Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

ABM Industries Incorporated (NYSE:ABM)

Q4 2013 Earnings Call

December 10, 2013 9:00 am ET

Executives

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

Sarah Hlavinka McConnell - Senior Vice President, Corporate Secretary and General Counsel

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

Analysts

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

Joe Box - KeyBanc Capital Markets Inc., Research Division

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

David Gold - Sidoti & Company, LLC

George K. Tong - Piper Jaffray Companies, Research Division

Dan Dolev - Jefferies LLC, Research Division

Michael W. Kim - Imperial Capital, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the ABM Industries Fourth Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Now I'll turn the conference over to your host, President and CEO of ABM Industries, Mr. Henrik Slipsager. Please begin.

Henrik C. Slipsager

Thank you. Good morning. Joining me today are Jim Lusk, Executive VP and Chief Financial Officer; Jim McClure, Executive VP; Tracy Price, Executive VP; Sarah McConnell, our Senior VP and General Counsel.

Today, I'll provide an overview of the 2013 fourth quarter and fiscal year that ended October 31. Jim Lusk will discuss details of our financial results. Jim McClure will provide an update of our Onsite businesses. Tracy will then comment on the company's operational results for Building & Energy Solutions, as well as our sales and marketing initiatives. I will then comment on the Air Serv performance for the quarter and then conclude our prepared remarks with our outlook for fiscal 2014.

There is a slide presentation that accompanies today's call. You may access this presentation now by going to our website at www.abm.com, and under the tab Investors, you will see the Events & Presentations tab. Today's presentation will be the first listed.

Sarah?

Sarah Hlavinka McConnell

Thank you, Henrik. Please turn to Slide 2 of the presentation. Before we begin, I need to tell you that our presentation today contains predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds.

While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies this presentation.

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

Henrik C. Slipsager

Thank you, Sarah. Now please turn to Slide 4 for an overview of our fourth quarter and fiscal year.

Operating results for the fourth quarter ended for fiscal 2013 exceeded our expectations. Revenues for the quarter was -- were $1.2 billion, a record for the quarter and up approximately 14% from the same period last year. Organic growth for the quarter on a consolidated basis was 3.3%.

Janitorial posted top line growth of 4.1%, consistent with the comments we made in our third quarter call. Building & Energy Solutions had an exceptional quarter both in revenue and operating profit. Excluding revenue from acquisitions and the Government, BES achieved top line growth of nearly 27%. And Security was able to achieve another quarterly improvement on a year-over-year basis in revenue and operating profit, increasing 4% and 70% respectively.

Adjusted EBITDA was up nearly 16% to $58 million.

On a sequential basis, we reduced outstanding debt by $34 million.

And we announced yesterday a 3% increase in our quarterly cash dividend, which will be at $0.155 per common share. This marks our 191st consecutive dividend.

Before turning the call over to Jim, I would like to make a few comments about fiscal 2013, which, by all measures, was a very successful year and is a transformational period for ABM. Our strategic focus in verticals, combined with our transition to an Onsite, Mobile and On-Demand operational model, have significantly improved our growth prospects and competitive position. In doing so, we achieved a number of milestones in this company's 104-year history.

Here are some highlights: Revenues exceeded $4.8 billion; $85 million in adjusted earnings; adjusted EBITDA of $206 million, the first time we've surpassed the $200 million threshold; acquired and integrated 5 companies in the fiscal year, with the acquisition of Air Serv, ABM has a platform to expand our services globally; won and commenced work on our largest energy retrofit project at Wright State University; and we achieved our fifth year of free cash flow exceeding $100 million.

Now I'd like to turn the call over to Jim Lusk for a financial review of our fourth quarter and our fiscal year. Jim?

James S. Lusk

Thank you, Henrik, and good morning, everyone. Turning to Slide 5. As Henrik noted, revenues of $1.24 billion for the fourth quarter were up 13.5% compared to the prior year. This was due to sales contributions of $110.8 million from our 2013 acquisitions, which continued to exceed our initial expectations, and organic growth on a consolidated basis of 3.3%. Jim McClure and Tracy Price will provide some additional comments behind the continued improvement in our top line growth.

Gross margins for the 2013 fourth quarter were 10.93%, down 22 basis points compared to the fourth quarter of 2012. This was primarily due to costs associated with the continuing ramping up of new jobs in Janitorial and Air Serv, which began in the third quarter as well.

SG&A expense for the fourth quarter increased $11.1 million to $90.7 million, primarily as the result of $4.5 million of increased SG&A costs from acquisitions and a $2 million increase in parallel[ph] expense associated with bonuses due to improved performance.

Amortization of intangible assets for the fourth quarter increased by $1.8 million to $7.1 million. The increase was primarily related to intangible asset amortization expense from the November acquisitions.

Interest expense increased $0.9 million to $3.2 million from $2.3 million in the 2012 fourth quarter. The increase was from higher average borrowings to fund the November acquisitions. The average outstanding balance of the company's line of credit was $390.9 million during the quarter compared to an average balance of $269.2 million in the prior year ago quarter.

Our effective tax rate on income from continuing operations for the fourth quarter of 2013 was 33.9% compared to 21.8% in the prior year period. In fiscal 2012, the company had an $0.11 benefit from a discrete tax item compared to a $0.04 benefit for discrete tax items in the 2013 fourth quarter.

Net income from continuing operations for the fourth quarter was down $3.5 million or 12.6%, primarily due to the lower benefit from discrete tax items compared to the prior year.

Adjusted EBITDA, which excludes items impacting comparability, was $58.1 million for the 2013 fourth quarter, up $7.9 million or 15.7% year-over-year, as contributions from acquisitions and new business drove the double-digit increase.

Regarding year-to-date financial results, I'd like to focus on adjusted income from operations and adjusted EBITDA. Both measurements demonstrate the continued improvement we are seeing in our fundamental business and the trends that continue in our operations.

Adjusted income from continuing operations for the 12 months ended October 31 was $85 million, up 11.7%, while adjusted EBITDA, as Henrik mentioned earlier, was $205.9 million, up 16.7%.

Over the past 5 years, adjusted EBITDA has increased 54%. We are very pleased with this accomplishment, especially since we've had a number of headwinds to deal with, including the fact that stock-based compensation during that time frame has gone from $7.2 million in 2008 to $13.3 million in 2013.

Now turning to Slide 6. Days sales outstanding at quarter end were 52 days, up 1 day on a sequential basis and 3 days year-over-year. This was 1 day more than we anticipated and is primarily due to timing and higher receivables at Air Serv, resulting from a systems change. For fiscal 2014, we expect DSOs will be about 52 days.

Cash generated in operating activities for the quarter ended October 31, 2013, was $51 million, down $15.8 million compared to the same period in fiscal 2012. This decrease is primarily due to the timing of collections of receivables.

Turning to insurance. Total insurance claim liabilities at October 31, 2013, were $358 million compared to $343.8 million at the end of fiscal 2012. For self-insurance claims paid during the quarter, the total expenditure was $25.1 million compared to $22.5 million for the fourth quarter of 2012.

I'd like to now turn it over to Jim McClure.

James P. McClure

Thank you, Jim. Please go to Slides 7 and 8. I will now provide some operational highlights of our Onsite services for the fourth quarter, before turning the call over to Tracy for an update on Building & Energy Solutions.

Janitorial accomplished 4% growth compared to 2012 with revenue of $628.7 million, a record for a fourth quarter. I'm very encouraged with the progress made this year in driving sales growth, and we ended the year with the best momentum I've seen in the Janitorial business since 2006. We recently were awarded some new jobs, which should help sustain our revenue growth into fiscal 2014, assuming the client retention rate remains near internal goals. The Janitorial segment earned $34 million in operating profit for the fourth quarter. Expenses associated with new jobs started in the third quarter were the primary contributor to the 8% decline from the fourth quarter of fiscal 2012. The $34 million of profit was below my expectations. But as we move into fiscal 2014, I anticipate we will see improvements in productivity and benefits from our reorganization that will yield gradual improvements in our Janitorial operating margins, especially in the second half of the fiscal year.

Moving to Onsite Facility Services. Revenues were up about 1% year-over-year to $152.9 million, below their 6% to 8% run rate in prior quarters. This lower revenue growth is primarily the result of losing 1 large job. The Facility Service team is continuing to do a good job of adding new business, and just recently won a contract with a premier European automotive conglomerate. However, for the next couple of quarters, the year-over-year revenue comparisons will be challenging. Even though the revenue growth rates were below recent quarters, the Facility Service team did an exceptional job of generating profit and managed 19.3% increase to $8.1 million compared to the fourth quarter of 2012, a great effort.

For Parking, revenue was $152.2 million and down 1% compared to 2012. I expected to see some top line growth by the fourth quarter. I have the Parking team refocused in some areas where I feel we can improve the sales effort. As we enter fiscal 2014, we should see increased bid opportunities on our current visibility. Renewed efforts on sales will be a 2014 focus for Parking. Despite the slightly lower revenues, Parking's operations managed to meaningfully improve their operating profit, achieving an 11.8% increase to $8.5 million. I'm really pleased with the team's efforts here, and I feel good about Parking's prospects for fiscal 2014.

Turning to Security. The team accomplished another quarter of top line growth with a nearly 4% increase on revenue of $97.1 million. As I mentioned on previous calls, Security has probably benefited the most from our bundled sales, and I anticipate this trend will continue into 2014. Security managed a 70% increase compared to fiscal 2012 and posted $5.1 million of operating profit for a margin of 5.3%. This is the first time Security has surpassed the $5 million mark in a quarter. For those of you who have followed ABM over the years, you will realize just how significant an improvement we've made in this line of business, a great job by the team.

Before turning the call over to Tracy, just a quick closing comment. We continue to consolidate Onsite operations where appropriate, and develop processes to reduce operational costs, which will generate additional savings in 2014, consistent with the numbers we provided earlier this year. I remain confident that our ability -- with our ability to execute on our plan.

In concluding, I want to acknowledge my team for their efforts in fiscal 2013. To deliver the level of growth in sales and profit, while dealing with a significant reorganization, is testimony to their capabilities and commitment.

With that, I will now turn the call to Tracy.

Tracy K. Price

Thank you, Jim. Continuing on Slides 7 and 8, I will provide an update on our Building & Energy Solutions segment, which includes ABES, Government Services and HHA Services. This was truly a breakout quarter for my team and I'm pleased to be able to share these results.

Starting with revenue. We accomplished a 33% increase to $114.8 million. Excluding acquisitions and the Government business, we achieved organic growth of nearly 27%, as we benefited from an increase in energy retrofit projects, service and maintenance contracts and our franchise business. Another excellent quarter for the ABES team and reflective of the record backlog in sales we mentioned on our previous calls this year. In fact, all of our ABES business service lines have achieved roughly 20% combined annual growth rates on both the top and bottom lines since being acquired by ABM.

With year-over-year growth in revenue by ABES, contributions from HHA and continued improvement in margins associated with our Government Services, Building & Energy Solutions generated operating profit of $8.6 million, which included depreciation and amortization expense of $2.9 million. This was the second consecutive quarter where we achieved an increase of over 80% on a year-over-year basis. These are outstanding results, and based on the strength of our pipeline, we believe we're well positioned as BEST moves into 2014.

Even though our Government business continues to face a challenging revenue environment, they continue to deliver solid operating earnings that are in line with expectations. Recent awards reflect positive momentum for this business unit.

Pertaining to recent acquisitions, HHA and Calvert-Jones contributed $18.7 million this -- to this quarter's revenue. We continue to make excellent progress integrating the HHA acquisition and remain very pleased with the amount of business they've added since we've acquired them. Their client retention has remained at 100%, a significant accomplishment and reflective of the quality of the people in our Healthcare Services organization.

With the recently announced formation of ABM Healthcare Support Services, there is significant opportunity to grow this vertical in coming years as the combined HHA, ABM Health and Healthcare Parking Systems of America businesses evolve and leverage each other's domain expertise.

Our vertical strategy in Healthcare and Aviation were anchored by our acquisitions of HHA and Air Serv. Each company has exceeded our expectations. In the case of Air Serv, when we acquired the company, the revenue run rate was $312 million. Using their results for the fourth quarter, their annualized revenue number is $342 million. For HHA, when we acquired the company, the revenue run rate was $42 million. Using their results for the fourth quarter, the annualized revenue number is $56 million.

Compelling results for each company and part of the reason behind our excitement were the initial results of the vertical strategy we discussed in March at our Analysts and Investors conference.

Turning to Slide 9, I want to mention a couple of the sales and marketing highlights from the past quarter. We recently announced that BMW of North America selected ABM as its preferred electric vehicle charging station installation and service partner for its BMW i Centers across the U.S. and Canada. With federal, state and utility incentives, along with consumer demand driving the buildup of America's EV infrastructure, ABM is one of the few companies that are well positioned to meet this growing demand for the installation, service and maintenance of charging stations. We continue to feel this is a very good long-term opportunity for us.

In October, we announced that the Harris County Public School District in Georgia selected us to install energy-efficient lighting, improve indoor air quality, install energy management control systems and increase water conservation. As a result of the improvements, Harris County is expected to save more than $10 million in energy and operating costs over a 20-year period.

And just recently, we announced that ABM's Energy business has successfully commissioned a 1.2-megawatt solar array in Baltimore, Maryland, representing one of the largest solar installations to date in the Baltimore metropolitan area. In addition to being responsible for construction, ABM will also maintain the 4,150-panel array under a long-term contract.

We continue to make significant progress on our sales and marketing initiatives and the enthusiasm and collaboration continue to remain high, as investments we've made in helping to drive the increase in our revenues and profitability are evidenced in our results.

And with that, I'll turn the call back to Henrik.

Henrik C. Slipsager

Thanks, Tracy. Before discussing our outlook for fiscal 2014, I want to say a few words about Air Serv. This segment, listed as Other in our financials, generated $90.9 million in revenues and $3.9 million in operating profit, both of which exceeded our initial expectations for the quarter. The operating profit includes amortization expense of $1.6 million and depreciation expense of $0.3 million, just an outstanding job by the Air Serv team here in the States and in the U.K. In the fiscal 2014, we had a number of solid opportunities to expand their presence in the aviation vertical.

Please now turn to Slide 11 for a review of our financial guidance for 2014. Based on the strength of fiscal 2013, the company is providing guidance as follows: $1.38 to $1.48 for income from continuing operations per diluted share; $1.58 to $1.68 for adjusted income from continuing operations per diluted share. The adjusted guidance reflects the exclusion of charges consistent with our past practices, as well as the absence of $2.9 million or $0.05 per diluted share benefit in retroactive employment-based tax credit realized in the first quarter of fiscal 2013.

Labor workdays for fiscal 2014 are 261 days. This is identical to fiscal 2013 on a quarterly and on an annual basis.

We expect our effective tax rate for fiscal 2014 to be in the range of 36% to 38%. This assumes that Congress will extend the work opportunity tax credit. It is important to recall that in fiscal 2013, the first quarter had a $0.05 per diluted share pickup from the retroactive application of employment-based tax credit from calendar 2012.

Depreciation and amortization expense is expected to remain consistent with fiscal 2013, and we're providing a range of $60 million to $62 million.

Please review the other items listed on Slide 11, which contribute to the EPS guidance we have provided. And as is customary, our guidance is exclusive of any future acquisitions.

At this time, we would like to open the call for questions. Please, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Michael Gallo of CL King.

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

Good results. A couple of questions. What's the outlook for SUI next year? Should we expect to see a leveling out there? Do you think it'll be moderate increases? Or any chance you might think of even getting a decline?

Henrik C. Slipsager

We have assumed it's going to be pretty flat overall. If the unemployment continues to develop as the way we've seen it over the last couple of quarters, you might see some benefits, but not until 2015 or so. It takes time before it's reflected in the rates.

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

Okay, great. Second question I have just on the Facility Services comments, and Jim indicated some headwinds due to a loss of a contract there. How much do you expect those headwinds to be in the first half? And it sounds like you got some other things going that you hope to be able to replace the level of business in the second half?

James P. McClure

Yes, we're -- the headwinds should be not as severe as we saw on the fourth quarter, and we're very positive about our pipeline opportunities that we have in the Facility Services group. So they had a tremendous year and I think you'll see them return to growth range that you've seen in the past years.

Henrik C. Slipsager

And I think we are expecting, on a year-over-year basis, to see growth in that segment for the full year.

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

Right, okay. And then just final question for Jim. How much do you expect total amortization to be in fiscal '14?

James S. Lusk

We have -- I think, as we said in here, the depreciation and amortization, as combined, they'll be in the range of $60 million to $62 million. And...

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

Okay. How much is the amortization piece of that?

James S. Lusk

About half.

Operator

Our next question is from Joe Box of KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a question on the new contract wins. I mean, you guys clearly have some real nice success over the last few quarters in securing new business. I'm just curious, do you see this as maybe the beginning of a cycle where you're going to win a lot more than you're losing? And then secondly, are you becoming more optimistic on the macro here? Or is it still kind of purely a function of your new strategy?

Henrik C. Slipsager

I think it's a little of all the things you mentioned. I think the economy right now is probably better than I've seen in a long time. I also believe, with a little luck, we will see this trend of new jobs continue. At least from an activity level, we probably have never seen as much activity on big opportunities as we see right now. That doesn't mean we're going to close them all. But when we close them, it's going to really have an impact. So basically and lastly on the organization, Jim and his team have done an excellent job in reorganizing the business. And the opportunities that's coming out of that has, I think, exceeded everyone's expectations. So it's a little of all those things, but very difficult not to be optimistic about the future.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Understood. And Jim, you'd mentioned earlier that you expect gradual improvement in Janitorial margins throughout 2014. Can you just put a little more color on this? I know the first half is seasonally lighter. So on a year-over-year basis, are you looking at margin contraction in the first half and then expansion in the back half? Just any color there would be helpful.

James P. McClure

Yes. I think when we focus on our reorganizational plan, as we outlined earlier last year to you, we're very confident that we're going to meet those expectations and those numbers, and will simply drive the margins as they're implemented. And that will be focused mostly in the third and fourth quarter as we implement and see the results of those.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. And maybe just to get specific. Now when you look at the added costs that you had within Janitorial, can you just flesh out how much of that actually stemmed from your new contracts?

James P. McClure

Yes. The start-up cost that we had was substantial. It was -- it was substantial. I don't have an exact number for you, but it was a primary driver in the results compared year-over-year.

Joe Box - KeyBanc Capital Markets Inc., Research Division

I mean, would you say that it was north of half of the incremental expense or...

Henrik C. Slipsager

Let me step in on this one. It was -- it seems that it's a substantial number plus, in addition to the start-up costs, we didn't make the expected profit on the job. So those 2 things, combined, was probably more than half of the shortfall year-over-year.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. And then maybe just to that point then, Henrik, when you look at these contracts, I know they're long-term contracts. There's initial start-up expenses. Two, 3, 4 quarters from now, where do you think that these contracts are going to shake out relative to the corporate average? I mean, are these contracts going to shake out and be more profitable? Or are these not quite as profitable?

Henrik C. Slipsager

I think these contracts are unique. We probably had more start-up expenses than we originally believed we were going to have. So we had some challenges. But right now, it seems to be running pretty smooth. I would say, on an overall basis, the profitability of this job is going to be equaling average of what we see in the rest of the business. It's not lower, it's not greater, but pretty much average.

Operator

Next question is Justin Hauke of Robert W. Baird.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

I have a couple of questions, but trying to combine it kind of into 1 here. So I guess the question is if we do the math on the guidance, it kind of seems like at the growth rates you're talking about, which is kind of sustainable with where you are now, that the EBITDA margins would be more or less flat next year. And so I guess the first part of the question is, is that kind of what you're implying in your guidance? And then the second part of the question would be relative to your restructuring programs that you outlined earlier this year, I think the implication of that was 10, 15 basis points margin improvement a year. So I guess if you could kind of talk through that and maybe give us an update as to what was achieved this year in '13.

Henrik C. Slipsager

That was a long question. Let me start with the EBITDA percentage. There's no doubt that we are, long term, targeting growth and hopefully we'll hit the 5% plateau sooner rather than later. A lot of that has also to do with job mix. If we keep growing in the high-profitable areas the way we've seen in the past, particularly ABES, it's going to be a little easier to 5% than if we grow in the lower-profit areas. When we do forecasting -- the world ain't perfect. And when we do our forecasting, we are, of course, expecting to -- our target is to get in with a higher EBITDA percentage. But I think it's fair to say we -- in our forecasting have -- I expect just a slight increase in it as a percentage of revenue. I can do the same math as you can, so I know you're right about that. So it's a forecast that's based upon, I think, the real world. Something is going to be better and something is going to be worse. But we feel very comfortable with the numbers that we presented today.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

And the cumulative synergies from your restructuring, I think, you'd talked about $9 million to $10 million cumulatively by the end of '14. Is that still kind of what you're thinking?

Henrik C. Slipsager

Goal is $9.9 million. That was an accurate number. It's slightly below $10 million.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Slightly below $10 million. And then I guess, this is more of a housekeeping question. On Government, just to kind of help us think about where that is today, what's the revenue contribution from Government today in the fourth quarter? And what was that versus a year ago and maybe last quarter?

Henrik C. Slipsager

The -- I would rather deal with Government on a year-over-year basis. Government now represents around $125 million of business, which is down pretty dramatically year-over-year. The good news is with the kind of awards we've seen going forward, we do expect a sizable growth. But again, we deal with the government, so we might have been awarded a number of jobs, it doesn't mean we started. But if we started, it's going to be a very, very interesting and good year for Government. At the same time, I'd like to make a comment about Government. I think we've done a tremendous job with the revenue shortfall to be able to come in with the profit at the same level as last year. That was pretty amazing to me.

Justin P. Hauke - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then I guess, just my final one here. On Air Serv, clearly it's been a good year for you with that one. I know you had the Heathrow contract, which, obviously, I think, was a big win. But as we start to model that one going forward, since we'll actually have kind of year-over-year comparisons, what's kind of your thinking about sustainable organic growth for that business? Is it mid-single digits? Or what are you thinking?

Henrik C. Slipsager

High single digits, for sure. That's our internal goal. And our internal goal is we can -- it's going to be 10%. But the problem with -- not the problem, but the interesting part about Air Serv in our Aviation business is the fact that we've seen these major mergers, and that means we're going to see some major opportunities. And some of those opportunities are going to fall in '14, others are going to fall in '15. And sometimes you're going to see maybe a 3% to 5% growth. In other times, you're going to see a 12% to 15% growth. But overall, the target is 10%.

Operator

Our next question is from David Gold of Sidoti.

David Gold - Sidoti & Company, LLC

So let's see, a little bit of follow-up on the Janitorial side. So a couple of things. First, can you give us a sense for what the pricing environment is out there? And with that, part two, as you talk about a little bit of, say, extra costs that we didn't expect, would you attribute that more to pricing or the timing of these start-up expenses? So in other words, did we price it properly? Or is it just that some of these expenses fell into a period that we didn't expect them to?

Henrik C. Slipsager

First of all, let me deal with the pricing environment. The pricing environment is not worse, it's not better than what we've seen in the past. I think our strategic position in the market is different than I've seen the past, and that's why we see some of these major opportunities that we haven't seen before. And there's no doubt that Jim and his team are very well positioned to add some major opportunities or major jobs these coming years. Point two is the start-up. I can make it very short and sweet. We expected the start-up to be done in the third quarter. It was not. It was delayed for a lot of reasons, but part of it was us underestimating the start-up expenses associated with the job. So it's more of a boo-boo on our side. But that doesn't change the fact that it's going to be a very good long-term job. That's the wonderful thing about our business, that hopefully we're going to keep the average number of years, which is 15 to 20 years.

David Gold - Sidoti & Company, LLC

Got you, got you. Okay. And then just jumping back to your first comment on sort of taking a different approach to pricing. Is -- I mean, that's kind of mean to say that we're looking at things, we're taking a more aggressive stance?

Henrik C. Slipsager

No, I don't think I said that. I said that we see some major opportunities, I think, due to our reposition in the market that we haven't seen before. I don't think we are taking a more aggressive stand on pricing. We are still the good, old conservative guys that believe that we need to make money on the jobs we get, and we are very much focused on getting those percentages up on the bottom line.

David Gold - Sidoti & Company, LLC

Got you, okay. So I'm not sure I understand. I guess, the question -- you said on the pricing environment, it's no different than the past, but Jim and his team are doing things a little bit differently. What are they doing differently?

Henrik C. Slipsager

Well, first of all, we have the Onsite organization, which we didn't have before. I think we've made that pretty public. And the other thing that we see is pretty much a reflection on the customers, that the customer opportunities are greater than before. So when we -- in the past, maybe we were bidding on 5 regional jobs; we're now bidding on 1 nationwide job. When we bid on 1 nationwide job, of course, the job is much bigger than the regionalized jobs. Not only that, but it limits the competition from the perspective that we're the only one who has a branch network to support it. So that's what I'm talking about in new opportunities, which has nothing to do with pricing and such, but has more to do with volume and ability to service the client.

David Gold - Sidoti & Company, LLC

Got you, perfect. That's helpful. And then one more, Henrik. Anything to talk about -- I know you've hit on a couple, but on particular market segments where you're seeing that new success on the wins?

Henrik C. Slipsager

Market segments were -- our Electric or the BES this year, has been, in my opinion, outstanding. If you go over the last 3 years, we're dealing with growth rates at an average of 20%, both top and bottom line, which is, I think, pretty unique in any business, especially in our world. So we believe great growth is going to come out of that. On the Government side, I'm not trying to hurt people in the Government business here, but it's at such a low level that I can't see how we can grow, even we can grow there now. So that represents some great opportunities. I mentioned before, I've not seen growth like this before in the Janitorial world. We have some international expansion opportunities through our Aviation business that I haven't seen before. And lastly, but not least, our Healthcare Services are hitting in all cylinders. It is going to be a wonderful year to follow those guys, because the growth you will see there, it might be able to be at least double digit. And with a little luck and a little -- yes, little luck, it might be even bigger than that. So I really think we are right in front of a growth period that ABM has not seen in my time here.

David Gold - Sidoti & Company, LLC

Perfect. And if I can, just one last. On the reorganization, what's left to do there?

Henrik C. Slipsager

Real estate. So part of a reorg is we have some adjustments still to be made in the back office. But the major number's real estate, and we can't take the benefit of real estate until the people are physically out of the building. It took a little longer than we expected, but the overall numbers are exactly in the level that we communicated to the market.

Operator

Our next question is from George Tong of Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

You're now several quarters into implementing your OneABM initiative. Can you give us a further update on how that is going? And what metrics you use to measure success? And how those metrics are performing?

Tracy K. Price

Yes, this is Tracy. I'll respond to that. So OneABM is our internal marketing play. It's not the external one. The external guidance that we give is about our end-to-end strategy and how we're taking care of the customer ecosystem and what we're doing in the verticals and how we're leveraging the technology to drive productivity, specifically at the point of service. But internally, with the marketing programs we've put in place, the sales leadership we've put in place and the restructuring to combine the mature businesses into the Onsite business, and then focus on verticals in the higher growth initiatives in Mobile businesses, we're seeing increased activity across-the-board in virtually all verticals. We have our pipelines being measured and scrubbed. We have our Solve One More program, where we're not asking our sales people or marketing folks to go sell another service, we're asking them to solve another problem on the customer's behalf. That's been very well received. We've generated $25 million plus just in collaborative sales in the last 12 months through the Solve One More program. So what you're seeing is a company that's transforming itself into a sales-driven, operations-checked business, and we've said this before, and Henrik has as well. I think you'll find that ABM has the best operators anywhere. We're now putting a sales head or an engine at the front of this company. And while we're probably in the second inning of the game, the results are pretty eye-popping. And internally, there's tremendous traction. And I think we're at an inflection point in terms of our capability or capacity to drive sales across all the different business lines and the verticals. So I don't think we're seeing any particular business line or vertical that we aren't reasonably saying about our growth potential. And we do have better tools to measure, drive backlog, review pipeline, lead the sales focus and help deliver better results.

George K. Tong - Piper Jaffray Companies, Research Division

Got it, that's very helpful. As you think about start-up costs, not just in Janitorial, but in Air Serv and other Facility Services, as they begin to moderate, how much upside does that present for margins for the total company in fiscal 2014?

Henrik C. Slipsager

It's not material. It's always material when it happens in a quarter, for the quarter. But overall, I'm not going to say it's going to be material. Start-up costs normally will last 90 days or so. It's -- and it reflects the additional training of the supervisors, maybe additional people at the job sites who get started, because we all want to start -- you want to make a difference on the job start -- the job from the get-go. So -- but it's not a meaningful change.

George K. Tong - Piper Jaffray Companies, Research Division

Got it. You delivered very nice revenue acceleration in the Janitorial segment this quarter. Now that growth has broken above 4%, how should we think about growth going forward?

Henrik C. Slipsager

Above 4%? No, I'm kidding. We believe that, at least for the next couple of years, if things are developing the way we see it now, that we can maintain mid-single-digit growth. That could be 4%, could be 5%, could be 6% if we're real lucky. But the advantage we have with the portfolio of businesses across that, if we don't lose anything, as Jim, I think, mentioned earlier, if we're able to keep our retention at those very, very exceptionally high rates, you can see that we have a good reason to believe that this year's growth should be between 4% and 5%, at least.

George K. Tong - Piper Jaffray Companies, Research Division

That's helpful. And then last question. Cancellation of a large job impacted growth in Facility Services this quarter. Looking forward into the pipeline, are there any large contracts coming up for renewal or ones that you see as a particularly large renewal risk?

Henrik C. Slipsager

Not as much, but there's always -- there are always renewal risks. And there is always risk of losing jobs. And you can lose job also with change of ownership, et cetera, among the customers. But Facility Services has 1 or 2 challenges this year. They had a number of challenges last year. At the same time, they have a number of opportunities this year as well. So I think, going back to what Jim said earlier, we believe that first half is going to be under a little pressure in Facility Services, but overall, year-over-year we're very pleased with where we are.

Operator

Next question is from Dan Dolev of Jefferies.

Dan Dolev - Jefferies LLC, Research Division

First thing, can you quantify actually the growth just in the retrofit part of BE&S this quarter and how it trended over time, maybe the organic growth?

James P. McClure

I can characterize it from the sales perspective. Our sales plan number was in the mid-80s. We sold $140 million. So. . .

Henrik C. Slipsager

Well, that's [indiscernible]. I will come back to you with that number. I only have the combined number with the whole team.

Dan Dolev - Jefferies LLC, Research Division

Okay. Second question, Blackjack. It seems to have contributed about $5.3 million to revenues. That's incremental, right, to that Air Serv? What was the profitability in this business, in that -- for that $5 million?

Henrik C. Slipsager

One second. Again, I don't -- when it's inside the segment, I need to find the numbers.

Dan Dolev - Jefferies LLC, Research Division

But it was profitable, right?

Henrik C. Slipsager

It was profitable, but I don't remember how profitable it was. And I know it lived up to our expectations. That's all I can give you right now.

Dan Dolev - Jefferies LLC, Research Division

Okay, because I remember you mentioned that Air Serv is higher profitability than the rest of the business, so I was just wondering if it's sort of in line with Air Serv or -- but we can catch up off-line. So 2 quick last questions. Cash flow, if I'm calculating correctly, free cash flow in the quarter was a little bit light if you compare it to the last 4Q. Is there anything particular that's going on there?

James S. Lusk

Yes, there was -- what we, in Air Serv, we moved them to our main systems on JD Edwards. And because of that, we had some delay in collections. We'll catch that back up in the beginning of the year here. So that was really -- that was the main issue.

Henrik C. Slipsager

And then we gave you a number, the year-to-date numbers on the project, the BES projects. They went from $24 million in 2012 to $42.5 million in 2013, annually.

Dan Dolev - Jefferies LLC, Research Division

So yes, that's pretty good news. One last question, if I may. You mentioned -- I think you mentioned earlier in the call, I just want to make sure I understand, the $0.05 per diluted share in retroactive employment-based tax credit. Is -- was that part of EPS last year? Or was that also excluded? Was the benefit included in EPS -- in adjusted EPS last year or was it excluded?

James S. Lusk

Yes, we always include the tax items in adjusted EPS.

Dan Dolev - Jefferies LLC, Research Division

But you said -- so the $2.9 million, that should be excluded from -- just so I understand, it's a negative. . .

Henrik C. Slipsager

With the $2.9 million, we won't get one more time. It was -- if you remember back, we -- you might not remember it, but nonetheless, the tax credit was not decided upon until the beginning of 2013, or the end of 2012. So that particular first quarter last year, we had the benefit of a prior year of tax credits. So that is reflected in the tax percentage of first quarter of 2012 and benefited that first quarter by $0.05, which we called out.

Operator

Our next question is from Michael Kim of Imperial Capital.

Michael W. Kim - Imperial Capital, LLC, Research Division

Looking at Janitorial, you called out South Central and Midwest regions as being particularly strong. When you look at your pipeline of new jobs that you expect to add next year, is that primarily in those same regions? Or do you see opportunities to expand or replicate the sales strategy in other regions?

James P. McClure

This is Jim. We have both strong regional opportunities across all 4 super regions, but we're seeing a lot more national opportunities as we roll out the Onsite model and so we're seeing much larger opportunities. And our pipeline is more robust than I've seen in years. So it's across the teams and it's on a higher level, so more national. So we're very positive on that.

Michael W. Kim - Imperial Capital, LLC, Research Division

And could you refresh me, for national-type jobs, is the client retention rate generally or historically better or worse than maybe your smaller opportunities?

James P. McClure

It's in line with the regional jobs. I mean, the larger the job, the greater the opportunity for a long-term relationship. People don't normally like to go through that process, it's very labor-intensive, for the sake of doing it. So as you go multi-regional, national opportunities, as long as we perform, we have a very long life contract longevity.

Michael W. Kim - Imperial Capital, LLC, Research Division

And then also similarly on the operating margin side, I guess, historically, are the national accounts similar to the regional jobs that you normally would deliver?

James P. McClure

Yes. Like all jobs, you get into a new job kind. But it takes a while to create a run rate profitability level, but they clear[ph] out to a point to where they're in line with what our position is on a regional basis as well.

Michael W. Kim - Imperial Capital, LLC, Research Division

I don't know if I heard about it, but can you articulate what the tag business was in the quarter?

James P. McClure

Quarter-over-quarter, it was up, but I don't have that number. But we can get that to you. It was a positive number.

Michael W. Kim - Imperial Capital, LLC, Research Division

And with the weather now, are you seeing so far this quarter maybe a tick-up in tag business again this quarter?

James P. McClure

Well, the weather just hit. So as long as the snow stays out of New York and it keeps hitting the Philadelphia and Washington, D.C., we're very happy with where the snow is falling. So I'm more concerned with my travel home than I am with the number of the snow. But it's just -- I think what you saw in the Midwest and through Colorado, and as we see storms, is pretty light early on in the season and light snow and light storms, and now we're seeing a little bit of snow. So that's something that we have an expectation baked into our numbers. But yes, it seems like...

Henrik C. Slipsager

It's a good thing.

James P. McClure

It's good.

Michael W. Kim - Imperial Capital, LLC, Research Division

Fair enough. And then, lastly, on capital allocation. It's been about a year, at least, on the acquisition side I think, it's been about 1 year since your last series of acquisitions. Can you talk a little bit about the acquisition strategy and the balance of your capital allocation priorities?

Henrik C. Slipsager

Yes, the acquisition strategy hasn't changed. We've always done acquisitions on an opportunistic basis. So it's not something that we're aggressively out getting. But when we have opportunities, we will do it as long as the price is right. And we'll still be looking. We, as you know, has -- we did 5, most of them in the beginning of last year. And I'm very proud to say that not only did we do those 5, it was 5 very good acquisitions and they're all integrated into the business. And with the right opportunity, we're ready to do some more. But I'm not and will never project future acquisitions to the market.

Michael W. Kim - Imperial Capital, LLC, Research Division

Sure. So you've given the integration, the ramp-up with those acquisitions. Is it your sense then you'll focus, primarily, on a vertical basis on Healthcare and Aviation or add another vertical?

Henrik C. Slipsager

Well, I think if you look at where we've been successful, I think the vertical strategy, and if there's vertical opportunities to kickstart new verticals, is always something we look at and will be looking at. There'll be some filler acquisitions on the technical side, the small acquisitions that will help on our footprint on a nationwide basis to support the Energy jobs and some of the high profitable areas that we see we are in. So it's a combination of those strategies. But again, it is opportunity-driven. So at the right time, the right place, we will allocate the appropriate amount of dollars to do the acquisitions. And I think we've proven to be pretty good at it. So again, I won't project anything, but we are not changing any strategy at all other than, as you mentioned yourself, the vertical clearly has a high priority, as well as the small acquisitions on the technical side.

Michael W. Kim - Imperial Capital, LLC, Research Division

And absent any acquisitions, it looks like you're delevering. Do you have a target leverage in the near term that you have in mind?

Henrik C. Slipsager

Well, it's very clear that probably we're around 1.5x at the end of the fiscal year. And if we generate, let's say, $100 million plus of cash next year, I think we can do the math. It's going to be very close, very close to 1x EBITDA by the end of fiscal next -- fiscal 2014. I would rather tell you we should be at 2x or 3x with the right acquisition, but I'm not going to commit myself.

Operator

[Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Henrik C. Slipsager

Yes. It's Henrik, and I want to thank our investors for supporting us this year, our shareholders, et cetera, as well. It's been -- it was a very good year for the company. But the most important thing is I want to thank our employees for doing a wonderful job for us in 2013. Thank you very much.

Unfortunately, this world is pretty short term. So we expect the same effort for 2014. Maybe these -- a little better even. But thank you very much. We couldn't have done it without you. And happy holidays to everybody. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ABM Industries Incorporated Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts