ABM Industries - Earnings Call - Q4 2016

Transcript

Speaker 0

Good day ladies and gentlemen and welcome to the ABM Industries Q4 Fiscal Year twenty sixteen Conference Call. At this time all participants are in a listen only mode. Later, will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Susie Choi, Head of Investor Relations.

Please go ahead.

Speaker 1

Thank you all for joining us this morning. With us today are Scott Salmiers, our President and Chief Executive Officer and Anthony Scaglione, Executive Vice President and Chief Financial Officer. We issued our press release yesterday afternoon announcing our fourth quarter and fiscal twenty sixteen financial results. A copy of this result and an accompanying slide presentation can be found on our corporate website. Before we begin, I would like to remind you that our call and 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 a slide that accompanies our presentation. During the course of this call, 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 Investor tab. I would now like to turn the call over to Scott.

Speaker 2

Thanks, Susie. Good morning, everyone, and thank you for joining us today. By this point, I'm sure you've had a chance to review our fourth quarter and full year results for fiscal twenty sixteen. I'm pleased to report that we continue to navigate change and transition successfully, while managing our business at the high level we've come to expect from our management team. Anthony will have much to cover on our financials, but let me give you a couple of highlights.

We grew revenues to $1,300,000,000 for the quarter and $5,100,000,000 for the full year. This represents a 3.5% quarterly increase and a 5% annual increase. We also maintained solid organic growth of 2% for the quarter, which translates to closer to 3% when normalizing for foreign exchange with our UK operation. For the full year, we grew 3% organically or 3.3% excluding the foreign exchange impact. Given the backdrop of our continued shift towards being more discerning about the margin quality of the work we take on, I'm unquestionably satisfied with our growth.

We delivered adjusted EBITDA margins of 4.6% for the quarter. And in line with our previous guidance, full year adjusted EBITDA margin was slightly greater than 4.1%. As you may remember, we finished 2015 with a recasted 3.8% margin. So we are trending up and just as important, we are delivering as we had outlined. These results led to GAAP EPS of $0.16 for the quarter and $1.9 for the full year.

The GAAP figures were impacted by our decision to exit our Government Services business, which we stated in yesterday's press release. On a non GAAP basis, we delivered adjusted EPS of $0.51 for the quarter and $1.74 for the full year, which is at the high end of our previously issued guidance range. Now let me explain our rationale for exiting our government business. Last quarter, I alluded to the relatively small size and scale of our government segment as compared to our competitors in this industry. I also pointed out its disproportionate impact on the BESG segment profitability.

As we undertook our 2020 organizational realignment, we stood up our industry group verticals and we worked on plans for 2017 and beyond. As part of that process, we came to the conclusion that our current government business wasn't a strategic fit for our long term goals. While we believe that the core competencies of our government business gives us the ability to compete, we felt the company with scale that can fully leverage the group's capabilities and provide an infrastructure that would foster its growth would better serve the business. Allocating capital to this segment doesn't fit where we are heading as a firm. Therefore, we are in the midst of evaluating a plan for its sale and we will provide an update when appropriate.

Until such time, we will report our government business as held for sale and continuing operations. So I'm pleased to say that we are now into fiscal year twenty seventeen and Phase two of our 2020 vision is well underway. In mid November, we held our annual leadership conference where we focused on a number of initiatives including defining our industry groups strategic priorities, the development of standard operating practices for how we will run our day to day business and tools to enhance employee engagement. These initiatives will center our activities for the fiscal year. Just to make it a bit more tangible, let me highlight one of our standard operating practice initiatives as an example.

Let's take labor management. We have more than 200 branch offices across The U. S. Managing over 100,000 service workers. We believe we are adept at managing labor, but we also recognize that as ABM grew both organically and through acquisitions, we didn't apply any standardization to managing our workforce.

As a result, everyone manages labor a little differently from office to office. We believe we will see significant benefits from codifying the best practices that already exist in certain pockets around the country and then implementing those practices across our entire platform. While it's too early to quantify the financial upside, I would point out that labor is our number one organizational spend. So we're optimistic that there is value to be captured. Right now, we are in pilot stages of implementing those standard operating practices and not just for labor management, but also for our safety programs, employee engagement and our approach to managing our client assignments and our overall client relationships.

These programs will be foundational to our approach in 2017 and beyond. It's encouraging to us that with each day we have greater visibility into our business and the tools we need to deploy. Part and parcel to that, we recognize that we need to accelerate our technology initiatives. We will be focusing on HRIS systems to enhance our human resources area, analytical tools to help us mine data, as well as client facing technology, which will deepen our relationships with our customers. We've made technology a core tenet of our 2017 plan and you will see that reflected in our capital expenditures budget.

And now that we have set the foundation for long term profitable growth, we see that the 100 basis points of adjusted EBITDA margin accretion is achievable and we feel confident in ending fiscal twenty seventeen with a run rate that captures that baseline. In fact, we believe there is opportunity to capture margin beyond the 100 basis points we originally outlined. Digging deeper into what we have learned in Phase one combined with what we are discovering in Phase two, we have uncovered areas for additional margin. To help determine that potential, we have tasked the Boston Consulting Group to assist us in this evaluation with a focus on driving margin expansion into 2018 and beyond. Just to give you one example, procurement remains an area of margin opportunity as it impacts approximately $1,000,000,000 in annual addressable spend.

In Phase one, we only concentrated on $200,000,000 of this pool. Anthony will discuss our procurement efforts in more detail, but be assured we remain on track for delivering the 12 to 15 basis points of margin improvement on a run rate basis. And now we see additional opportunity that will extend past 2017. It would be premature to specify a new margin target range at this point. For me, 2020 Vision has always been a plan to discover potential beyond 100 basis points, but we are committed to maintain our discipline of not getting ahead of ourselves until we have greater definition of what is achievable.

Fifteen months ago, we launched our 2020 Vision, the most compelling multi phase, multiyear strategy in the history of the company. This has led to some tremendous undertakings, among them the sale of our security group, which allowed us to focus on more margin accretive services the acquisition of Westway Services in The UK, which added to our higher margin technical services offering the realignment of our organization from a services based approach to market to an industry group vertical approach to market initiating a true shared service center for centralized processing of our core back office functions creating a procurement group to develop best in class programs across key categories, a focused effort on talent development and employee engagement and beginning a process to develop standard operating practices through our newly formed Center of Excellence. Our 2020 Vision initiative was not just about 100 basis points in margin, it was a catalyst for change that has now permeated our entire organization. The enthusiasm and the confidence amongst our employees continues to grow. ABM is no longer the service provider of the past.

Today, we are a dynamic industry focused solution provider and nothing speaks to the quality of this organization like the fact that during this year plus journey, we haven't lost a single client due to the transformation. Our ability to navigate and execute, I would dare say is unparalleled in our industry. And as part of this journey, we will continue to take a hard line on the contracts we want to win, those we want to optimize and those we may elect to exit. Before I turn the call over to Anthony, I want to thank our employees for their commitment, their endurance and excitement around our shared vision. Our entire organization should feel an immense amount of pride as we delivered on our financial promises and set the stage for long term profitable growth.

Our success in 2016 is the starting point down a path of fulfilling ABM's company vision of being the clear choice in the industries we serve through engaged people. We will do this by achieving our mission of making a difference every person every day. Staying true to our vision and mission will ensure another one hundred years of being the benchmark in our industry and fulfilling our purpose of taking care of the people, spaces and places that are important to you, you who are our employees, our clients and our shareholders. So thank you all for your continued consideration and support. Have an amazing holiday season and rest up for an exciting 2017.

And with that, I'd like to turn the call over to Anthony.

Speaker 3

Thank you, Scott, and good morning, everyone. I would like to reiterate Scott's sentiment about our performance in fiscal twenty sixteen. Our entire organization executed admirably during highly complex and transitional year. We are pleased to have delivered and even exceeded in some respects our initial plans, while managing all the complex changes associated with standing up our verticals from both an operational and financial standpoint. As I will discuss with you in more detail, preparing to report under our new vertical structure has been a tremendous task.

I'm especially proud of the finance team for navigating this incredibly complicated project amidst our typically intense year end close processes. I will now review our fourth quarter results and summarize our full year performance, which are described in today's earnings presentation. As outlined in our press release, we made a strategic decision to exit our government business during the quarter to better align our operations with our 2020 vision. As a result, we recorded a non cash pretax impairment charge of $22,500,000 during the quarter, which you will see reflected in items impacting comparability. This change considerably impacted both our GAAP results on a quarter and full year basis.

Now on to our performance for the fourth quarter. Please note, I will be referring to results from continuing operations, which continue to exclude the sale of our security business. However, the operations of our government business were not material and therefore are not classified as discontinued operations for financial statement purposes. Consolidated revenues for the quarter were up 3.5 versus last year, including organic growth of 2%. Excluding the impact of FX, our organic revenue would have been 2.7%, a good indication of the continuous execution of our business, which was driven by janitorial, parking and other for our air serve segment.

In addition, acquisitions provided approximately $19,000,000 of incremental revenue to the quarter, which are reflected in our Building and Energy Solutions segment. Before I move on, I would like to remind everyone that as expected, the fourth quarter was impacted by higher expenses related to current year insurance and one additional working day. These expenses were partially offset by savings related to our 2020 Vision initiative. On a GAAP basis, our income from continuing operations was $9,000,000 or $0.16 per diluted share. The decrease versus last year was primarily driven by the impairment charge in our government business.

On an adjusted basis, income from continuing operations for the quarter was $29,200,000 or $0.51 per diluted share. Now turning to our segment results for the quarter. Please turn to Page five of today's earnings presentation. As mentioned earlier, higher current insurance expense, one more working day in janitorial and 2020 savings contributed to our segment operating results. For janitorial, revenues increased 2.3% versus last year to $704,500,000 and operating margins were 5.5%.

Revenues benefited from organic growth driven by the expansion of existing accounts, including additional TAG revenue. Margins benefited from strong domestic TAG sales, which partially offset the negative impact of certain year end adjustments in both inventory and for our UK operation. Facility Services revenue increased 2.9% to $149,600,000 and operating margins expanded 16 basis points, driven by new business and contract mix, including TAG revenue. Parking generated a 6.8% increase in revenues versus last year. However, we experienced certain margin erosion stemming from start up costs associated with new jobs and less profitable legacy contracts.

Our parking business remains a key service for our vertical strategy and is a key area of opportunity as we enter 2017. Building and Energy Solutions revenues increased 2.9% versus last year, which includes approximately 19,000,000 in revenue contribution from our Westway acquisition. As I have previously discussed, last year our technical service, AIDs business was a back half story and this year's Q4 year over year was in line with our expectation but essentially flat for this business. We continue to be very pleased with AIDS and it was the primary driver of BESG in 2016. On an annual basis, BESG closed the year up 15.3%, due primarily from our Abe's business where we continue to see strong future pipeline.

Operating margins for the quarter reflect the twenty two point five million dollars impairment charge related to our government business. Lastly, revenues for our Other segment or AirServe increased 8.3% despite FX degradation of approximately $4,000,000 Excluding FX, growth would have been approximately 12%, another outstanding quarter with consistent execution in our cabin cleaning and wheelchair services. Operating margins increased 51 basis points to 4.9% versus last year. Now for a quick recap of our annual results. Overall revenues increased by $246,900,000 or 5% compared to last year.

The increase in revenues was attributable to organic growth of 3% or 3.3% excluding FX and $102,000,000 of incremental revenues from acquisitions. Our GAAP income from continuing operations for fiscal twenty sixteen was $62,300,000 or $1.9 per diluted share. A benefit from taxes and net savings related to our 2020 Vision initiative more than offset the impairment expense related to the government business and higher expenses related to current year insurance. On an adjusted basis, income from continuing operations for the year was $99,200,000 or $1.74 per diluted share. Adjusted EBITDA grew to $212,200,000 and we ended the fiscal year with an adjusted EBITDA margin of 4.13% versus our 2015 recast margin rate of roughly 3.8%.

Turning to liquidity. We ended the year with total debt including standby letters of credit of $399,200,000 and our total debt to pro form a adjusted EBITDA was roughly 2.2 times. Our operating cash flow for the full year was 110,500,000.0 slightly impacted in the last quarter due to the timing of collections as we migrated certain billing processes to our shared service center and longer billing cycles for one of our government contracts. During the year, we repurchased approximately 1,400,000.0 shares of common stock for roughly $46,600,000 at an average price of $33.48 As of October 3136, there was approximately $142,000,000 of availability remaining under our $200,000,000 share repurchase program. In addition, for the year, we distributed approximately $36,900,000 to shareholders in the form of dividends.

And finally, I am pleased to announce the Board has approved a 3% increase to our quarterly dividend to zero one seven dollars per share. This marks our two hundred and third consecutive quarterly cash dividend payable on 02/06/2017 to shareholders of record on 01/05/2017. Now I will turn to our adjusted guidance outlook. Given the transitional nature of 2016, I would like to bridge our 2017 guidance and explain some significant items that impacted fiscal twenty sixteen and the drivers and its implications to fiscal twenty seventeen. First, as a reminder, we benefited from a retroactive reinstatement of the 2015 Work Opportunity Tax Credit, which had a one time impact on Q1 and the full year of 2016 of roughly $09 Second, we saw a roughly $09 benefit related to the timing of investments in people and projects with our 2020 savings initiative.

For fiscal year twenty seventeen, we no longer anticipate a material benefit from this timing. Lastly, as it relates to our 2020 Vision initiative, we realized a little over $22,000,000 in savings in fiscal year twenty sixteen related to our organizational design and initial procurement work. In fiscal year twenty seventeen, we expect to yield additional benefits related to operational improvements of 18,000,000 to $22,000,000 and we continue to expect run rate operational benefits at the high end of our previously discussed 40,000,000 to $50,000,000 range by the end of fiscal year twenty seventeen. This includes our current procurement work, which targeted approximately $200,000,000 related to janitorial supplies and other corporate expenses. Beyond this, as Scott alluded to earlier, we are excited about discovering additional opportunity beyond the initial phase as we target the remaining amount of addressable spend.

However, we believe these benefits will impact twenty eighteen and beyond and thus are not reflected in our guidance. Accordingly, we are introducing a fiscal twenty seventeen GAAP guidance outlook range of 1.4 to $1.5 and on an adjusted basis 1.8 to $1.9 per share. With the exception of the 2017 Work Opportunity Tax Credit, this guidance does not include any potential benefits associated with certain other discrete tax items and other unrecognized tax benefits. In addition, we are not expecting any material contribution from our government business in continuing operations for the fiscal year and in our guidance range. The delta in GAAP versus non GAAP guidance for fiscal twenty seventeen includes charges related to BCG's evaluation of our additional margin opportunity beyond the 100 basis points we previously announced, charges related to our continued execution of our 2020 Vision and general amount of $20,000,000 for other potential one time unknown charges in line with previous years.

Our guidance also contemplates capital expenditures of 60,000,000 to $70,000,000 and depreciation and amortization of 57,000,000 to $61,000,000 Given the transitional nature of 2016, we reevaluate the type and timing of some investments. The increase you're seeing in our CapEx and D and A for 2017 is primarily driven by a pause in some of our IT investments and the initiation of some actions that are essential to the acceleration of our 2020 vision. As it relates to IT, we are now ready to make the necessary improvements to our systems and processes. These projects revolve around aspects that Scott alluded to earlier, including labor management and talent development, pricing and data analytics, and sales acceleration. In addition, in our goal of being more efficient and profitable, we've begun the consolidation of some of our offices, such as our shared service center, which contributes to the year over year increase in CapEx.

Finally, we will now report new operating segments beginning in the 2017. The 2017 outlook section of today's presentation contained an early look at our new reporting structure. Business and Industry, Aviation, Emerging Industries, Technical Solutions, and for now Government will be our five standalone verticals moving forward. To provide greater clarity on the financial profiles associated with these new segments, today's presentation provides a general outlook of the revenue size and operating margin by segment. For Business and Industry, this encompasses much of our legacy business, including commercial real estate, sports and entertainment and industrial and manufacturing.

In 2016, revenues were approximately $2,900,000,000 and this business will generally have low to mid 5% operating margin. Everyone should be familiar with the Aviation segment as it was really our first standalone vertical. You'll see that the new breakdown incorporates the legacy on-site business associated with janitorial work at airport and shuttle parking services, which have historically been lower margin businesses. This segment now stands at approximately $850,000,000 of revenue and we anticipate a mid to high 4% operating margin in the near term. Emerging Industries is an aggregation of our operations in the education, high-tech and healthcare sectors.

This vertical had a size of about $800,000,000 in revenue and we have an operating margin profile in the mid to high 6% range. With the current status of our government business, I will skip to our Technical Solutions segment, which is a reflection of our AIDs business and our U. K. Technical arm. We are excited to finally be able to show you our Technical Solutions business on a standalone basis.

Revenues in Technical Solutions were approximately $430,000,000 and we expect mid to high 7% operating margin range. Our goal is to be as transparent as possible and assist in any way as we manage through the changes that are still to come. As such, we are in the early stages of planning an Investor Day in early spring and we look forward to announcing a date in early twenty seventeen. Thank you. And operator, we are now ready for questions.

Speaker 0

Thank And our first question comes from Michael Gallo of C. L. King. Your line is now open.

Speaker 4

Hi, good morning and congratulations on a successful first year, Scott.

Speaker 2

Thanks very much. Appreciate that, Michael.

Speaker 4

I have just one, I guess, key question. Scott, I know you kind of glazed over quickly in the prepared remarks, but it would strike me that the opportunity in implementing best practices on the labor side is potentially enormous. Can you give us just some high level sort of viewpoints on what you've seen so far? How kind of unstandardized things are across the organization? And I know you're not ready to put numbers on it, but just some high level thoughts on how big this could potentially be.

Because as you mentioned, it is obviously the single biggest expense in the company. And I was wondering just kind of how inefficient you think things are from a best practices perspective based on what you've seen to date so far? Thanks.

Speaker 2

Yeah, no, I appreciate the question. It really is hard for us to quantify right now. One of the things that we've been true to and committed to is until we get a line of sight on something, we don't want to get over our skis, right? I will tell you that we've done well over 100 site visits across the country. And I think more than anything, what we're seeing is that people approach this differently.

And we found pockets of real excellence. We're calling them bright spots in the organization. And we're going through and codifying them right now. And we're just initiating our pilots right now. So it really is hard to tell.

This could have significant upside for the firm. From what we've seen in talking to BCG who have worked on these kinds of processes with other services firms, there could be some good trajectory here. But it is early days and the truth is we weren't very standardized across the country. And that gives us, we think good opportunity in the future. But I just don't want to get out there and throw out numbers yet until at least we get through the pilot stages, which are going to happen in the next three to six months.

Speaker 4

And then just as a follow-up to that, Anthony, is there anything in the 2020 vision savings for standardization of best practices? Or whatever you find in this program, would that be 100% incremental to that? Thanks.

Speaker 5

Yeah. We have if you think about the buckets of our initial 100 basis points, roughly half is coming from org, maybe a third from procurement, and the rest is what we're codifying the initial stages of the standard operating procedures, the vertical acceleration, etcetera. So there is some line of sight to the initial amount in our 100 basis points. What Scott is alluding to is really what that upside potential could be as we look at it in more detail and we look at it across the enterprise. That's a little harder to quantify, but for the bright spots of the pockets where we've done the analysis, we do see an ability to capture that and it is in our 100 basis point trajectory.

Speaker 2

And I would add, this is a huge priority for us, right? These pilots are going to be great. We're kind of we're branding them internally our quick wins. So we're going out there and we're trying to capture savings, see what we can learn as quickly as possible so we can finalize these. So when you think about 2017 for ABM, think about standard operating practices across all of our work streams.

That's kind of where we're heading operationally and frankly culturally as a firm.

Speaker 4

Thanks very much.

Speaker 0

Thank you. And our next question comes from Joe Box of KeyBanc. Your line is now open.

Speaker 6

Good morning.

Speaker 4

Good morning, Joe.

Speaker 6

Anthony, can you maybe just give us a goalpost or give us a little bit more color on revenue growth that's factored into the FY 2017 guide? I guess aside from the Government Services business, I'm curious if you're still rightsizing some of your customers and if we maybe could see a little bit of a lower growth rate because of that or if we're at the point where your sales org is set up, the industry verticals are in place and we could start to see accelerating growth?

Speaker 5

I think it's too early for 2017 to anticipate much of a delta from what we've historically been able to accomplish on a service line basis. If you think about it, Joe, we've remapped the business. We're standing up the verticals. This is the first year that the operators are really going to be operating under the new vertical structure. To think that that's going to accelerate.

It's really more of a 2018 and beyond plan. So for expectations, as we've committed to, we're going to look at contracts across the enterprise. We're to continue to be very diligent from a margin perspective. But overall, we're still seeing the growth in 2017, but I would not anticipate an acceleration of that growth or a material difference than what we've historically been able to accomplish as an enterprise.

Speaker 6

Okay, perfect. That's helpful. Thanks. And then a big part of your value proposition was moving up the chain and extracting better price from your customers. So I guess to that point, could you maybe just deconstruct the 2% organic growth that we saw in the quarter and maybe help us understand how much of that was price versus volume?

Speaker 5

Yes. So for the pricing, that exercise is actually something that we're going to address in what we're calling the next phase of the evaluation with BTG. So if you think about what Scott alluded to that we see good opportunities both in pricing and in procurement, the pricing side, we haven't really addressed it from a systemic way, systemic process. So this is part of our standard operating procedures. And it's not so much about the fact that we're gonna look at a customer and say we're gonna be able to charge more.

It's how do we operationalize the best practices? How do we ensure that when we're in a customer site, we're looking at it consistently in terms of how we're pricing the square footage, how we're pricing the tags, so that we're able to extract more value from the proposition versus doing it in pockets and doing it independently. We may not have the same consistency. So the growth that you saw in Q4, it's more same business as usual from a volume perspective. Recall it's closer to 3% when you exclude FX.

So good mix of both volume. I wouldn't say that there was really a concentration yet on the pricing side.

Speaker 2

Yeah, and just to add on to that and why I think we're optimistic about where pricing could go for us. And again, it's really a 2018 story as we start going through the process of figuring this out, is the fact that we don't have that standardization from market to market. Take something as simple as carpet cleaning, how we price it, how we construct the price, how we bake in our costs. We just think there's going to be a lot of ability to capture value by standardizing that. So I'll go back to my earlier comment about standard operating procedures.

Just in pricing, I think there's going be great value. But again, it's aggressively a back half of 2017 story, but realistically a 2018 story.

Speaker 6

Understood. Okay. And then maybe just one last quick one for you. Scott, I'm assuming that the Government Services business, all those attributes were largely available to you back when you guys did your strategic review over a year ago. So I guess I just want to understand why now?

Are there some tentacles in this business where you just have to provide the services maybe to win other businesses? Or really what was your reluctance to exit this business before?

Speaker 2

I think it's like everything else. We had our kind of priorities and the cadence of our transformation. And as you can see, it has a very low revenue profile in the firm. We're talking about $120,000,000 odd in revenue and the concept of bigger fish to fry, right? And I don't think we were completely resolved early on that we were going to exit this business.

I think we saw trends over 2016 that just really solidified for us that if you weren't going to invest and go to scale, it just wasn't going it wasn't going to be a good long term move for us. So this was one where security for us was pretty kind of black and white. This was one early on where it wasn't as black and white but shaped up that way over time. It's the right time now.

Speaker 6

Thanks.

Speaker 0

Thank you. And our next question comes from Andy Wittmann of Robert W. Baird. Your line is now open.

Speaker 7

Great. Thanks and good morning. I guess Anthony, could you help us just decompose the margins a little bit that were reported in the quarter? You mentioned the day, I think that's about 30 bps, you tell me, insurance, Vision 2020. Also think that maybe last year had an incentive comp reversal.

Margins were down but you've got a lot of good things going on. So I think some details to quantify the moving parts would be helpful for us to understand better.

Speaker 5

Yeah, sure. So I think you nailed all of the major items. So if you decompose the upside is primarily from twenty twenty Vision and some operating mix. We had some performance challenges in our parking business that really related to startup costs associated with a very large contract in aviation on the West Coast. And then we had some margin compression on some of our legacy accounts, which we're actively looking at as part of our overall process.

So when you isolate that for parking and then janitorial, two items impacted the quarter. One was a review of our inventory, which is the normal course and tightening up. And then there was also a review of our UK operations as we merged the operational context under one leadership through the Westway acquisition and that kind of occurred throughout the year. When you isolate those two items and the bonus reversal, the rest of the operations were at or exceeded plan from our anticipation. So really, it's 2020 vision plus the impact of LOTSI and other things from a net income standpoint, all offset by the increase in insurance, the one additional working day, and then the operational factors that I just alluded to.

Speaker 7

Okay. So the day 30 bips, insurance about 30 bips, what were the inventory in UK transition costs? How much was that impact to margin?

Speaker 5

It's roughly $3,000,000 plus or minus.

Speaker 7

Okay. Then

Speaker 5

then incentive comp parking was another $2,000,000

Speaker 7

And so I guess you said for parking was mostly start up costs, you also mentioned some operational issues. Are there how much of this do you think would be between you mentioned some underperforming customers, parking. How much of this do think kind of might stick around as we move here into 'seventeen?

Speaker 5

Yeah, think if you look at our parking business and as you recall, there's really two components. There's the management side and the lease side. This is predominantly on the lease side and that's a little bit harder to predict exactly the cadence of how parkers and how that revenue stream and the profitability of that revenue stream translates. We don't anticipate continuing degradation, Andy, it's difficult to say how many parkers are going to park in particular parking lot in a particular market. But we have our operators looking at things with an attendant eye and trying to drive more volume and value in that chain.

Speaker 7

Okay. All right. That's helpful. And then I wanted to talk a little bit about the tax rate guidance here. Obviously, you got the headline number 42.

You've got WOTC quantified in cents per share. I guess by my calcs, I think the reported number for the full year basis would work its way down probably closer to 37% if you include the ASU 20 sixteen-nine and the WOTC. I guess I wanted to confirm that and how can you help us? It seems like this number is going be bouncing around quarter to quarter a little bit more. I think you talked about this when you first talked about the ASU change.

Can you help us quantify quarter to quarter? And also I think previously you mentioned that there'd be an offset to the tax rate benefit from the ASU that would maybe be as a result of higher share count and then it wouldn't be an actual net EPS effect. Now I could be wrong on that so I wanted to give you a chance to address that factor again.

Speaker 5

Yeah, so I don't think that's technically correct. But in terms of the tax benefit in our numbers, right now what we're predicting is $0.11 impact from walk in force and as you mentioned from our stock based compensation, which is a known number at this point. If you recall, it's really predicated on a calendar year and based on how our fiscal year is, we pretty much know that number in advance. So the 4¢, we feel pretty good. Could there be variability slightly?

Sure. The other thing that makes it very difficult to project the effective tax rate is we do have other discrete that potentially could impact our tax rate. And those could include 179 B, additional WASI. So we try to provide a best case estimate and that's what we're doing with the annual guidance. How it breaks down per quarter and then how that obviously translates for the full year.

We'll keep you abreast, Andy, it's a hard task with those unknowns.

Speaker 7

Okay, great. And then I guess maybe my final question, Scott, wanted to get you involved here a little bit too. Just, you know, thinking beyond the 100, you know, we heard procurements and kind of a new bucket there that you're going after that you didn't previously address. What do you other think of the kind of primary buckets that will allow you to drive beyond the 100? And it sounds like the piloting is next three to six months.

Is that do you think that's the right timeframe to have a more solid outlook as to how far beyond the 100 and where it will come from? Should we be thinking kind of mid fiscal year?

Speaker 2

Yes. I think it's more of a back half of the year story because it's going to take us to really get the right kind of learnings, it's going to take six months because there's a continuous improvement process with this and refinement that happens. So I think we'll be at you with better line of sight in Q3, Q4. But I mean, I have to tell you, the labor management area is so exciting. And the other area that we haven't talked a lot about is our account management area in terms of how we manage our client relationships, whether or not we're instituting quarterly business reviews across the platform, how we're thinking about engaging with our clients, how we're thinking about cross selling on a kind of more tactical basis about having those conversations and raising opportunity.

So I think that's going to be an area that may be longer term. But I think it's just going to help us with retention and it's going to help us find margin over time. So I think there's these new initiatives, which is going deeper into procurement and exploring pricing that are really exciting to get us past the 100 basis points. But I think the stuff that we put in place now through Phase one as they mature are also gonna give us great opportunity. So I think it's really those two things, the stuff we already initiated in Phase one getting more mature over time and the new stuff that we're initiating in Phase two which is procurement and pricing.

Speaker 7

Great, thank you.

Speaker 0

Thank you. And our next question comes from Jeff Kessler of Imperial Capital. Your line is now open.

Speaker 8

Thank you for taking the question. In talking about standardization which is going to be a big priority of yours over the next twelve months, are you going to be looking at what is the what I call the standard operating rate or the standard operating performance measurement that you have average company wide and taking a look at the bottom performing bottom performing divisions, I should say, bottom performing offices, branches, and looking at those variances and trying to get those variances up to average? Is that part of the assessment?

Speaker 6

Yeah, think

Speaker 2

that's one of the core functions of what we're trying to do. And when you get the standardization, you start creating benchmarks and you start creating averages, you create these metrics, right? And I think that's one of the core principles of this is how do we help optimize accounts? And that's the key. And now through the standardization and getting data to help us figure this out, I think that's gonna be the huge trajectory.

So for us, it's all about how can we optimize kind of the bottom. And it doesn't mean that we're operating them badly or that we have less than capable managers, just that they haven't had the tools, they haven't had the insight, they haven't had the resources of having standard operating practices. And that's what's gonna make this so powerful.

Speaker 5

And variability some of is gonna be expected variability by market. Really driving within a particular market why one branch is operating differently than the other branch to try to get that lower performing branch up to that mean. You can't look at it enterprise wide and say, well, you know, x is the the right percentage, and that's what the whole enterprise is. Because there's going be variability by market that may be known.

Speaker 2

Yeah, and I think just to finish this concept, I think it's not even branch by branch, it's account by account. So I don't think and we don't believe that there are holistic branches that are operating below the mean. We just think maybe within a branch, there may be particular accounts that may not have gotten the focus that needed to, or again, they didn't have the standard operating practices to help them manage them up to the mean.

Speaker 8

Okay, and following on to that question, with regard to your new segment structure, are you going to be looking at the same types of standard standardization procedures as they pertain to these divisions and what the, if you want to call it again, getting the lower performing accounts in those divisions up to what would be average or typical for that division? And where can you, where do you amongst those segments, where do you think the biggest opportunities are?

Speaker 2

Yeah, so I don't necessarily think there's any one segment that has more opportunity than the other with standard operating practices. I think there are certain elements that run across every segment. So if you look at labor management, the basic concept of are you scheduling the day's labor? And do you have the tools to appropriately schedule the labor? Well, that can run across every one of our industry groups.

But there'll be nuances between doing it in a wheelchair format in an airport and possibly janitorial in an educational facility, right? So there'll be, again, little nuances between the services and those. But everyone should think about scheduling their work at the start of the day. Everyone should have the opportunity to have a tool that helps them do that. Everyone should have the opportunity to understand how similar accounts are performing so they can figure out how to get up to that or exceed that.

So I think there's tenants that run across, but there are also specifics that'll have to be figured out industry by industry.

Speaker 8

Okay. Final question. That is, you know, historically the company has sought and this we're going back twenty years now to try to develop some type of cross selling programs between the segments as they existed then. Now you are looking at trying to cross sell across new I guess not they're not completely new obviously. They're just segmented differently.

Is there any strategic difference in the way you're going to try to go about cross selling amongst the new segment structure?

Speaker 2

Yes, there is, I think. And it really stems from something I talked about earlier, which is our account planning process. So here's the way you could think about for many of our accounts of any kind of scale, they're gonna have a fully built out account plan that's gonna look at it. And one of the key tenants is going to be cross selling. How many services do you have?

So picture you're a project manager of a large scale account. And every month when you're looking at your account plan, you're looking at how many services you have, right? And you're going to be metric on that. You're gonna be kind of benchmarked on that across the organization. So it's gonna be front and center to how you're managing that account.

And with our newly formed Center of Excellence, they're gonna have all these protocols on how you go about cross selling and tools to help them do that. So I think when it's front and center and you know you're getting metric based on it, and then you additionally have the resources to help you do that, that's a dramatic shift than where we've been in the past. And so we're really hopeful over time you're gonna see us move up in terms of how many services per client.

Speaker 8

Okay, is there a timeframe which we can hope for to hear you begin to talk about guidelines or results towards? Are we talking again toward around 2018?

Speaker 2

Yeah, it will be only because we're going to almost need a year of baseline information to really understand where we're starting from, right? So I think part of it is the fact that we're just initiating these metrics now. And they take time to get going and to get acculturated. That's number one. But then you also again, you need a baseline so that you can show where it's heading.

Speaker 5

And we're hopeful that as if you recall historically, if you were in janitorial, there was really light incentive to sell any other service. And now if I own an education customer, I'm owning the customer. So the incentive to try to sell more to that customer is in my best interest from a revenue and a profitability standpoint. So we're hopeful that we see some of that in 2017, but it does not reflect our guidance in terms of that multiple cell to Scott's point. It'll be more of I think with data, a focus area for 2018 to really start to drive that measurement going forward.

Speaker 2

Yeah, that's not a minor point that Anthony is making. Because in our old format, if you were in the janitorial segment, you always wanted a cross sell engineering, but you weren't incented to do it. It wasn't going to be captured on your P and L. And so much of what we do is we look at our P and Ls and we want to maximize our P and Ls. Now in this new format, as Anthony pointed out, you own the customer.

So when you're cross selling in services, you get that on your P and L, you're responsible for it, you're responsible for the execution of it. So it's a big shift.

Speaker 0

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

Speaker 9

Hi, thanks. Good morning. Scott, can you elaborate on your immediate next steps in your 2020 Vision strategic plan over the next call it two to three quarters? Which areas are priorities for you and assess the potential sales risk of realigning your sales force by vertical?

Speaker 2

Yes, so I'm not concerned about the sales risk of realignment. We've had that in place now for a few months and things are going really well. And so I'm not worried about that. I think there's two things I would think about that are on my mind in the near term. One is the standard operating practices across the work streams of labor management, how we manage our accounts, safety and risk.

And then lastly, engagement, Because employee engagement is the other piece of it. So I look at kind of 2017 and what immediately comes to mind to me are standard operating practices and employee engagement. How we get our 100,000 workers activated and being promoters of everything we're doing, engaged. We work really hard at kind of crafting our purpose, vision and mission to get people's hearts and minds with AVM and how we make them feel like valued employees, valued part of our proposition to our clients. So I'm so excited about where we're heading in terms of employee engagement.

So big focus for us outside of the standard operating procedures.

Speaker 9

Got it, very helpful. Anthony, given your workers' comp claims experience over the last twelve months, can you discuss trends you see in insurance expense and how you expect insurance expense 2017 to compare to 2016?

Speaker 5

Sure. So if you recall in 2016, we took a large increase in our insurance expense with the premise or the backdrop of until we see sustainable long term trends either way, not to adjust the rate. And we're committed to that. So we're heading into 2017 with an accrual similar to 2016 from a work comp and general liability perspective. Some of the trends that we're seeing with some of the standard operating procedures and consistent excellence on the day to day is starting to have initial impact as a huge focus.

It's one of our key tenants of our 2020 vision. It's one of the key tenants from Scott and the executive management team to make that a clear focus, not only for the short term, it's not the 2020s, but this is for the health and the long term objectives of the company. So you shouldn't see any current year changes in our accrual rate in 2017. It's a similar year over year.

Speaker 9

Got it. And then lastly, Anthony, you've guided to $18,000,000 to 22,000,000 anticipated incremental 2020 Vision savings in fiscal twenty seventeen. Can you talk about how much of that you expect to flow through to drive margin expansion taking into account potential margin offsets such as reinvestments?

Speaker 5

Yes, sure. So if you think about we ended the year with roughly $22,000,000 of realized savings and a run rate of $34,000,000 So the targeted amount that we're looking at from purely 2020 is really a coupling our additional procurement, the full run rate of org, and the beginning stages of our consistent excellence, which are some of our standard operating procedures. So we have good line of sight into those three metrics. As it relates to the rest of the business, as we mentioned earlier, we stood up these verticals and we stood up the industry groups in terms of the operational performance. They pretty much were operating and put together from a budget perspective as they performed in 'sixteen.

So not a lot of margin accretion or degradation in any of the metrics from what we expected. So what you're looking at as a 2017 plan is really a continuation of our 2016 progress we've made in addition to the 2020 savings that will come in over the next twelve months.

Speaker 9

Very helpful. Thank you.

Speaker 0

Thank you. And our last question comes from the line of Mark Riddick of Sidoti. Your line is now open.

Speaker 10

Hi, good morning. Morning. I wanted to just ask about the revenue growth and the impact of and or effects of TAG revenue during the quarter and then also maybe what you see going forward there as far as the contribution? And then I have a quick follow-up on those efforts.

Speaker 5

Sure. So for TAG it continues to remain a focus area for the organization and we had a good Q4 TAG penetration. As we kind of alluded to, TAGs typically run around 6% to 7% of our janitorial and facility services. Those are the two primary areas where TAG really has a benefit and where it's really a focus and that's where the margin accretion could occur. So, we had a good execution in 2016.

We expect the same level of momentum heading into 2017, and it is a focus area for the organization and is one of the key components of our metric dashboard around penetrating and ensuring that it continues to be a focus area for the firm.

Speaker 10

And then maybe can you sort of share a little bit of the as how that bridges with some of the commentary around best practices? I wanted to get a sense of maybe where you were currently with pursuing that revenue, whether you were sort of in the early stages or maybe compared to some of the other businesses sort of where you were as to

Speaker 5

Yeah, the current sure. Activity

Speaker 3

So TAG for us, if

Speaker 5

you think about it, it's always been a part of our business model. What we've done as part of the 2020 vision and, you know, starting this discussion around the margin projection, it really goes to the account plan. And when you look at an account that has scale, you know, what are you doing in that account? Are you selling additional services? Have you penetrated the right amount of tags?

So we're not expecting significant tag increases in 2017, because we think it it has historically been a good focus area. Where I think there's benefits in tag over the long term is when you look at the standard operating procedures and where a customer says, hey, I have a TAG job related to a carpet cleaning, we may have not priced that consistently between accounts. So when we're looking at that pricing methodology consistency across, we see benefits in just making that standardized. But in terms of increasing our TAG penetration, obviously that's an objective. But I don't want it to seem like we haven't had a focus on TAGs in the past.

It's always been a focus and it continues to be a focus going forward.

Speaker 10

And then as a quick follow-up, maybe if you could sort of give us a quick overview on sort of where you see Westway and how that's progressed during the course of the year and what expectations we may see from there?

Speaker 5

Yes, so Westway is performing as planned. So our objectives when we acquired Westway is to provide a complement to our cleaning business that we had acquired back in 2014 to give the technical component, a higher margin business. And we've seen initial stages of those two businesses coming together and really the cross selling aspect of taking the technical solutions and putting it into the GBM business or the historical B and I business, we've seen some good progress there. So it's operating as intended and as planned and we see good prospects going forward.

Speaker 2

Yeah. And I would just add one of the things we're so excited about is now we have this full IFS offering in Europe. And we had our first contract we talked about last quarter. And we have a good pipeline of accelerating that offering. So it's quite exciting.

Speaker 10

Okay, excellent. Thank you very much.

Speaker 0

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Scott Selmirs for closing remarks.

Speaker 2

Okay, thank you. So listen, thanks everyone for your support and interest. You you need to know we really appreciate it and wish everybody a happy holiday. We look forward to reporting back in Q1. And just know that as a firm we are so excited about 2017 and are really energized about what's possible with this firm.

So thanks very much.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a

Speaker 5

great

Speaker 1

day everyone.