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ABM Industries Incorporated (NYSE:ABM)

Q2 2014 Earnings Conference Call

June 4, 2014 8:30 am ET

Executives

Henrik C. Slipsager - President and CEO

Sarah Hlavinka McConnell - SVP, General Counsel and Corporate Secretary

James S. Lusk - EVP and CFO

James P. McClure - EVP and President of ABM Janitorial Services

Tracy K. Price - EVP and President of ABM Facility Solutions

Analysts

Mike Gallo - CL King

Andrew Wittmann - Baird

Michael Kim - Imperial Capital

Adam Thalhimer - BB&T Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the ABM Industries Q2 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, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Henrik Slipsager. You may begin, sir.

Henrik C. Slipsager

Thank you. Good morning. Joining me today are Jim Lusk, Executive Vice President 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 2014 second quarter that ended April 30. Jim Lusk will discuss the details of our financial results. Mr. McClure will provide an update of our Onsite businesses and Tracy will comment on the Company’s operational results of Building & Energy Solutions, as well as our sales and marketing initiatives. I will then comment on Air Serv's 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 Web-site 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 Web-site under the Investors tab.

Henrik C. Slipsager

Thank you, Sarah. Now please turn to Slide 4 for an overview of our second quarter. Revenues for the quarter were in excess of $1.2 billion, a record for the second quarter and up nearly 5% from the same period last year. Janitorial posted top line growth of over 3%. Building & Energy Solutions had another exceptional quarter both in revenue and operating profit. BES achieved top line growth of 26% and on an organic basis 21%, and operating profit increase of over 105%. The growth came from all three parts of the business with revenue from ABM Healthcare Support Services increasing 35% and the Government business increasing 20%.

Air Serv revenue was up 12% benefitting from organic growth and the Blackjack acquisition. There were a number of items that affected the same quarter results of fiscal 2014. Legal expenses were higher than anticipated and start-up costs and weather in March impacted our Parking, Janitorial and Air Serv businesses. In addition, the same quarter of fiscal 2013 had a Work Opportunity Tax Credit benefit.

Cash flow improved significantly in the quarter compared to fiscal 2013 second quarter and on a year-to-year basis. Cash generated from operations is consistent with fiscal '13 and in line with our expectations. Our six month results with the exception of the Work Opportunity Tax Credit [are as per internal plan] (ph) and we expect to be on plan for the fiscal year. Yesterday we announced a cash dividend for the third quarter of $0.155 per common share. This marks our 193rd consecutive dividend.

Now, I would like to turn the call over to Jim Lusk for a financial review of our second quarter.

James S. Lusk

Thank you, Henrik, and good morning everyone. Turning to Slide 5, as Henrik noted, revenues of $1.23 billion for the second quarter were up 4.9% compared to the prior year. This was due to net sales contributions of $48.2 million from organic growth or 4.1% and $9.5 million from acquisitions.

Gross margins for the 2014 second quarter were 10.39%, down 30 basis points compared to the second quarter of 2013, primarily attributable to higher operating expenses from net new business and the impact of unfavorable weather conditions in the current year quarter. This decrease was partially offset by contributions from newly awarded contracts within our Building & Energy Solutions segment and savings realized from our organizational realignment.

SG&A expense for the second quarter increased $8.8 million or 10.4% to $93.3 million, primarily as a result of a $3.4 million unfavorable arbitration decision, a $3.2 million increase as a result of hiring additional personnel to support certain growth initiatives in IT, and a $1.4 million increase in legal expense. These items were partially offset by $1.4 million decline in depreciation expense, mostly associated with the previously upgraded enterprise resource planning system. Amortization of intangible assets for the second quarter decreased by $0.6 million to $6.7 million.

Our effective tax rate on income before – for income taxes for the three months ended April 30, 2014 and April 30, 2013 were 42.4% and 39.1% respectively. The year-over-year difference consists primarily of the WOTC credits that occurred during the second quarter of fiscal year 2013.

Adjusted net income which excludes items impacting comparability was down $1.4 million to $18.8 million for the second quarter as a result of lowering operating margins due to new business. Also impacting operating margins were higher legal expenses of $0.9 million, startup costs of $0.9 million and the impact of adverse weather of $0.5 million. These items were partially offset by profits from new business in the Building & Energy Solutions and organizational realignment savings.

Now turning to Slide 6 and 7, Days sales outstanding at quarter end were 53 days, up three days on a year-over-year basis but down three days sequentially. Cash generated from operating activities for the quarter ended April 30, 2014 was $76.6 million. This was an increase of $27.3 million compared to the same period in fiscal 2013, primarily related to the timing of collecting receivables and payments to vendors.

Turning to insurance, total insurance claim liabilities at April 30, 2014 were $357.1 million compared to $350.7 million in the second quarter of 2013. For self insurance claims paid during the quarter, the total expenditure was $23.1 million, down $0.5 million year-over-year. As Henrik noted earlier, we announced our 193rd consecutive dividend, continuing the long established pattern, as evidenced by the chart at the bottom half of Slide 7.

I'd now like to turn the call over to Jim McClure

James P. McClure

Thank you, Jim. Please go to slides 9 and 10 and I'll now provide some operational highlights of our Onsite Services for the second quarter before turning the call over to Tracy for an update on Building & Energy Solutions. Janitorial top line growth for the quarter was 3.1% compared to 2013 with revenue of $631.7 million. Janitorial sales momentum continues with the recent contract wins at our financial services, education and technology verticals as well as national bids. Discretionary tag spending increased 2.3% over second quarter of 2013, while client retention on a rolling four quarter basis was at 92%.

The Janitorial segment earned $36.2 million in operating profit for the second quarter of fiscal 2014, down $1.3 million compared to fiscal 2013. For some time, clients have been moving towards aggregating and centralizing their purchasing decisions. This is causing an increase in bids for big packages on a national basis. The Onsite focus has made us very successful in earning these types of bids and sales remain strong. However, these larger and national jobs initially have lower margins and startup costs can be significant.

Partially offsetting the lower margins on the new business were savings from our realignment. In addition, the second quarter operating margins for Janitorial were impacted by higher legal expenses, startup costs on significant new jobs, weather, and as I mentioned on the first quarter call, we cancelled a large unprofitable job in March. All of these items were approximately $1.8 million of impact on a year-over-year basis.

Moving to Facility Services, as previously communicated, we expected revenue to be lower but we managed a small increase of $2.1 million. Despite the slight revenue growth in the second quarter, operating profit for Facility Services was $5.4 million, down $800,000, primarily from legal expenses of $400,000 associated with two closed cases.

For Parking, revenue was $152.6 million, up $1 million compared to 2013. Management reimbursement revenue was up $900,000 to $77.1 million. Parking operations achieved a 4.9% increase in operating profit of $6.4 million based on realignment savings and a one-time benefit. Partially offsetting these items was $200,000 unfavorable impact from adverse weather. We are very pleased that Parking generated both top and bottom line growth for the quarter.

Coming to Security, the team accomplished another quarter of top line growth with a 2.5% increase on a revenue of $93.8 million. For the second quarter, Security generated an operating profit of $2.2 million, a 5% increase compared to the second quarter of fiscal 2013.

Before concluding my portion of today's prepared remarks, I want to provide an update of where we stand on the Onsite realignment. For the second quarter we achieved on a pre-tax basis savings of approximately $2 million compared to the second quarter of fiscal 2013. We are on course to have cumulative synergy savings of approximately $10 million for fiscal 2014 and since inception approximately $13 million for Onsite, all of which is consistent with the numbers we provided last year when we announced our Onsite realignment program.

With that, I'll now turn the call to Tracy.

Tracy K. Price

Thank you, Jim. Continuing on slides 9 and 10, I will provide an update on our Building & Energy Solutions segment which includes ABES, Government Services, and ABM Healthcare Support Services. This was another strong quarter for the team and we are very pleased to share these results.

Starting with revenues, we accomplished the 26.2% increase to $118.5 million. Excluding acquisitions, we achieved organic growth of 21% as we benefited from an increase in energy projects, service and maintenance contracts and continued improvement in our Government business, another outstanding quarter for the ABES team and reflective of our continuing record backlog and strong sales momentum.

Revenue from our ABM Healthcare Support Services was up 35% to nearly $26 million compared to the second quarter of fiscal 2013, and our Government operations grew revenue on a year-over-year basis achieving top line growth of over 20% with revenue in excess of $38 million.

With year-over-year growth in revenue by ABES, contributions from ABM Healthcare, Government Services, BEST IR, and our newest acquisition, Alpha Mechanical, BES generated operating profit of $3.5 million, up 105.9%. These are outstanding results and based on the strength of our pipeline, we remain well-positioned as BES moves further into fiscal 2014.

Turning to Slide 11, I want to mention a few of the sales and marketing highlights from the past quarter. We continue to make strategic investments to drive organic growth and enhance our sales capabilities by utilizing our automated sales and marketing tools and ensuring our sales personnel have the best skills by putting them through our trusted advisor training program. Approximately 84% of our 250 salespeople have entered the Challenger Program to-date.

At quarter end, our Solve One More program has generated nearly 1,800 leads and a sales pipeline of approximately $100 million. The corporate sales team is working across operations to strengthen collaboration and help drive sales in multiple services and we are concentrating our efforts in a number of key areas including aviation, education, healthcare, energy and government, all of which sustain the growth rates we've been experiencing across ABM.

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

Henrik C. Slipsager

Thanks Trace. 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, had revenue of $85.2 million, up $9.1 million or 12% compared to the same quarter of fiscal 2013. The Blackjack acquisition contributed revenue of $4.6 million. Organic revenue growth was 5.9% with the recent startup of the shuttle operations at Heathrow Airport. Air Serv is in a position to achieve top line organic growth in high single digits for the remainder of fiscal '14. Operating profit of $2.4 million was essentially flat for the quarter as Air Serv had $900,000 of costs associated with significant new jobs on a year-over-year basis.

Please now turn to Slide 13 for a review of our financial guidance for '14. The Company continues to expect the following; $1.38 to $1.48 for net income per diluted share; $1.58 to $1.68 for adjusted net income per diluted share. The adjusted guidance effects the exclusions of charges consistent with our past practices and is based on an effective tax rate of fiscal '14 in the range of 36% to 38%. It is based upon Congress extending the Work Opportunity Tax Credit before the end of fiscal year, October 31, 2014.

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 13 which contributes 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. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Gallo with CL King.

Mike Gallo - CL King

Congratulations on another good quarter of organic growth. I wanted to just dig in a little bit on the cross-sell. It seems like that's really starting to gain some traction. Obviously you had the nice win at Heathrow. So I was wondering if you could update us on what you are learning as you start to bundle and incent, how you are making adjustments and how you can kind of bring that to the next level where we really see a fully integrated ABM going to market in more and more areas?

Tracy K. Price

Michael, this is Tracy Price. So I think the learnings over time are that we have an enormous opportunity in front of us if we can do a good job of educating and training our folks in the local markets about the myriad of services ABM provides. Therefore, most of these people have been focused on their existing service line, and with the restructuring and reorganization, they are learning about multiple services within Onsite as well as being exposed to the services provided by the mobile group in power and lighting and mechanical, and this is a lot to digest in a small period of time.

What we've been doing is conducting 'Day in the life' meetings and taking all of the management and sales talent in mobile markets through all the different services that ABM provides, and we've also been hosting Solve One More meetings where literally people who have worked for the same companies for 20 plus years are meeting for the first time. So, the exchange of information is terrific, the behavior is more like the musketeers that we were hoping for, people are rallying around the brand, they get the [rear work] (ph), they like the vertical strategy, and where we've been able to infill with mechanical or electrical locations in markets where we have client concentrations, we're driving terrific growth.

Mike Gallo - CL King

That's great. And then just a question on the acquisition pipeline. Obviously the balance sheet is deleveraged at this point. I was wondering if you can give us an update on what you're seeing out there in the acquisition pipeline, whether you expect we'll see some additional tuck-ins, whether multiples are at reasonable level?

Henrik C. Slipsager

In my world, the multiples will never reach to go tuck. They have been moving up a little bit, the multiples in the business because of I would say private equity in the market and the financing opportunities, but we do see some decent activity. We have not been very aggressive on the specific Onsite Services the last year and a half simply because Jim has gone through an enormous restructuring, he's done a fantastic job of getting us to where we need to be. So, the focus has been more on the technical services and on future verticals. So, that will probably alter the source of growth going forward.

Mike Gallo - CL King

So as you go forward, you feel like Onsite is where you wanted to be, where you might look a little more aggressively at this point or should we expect more of the same?

Henrik C. Slipsager

I hope we're going to see Onsite having a more consistent organic growth at these new levels. So 3% to 5% will be something that we would like. And I really don't want to have an acquisition, always exception if something comes by that's very attractive, but nonetheless we don't want to disturb the organization with an acquisition right now because I think they are on the track of developing a wonderful organization where an acquisition can be more of a distraction instead of having the focus on growth in this, basic profitable growth.

Operator

Our next question comes from Joe Box with KeyBanc Capital Markets.

Unidentified Analyst

This is [indiscernible] in for Joe Box. Just a quick thematic question for you. I wanted to go back to something that you mentioned on the Janitorial side. You talked about the trend for contracts being bundled, larger national contracts, and coming in at a lower margin. Should we be thinking about the Janitorial operating margins then potentially drifting lower or do you see that offset by your realignment efforts?

James P. McClure

This is Jim McClure. I believe that margins will stabilize. This is a product right now of a job mix impact. These larger accounts do initially have lower margins, that kind of always has been the case, but we are seeing much larger opportunities which are fantastic because we are able to enter those opportunities at a senior level, communication above procurement level, and over time we will get the revenue growth we're looking for and we've always been able to mature these jobs to where the margins come in line. So I think you can consider the Janitorial margins in the past to be what to expect for the future.

Unidentified Analyst

Okay, great, thanks. That's all for me this morning.

Operator

Our next question comes from Andy Wittmann with Baird.

Andrew Wittmann - Baird

Building on that last question a little bit, it sounds like, Jim, from your comments on the Janitorial segment that you have done one of these new larger jobs maybe than you've won. In other words, the job size has been larger than what you've won in last couple of years. It's kind of hurting your margins for now, you'll get it back over time. Can you talk about what the pipeline for new work looks like, what's the complexion of that? It sounds like there are more large jobs in there. Do you expect that to be the growth driver and are these levels, in the north of 3% range for Janitorial, sustainable as you look into next year?

James P. McClure

I'll start with the last part. Yes, they are sustainable, the 3% plus for next year. The pipeline is as robust as I've ever seen it. We've got pending commitments that are tremendous, and of those commitments a majority are falling in that medium to large contract size. And as this continues, the market catches fire when they feel us getting these bigger opportunities and they become the norm. We get continued looks from companies both nationally and internationally to expand. And so, we're getting a lot of action and our national sales team is earning their money these days, those are covered up of opportunities. So we're feeling very good about our pipeline.

Andrew Wittmann - Baird

Okay. Before going to margins on that, can you just talk about like the win rate that you're having? It feels like you've got pending commitments meaning you've got bids that you're waiting to hear back on. Can you talk about the win rate that you've had recently, is it in line with historical norms or is there something about kind of a 'One ABM' selling process which is improving your win rate?

Henrik C. Slipsager

Let me jump into this one also because I think it's very difficult to talk win rates because most of the jobs that we have received has been negotiated jobs that drove these bigger, bigger jobs, because I would want to say, very few companies, if any, can do those jobs, they are simply too big. So to give you a ratio number I think will be very wrong but at least that's towards the major jobs are negotiated and not bid, which is great.

Andrew Wittmann - Baird

Okay. Maybe just one last one here for Tracy. On the BES segment, I kind of think of because there's some project based work, I mean that business can be lumpy. Can you talk about kind of what you're seeing today as underlying trends, is the quarter growth rate benefiting from some lumpy business or do you see that some of these new business levels or revenue levels as fairly sustainable too?

Tracy K. Price

What you have to understand is that we have been backfilling with additional BES sales talent as we have made strides. So we have been taking it forward and putting in place in the markets where BES is attractive, the talent to drive more business. So it shouldn't be very lumpy. We have benefited from a lot of wins. In last year, we had the largest deal in the history of the Company which was $25 million. Last quarter we signed the second largest deal which was $13 million. The pipeline is currently larger than it was at the same time last year, even though the largest job in the Company has effectively been worked off. So we've got broader talent base, we're covering more markets and we're going to continue investing in that [area] (ph).

Henrik C. Slipsager

I just want to add one thing in here. It's not really lumpy if you look at it over time, but you might have quarters where you either finish up more than expected or finish up less jobs than you expected, simply due to the fact that we're doing the project type work. So if we have a win in a quarter, some of the work might be delayed into the following quarter. That's one area I wanted to make comment on.

The other area is government. Right now we are enjoying government and the comparisons with government, but I'd like to say, our history tells us we really don't know about government in the future. So we are just hoping and praying that it is continuing the way it's been going this year.

Andrew Wittmann - Baird

Guys, pardon me but I want to do a last, last question, and I want to involve Jim as well a little bit here. Just on some of the adjustments to the adjusted net income, Jim, if you read the press release, you kind of hear about litigation charges that were added back in the adjusted number but you have got it looks other kind of comments on legal and related charges that flowed through and impacted your margins. Is that just because is the litigation just added back if it's of substantial size and the other ones expensed because they are smaller, or can you talk about kind of what the hurdles were to add-back and what was added back and what was not?

James S. Lusk

The one that's added back, which is in items impacting comparability, was an arbitration, an arbitration case. So that's kind of a finite kind of thing. The other are just legal expenses for ongoing things that we have. So that's the differentiation. So we're trying to use the word arbitration for below the line and then legal for above the line to avoid that confusion, but in fact it was an arbitration settlement that we backed out.

Henrik C. Slipsager

I would like to add about that arbitration settlement also that it is a decision we very much disagree with and we challenge the decision, but due to our experience when it comes to arbitrations, it would be very difficult for us to an alternative, but nonetheless we are challenging it.

Operator

(Operator Instructions) Our next question comes from Michael Kim with Imperial Capital.

Michael Kim - Imperial Capital

So not to neglect Parking, obviously weather wasn't particularly great this quarter, but can you talk about some opportunities to align the growth rate closer to the corporate average or at least closer to Janitorial, what are some steps you can do to bring that business up?

Henrik C. Slipsager

Obviously weather was bigger than [indiscernible] for the quarter, but nonetheless, the growth we have seen in Parking and the growth we expect for the third and fourth quarter I think is going to be pretty close to the growth of Onsite, and if nothing unforeseen is coming up. We are aware of some start-ups, I think starting this month is a major job in LA. So I hope for the rest of the year, you will see Parking be in line with the rest of the business.

Michael Kim - Imperial Capital

And then maybe to a lesser extent, Security as well, do you see an opportunity to gain share there or cross-sell with some of the other existing Onsite clients?

James P. McClure

This is Jim. Security has benefited from the Onsite environment. I think if you go back over the last year, you're seeing tremendous bottom line improvement and top line enhancement. They had some minor negative top line impact this last quarter but they've got a robust pipeline on some exciting national industrial accounts that are really their sweet spot. So we feel good about Security, and like I said, their profit contribution has increased dramatically and it's getting more in line with the rest of Onsite.

Michael Kim - Imperial Capital

Okay great. And then just turning back to Solve One More, I think you called out a pretty significant increase in leads and somewhere around $100 million in pipeline. Can you help us maybe get a better sense of what this pipeline conversion could look like, at least maybe what you're targeting and how much of that could occur in the current fiscal year?

Tracy K. Price

I can tell you that we closed about $36 million to date. I don't have the conversion ratio off the top of my head, but understand that the whole value statement in Solve One More is, we are going to existing clients and solving additional problems that they have with services that we're quite confident in delivering. So the close rates tend to be higher. There is just a lot of enthusiasm and upwelling and excitement, but keep in mind we're rolling this out serially across the country. So we just don't have the headcount or the resources to go do 80 Solve One More meetings in every market that we could.

So we're taking them systematically by region and making sure that we're doing a deep dive on cross-training and that we got the systems in place to track the leads, to nurture the leads, but then qualify the sales process into our sales force CRM program, and then once they get into JVE, they become opportunities for additional Solve One More programs. So it's probably 2x to 3x the close rates of our traditional sales activity, but I don't have that at my fingertips.

Michael Kim - Imperial Capital

Okay, no, that's fair enough. Great, thank you very much.

Operator

Our next question comes from Adam Thalhimer with BB&T Capital Markets.

Adam Thalhimer - BB&T Capital Markets

[Inaudible] to your full year guidance, what are you assuming for EPS in Q2, is it the $0.33 or are you adding back the $0.04?

James S. Lusk

$0.33. Yes, we are assuming the actual. And the guidance is, the overall guidance is dependent on the WOTC credits that we mentioned before within our fiscal year.

Adam Thalhimer - BB&T Capital Markets

Okay, how big are those?

Henrik C. Slipsager

$0.08 for the year.

Adam Thalhimer - BB&T Capital Markets

$0.30 in it?

James S. Lusk

$0.08.

Henrik C. Slipsager

$0.08, approximately $0.02 per quarter. It's going to be $0.03 year-to-date but it's around $0.02 a quarter, $0.08 for the year, is in our original budgeted plan.

Adam Thalhimer - BB&T Capital Markets

Okay, so it is $0.05 in the back half that could show up on the tax line?

Henrik C. Slipsager

$0.05 in the second half is what we expect to benefit from the WOTC credits, and it's been all [curve] (ph) through. We have the $0.03 for the first half and we can [indiscernible].

Adam Thalhimer - BB&T Capital Markets

Okay, thanks for that. And then I wanted to ask about the Alpha Mechanical acquisition. Strategically, would it make sense to be bigger in the HVAC service business?

Tracy K. Price

Absolutely, I'm not going to argue with you on that one. What's happening, and we can show evidence of Washington DC market, Atlanta, LA, Orange County and dropping in San Diego, we went about undertaking a California strategy where we wanted to more or less concretize the backbone of the mobile services to leverage off the existing client base, and we do a $1 billion worth of revenue in California, it's over 20% of our employee headcount. So it makes sense just trying to connect the tissue between the service lines in those markets.

And what we're finding is, where maybe in years gone by there was little to no communication between groups, with the restructuring of Onsite and the tying together of the technical competencies that we have at mechanical and electrical and the power business, we're getting tremendous pull-through. And as you know, if you've got a $10 million to $15 million branch location and you're pulling through $800,000 to $5 million jobs, the growth tends to be pretty eye-popping.

So, in the markets where we've been able to put the multiple service lines, do the Solve One More, do the 'Day in the life', we're seeing terrific growth. So, to the extent that we could land mechanical and power and electrical business in all of our markets where we have client concentrations for ABM, it would be wonderful, but also we're not a serial acquirer of small companies. So, we are picking our markets, looking at the right opportunities and getting things that are more impactful. We can't go buy tiny companies all over the place. But it's a terrific infill strategy and it's working quite well.

Adam Thalhimer - BB&T Capital Markets

And then you're not – I mean before the acquisition, how much construction did you do, you're not – I mean you would welcome a construction recovery benefit?

Tracy K. Price

I welcome a construction recovery because then the construction companies go back to doing construction and they get out of our market. So they tend to create a lot of confusion in low margins when the economy is not doing well. And we do construction management in our Government group but we are a pure service play on mechanical and electrical.

Adam Thalhimer - BB&T Capital Markets

Got it, okay. And then I guess just last question, as it relates to guidance for the full year, Henrik, I mean Janitorial margins are good but in some of the other segments, like Facility Services, Security, BES, Air Serv, it looks like you need margin improvement in the back half and there has been a lot of moving parts in the first half of the year. So what's your confidence level in that margin improvement in the back half?

Henrik C. Slipsager

I'm very confident about the overall result for the year and our guidance, and it is associated with a lot of things. We [indiscernible] that it's really unique compared to other business with respect to the quarters [where we earn] (ph) the bigger bucks, the way we take or expense [indiscernible], it's probably hitting us in the first and second quarter, and coming May, June, it's going to drop dramatically and we go through the summer with a lot of vacation replacements. We have a pipeline that we are aware of, we had a lot of start-ups earlier this year that we will benefit from in the second half.

So I think I can tell you, yes sir, I'm very comfortable that we are going to live up to our expectations for this year because we have started the business, we know what we have for the rest of the year and we have worked on some [tracing] (ph) before we – we have basing our forecast on the backlogs and what we have in front of us and not with the hope that we're going to get a job or two in the next three months, and it looks pretty good for the remainder of the year.

Adam Thalhimer - BB&T Capital Markets

Okay, great, thank you.

Operator

I'm not showing any further questions at this time. I'd like to turn the conference back to Mr. Slipsager for closing comments.

Henrik C. Slipsager

Thank you very much and thanks for listening to our second quarter call. We will get back to you after the third quarter. Enjoy the summer. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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