David Farwell - SVP, Investor Relations Scott Salmirs - President and Chief Executive Officer Anthony Scaglione – EVP and Chief Financial Officer.

Andy Wittmann - Robert Baird & Co. George Tong - Piper Jaffray David Gold - Sidoti Michael Gallo - CL King Joe Box - KeyBanc Capital Markets Dan Dolev - Jeffries Adam Thalhimer - BB&T Capital Markets.

Good morning, ladies and gentlemen, and welcome to the ABM Industries third quarter fiscal year 2015 conference call. [Operator Instructions].

Thank you, Bridget. 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 tab, you'll see Events tab. Today's presentation will be the second listed. 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. And I want to thank everyone for joining us this morning. So welcome to my second official investor call, as CEO of ABM. We certainly have a great deal to share with you this morning.

By now, I'm sure you've read all the press releases, specifically related to our third quarter earnings and our long-term strategic plan, which we are calling our 2020 Vision.

As I mentioned during our second quarter call, developing a comprehensive strategic plan was of paramount importance to the ABM leadership team, our Board of Directors and to me.

Today, I'm pleased to announce that we've concluded the initial phase of our review, and our Board of Directors has approved the comprehensive strategic and transformative initiative. As I mentioned, we call our 2020 Vision, and we're eager to share the highlights of it with you today. So let me first review the process we used to get here.

Please turn to Slide 3. Working with the Boston Consulting Group, we talked to our leaders, functional experts and our operators; we interviewed clients, industry experts and investors to understand their expectations, concerns and perspectives.

And we also analyzed our market as well as an enormous amount of data to determine where we perform best across our business and where we have what we call, our right to win, or essentially a competitive advantage. Our findings became the foundation of our 2020 Vision.

Our new vision centered around creating clarity and focus in our offering, both for our investors and our employees. It can be stated simply, we want to be the leader in providing facility solutions in industries, where we have that right to win every time, every day.

Our strategy will transform the company drive long-term profitable growth and enhance shareholder value by focusing on ABM's core strengths and most profitable businesses, and aligning our operations to deliver industry-based client solutions.

It reflects the realities and actions we must embrace to be a true solutions provider for our clients and to continue to grow and thrive in the years ahead. Please turn to Slide 4. How do we get there? Well, we're going to get there by doing six things really well.

First, we're going to focus on resources on industries, where we can differentiate on service and quality and drive margin growth. Second, we will align our organization to deliver customized industry-specific solutions, both in terms of our go-to-market approach and our service delivery model.

This will require restructuring our organization, restructuring from primarily being regionally and service-line focused to one that better aligns to our client industries. Third, we will focus on something we are calling consistent excellence.

We will define and implement the best practices in account and labor management from across and outside our business, as well as develop a more integrated approach for continuous improvement in our safety program. The ultimate goal is to develop and deliver consistent excellence throughout the entire enterprise.

Fourth, we will leverage our buying power to manage cost more efficiently and effectively across the company. We do this best-in-class in certain areas of the company, but we will do it across the entire enterprise in the future.

Fifth, we will improve employee training and development, so we can create great internal opportunities and even better career paths for our team. We've done a terrific job in compliance and trade schools training, where we have an opportunity to improve our management and leadership training.

And lastly, we will allocate our capital with a more balanced approach to maintain our ability to run the business and invest in the future. Please turn to Slide 5. This slide provides a high-level picture of what the firm could look like in the future.

We are at the very beginning stages, but we believe that the five industry verticals, outlined to the right of the page, can give us great advantage in the future. We have scale in each of these areas today with the opportunity to accelerate topline growth and create margin expansion in the future is exciting to us.

The performance of our aviation vertical or Air Serv is proof positive of the power of what is to come. Please turn to Slide 6. Our timeline is in three phases. Phase I is the foundation setting, Phase II is development and initial execution and Phase III is the acceleration of the plan.

On our Investor Day, which we are targeting for October 28, we will provide additional insight into the work streams of each phase as well as the costs and benefits we are projecting. For today's call, remember, we are at the beginning stages of our plan, so you won't get the detail that we we'll be able to provide you next month.

Please turn to Slide 7. We are taking three immediate actions. First, we will initiate Phase I of our transformation by mobilizing our transformation office and teams. Second, as I mentioned, our review of our business was comprehensive. We looked at every industry vertical and every service line.

After very careful consideration, we have determined that the best course of action was to explore strategic alternatives for our security business. We have good underlying fundamentals in our own security business.

But to be competitive in this business segment going forward, there needs to be investment and achieving greater scale and moving more towards technology enabled solutions. For us, this is about where do we best deploy our capital going forward. That being said, we have not come to any definitive conclusions yet on the best course of action.

However, it's another of our immediate actions. And third, we were pleased to announce a $200 million share repurchase program. Anthony will be addressing that in more detail in a moment. Our 2020 Vision is exciting, but it also means change, and they're on the way and we have a lot of work to do.

We will undoubtedly have a number of tough decisions in the coming months. You likely saw the announcement regarding Tracy Price, EVP and President of ABM Facility Solutions Group. Tracy has been a champion of our Unified Workforce software platform.

He will be leaving ABM to serve as Chief Executive Officer of the newly formed business to be named QMerit, and ABM will have a minority interest in the company. I sincerely thank Tracy for his leadership over the past few years, and we wish him all the best in his new role, as he drives to further develop a commercialized software platform.

Now, let me briefly explain the financial implications of the transformation initiative. We expect to realize annual operating benefits of $40 million to $50 million, fully realized in the second half of 2017. As part of the reorganization, we anticipate taking pre-tax restructuring charges in the range of $45 million to $60 million.

The majority will be incurred through the third quarter of 2016, and primarily for severance, project fees and the potential write-down of certain investments. We look forward to getting into much more detail on the 2020 Vision at our Investor Day. It takes great confidence in an organization to implement a broad-scale transformation.

I've said it before and I believe it now more than ever, our culture of winning as a team rather than individuals will carry the day. It's cliché to say we have the best people. I'm happy to be clichéd. I would never embark on this journey if I didn't believe that.

As to completing this reorganization and fulfilling our 2020 Vision, I believe we will quickly become the market leader, against which other companies will benchmark their performance. But before I turn it over to Anthony, I just want to spend a moment reflecting on our third quarter.

While we were pleased with our topline revenue growth for the quarter, the magnitude of the increase of our insurance reserves, the casualty programs adversely impact our earnings. And Anthony will spend a great deal of time, taking you through those details.

Reducing our risk is of utmost importance to us and is one of the key detailed pillars of our broader 2020 Vision strategy. I am committed to making sure we remain focused on developing a more integrated approach for continuous improvement in our safety and risk management programs. It’s unfortunate to have to end my remarks on that note.

But it was important for me to communicate to you how vital our insurance program is and how focused we are on getting consistency going forward. But now let me turn it over to Anthony Scaglione, our Chief Financial Officer, who will provide details on our financial results..

Thank you, Scott, and good morning, everyone. Before I get into the details of our third quarter results, let me comment briefly on the new strategic vision we announced today. As you heard from Scott, our strategic plan will enhance our competitive position and enable us to continue to create value for our shareholders well into the future.

The strategic plan consists of three primary phases, during which we will implement a series of initiatives to drive sustainable profitable growth. During the first phase, we will streamline costs and realign our operations for the efficient delivery of our services in order to drive margin accretive growth.

The company expects to achieve annualized operational benefits of $40 million to $50 million by the second half of fiscal 2017, with these benefits primarily coming from a more simplified organizational structure and company-wide profit enhancements, including leveraging our procurement.

We anticipate pre-tax charges of $45 million to $60 million over the next several quarters to implement these changes. We believe the cost benefit of this restructuring is both highly compelling and necessary to deliver the results the business is capable of achieving.

We look forward to updating you on the progress and sharing further details on the expected impact of our restructuring efforts and initiatives at our Investor Day in October. Now, let's do a quick review of the quarter highlights. Please turn to Slide 9.

We achieved record revenues of approximately $1.35 billion, an increase of 5.7% compared to the third quarter of fiscal 2014. Organic growth was 2.8%. And adjusted net income was $26.8 million or $0.47 per diluted share, flat on a year-over-year basis. As Scott mentioned, insurance had a significant impact to our quarter and year-to-date results.

Additionally, we recorded approximately $5.4 million of discrete tax items in the quarter. Rounding up the quarter, I want to highlight our strong cash flow of $62.4 million, which brings year-to-date cash flows to over $100 million. Before I go into the segment operational results, let me give you some context on the insurance program.

At any point in time, we manage over 5,000 individual claims, each with large deductibles related to our work comp, general liability and auto programs. It is important to note that we depend heavily on trending data that help us establish our estimate of ultimate unpaid loses, which are effectively our reserves.

As discussed in previous years, we have made considerable investments in our risk management and safety programs. These include implementation of work comp accountability programs, the introduction of our Think Safe initiatives, and targeted emphasis on Return to Work programs.

With these investments and the related potential benefits, the company made assumptions with respect to its ability to positively impact the frequency of claims and the cost of such claims, which have not materialized at the expected rates.

As a result, we experienced adverse development in our inventory of open claims, since the last actuarial study was completed in 2014. General liability claims drove the majority of the adjustment in Q3.

The complexity of some cases, especially those which contain a bodily injury component, increases the difficulty to estimate ultimate unpaid loss and resolve claims in a timely manner.

We are working towards the programs to address GL and we plan on implementing a loss accountability program in fiscal 2016 to help better align incidents to result on a go forward basis. Moving to the actuarial process.

Our external actuarial consultants consider the historical claim reserving and reporting patterns when calculating the estimates of unpaid losses, including benefits assumed from safety initiatives.

However, the impact of the adverse development for existing claims, the changes in the frequency of claims and the estimates of ultimate losses materially impacted their actuarial analysis, which resulted in the charge of $46.5 million that we reported in the period.

Finally, for fiscal 2015, the impact related to current year insurance and operating profit margins will be approximately 27 basis points for the full year. In addition, although not finalized, we anticipate our insurance rate for fiscal 2016 to further impact our full year operating margins by an additional 25 basis points to 35 basis points.

This is primarily a result of higher insurance rates being charged to operations that will not include the same level of risk and safety benefits that we assumed in the past. Now, let's move to Slide 10 to review operations.

Janitorial revenue increased 4.7% year-over-year to $678.5 million, primarily due to $20.8 million in additional revenues from acquisition and organic growth including higher tag revenue. Operating profit decreased by $8.2 million, with margins decreasing by a 150 basis points to 4.9%.

The decline in janitorial operating profit margin was primarily due to the unfavorable impact of insurance. In addition, janitorial margins were negatively impacted by approximately 10 basis points, primarily as a result of higher SG&A and the absence of a gain from a property sale in fiscal 2014. Partially offsetting these items was new business.

We now expect janitorial operating profit margins to be approximately 5.6% for fiscal 2015. Moving to facility services. Revenue decreased by $3.7 million or 2.5%, primarily due to the termination of certain lower margin contracts that exceeded new business.

Operating profit for facility services decreased by $1 million or 14.3%, with margins decreasing by 50 basis points to 4.1%. Again, the decline in operating profit margins was primarily driven by the unfavorable impact of insurance. Going forward, we expect the operating profit margins to be approximately 4.2% for fiscal 2015. Turning to parking.

Revenues increased $5.5 million or 3.5% over the third quarter of 2014, primarily due to increased scope of work from existing clients. Management reimbursement revenues were essentially flat at $78.5 million. Operating profit in parking was $1.2 million or 13.3% lower in the quarter, with operating profit margins declining 100 basis points to 4.8%.

The decrease in operating profit margins was primarily related to insurance. We expect operating profit margin of approximately 4.8% for fiscal 2015. Turning to security. Revenues grew nearly $99 million, an increase of $3.5 million or 3.7%, primarily a result of increased scope of work from existing clients.

Operating profit margin decreased by $0.6 million and operating profit margins decreased by 80 basis points to 3% as a result of insurance. We expect operating profit margin of approximately 3% for fiscal 2015.

Overall, the takeaway is that our on-site business delivered as expected and the continued discipline on cash contributed to the quarter outside of insurance. Turning now to Slide 11. BESG revenues were $149.1 million, an increase of $21.6 million or 16.9%.

BESG revenue growth was largely driven by contributions from acquisitions and organic growth in government contracts including DLITE, which continues to grow from increased scope. Important to note in our ABES business, revenue bookings at the end of the third quarter were approximately $67 million. This compares to $30 million in the prior period.

As we had mentioned in our Q2 call, we expected double-digit revenue and operating profit growth in the second half and the team is on track to deliver it.

BESG operating profit increased 19.1% to $8.1 million and operating profit margins increased by 10 basis points to 5.4%, primarily due to tax credit from energy projects that offset the insurance charge. Moving to Air Serv, we had yet another quarter of impressive growth with a 16% increase in revenue driven by U.S. operations.

Operating profits held steady with operating profit margins decreasing by 60 basis points to 4%. As in many of our other operating segments, the decrease in operating profit margins was primarily related to insurance. Corporate expenses excluding IICs or items impacting comparability decreased by $1.6 million.

For the full year, we continue to expect the 7% to 9% increase in corporate expenses, excluding IICs as we've communicated previously. Now, let's turn to Slide 13. Cash generated by operating activities for the quarter was $62.4 million. DSO at quarter-end were 53 days, down 1 day on a year-over-year basis and unchanged sequentially.

Let's turn to Slide 14 for a look at the company's leverage profile. We ended the quarter with approximately $305 million of debt under our $800 million line of credit, including letter of credits of approximately $160 million, we ended the quarter with a leverage ratio of 1.95x. Turning to Slide 15.

During the quarter, we've repurchased approximately 307,000 shares at a cost of $10 million. And also that company announced, the Board authorized a new $200 million share repurchase. The $200 million share authorization does not alter our overall philosophy.

We will continue to prioritize value enhancing investments and operate with a strong balance sheet and leverage profile to ensure we have adequate liquidity to execute our strategic plan. And yesterday, I'm pleased to announce that company approved its 198th consecutive dividend at $0.16 per share. Moving to Slide 17.

As noted in our earnings release yesterday afternoon, we narrowed fiscal 2015 adjusted EPS guidance to $1.75 to $1.80. This guidance excludes potential benefits associated with the extension of the Work Opportunity Tax Credit for calendar 2015.

If Congress were to extend the WOTC for calendar 2015 prior to October 31, 2015, the company could have a further benefit of $0.08 per diluted share. Due to the insurance charge and the uncertainty of the timing of restructuring charges, we are withdrawing our guidance for GAAP net income for diluted share.

I look forward to providing everyone more details about our strategy and restructuring efforts at the Investor Meeting in late October. With that, I'll turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions] Our first question is from Andy Wittmann with Robert Baird & Co..

I had several questions this morning. I guess, I wanted to start with the outlook for the near-term here and the revision to the guidance, contemplating and recognizing the tax benefit that you got for the quarter.

If you were to take in your previous guidance and kind of looked at it on an EBITDA basis, given that you gave us the EPS, deprecation, interest, tax rates, all that you were found out that you were as implying something like $205 million of EBITDA with the new guidance, but previously that number was like $225 million, so that's like a $20 million EBITDA hit quarter-over-quarter.

Now, $10 million of that or so is explainable from the insurance reserve, but the $10 million other difference seems pretty significant and it looks it’s attributed to the margins.

A long way of saying, what's happening in the core business that explains where the margins were for the quarter, exclusive of the insurance charge?.

Andy, so for the year we expect $14 million of adjustments related to insurance of which we recorded $7 million in the quarter as a cumulative catch up and then for the balance of the year we'll have an additional $7 million, which included $3.5 million for Q3.

So there is a $14 million impact cumulatively for insurance of which we recorded the $10.5 million in Q3, so there is an additional $3.5 million coming in the period. In terms of the bridge, we had one less day for Q4. We have additional discrete items coming through for the quarter of approximately of $1.2 million.

As we mentioned, our ABES business had significant bookings in Q3 and we expect to turn a good portion of those bookings in Q4, so there is going to be a good uplift related to our ABES business. And as you know Q4 typically is our strongest quarter, so we feel very comfortable with the revised guidance and the range that we provided..

So as this relates to '16 then, if you use kind of the new starting point for what you're guiding for, for EBITDA, and then recognizing that next year has an extra day, which is like a $4 million cost headwind I guess, I'm trying to understand, and plus now it looks like another 25 basis points to 35 basis points of insurance reserve, which I wanted to get into separately, I'm trying to understand, if there is any other one-time items that were negative to 2015 that are not expected to happen in 2016, I just want to look at the consensus numbers that are out there on 2016.

I'm trying to understand why we shouldn't build off of 210 minus 35 basis points minus the extra day headwind?.

I don't think there is anything specific in 2015 that I can point to outside of the large insurance adjustment. At the end of the day, when we look at, as you can imagine, we're currently in the process of building up our budgets for fiscal '16, so we're not in a position to provide guidance at this time.

But outside of the insurance headwind, which is incremental year-over-year, we don't see anything on the horizon that's going to fundamentally change our go-forward run rate as it relates to the EBITDA or the margins that I described..

So let's dig into this extra 25 basis points to 35 basis points of insurance headwind. I guess, I'm not an insurance expert, but it seems like when you take the big reserve for this year, it's a $14 million difference for this year.

If you're accruing at a new rate, why is there another headwind into next year? Can you just give us a little more detail behind that?.

Yes, when we look at our rates for fiscal years and the go-forward, and as we receive that information from our actuary, they provide ranges as it relate to the rates. So our position going forward is to take less of the benefit related to some of the investments that we've made in safety, almost a credit list perspective.

So we're going in next fiscal year with the assumption that it's a full allocation of our insurance rate or the true cost of insurance with the hope of discipline on driving safety that will hopefully drive down volatility, if we can drive the frequency down.

So effectively, the increase in insurance rates going into 2016 is really related to what we've experienced and then potentially additional exposures going up next year, as we grow the business..

I'm going to do a one more, then I'll jump back in queue, but I wanted to just to talk about the balance sheet and the buyback a little bit, because this is important as well. The $200 million buyback, I think probably surprises some people in its size.

But if I'm not mistaken, you guys were talking about potentially operating the business at a little bit higher level than you'd run historically.

So is it fair to think about maybe a 2.5x leverage rate as a normal way of doing business? And then in that context, if you think of over the next couple of years, if you do a $100 million of free cash flow, which is a rough number for the next two years, that's $200 million, plus you want to turn up the leverage another turn, so that's another $220 million, let's call it.

In other words, the $200 million buyback, if over two years, that'd only be like half-a-year free cash flow. Why cant' that be more? Why can't that be $300 million? Your thoughts on that would be appreciated..

Yes, absolutely, Andy. So you're absolutely right. From a leverage perspective, I think we're more comfortable stating that we're looking to potentially move to the 2.5x range. As you can imagine, it's not something that we're going to peg and drive towards.

But from an operational standpoint, we're comfortable that 2.5x gives us enough flexibility with the free cash flow, the liquidity needs, and access to capital to continue to maintain a risk profile consistent to the way we've operated in the past.

And the $200 million, the way we arrived at that is really through an evaluation of all those components. And going forward, when we look at the optionality around investing in our business, continue to have the opportunities from an M&A perspective, we want to provide ourselves that flexibility.

So we feel really good about the $200 million announcement and the ability to continue to have the flexibility from an investment standpoint..

I'm going to do a last question, guys, I'm sorry, but another one that I think is important. Previously different management teams have committed to cost savings that we actually never really saw in the bottomline, because they're reinvested.

Scott, can you say here today that the $40 million to $50 million that you're planning at least under this wave of restructuring is something that we should see in the bottomline?.

We're absolutely committed to it. This was part of a long thought-out review. We looked at all areas of our business, externally and internally. And Andy, we wouldn't put it out there, if we didn't feel certain that we can accomplish it..

And our next question is from George Tong with Piper Jaffray..

I wanted to drill deeper into EBITDA margins in fiscal 3Q. The decline was 90 basis points year-over-year. However, you noted that the insurance impact from current period claims was only $7 million and that translates into about 50 basis points of impact.

Were there other areas of the business that may have contributed to the year-over-year margin headwind?.

Just to provide some clarity there, the $7 million was a cumulative catch up for Q1 and Q2. The actual impact from an insurance standpoint, from our run rate we were on, is actually $10.5 million. So there is an additional $3.5 million that we recorded in Q3 as part of our normal close process. So that's going to be part of the impact.

Additionally, as we mentioned in Q2¸the ramp up for some of our ABES business shifted to the right. So the turn of that business had a slight impact to our EBITDA margins in a quarter, but we expect a strong Q4. And as I mentioned, our bookings year-over-year were significantly higher than they were last year at this time.

So effectively, I think it's the insurance that's driving the majority of the EBITDA compression and then there is little puts and takes here and there, but as I mentioned in my prepared remarks, insurance, that's the big driver..

And then on the insurance side, can you talk about what changes may have occurred in the risk or demographic profile of the employee base that may have contributed to the large claims adjustment?.

There is nothing fundamentally that shifted. I think as I mentioned in my prepared remarks, we run a very large insurance program. And there is always going to be the potential for volatility. And our investments that we made in safety and risk, those investments, we had built in an assumption that they were going to drive down frequency.

They're going to drive down the severity of our claims. That hasn't occurred. So effectively, this is a catch up of reserves that we thought we're going to have a much bigger impact with the investments in safety and risk, that hasn't occurred.

So nothing from a demographic or jurisdictional standpoint that I can point to, but we are doing much deeper analysis as it relates to risk across the enterprise, so more to come on that..

And then last question for me.

Could you provide some thoughts on how you plan to stage your newly announced $200 million buyback?.

Sure. So we plan to deploy the repurchase in a discipline fashion, when we take in consideration other uses of capital. We're going to continue with our conservative risk profile, as I mentioned earlier.

And borrowing any other liquidity event, we look at the deployment in line with what we've deployed in the past, which is effectively an anti-dilutive measurement. So I would model in $40 million to $60 million per annum. And then we would adjust depending on opportunities in the market that may either increase or decrease that amount..

And our next question is from David Gold with Sidoti..

A couple of things. First, the easy one is tax free go-forward. I know you had noted in your presentation that it will be in the 20s. I guess, a couple of questions are tied together.

Number one, where are we in the captive insurance process? And number two, are we already benefiting from captive insurance, and therefore, is that mid-20s a good go forward tax rate for us to model?.

Yes. So let me give you a little bit of clarity. On the captive, we still have the captive as we mentioned in Q2. We're continuing to have benefit as it relates to the cash flow, relating to the captive. And we achieved an additional $6 million.

So that brings our year-to-date captive cash flow benefits to approximately $12 million, and we're continuing with the $15 million to $20 million that we signaled in Q2. As it relates to that tax rate, the discretes are really being driven off of two main areas.

One being specifically to our energy business, we have 179D tax credits that are built into the way we operate that business and that's driving the tax rate down.

And the second is, the reversal of certain FIN 48 positions that we have on the book that we continue to see some benefits going forward and we're factoring approximately $1.2 million in Q4..

So to summing that up, how do we think about tax rate go forward given the benefits from the captive?.

The benefits in our tax captive are really cash flow driven. They don't impact the effective tax rate..

So where do we think the effective tax rate lands then once were sort of normalized?.

So a challenging question. We'll provide details -- there is a bunch of discrete tax benefits that we have visibility into, but due to expiring statute of limitations, at this time there's no assurance that any of the remaining reserves will reverse, but amount that could have an impact will be disclosed in our 10-Q accordingly..

So just sort of high level, we wouldn't expect it to stay in the 20s..

No..

And then just going over, I know you have given more detail on the plan on October. But curious again, high level, one, we look at what you've laid out presumably the bulk of the cost will be done, say, by the midpoint of '16, but it looks like from what I understand the bulk of the benefit won't be evident until for full year behind that.

Can you just give a little bit more color on the lag, the delay and how that lays out for you?.

So as we looked at this, and you may have noticed I talked about three phases in the presentation. So think about that Phase I is mostly organizational design, in creating the efficiency and I think that's where you'll start taking the cost out, but then you move into this mode where you start realizing those benefits.

So we're going to have the six month process of organizational design that will take us through mid-2016. And then we'll start on a glide path of realizing those benefits, especially as we layer on our account management programs and labor management programs.

So we really feel like when you want to look at how we've landed at that $40 million to $50 million, it will be in that first half of 2017, as we move up back curve..

So the costs are really on the organizational changes, and so we'll take out some costs there.

But basically if you were to get the big benefit, you really need to get into Phases, say, II and III?.

That's right. And its really, it transitions from the cost side to the growth side, right, where you put the programs in place, you put your business plans in a more robust fashion and you start to accelerate it..

And then just one last one, with the captive, do we change how often we do this actuarial review or is it still something that we expect the big hit every year in the third quarter..

No, hopefully, there aren't bit hits going forward, but no guarantees there. We are putting in place a biannual review from an actuarial standpoint, not so much due to the captive, but the captive obviously will facilitate some of that analysis.

So we are going to have that biannual April, and Q4, October 31, data points, which will be a Q1 and Q3 events going forward..

And our next question comes from Michael Gallo with CL King..

Just a couple of questions, if I may.

Scott, would you expect to get any benefits in the back half of '16 from some of these improvements? I know you won't get the full run rate, but do you expect to start to get some benefits from a cost savings perspective or you won't see anything until '17?.

No, we will start getting in the back of '16. That's when the organizational design will be set and you'll start seeing run rate or we'll start seeing run rate savings just on the efficiency side of the organization. So that will start. I think when you talk about this bridge from Phase I to Phase II it's really about the glide path.

It's really about when it really starts kicking in, because it doesn't happen all at once, right. You don't all of a sudden just reset the organization. It's a part of a process. So it's about full realization and giving us the opportunity to understand that there will be things happening in 2016 in the back half and in the front half of '17.

But for you guys to feel comfort, you'll have a data point by mid-2017 as a check in that we realized those benefits. And we'll provide more on the Investor Day..

You may not be ready to provide, but I mean rough numbers, could it be, I guess, $10 million to $15 million benefit? I was wondering and if you look at, obviously, you're going to have the headwind on the insurance reserve, I was wondering whether you actually might see some offset to that from some of the cost savings back?.

You'll see our org, as Scott mentioned, will be realigned by the first half of '16 with the benefit on a full run rate at that time. And so the cost that we're taking out, as it relates to the realignment and the up organizational structure will be run rate starting in '16. So you'll see some of the benefits.

I don't want to get into the specifics, but the majority of the benefits on our targeted range would be starting in 2016 and then the full run rate and all the other initiatives will be a 2017 event..

Second question I have, I know you talked about the cash flow benefit to the captive.

Do you expect to recognize any operational income statement benefits or is it purely just getting the cash flow benefit from setting it up?.

Yes, it's too early to tell the -- on the income statement side we are beginning to operate, and this one of the initiatives that I have underway with the team.

We've begun to operate like an insurance company to ensure that we have the true risks of the operations embedded in the insurance risks, and the goal is to have the right pricing for the long term.

So there could be incremental income statement benefits on a go forward basis as we start to deploy some of these programs, but it's difficult to pin that down now, but as they occur, we'll obviously highlight them..

And then final question, any read yet, Anthony, on the state unemployment insurance rates? Obviously, unemployment has come down significantly. Seems like we're at the point of part of the cycle where you could actually see a drop in rates next year.

So I was wondering, if you have any thoughts on, I know it's early, but where do you see for SUI next year?.

That's a little too early in the process. As you can imagine we're currently evaluating our SUI rates as part of our budget process and as part of the go-forward. But at this time, it will be premature for me to give guidance around that figure or the impact for fiscal '16..

And our next question is from Joe Box with KeyBanc Capital Markets..

So I know you're at the beginning of your plan, but I do just want to push you a little bit more on the details of the $40 million to $50 million of cost saves.

Can you give us a sense of how much of that might come from supplier consolidation, how much could come from procurement? Maybe how much is the organizational restructuring that you alluded to earlier? And then, just a clarification, all of these saves, they do come with or without the security business, right?.

I appreciate the fact that you want to push us, but next month, we're going to give much more clarity on all these work streams, so you're going to have to give us that time, because we are at the beginning of the stages. And we've been so thoughtful, Joe, about this process to this point, and we've been so methodical.

So I'm going to ask you to give us that leeway to wait another month for our Investor Day. But we have modeled in security into our business, and we haven't made any decisions yet. We are exploring strategic alternatives..

But then why not wait until next month to put out some of these goals or some of these longer-term targets, so we could see some of the meat and potatoes behind that?.

I think what we wanted to provide today was where we feel, line of sight, we have visibility into what we think we could achieve in terms of the saving side and the cost associated with putting the organization in place.

In terms of specificity around the bucket, to Scott's point, we'll provide that as well as a glide path in our Investor Day in October. But these are true costs. We have line of sight, we are putting in place the plans and we'll share those plans in October..

I mean, I'm assuming that you sit back and you created a model, and you looked at all these individual items to comprise that $40 million to $50 million. So I'm assuming that you have the data. But we have to model the company. So we're going to have to put something in. So it would be helpful to have it right here.

Maybe what I could do is I could ask something more hypothetical. As you sit back and you refocus on the verticals that you can distinguish yourself in.

I don't necessarily disagree with this move, but it's always kind of been expressed to us that part of ABM's advantage has been its ability to really self-perform a greater number of their service relative to your competitors. And I think that's been part of the driver, why you guys have been able to get above trend organic growth rates.

My question to you is, how do you go out? How do you deemphasize some of these businesses and transition to more core markets, yet you still are able to keep some of the same share gains coming and even accelerate growth?.

I think it's because of the structure that we're going to be able to do all this. We're really not deemphasizing any businesses, what we are doing is emphasizing businesses and creating a more streamline focused. Look at our Air Serv business and how it performs.

When you approach the market with end-to-end solutions and you really understand the customer, you end up selling more through and adding more services. Because remember, we have a very robust offering, right. We have one addition to security, which we're talking about exploring alternatives for.

We have our janitorial, we have our parking, we have a very robust station engineering practice, we have a robust mobile engineering practice and we have our high-tech services through our ABES division that's project-based and mobile-based. We can do lightening retrofit, energy retrofit.

So we just have a number of tools and resources to bring to bear on a client. This is a process of figuring out where we have the best. Again, we're calling it, right to win, because we look at the industry and the market and whether that market is growing, outsourcing potential, scale advantage, and again where our competitive positioning was.

So when we looked at this and when we did this model, we just didn't say, oh, which verticals do we have the highest margins. It was really comprehensive, looking to the future and where we can expand. So I don't think it's going to be less offerings. I think it's going to be more focused offerings..

Then I'm assuming that there is going to be a lot more detail on my next question at the Analyst Day. But can you just help us understand the simplification of the operating model.

I see the slide in here, but what I'm trying to get at is, if the operating model is going to end up being more client-centric, it does imply that there is going to have to be some sort of sales restructuring to get you to that point.

How do you ultimately do that without having to be disruptive?.

So again, we are operating in all of these verticals right now. So let me give you a very simplistic version, but maybe it will give you some clarity. So right now you may have a branch manager in the operations that has 20 projects, 20 clients, and that may span five or six different verticals, because it's a service-line approach.

Now, what we see is how do you narrow that down and have the branch manager focused on one vertical, where they become expert in it and understand the clients' needs and figure out how to solve problems and be a solutions provider. And I think that's going to create that.

That's the simplification in the model, getting expert people, handling expert service delivery..

And I'm assuming that there will be some comp change to really reinforce this goal, right?.

Yes. It's not so much changed. It's alignment, right. And we have an objective, right; margin expansion, grows the EBITDA, accelerate topline growth with specific industries. People will be compensated with that alignment, talking about safety programs, our account management programs, labor programs.

There's going to be a lot more structure going forward, and how we compensate people and how it aligns to the goals that we're setting out in 2020 Vision..

And our next question is from Dan Dolev with Jeffries..

So can you explain a little bit, in janitorial it looks like organic growth x that large contract is still healthy, but it did decelerate from earlier this year and it is a deceleration from some of the organic growth rates we saw last year.

Can you maybe explain a little bit what's going on there? And will you be able to get to those 4% to 5% growth rates?.

Nothing fundamental, I think from organic growth. To Scott's point, we're focusing where do we want to grow at the end of the day, and that's driving some of the decisions on the expansion. But year-over-year, when you look at it, it was in line with our expectation. We had the large contract that you alluded to, that impacted this comparison.

But we're still seeing good organic growth, 3.5%, excluding that large contract. And we have a platform in the U.K. now that's contributing to the growth. I know that's one where we are very excited about the go-forward plan there. So I think we're going to continue to see the good organic growth that we've had in the past in that 3% to 4% range..

And then just one more question, I think it was slightly alluded before.

But why securities is still lower, because of the lower-margin quality that it has, because if I look at organic growth at least in the last two years, it's actually been outperforming or growing faster than some of your other businesses?.

So, Dan, this is forward looking, right.

We're looking to the future and looking how -- when we look at the service line and look at what's needed to compete effectively in the verticals that we're going to be in, now, there is going to be a shift from manned guarding, which we primarily ought to technology-enabled solution, and it's going to require investment.

And I think you'll have to look at our security division and recognize that we don't have the scale, we are not a national provider. We provide in certain pockets. So we're a regional provider in different regions across the country.

So as we are going through the strategic alternatives, we're saying, are we willing to invest in scale and are we willing to invest in technology solutions? And we look at that against the backdrop of where else should we invest and where else should we deploy the capital. And that's the process we're going through right now.

So it's not about today, it's about tomorrow..

And does that also open the gate potentially to parking being excluded, that rationale of not being the market leader?.

Well, first of all, we are market leader right now in parking, right. I think by any standards we're the number two parking firm and we have quite good margins there. But I think, look, every service line, every vertical went under a comprehensive review.

We looked at parking and we look at the verticals that we want to play-in in the future and there is good strategic set. I mean, we think about how we are in the aviation business, it'd be very difficult to talk to an aviation customer about it, end-to-end solution.

And say, that we don't operate shuttle buses either in front of the gate or behind the gate or that we don't park cars in an airport. Because in aviation, it's about the passenger experience from the minute they drive-in to the airport till they get on the plane.

So again, in certain verticals, parking becomes compelling, and that was part of our review..

And our next question is from Adam Thalhimer with BB&T Capital Markets..

The $10.5 million insurance cost, how much of that was in the janitorial segment specifically?.

The out-of-period adjustment for insurance for janitorial was roughly $4.5 million of the $7 million. So if you extrapolate that from a percentage perspective, you'll get the adjustment for the $3.5 million for the full three quarters..

But you also said there were some discrete items that had janitorial margins?.

No. I think I mentioned that there was a 10 basis point impact to our margins related to other items like SG&A costs, et cetera. The majority of the impacted margin was insurance. Outside of insurance, it operated as expected..

Again, can you give a little more clarity? You mentioned that your bookings are very good in Q3. You talked about the 3% to 4% organic growth rate.

I mean, can you talk a little bit more about just what you're seeing in terms of market demand and the economy?.

On the booking side, that was specifically related to our ABES business, which is a component of our BSG operating segment. So year-over-year we've seen significant improvement in the bookings, and it's one of the highest in the company's history.

So at the end of Q3, we had $67 million of bookings, which we anticipate approximately $37 million to be recognized in Q4. So back to what we mentioned on our Q2 call, BSG is typically a second half story. And the guys there are really performing exceptionally from a bookings standpoint.

As it relates to the on-site business, we continue to expect to see the low single-digit organic growth. 2% to 4% is typically what we're expecting. But again, to Scott's point, I think what we're echoing, we're really trying to drive the discipline on the margin.

So as we take on new engagements and as we expand, we're also looking at the margin profile to make sure that it's meeting our objectives..

And then, how are you going to -- maybe I'll talk about this more in next month.

But how are you going to report, are the segments going to change or you're going to start to report by industry vertical results?.

Yes. At this time, there is not going to be any change to the segment reporting. As we continue with the evolution from a service line to potentially a vertical line, we'll make the assessment whether to begin to report on a vertical, and then appropriately restate the previously three years..

Until we start operating the business that way and attacking the market that way, we think it would be premature..

And our last question comes from Michael Gallo with CL King..

Just a quick follow-up, which quarter next year will have the extra day..

I don't have that in front of me Michael, but I can get back to you. Unfortunately, I don't have that readily available. I think we've put it on our -- yes, I'll get back to you Mike..

Thank you. And I'm not showing any further questions. I'll now turn the call back over to Mr. Salmirs. End of Q&A.

Well, thanks everyone. We appreciate the questions and the interest, especially at this time of the year, when everyone is getting ready for the long holiday. So thanks for hanging in there with us. And enjoy the holiday weekend. Take care..

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