ABM Industries Incorporated - Analyst/Investor Day

| About: ABM Industries (ABM)

ABM Industries Incorporated (NYSE:ABM)

March 06, 2013 9:00 am ET


David L. Farwell - Senior Vice President of Investor Relations

James S. Lusk - Chief Financial Officer and Executive Vice President

James P. McClure - Executive Vice President and President of ABM Janitorial Services

Tracy K. Price - Executive Vice President, President of ABM Engineering Services and President of Linc

Ross Thompson

Henrik C. Slipsager - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Tracy Price

David Whaley


Michael W. Gallo - CL King & Associates, Inc., Research Division

David Gold - Sidoti & Company, LLC

Joe Box - KeyBanc Capital Markets Inc., Research Division

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Adam R. Thalhimer - BB&T Capital Markets, Research Division

David L. Farwell

[Audio Gap]

for ABM. And if this video works, I'll be absolutely amazed, given the fact that the slides haven't worked yet. So no, there was a video that was supposed to play, but I'd tell you what -- There. Woah! Okay. There we go.


All right. With that, we've got a better feel for the foundation of ABM. I'd like now to invite Jim Lusk to come up and spend a few minutes talking to all of you. Thank you. Jim?

James S. Lusk

Thank you, David.

David L. Farwell

And hopefully, you have better luck [Audio Gap]

James S. Lusk

We'll see. If not, we'll have a new IT department. Nothing personal, believe me. All right. So with that foundation -- I did say that. I did. With that foundation that we've laid, so what are we all about going forward? What I want to talk to about now is what do you all want? You want accelerated top line and bottom line. And I've heard something about people in this room care about dividends, they care about cash flow, et cetera. Well, we do too. And what I want to talk about is there's 7 things we're doing to make this happen. I'll call them simultaneous equations because they're happening at the same time, but there's 7 things. And between Jim, Tracy and Ross and Henrik, we're going to cover all these. But I want to kind of give you the big picture to start with, because there are a lot of messages in here.

So we want to accelerate the top and bottom line. That's a good thing, right? Here's the first one. We're realigning the business. If you look at the opportunity we're chasing, our marketplace, it's integrated facility services, and we're providing integrated facility solutions to meet those needs.

Now as we've all looked at the marketplace -- if you look at the marketplace and you divide it into something we'll call "on site," think big buildings with lots of density and then think rural and think of where you have to do a truck roll. We have been really addressing about 1/3 of the marketplace. But the opportunity is 3x as big as that.

So by looking at on site, which is dense buildings like New York City, et cetera -- but think about rural customers, think about suburban customers, et cetera.

So the first thing that we're going to do here, this is the first simultaneous equation. And I am pushing the button, so something is supposed to happen. There you go. We are going to realign our business to capture the opportunity. We're going to take all the on site businesses that we have and -- under Jim McClure's leadership. We're going to take all the on-demand and mobile businesses and put them under Tracy's leadership.

Now we're doing that because the needs are different, the marketplace is different, the cost profile is different and the margins are different. You can imagine, when you roll a truck to somebody rurally, it's going to cost more money, but there's also higher margins. There's different margins in the energy business.

So no matter where you are, we're going to be able to provide the end-to-end solution. So number one is we're going to -- we're realigning the business to capture the opportunities. And by the way, there are some unique skills that my friends have here, which they are very good at, which we're also capitalizing on as we go forward. So that's number one of the 7 simultaneous equations. We're realigning to the market opportunity, and the market opportunity is bigger than we've really been chasing in the past. It's a big market.

So if -- once we've done that -- now here's the second plank of what we're doing. You can imagine now, let's just take Jim McClure's business, and he'll talk more a bout this. I just want to kind of give you the high levels of it. You take an area like Houston. In the past, we had a janitorial group, you had a security group, you had an engineering group, you had a janitorial group. All of them had infrastructure. And they were very focused on their individual clients.

What Jim is doing now that he has all these on-site operations is he's going to common processes. He's going to cross selling. It's actually starting to happen. He is looking at individual needs. He is getting subject matter experts on all those services, not only throughout the globe, et cetera, but locally.

So he has subject matter experts now locally across all services and across the nationwide platform and some outside the United States. So we are -- number one is we're looking at the marketplace differently. We're organizing to capture that opportunity. We're looking to provide end-to-end solutions along that big continuum, and that's creating the opportunity to have all these employees that have been in silos to start looking at it from a OneABM perspective.

We're also doing the same in Tracy's organization. You don't have the same kind of cost infrastructure that we have there, but we also are looking at it there, too. So that's kind of the second plank that we've looked at.

If you could just move to the next slide, please, just what I've said -- all right. The third thing we're doing -- and again, these are simultaneous equations. The third thing we're doing is taking the basic infrastructure that we've built from a technology platform. If you think about it, we've kind of built our core infrastructure. It's pretty much state-of-the-art, but it's the core. What we're building on top of that now really is more of the application layer. Tracy, as an example, is leading some really cutting edge stuff on how we take orders into the system, how we deploy it. He'll talk briefly about that, but there are some very interesting -- especially customer-facing technology that we're doing.

We're also continuing to work on the core infrastructure, capturing time electronically, which creates a lot of process improvements, and I know, et cetera, et cetera. So we're continuing to capitalize on our technology.

The third thing -- fourth thing we're doing -- again, these are all simultaneous. The fourth thing we're doing, by some of the cost reductions that Jim and Tracy are driving in their businesses, by the reorg and by the geographic density kind of look, we're investing a lot of that money into marketing sales. We have -- we now have a new head of sales. We have a head of marketing. We have a number of initiatives. Tracy will touch on a few of those in order to just improve how we go to the market. The branding that you see here is all part of that.

One example is a program called Solve One More. And basically, we're encouraging employees to take off their -- say, their janitorial hat or the security hat and just look at a building. One story that I've heard from our Head of Marketing, Brett Knox, is that apparently, at a school, somebody's kid was really hot. It was a parent's meeting or somebody, and somebody was complaining about it. There happened to be an ABM parent in the room. And because of this program, they were thinking, "Well, I can make a little bit of money if I do this program here." It ended up in a $1 million plus retrofit for the facility.

So it's not only just logos, et cetera, but we really are trying to change mindsets. What Jim and Tracy are doing here, especially in these first 2 steps, they are getting people to think about ABM. They're getting to think about -- when you think about Solve One More, you walk into a building like this. If you're a janitor, you may look at the cleanliness. But there's also lots of lighting. How was the security at the front door? All those kinds of things. There's a -- this is a -- for 100-year-old company, this is -- it feels like a 100-year-old startup. It's kind of a secret sauce getting everybody excited about what ABM can be. So that's the fourth plank of what we're doing.

If we move to the next one. Think about verticals as kind of a third dimension of everything we're doing. Basically, the whole business reports to Jim and Tracy, with the exception of a company we bought, Air Serv. And I'll talk about kind of how we're going to report that. We're looking at -- as we're doing all this, we're also focusing on verticals, kind of health care, aviation, education, just to announce a -- just to think about a few.

If you look at the on-site businesses and the rural, et cetera, and the end-to-end solutions, there's a unique set of skills in various industries. So not only are we organizing like I said before, we're also thinking about this vertically. We're thinking about it from a marketing perspective. And organizationally, we even have Air Serv as kind of a separate thing that we're kind of incubating. But those are all happening kind of simultaneously. And to garner the extra margin and growth, these verticals tend to grow more like double digits than the rest of the business, and that's one of the reasons we're investing in that.

And as we've done the sixth plank of what we're doing, a lot of our M&A recently has been focused on the vertical markets. It's still all the same basic services we're doing, but we're looking at those users and those customers that have a higher growth. So therefore, we've gone after Healthcare, and we've gone after Air Serv.

And number seven, because Henrik always wants to do what's right, as we do all of this, we're not changing our risk profile. We're keeping the basic same capital structure, the basic same dividends and things like the amount of debt we take on, integrity and doing things right. That's all there. So part of our investment thesis right now is we're doing all these things at the same time, and we're building on the very strong foundation that we have. And Jim and Tracy and Ross will unpack this.

From a financial reporting perspective, just so -- you all that follow us, this is how we used to talk about ourselves externally. Because of those first 2 planks that I mentioned of the 7 simultaneous equations, we're going to be reporting the business a little differently. Basically, what we're doing, and I'll show you a picture in a second, we're basically taking what used to be Facility Services, break it into 2, and we're creating a category called Other.

So Jim's on-site business is what used to be Security, what used to be Parking, what used to be Janitorial and the on-site piece of engineering. Tracy has the rest of what we're calling Building & Energy Solutions, with the exception of Other, which is Air Serv. And again, that's kind of our vertical incubator, if you will. So we're going from 4 segments to 6 to give you a little more visibility and transparency in what we're doing as a business.

Okay. So with that, I just want to say 1 or 2 more things. We'll tee us up and then we'll turn it over to Mr. McClure. This is our first quarter highlights that we announced. All in Jim's organic growth for the quarter, for this entire on-site business, was 2.6%. We're starting to see some really nice secular trends in the industry. The economy -- obviously, Dow hit a 5-year high yesterday, so it's kind of reflective of some of the things we're feeling. But 2.6% organic growth in this on-site business is -- I mean, obviously, we want a bigger number. But from where we've been, that is a good start. And if you could see Jim's pipeline, it's -- there's a lot of exciting stuff going on in terms of future opportunities.

So with that, Mr. McClure, I think I'm handing it off to you.

James P. McClure

[indiscernible] I'm a little clairvoyant. I brought my slides with me just in case.

Before I get started on the slides, I just wanted to kind of give you a statement on what we're doing with the on-site. It's something that I actually wrote this morning. As we build out this on-site organization, we keep 3 things in mind that we want to achieve: organic growth, boost customer retention and maximize operational efficiencies across the on-site operating units. That is what we're calling the breakout play. To support this, we leveraged our super region infrastructure with talented leaders across the super regions to create a geographic market. And I'll talk about those a little later. This will allow us to drive OneABM strategy by breaking down the barriers between the service lines. That's what we're talking about here.

And let's see if this works. And as we -- and as I talk about this, we've done this already in the Southeast. These line items that you see here, market creation, market leaders, market support, field consolidations, this is not a pipe dream. This is an action in place. So on the Southeast, from Texas to Florida up into the Carolinas, we have identified the markets. We've identified the leaders. They are in place. We are -- have the market support, which is very important. So the point of service is being driven at the local level. The market support is there. The subject matter experts are in place, both on a local level and a national level. We're looking at real estate. We've consolidated offices. It's real stuff, and it takes a lot of front legwork to get this process in place, to get all these programs so they're efficiently done. And this will allow us to move a lot quicker as we migrate this market base matrix system into the Northeast. That's Scott Salmirs' operation. And over -- into the Midwest. And finally, to the west. And I believe, from a timing standpoint, which interests everyone, the Northeast and the Midwest will be achieved in fiscal 2013.

And I'll show you a synergy piece a little bit later, but this has been months and months and months of work. This is not -- those of you that have been around a while, I've been involved in a lot of synergies post-acquisition. And we've always delivered and -- this is a bit different because we have culture involved. So to get everyone on site with OneABM takes a little time, takes a little communication, takes a little uncertainty out in the field. And as they see it start rolling out, I will tell you this. I was personally in a meeting in Houston, which was the first marketplace we rolled this out last week, with the 50 stakeholders in that city. Not the bosses, the boots on the ground. And the energy and excitement that they're going to be living together, same offices, they're going to be selling together, cross-selling, they're going to be compensated in a way that incentivizes them to support the OneABM model, you won't ultimately be paid on your Janitorial business anymore. You're going to be paid on how your marketplace does and how the overall OneABM model works. And I think those of you in the room understand "skin in the game." That's what we're talking about here, and that's the only way to get the buy-in and the support.

So the collaborative structure that we're looking at is being embraced by the field. That energy will lead it as we move into Scott's area because people hear that and they see that, and the flow and the momentum will drive this. And we anticipate that creating the ability to move this a little quicker. Thank you.

And as we focus on client retention, we've talked about a lot of that in the prior -- in the Janitorial business as we raised retention up into the 97 percentile. It's remarkable, we can do better than that. And client retention, to keep the growth from going out the back door is very important. And we're showing a terrific retention as we start this program out in 2013.

But as we have a single P&L responsibility and we create the market leaders, and we bring the administrative efficiencies to them, that will create organic growth, and that will give us a competitive advantage. And I'm as excited about the growth aspect of this model because what we're seeing already is we're seeing energy from our clients. We got energy inside the company, we got outside the company.

I have people coming to me and saying, "This is how we've been organized. It's about time." It takes a commodity mentality out of the single service application, where Janitorial sometimes can be looked at as a commodity, and we've talked about that. And as we've grown that business to be just short of $2.5 billion and with bottom line margins around 6%, that gets squeezed as a commodity in a down market that we've experienced since 2008.

Now that we're coming out of this, now that we're looking for this bundled service approach to on-site, it builds better communication and it builds a better entry-level point. As a combined service, our entry level will be much higher in that customer's organization than it is as a single point, and that's important. Higher you get, the better people you're talking to, kind of out of procurement in the middle management and senior management.

How -- in developing markets, I just wanted to show you, we look at employees, we look at revenue, we look at profitability and we build this market. And then we build submarkets that we can sustain and that we can grow. And what we found out in this exercise is when you have a $2.5 billion Janitorial company, have a $600 million Facilities company, a $600 million Parking company and a $350 million Security company, those companies sometimes have holes in where they are. So the Janitorial footprint is going to be able to allow these on-site services that maybe aren't in Raleigh. To be in Raleigh, be officing with us, and there's great growth opportunities. And we've also found in certain cities, we're less profitable than we'd like to be in some of those other operations, and that family environment will bring everyone up. So I think this organization -- I don't think, I know, that this organization is -- will create market expansion as far as our margins. And this obviously will fuel that, but a tremendous amount of work went into the Southeast portion, and the Northeast will benefit from it as will the Midwest. But the margin expansion of this is what we're going to see and what we're already feeling in the Southeast. And this is a work-in-progress. This has got -- virtually gotten rolled out 30 days ago. So as we do this and we gain more information, then we can report on that. And it's in what you do and what you show, not what you create. So we're really proud of what we've created. And with that, we've got commitments to the company and what we're projecting from synergies. And the synergies are coming from the organizations, in streamlining the organizations as we bring them into a single location. Back of the house, we've got efficiencies that are going to be gained. We have 5 or 6 high-level accounting people that I worked with for a long time. They've created 22 projects that will help sustain and modify and bring additional technology to what we're delivering to the field. And real estate. Consolidation of offices. And I can just speak to a fact. In Houston, where we started, we went from 11 offices to 5, and really 3 and then 2 satellite business because we needed to keep for mobile services a little building because they have big trucks and stuff. So really, main offices, 11 to 3, with 2 little satellites. What that means in dollars and cents on an annual savings is about $700,000 a year. Not every city in the country will be like that, but I think you'll see a lot of that opportunity also in the West Coast as we get there because that's where our breadth of all services is the deepest and because a lot of these companies were starting in California. Less in the Northeast and a little bit more probably in the Midwest. But the $3.5 million to $4 million number for '13, I've never missed a synergy number. I'm not going to start in '13. But as we mature that through, you see it's $9 million to $10 million in '14 with full year realization of $11.5 million to $12.5 million. It's an estimate. These numbers are very attainable. And as we get into it, I'm more on the bullish side of where we can go with that number than I am scared of the number. So that's where we are. We are on pace for what we have outlined in '13 and very excited about it. And what this does is when we get through this management organizational piece, it takes the uncertainty out of it for the employed. And that's the tough part about getting started because it takes a while to understand it and to educate, and that uncertainty is tough in the organization. We're kind of past that a little bit, and the enthusiasm is outpacing the uncertainty. And that's a good place to start to be.

So as we go from silos to matrix and we have market-based delivery service, we're going to -- the point of service, the quality of what we do -- we're bringing technology, so those managers that are out on the streets can be out on the streets. So from our back-of-the-room IT and accounting standpoint, we're going to be arming people with tablets so they can have the 5 or 6 things they need to look at everyday, whether it's labor control, whether it's a safety issue, whether it's a billing issue, whether it's a collection issue, when you're sitting in front of a client, where you can pull the invoice up and talk in real time. So cash management enhancement. But my goal is to get the people out to the customers so the touch point is there more often. So that's how, in my life, in the service business, you retain your business and you grow your business because it's relationships. And in the growth opportunity aspect of it, the new sales will come with the new products and being out in front of the clients. The bundled service will create new opportunities. We've already seen it. Not only new opportunities, but bigger opportunities. And I've been in this a long time, and this is the first time in my career that I have a $75 million to $80 million health care opportunity come to us through a long-standing relationship that we're integrating, that we plan on having fully integrated by the end of the summer. We feel that will be a long-standing relationship. And we feel that vertical, be it assisted care living that we really weren't in before, we feel that this opportunity easily can be a $200 million opportunity, because what we're finding in assisted care living is that they bundle where they kind of locate. And these are smaller locations in secondary cities, but there's one across the street usually, and we're finding that, that's under a less than positively performed industry, with little competition that we've entered into. And it is not unlike the bakery business. For those of you that remember OneSource, that ABM in all their years didn't know anything about, and when we bought OneSource, it was about $37 million in bakery business with a company out of Thomas, Old Georgia called Flowers, and now it's $65 million. And now Flowers was the stocking horse on the Hostess piece, and they're going to grow dramatically, and we're going to grow dramatically with them. So this extra service base, this on-site opportunity, the focus on verticals and the focus on market share base is what we're about. And as we get done with this rollout and the energy in the company continues to grow, that enthusiasm will help that organic piece of our business, outpace anything I've seen in a long time.

So thank you. And I'm looking forward to your questions.

James S. Lusk

Thanks, Jim. Nice job. I want to talk about the other segment here, which we're finally calling Building & Energy Solutions. This segment does include our Government segment, and Tracy has a very tough compare to last year. If you exclude the Government, he was basically flat organically. The pipeline in this business is very exciting right now. We just announced a huge energy job at Wright State for $25 million, the biggest energy job we've ever won. The pipeline here is really amazing. Tracy is not only responsible for this, but also for sales and marketing and a lot of the other initiatives we've talked about. So watch this space. This is our growth engine going forward for sure. So with that, Mr. Price, it's all yours.

Tracy K. Price

First of all, I am tasked with the responsibility of turning ABM into a sales-driven operations check machines, and we've got all the operational integrity you could ever dream of having. And to be able to partner with someone like Jim and be given the reins for corporate marketing and corporate sales, in addition to what we kicked off in brandings, pretty exciting stuff. And there's a lot that comes with it. The responsibilities that I now have and some that I've inherited, and I'll talk to each one briefly, the main one, and you've heard people talk about it, was branding.

And the branding was hugely important because there were a lot of new entities that had come to ABM and acquired by ABM, and we wanted something that resonated with the employee at the point of service. So what you see with the M person is we wanted it to be about them, and we wanted them to understand that they provide tremendous value to our customers. Now we have a little double entendre there because we do energy retrofits, which reduces the operating cost of the facility times the cap rate increases the value of the asset. So we are adding tremendous value to the building, and we provide tremendous value in the services that we provide to the building.

So the branding was important. I think it's been a home run. Everybody's rallied behind it, and we've used that to leverage into the marketing and sales piece. As Jim said I think earlier, Brett Knox has been charged with heading up corporate marketing. Bob Swanger charged with heading up corporate sales. Those 2 guys are working together to effectively drive sales and marketing by vertical, and then geography operations -- geographically delivered operations.

So we focused on several of the verticals early on, aviation, health care. Henrik made some acquisitions in those spaces, education, high tech and others, and we'll discuss them a little bit. But one of the biggest issues for us was how do we convey to the employee at the point of service exactly how important their job is, what is it that they're tasked with doing and how are they supposed to do it so that we perform the work the same way in Alaska as we do in Miami as we do in New York? Part of that is covered in this learning and quality group headed by Greg Lush. We've done some incredible things there that we'll be sharing with you folks in the coming quarters. But as simple as putting QR codes and tags on pieces of equipment or pieces of operating equipment for the employees so that they can scan it with a PDA and actually see how they're supposed to be working on this piece of equipment, what the preventive maintenance measures are, how effectively to troubleshoot and diagnose any problems with the equipment, really state-of-the-art stuff, driven to the point of service in what was heretofore a pretty mundane labor business.

The high-growth areas or the bigger growth initiatives with the larger margins, ABM Energy. We've talk about the Wright State job. I'll give you a little more background on some of the other things we've done there. But the important piece of this is, prior to our involvement with ABM, they were only a certain sized project we could really take on. We had won some jobs with the government in the past, and the government came back and said, "Eh, you're actually not big enough to do this work." Balance sheet like ABM, 100-year operating history, public company, very strong, it assuages the concerns of customers for us to be biting off bigger bites of the apple on these larger projects.

I think the largest project we had ever done in the history of the company was about $10 million or $12 million in energy retrofit. Most recent one is $25 million. That's substitute. We have a pipeline in that business that is 100% greater than it was at this time last year. We have a lot of momentum. The really important thing to understand with our Energy group is these are pay-for-type contracts, which I'll explain a little later. But moreover, we've only been in 10 states with this. So we focused on the states that had the programs where we could drive the economic benefit, take advantage of some tax laws or rebates, and now we're rolling that out to another 11 states this year. So this should be a high-growth area for us.

ABM On-Demand, I'll get into a little bit later, but that's really the vendor management platform that we have in place. And then we're tying all these together, and this is the first time we've talked about this, with a platform called Unified Workforce. It is effectively a middleware platform that's going to tie all of the elements of our on-site business together with our mobile business, together with our On-Demand platform so that as we look at market geographies, we can go with the portfolio labor approach. That's going to change our industry. And we'll talk more about that in the coming quarters.

As far as operating businesses that I have, electrical and lighting. I think a lot of you probably read about CRI yesterday and what's happening with LED costs and the fact that they're trying to drive that next wave. There should be a 10-year retrofit wave coming in LED, and we are absolutely poised to take advantage of that. HVAC and mechanical is the core of most retrofits. We have a very confident group that Scott Giacobbe leads. He is actually responsible for many of these businesses here, electrical and lighting, HVAC and mechanical, as well as the franchising group. And the franchising group allows us to proliferate our brand more quickly with more capital efficiency than any other way that you could do it. If we were trying to be a serial acquirer in the mechanical and electrical space, it would take us 20 years to get the kind of coverage we have today. We have over 100 mechanical locations, near 100 electrical locations to augment what we're trying to do in the energy business, take advantage of the incumbency that ABM has with 25,000 customers around the country and really bring a different solution set and a bundle to these customers, which is also significantly higher-margin.

Beyond that, our government services business, Ross Thompson's going to talk to. And Healthcare was an acquisition that Henrik made of HHA that we combined with our ABM Health group and HBS-ACC. There's another couple of hundred million dollar vertical there, and I'll talk to that briefly as well.

You've seen this model. We've talked to it before. But just to emphasize or reiterate, we've aggregated all of the on-site assets under Jim McClure. That is arguably the hardest work to do. It's the most technically demanding, and it's also the lowest margin. So you have a lot of the big Fortune 500 companies focused on the trophy properties, the big cities, all kind of eviscerating each other relative to margin and continuing to compress those businesses through competition. Harder to do the logistics business of the mobile enterprise because it requires a different G&A infrastructure to accommodate doing the work. And so therefore, we're entitled to better margins.

But the thing that I want you to understand is it's very, very difficult for on-site businesses to go mobile because they don't have the infrastructure to execute it. It's very hard for mobile businesses to go on-site because they carry too much G&A to effectively work at the margins that on-site affords you. Then you have the whole on-demand platform that 7,000 vendors across the country, that are doing effectively local labor services, the same 50 building trades that we do on the on-site business, only from a managed platform perspective. The important thing there is it gives us the ability to backfill any of the services. You heard Jim earlier say we don't have complete coverage in every market. We can backfill those services where there are On-Demand platform. It's a logistics business as well, but it's basically taking a customer work order and brokering it to a local labor provider. So again, if you're not legitimately in that business, you're not going to be able to subcontract with local labor and drive quality to maintain it at the standard that your on-site business is. So we believe that if you're legitimately in the on-site business and you operate that tremendously well like we do, you're legitimately in the mobile business, and you're legitimately in the on-demand business. And you tie that all together with one middleware platform, that this company becomes one of one.

And we have some other strategies we're going to be bringing to the table here. One is leveraging ABM's purchasing ability. Heretofore, that had never really been aggregated and coordinated. And you heard somebody talk earlier about getting from the procurement guys up the food chain. We're going back down to the procurement guys and trying to drive rebates, discounts and things, just aggregating purchasing. An example is when we started acquiring businesses in our previous life, we figured out we were buying about $400,000 a year from Grainger. In order to be a big customer of Grainger's, you needed to buy about $1 million a year. We started driving more of that purchase decision. We still don't have an e-procurement platform to compel those behaviors. But manually, we're doing as good of a job as we can.

Last year, we bought $14 million from Grainger. Okay? We've enjoyed significantly better discounts. Now we are getting rebates. Now we are getting additional coverage. Now we're rolling that out and proliferating it to our electrical businesses, as well as our mechanical business and taking it to the on-site business. So we'll be able to talk in another quarter or 2 about some of the things we're doing with that purchase group.

So as far as an end-to-end service delivery system, this graphic kind of outlines what we're doing in urban, suburban and rural environments. And the reason why we did that is because of what we recognized that's happening in the marketplace. There's consolidation in all kinds of articles. They are going to a mega provider or a mega carrier concept. We want to be the mega service company to provide that ecosystem with services. In order to do that, you have to be just as good in San Francisco as you are in Orange County, as you are in Barstow. So we have a lot of customers that have high-rise buildings in one city. They have mid-rise, low-rise data centers in the suburbs, and a bank branch 300 miles away. If you try and take your on-site business to a bank branch 300 miles away, you lose money. If you try and take your mobile business to a bank branch 300 miles away, you lose money. If you do a deal with a local labor provider and have him integrated on your same platform, you drive good value for the customer and you capture that margin. So again, in order to legitimately be in on-site mobile and On-Demand, you have to be able to integrate those functions and then stretch them across this urban, suburban and rural footprint.

If you look at the aviation market, and Henrik made a significant acquisition there, today we have over $650 million in that vertical. That vertical wasn't a vertical a little while ago. Okay? We had a couple hundred million dollars worth of that business. But again, it was pretty heavily siloed. If you look around ABM, we have subject matter expertise in so many of these different vertical markets. We have been holding summits. We have an aviation summit, we had a health care summit, we're having an education summit. Every month, we're getting all the stakeholders to come to the table, and it's remarkable because, I was telling Jim it's -- I look around the room, it's like there's gold bars laying all over the ground, and nobody thought to pick them up, put them in a sack and take them to the bank. That's how much opportunity there is for ABM. We have people in Parking with this expertise, in Janitorial with the expertise, in Security with the expertise, in Engineering with the expertise, in the mobile business, in the energy business. But none of these assets have ever been brought together before. Now we're doing that.

If you look at the evolution of consolidation in the airline industry, they're going to this mega carrier concept. Okay? Nobody is -- nobody today can service the major hubs like we are, the mid-sized airports like we do and then the regional airports and really in the rural ones as well. So now you have the airlines wanting to provide a service continuum with whatever quality experience they're trying to affect. And obviously, some do it better than others. But whatever it is they're trying to maintain, they need to know that they're giving the same customer experience in an outlying airport as they are at JFK. And we are really truly uniquely positioned to be able to do that because of urban, suburban and rural, and being able to provide this panoply of services across all those environments. Very, very important.

The Air Serv acquisition gave us a significant capability, and it was complementary to what Jim's businesses do, just doing it a little differently, and also giving us a much bigger footprint. Now kind of -- one of the fun things that recently happened, and we were just awarded it yesterday, is -- through a lot of our international ambitions and credibility in the aviation space, we were just ordered Terminal 1, or the first terminal, at the New Doha airport in Qatar. And that job is a $10 million project, 3-year deal. It's for the Emir's private terminal. The larger contract is going out hopefully in the June/July time frame. But again, because we have this footprint and we do have international chops but we have such a deep domain expertise, people are seeking us out to be providing them this integrated services for their ecosystem.

You look at the health care market, same thing taken place. Okay? They're consolidating to these mega providers, but the mega providers are doing something different than they used to. They aren't all on hospital. They are figuring out, "We got to catch profits in the other waves that are out there." And they've moved some of these services that were traditionally on hospital into medical office buildings. There aren't very many companies that do hospitals in office buildings. You take that out further to surgical and acute care centers, now you've got this service continuum again that needs to be met, and they can have MRI machines in those buildings. You know how much outpatient surgeries going on in these smaller centers, things that once were reserved for the providence of the hospital that are now being done 120 miles away, but they still have the same demand for quality of care and service level. And so again, if you can say to them legitimately "Hey, we're in the hospital business. We're in the medical office building business, and we're in the acute care business, and here's how we take care of the service continuum," it's pretty compelling. So if you look at the consolidation in industries and you think mega provider, mega carrier, who's the mega service company, that's going to be us.

In terms of energy, claim to fame there driven by Scott and his team, and they have the stripes on their backs to prove it. We have demanded that we would be 100% referenceable in this business, and we are. And over the last 9 years, we've done 60, 70 jobs. It's very hard to go into an existing facility, provide an effective energy retrofit, guarantee a savings outcome and have all raving fans. These guys have done it. They've done a tremendous job. On average, clients are saving 28% in energy. Last year, we helped out on rebates. The rebates are continuing. But across the spectrum, again, in terms of the panoply of services we provide to buildings, we are doing all of this turnkey, in house, ABM folks doing ABM work. If we subcontract services, it's because we don't have our clusters of assets in those areas. But it's a huge difference to be able to go to a customer and say "Here's all of our references, call them all. And oh, by the way, we do the work. And since we're doing the work, we don't have to broker any of the services. So we can either do more work for the same money, or we can do the same work for less money." That's very, very compelling when we go up against the ESCOs or the manufacturers, because those guys are typically brokering the services. They are not providing them turnkey like we are.

EV Charging Stations is an interesting world for us. We're probably the leader in installations. It's a good door opener. We use it to bundle additional services. And it's just one of the many technology pieces of energy that we're involved in. The renewable side, you'll see more about that. We'll have some announcements coming up in coming quarters as well.

Just wanted to give you an idea, a case study. Again, 21% energy reduction. This is a huge campus in Ohio, $25 million job. I would volunteer to you that this is not unique to this campus. There are thousands and thousands of these opportunities across the country. There's one company that I'm aware of that's 100% referenceable, and that's us.

This is another job that we did, Emery County schools. The example here is we got the first job, then they gave us another phase, then they gave us another phase. But again, 28% energy reduction. This was a $6.5 million job. So if you look at the evolution of our business, crawl, walk, run is our strategy, always has been. We perfect what we're doing on smaller jobs, then we take bigger bites. So we're not going out tilting at windmills and taking huge risk. We're doing this in a very programmatic fashion so that we know that we can be successful and build on the relationships and the references that we have. Because it's all reference businesses.

This is a great example for those of you that go into parking garages and wonder why they look like they look. There's an opportunity to do wonderful refreshes in there. This was an opportunity created by ABM for ABM with an existing customer. They wanted EV Charging Stations. We went into look at installing the EV Charging Stations. Lo and behold, the place was antiquated, looked terrible, had a lot of dark spots, energy consumption off the chart. And so we promoted to them, "Hey, why don't we do this all as a bundled deal? We'll completely cover the pay for out of the energy savings." It improved dramatically the quality of the lighting there. It was a huge payback, great success. But again -- and this is with a public entity. So when you look at the opportunity to do these comprehensive energy retrofits, we've done them in the verticals, we've done them in the government. The lagger has always been commercial property management, to be honest with you. And we've got some solutions there. You can probably talk to Anthony or Henrik about -- hopefully what's coming with our FinCo model. But we really do think that we've got the long pole in the tent figured out on this and that this should be a huge growth opportunity for us going forward. And another example of going into a city, going into a governmental agency and creating money in their budget out of their operating expense that they didn't have to spend on capital projects. Works great.

With that, I'm going to turn it over to Ross Thompson so he can talk about the government vertical per se. And for those of you who don't know Ross, Ross came to our company. He's a retired 3-star, had the entire army material procurement budget under him at the last job he had, $88 billion, has a deep, deep knowledge of what we do in our business, has been with us a couple of years, and he's going to brief you on government. Ross?

Ross Thompson

Well, good morning, everybody. I'm really glad to be here with you today. And one of the things people say all the time is, "It's so difficult to do business with the government. In particular, the federal government. Why do you do that?" And I'm going to give you some numbers in just a minute that will tell you why we stay focused on the government business. And it's not just federal, it's also the local and the state governments as well.

So first thing up here is what is government services all about? And that's sort of the mission statement. So that comes sort of military background. And the first thing you've got to do is what am I about? What's the purpose of my organization? And for government services, it's -- that statement is up there right now: cost effective, efficient, sustainable infrastructure, specialty service solutions, we'll talk about that a little bit. But the keyword up here, it's not just the Federal, it's the local state and Federal government clients and the vertical integration. You've heard that many, many, many times today. It's taken that vertical integration strategy and pulling it through to our government clients.

When we looked at our own data, we found out that we had, inside of ABM, about $500 million of the $4.2 billion, $4.3 billion of revenue was on government clients. About $180 million of that, the Federal government but then pockets of support to local and the government clients all over ABM. And so our thought was, how do we pull all that together and look at the Government business not just as a business unit, standalone business unit that was primarily focused on the Federal Government business, but also as a vertical. And let me just give you a couple of stats here that I think will make the case. The Federal government owns 500,000 buildings, 3.1 billion square feet. We're a service company, why wouldn't we want to go after that market? GSA alone, 11 regions, spends about $66 billion a year, a lot of that on supplies, but a lot of that also on the building infrastructure. The Department of Defense, in just FY 2013 is going to spend about $16 billion on maintaining their facilities' infrastructure.

In the local government side, there's about 30,000 cities and towns in the United States, there's 3,143 counties, there's 37,000 special districts and that doesn't include school districts, and there's 310 Indian reservations. The state government -- all 50 states have some kind of incentive program for energy efficiency. They ebb and flow depending on who's in the governor's mansion and the different programs, but they all have some kind of incentive program and our energy group well aware of all those incentive programs, and we're really focused on going after that marketplace as well.

And then from a standpoint of more efficiency, there's a lot of procurement co-ops that are already in place and that are being formed to tie together the municipalities and the cities and also the state procurement officials so they get a better bang for the buck, if you will. And we're well positioned as the big service provider, ABM, to be able to take care of those needs as well.

Just a couple of general observations here, and I'll talk to this, one of the things where we lost about $60 million of revenue opportunity in 2011, 2012 was when the U.S. made a decision to get out of Iraq very quickly. The overseas contingency operations funding, that's not part of the base budget. There's about $87 billion of that that's supplemental funding by another term. That is -- has been declining and will continue to decline as the U.S. pulls out of Afghanistan with a deliberate strategy in 2014. Our focus is going to be on this base discretionary funding. And it's not just the Department of Defense, it's also the other government agencies. And when you look at the information that's there, there's a lot of money in the other Federal government agencies and I'll just give you some facts and figures too.

This is just discretionary funding. The Veterans Administration, about $61 billion a year, and that budget is not being decreased at all. The State Department, about $50 billion a year, again, one of the departments of the federal government that continues to increase in the out years. Health and Department of Homeland Security, about $40 billion a year; Energy, about $27 billion; and then the Intelligence Agency is about $56 billion a year. Conservatively and when you look at what they spend inside those discretionary budgets, even at a 5% figure, there's $14 billion to $15 billion a year of facility needs that all those agencies have got.

There's two 4-letter words in Washington these days, one is debt, and the other one is 13 letters and that's sequestration. It has caused a lot of delays, and I'll talk a little bit about that on the subsequent slides, maybe some on the Q&A later on. But at the top level, I think there's going to be slower delivery of contracts for the next couple of years because of the impact on employees being furloughed, and I also think the dollar value of the contracts is going to be a little bit less. But I think we're well-positioned to stay where we are right now and indeed grow in the out years.

And then our forward-looking government strategy is really pulling those pieces together. Looking at not just the Federal government but also looking at the local and state, and then looking at vertical integration that we're doing in healthcare and in aviation and pulling that expertise on the sales and marketing delivery into the space that services the government clients.

I've talked about withdraw from Iraq in 2012. A very deliberate drawdown in Afghanistan. There will be, in my view, probably 3 enduring bases in Afghanistan because even after most of the troops come out, there's still going to be a presence there for special operations, a presence there to do the training for the Afghan forces. We have the contract and just one in addition to the contract for 1 of those 3 enduring bases in Afghanistan. The squeeze on the domestic budget will be there. The politicians in Washington made this decision by no decision. There will be an impact on the appropriated dollars due to sequestration. But there's a lag effect because a lot of the spending doesn't happen in the year that dollars are appropriated, it happens in the subsequent years. But it is going to have an effect.

The Army and the Marine Corps have spent the last couple of years trying to become smarter buyers, and they have consolidated their logistics contracts and we are on both of those major task order contracts. EAGLE for the Army stands for Enterprise Army Global Logistics (sic) [Enhanced Army Global Logistics Enterprise]. And then the U.S. Marine Corps contractors called MCLOG, which is Marine Corps Logistics. We are on both of those contract instruments, both as a prime and as a sub. As you well know, a lot of the Federal government work is designed to go to small businesses, 8A or set aside, and where we position ourselves very well is our joint venture relationships and our matter of protege relationships. In the government services business unit, we have 10 of those joint venture relationships. So we bid on EAGLE. We've got 6 bids in right now. We'll start to hear in March through June on those 6 and another 5 that we've got that are being turned in right now. And we're positioned to be awarded those contracts both as a prime and as a sub.

Because of 2012, we turned our emphasis -- because of revenue opportunities were coming down, focused in on gross profit performance, and we're able to increase our gross profit percentage even though the revenue was coming down. And then I've talked about already, we've been collaborated, kind of repositioned our government strategy. One of the key things there is deciding what we want to do. And then it's always key to get the right people. We have made some very, very smart hires on people that understand state and local governments, people that understand the Federal energy marketplace. And we're tying all those pieces together by better teamwork and better collaboration and the cross-selling that we talked about already.

So these are the 4 big pieces: The diversified contract portfolio; the local government sales team, 3 hires already, already demonstrated some success there; our Government business development capture aligned with our vertical market expertise; and then on the construction management, inside our government services business unit today, about half of their business is operations and maintenance and civil for the corps of Engineers. About 30% of their business is construction management, primarily for medical facilities for the DoD and about 20% of their business is tied to the supplemental funding that's the overseas contingency operations.

The only true construction management capability inside ABM is inside the Government business unit. And we're very purposely taking that expertise as we win some of these large projects and as we have a lot of these large projects in the pipeline and using that construction management capability to be able to manage the overall project, which is difficult to do, but also then turn to ourselves internally and self-perform a lot of that work instead of subcontracting at somebody else.

The light -- there has been 4 language contracts awarded this year, we've won 2 of them. We just found out on the one that was the third one there, just yesterday, that we didn't win that one, and I attribute that to 2 reasons. One is I think the government is spreading its risks, they never want to put all their eggs in 1 basket if you will, and have 1 service provider. So we've got 2 of the 4 contracts. They're worth about $12 million a year combined, about 190 linguists. Even with the drawdown in Afghanistan, I think we'll settle on about 120 linguists from an enduring perspective for the next couple of years.

Our current business is really focused on defense facilities and medical centers. We do about 20 hospitals and major clinics for the Department of Defense today. And as we look at the HHA acquisition and the ABM Health, how do we pull their processes and the great things that they do on clinical engineering and facilities management? How do we pull that into the Federal space and win some more opportunities there? And then for 2013, just repositioning ourselves to look at not just the Federal government from a DoD perspective, but also look at all agencies, especially the ones that are growing, and also look at that vertical expertise across the company and pull that into the government space. So I look forward to your questions.

Henrik C. Slipsager

Good morning. So what took us so long? I always -- when I'm out talking to investors all the time, they focus very much on the Linc acquisition. And trust me, we have done that too. But you have to go back a little bit and see where we came from. It's probably 6 years ago, we bought OneSource and became a very dominant janitorial leader. But also probably 4 or 5 years ago, we saw the market was changing away from being a single service market into be a multiple service market. We also realize that that could not be happening with janitorial as the lead service. We needed something different. At that same time, we started to invest heavily on the IT side, knowing that one of the key competitive parameters going forward will be systems and ability to delivering on time and ability to give information all the time.

Then the big day came and we bought Linc, November of 2010, long time ago. And we ran out at that time and said, that is a transformational acquisition. Why was it transformational? Most acquisitions you do, you either do it in areas you're in, or you do it as a separate investment with a separate pay back, if you're a holding company. But we did this acquisition to make sure we could see the integration of Linc into what we have could create the best and biggest Facility Service operation that this in existence liability [ph]. We believe that the technical side would be the lead service going into the facility service market and we believe that the facility service market will be the market where we can get to the end user, while on the single service market, we would end up being subcontractor or sub to a sub. And when you are a subcontractor or sub to a sub, you truly become a commodity and profits will drop over a long period of time.

The Board was very supportive in making this transformational acquisition. I'd say the hiccups we had was some government business went away, we just talk about that before. But what you don't see is, what we've got was, and saw some of it today, hopefully, take legal expertise we never had before. We got quality of people we haven't seen before. And with the branding, we were able to create one ABM. I don't think anybody understands how difficult it is to get a common culture when you buy a company like Linc, who has a very strong culture. For good reason, they're extremely successful. We had a very stubborn old culture and we've been successful, we believe, for many, many years. But how do you get the best out of both organizations and create a joint culture where everybody goes out and say, ABM here we go? I'm so proud today when I see the marketing, sales people, screaming ABM louder than I've ever heard. So the operation has been a success and the patient didn't die.

So now we're in the situation I think we're done with the acquisition from a cultural point of view, we're done with the re-org that we're in the process of doing. I know Jim is looking at me now and say, "hey, I'm in the middle of it." But in my world, we're done, and now it's just execution. Execution is a little easier than planning and strategy, et cetera, et cetera. Especially we have a guy like Jim, and a guy like Tracy who knows how to execute.

So let me just -- alright, let's go back to these things we were talking about before, realignment of businesses. What Jim went through very clearly was it's going to create savings and that's the only number you probably got out of us today, sorry about that. But the fact of life is, it will create growth that we haven't seen before. Jim and I, going back many years, are trying to break the code of cross-selling. We broke it. And I mean we broke it. And I hope you're going to see tremendous impact of this not only short term, but long-term. The savings, I think, is one area we're very strong. We feel very comfortable that we're going to deliver the savings that we promised we'll do.

Geography, I think, speaks for itself. Nobody can match us on geography. So when you have a situation that Jim talked about before with the assisted living, nobody can match us. It's just impossible. And with the international expansion we're going through right now, which we love -- we're doing through the verticals, because it's a logical way for us to grow. Because if we have to go out and buy companies in every single country there is, we won't be done the next 100 years, this is the right way of doing it.

Our technology, we have spent and invested tons of money in technology. It helps us areas where you probably can see it as -- outstanding receivables has been down over the years, we're generating cash flow, all system-related. Jim is now getting information, and Tracy is getting information faster about the jobs that we have in the past that leads to faster decision and profitable decisions. And our ability to communicate with the client exceeds anybody else. You have the new healthcare reform coming out, Obamacare. The fact is that we have systems in place, they'll make it easier for us to absorb that challenge. So systems have meant a lot, it's been painful. And for those of you who deal with IT people, they always want more, but what they have done, I think we have an IT group that very well understand the operational needs, which is the key.

The sales and marketing culture, something ABM historically has been very weak in. That's always been [indiscernible] -- great operating company. But with Tracy and his team coming in, they had a marketing sales culture that we have now become -- made an ABM sales marketing culture. They took the lead and, man, they are leading. They're doing things that we would never be able to do. So that's going to create growth. We made investments, some of the savings Jim creates, Tracy spends, that's how it is. But nonetheless, we will get back payback later in form of the organic growth that we're all are praying for. And the vertical markets, I think, speaks for itself. We already seen growth in those vertical markets, even though the acquisitions happened 4 months ago.

And lastly but not least, mergers and acquisitions. Mergers and acquisitions is something that you probably see us slow down, doing short-term future for sure. We have made some very successful acquisitions. But with the work Jim has in front of him, with respect to the reorganization and the investments that Tracy is putting into the sales and marketing, it has to be a very, very good acquisition in order for us to even consider. So that's where we are right now. And again, Linc acquisition, the best one I've ever done in my life. Now open for questions. Thank you.

Question-and-Answer Session

Michael W. Gallo - CL King & Associates, Inc., Research Division

It's Mike Gallo, CL King. Probably, a better question for Tracy or for Jim, I was wondering when you look at the changes you're making in the sales and marketing, away from the silos, I was wondering if you're getting the customer to a single point of sales contact or that's something that you aspire to and they're still going to go to the individual contact and the individual verticals? And then also in terms of the change in the compensation structure to get people to sell the OneABM, I was wondering if you can go a little more detail on exactly how that's going to work?

Tracy Price

Yes, so first of all, marry that to Jim's geographic strategy on the operations, we're putting in market sales leader in place. We've already done this. We're incubating it. We've done one in southern California with the sole ambition of policing how everybody behaves in the sandbox. Because we're not going to change the reporting structure inter-division. With the sales guys, they're all going to have their same plan, they're going to report up through their P&L. But their incentive to collaborate and the sales compensation is being changed and weighted so that everybody eats out of the same -- I told everybody we're going from rice bowl to rice trough. We'll keep putting the rice in, you got to eat together. And the important thing there is that if you let people be myopic and you only put the small target in front of them, that's what they're going to aim at. If you tell them there's a panoply of services that we can provide, and you're going to get compensated an incentive to bring that customer in. That's the win. We've got 50 different services we can sell. Either discreetly to add one more or solve one more service or collectively unbundle them or in pieces. Originally, everybody thought the world was going to move towards the integrated facilities management model and the bigger companies are. It's kind of the mega -- the Shells, and the HPs and those guys, that's maybe 5% of the market. So we need to go after the discrete services in their large, mid-rise and smaller customers. But we need to incent everybody who's carrying an ABM bag to win on every service we provide. So what I don't want is guys driving on the road, seeing a hospital, seeing an airport and seeing a 7-Eleven, whatever, and not thinking they can go sell in those markets because they aren't in them. So the sales and marketing guys are putting some marvelous collateral together, so that these people can be confident in front of that end user customer in every vertical, and they'll be incentive to do that. As far as the overall recognition, and I think this is the most important thing and this is what Jim is working on, we understand that the game is won or lost at that branch manager or General Manager layer within this company. And we are organizing all of these people and incenting them and kind of raising and lifting that profile up so that there's a great awareness of that job role in each geography. And these guys who had never been peers, had never been partners, had never been at conferences together, at meetings together, don't know each other, literally. We're holding meetings and guys are meeting for the first time, they worked for the company for 20 years. That's a cathartic moment for this company, and people are on fire. So yes, we're incenting them to behave properly, but we're also providing a collegial environment for them to do the right thing and they're doing it.

James S. Lusk

So to answer your question on the more specific side, since we just rolled out the Southeast region, what we're doing right now is we're creating an incentive program that will be communicated in the next month or so to that group which will go to the other rollout regions, which will basically, the individual units -- the individuals will be payed on the collective market segment success. And there'll be a benefit in that for them, but we're dealing through human resources right now, but we will rollout that out to you. When we roll that out to the field, we will roll that out to you, but they will be incentivized and have skin in the game on their market segment being successful not their individual silo.

David Gold - Sidoti & Company, LLC

It's Dave Gold at Sidoti. Just a couple of quick questions, the other side of that, essentially, the buyer at your claims [ph]. When you go to these buyers, do you have to sell them on the concept of buying multiple services, a? And b, once you're sort of there, do they ascribe value to it? Do they care? They're obviously, presumably giving up some leverage by giving you a sort of a broader base contract. Is there enough in there for them by way of saving whether it's time or headache that folks are willing to do that?

James S. Lusk

Yes, David. They don't like to be in the Janitorial business, they kind of don't like engineering or security or facilities group, so what we're doing is, some people love it, some people are a little afraid of it. As we migrate into this and as we're successful, it's a same old story. People don't like to be the first one in the tank, but we've got a lot of people that love the concept. Some of the major users in the commercial side, this is how they run their companies. So they're seeing and they're asking us, "what took you so long?" And we feel confident that, that will grow and that will be a basis for us then to market this down the road to others, and I think ultimately, there's a price point enhancement for them. There's a service entity. Some people like a single point of contact, some people don't. So it's -- we'll be able to go end-to-end as Tracy said, and no one else can do that. And the big thing for them right now is what we see them moving away from. As end users, is they're moving away from paying someone to manage and subcontract -- the big deal -- managed and self-performed.

Henrik C. Slipsager

Yes, I want to add to that. Give you a couple of examples. Jim talked about the bakeries before, it was a very small piece, $60 million to $65 million. For the first time, we just got a contract, I think, starting in a month including security. So here, you're expanding from one service to another. Was that because the customer was ready or -- I don't know. But the fact is that we're talking about these assisted living homes. Now we're out there seeing from the team point of view. We know there are tremendous opportunities to save them a lot of money [indiscernible]. So it depends on the situation, the management, timing and everything else. But if you're not trying to present yourself as someone that can solve it, trust me, you won't get it.

Tracy Price

I think the other important piece is that you have to look at the percentage of the market that's not outsourced. And so you got your current outsourced market providers. And for them, maybe they want to take the leap of faith and have you provide all services, or maybe they're fine with you providing a half dozens discrete services, and simplifying billing and the point of service. But for the people who are taking that leap of first time outsourcing, asking them to eat the elephant all at once is really hard to do. But if you say to them, "hey, tell me what your pain point is. What service provider are you not happy with?" Okay. Well, I don't like my landscaping. Give us a shot at that. And then it's the incremental boiling the frog kind of analogy. So if you can provide one more discrete service and you keep winning, then the customers' going to give you more and more opportunities to do that. So I think we're looking at the trends and the vectors all point in the right direction for outsourced service growth which inures to our benefit and then we will have some partner customers that we compete with. That's going to happen from time to time. But I think we figured out a way to work through that.

Unknown Analyst

Tracy, I have a question for you on the mobile

storage platform. Can you just maybe talk to what the incremental cost might be to build out this platform? Because I guess it's not entirely clear to me what you plan to self-perform versus franchise versus outsource?

Tracy Price

So the mobile service platform writ large?

Joe Box - KeyBanc Capital Markets Inc., Research Division


Tracy Price

Okay, so ambition for us was to be legitimately in the mechanical and the electrical businesses. The predecessor companies, when we first acquired them, I think we had 9 company locations. Now, we have 25. I would love to have $1 million worth of EBIT versus $125,000 worth of royalties. But the reality is, these guys have territories. When they become available, we'd like to be acquiring them. No different on the electrical side. We have half a dozen electrical and lighting locations, and we have 100-plus franchise locations. The reality is if we -- to Henriks' earlier point, if we wanted to try and go to market by owning all of that, and be a serial acquirer, it would take us 20 years. I mean, it's just not doable, and we're not a consolidator and I never thought that, that was a real good model to begin with. But with our -- we have a program called ABM Connect. We tied together the mechanical assets in the market with the electrical assets in the market, and we provide kind of the supervision and oversight in project management so that we get the same quality, same outcome. And yes, we don't make as much of the bottom line profit, but it's a great flanking maneuver for those local providers and our local franchisees, when they're competing against a Johnson Controls or one of the bigger companies. So I think it's kind of the best of both worlds. We have to drink the Kool-Aid. We have to use our own systems. We can't just espouse that they should do things that we're not willing to do ourselves. So I think it's important to have company-owned locations and franchise locations. But I think we're indifferent as to whether -- if we were to proliferate more quickly with franchise locations, again, it's more capital-efficient than acquisitions. Acquisitions tie up resources. I think Henrik would rather make larger acquisitions than smaller ones. But if we have optimal geographies where we have a cluster of assets of the on-site world that Jim has, yes, we'd like to own those markets. But we've got pretty good coverage in the U.S. today. That is a great expeditionary capability for us as well, so we have a lot of franchise locations now in Europe and Eastern Europe. We're proliferating down in South America. So I think that ambassador opportunity for us globally in the franchise business is better than making those acquisitions, and then having the verticals take us into new environments is the right way to go.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Andrew Wittmann from Baird. Just a couple of questions. One, just to clarify on some of the target synergies out of this deal, yesterday in the conference call you mentioned, I think, $14 million cost synergy number. In today's presentation you said it was going to be $4 million this year, and is that another $10 million next year or $10 million total through next year?

Henrik C. Slipsager

$8 million more next year.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

$8 million more next year.

Henrik C. Slipsager

And we have a $3 million investment market this year also. So maybe impact one year, this year.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

$3 million of marketing this year?

Henrik C. Slipsager

Of marketing investment.

Tracy Price

Sales and marketing.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

So the $4 million this year is actually like $7 million net of that?

Henrik C. Slipsager

No, it was $1 million net of $4 million. Net $1 million of $4 million. $4 million in cost savings and $3 million invested.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then but now kind of looking at a top line, Henrik, clearly your growth rate sounds like you're optimistic about that accelerating from today's levels. Can you give us kind of a minimum -- and I know the economy has been something that's been kind of clouding up the picture. But in an environment that we're in today, do you feel this is 200 basis points of growth rates? I mean, where do you feel like we should put boundaries around this?

Henrik C. Slipsager

Let me check the presentation, I didn't see any numbers.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

That's exactly why I'm asking. Because the numbers that we got were in the cost side.

Henrik C. Slipsager

You know what, it's -- I can only tell you what we're doing and how we're doing it. I can only tell you I'm very comfortable to say the growth this year will exceed last year. And I'm very comfortable in saying the growth in '14 will exceed the growth of '13. I'm not going to sit here and shoot 2.6% growth out, 9.2%, I don't know. Because there are some closing issues always, there are some starting issues, and God knows I've hurt myself over the years by assuming certain things. But I can tell you the growth will be greater than you've seen in the past this year based upon what we have gotten already, and the growth next year will exceed '13.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got it. Just interestingly, I thought the map that showed your kind of international exposure was different. And actually I didn't know that there was ABM exposure in various places in the world. Are the returns on some of your more far-flung personnel in Asia or in Africa or even in Europe? Do you have the density there to justify those returns? Or what's the long-term strategy? Is it to build that out or to maybe consolidate more at home?

Henrik C. Slipsager

In general, our customers globally happen to be in U.S. government. So you can look at it, it's under U.S. law, it is U.S. contracts. So we do hospitals, we do other stuff in areas where we are the prime contractors. So you don't need the same infrastructure in place as you would need if you have a new job in London or other places. So the growth you'll see from our side, in my opinion, will still be with the government on the global side, where the U.S. is still our prime customer. And you will see growth hopefully on the verticals as Tracy has talked about. We've got Doha Airport now, we just started Glasgow Airport this quarter. We've got Heathrow, hopefully we'll grow Heathrow. So I'll say the geographical platform is true and factual, but the customers might not be global customers [ph].

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got it. And then just one final question, and I asked you this last week at the Baird Conference was on healthcare, and I think it's an important topic. Can you just kind of give us your thoughts on Obamacare and what that means for the company in terms of how compliant your plan is today? As well as how many people may be affected of your hundred and plus thousand of people?

Henrik C. Slipsager

Right. Well, based upon what we have in front of us right now, because Obama have shown a tendency to change over time, we are planning to -- first of all, we didn't make the rules, the government made the rules. It is our opinion that it would be paid by customers. For us, it is like a minimum wage increase. So a key thing with Obamacare versus a minimum wage increase is it's different from area to area. Out of our 110,000 people, around 27,000 we believe, will be impacted by it. We look at that population having 2 or 3 choices. And you go to the client and explain to the client, choice number one is, you can change the part-time labor. By going to the part-time labor, you're attacking a different labor pool and probably have higher turnover. That's the downside, the upside is there's absolutely no Obamacare care solution in the part-time employees. Right now rule's under 30 hours. We do believe that's going to be changed, lower, probably to about 20 hours, but that's just pure speculation on our side. Alternative two, we can keep the individual 8A healthcare option. And according to the rules, you cannot have the employee pay more than 40% of the package, which means we have to pay 60% of the package. If it's over that, at the same time, the cost cannot be more than 9.5% of his wage. So now back to the real world, a guy makes $10 an hour, he makes $400 a week, you can charge this guy $37.50. Or over the year, $1,600, $1,700. There is very little likelihood that this person can afford to take this plan if he makes $10 an hour, it's a lot of money. So we believe that the number of people that are going to take that plan are going to be well below 10%. That increase we will have in cost for the 10%, we will charge the client. We will not take the penalties the way it's said right now because if you have 1 person take the penalty, the whole company have to take the penalty. And that will be an additional cost of I guess $235 million. Not in my plan. And we expect most contractors will probably take the advice we are taking. I think the difference is that it's going to be difficult for this $50 million, $100 million, $150 million company to offer different choices while it's relatively easy for us. I'm saying that looking at my HR person, very easy for us. So at the end of the day, I think it's doing exactly what it was not supposed to do, it's going to hurt small business, it's going to benefit us. We look at this as an upside, not a downside.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Just a point of clarification on that one, for the employee that opts to not take your insurance, is there penalty that you need to pay...

Henrik C. Slipsager

There's a penalty -- I'm sorry, thanks for bringing that up. Year 1, there's a penalty for that employee of not taking that of $95, which I think is due when your taxes are due in '14, so -- no, in '15. So 60 months later down the road, I'm sure that time, when the government finds out, they're going to take care of it that way. And I think year number 2 is around $200?

Tracy Price

Yes, a little over $200. It ratchets it up.

Henrik C. Slipsager

That's still very much cheaper than the alternative.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Adam Thalhimer with BB&T. Henrik is there any part of the business that can benefit from a new construction recovery?

Henrik C. Slipsager

Yes, I think generally, new construction recovery will open up a lot of opportunities for us. And that, in my opinion, means that the whole economy is doing better. New construction by itself is -- we will not break into the construction business in spite of what we do in the government is very isolated, it's medium-size project, but we're not going to build high rises tomorrow [indiscernible].

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Well, I'll just take it back to 2005 or 2007, when you had a lot of new construction. Was it just easier to have organic growth in the Janitorial segment?

Henrik C. Slipsager

It was much easier to have organic growth in that segment. And you also -- the economy was good. We didn't go out and fight for declines at 1/10 of a percent. As a matter fact, I would like to bring this up, this is the first year when I see 2 things I haven't seen the last 5 years. One is, we're actually getting the increases. Two is that the payroll taxes that have been killing us every year the last 3 or 4 years for consumer rate [ph] are actually at the level we projected. And we do not have any negative surprises there for the first time in 4 or 5 years. So that's good. That means just that unemployment have settled at a certain level, leveled out. So if unemployment goes down, we'll benefit from it over the next many years, but it's good to see that finally we don't have to scratch our heads over it.

James S. Lusk

And one other point, if in commercial real estate, if you see a turn and you see a positive effect on occupancy, all the real estate that we have and you go city to city, if there's 20% vacancy factor, that's built in money that we've lost since 2007. As that fills back up, we just build on that, so you'll see revenue growth out of that.

Tracy Price

And I think I'll one point relative to the mobile service platform, mechanical and electrical. When the economy goes bad, all of the construction-oriented companies get into the service business. So they bring that competition and those margins and confuse the marketplace pretty dramatically, and we see compressed margins as a result. So God willing, when the construction industry picks back up, all these guys go back to core competency, it quiesces our world, our margins improve, and we have greatly reduced competition. So it's always a benefit to us if there's a construction upswing.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Okay. And I just want to ask quickly also about Air Serv. Why is that its own segment and what's the vision there?

Henrik C. Slipsager

Air Serv first of all, we have had pretty good development ourselves in that Aviation business. So we knew the business, we can see the growth in it, we see the consolidation in the marketplace, but what Air Serv also brought to the table was disciplines and services we did not provide. It turned out they provide wheelchair transportation and that will be a growing business. As you get older, can't walk, et cetera. They were probably a little better than we were on the cabin cleaning side, they have some technologies we didn't have. But lastly but not least, their culture was perfect for us. This was a perfect decision to grow international at a reasonable multiple. And at the same time, I think, own that vertical over the next 10 years. Nobody can match us on the number of services we do. We are one-of-one.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

So Henrik, it's loud and clear on the M&A that you're kind of slowing down and kind of digesting a little bit focusing internally. Longer term though, after you digest and maybe delever some, do you think that the capital allocation winds up more back in shareholders' hands as dividends and repurchases? Do you feel like when the balance sheet and organization near there that the M&A and strategy is still a very important part of growth here?

Henrik C. Slipsager

As long as -- my philosophy has been as long as the M&A will give a greater return to the shareholder long-term, that means me buying back stock. I will consider doing M&A. I don't think it's [indiscernible] I want to make sure that the shareholder gets the best long-term benefit, not short-term. We stay long-term. That's why Linc is so good.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

And is the recent strategy of finding new verticals, is that the way to do it?

Henrik C. Slipsager

Well, verticals is clearly an area we're looking at. There are some healthcare opportunities, sure, out there in the marketplace. But yes, if I have to prioritize, verticals is there and we will invest in. Technical services is an area we will look at. And at some -- we will look at acquisitions that will bring value to the total enterprise, not on a single little area.

David Whaley

Any other questions at this time? Well if not, then that concludes our Analyst Investor Briefing. And we're very thankful for your time and appreciative of your interest. And for those who own the stock, very appreciative of that as well. Thank you, all, very much.

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