ABM Industries - Earnings Call - Q2 2015
June 3, 2015
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the ABM Industries Second Quarter twenty fifteen Conference Call. This conference is being recorded.
Speaker 1
Thank you, Ben. Welcome everyone. I'm David Farwelt, Senior Vice President, Investor Relations. Here with me today are President and Chief Executive Officer, Scott Salmiers and Anthony Scaglione, Executive Vice President and Chief Financial Officer. 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'll see Events. Please select this tab and click View Presentation. Now turning to slide two of the presentation is our agenda. 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.
I would now like to turn the call over
Speaker 2
to Scott. Thanks, David. Good morning, everyone, and thanks for joining us. I'm excited to be conducting my first quarterly call as ABM's CEO. It's great to be able to start by delivering another quarter of solid performance.
We're pleased with our growth in sales, margins and earnings. Our business fundamentals continue to be solid and our outlook remains solid. As you can see on slide three, our adjusted earnings per share are $0.37 That's an increase of 12% year over year. From a revenue perspective, we grew 3.2% company wide. While our organic growth was low for the quarter, it may be more insightful to look at growth without the anomaly of the large on-site job we exited in December, which you have all heard about before.
When accounting for that, we are showing approximately 2.5% organic growth, but we had some timing issues on our project work in the BESG segment. We spoke about that on last quarter's call and signaled that we didn't expect there would be a pickup until the third quarter. So I don't think this is going to surprise anyone. We feel good about this segment and believe we will track the plan in Q3 and Q4. Actually, the team believes that if we hit on all cylinders, we may even make up for the deficit in Q1 and Q2.
That's the goal they're driving for and they're pretty passionate about it. Contributions from acquisitions were roughly $23,000,000 Our U. K. Acquisition of GBM this past October was driver. We've been really pleased with the progress we've made in The U.
K, not only with GBM, but also in the aviation market through our Omniserve business. I've had the good fortune of spending a fair amount of time in The U. K. Over the past six months and can tell you firsthand that we have a terrific team there and they're excited about leveraging our U. S.-based customers and our scale.
From an enterprise wide perspective, our adjusted operating margins were 7.6% year over year and that's after adjusting for our joint ventures. Our on-site organization showed margin improvement through operational efficiencies and the continuing benefit from our in year risk management and safety programs. Our other category, which is our grew their operating profit 25% year over year, largely due to strong organic growth. I was with the senior team two weeks ago at their annual operations summit. This group is really energized.
They're growing fast and they're building density in key markets. Just to give you an example, after some sizable wins in the past couple of months at the three New York area airports, these locations have grown to over $120,000,000 in revenue and 3,400 employees. This is really impressive. And density stimulates margin as you know. Outside of operations, we've been keeping pretty busy working on our strategy, repurchasing stock and launching an insurance captive.
Anthony will provide some color on our stock repurchase and insurance captive and also in a few moments give you some more color on the general financial condition. But before I turn it over to him, I want to share some observations since the announcement of my appointment as CEO in January. I spent a considerable amount of time on the road, meeting with our employees across the company and conducting town halls, the conversations and interactions have increased my confidence in the strength of our organization. I now have a much deeper appreciation for the talent across the country and I firmly believe we have a unique opportunity to take the foundation we've created and build on it. As many of you on the call from the investment community know, from day one in January, I've stressed that defining our strategy would be of paramount importance.
I've taken that commitment very seriously. In April, we launched a broad strategic review to build a comprehensive long term plan. As part of that process, we engaged the Boston Consulting Group to assist us in developing the frameworks for that initiative. We wanted to enlist a leading thought partner with deep business services expertise and we certainly got what we asked for. We're fortunate to be undertaking the strategic review from a position of strength as an industry leader.
Our focus is going to be to drive profitable sustainable growth. We're generating a great deal of energy and enthusiasm around the process across the company. And that's because we're taking a collaborative approach and creating touch points at all levels of the firm as well as with our customers. We're in the early stages when we plan on finalizing our review in the fall. So there'll be more details to come on that.
But I will say it's going to be our culture that's going to see us through. You can't have a winning strategy without the right culture to support it. Our culture here is so rich. And what I see clearly is that people here want to win. And they don't want to win as individuals.
They want to win as a team. And in essence that's our culture. And I believe that's what sets us apart. And I'm confident that our culture will be the engine that will drive our growth going forward. And when we marry that culture with a focused strategy, we are going to get an incredible trajectory.
So big picture, I'm excited about our future. We have an amazing group of people and a Board that is super supportive. Now I want to say a few words about our new CFO who's sitting right in front of me. I've had the opportunity to work with Answering since he joined ABM in 02/2009. I've always had a deep respect for his financial acumen and his M and A capabilities.
But now
Speaker 3
that I've had a chance to work closely with him, I'm confident that his energy and insightfulness are going to be what defines him and he's going
Speaker 2
to do an outstanding job in this role. So I'm setting the bar high Anthony, so no pressure at all.
Speaker 3
Thanks for the vote of confidence Scott and good morning everyone. I'm so excited about my new role in the CFO team. I'll mention more on that at the conclusion of my prepared remarks. Moving along, I just want to state that all financial results are year over year unless otherwise noted. Now two points from slide three.
We had record revenues for the quarter of $1,270,000,000 an increase of 3.2%. Adjusted net income rose 13% to $21,300,000 while adjusted EPS improved 12% to $0.37 per share. A portion of this overall increase is related to actuary determined insurance rates established in the 2014. These rates continue to favorably impact ABM's insurance expense in the quarter. I will refer to this item as insurance benefit for the following segment discussion.
Now let me highlight what drove the quarterly results. Moving to slide five. Janitorial revenue increased 4.4%, primarily due to $17,800,000 of additional revenues from the acquisition of GBM, organic growth and additional tag revenue. Organic growth was 1.6%. As Scott mentioned, excluding the termination of a large multi regional contract in December 2014, organic growth would have been approximately 3.9%.
Moving to operating profit. Operating profit increased by $2,700,000 or 7.3% with margins increasing roughly 20 basis points to 6.1%. The increase in operating profit margin was primarily due to the insurance benefit, the termination of a large low margin multi regional contract and operational efficiencies included a property sale. This increase was partially offset by one more working day during the quarter and additional personnel to support initiatives. Moving to facility services.
Revenues decreased 3,700,000 or 2.5%. Approximately $10,000,000 of low margin business was either canceled or lost. Partially offsetting this was new sales and increased scope with existing clients. Operating profit for facility service increased by $1,600,000 or 32% with margins expanding by roughly 120 basis points to 4.5%. The increase in operating profit margin was primarily driven by the contribution from the cancellation of loss of low margin business, the insurance benefit and lower legal fees.
Looking at parking. Revenues were essentially flat. Management reimbursement revenues decreased by $2,000,000 to $75,100,000 Excluding management reimbursement, parking revenue was actually up $2,900,000 or 3.8%. Operating profit increased by $700,000 or 11.7% with margins increasing by 50 basis points to 4.4%. The increase in operating profit margins was primarily related to the insurance benefit.
Rounding out our On-site results, security had flat revenue. Operating profit increased by 30% to $2,600,000 and margins improved by roughly 70 basis points to 2.8%. Our short term objective is to move the margin profile towards a 3% range by managing our labor costs better. Turning to slide six. BESG revenues were up 2.5%.
This was lower than what we had expected. With the BESG team, Scott and I reviewed in detail our pipeline of business, new sales and backlog and feel that there are no systemic issues that created the shortfall. Operating profit decreased by $300,000 or 8.6%. Operating profit margins decreased by roughly 40 basis points to 2.6%, primarily driven by higher investment in selling and onetime items. Partially offsetting the decline was income from our unconsolidated affiliates.
Although there are some risks with the plan, we feel confident with BESG's ability to achieve double digit growth by the end of the fiscal year. Moving to AirServe. We had another quarter of exceptional growth with a 12.8% increase in revenue. The focus of this vertical continues to drive multi service wins in both our U. S.
And international operations. Operating profits for air service increased by 600,000 or 25% with margins increasing by roughly 30 basis points to 3.1%. The increase in operating profit margin was primarily related to lower amortization and insurance benefit. The increase in operating profit margins was partially offset by higher labor costs associated with a scope increase, which we fully expect to recoup by the end of the fiscal year. In reviewing our corporate expenses, they were up approximately $3,000,000 excluding items impacting comparability.
For the full year, we continue to expect a 7% to 9% increase year over year as we communicated last quarter. Looking to slide eight. Cash generated by operating activities for the quarter ended April 3035 was $71,400,000 Sales outstanding at quarter end were fifty three days, unchanged and down three days sequentially. Now I'd like to say a few words about the company's leverage profile. Please turn to slide nine.
We ended the quarter with approximately $3.00 $7,000,000 of debt under our $800,000,000 line of credit. Including letters of credit of approximately $116,000,000 we ended the quarter with a leverage rate of 1.93 times EBITDA. Turning to slide 10. During the quarter, we repurchased 313,000 shares at a cost of $10,000,000 leaving $20,000,000 outstanding under our previous authorization. Working closely with our Board, we will continue with a capital allocation strategy that takes into consideration the use of capital alternatives when measured on a risk adjusted basis.
And yesterday, I am pleased to announce the company approved its one hundred and ninety seventh consecutive dividend at $0.16 per share. Please turn to slide 11. I'd now like to make a few comments regarding insurance, which is a significant part of ABM's business. In reviewing ways to holistically manage the company's insurance programs and more effectively deal with unfavorable trends and developments, the company formed an insurance captive. One of my immediate objectives is to take a longer term view of our insurance program and we will use the captive as a catalyst for change.
Over time, our insurance strategy through the captives should provide ABM with increased flexibility in the end to end management of its insurance program and drive greater accountability for risk and safety across all levels of the enterprise. The last point on insurance. For fiscal twenty fifteen, the company anticipates a cash tax benefit of 15,000,000 to $20,000,000 relating to the captive. Moving to slide 13. As noted, we are reaffirming guidance for fiscal twenty fifteen.
Before I turn it over to the operator, I would like to say a few words. I'm truly excited about the future of this company. I have a great team. And along with Scott and the senior leadership, I'm very confident that the goal of our strategic review will be to evaluate all options and prioritize when, where and how we should pursue different avenues of growth to increase long term shareholder value. Operator?
Speaker 0
Our first question comes from the line of David Gold of Sidoti. Your line is open. Please go ahead.
Speaker 4
Hey, good morning.
Speaker 2
Good morning, David.
Speaker 4
Welcome to you both on the first call. Always nice to see a little upside certainly versus our EPS estimates, so we'll take that. A couple of questions for you. First, speak a little bit if you can on the BSG side. Essentially where you expect to see the upside come from and then sort of level of confidence that second half of the year we might make up that first half as you mentioned was a possibility?
Speaker 2
Hey, David, this is Scott. I said on my opening remarks as I said, we have so much confidence in this group. If you kind of look at the history of how they performed quarter by quarter, Q3 and Q4 is significantly more revenue generation and profit generation than the first two quarters. There's a lot of weather in there. We do a lot of school work that you have to wait till school is in recess.
So we feel strongly that we're going to track to plan in Q3 and Q4. And as I said, these guys are so fired up and they believe they're going to make up Q1 and Q2 and they're working towards that. So the way I would look at this, first is it systemic? Is there a problem? And there is absolutely not.
And the one metric that is so insightful to me is the fact that if you talk to the guys about the near term pipeline over the past three months and who was on it and what they're targeting, they would say nothing has dropped off. Not a single opportunity has dropped off of that pipeline. So it's a timing issue. So that's where we are. So hoping to make up the whole year, very, very confident that we're going to track the plan in Q3 and Q4.
Speaker 4
Perfect. That's helpful. And then on the facility services side, speak there to growth trends and what went on in the quarter versus what maybe you might have expected and outlook there from a revenue perspective?
Speaker 2
Yes. I mean, for us the way we look at this, we're encouraged. We're on our plan. And if you saw what's happening here, it's about exiting low margin business and trying to be more strategic about how we approach the market. And as we go through and we do a more comprehensive strategic review, we're going to be focused on identity and how we're going to move forward in this space.
But we think if you look at kind of our revenue in context to the broader facilities market, I mean talk about white space. I mean there is significant upside for us. So this is about figuring out where we want to play.
Speaker 4
Got you. So presumably could there be more revenue runoff there as you exit more low margin business if you will?
Speaker 2
Look in any operating business there will be runoff, but there is nothing that today as we looked at our portfolio there is nothing that we are targeting to exit. This is all about moving forward now.
Speaker 4
Got you. Got you. Okay. And then on the captive insurance company side, a couple of things. One, cash tax benefit this year, is that something that we would expect to be ongoing?
Or is that one time?
Speaker 2
I'll let Anthony handle that one.
Speaker 5
Okay.
Speaker 3
Sure. Sure. So as mentioned, we implemented a captive insurance this quarter, which will provide the 15,000,000 to 20,000,000 So currently, haven't decided upon the internal funding levels for next year's program. That will be part of the broader strategy. So once we have a long term plan in place, I'll be able to provide more color on the recurring benefit that the CapEx could provide.
But this year, we feel confident with the 15,000,000 to $20,000,000 that we've listed.
Speaker 4
Got it. Okay. So presumably, you'd expect some annual benefit. It's just a question of how much?
Speaker 3
Yes. It's all if you know how the captive works, it's all about
Speaker 4
Yes. I'm not as familiar. So if there's a little bit more sort
Speaker 0
of Yes.
Speaker 3
We can talk about it offline. I'd more than happy to provide you more color on
Speaker 4
Perfect. Perfect. But then second more strategically speak a little bit on the captive about some of the flexibility that that gives you.
Speaker 3
Sure. So as I mentioned insurance is a significant part of our operating expenses. And we're going to use the captive as that catalyst for change. So we formed a cross functional team of our senior leaders to build out the strategy. And that's going to really help us operate more like an insurance company, taking a longer term view of risk.
And my real goal is to ensure that the insurance allocations we have to the operating units are representative of the true long term cost for underwriting that risk. So my goal is to have the right pricing for the long term and it's really too early to put any cost or savings associated with that.
Speaker 4
Got you. Perfect. That's helpful. Thank you both and welcome.
Speaker 2
Good hearing from you, David.
Speaker 0
Thank you. Thank you. Our next question comes from the line of Andrew Wittmann of Robert W. Baird. Your line is open.
Please go ahead.
Speaker 6
Hi, guys. Scott, I wanted to dig into the strategy review with Boston Consulting Group and I completely recognize that this is an ongoing process. But I wanted to get your sense of the goals of this. Is this focused around the strategy of how you're selling? Is it really targeted more at the cost structure that you have in place?
Is it as comprehensive as looking at the allocation of capital? Just giving some of your goals for the process and some of what the scope is included with this consulting group would be helpful.
Speaker 2
Sure. And thanks, Andy. So I think comprehensive is the key term here. We're really looking at everything. We're looking at capital structure, businesses, operating models.
This is all about providing growth on the top line, but margin growth. And you know I've been consistent about that about providing margin expansion for the firm. So we're looking our hypothesis going into this Andy is a customer centric view and how best to organize our operating model to get efficiencies on that. So we will look at SG and A, but it won't be SG and A through the lens of how could we cut. It's going to be SG and A through the lens of how do we deploy our cost structure to best fuel our growth going forward.
So I suspect there'll be areas of opportunity and areas that we're going to need to enhance as part of this review. So this is going to be as holistic as possible. And that's why we're taking until the fall to make sure the review is thorough.
Speaker 6
Got it. So does that does the comprehensive review include the way the Board looks at the governance issues? In other words, the company was born out of a family owned structure. As part of that there was a classified Board in three classes. It seems like really more of a relic of a past and something that's relevant and I think is fairly outdated.
The Board looking at itself and its structure? And is the declassification of the Board one of the areas that you're investigating with the consultants as well?
Speaker 2
That's not part of the consulting review, but I would say that's always part of the Board review. Governance I just went through my first Board meeting, right? And I can tell you governance is incredibly important to this Board and everything is constantly under review and we look at this as a fluid process. So I think there's more to come on that.
Speaker 6
Got it. And then maybe just you mentioned a couple of times that you walked away from some work. It seems like there's a first step which is you go to the customer and you're asking for better pricing or renegotiation of contract terms. Can you just give us an update as to where you are on that overall process of reviewing your portfolio of work as well as the outcomes of some of the conversations you've had for looking at those contracts that are less profitable?
Speaker 2
Yes. So I don't view this as a new initiative. And I won't take credit for this, right? I think it's a culture that's been evolving over the last two or three years of examining margin profile more closely and having these conversations. Our feeling as a firm is, if you're doing a good job for a customer, never be afraid to have the conversation.
And that culture is being inculcated more and more over time here. And again, as I said, step one, do a good job for your customer. Step two, start having the conversation and work through a plan. And you know what, if step three doesn't work out then you exit or you ask for them to put it out to bid and you reprice and you put it at the price that you want. And if you're successful, fantastic.
If not, you're I wouldn't say you're happy to walk away, but you're satisfied that you walked away.
Speaker 6
In those opportunities where you have rebidded, have you been able come in back at your pricing yet? Or is that not something that's happening in the organization right now?
Speaker 2
Look, we've had good success because one of the foundations of ABM for literally the one hundred year history has been having relationships with customers. So we've been having tremendous success either in initial conversations or through a bid process. And where it doesn't work, it's probably just about the alchemy between us and the customer. And again, not happy, but you're pleased that you parted because there's no upside here in doing work for free, right? And way back in the day, probably even before I joined, it was more about revenue growth top line, top line and less of a conversation about margin.
And now as we continue to evolve our culture, it's you don't have a revenue conversation at ABM anymore without having a margin conversation.
Speaker 6
Yes. Okay. Anthony, I had a couple for you, if you'll afford me a couple more here. Just there's two discrete items that I wanted to dig in. Maybe the first one is, in the quarter, I think there was a mention of a gain in the janitorial segment.
Can you talk about can you quantify what that gain was? And maybe was it in the janitorial segment or was it in the corporate segment?
Speaker 3
No, was in the I believe you're referring to the janitorial segment. We had a $1,400,000 gain associated with some operational efficiencies. We're kind of looking at our total portfolio. And in the quarter, we had that $1,400,000 gain associated with the sale of a building.
Speaker 6
Okay. So it be really more of a one time thing not a recurring saving?
Speaker 2
Yes. It's so funny Andy. This is Scott again. I don't look at it as a one time thing. One of the things that we're focusing on is our workplace strategy and how we occupy real estate and kind of the bid and the ask of this is office for executives versus being an open plan and how you could change your newly under review.
So the concept of selling a building in quarter maybe a one time, but we will continue to look at our real estate and how we can optimize it.
Speaker 6
Yes. That makes total sense. And then thank you for that Scott. So just last one, if I missed and then maybe I'll go back in queue. Anthony, you could just remind us last third quarter of so last year's third quarter had a benefit from the release of insurance accrual.
I think it was $6,100,000 but can you confirm that? Just I just want to make sure that we get the year over year margin growth correct as we model the third quarter.
Speaker 3
Yes, absolutely. So last year we had a Q3 adjustment which was roughly $6,200,000 Yes. So if you would have reallocated that Q3 from a cumulative adjustment perspective then you can do the proper year over year analysis Q2 over Q2.
Speaker 5
Okay. Yes, go ahead.
Speaker 3
No, no, no. That was it.
Speaker 6
Okay, great. So thanks. I'll jump back in
Speaker 2
queue if I have any more. Hey, good speaking with you, Andy. Thanks, Andy.
Speaker 0
Thank you. Our next question comes from the line of Salik Khan of Imperial Capital. Your line is open. Please go ahead.
Speaker 7
Great. Thank you. Hey, Scott, David, how are you guys?
Speaker 2
Hey, all well. Thanks for joining.
Speaker 7
Yes. Couple of questions that we had on our end is with the consolidation that we're seeing within the health care industry and the operations behind it, what types of benefits are you seeing right now as a result of that shift?
Speaker 2
Well, I think you have to put our healthcare business in context to the market, right? So we are we're a healthcare organization now that's tracking to annual revenues in the $150,000,000 range, right? And you look at some of the bigger players and you know the names, but there's kind of the big three that they all have a B in front of their number. We have an M, right? We're $150,000,000 in They're in the $1,000,000,000 range.
So for us, we're not as concerned right now about consolidation and what it means, because we have a lot of runway. I'll put it to you this way, a lot of runway on the revenue side right now. And for me what's so exciting about this is, this is an area where we are truly providing end to end services. I was in Cleveland two weeks ago visiting with one of our major hospital accounts, three fifty bed hospital. And boy, I have to tell you, you walk in and you see from you can see the concept of going from valeting someone's car to wheelchairs to maintenance to taking care of some of the devices whether it's the small equipment which we do.
I just think that this is going to be an area of real focus for us going forward. So consolidation again context to where we are not an issue.
Speaker 7
And Scott on the same token from the business that you had with the employees around the globe, what gaps are you finding right now within your talent pool that you believe needs to be filled either from a cross selling perspective or anything else that you could think about?
Speaker 2
So when we look at cross selling, we look at what kind of services obviously that we can complement with our customers. And as we start developing a more vertical, I think that's when the cross selling gaps will come into play. We'll start looking by industry and seeing what services are essential if we're going to be in that industry and that's where we'll see gaps. Right now our cross selling has been more tactical. It's been looking at existing clients and seeing if we can get one more service.
Our tagline is solve one more, which essentially means can we have one more service. So what I would like to say is that on a high level right now our Solve One More Selling is more tactical. And going forward, you're going see a more strategic focus as we start thinking of those.
Speaker 7
And as we look at the M and A opportunities that are ahead of you, what solutions do you need under your umbrella to better position you over the next twelve and twenty four months? Is there something that the consultants that came up to you and said, this could be a better direction? Are there opportunities available to you? If you could broadly speak to that that would be great.
Speaker 2
Yeah. What I can say at this point is that's part of the scope, right? So we're in early days of our strategic review. Fundamentally we're in the data gathering stage, fact finding stage. So we haven't seen those themes come across just yet.
Speaker 7
Okay. And the last question I had for you was, as you look at the capitalization of the overall company, does the lower interest rate that's out there in the marketplace right now, does that entice you to increase your overall debt reliance? Or the fact that it comes with a lower tax benefit as well because of the lower interest rate, are you less likely to bring on more debt?
Speaker 2
Yes. We have fluid conversations with our banking group all the time. And there are a number of theories out there as to where interest rates are going. I'll let Anthony speak to that a little bit more, but I can tell you it continues our capital structure as a whole continues to be again a very fluid conversation for us at the firm. But Anthony, don't you give us some more color on that?
Speaker 3
Sure. So if you look at our capital structure, as I mentioned in my prepared remarks, we ended the quarter with roughly two times leverage. We feel the capital structure we have in place today gives us enough flexibility to ensure that we have the growth opportunities be it either investing in our business, M and A, dividend, share buyback. We have enough flexibility to look at all those areas along with the Board to ensure that we're deploying that capital in the most efficient way. So in the short term, I don't think you're going to see any major changes in our capital structure.
But as Scott alluded to through both our analysis and we're looking at a lot of trends, so a lot of trend analysis there as well, we're going to determine whether we can whether there will be a shift in our capital structure as well.
Speaker 7
Great. Thank you, guys.
Speaker 0
Thank you. Our next question comes from the line of Joe Bach of KeyBanc Capital Markets. Your line is open. Please go ahead. Good morning,
Speaker 2
Good morning, Joe. Good morning.
Speaker 0
So I just want to dig
Speaker 8
into the janitorial margins a little bit further. If we add back the $4,000,000 headwind from the extra day that you had in the quarter and then we take out the $1,400,000 gain that you guys said came from the sale of the building, we still get operating margins of 6.4%, which is that's really the highest number that I could find in my model for 2Q. Can you maybe just put some more context around how you guys got to that type of margin? Was it mostly just stepping away from that low margin big contract? And maybe how sustainable these margins are?
Speaker 3
So let me answer a little color around the margin story. So the exiting of that multi regional account contributed roughly 20 basis points 13 basis points to the margin improvement. So that's as Scott mentioned some of the efficiencies that we're looking at that will drive margin improvement going forward. We had the year over year insurance benefit, which I discussed and the offset is obviously as you alluded to additional one working day. So effectively the contribution margin we see going forward will be in line with what we've historically have achieved which is around that 6% range.
And Scott you can add more color there.
Speaker 2
Yes. I just look this is a high performing group for us in terms of operating efficiencies. And as you guys know, it wasn't too long ago that I was in the field kind of in the day to day combat working on the janitorial side as well as other of our on-site businesses. And if you look at having a 6% front of your operating margin in the janitorial space in this environment, we're just more than pleased. And it's just again a very high functioning group.
Speaker 8
Understood. Scott, you mentioned earlier some of the benefits of density in the New York airport market. I think you called out about 3,400 employees at the three airports. When you get to that level of density, I'm just curious how the margin profile compares there versus say the average at AirServe?
Speaker 2
It's kind of hard to say that because when you look at the AirServe business there is no kind of commonality. Every assignment of ours is unique, right? Because it's a combination of passenger services and it's also we'll do cabin cleaning, we'll do some security. So it's I'm struggling to provide you clarity. The best way I could say is that what density does for you, it allows you to cross utilize labor more efficiently.
And kind of the name of the game in our business going forward is going to be about labor efficiency. And we think about that all the time. And AirServe has some phenomenal technology that lets us maximize the way we deploy labor. So it's less about creating an average in an airport versus a dense. It's more about a mix services and densities.
Then we're just trying to optimize our labor and that's really been the winning move for us.
Speaker 8
Understood. So I can imagine that labor is obviously your biggest expense there. But can you maybe take it one step further and say density gives us 100 to 300 basis points of margin expansion or it's north of I'm just trying to understand the magnitude of what density can do?
Speaker 2
Yeah. No, I just don't think at this point I can give you that level of detail. I could just tell you that we see a difference in the margin profile. But again, we haven't done the analytics that I would feel comfortable giving you any more color on that.
Speaker 8
Understood completely. Okay. At this point, I think you guys are still clearly getting traction on bundling your products. I'm curious how your customers are valuing the bundle and how that translates to price. So maybe just hypothetically, if you guys were to win a bundled janitorial and security contract, does the pricing end up being accretive to the segments?
Or is it dilutive? And maybe just how your view has changed on how you bundle these products and how you price it? Obviously, you're putting more emphasis on the margins now or has the strategy kind of remained very similar to the prior regime?
Speaker 2
Well, look, clearly bundling is a plus for us on a margin standpoint. And it's really in a couple of ways, right? You get a little bit of throughput on overhead, right? Because you're kind of taking your managerial labor and focusing it on one account, so maybe have less supervision per capita or per person I should say. But also for us, it creates a certain stickiness with the customer, right?
Because now when you start adding on services and you're creating a story and you're creating a theme and an end to end experience in a particular property, you end up staying in that account longer. And the longer you're in account, the higher your margin profile goes. So for us, it's just it's a combination of factors. And Anthony, I know you wanted to give some color on that.
Speaker 3
Yes. So I think to Scott's point, our overarching goal is to come with a solution based approach for our customers and not a service line approach. So over time with the strategic review, one of my hopeful outcomes of that is that solution based approach, which should lead to, as Scott alluded to, longer term stickiness and a better margin profile going forward.
Speaker 8
Great. And then just one last follow-up for you on the modeling side Anthony. I know your other income tends to jump around from the JVs, but any reason why we shouldn't see that other income migrate back down to the $1,500,000 range next quarter?
Speaker 3
Yeah. I think we had some acceleration this quarter related to the JV and that was due to some of the startup of our international JV, specifically the Qatar Airport work we're doing there. So effectively, would see I would say you should look for that JV income to normalize in the second half to our kind of normalized run rate.
Speaker 8
I appreciate it. Thank you both.
Speaker 2
Thanks.
Speaker 0
Thank you. Thank you. Our next question comes from the line of Michael Gallo of C. L. King.
Your line is open. Please go ahead.
Speaker 9
Hi, good morning.
Speaker 2
Hey, Mike. Morning.
Speaker 9
My question is just know you're not ready to comment on the specifics related to the captive, but I was wondering what is your total insurance expense currently on an annualized basis?
Speaker 3
We typically don't disclose the details just for competitive reasons. We don't try to give that level of detail. But I could say it's a large number and it gives us ample opportunity to take a look at it holistically. And it's one of the reasons or one of the drivers of why we've launched a captive A and B why we're taking a much longer term view around insurance going forward.
Speaker 9
And just so I understand the captive, you plan to put all your claims in the captive? Or will it be workers' comp? Or will it be certain kind of state by state? Or is that still to be determined?
Speaker 3
Well, the current year I can speak to. And then obviously as I mentioned earlier, we're still looking at the longer term strategy. So current year we've transferred our workers' comp and GL programs into the capital for the current year. It's not the whole program, but it's the majority of that program is going in and that's what's really driving the current year tax benefit. So it's not a loss portfolio transfer for the prior years, but that's something that we're looking at as well.
Speaker 9
Right. But that's the one time benefit. But do you have any benefit embedded into the guidance for this year in terms of savings? Or you just kind of assume it's a wash in terms of the numbers?
Speaker 3
It's a wash. There's no adjustment to our EPS guidance.
Speaker 9
Right. But in terms of as you go and as you get better depending on obviously how you underwrite it, if you can underwrite it breakeven even given the fees as I understand them. It should be nicely accretive at some point. Think let me make
Speaker 3
it clear. We're not changing at the current point. We haven't changed our retention levels or our risk profile. So effectively from a risk transfer perspective nothing's changed within the company's risk profile. So that's typically where you'll start to drive some savings.
But as I mentioned as part of the broader strategic review and how we're going to operate the captive going forward and what exposures go into the captive and then how those exposures are risk transferred externally, it's something that we're looking at holistically. So ultimately, can't give you any clarity now and there's nothing in our guidance reflecting any cost or additional savings related to the captive, but it is a longer term lens that we're taking with the captive and look forward to providing more clarity as the quarters go on.
Speaker 9
All right. So it sounds like you're still figuring it out. There probably will be some savings, but until you work out all the different permutations, it's too early to say.
Speaker 3
That's correct. And just so we're clear, we are going to generate the 15,000,000 to $20,000,000 of tax savings cash flow.
Speaker 9
When will those come in? Will those come in early twenty sixteen or later this year?
Speaker 3
It's in our 2015 plan.
Speaker 9
So it will come in later this year in terms of the cash impact?
Speaker 3
Yes. We had a little bit of a cash impact this quarter roughly $6,000,000 and then the balance would come in the second half.
Speaker 0
Right. Okay.
Speaker 3
Thanks very much. Thanks.
Speaker 0
Thank you. Our next question comes from the line of Dan Dolev of Jefferies. Your line is open. Please go ahead.
Speaker 4
Hey, thanks for taking
Speaker 10
my question. It looks like ex that contract or even ex that contract in janitorial, you had about a 40 basis points deceleration. If I see the numbers correctly, compares were easier. What was the reason for that? And what would it take to get back to mid single digits organic growth in that segment?
Thank you.
Speaker 2
When we look at organic growth in that segment, we've been pretty clear targeting the 2% to 4% range in growth. So we're at the low end of that range right now. But again, I think Dan the biggest key here and something that I just want to make sure gets reiterated is there's nothing systemic there. It's we and that's why we stay away from kind of quarter by quarter revenue comparatives because it could be misleading. So I think we're kind of at the low end as I said of the range we'd like to be in, but we're comfortable.
Speaker 3
And I think Dan by the end of the year, again excluding the impact of the large multi regional contract that we exited, you'll see our janitorial move back in line with what we expected. So this quarter was a bit of an anomaly, but we're hopeful that by the end of the year they should be back within the range that we expected.
Speaker 10
Okay. Thank you. And then just one bigger picture question. Clearly, Henrik was great and he's been leading the company for many, many years. But if
Speaker 11
you had to sort
Speaker 10
of think about sort of the one to two things, biggest things that you would do differently than him, what would they be?
Speaker 2
So I don't look at this as a kind of a versus or differently. I look at this as kind of an evolution. If you look at what Henrik's done for this company and setting up a platform over time and how this company has changed. I came twelve years ago, we were predominantly a janitorial company and now we are truly an integrated facility services company. So he's put us on this amazing path.
And now I think what's going to happen is focusing more on strategy on how we take this platform that we have and focus it and allocate resources, allocate energy and enthusiasm around finding the areas where we can best win in. So it's part of an evolution. And that's what his aspiration for us was as well is to continue to evolve this company and take it to the next level.
Speaker 10
Okay. Thank you very much guys.
Speaker 5
Thank you. You're welcome.
Speaker 0
Thank you. Our next question comes from the line of George Tong of Piper Jaffray. Your line is open. Please go ahead.
Speaker 5
Hi. Thanks. Welcome Scott and Anthony to your new roles.
Speaker 2
Thank you. Thanks, George.
Speaker 5
I'd like to talk a bit about margins. You saw benefit this quarter and in earlier quarters from insurance risk management. You talk about the potential for further margin improvement from this area and how this compares to other drivers of long term margin expansion such as mix away from lower margin contracts and operating efficiencies?
Speaker 3
Okay. Yes. So let answer the question on insurance and then Scott will provide some color on the margin profile. So from an insurance perspective, so if you recall as we the way we manage our insurance programs is we perform an actuarial review at the April '30 with data claims of data through April 30. And then in Q3, Q4, we present the information or the feedback from that actuarial review.
So from a year over year perspective, as discussed earlier, we have the benefits of continued favorable actuarially determined rates that were determined in '20 the 2014 flowing through Q1 and Q2. Our expectation is we're in the early stages of providing the data to the actuary and our expectation is to be on the same time line in terms of what that information comes back to in Q3 and Q4. So it's hard for me to speculate around the end year.
Speaker 2
And then the color I would add on a high level, as we look at margin profile going forward, it's less about an absolute number that we're heading to and it's more about a glide path forward and how we get there. And that's really you look at kind of the foundation of this comprehensive review that we're going through and it's creating those pathways for glide path and that's what we're heading towards.
Speaker 5
Got it. Going back to the topic of managing lower margin contracts, can you talk about whether there are large or larger contracts in janitorial that are opportunistic to either exit from or negotiate improved pricing for?
Speaker 2
I wouldn't say that's something that's that's not I'll tell you, I'm going to answer that in a different way, because that's not what's first and foremost on our mind, because we have such amazing operators, right? And we feel like that's again part of what we do every day, focused on contracts, how to optimize them and having conversations as I alluded to earlier. But I think the key here is in terms of scale, not necessarily the contracts we want to exit, it's about the opportunities in front of us. And just talking to Jim McCour the other day, he would say, it's like the number of opportunities that we're seeing in the $25,000,000 to $40,000,000 range are just astounding. And when you look at how that shifted over the past few years in terms of scale of opportunity, it's pretty dramatic.
And I'll give you another quick metric. Three we have a national account group that manages accounts that go across our different regions. Three years ago, we had 55 national accounts that equated to $250,000,000 in revenue. Today, have 100 national accounts that are over $500,000,000 in revenue. So that kind of speaks to scale and it also speaks to our opportunity in the market because our clients are looking to us for scale, right?
And you guys have all seen the broader consolidations in the managing agents and what they're doing. That's going to play to our strength, because as they're trying to create efficiencies with their own organizations, they have a choice. They can deal with 40 regional firms and scale up their organizations to manage those 40 regional firms, where they can come to someone like ABM and say, how do you guys provide a geographic solution for us? And we're having more and more of those conversations every day.
Speaker 5
Got it. That's helpful. And then lastly, could you as you think about performance in the BESG segment this quarter, can you talk about the top two or three factors that may have surprised you and how you're evolving your execution to drive improved performance in the segment?
Speaker 0
Well, just to highlight a few
Speaker 3
things that happened in the quarter. This is Anthony. So there are a few onetime items that I wanted to call out and that impacted our health care group, which we don't expect those impacts. And that hurt our bottom line by approximately $1,000,000 which were again onetime. So there's part of the bottom line story for the quarter were one time items.
As far as the second half story, some of the deposits to note is we're fully committed to BSG's ability to outperform in the second half. As Scott mentioned, the pipeline is strong. It's really the delays in terms of those projects starting and when we expected them to start, but we have full faith in that group to outperform the second year the second half of the year. We've had delays and notices to proceed in the government group. So we've been awarded, but it's delays and the notices to proceed that also impacted the quarter.
So when you sum those two things up or those few things up, as Scott mentioned earlier, we feel real comfortable with the second half being a strong and referring to Abe specifically, we feel good about their ability to hit their plan and hopefully outperform.
Speaker 5
Very helpful. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Adam Thalhimer of BB and T Capital Markets. Your line is open. Please go ahead.
Speaker 11
Hey, good morning guys. Nice quarter.
Speaker 2
Thank you.
Speaker 11
Scott, you talked about operating margins in the janitorial segment. You said 6% is continues to be a good margin for that. Second question is, can the other segments trend towards 6%? Or are those just different businesses?
Speaker 2
So they're different businesses and that's not necessarily in our line of sight right now. I think if you looked at the different on-site businesses, they have a range of margin expectation right now. And I think in large measure that's one of the catalysts for why we're going through this comprehensive review. And who knows, we may be talking less in the future about segment results in terms of service line and more about vertical as we kind of focus our energy in different areas. But we don't believe that each one of those segments are going to have.
Speaker 11
Okay. And then I wanted to ask about the CTS acquisition. You made a couple of acquisitions now in the HVAC service business. And I'm just curious what about that business is attractive to you guys?
Speaker 2
So if you look at the margin profile of those high technical services businesses, you're talking about 30% margins. And what our strategy has been and will continue to be is to find those types of opportunities with companies like CTS around our on-site businesses, so we can sell through those higher margin businesses to our on-site customers. And when you start looking at an on-site margin profile and kind of in stasis and then you add in some project work from those technical services side, you can have a huge margin, huge margin expansion. So for us, it's all about a clustering of assets and figuring out how to create almost a little ecosystem by geography where you're centered with on-site businesses and kind of you're satelliting around these high margin technical services businesses.
Speaker 3
And another nice thing about the CTS acquisition, extends our technical capability that Scott mentioned in the D. C. Area where we have an on-site presence, but it also gives us additional technical capabilities and mission critical facilities. So as we look at the tech vertical lack of better word, it gives us additional credibility in that space.
Speaker 11
Okay. And then Scott you mentioned by projects you're talking about more repair work not new construction, right?
Speaker 2
Yes, work exactly and energy retrofits, right. So less about kind of longer term services and more about finite beginning and end projects which again have the higher margin profile.
Speaker 11
Okay. And then lastly, consulting strategic review, the costs associated with that that's I assume that's included in your plus 7% to nine SG and A guidance for the year?
Speaker 2
We've included that cost in how we look at the rest of the year and factor that into our guidance, yes.
Speaker 11
Okay. Great. Thanks a lot.
Speaker 0
Thank you. Next question is a follow-up from the line of Andrew Wittmann of Robert W. Baird. Your line is open. Please go ahead.
Speaker 6
Thanks for taking my follow-up. Anthony for you on the tweak in the expected full year tax rate. You took it down at the midpoint 200 basis points. Can you talk about where that came from or what's changed if anything?
Speaker 3
Yeah. Andy, let me give you some color on that. So we analyze our discrete items for the balance of the year and we feel there's opportunity in the second half to benefit from those items. Offsetting that from an EPS perspective are other costs and that's one of the reasons why we did not adjust our overall EPS guidance as noted.
Speaker 6
Got it. Can you give a little detail on the types of discrete items that are affecting that?
Speaker 3
It's primarily related to some of the NOLs from previous perspective.
Speaker 5
Got it. Okay. That's all I had. Thank you.
Speaker 3
Great. Thank you.
Speaker 0
Thank you. And that does conclude our question and answer period for today. I'd like to turn the conference back over to Mr. Somers for any closing remarks.
Speaker 2
So I just want to thank everyone. This was our first call and we're excited to be here. And hopefully, we answered all your questions. We're always available offline for any more color that you need. But thanks very much for hanging in there with us and supporting us through this.
We're really excited. Thank you.
Speaker 3
Thank you.
Speaker 0
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.