ABM Industries' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Mar. 5.14 | About: ABM Industries (ABM)

ABM Industries, Inc. (NYSE:ABM)

F1Q 2014 Earnings Conference Call

March 5, 2014 8:30 AM ET

Executives

Henrik Slipsager – President and CEO

Sarah McConnell – SVP, General Counsel and Corporate Secretary

Jim Lusk – EVP and CFO

Jim McClure – EVP; President, ABM Janitorial Services

Tracy Price – EVP; President, ABM Facility Solutions Group LLC

Analysts

Joe Box – KeyBanc

Andy Wittmann – Baird

Michael Gallo – CL King

David Gold – Sidoti

George Tong – Piper Jaffray

Adam Thalhimer – BB&T Capital Markets

Michael Kim – Imperial Capital

Operator

Good day, ladies and gentlemen, and welcome to the ABM Industries Q1 Fiscal Year 2014 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Henrik Slipsager, President and CEO. You may begin.

Henrik 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; and Sarah McConnell, our Senior VP and General Counsel.

Today, I’ll provide an overview of the 2014 first quarter that ended January 31. Jim Lusk will discuss the 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 an update on 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 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 Slipsager

Thank you, Sarah. Now please turn to Slide 4 for an overview of the first quarter.

Operating results for the first quarter in general exceeded our expectations. Revenues for the quarter were in excess of $1.2 billion, a record for the quarter and up nearly 4% from the same period last year.

Janitorial posted top line growth of 4.6%. Building & Energy Solutions had an exceptional first quarter both in revenue and operating profit. BES achieved top line growth of 60% of which organic was 13.6% and added $2.8 million in operating profits. For the first time in over a year, revenue from our government business, were on a comparative business both an increase of 10%. Security was able to achieve another quarterly improvement on a year-over-year basis both in revenue and operating profit, increasing 3% and 55% respectively.

Adjusted operating profit before taxes was up 19%, adjusted EBITDA was up over 7%, cumulatively reported $2 million and yesterday we announced a cash dividend in the second quarter of $0.155 per common share. This marks our 192nd consecutive dividend.

Now I’d like to turn the call over to Jim Lusk, for a financial review of our first quarter. Jim?

Jim Lusk

Thank you, Henrik, and good morning, everyone. Turning to Slide 5.

As Henrik noted, revenues of $1.23 billion for the first quarter were up 3.8% compared to the prior year. This was due to net sales contributions of $37.8 million from added growth and $6.6 million from acquisitions.

Gross margins for the 2014 first quarter were 9.63%, down 3 basis points compared with first quarter of 2013, primarily attributable slightly lower profits at Janitorial and Facility Services partially offset by contributions from newly awarded contracts within our Building & Energy Solutions segment and same is realized from our organizational realignment.

SG&A expense for the first quarter decreased $0.3 million or 0.4% to $87.4 million primarily as the result of $1.3 million less depreciation, also associated with our enterprise resource planning system and $1.1 million reduction of cost in the realignment of our on-site operational structure.

These items were partially offset by $0.9 million increase in sales and marketing expense, and $8.8 million (ph) increase in share based compensation expense.

Amortization of intangible assets for the first quarter increased by $0.5 million to $6.7 million.

Interest expense decreased $0.6 million to $2.7 million from $3.3 million in the 2013 first quarter, the decrease from lower average borrowings and a lower average borrowing rate. The average outstanding balance of the company’s line of credit was $355.6 million during the quarter compared to an average balance of $447.4 million in the prior year ago quarter.

Our effective tax rate for three months ended January 31, 2014 and 2013 were 42.5% and 22.2% respectively. Year-over-year difference is primarily of the $2.9 million retroactive reinstatement of the 2012 work opportunity tax credit of WOTC that occurred during the first quarter of fiscal 2013 and the exploration of WOTC as of December 31, 2013.

Without these discreet items, income taxes were significantly higher in the first quarter of fiscal 2014. Net income for the first quarter was down $0.3 million or 2.2% primarily due to the lower benefit from WOTC of $3.4 million compared to the prior year, partially offset by $3.1 million and higher profits net of tax.

Adjusted operating profit, which excludes items impact to comparability was up $4.1 million or 19.1% to $25.6 million for the first quarter. Profits from new business in the Building & Energy Solutions, parking, security and Air Serv businesses and organizational realignment savings were partially offset by higher cost from one significant Janitorial contract.

Adjusted EBITDA, which excludes items impacting comparability, was $41.5 million for the 2014 first quarter, up $2.9 million or 7.5% year-over-year, as contributions from growth initiatives and realignments drove the increase.

Now, turning to slide 6 and 7. Day sales outstanding at quarter end were 56 days, up 4 days both on a sequential and year-over-year basis. This was higher than we anticipated and is primarily due to timing of client receivable collections. We continue to expect our DSO to be 52 days for the year and cash flow from operations to improve throughout the fiscal year.

As it’s typical for the first quarter, cash used in operating activities ended January 31, 2014 was $38.9 million. This was an increase of cash used at $27.4 million compared with the same period in fiscal 2013, primarily due to lower collection in receivables.

Turning to insurance. Total insurance claim liability at December 31, 2014 was $357.6 million compared to $358 million at the end of fiscal 2013. For self-insurance claims paid during the quarter, the total expenditure was $23 million compared to $20.1 million for the first quarter of 2013.

As Henrik noted earlier, we announced our 192nd consecutive dividend, continuing the long salvage pattern as evidenced by the chart at the bottom half of slide 7.

I would like to turn the call to Jim McClure.

Jim McClure

Thank you, Jim. Please go to Slides 8 and 9. I will now provide some operational highlights of our Onsite services for the first quarter, before turning the call over to Tracy for an update on Building & Energy Solutions.

Janitorial top-line growth for the quarter was exceptional at 4.6% compared to 2013 and revenue of $637.1 million in record 41st quarter.

We continue to make good progress on initiatives associated with our operational realignment program and in general, we are on schedule. We remain intensely focused on driving top-line growth and during the quarter, we explored some contract wins in key verticals such as sports and entertainment, high-tech and industrial.

In addition, we have sniffed an increase in discretionary tax spending that help to offset in part of the tag that was generated in the first quarter of fiscal 2013 from Hurricane Sandy.

Client retention remains the focus and a rolling four-quarter basis, we are approximately 93%. Better than the historical average of 92% but our long-term client retention target remained at 95%.

The Janitorial segment earned $29.1 million in operating profit for the first quarter of fiscal 2014. Expenses associated with a significant job that we started in the third quarter of fiscal 2013, was a primary contributor to the 1% decline from a comparable period.

We have taken specific steps effective March 1, one way to improve the margin for the significant job. In addition, the absence of higher margins that were associated with the clean-up from Hurricane Sandy adversely impacted year-over-year comparison.

Moving to Facility Services, as previously communicated, we expected revenue to be lower based on the loss of significant contract that was the way of a global bid which prevented us from retaining the business.

Revenue for this segment was down 3% to $151.7 million. Operating profit for consulting services decreased 10.2% or $0.6 million primarily due to timing of a bi-annual performance-based award.

For Parking, revenue was $130.3 million, down about 1% compared to 2013. The decrease was primarily related to the termination of certain lower margin contracts which is partially offset by additional revenues for new business.

Management reimbursement revenue was up $0.4 million to $76.3 million. Despite the slightly lower revenues, Parking operations managed meaningful improvement in their operating profit achieved in 17.1% increase to $5.7 million. Better mix of contracts and reduction in expenses as a result of the realignment of our onsite operational structure for the improvement in margins.

Turning to security. The team accomplished another quarter of top-line growth with 3.2% increase on revenue of $99.7 million. As I had mentioned on the previous calls, Security has benefited the most from our on-site bundled sales approach and the team continues to pay market share.

For the first quarter, Security generated operating profit of $2.6 million an increase of 55.5% compared to fiscal 2013. The improvement in operating profit came from higher revenue and reduction mix expenses of results of the realignment of our on-site operational structure.

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

Tracy Price

Thank you, Jim. Continuing on Slides 8 and 9, I will provide an update on our Building & Energy Solutions segment, which includes ABES, Government Services and ABM Healthcare Support Services. This was another very good quarter for the team and we’re pleased to share these results.

Starting with revenues, we accomplished a 16% increase to $102.1 million excluding acquisitions we achieved organic growth of 13.6% as we benefited from an increase in energy retrofit projects, service and maintenance contracts and an improvement in our government business. Another great quarter for the ABES team and reflective of the record backlog in sales we mentioned on our previous calls.

Revenue from our ABM Healthcare Support Services was up over 25% compared to the first quarter of fiscal 2013, continuing its momentum. And for the first time in many years, our government operations grew on a year-over-year basis, achieving top-line revenue growth of 10%.

We were however notified late last week by the U.S. government that the protestor on our Fort Benning contract win was successful. We are currently looking into options we can pursue to overturn that decision.

With year-over-year growth in revenue by ABES, contributions from ABM Healthcare, Government Services and BEST IR, BEST generated operating profit of $2.7 million in your outstanding results and based on the strength of our pipeline, we remain well positioned as BEST moves further into fiscal 2014.

Turning to slide 10, I want to mention a few of the sales and marketing highlights from the past quarter. Sales momentum in a number of key verticals continues. We have recently been awarded business for a couple of significant sports and entertainment stadiums. In our aviation business, our Omniserv unit was awarded a key transportation job at a major airport in the United Kingdom, which we anticipate will start later in the fiscal year.

This win is an excellent example of the synergistic benefits ABM can deliver by leveraging our aviation knowledge and transportation expertise in the U.S. and U.K., to develop an industry-leading solution and be able self-perform new services.

We were selected by several educational institutions to implement bundled energy solutions project, including Franklin City, Virginia Public Schools where we will execute a district-wide energy and facility improvement project.

In addition, we were awarded our first commercial real-estate job utilizing Property Assist Clean Energy or PACE funding. They are continuing to be keen interest in our bundled energy programs and we remain very positive about the long-term growth prospects for this type of business.

Turning to sales, our organic growth initiative Solve One More, continues to gain traction and foster collaboration across ABM Service lines. On an annualized basis, sales exceed $40 million and keep in mind this program was launched less than a year ago and still be rolled out.

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

Henrik Slipsager

Thanks, Tracy. Before discussing our outlook for fiscal 2014, I want to say a few words about Air Serv. This segment, listed as others in our financials, had revenue of $85.6 million up $5.3 million or 6.6% compared to the first quarter of fiscal 2013. The Blackjack acquisition contributed revenue of $4.5 million.

Operating profit increased $300,000 or 19% to $1.9 million due to growth in our U.K. operations.

As Tracy mentioned, we recently were notified that we won a large transportation contract for a major U.K. effort. This contract win as well as a strong pipeline should help Air Serv generate top-line growth organically as expected.

Please now turn to slide 12, for a review of our financial guidance for 2014. The company continues to expect the following. At $1.38 to $1.48, the net income per diluted share, at $1.58 to $1.68 for adjusted net income for the rule of share, the adjusted guidance effect exclusion of charges consistent with our past practices and it’s based on an effective tax rate of fiscal year 2014 in the range of 36% to 30%.

We continue to anticipate depreciation and amortization expense in the range of $60 million to $62 million. Please review the other items listed on slide 12, which contributes to the EPS guidance we have provided. And as it’s customary, our guidance is exclusive of any future acquisitions.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Joe Box of KeyBanc. Your line is now open.

Joe Box – KeyBanc

Hi, good morning guys. Jim, can you just put some color around the tag increase, I’m just curious, how much of that snow removal and maybe weather related as supposed to just customers feeling better about their business. And I mean, do you think that this is a start of a trend or is it maybe one-time in nature?

Jim McClure

This is Jim, McClure. The tag increase was partially snow removal but the snow removal but the snow from impact for the quarter was in fact a negative aspect to our bottom line of our $570,000.

So, the Sandy impact in ‘13 was just over $5 million inorganically from the group we were able to achieve and basically have the same $15 million for the quarter in tags. So we’re very bullish on the discretionary spend and I can’t predict the future but I feel good about our organizational structure and how we’re out there selling and maybe tag.

Joe Box – KeyBanc

Good, that’s good to hear. Just probably another question for you Jim, it. It sounds like the government is actually looking to consolidate building maintenance and janitorial vendors for some of their properties. I think they’re going from about 1,000 vendors down to 20.

I would think this would be a benefit for ABM given your presence but they did say that they want to stress small and local business owners. Is this something that would have any impact on your business?

Henrik Slipsager

A lot of times we see there is a certainly time lag between the government says to what actually happens. In this particular case, I think it’s the same thing. I have not seen this particular one with Janitorial contracts going from 1,000 to 20, but obviously that’s the case. And it has happened, it would benefit us dramatically.

Joe Box – KeyBanc

Okay, understood. Question for Jim Lust on WOTC. Can you just give us a sense of what was previously factored in the guidance just from an EPS standpoint?

Jim Lusk

Yes, from – are you talking year-over-year or are you talking for the whole year?

Joe Box – KeyBanc

For the entire year.

Jim Lusk

Yes, for the entire year. The WOTC for the entire year that we are expecting for fiscal 2014 is about $0.08 give or take, it depends on our hiring, etcetera. But it’s about $0.08. As of right now, if you listen to what’s coming out of Washington, you can hear anything from total tax load rewrite where they get this up to a more likely outcome where these things will be reinstated. They have been really been reinstated retroactively for many, many years in a row. But that’s what kind of factored in right now. So, what we’ll see what happens there.

Henrik Slipsager

Let me add to that Joe, because I think the key thing is, it might be tough to see out of the numbers, that a regular quarter, year-by-year comparison we had five pick-up last year associated with a cycle which Jim is talking about, a delay in WOTC credits and government where we pick-up a full year for mostly 2012.

And it seems that the difference this year in WOTC credits where we had $0.03 benefit last year, and not being this year. So, year-over-year there is a $0.07 negative impact on us from taxes for the quarter.

Joe Box – KeyBanc

Understood, thanks guys.

Operator

Thank you. Our next question comes from the line of Andy Wittmann of Baird. Your line is now open.

Andy Wittmann – Baird

Hi guys, good morning.

Henrik Slipsager

Good morning.

Andy Wittmann – Baird

So, I know that you just kind of talked with the U.K. contract for Air Serv, can you give us the size and kind of timing when we should expect to see that in the income statement?

Henrik Slipsager

I believe it’s around $8 million a year it’s a five-year deal. And I believe we start in May or June.

Andy Wittmann – Baird

Great.

Henrik Slipsager

I’m sorry, we don’t have the exact date, but it’s either May or June.

Andy Wittmann – Baird

Got it, that’s helpful. And then, can you get into another one, it sounded like there was a protest in your government business that Tracy mentioned in his comments. Can you talk about how much longer you’re up on that and maybe what’s the trailing ‘12 revenue contribution was from that one?

Henrik Slipsager

Yes, I can tell you, let me start with the trailing ‘12, that was zero. And let me tell you also by my current expectations for this year is zero. But nonetheless, we were awarded for maintaining a $45 million year contract. In a normalized world, we would have gotten the job we believe. It was processed at – at the process that was accepted by the government and now we’re planning, trying to lower rates that we can process this particular decision. But to make a long-story short, it’s not in our number.

Andy Wittmann – Baird

Got it, got it. And I think you talked about this one at journalist day but did you quantify what the expected contributions on that one was going to be?

Henrik Slipsager

I think for the year, it was somewhat material. I think we said around $500,000 to $600,000 for profit for the year was expected now individual project, somebody in material if you look at the overall numbers.

Andy Wittmann – Baird

Yes, okay, great. And then, just more generally speaking, obviously the growth rates in Janitorial has been improved, some of these things we were expecting because a year ago or so, maybe a few quarters ago, you guys talked about the effect that you’re having from these successful wins.

At some point here in the next quarter, do you construct any more difficult when some of these things annualize themselves, or how should we be thinking about kind of the growth rate for that core segment as we move through the year?

Henrik Slipsager

Well, I think we have been anticipating this growth for quite some time now. I think we’ve communicated this to the investors that over the prior quarters that. We can only look at our pipeline and opportunities going forward. And I think it’s the last quarter we see better and bigger opportunities than we’ve seen in the past.

So, it is our hope and belief that we can get to that mid-single digit growth in Janitorial, hopefully not only for the three quarters going forward but for a long period of time.

Andy Wittmann – Baird

Okay. And if I might, let me slide one more in here. I think Jim referred to the bi-annual contract performance-based award in facility management. I have to admit, I don’t know what that is, so maybe some color as to what that is, why that happened and the impact of the income statement would be helpful?

Jim McClure

Yes, it’s Jim. Basically it’s a timing adjustment. So as we go back the second payment of the performance award for 2012 we realized in January 2013. The second payment for 2013 was realized in October 2013 and that will be a more normalized expectation of the timing of this award.

So, that had quarter over quarter impact but going forward we feel that the customer has made this adjustment and timing it will be reflective of two awards that will be more in gearing our fiscal year and the calendar year.

Andy Wittmann – Baird

So, these are like incentive awards for doing your job well essentially?

Jim McClure

This is based on excellent performance.

Andy Wittmann – Baird

Okay. So, these are kind of one-time pick-ups that you do not advertise over the life of that contract or just when you get them you recognize that you haven’t get kind of a one-time, but recurring one-time benefit?

Jim McClure

That’s correct.

Andy Wittmann – Baird

I got you. Okay. Thanks guys.

Jim McClure

Great.

Operator

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

Michael Gallo – CL King

Hi good morning. Just wanted to drill in the cross sell. I think you noted getting some meaningful traction on the Security business. So I was wondering if you could want to elaborate on that. And two if you could talk about how you use some of the learning that you’re seeing in the benefit of how you are cross selling Security effectively and how you tie that in with some of the other areas you really start to get that bundled approach? Thanks.

Henrik Slipsager

Okay, I will have Tracy talk about the general sales margin program as well as (inaudible) and Jim might add something about Security, can do that.

Tracy Price

Sure, thanks, Henrik. I think the exciting thing that’s happening for ABM is as a result of the restructuring, there is a different more collaborative feel taking place across-the-board and I think Jim earlier stated that one of the benefactors has certainly been security. They’ve been pulled close to the vest and made feel like they’re part of the team. And that collegial environment here is certainly being fostered.

Relative to kind of change in the orientation of how ABM goes to market a couple things have happened. One we unified under a new branding which I think has been well received by our teams, two we’ve implemented some professional marketing programs, purchase systems to help create visibility and track leads better and three, that integrates directly into our CRM system which creates the ability for us to track the pipeline better and know what’s happening in real-time with existing customers as well as new opportunities.

We’ve embraced a challenger sales methodology. That training is being rolled out across the country and really, the evolution of the business has been to go from more of an RFP response based environment to proactive sales and more of a trusted advisor mentality amongst our teams.

And I think it’s being incredibly well embraced and pushed out to our clients and appreciated. So we’re able to do more services with same clients in a fashion that reduces their costs and adds tremendous value to what we’re doing.

Jim McClure

And to add, I simply said today Security feels like they’re part of a great team, a great team in the past they might have felt they were more an isolated silo. So they’re gaining the benefit of all of the point that Tracy noted. And they’re feeling better about themselves and you’ve seen that in bigger and better opportunities.

Michael Gallo – CL King

Okay, thank you.

Operator

Thank you. Our next question comes from the line of David Gold of Sidoti. Your line is now open.

David Gold – Sidoti

Hi, good morning.

Henrik Slipsager

Good morning.

David Gold – Sidoti

A couple of questions on the growth in Janitorial. First, Henrik, can you speak a little bit about what you see by way of the no contracts and two, would you, I think I know the answer but do you attributed to recovering market, market share gains or a little bit of both?

Henrik Slipsager

Well, Well…

David Gold – Sidoti

I know you love that question.

Henrik Slipsager

Yes, yes, yes, I always love that question. Let’s start with the growth that we’ve seen in Janitorial. I think it is a combination of, we expected bigger job being offered and thereby us in some instances being one-on-one out in the marketplace because we are the only one who can actually meet the customers’ expectations.

I think we are benefiting again tremendously from the new organization and seems to be much more one could here in the team. So, I believe also we are actually taking market share right now and Janitorial is as usual doing a fantastic job in that area. And if I look forward again I talk, about earlier we see great opportunities in the pipelines, nothing is signed and sealed but it all starts with opportunities. And the opportunities are bigger and better. And again with bigger and better, we hope to be in a position of being one on one, because nobody else can match us on a geographical footprint.

David Gold – Sidoti

Got you. And based on the opportunities that you’re seeing, can you give us some sense for what your outlook is on say office occupancy? I mean, does it appear as though they will be increased opportunities say throughout the year or two where things get much better?

Henrik Slipsager

As I’ve stated it before building occupancy or especially commercial building occupancy has maybe a slight impact on our numbers but very minimal. I think it’s more if the occupancy is improving or the vacancy is dropping, it’s all, it’s more I think a result of better business and better business environment. And better business environment is leading to exactly what Jim was talking about before which is excess tax sales.

And we have it to actually this quarter we saw excess tax sales of $5 million year-over-year but we’re not ready I think to say this is the new level, we want to see it continue for one, two, three, or four more quarters but nonetheless it’s very encouraging for what we see in the marketplace.

David Gold – Sidoti

Perfect. And then, one other, on the tag sale side. Can you give us a sense for what sort of, what kind of work you’re doing number one and number two, what you think say, the longer term potential as of that business and it’s nice to see it back in the $5 million level but where do you think it could go?

Jim Lusk

David, I think what we see is just across all of the symbol regions, an organic spend increase that touches all aspects of the tag business. There’s not one piece of tag work be it carpet cleaning or specialty cleaning that has lead the way. It’s just been organically from the bottom.

And it’s really a concentrated effort by the team to achieve a certain element of tag sales as it compares to their overall revenue goals and as you push that down into the system and you have more people out there with those targets and with those initiatives that are well defined you get those results.

David Gold – Sidoti

Perfect, perfect. Just one last one, I’ll get off. Can you talk a little bit about I know you hit on the realignment but sort of where we are in the process or how close to done are we?

Henrik Slipsager

On the operational realignment?

David Gold – Sidoti

Right.

Henrik Slipsager

I would say Jim can jump in if you want to jump in, but I think in general we are 80% to 90% there. There’s still some offices that need to be closed down but I think the leadership has been communicated throughout the organization.

And I’m very, very pleased to say that in the process which you do reorganizations, we did not lose one person that we didn’t want to lose. And we have a team that’s very enthusiastic about the new organization. So I believe I would say as of now the operation was a success.

David Gold – Sidoti

Excellent, thank you.

Henrik Slipsager

You’re welcome.

Operator

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

George Tong – Piper Jaffray

Hi, good morning. Could you provide us with some of the additional details on the higher operating costs, you noted associated with the large Janitorial contracts, and what plans do you have to bring those costs over time?

Henrik Slipsager

Yes, we have it, the business, it’s a very sizable contract and I would like to start by saying shakes as of March 1, and we expect profits to move in the current quarter to be substantial to see our contract. But nonetheless, when you start big contracts, you make your big proposals.

You have a lot of assumptions in that proposal. We made some miscalculations in some of those assumptions. And we dealt with the issue and it’s been solved. It’s not unusual when you have jobs with this material job I think will fall between 2,000 and 2,500 people, it’s a sizable business. And the good news is, we with our retention rate we expect this job with us over the next 15 to 20 years profitable.

George Tong – Piper Jaffray

Got it, that’s very helpful. And to the extent that you’ve done the math or talk through the potential impact, could you walk us through implications of minimum wage increases on your business?

Henrik Slipsager

Yes. In general, I’ve been, I’m old. I’ve been through many minimum weight increases. And in general I can just tell you that it really has no impact or if there is an impact, it’s a positive impact. The key thing is, the minimum weight increase it hits everybody. It’s much more difficult you deal with the union increase in a mix model with union and non-union and the non-union part of the market has net increases.

So, in this particular case with minimum weight increase, we do not expect any negative impact on the company’s performance, to have a positive impact of course on revenue. And overall, based upon our historical knowledge, given with minimum weight increase, we normally see a positive impact with bottom line as well.

George Tong – Piper Jaffray

That’s very helpful. And then last question, you noted some positive trends in healthcare sports and entertainment protocols. Could you elaborate on that in terms of what you’re seeing and how these trends will translate into bookings and revenue performance?

Henrik Slipsager

Yes. Let me start with healthcare and I’m so proud of Tracy and his team has done with healthcare. Healthcare, as you know we bought HHA a year ago, a year two months ago and relatively small organization, $50 million to $55 million of business.

We must need through the all the healthcare businesses, which was primarily (inaudible) healthcare and now we are on a sales basis including our HQA acquisition which was our healthcare partner. And that team combines really, really hitting it out of the ballpark in my mind. We expect double-digit growth this year for top and bottom line, not only double digit growth but a sizeable double-digit growth.

And when we made those acquisition aviation as well as healthcare, I think I made it very clear that we can expect the vertical probably to create and achieve higher growth rate that we’ve seen in our regular business. And if this continues, at least I could tell you I was very right.

On the other verticals, it’s primarily a sales vertical. We talk about stadiums and arenas and again you’re looking at double-digit growth, you’re looking at growth not only here, you’re talking about growth also in the U.K., tremendous success in the way they are approaching the market. And I really believe we are one of the top notch-provider of the services in the stadium world.

George Tong – Piper Jaffray

That’s very helpful. Thank you so much.

Henrik Slipsager

You’re welcome.

Operator

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

Adam Thalhimer – BB&T Capital Markets

Hi, good morning guys, nice quarter.

Henrik Slipsager

Well, thank you.

Adam Thalhimer – BB&T Capital Markets

Just curious you said in your commentary that Q1 came in a little better than your internal expectations. Where were you surprised on the upside Henrik?

Henrik Slipsager

I was surprised in, and this is a very good question by the way, first time I got that. I was surprised that we were able to see growth in the level at repeat, as we talk about before. Security did still better than I expected. Janitorial did pretty much what I expected. Parking did much better than I expect considering I knew there was going to be hit of snow as well as the revenue growth is not as great there as advertising.

So I would say that the good news is, this was not like a one-time New York Lotto Award but truly throughout the business, I saw a little here and little there. And I mean, the best point of view, that’s what we also prefer because it’s not a one-time type situation in my opinion. I think in general we see an optimistic organization and we see a pipeline on your business that exceeded at least my expectation.

Adam Thalhimer – BB&T Capital Markets

Great. And then if you get the WOTC credit, I mean, give your optimism and good results in Q1, does that make you more confident maybe in the high-end of your guidance range?

Henrik Slipsager

I would like to talk guidance after the second quarter. This quarter as an example, I could not predict the snow that Jim had a little hit on the snow living in New York, believe me, we’ve seen snow this year. And I’m not ready to say there will be. So there are so many things that can still happen. But clearly the first quarter is in the burst, and I’m very pleased with the first quarter. So, we’ll start with that example.

Adam Thalhimer – BB&T Capital Markets

Okay. And then just one, the corporate expense in the quarter was down year-over-year and you gave a couple of reasons for that. But it didn’t seem like those reasons were necessarily going away so any chance that line item is down year-over-year this year?

Henrik Slipsager

I think there is a good reason to believe it’s going to be hopefully flat year-over-year slightly up. There are some temporary things that takes place in that particular line. We have our IT Group in Atlanta, and we are trying to hire people all the time because we’re little behind our IT people.

So that is bad news because we save a lot of money. So, I think we are controlling that line very tightly. And flat would be a good year up to 3% would be acceptable in our mind. But we don’t expect anything. We have plans to lower that by $10 million but keeping flat.

Adam Thalhimer – BB&T Capital Markets

Okay, great. Thanks for your color. I appreciate it.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Michael Kim of Imperial Capital.

Henrik Slipsager

Michael.

Operator

Your line is now open.

Michael Kim – Imperial Capital

Can you guys hear me?

Henrik Slipsager

I can hear you.

Michael Kim – Imperial Capital

Yes, good morning guys. So, for customers where you had great assessment bundling on-site services, how has that benefited pricing I guess, at least on the Janitorial side or versus selling individual services?

Henrik Slipsager

The pricing side?

Michael Kim – Imperial Capital

Correct.

Henrik Slipsager

It was very limited impact on the pricing side. So I think in general you will see the bigger the jobs are the pricing is a little tighter going into the job. But for that’s some while we give it back to the average of the offices. So, it really has no mix impact on the prices.

Michael Kim – Imperial Capital

Okay. And then, client retention 92% is pretty good, how do you guys get to your 95% target and how much – how important is pricing to that or are there other factors that way into that number?

Henrik Slipsager

First of all it was 93%.

Michael Kim – Imperial Capital

Yes.

Henrik Slipsager

Second of all, the way to get to 95% is lose those accounts. And the way Jim has done it, it’s a very targeted approach towards every employee in the company for people to understand it’s much more important to have a happy existing for us and then should go with to grow with a new customer.

And I think Jim has already been very successful with that program and is moving in the right direction. And I’m pretty certain he’s going to hit 95% maybe not this year but hopefully in the next.

Michael Kim – Imperial Capital

Great, and then just turning to the government side, what was the overall contribution from government in the quarter and with that recent budget deal, are you seeing some larger scale opportunities emerge that could drive for fiscal ‘15 type opportunities?

Henrik Slipsager

The overall numbers just one thing – let me add about the opportunities. I think basically what you see with the government right now is that let me give you a number here. It’s profit wise it made $2.6 million approximately with sales of around $32.5 million for the quarter.

I would say and Tracy feel free to jump in here, but the budget side is I would say there is some noise out of the system but actually having a budget that’s approved. Hopefully we will see that the system out of government that we expect, and I would just like to say we had a very good start of the year with government and it’s probably is a reflection of a more stable situation than we’ve seen in the past. Anything?

Tracy Price

Yes, I think if you look at the performance in that business unit, where they’ve really had kind of stall work activities in the medical piece of the business and that’s consistent with the vertical strategy that we have in healthcare. So, the medical and O&M business is doing very, very well, that news works in that – piece of being a company as well.

And the project work is about similar to activity that it was last year. So, I think all-in, we see pretty normal operations. Obviously the government is pulling back from its work footing. So we need contracts related to international ambitions in the Middle East have been generally pulled back. So our focus continues to be on the things that we do very well domestically. There are some opportunistic contract potentials in Eastern Europe as a result of recent geopolitical activities.

Henrik Slipsager

Thank you.

Michael Kim – Imperial Capital

Great. And then, are you starting to see a little more frequency in protest activity, just given the budgetary environment or is it fairly similar with recent years?

Jim McClure

I think the protest activity has gone up each of the last three or four years. So, it’s very rare when you have significant contracts that aren’t protested. And it’s just as becoming a real drag on the velocity of that business. Conversely, we’ve had four or five different contracts this year that we anticipated ending that have all been extended through the end of this fiscal year, so it goes both ways.

Michael Kim – Imperial Capital

Great. And then on aviation, what kind of opportunity are you seeing outside the U.K. in the Middle East especially and can you elaborate some of those capabilities into Continental Europe or also you can make an acquisition there?

Henrik Slipsager

Well, I think you’ll see aviation been through these private wing throughout Europe and hopefully also in the Middle East and other places. It’s somewhat of a long-term process. We have grown to America in the U.K. this year and I see growth going forward for U.K. as well. So, an acquisition would absolutely help that growth vehicle and if something comes along I might look at it.

Michael Kim – Imperial Capital

Okay, great. Thank you very much.

Henrik Slipsager

Thanks.

Operator

Thank you. Our next question comes from the line of Andy Wittmann of Baird. Your line is now open.

Andy Wittmann – Baird

Thanks for taking my follow-up guys. Tracy the Building & Energy Solutions business and backlog business you’ve been talking about that it’s kind of up maybe record. Can you give us what the backlog is today, how it may be compared to last quarter and maybe last year just to we can get a sense of that glide path?

Tracy Price

Yes, I can tell you that the backlog last year compared to this year at the same time is 3x what it was. And that’s prior to landing the big right State job which really pumped up our backlog, however we have kind of a clear line to maintaining that level of backlog going forward without having large right State project. So I think we feel very, very good about how that business is working and what the long term prospects are as we continue to build that footprint out.

Andy Wittmann – Baird

But does that backlog pertain to the entire Building & Energy Solutions reported segment on your segment reporting, was that just part where you’re actually doing energy efficiency work in other words, you’ve got I guess, government in BES segment, but is the backlog just the mechanical projects part of BES?

Tracy Price

Yes, the backlog would be pertinent to everything under our ABES banner, so mechanical, electrical and Building Energy Solutions.

Andy Wittmann – Baird

Okay, good. I just didn’t want investors to get confused and say okay, backlog is up three times that means that segment’s revenue is up three times, but it’s not – so it’s just a portion of that segment is up three times?

Tracy Price

Yes. And the backlog gets worked up over time. So what we see is – we’re in a very good position compared to where we were at the same time last year.

Andy Wittmann – Baird

Just for perspective, maybe can you give us a sense of how much of the reported segment of BES is ABES, does that make any sense there?

Tracy Price

Yes, about 45%.

Andy Wittmann – Baird

Okay, great. That’s really helpful. And then final question, Jim, just on the cash flow as you mentioned timing, is it fair to assume that at the close of books and at the end of February that DSOs started working on to those back from those timing issues or are there large contracts that maybe are being disputed or kind of hanging things up?

Tracy Price

Clearly for the year, it does get better, clearly for this year and that will be better. So, that’s always an issue of individual customers but they will get better.

Henrik Slipsager

Our cash flow expectations for the year has not changed.

Andy Wittmann – Baird

Okay, great. Thanks.

Operator

Thank you. I’d like to hand the call back over to Mr. Slipsager, for any further remarks.

Henrik Slipsager

Okay. Thank you very much. Thanks very much for listening to our first quarter call. I’m sure we’ll talk with you in 90 days. Have a beautiful day. Thanks.

Operator

Ladies and gentlemen, thank you for your participating in today’s conference. This does conclude today’s program. You may disconnect. Have a great day everyone.

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