Susie Choi - Director-Investor Relations, ABM Industries, Inc. Scott Salmirs - President, Chief Executive Officer & Director Diego Anthony Scaglione - Chief Financial Officer & Executive Vice President.

Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker) Joe G. Box - KeyBanc Capital Markets, Inc. Michael W. Gallo - C.L. King & Associates, Inc. Adrian S. Paz - Piper Jaffray & Co (Broker) David J. Gold - Sidoti & Co. LLC Jeffrey Ted Kessler - Imperial Capital LLC.

Good day, ladies and gentlemen, and welcome to the ABM Industries First Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the conference over to Susie Choi, Head of Investor Relations. Please go ahead..

Thank you all for joining us this morning. With us today are Scott Salmirs, our President and Chief Executive Officer; and Anthony Scaglione, Executive Vice President and Chief Financial Officer. We issued our press release yesterday announcing our first quarter fiscal 2016 financial results.

A copy of this release can be found on our corporate website. But before we begin, I would like to remind 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 risk and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation.

During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the Investors tab. I would now like to turn the call over to Scott..

Thanks, Susie. Good morning and thanks to everyone for joining us today. Before we begin, I want to start by introducing Susie Choi, who just did our introductions for the call, and has joined ABM to lead Investor Relations. Susie has replaced David Farwell who left us at the end of February after more than 13 years of service.

I want to commend David for his distinguished career at ABM. By now, I'm sure you all had the chance to review last night's press release discussing our fiscal 2016 first quarter results. We reported a strong quarter and I'm very pleased with our overall performance.

As you know, we've begun our transformational journey towards our 2020 Vision, and I believe our results continue to demonstrate our ability to simultaneously manage this transformation and to comfortably grow our business.

I do want to call out that we have updated our full-year guidance outlook by $0.20, reflecting the extension of the WOTC, Work Opportunity Tax Credit, for 2016 and the retroactive adjustment for 2015. As you know, we previously stated that our initial guidance for 2016 excluded any benefits associated with WOTC.

Anthony will provide more specifics later in the call. Looking at the quarter, our revenues were approximately $1.3 billion, a 6.2% increase from last year and organic sales were up 3.7% year-over-year.

This was due to several factors including strong retention rates, increased tag sales and revenues from a robust backlog in our technical services, ABES business. For our Janitorial segment, we saw increased tag work around the holidays and the expansion of existing business with some of our marquee clients.

We also saw new business wins throughout the whole Janitorial segment including the Putnam County School District in our education business, and other key wins in our commercial and industrial businesses.

Our ABM team even helped make a lasting impression for the guests during the Super Bowl, probably more than we can say for the players on the field, but that being said, we had over 300 ABMers clean Levi's Stadium during and after the big game on February 7. This just reinforces the strides we are making in our sports and entertainment segment.

Our technical services, ABES business, had an outstanding start to the year, with impressive revenue growth and solid EBITDA margins. This was primarily driven by strong sales execution.

In addition, ABES continued to see benefits from our CTS acquisition of last year, and we have already begun to realize benefits from our Westway acquisition in the UK, which we announced last quarter. ABES just begun the second quarter, sustaining its strong backlog, and we expect that trend to continue throughout the year.

In our aviation Air Serv business, we continued to see terrific growth as revenues increased 15.6% year-over-year, driven by new customer wins and several contract specification enhancements that increased our scope of services.

However, Air Serv did experience some localized issues this quarter and this partially impacted their bottom line results; certainly, nothing that we see as systemic. Before Anthony provides you with more financial detail on the quarter, let me update you on how we've been progressing in our 2020 Vision transformation.

The initial phase of our transformation strategy was focused on designing and then, aligning our internal organizational structure to better support our industry-based vertical strategy. First, I couldn't be more encouraged by our progress in this area.

We've made substantial headway and we will be fully aligned with our new organizational structure by the second half of 2016, just as expected. To-date, we are on track to hit all of our internal targets on savings and timing. This has taken a tremendous amount of effort and diligence.

And I want to take the opportunity to mention how proud I am of our leadership team and our employees who have embraced our new direction. Today's results are a testament to the commitment from our organization to our 2020 Vision and to ensuring that our clients are well served.

I point this out because without this level of commitment, the risk to success would be magnified. Second, I'm also pleased to announce that we've been able to fill several crucial roles this quarter.

This includes our new Chief Human Resources Officer, David Goodes; the President of our Education Industry Group vertical, David Carpenter; and our new Head of Procurement, Chris Morawski (06:13). Bringing in strong talent to the organization is vital and will help us accelerate our path to sustainable profitable growth.

I also want to point out that we've established a tight link between performance and reward by directly aligning both short-term and long-term compensation policy to our key 2020 Vision goals.

Beginning this fiscal year 2016, some of the key compensation metrics for our management team will be EBITDA margin, organic revenue, safety and risk, and ROIC. We were clear from day one that this was an important initiative and we want to make sure we message that we followed through as promised.

We've also initiated several important programs that are critical to support the second phase of our transformation strategy that begins in a few short months. We've formed a new area of the firm that we are calling Commercial Growth and Strategy.

Think of this as our center of excellence that will enable the implementation of best practices across all of our industry group verticals. We will be creating uniform sales and operational protocols, account planning programs for each of our clients, and detailed labor management methodologies.

We are just in the initial stages, but we believe this will significantly enhance our transformation as we develop and refine these tools over the coming months and, realistically, years. Taking advantage of firm-wide best practices will be a key accelerator for ABM.

One of the other areas that we see real long-term potential is in enterprise-wide procurement. We have mentioned this before and wanted you to know that our effort is underway and developing. Over time, we will be able to share with you examples of how we'll leverage this initiative to create sustainable savings on our expense line.

All in all, I believe our 2020 Vision aspirations are beginning to take shape. And while we have a lot more work to do, the progress that we have made is substantial. We are on track with our 2020 Vision estimated cost savings of $10 million to $20 million for the fiscal year.

And I want to reiterate that this quarter's results continue to demonstrate our ability to successfully grow our business as we transition to our new model. And finally, we distributed over $20 million to shareholders in the forms of dividends and buybacks.

With our strong cash flow and access to capital, we remain committed to growing our business both organically and through targeted M&A. With that, I'll hand the call over to Anthony..

Thank you, Scott, and good morning, everyone. Let me reiterate Scott's pride in our organization for delivering a solid quarter against the backdrop of the many changes we are making to move our organization forward to our 2020 Vision.

As I review our financial results for the quarter, I would like to remind everyone that these results were impacted by insurance-related increases to our expenses, which I covered in detail on the third quarter and fourth quarter calls last year.

In addition, I would like to remind everyone that I'll be referring to results from continuing operations, which exclude the sale of our Security business. Now for a review of our first quarter performance.

Revenues for the quarter were up 6.2% versus last year, driven by organic growth of 3.7% and roughly $30 million of revenues from our CTS and Westway acquisitions, which are reflected in our Building & Energy Services (sic) [Building & Energy Solutions] segment.

Adjusted EBITDA margin increased 20 basis points to 3.4%, due to higher margin revenues within our ABES or technical services business, and higher Janitorial Work Order or tag revenue. We were particularly pleased with these results because of the previously discussed higher insurance expense we are incurring in the overall business.

To clarify, as discussed on our previous calls, we had adjusted our insurance rates in Q3 of last year, which reflected a higher current year expense for fiscal 2015. Part of the adjustment made in Q3 fiscal 2015 were for the rates we had previously charged the business in Q1 and Q2, which needed to be revised upward.

Therefore, for comparison purposes, on a year-over-year basis when normalized, current year insurance for the full year will still be roughly 35 basis points higher from last year, but for Q1 and Q2, given the timing of the Q3 fiscal 2015 adjustment, the impact on a year-over-year basis is approximately 60 basis points, or when normalized, roughly 30 basis points.

Before I discuss our segment results for the quarter, I'd like to note that as expected, the impact of the 2020 savings was not significant to the overall margin profile for Q1. We anticipate from an enterprise perspective that the savings will continue to be in the $10 million to $20 million realized range for the year. Now for the results.

Please turn to slide five. Janitorial recorded overall revenue growth of 3% versus last year. On an organic basis, Janitorial grew by $17.1 million or 2.6% due to strong tag revenue and good client retention. Janitorial operating profit margins were 4.9%, 30 basis points lower than last year.

Excluding insurance-related expenses, operating margins were up year-over-year. Higher margin revenue and overall cost control measures exceeded expectations. Facility Services revenues were up 1.5% versus last year, and operating margins were 3.2%.

As anticipated, operating margin was down for the quarter largely due to the unfavorable impact of insurance offset primarily by the timing of a large biannual KPI (11:58) contract award. Moving to Parking. Parking faced some headwinds during the quarter. While we had strong growth of 4%, our operating margins were down versus last year.

The margin decrease is the result of certain contract conversions from managed to lease, the impact of a tax audit, and increases in insurance-related expenses. Moving to Building & Energy Solutions. BESG experienced particular strength during the quarter with revenues up 25.5% versus last year and operating margins up 330 basis points.

These results were driven by incremental revenues from acquisitions of $26.7 million and 3.2% higher organic revenues year-over-year. We continue to be pleased by the strength of our ABES or technical service business, which drove Building & Energy Solutions' results.

As you may recall, our ABES business was a second-half story in 2015, and we were extremely pleased by the team's execution in the second half of fiscal 2015 from a pipeline and backlog perspective. That momentum at year-end has continued to benefit our results into this year.

We continue to expect good year-over-year growth in this business but comparisons will normalize in the back half of this year. To round out our discussion on BESG, healthcare continued to experience some operational issues, but our teams were successful in underlining certain unprofitable contracts.

We continue to take corrective actions with certain accounts and our outlook for the business remains on track for the year. In addition, government results were in line with expectations, and we continue to rationalize the opportunities we pursue. Finally, revenues for our Other segment, Air Serv, increased by $15.2 million or 15.6% year-over-year.

Organic revenue continued to grow at a strong pace, driven by our U.S. operations. Operating margins for our Air Serv segment decreased 120 basis points to 1.5%. Let me explain this performance for the quarter. Insurance was responsible for roughly half the margin impact.

The remainder of the impact was due to a combination of a one-time regulatory penalty, in addition to some operating issues related to that specific region for a large multi-regional contract. We have taken steps to remedy this localized non-structural issue.

The combined contribution from our operating results led to adjusted income from continuing operations of $21.6 million or $0.38 per diluted share, compared to $18.2 million or $0.32 per diluted share last year.

From an enterprise perspective, the 18.8% increase over last year was driven primarily by higher contribution from revenue and the benefit of the fiscal 2016 WOTC, offset primarily by higher insurance-related expenses. Moving to adjusted EBITDA, adjusted EBITDA grew to $43.7 million, and we ended the quarter with an adjusted EBITDA margin of 3.4%.

This represents a 20-basis-point increase versus last year, which was partially due to the timing of actions and investments related to our 2020 Vision. For example, we had delayed some investments in IT and some of our sales ramp-up in our technical service business was executed late and not fully in the quarter.

We expect to continue to proceed with these investments and for them to materialize going forward. Having said that, we are particularly pleased with our performance given our long-term focus on EBITDA margin expansion, which will be precipitated by our 2020 Vision transformation.

We are well on our way to tracking to the adjusted EBITDA margin goal we set out for this year of transformation. In Q1, we had a use of cash flow from continuing operations of $8.2 million versus $26.7 million last year.

We also ended the quarter with total debt including standby letters of credit of $415 million, and our total debt to pro forma adjusted EBITDA was approximately 1.9 times. During the quarter, we repurchased approximately 400,000 shares of common stock for $11 million.

And as at January 31, 2016, we had roughly $177 million of availability remaining under our $200 million share repurchase program. And finally, I'm excited to announce the board has approved ABM's 200th consecutive dividend of $0.165 per share, payable on May 2, 2016 to stockholders of record on April 7, 2016. Now let's turn to our guidance outlook.

Given the extension of the Work Opportunity Tax Credit for calendar 2015 and 2016, we have adjusted our full year 2016 guidance range for adjusted income from continuing operations to $1.50 to $1.60 compared to our previous guidance range of $1.30 to $1.40.

In summary and similar to Scott's testament earlier on the call, our organization delivered solid results in addition to beginning to execute the first phase of our 2020 transformation. Our operating results began the year on track and we are pleased with our entire organization's performance for the first quarter of the new fiscal year.

Operator, we are now ready for questions..

Thank you. Our first question comes from the line of Andy Wittmann from Robert W. Baird..

Hi. Good morning. I guess I wanted to dig a little bit into the top-line trends here. You talked about tag revenue a couple of times on the conference call.

Can you just give us maybe what the year-over-year contribution was from the tag delta?.

Sure, Andy. So, for tag, if you look at it in two components, the big drivers were Janitorial and our Facility Services. On the Janitorial side – and overall, we had about an $8 million increase year-over-year or roughly 12%.

On Janitorial, we saw continuous growth and Scott can allude to the specifics, but we saw some continued growth in Janitorial tag.

And on the Facility Services, which growth in tag is truly pass-through, so, from a margin perspective, it's not going to have the same impact that it does in Janitorial, but we saw continued growth in tag on the AFS side..

Yeah. And what I would add, Andy, is typically in the first quarter, we see good tag sales because you have the holidays baked into that. But I think also, there's a change in the firm. People understand that there's typically higher margins associated with tag. So, as we focus on our EBITDA margins, we're placing more emphasis on selling through tag.

Hope this trend continues, but again, optimistic with what we saw in the first quarter..

Yeah, that makes sense. I guess what I'm eventually working to here was about $30 million of acquired revenue, $8 million from tag.

Looks like, if you'd call a kind of core growth on the base business excluding acquisitions and tag, is it fair to say that organic growth is probably around 2.5%? And I guess that the follow-up question from that would be, are you seeing any disruption from the organizational changes that were pending in the quarter or are you seeing them here in the second quarter in terms of your ability to grow the business?.

Yeah. I'll take the first half of that question. So, excluding tag, our growth was right in line with our expectations from an enterprise perspective. And tag, as Scott alluded to, we had good growth in tag, but tag is a component of our overall revenue. So, we don't strip it out when we look at organic and totality.

So, from an enterprise perspective, our growth was right in line. We saw a good growth in some of the segments and tag contributed proportionally to that growth..

As you can imagine, Andy, with our 2020 transformation in redesigning this organization is a lot of work being done by our key people and really doing double duty, right? Because you still have to execute on your day job and put a lot of effort into how we're going to plan the organization going forward.

And probably this is one I'm most proud of is that we're able to execute during the quarter in this period of transformation. So, we don't see any headwinds as relating to the effort and the work that people have put in and I would say our organization is completely aligned to this new structure. So, there's a lot of enthusiasm around it.

We're not getting a lot of complaints from people about how hard they're working. As a matter of fact, people are pretty excited about what the future is looking like. And as we go through this, and month after month passes, you can see kind of the finish line ahead. And like I said, we're excited about where we are today..

Okay, great. I wanted to follow up with a question on margins. And I guess you had, on the face of the income statement, 20 basis points. I think looking at it as a 30 basis points increase is kind of fair. Obviously, that's going to reverse when we get to the third quarter.

But the 30 basis points kind of underlying margin benefit, but still really I think you said no benefit from 2020 Vision. So, we can see that, a) this did better. So, it looks like it's kind of more of a mix impact, but I guess I wanted to confirm that.

And then I wanted to dovetail that in fact that we noticed that there was a $6 million self-insurance adjustment, not for this year, but for prior years.

Given that you guys have been revaluing or reassessing the impact of your self-insurance liabilities, I have to ask the question to make sure that where it's currently, is that the right level to make sure that we're not surprised with anymore that's going forward like we were last year?.

Yeah, absolutely. So, let me take that. So, the way we're looking at it is if you normalized last year for the margin as it relates to the insurance rates that we're charging the business currently. And those rates, we feel really confident and comfortable with those being the right insurance rates from a current year expense standpoint.

So, if you look at where those rates would have been impacting the margin from last year, we would have been roughly 2.6% give or take on EBITDA margin, and we provided somewhat of a bridge (22:20) in the deck. We ended this quarter with a 3.4% EBITDA margin. So, when you think about the 80 basis points, it comes in a number of different components.

Roughly 50 basis points is operational-driven based on the factors we just discussed. 2020 had a small impact, roughly 10 basis points, 13 basis points of impact. And the rest is really going to be due to timing. We had some certain one-time items come in through the quarter from a benefit standpoint. We've delayed some investments that we were making.

So, that I would say is more of a timing issue. So we're really proud of what the organization was able to deliver from a margin perspective, given the headwinds on insurance particularly. On the out-of-period insurance, as you recall, late last year, we did mention we're going to have a second review done primarily for our captive insurance.

As part of that review, we've rolled forward the third quarter of last year's actuarial report. And based on the data, we continue to see some unfavorable trends in the prior year, and we've made an adjustment appropriately for those unfavorable trends. And we'll continue to monitor that going forward.

But what we're comfortable with is that the rate that we have for this year is the right rate and the business is operating with with that total cost of risk, and we don't expect that current year to be adjusted this year or going forward..

Great. I think I'll leave it there and maybe jump in later if I have some follow-ups..

Thanks, Andy..

Thank you..

Thank you. And our next question comes from the line of Joe Box from KeyBanc Capital Markets..

Hey. Good morning, guys..

Good morning..

Couple of questions for you on the guidance. One, is the WOTC number a true $0.20 number, because I guess I was always under the impression that it was $0.08 per year or $0.16 if it's retroactive. And then two, you guys put out a really helpful adjusted EPS bridge last quarter.

Aside from the tax items that you're calling out this quarter, would there be any changes to the buckets that you laid out last quarter to get you to the annual guide of $1.50 to $1.60?.

So, let me answer the WOTC. So, WOTC, as you articulated, there's a cumulative impact and then there's a full year impact. The cumulative impact is the $0.20 that we guided towards. In the quarter, we had two components.

One was a catch up of 2015 which added roughly $0.09 to the quarter, and then there's $0.02 related to 2016 WOTC which will continue to accrue for the balance of the year. So, roughly the $0.20 is where we're seeing the guidance from WOTC being updated..

Okay, got it. Thank you.

And then on the walk?.

Yes. On the buckets, we don't see any major changes to the drivers. So, we still feel pretty comfortable with what we articulated in terms of the headwinds being insurance and the benefits being 2020 in the operational. So we're still pretty good with those..

Okay, great. And then, Scott, can you maybe just help us understand how you're thinking about revenue growth versus margin preference, especially at this point in the restructuring? I guess if you look back over the last couple of quarters, I thought some of the preference was to call out some lower quality business.

Optically, it looks like that really didn't happen this quarter just based on revenue growth and then the margins. Just any color on the near-term strategy to call out business at this point in the restructuring would be helpful..

Yes, look, we're always trying to strike a balance between growth and margin, right? Our focus and what we're putting out there is margin enhancement as one of the primary drivers of 2020 Vision. But that's part and parcel to revenue growth. And what we're finding is we're just seeing a lot of collaboration in our firm for cross-selling.

And I think what we're seeing now, especially when you saw the margin increase, is that message is resonating within the firm. And as that resonates, with it is coming sales growth. So we're really proud we have 3.7% organic revenue growth. And we're looking at our pipeline going forward.

We're feeling really good about the balance and how we're handling our forward – really strategic approach towards picking up new business. But I don't think we ever really said 2020 Vision was about how we exit big amounts of business. It's really about how we grow going forward..

Right..

And let me add a little color to that as well. If you look at our healthcare business which has had – very small component of the business, had some challenges. And if we exited the contract subsequent to Q1 that will improve the comps going forward for that business.

So we are still taking a hard look at existing business on a renewal basis to make sure it makes sense. But to Scott's point, this is not about culling revenue for the sake of culling revenue, but where there's opportunity for us to improve the margin, we will.

And if it doesn't meet the margin profile on those renewals or there's not a glide path for that margin profile, then we're taking a harder look at that business..

Got it. Appreciate the color there.

And then just lastly, could we just take a step back and maybe look at some of the fundamental backdrops for some of your segments? Where are you feeling best about organic growth maybe accelerating versus where do you think fundamentally we could actually see some deceleration?.

Yes. So if you look at the SG&A, we kind of articulated the balance of the last year was BESG was a second half story last year. So first two quarters last year we had some tough comps, but they over delivered in the second half. And that over delivery is translating into a good pipeline and good bookings continuing in the quarter.

We expect that for the ongoing quarter. If you do a comparison from Q3, Q4 of last year to what we expect the full year to be, Q3 and Q4 will be more normalized. But overall, we see good growth in our technical services business in particular..

Yes, I was just going to also add, if you look at Air Serv this quarter 15% plus in organic revenue growth. So I think as we start shaping these industry group focuses or verticals, you're going to see acceleration. We haven't put out exact guidelines yet because we're still going through the process.

But really the motivator for 2020 Vision is to get the focus by industry and really accelerate our growth..

So I think the summary is we don't see any wholesale headwinds in any of our businesses from a growth perspective. Could the growth taper in one and accelerate in the other? Absolutely, but at this point, we feel pretty comfortable for the full year..

Got it. Thank you..

Thank you. And our next question comes from the line of Michael Gallo from C.L. King..

Hi. Good morning. Could you speak at all to the margin compression you had at Air Serv in the quarter and more specificity in whether you would expect the business to be back on historical margin trends going forward? Thanks..

So, we've experienced some localized issues in Air Serv and some one-offs. The localized issues were specific to a particular region. And the team there is keenly focusing on an operationalizing and getting back on track. They have a plan for that.

So for full-year outlook from an operating profit percentage, we're probably going to be in that 3.3% to 3.4% range. And that's really going to be a number of factors. Last year we had outsized growth from our UK portion of Air Serv. It's going to be normalized. That portion has a much higher EBITDA and operating margin contribution. The U.S.

business had good or fantastic top line growth, but they had these one-off items that impacted the quarter. And as I've just mentioned, they have a plan in place to get back on track. So, overall, nothing systemic, but something that we're obviously keenly focused on..

Thank you. And our next question comes from the line of George Tong from Piper Jaffray..

Hi. This is Adrian Paz on for George Tong.

Can you provide some color around the sequential increase in SG&A cost as a percentage of revenue? And how you see those costs progressing?.

Sure. So, overall, if you think about SG&A, there's a lot of costs related to our items impacting comparability. So it's difficult to look at it in totality given the pluses and minuses quarter-over-quarter and year-over-year.

The way I would look at SG&A is obviously as part of 2020 some of the savings are going to come out of – or most of the savings are going to come out of the SG&A line that we'll be operating our savings as well as it relates to the organizational design.

So the way I would characterize it is the savings that we have both from an SG&A perspective impact from 2020 plus the operating perspective is going to get us to that $10 million to $20 million realized savings. So it's a little bit challenging given the year of transformation and the puts and takes to get to an exact number.

But as we move on throughout the year, we'll provide additional clarity..

Thanks.

And on the Vision 2020 cost savings, sounds like you didn't realize any savings this quarter, but can you provide us an update on the progression that you're seeing these savings coming in?.

Yes. So we're right on track with our plan. So many of the actions that we took from an organization standpoint happened late in the quarter. So from a run rate basis, we're approximately at the end of quarter at roughly $11 million on a run rate basis.

What actually translated in the quarter was the roughly 13 basis points that I articulated or $2 million plus or minus. As the actions in the organization gets further defined through Q2, we'll be able to provide an update, but we're well on our way with the realized savings that we articulated, and we feel really good about it..

Yes, for us it's all about whether or not we're hitting our internal targets for milestones both in terms of the process and moving the process along as well as the savings, and we're just so happy to report that we are on track..

Great. And just one more for me.

Are the increases in tax build a reflection of the shift to the verticalized sales approach and how sustainable do you see those sales?.

Yes. So it's not because of the vertical approach because we really haven't gotten into new verticals, right, because we're still planning the organization. So you won't start seeing the movement towards vertical operations until the second half of the year.

In terms of sustainability, again, Q1 is typically strong because you have the holiday sales in there, but again I do believe because of the focus on margin enhancement by our team, you'll see continued focus there. How sustainable the actual increases are that we put on quarter-over-quarter, we don't know yet.

But, again, we're encouraged by what we're seeing and more importantly what we're hearing across the organization in terms of focus..

Okay. Thank you..

Thank you. And our next question comes from the line of David Gold from Sidoti..

Hi. Good morning. Just two points, if I will. One, can you speak a little bit about the potential that you see from tag revenue from here on out, particularly in the different business lines? I guess we've always understood it to give high incremental margin on the Janitorial side.

But I was interested to hear that in some cases with some of the other business lines is a pass-through.

So just if you can speak about the potential by business line and also what you see as potential growth there or maybe at peak level?.

Facility Services and Janitorial. On the Facility Services side, it's a pass-through. So from a margin perspective, there's really not a lot of margin uplift – good sales that we can penetrate additionally. And we expect the growth to be in line with historical averages. Janitorial, obviously, the margin profile from tag sales is much higher.

And back to Scott's point, we have a Q1 uplift due to the holiday season and the focus from the operational standpoint given the margin focus is going to be driving the tag. So, I think that's going to be continuing to be a focus area.

We don't provide annual guidance on tag, but it is a focus area and one we're going to continue to look at going forward..

Yeah, sure. Okay.

And then (35:43) can you give a couple of things, one by way of refresher because I think it's out there, percentage on the Janitorial side that the tag business was at its peak for a year and where we are today?.

I don't think we've ever given Janitorial at peak or where we are today, but what I can say is roughly $180 million to $200 million give or take on an annual basis tags, how they come in and how they translate is going to obviously be contingent on the time of the year and certain events.

So, it's a little bit out of our control in terms of the timing, we just feel like it's a pretty good indicator of the focus on margins and an early indicator from an operational standpoint of where we want to be..

Yeah. And the one thing I would say, David, is you read about a lot of headwinds in the economy and I can tell you just from talking to our people and getting out and traveling to the different regions, we are not seeing any headwinds from our clients yet in terms of pulling back or grabbing us for conversations about how we cut costs right now.

So, we don't see any reason why our tag performance should deteriorate over the course of this year..

Okay. Terrific. It's helpful. And then one of the questions, some commentary also Scott on the changes in computation that you've made at the senior level. Can you talk a little bit there on a couple of things.

One, should we expect them – if the targets are hit, is it the same let's say aggregate amount of time just measured differently, or could there be uplift in comp related to that?.

Look, we have our internal targets that we don't necessarily disclose, right? But our hope is that if 2020 Vision is successful, we'll be able to accelerate compensation. We have very defined targets that we've put out. And our internal people know about it.

So, we're optimistic that if everything triggers the right way, our people will be well-compensated and really have a tight link between how they perform, right, how they perform and how they get compensated, the whole kind of pay for performance. That is the culture that we are driving in the firm..

I mean, I guess what I'm getting at is if we looked at, I don't know, last year maybe was a bad example, on the same metrics – or the different metrics that you've just added, would the bucket of comp be up significantly or are we redistributing and remeasuring the same bucket of comp?.

Yeah. It's a redistribution. The targets have changed. Our objectives have changed. And to Scott's point, if we over receive (38:39) and overachieve our objectives similar to prior years, there'll be an overachievement on the – but from an overall bonus pool, it's apples-to-apples.

We haven't changed the dollars amounts allocated based on the objectives we set..

Got you. Perfect. All right. That's helpful. Thank you both..

Thanks, David..

Thank you. And our next question comes from the line of Jeff Kessler from Imperial Capital..

Thank you. You've put together the compensation packages for the executives, and you've also put together the cross-selling package.

Can you give a real-world scenario of how you're going to go about succeeding and achieving the cross-selling capabilities that you've been talking about now? How is one group of performers going to help the next group of performers in another segment?.

Yeah. So, let me break that down to two components. So, for this fiscal year, we've aligned compensation to the main drivers that we're looking for, both short-term and long-term, and that's margin growth, revenue growth and safety and risk drivers.

As it relates to the cross-selling initiatives, we have programs in place that are more commission-based programs in place, so that's not really the bonus program.

And as we move forward into 2017 and 2018, the localized programs which in this current year are enterprise-wide will become much more focused on driving the behaviors and driving the performance at the vertical level.

So, you'll see more of the verticalization cross-selling, and I think that's what you're alluding to, as part of next year's compensation plan, not as part of this year compensation plan, because we're not operating in that framework today..

Yeah. And I think the other way you could think about it, in our current format when we're organized by service line, if you have a Janitorial contract, you're motivated to cross-sell some services, but you're motivated on a commission basis. When we move to a vertical-based organization, you're responsible for the customer.

You're not just responsible for Janitorial. So, when you're controlling that customer, when you're controlling that P&L, you're much more motivated to bring services in and really have an end-to-end experience for that client. And that's how we're going to be measuring people's performance.

So, it's going to be a very different paradigm at ABM in really 2017..

Okay. And that was the crux of the second part of my question is, it's one thing to say it, obviously, and the company has talked about this for many years, but actually doing it, getting a vertical responsibility for someone who has responsibility for this is a total change of customer.

Is this going to require a change out of some personnel or have you gotten most of the people onboard who are going to be involved in this process already?.

Yeah. So, I would look at this in a couple of different ways. First of all, we have a really good group of people that understand customers, understand our services. But as part of any transformation, you bring in talent from the outside. And we are bringing people from the outside.

We just brought in a really strong performer, a gentleman named Dave Carpenter who's going to be running our education vertical and has a terrific background in that area. So, it's always good to bring in new talent. But the third leg of this, besides the existing people and bringing in new people, is the training.

And as part of 2020 Vision, we have a whole other work stream on training and talent development. And you're going to see new people coming into the organization to fill that area. So, we're really excited about that because we know part of the transformation includes structural change to the organization.

But the other piece of it is developing the tools to help acceleration. And if you look at how we've messaged way back to even in Investor Day, we said there are a number of different phases to this transformation. First phase is developing the structure and the organization and putting people into seats.

But the second phase that we're going into in April is about creating the tools, creating the business plans, creating everything around accelerating the business once the organization is structured. So, you bring up a great point and that's something that is one of our key work streams..

Okay.

One quick follow-up question that is with the advent of the increasing effect of smart grids out there, how does BESG begin to dovetail with some of the more technical grid questions that come up and how can you service that portion of the critical infrastructure to increase your total available market?.

So, energy has been one of the huge focuses of the firm over the last two years or three years, and you've seen some of our acquisition in the ABES area. One of our latest acquisitions, CTS, is all about energy and power, working in data centers, working on smart grids.

And we have a gentleman on the West Coast named Tom Bowen, who's very focused on the energy sector. So, we see this as a trend that's continuing, and we think our glide path in this area is playing right into where the whole energy movement is heading. So, we're excited about our trajectory in that space..

Okay. Thank you very much..

Thank you. And our next question comes from the line of Andy Wittmann from Robert W. Baird..

Okay. Thanks for taking my follow up. I guess I wanted to build on the last question, a little bit about the new organization, a new Chief Human Resources Officer, new Head of Education, Head of Procurement, and then this whole idea of Centers of Excellence, Scott, with Commercial Growth and Strategy.

Certainly, I think they make sense in terms of what to do for the business.

How much incremental cost is there to carry some of this to develop your people and the organization where it needs to be? And is there a risk here at least in the near term as you work on your glide path for margin improvement that this is a step back before it's a step forward?.

Yeah. So, Andy, we're not breaking this out necessarily separately, but I will tell you that baked into our estimates in organizational savings, includes net investments. So, this isn't just about taking cost out. So, when we talked externally about our cost savings targets, there are always net targets. So, we factored them in.

We have timing and cadence for everything, and we're taking it one step at a time. So, this will not be a step back at all. It won't be a step back at all. It's all part of the milestones that we set out for this project..

And, Andy, if you look at the organizational design, there may be certain areas where we're not going to be filling the positions immediately, because as we build up the organization there's going to be gaps in that organizational design.

We're targeting to $30 million but half the savings coming out of the organization plus some of the procurement savings from a cost perspective, those are firm numbers. So, you may actually see it appear to be that we're ahead of where we anticipate because those investments haven't been made in necessary lock-step with the cost-out.

But, again, we're committed to what we've articulated as our goals on 2020 from a cost perspective and we're well on our way..

Okay. Great. And then, Anthony, just a quick technical question on the Parking segment, you had somebody ask about Air Serv and the issues that you had in the quarter here.

We like to look at Parking on what we like to call a net revenue basis because one of the factors you mentioned as the reason margins were down was more leased versus managed, I think you said. And that would explain part of it. But even if you adjust for pass-through revenue, margins were down over 200 basis points.

So, can you just give us a little detail of what happened in the quarter and why these are isolated in the quarter and don't continue?.

Yeah. So, there's two components. One was an isolated settlement of some certain tax audits that we had in the business which we don't anticipate occurring going forward. The other is the conversion of managed versus leased properties in the quarter.

And as you know, leased properties come with higher risk and reward, and in the quarter, the leases underperformed. So, we will continue to monitor the performance of the properties as it relates to lease. We don't expect to continue the same level of conversions from managed to lease that we experienced in Q4, Q1.

But that'll be something that we continue to look at going forward, and that's one where it's going to increase the risk of our profitability based on the exposure to leases. And don't forget, insurance also plays a big component of the margin decrease year-over-year..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to company management for any closing comments..

So, thanks, everyone, for participating. We appreciate the questions. And as I said, we're encouraged with that start. We still have a long way to go, but we are on the road and we have a highly motivated management team and a highly motivated organization that's excited about where we're heading.

So, thank you for the time, and we look forward to messaging back in the second quarter..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..