick up until the third quarter, so I do not think this is going to surprise anyone.

We feel good about this segment and believe we will attract the plan in Q3 and Q4. Actually, the team believes that if we hit on all cylinders, we may even make up the deficit in Q1 and Q2. That is the goal they are driving for and they are pretty passionate about it. Contributions from acquisitions were roughly $23 million. Our U.K.

acquisition of GBM this past October was the primary driver. We have been really pleased with the progress we have made in the U.K., not only with GBM, but also in the aviation market to Omniserv business. I had the good fortune of spending a fair amount of time in the U.K. over the past six months.

I can tell you first hand that we have a terrific team there and they are excited about leveraging our U.S.-based customers and our scale. From an enterprise-wide perspective, our adjusted operating margins were 7.6% year-over-year, and that is after adjusting for our joint ventures.

Our on-site 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 are growing fast and they are 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 3,400 employees, and density stimulates margin as you know.

Aside of operations, we have been keeping pretty busy working on our strategy, repurchasing stock and launching an insurance catalyst [ph]. Anthony will provide some color on a stock repurchase and insurance catalyst, and also in a few moments, give you some more color on the general financial condition.

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 have created and build on it. As many of you on the call from the investment community know, from day-one in January, I have stressed that defining our strategy would be of paramount importance.

I have taken that commitment very seriously. In April, we launched a broad strategic review to build a comprehensive long-term plan. As part of the process, we engage the Boston Consulting Group to assist us in developing the frameworks for that initiative.

We wanted to list a leading [ph] floor partner with deep business services expertise and we certainly got we asked for. We are 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 are generating a great deal of energy and enthusiasm around the process across the company and that is because we are taking a collaborative approach and creating touch points at all levels of the firm as well as with our customers.

We are in the early stages and we plan on finalizing our review in the fall, so there will be more details to come on that, but I will say it is going to be our culture that is going to see us through. You can 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 do not want to win as individuals. They want to win as a team and in essence that is our culture and I believe that is what sets us apart, and I am confident that our culture will be the engine that will drive our growth going forward.

When we marry that culture, with a focused strategy, we are going to get incredible trajectory, so big picture, I am 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 have had the opportunity to work with Anthony since he joined ABM in 2009.

I have always had a deep respect for his financial acumen and his M&A capabilities, but now that I have had a chance to work closely with him, I am confident that his energy and insightfulness are going to be what defines him and he is going to do an outstanding job in this role. I am setting the bar high, Anthony, so no pressure at all..

Thanks for the vote of confidence, Scott. Good morning, everyone. I am so excited about my new role in the CFO seat. I will 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. Two points on 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 determine insurance rate established in the third quarter of fiscal 2014.

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 statement 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 work. Organic growth was 1.6%. As Scott mentioned, excluding the termination of a large multiregional contract in December 2014, organic growth would have been 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 margin was primarily due to the insurance benefit, determination of a large low-margin multiregional contract and operational efficiencies included a property sale.

This increase was partially offset by one more working day during the quarter and additional personnel to support for selling and safety initiative. Moving to facilities services, revenue decreased $3.7 million or 2.5%.

Approximately $10 million of low-margin business with either canceled or loss, partially offsetting this was new sell and increased scope with existing clients. Operating profit for facilities service increased by $1.6 million or 32%, with margins expanding by roughly 120-basis point 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 on-site 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 Slides 6, BESG revenues were up 2.5%. This is 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 [ph] there were 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 Air Serv, we had another quarter of exceptional growth with a 12. 8% increase in revenue. The focus of this vertical continues to drive multiservice wins in both, our U.S. and international operations.

Operating profits for Air Serv 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 the 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 the 7% to 9% increase year-over-year as we communicated last quarter. Looking at 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 three days, sequentially.

Now, I would 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 [ph].9 to three 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 the capital allocation strategy that takes into consideration the use of capital of alternatives when measured on a risk-adjusted basis. Yesterday, I am pleased to announce, the company approved its 197th consecutive dividend at $0.16 per share. Please turn to Slide 11.

I would 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 in 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.

Overtime, our insurance strategy through the captive should provide ABM with increased flexibility in the end-to-end management of its insurance program and drive greater accountability for risk and safety across all levels of the enterprise.

A last point on insurance, for fiscal 2015 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 fiscal 2015. 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 option and prioritize when, where and 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. Your line is open. Please go ahead..

Hey, good morning..

Good morning, David..

Welcome to both on the first call. Always nice to see a little upside certainly versus our EPS estimates, so I will take that. A 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 yes sort of 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. on my opening remarks, as I said, you know, we have so much confidence in this group and if you kind of look at the history of how they perform quarter-by-quarter., Q3 and Q4 is significantly more revenue generation and profit generation than the first two quarters.

There is a lot of weather in there; we do a lot of schoolwork that have to wait till schools and recess, so we feel strongly that we are going to track the plan in Q3 and Q4. As I said, these guys are so fired up and they believe they are going to makeup Q1 and Q2 and they are working towards that. The way I would look at this, first, is a systemic.

Is there a problem and there is absolutely not.

and the one metric that is so insightful to me is the fact that you talk to the guys about the near-term pipeline over the past three months and who was on it and what they are targeting, they would say nothing has dropped off, not a single opportunity has dropped off of that pipeline, so it is a timing issue, so that is where we are, so hoping to make up the whole year, very, very that we are going to track the plan in Q3 and Q4..

Perfect. That is helpful. 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. .

Yes. I mean, for us, the way we look at this, we are encouraged we are on our plan and as you saw what is happening here. It is about exiting low-margin business and trying to be more strategic about how we approach the market.

As we go through when we do a more comprehensive strategic review, we are going to be focused on identity and how we are going to move forward in the space, but we think if you look at kind of our revenue in context to the broader facilities market. I mean, you know, talk about white space.

I mean, 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 will be runoff, but today as we looked at our portfolio there is nothing that we are targeting to exit. This is all about moving forward now..

Okay.

Then, on the captive insurance company side, a 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 will let Anthony handle that one..

Okay..

Sure. As mentioned, we implemented a captive insurance this quarter, which will provide 15 to 20, so currently we have not decided upon the internal funding levels for next year's program. That will be quite a broader strategy.

Once we have a long-term plan in place, I will be able to provide more color on the recurring benefit that the captive could provide, but this year we feel confident with the 15 to 20 million that we have listed..

Okay. Presumably you would expect some annual benefit.

It is just a question of how much?.

Yes. If you know how the captive work..

I am not as familiar, so there is a little bit more….

We can talk about it offline. Happy to provide you more color on that..

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

Sure. As I mentioned insurance is a significant part of our operating expenses. We are going to captive as that catalyst for change, so we have formed a cross functional team of our senior leaders to build out the strategy. That is going to really help us operate more like an insurance company.

Taking a longer-term view [ph] and my real goal is to ensure that the insurance allocations we have to the operating unit are representative of the true long-term cost for underwriting that risk. My goal is to have the right pricing for the long-term and it is really too early to put any cost or savings associated with that..

Got you. Perfect. That is helpful. Thank you both, and welcome..

Good hearing from you, David..

Thank you..

Thank you. Our next question comes from the line of Andrew Wittmann of Robert W. Baird. Your line is open. Please go ahead..

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 are 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? Just give me some of your goals for the process and some of what the scope is included with this consulting group, would be helpful..

Sure. Thanks, Andy. I think comprehensive is the key term here. We are really looking at everything; we are looking at capital structure, businesses, operating models.

This is all about providing growth on the top-line, but margin growth and you know I have been consistent about providing margin expansions for the firm, so our hypothesis going into this, Andy, is a customer-centric view and how best to organize our operating model to get efficiencies on that We will look at SG&A, but it won't be SG&A through the lens of how could we cut.

It is 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 will be areas of opportunity and areas that we are going to need to enhance as part of this review.

This is going to be as holistic as possible and that is why we're taking until the fall to make sure the review is thorough..

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 is relevant and I think is fairly outdated.

Is the Board looking at itself and its structure and is the declassification of the board in one of the areas that you are investigating with the consultants as well?.

That's not part of the consulting review, but I would say that is always part of the board review governance. I just went through my first board meeting, right? 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 is more to come on that..

Got it. You mentioned a couple of times that you walked away from some work. It seems like there is a first step which is you go to the customer and you are asking for better pricing or renegotiation of contract terms.

Can you just give us an update as to where you are on that overall process of reviewing your portfolio work as well as the outcomes of some of the conversations you have had for looking at those contracts that are less profitable?.

I do not view this as a new initiative. I won't take credit for this, right? I think it is a culture that has been evolving over the last two or three years of examining margin profile more closely and having these conversations.

Our feeling as a firm is if you are 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. Again, as I said, step one, do a good job for your customer. Step two; start having the conversation and work through a plan.

You know what, if step three does not work out then you exit or you ask for them to put it out to bid and you re-price and you put it at the price that you want and if you are successful, fantastic. If not, I would not say you are happy to walk away, but you are satisfied that you walked away..

Opportunities where you have rebidded have you been able to come in back at your pricing yet or is that not something that is happening in the organization right now?.

We had good success, because one of the foundations of ABM for literally the 100-year history has been having relationships with customers, so we have been having tremendous success either in initial conversations or through a bid process.

Where it doesn't work, it is probably just about the alchemy between us and the customer and again, not happy, but you are pleased that you parted, because there is no upside here in doing work for free, right? 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.

Now, as we continue to evolve our culture, you do not have a revenue conversation at ABM anymore without having a margin conversation..

Okay. Anthony, I had a couple for you, if you will afford me a couple more here. The two discrete items that I wanted to dig in, maybe the first one is, and in the quarter I think there was a mention of a gain in the Janitorial segment.

Can you quantify what that gain was and was it in the Janitorial segment or was it in the Corporate segment?.

I believe you are referring to the Janitorial segment. We had a $1.4 million gain associated with some operational efficiencies. We are kind of looking at our total portfolio and in the quarter we had that $1.4 million gain associated with a sale of a building..

Okay.

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

Andrew, this is Scott again. I do not look at it as a one-time thing.

One of the things that we are focusing on is our workplace strategy and how we occupy real estate and kind of the bid and the ask of this is, office for executive versus being an open plan and how you could change your - the review [indiscernible] 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. Then thank you for that, Scott. Just last one I promise and then maybe I will go back in queue. Anthony, if you could remind us, 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. Last year, we had a Q3 adjustment which was roughly $6.2 million. If you would have reallocated that Q3 from a cumulative adjustment perspective, then you can do the property year-over-year analysis Q2 over Q2..

Okay. Great. Thanks. I will jump back in the queue if I have any more..

Hey, good speaking with you Andrew..

Thanks, Andy..

Thank you. Our next question comes from the line of Saliq Khan of Imperial Capital. Your line is open. Please go ahead..

Great. Thank you.

Hey, Scott, David, how are you guys?.

All well. Thanks for joining..

Just a couple of questions we had on our end is with the consolidation that we are 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, right? We are we a healthcare organization now that is tracking to annual revenue in $150 million range, and if you look at some of the bigger players and you know the names, but there are kind of the big three, they all have a B in front of N and we have an M, right? We are 150 million in their there in the $1 billion range, so for us, we not as concerned right now about consolidation and what it means, because we have a lot of runway.

I will put it to you this way, a lot of run way on the revenue side right now. For me, what is 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 losing with one of our major hospital account 350-bed hospital and boy, I have to tell you walk in and you see, 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 is 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, context to where we are not an issue..

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?.

When we look at cross-selling, we look at what kind of services obviously that we can complement with our customers. As we start developing a more vertical, I think that is when the cross-selling gaps will come into play.

We will start looking by industry and seeing which services are essential if we are going to be in that industry and that is where we will see gaps. Right now, our cross-selling has been more tactical. It has been looking at existing clients and seeing if we can get one more service.

You know what, our tagline is Solve One More, which essentially means 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 are going to see more strategic focus as we start thinking of those..

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 as part of the scope, right, so we are in early days of our strategic review and fundamentally we are in the data-gathering stage, fact-finding stage, so we have not seen those themes come across just yet..

The last question I had for you was, as you look at the capitalization of the overall company, does the lower interest rate that is 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?.

Yes. 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 will let Anthony speak to that a little bit more but I can tell you.

It is continues our capital structure as a whole, it continues to be again a very fluid conversation for us at the firm, but Anthony, why do not you give us some more color on that?.

Sure. If you look at our capital structure as I mentioned in my prepared remarks, we ended the quarter with two 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, dividend, share buyback.

We have enough flexibility to look at all those areas along with the board to ensure that we are deploying that capital in a most efficient way. In the short-term, I do not think you are going to see any major changes in our capital structure, but as Scott alluded to through both, our analysis and we are looking at a lot of trend analysis there well.

We are going to determine whether there will be a shift in our capital structure as well..

Great. Thank you, guys..

Thank you. Our next question comes from the line of Joe Box of KeyBanc Capital Markets. Your line is open. Please go ahead..

Good morning, gentlemen..

Good morning Joe..

I just want to dig in to the Janitorial margins a little bit further. If we add back the $4 million headwinds from the extra day that you had in the quarter and then we take out the $1.4 million gain that you guys had came from the sale of the building. We still get operating margin of 6.4%.

That is really the highest number that I could find in my model for 2Q.

Can you maybe just put more contexts 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?.

Let me add sort of a little color around the margin story. The exiting of that multiregional account contributed roughly 20 basis points - 13 basis points is it is the margin improvement, so as Scott mentioned, some of the efficiencies that we are looking at that will drive margin improvement going.

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

Look, this is high-performing group for us in terms of operating efficiencies.

As you guys know it was not too long ago that I was in the field kind of in the day-to-day combat working on the Janitorial side as well as other of our on-site businesses and having a six in front of your operating margin in the Janitorial space in this environment, we are just more than pleased again a very high functioning group..

Understood. Scott, you mentioned earlier some of the benefits of density in the New York Airport market and I think you called out about 3400 employees at the three airports.

When you get to that level of density, I am just curious how the margin profile compares there versus say the averaged that Air Serv?.

It is kind of hard to say that, because when you look at the Air Serv business there is no kind of commonality. Every [ph] is unique, right, because it is a combination of passenger services and it is also we will do cabin cleaning, we will do some security, so I am struggling to provide you clarity.

The best way I could say is that what density does for you, it allows you to cross-utilize labor more efficiently and kind of 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 Serv has some phenomenal technology that lets us to maximize the way we deployed labor, so it is less about creating an average in an airport versus [ph].

It is more about the mix of services and then solutions and we are just trying to optimize our labor and that has 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 a one step further and say density gives us 100 to 300 basis points of margin expansion or it is north of that.

I am just trying to understand the magnitude of what density can do?.

Yes. I just do not 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 have not 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 am curious how your customers are valuing the bundle and how that translates to price, so maybe just 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 are putting more emphasis on the margins now or has the strategy kind of remained very similar to the prior regime?.

Look, clearly bundling is a plus for us on the margin standpoint and it is really in a couple of wage right? You get a little bit of throughput on overhead, right, because you are kind of 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 to certain stickiness with the customer, right, because now when you start adding on services and you are creating story and you are 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 are in account the higher margin profile goes, so for us it is a combination of factors.

Anthony, I know you wanted to give some color on that..

Yes.

I think to Scott's point, our overarching goal is that come with the solution based approach for our customers and not a service line approach, so over time with the 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.

Then just one last follow-up for you in the modeling side Anthony, I know your other income tends to jump around from the JV, but any reason why we should not 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 startup of our international JV, specifically the Qatar Airport, work we are doing there, so effectively I would say you should look for that JV income to normalized in the second half to kind of normalized run rate..

I appreciate it. Thank you, both..

Thanks..

Thank you..

Thank you. Our next question comes from the line of Michael Gallo of CL King. Your line is open. Please go ahead..

Hi. Good morning..

Hey, Mike. Good Morning..

My question is just I know you are 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 do not disclose the details. Just for competitive reasons, we do not try to give that level of the detail, but I could say it is a large number and it give us ample opportunities to take a look at it holistically and one of the reasons that one of the drivers apply.

We have launched the captive A and B, while we are taking a much longer-term view around insurance going forward..

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 kind of state by states or is that still to be determined?.

The current year I can speak to and then obviously as I mentioned earlier, we are still looking at the longer-term strategies so the current year we have transferred workers comp and GL programs into the captive for the current year.

It is not the whole program, but it's majority of that program that is going in and that is what is really driving the current year tax benefit, so it is not a loss portfolio for the prior years, but that is something that we are looking at as well..

That is the one-time benefit, but do you have any benefit embedded into the guidance for this year in terms of saving or you just kind of assumed it is wash in terms of the numbers?.

It is a wash. There is no adjustment to our EPS guidance..

Right, but in terms of as you get better depending on obviously how you underwrite. If you can underwrite it breakeven, even given the fees, as I understand them it should be a nicely accretive at some point..

Let me make it clear, we are not changing.

At the current point, we have not change our retention levels or risk profile, so effectively from a risk transfer perspective, nothing has changed within the company's risk profile, so that is typically where you will start to drive some saving, but as I mentioned it is part of the broader strategic review and how we are going to operate the captive going forward and what exposures go into the captive and then how those exposures are risk transferred externally, it is something that we are looking at holistically, so ultimately I cannot give you any clarity now and there is nothing in our guidance reflecting any costs or additional savings related to the captive, but it is the longer-term ones that we are taking with the captive and look forward to providing more clarity as the quarter go on..

All right, it sounds like you are still figuring it out that probably there will be some savings, but until you work out all the different permutations it is too early to say?.

That is correct..

Just so we are clear, we are going to generate to 15 and 29 of tax savings….

Right, and when will does come in? Will those come in, in early '16 or later this year?.

It is '15 plan..

Washout will 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 that come in the second half..

Right, okay. Thanks very much..

Thanks..

Thank you. Our next question comes from the line of Dan Dolev of Jefferies. Your line is open. Please go ahead..

Hey, thanks for taking my question. It looks like axe that contract or even axe that contract in Janitorial, you had about a 40 basis points 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 sort of mid-single digits organic growth in that segment? Thank you..

When we look at our organic growth from that segment, we have been pretty clear targeting in the 2% to 4% range in growth, so we are at the low-end to that range right now, but again I think Dan, the biggest key here and something that I just wanted to make sure gets reiterated is there is nothing systemic there and that is why we stay away from kind of quarter-by-quarter revenue comparatives, because it could be misleading so I think we are kind of at the low-end as I said of the range we would like to be in, but we are comfortable..

I think, Dan, by the end of the year, again, excluding the impact of that the large multiregional contract that we exited, you will see our Janitorial move back in line with what we expected, so this quarter was a bit of an anomaly, but we are hopeful that by the end of the year, they should be back within the range that we expected..

Okay. Thank you.

Then just one bigger picture question, clearly Henrik was great and he has been leading the company for many, many years, but if you had to sort of think about sort of the one to two things, biggest things that you would do differently than him, what would they be?.

I do not look at this as a kind of versus or to differently. I look at this is kind of an evolution.

If you look what Henrik has done for this company in setting up a platform over time and how this company has changed, now, when I came 12 years ago, we were predominantly a janitorial company and now we are truly an integrated facility services company, so he has put us on this amazing path and now to think what is 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, so it is part of an evolution and that is what his aspiration for us was as well is to continue to evolve this company and take it to the next level..

Okay. Thank you very much guys..

Thank you..

You are welcome..

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

Hi. Thanks. Welcome Scott and Anthony to your new roles..

Thanks, George..

Thanks, George..

I would 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. Let me answer the question on insurance and then Scott will provide color on the margin profile.

From an insurance perspective, if you recall the way we manage our insurance program as we perform actuarially review at the end of April 30th with data claims that through April 30th and then Q3, Q4 we present the information or the feedback from that actuarial review.

From a year-over-year perspective, as discussed earlier, we have the benefit of continued to favorable actuarially determined rate that were determined at the end of 2014 flowing through Q1 and Q2.

Our expectation is, we are in the early stages of providing the data to the actuary and our expectation is beyond on the same timeline in terms of once that information comes back lately in Q3 and Q4, so it is hard for me to speculate around being here..

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

Got it.

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

I would not say that is something I am going to answer that in a different way, because that is not what is first and foremost on our mind because, we have such amazing operators right and we feel like that is again part of what we do every day focus on contracts had 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 is about the opportunities in front of us and just talking to the [ph] the other day, he would say just like the number of opportunities that we are seeing in the $25 million to $40 million range are just astounding, When you look at how that shifted over the past few years in terms of scale of opportunity, it is pretty dramatic and I will give you another quick metric.

We have a national account group that manages accounts facto across our different regions. Three years ago, we had 55 national accounts that equated to $260 million in revenue.

Today, we have 100 national accounts that are over $500 million in revenue, so that kind of speaks to scale and it also speaks to our opportunity in the market because our clients are looking to us for scale, right.

You guys have all seen the broader consolidations in the managing agents and what they are doing that is going to play to our strength, because as they are trying to create efficiencies with 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 are having more and more of those conversations every day..

Got it. That is helpful.

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 are evolving your execution to drive improved performance in the segment?.

Well, just to highlight a few things that happened in the quarter this is Anthony.

There are few one-time items that I wanted to callout and that impacted of our healthcare group, which we don't those impacts and that hurt our bottom-line by approximately $1 million, which were again one-time, so part of the bottom-line story for the quarter were one-time items.

As far as the second half story, some of the positive to note is, we are fully committed to the BESG's ability to outperform in the second half as Scott mentioned. The pipeline is strong.

It is really the delays in terms of those projects starting and when we expected them to start, but we have full taken that group to outperform the second half of the year.

We have had delays in notices to proceed in the government group, so we have been awarded, but it some those delays in 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, A, specifically we feel good about their ability to hit their plan and hopefully outperform..

Very helpful. Thank you..

Thank you. Our next question comes from the line of Adam Thalhimer of BB&T Capital Markets. Your line is open. Please go ahead..

Hi. Good morning guys. Nice quarter..

Thank you..

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?.

They are different businesses and that is not necessarily in our line of sight right now. I think if you look at the different on-site businesses, they have a range of margin expectation right now.

I think in large measure, that is one of the catalyst for why we are going through this comprehensive review, and who knows we may be talking less in the future about segment results in terms of service line and the more about vertical as we kind of focus our energy in different areas, but we do not believe that each one of those segments are going to have an aspirational [ph] 6%..

Got it. Okay. Then I wanted to ask about the CTS acquisition.

You made a couple of acquisitions now in the HVAC, a service business and I am curious what about that business is attractive to you guys?.

If you look at the margin profile of those high technical services businesses, you are 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 on-site businesses, so we can sell through those higher-margin businesses to our on-site customers and when you start looking at an on-site margin profile kind of in stasis and then you add in some project work from those technical services sides.

You can have a huge margin expansion, so for us it is all about the clustering of assets and figuring out how to create almost a little echo system by geography where you centered with on-site businesses and kind of you are satellite being around these high-margin technical services businesses..

Another nice thing about CTS acquisition is it extends our technical capability that Scott mentioned in the D.C. area where we have an on-site presence, but it also give us additional technical capability to mission-critical facilities, so as we look at the tech vertical lack of better work, it give us additional credibility in that space..

Okay.

Then Scott you mentioned, by projects, you are talking about more repair work not new construction, right?.

Yes. Repair work exactly and energy retrofits, right, so less kind of longer-term services and more about finite beginning and end projects which again had the higher margin profile..

Okay.

Then lastly, the consulting strategic review that the cost associated with that, I assume that is included in your plus 7% to 9% SG&A guidance for the year?.

We have 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..

Thank you. Our next question is a follow-up from the line of Andrew Wittmann of Robert W. Baird. Your line is open. Please go ahead..

Thanks for taking my follow-up. Anthony, for you, on the tweak in the expected full year tax rates, you took it down at the mid-point 200 basis points.

Can you talk about where that came from or what has changed if anything?.

Yes. Let me give you some color on that. We analyze our discrete items through the balance of the year and we feel there is opportunity in the second half to benefit from those items. Offsetting that from an EPS perspective are other cost and that is 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 is primarily related to some of the NOLs from the previous acquisition and the positions that we have taken beginning to reverse themselves out from a tax perspective..

Got it. Okay. That is all I had. Thank you..

Great. Thank you..

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

I just want to thank everyone this was our first call and we are excited to be here and hopefully we answered all your questions and we are always available off-line for any more color that you need by them. Thanks very much for hanging in there with us and supporting us through this. We are really 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..