Greetings, and welcome to the ABM Industries Second Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Susie Choi, Investor and Media Relations for ABM Industries.
Thank you. You may begin.
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 Q2 fiscal 2018 financial results. A copy of this release 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 contain 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 our presentation. Additionally, today's accompanying presentation a historical segment recast for fiscal 2017 to reflect the new business segments we introduced earlier this year as a result of our acquisition of GCA.
During the course of this call, certain non GAAP financial information will be presented as well. 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.
Thank you, Susie, and good morning, everyone. I'm sure you've all had an opportunity to read our earnings release. I'd like to cover the quarter, give you an update on the GCA integration and discuss our outlook for the remainder of the year. I'm pleased with our results for the Q2. We had strong top line organic growth of 4.5 percent driven by new business wins and expansions with key clients, all anchored by steady retention.
Our sales initiatives are gaining traction and we are showing good momentum in attracting and hiring sales talent. So far this year, we've onboarded 62 new salespeople and we continue to train and manage our teams towards a higher bar for performance, so we can achieve profitable growth. And I think it's important to add that it's not just our sales people that bring in our new business. As we continued with our broad based sales initiatives and messaging. To give you a flavor of some of our progress, for the 1st 6 months of our fiscal year, we were awarded $460,000,000 of annualized bookings.
We are fortunate to be growing off a larger base of business this year with GCA, and this demonstrates our ability to integrate sales and operations and remain focused on growth even during a time when we are adding 40,000 new employees and hundreds of clients. Our GAAP EPS on a continuing basis for the quarter was $0.38 or $0.47 on an adjusted basis. Our enterprise performance for the quarter and for the first half of the year has essentially been as expected, driven by B and I, which is our largest segment. While we did begin to see the acceleration of labor pressures as the quarter progressed, notably in our lower wage geographies, B and I was more insulated than our other industry groups as they have a larger proportion of higher paid union labor and their pool has more density from its branch network. Cash flow is a key metric for the enterprise and I'm pleased that we generated more than $80,000,000 in free cash flow this quarter.
This brings us above $100,000,000 year to date. While Anthony will discuss cash flow in detail during his prepared remarks, I'm delighted with our first half collection efforts and want to thank our field and shared services teams for working together so diligently on this important aspect of our business. Turning to GCA, the integration is going very well with the majority of cost synergies ahead of plan and trending to the high end of our projected range. In fact, we are now targeting the $30,000,000 annualized mark with approximately $15,000,000 to $17,000,000 to be realized in year. We also continue to make strides in consolidating our GCA and ABM back office systems and processes with a plan that will culminate at the end of fiscal 2019.
Our new integrated organizational structure is designed and we have solidified our team. I'm delighted that everyone we have asked to stay on board has accepted his or her role, including our new CIO. And our retention rate on the GCA legacy business is trending in the low to mid 90% range, and we've had some great new notable wins across our different services. We were awarded a custodial assignment with San Jacinto College in East Harris County, Texas, an energy performance contract with Brooks County Schools headquartered in Quitman, Georgia, and event support services for the 11 sports facilities at Oklahoma State University, where we also performed janitorial work. I have to say, there's great energy and enthusiasm internally and externally around the potential for our education group.
As we continue to elevate the ABM brand and invest in this business, we believe that we will be the clear market choice as outsourcing accelerates and sector churn occurs over time. Let me now move to the full year outlook. Although many parts of our business and our 2020 vision are tracking to our long term plans, we are seeing pressure on the labor front. I'd like to discuss the broader labor environment and the burdens we are facing as a result of today's unique macroeconomic environment. As one of the nation's largest employers of both skilled and non skilled labor, in the past, we have certainly experienced cycles of labor shortages, wage growth and greater employment demand over the years.
However, what we are seeing today is an unprecedented level of both low unemployment and low underemployed across the country. The U. S. Economy is operating at an unemployment rate of 3.8%, one of the lowest points in history. While the macroeconomic environment will bode well for us long term, as we expand with our customers and grow our platform, the continued labor shortage is leading to higher costs.
This is impacting us on several fronts. Generally speaking, we are experiencing a lower availability of labor supply with a lower number of qualified applicants per job opening. Certain of our industry groups feel a greater impact as they have a more rigorous application process. For example, the aviation segment has a TSA process that can take up to 8 weeks to conclude from application to background check. The Education segment also has stricter standards and requirements for potential employees.
These types of protracted processes in the current environment make it more challenging to onboard employees. And employee retention is also more problematic in today's environment as people have more choices as wages grow and work becomes easier to find in or outside our industry. Now make no mistake, we are not sitting idly by to wait for the labor trends to pass. We have initiated several mitigation strategies to offset the majority of the impact we are experiencing. Among them, we have deployed digital applications and background checks through our implementation of Job Align and TalentWise.
This makes it easier to get through the application process and speeds up the background check waiting period. We have also instituted referral programs and social media outreach to attract applicants. We have hired more recruiters to specifically target more volatile geographic markets and target industry groups that are particularly susceptible to labor challenges, such as aviation and education. And there are more initiatives on the horizon. Given the nature of our service business, both direct and indirect costs comprise approximately 90% of our revenue.
On a full year basis, we anticipated and planned for a level of labor and labor related cost pressures in fiscal 2018. However, we are currently seeing an additional 60 basis points of those pressures above our original expectation. Given the macroeconomic nature of all these cyclical trends, we cannot predict when normalization will occur. And keep in mind, our pricing is not dynamic. We take cost increases into account when we consider pricing as we cycle through our contracts, but it's not elastic.
In certain segments, we feel really good about where we stand and our ability to gain share has never been better. In other sectors, the wage and labor markets take longer to cycle through. In the meantime, the operational efficiencies and improvements we have been pursuing as part of our 2020 vision have and will continue to offset a portion of these rising costs. We have instituted rigorous weekly operating review protocols to assess and action labor initiatives for new and existing assignments. We are working with our suppliers on procurement efforts to further control supply costs.
We're also proactively identifying those clients where we can pursue price increases in the near term, while not jeopardizing long term relationships. We have also recently instituted several enterprise wide cost containment measures to reflect our current environment. Even with all of these initiatives in place, we cannot fully overcome the increase in our largest cost input, which is labor. Therefore, we are revising our fiscal 2018 outlook to $1.85 to $1.95 per share on an adjusted basis to reflect a portion of the 60 basis point challenge that we are facing. Most importantly, we are managing our business for the long term and not making short term decisions that will jeopardize our path.
We continue to invest in technology and process improvement as a means to become the most cost efficient in our delivery of services and distinguish ourselves as the partner of choice to our clients. We believe our size and scale gives us a competitive advantage over smaller players who are experiencing the same pressures and may find it more difficult to navigate this cycle. This should translate to additional market share over time. We also believe the current macro environment will give rise to a new focus on outsourcing and there is the potential for the share market to grow in size. The core fundamentals of our 2020 vision remain intact and the acquisition of GCA has further strengthened our long term financial and operational position in the marketplace.
Our business model remains resilient and we have a compelling value proposition to capitalize on our core strengths and build out our long term future. With that, I'll turn the call over to Anthony.
Good morning, everyone. Before I dive into the details of today's call, I'd like to preface my review by reminding everyone that our overall results for the quarter reflect higher amortization, interest expense and share count dilution resulting from our September 2017 acquisition of GCA Services Group. On a segment basis, GCA impacted all of our industry groups except for technical solutions. In addition, our 2nd quarter results do not include the contribution from our government services business, which we sold in May 2017. Turning to results.
Total revenues for the quarter were $1,600,000,000 up 20.6% versus last year, driven by GCA revenues of roughly $256,000,000 and good organic growth within the Business and Industry and Aviation segments. Specifically, our 4.5 percent organic growth was driven by low to mid-ninety percent retention and realized revenue stemming from expansions and new business, which we measure by tracking new sales throughout the year. For the first half of fiscal year, we had approximately $460,000,000 in annualized new bookings, which is comprised of new business and expansion. In addition, approximately $17,000,000 of our growth was due to higher management reimbursement revenue, primarily in our Business and Industry and Aviation segments. On a GAAP basis, our income from continuing operations was 25,400,000
dollars or $0.38 per diluted
share versus $31,600,000 or $0.56 per diluted share last year. The reduction of our federal corporate income tax positively impacted the quarter by approximately $4,000,000 or $0.06 per share. Our results also reflect the following items that are predominantly related to our acquisition of GCA: higher amortization of approximately $11,000,000 which is embedded within each impacted reportable segment higher interest expense of $10,800,000 and an increase in weighted average shares outstanding on a diluted basis of $66,200,000 dollars Excluding the impact of segment related amortization, our overall operational results benefited from GCA related revenue, predominantly within the Education, Technology and Manufacturing and Business and Industry segments. On an adjusted basis, income from continuing operations for the quarter was 31,200,000 dollars or $0.47 per diluted share. During the quarter, we had adjusted EBITDA of $83,000,000 at a margin rate of 5.3% compared to 4.6% last year.
Prior to moving new segments and providing a brief summary for each, I wanted to spend a few minutes on the direct labor and labor related developments we have seen. The labor pressures that Scott discussed began to pick up as we progressed through the quarter. For the first half, we were able to overcome most of the pressures through proactive expense management as well as a few one time items that benefited the quarter, a reversal of approximately $1,400,000 of certain incentive compensation accruals due to our revised full year forecast and a shift in timing related to IT projects to the to the
second half of this year. On the direct
labor and labor related cost front,
we saw approximately 40 basis points of pressure in the first half, mostly weighted in the second quarter. And we anticipate the back half without mitigation to be further impacted by an additional 80 basis points. Given the cost mitigation and other measures, anticipate the full year impact to be roughly 20 basis points. Now let me dive into the segment results for the quarter, which are described on Slide 12 of today's presentation. As discussed last quarter, as a result of the GCA acquisition and the remapping of overhead expenses, including allocations and additional amortization, our operating segment results will not be easily comparable on a year over year basis.
To help you assess our operating performance during the 1st year, we have provided full year operating margin guidance for the 1st fiscal year, which we have updated and can be found in today's presentation. Revenues in our largest segment B and I grew 13.4 percent to $723,000,000 versus last year, driven by $43,000,000 of additional revenue related to GCA, including $20,000,000 of vehicle services work. As expected, B and I exhibited strong organic growth due to the large U. K. Janitorial win from last year, in addition to expansions with key clients.
Operating profit for the quarter was $43,500,000 for a margin of 6%, including approximately $2,000,000 of onetime items. While labor challenges are present in certain areas, this segment has a high proportion of unionized labor, where wage rates are higher and turnover is lower than in other industry groups. In addition, B and I is our most mature business and our branch network and employee density allows us to better manage through labor cycles as employees can move within sites and the employee base is larger. We have also been successful in gaining some pricing increases with our customers, including our Vehicle Services group, although we continue to evaluate the long term potential and strategic path for the smaller book of business. Overall, we were pleased with B and I's results and full year outlook.
Excluding GCA related amortization, the operating margin for total B and I was 6.3% this quarter and we continue to expect to end the year with operating margins in the low 5% range. Aviation reported revenues of $245,400,000 an increase of 5.8%, which was primarily related to organic growth within their parking and transportation service line. GCA had a relatively small impact of approximately $4,000,000 in this segment. Operating profit came in at $5,100,000 for a margin of 2.1%. The year over year decline was partially due to a 70% increase in management reimbursement revenue, which is pass through revenue as well as more acute labor and pricing pressures that are more inherent in this industry.
To be more specific, due to the concentrated client base and rigorous onboarding and TSA clearance protocol, employee onboarding is more complex than some of our other industry groups. Therefore, during a period of acute labor cost pressures, mitigation strategies take longer and pricing power, generally speaking, with this customer base is more difficult. Our outlook anticipates a 3% operating margin for the full year and we continue to look at cost levers to improve on this going forward. In addition, while we continue to seek market opportunities in this segment, we are becoming more discerning in the types of contracts we are pursuing. Our newest segment, Technology and Manufacturing, achieved $228,000,000 of revenue for the quarter, growing 41% versus last year, largely due to $61,000,000 of GCA related revenue.
Organic growth was driven by janitorial service line expansions with key clients. Operating profit came in at $16,000,000 for the quarter for a margin of 7%. Excluding GCA related amortization, the operating profit margin would have been 8.2%. However, for the full year, we now expect operating margins in the low 7% range, primarily as a result of projected incremental labor pressures we are seeing due to more remote account locations and lack of employee density for some of our accounts, which inhibit our ability to attract labor at contractual costs. While we see labor challenges in this segment, we are encouraged by the sales and operational foundation we are developing.
We are being viewed as the outsourcing firm of choice by existing and prospective clients, which should lead to above average growth over time and at better operating margins in most instances. Turning to Education. Revenue was $206,000,000 for the quarter benefiting from $142,000,000 in GCA Business. From a top line perspective, revenue was marginally behind our projections. However, just as we stated in the Q1, due to seasonality in the K-twelve secondtor, we expect growth to accelerate in the second half of the year as assignments are generally awarded in the May through July time frame and overall as schools prepare for the new academic year.
Operating profit for the quarter was $10,600,000 for a margin of 5.1%. Excluding the impact of amortization, operating margins were 8.3% as this segment saw the largest impact from GCA. We expect to end the year in the low 5% margin range, including amortization. This segment is proportionally more affected by labor pressures due to its geographic concentration in low wage areas where employee turnover is more prevalent. Healthcare revenue was $70,000,000 for the quarter, including $8,000,000 in contribution from GCA.
Excluding GCA amortization, operating margins were 4.1% for the quarter and 3.8% on a reported basis. We expect operating margin in the low 4% range for the full year. Finally, Technical Solutions reported revenues of 109,000,000 dollars down 2.1 percent for the quarter. As we anticipated based on the pace of bookings and the pipeline we saw at the end of last year and the beginning of this year, our project and revenue churn will begin to normalize as we head into the second half of twenty eighteen. We expect full year revenue to be up on a year over year basis due to the expected project churn over the next 6 months.
In addition, our prospects and backlog pipeline continue to remain robust and we are confident that our full year operating profit and margin will continue to trend in line with historical amounts. For the quarter, operating margins were 7% compared to 9% last year, reflecting our continued investment in U. S. Salespeople and support as well as certain underperformance by our U. K.
Technical business. However, with our back half growth, we expect to hold margins and reiterate our high 8% operating margin target for the year. Turning to cash and liquidity. Cash flow from operations was roughly $100,000,000 for Q2, including the contribution from GCA as well as several strategies that contributed to this performance. At the end of last fiscal year, we began instituting processes to better align our enterprise shared service billing and collection functions with our field operations.
While we
are still in the very early stages, we
have begun to address some of the pain points of our process as we migrated accounting centers from across the country over the past 24 months. As a result, we started to see a gradual improvement in our working capital, driving down our DSOs as we continue to integrate our business units and GCA. In addition, as part of our interest rate risk management strategy, we terminated swaps with a fair value of approximately $26,000,000 and subsequently entered into new swaps with a notional value of $440,000,000 and with maturity date more closely aligned with the company's repayment strategy. And we continue to proactively manage our fixed to floating rate profile. Finally, with our discipline on working capital, our free cash flow should gradually improve over the next 12 to 18 months as we continue to drive our back office efficiencies.
For fiscal 2018, due to the aforementioned developments and assuming the continuation of our current DSO trends, we now expect to end the year with free cash flow of approximately $150,000,000 We ended the quarter with total debt including standby letters of credit of roughly $1,300,000,000 and a bank adjusted leverage ratio of 3.8x. We are also updating our estimate for interest expense. Given the accelerated rise in interest rates and the outlook for the remainder of the year, we are increasing our interest rate expense outlook to $55,000,000 to $58,000,000 Please note, the rebalancing of our swaps should provide a nominal reduction in our interest rate expense in fiscal 'eighteen and our repositioning should be net positive over the remaining life of our credit agreement. During the quarter, we paid a quarterly cash dividend of $0.175 per common share for a total distribution of approximately $11,500,000 to shareholders. Today, I'm pleased to report our Board has approved our 209th consecutive quarterly cash dividend.
Before moving on to our guidance outlook, I want to take a moment and acknowledge the efforts of our teams in converging operationally, financially and technologically with the integration of GCA. During fiscal 2018, we continue to operate on 2 ERP systems and we have begun the migration process to a centralized back office platform, which I expect to be completed in fiscal 'nineteen. This year, we are taking a practical approach in implementing our internal control framework, processes and systems as we acclimate GCA to our respective practices and move to the longer term IT framework. Ultimately, this will strengthen our combined entity and lead to further efficiencies with our end to end process. Now let me discuss our revised guidance outlook.
As described in our press release, we are updating GAAP and non GAAP guidance to reflect our outlook for higher labor costs for the remainder of the year. At this time, we do not see signs that these pressures will abate in the near term. As a result, we now expect GAAP income from continuing operations to be in the range of $1.73 to $1.83 and on an adjusted basis, dollars 1.85 to $1.95 per diluted share. In addition to all the operating strategies we have initiated, we have instituted certain cost containment measures to help alleviate some of the labor headwinds we are facing. As we progress through the remainder of this year and begin the planning process for fiscal 2019, we will continue to look at areas to contain costs and become more efficient.
Until we progress through this year, it's too early to tell what effect labor costs could have for full year 'nineteen and beyond. At current trends, one could expect a 20 basis points headwind, which is a minimum of 40 basis points annualized to be partially mitigated by the steps we have taken implementing our labor management strategies and cycling through contract renegotiations and the full year benefit of synergies. Our guidance continues to assume a tax rate between 28% to 30% for fiscal 2018. This rate excludes discrete tax items such as the 2018 work opportunity tax credit and the tax impact of stock based awards, also referred to as FAS 123R, which will be a little more than $10,000,000 in discrete tax items for the full year as we disclosed last quarter. Finally, as Scott discussed, our GCA integration is proceeding as planned and we continue to achieve synergies of approximately $30,000,000 on a run rate basis and we are projected to end the year at a realized rate of approximately $15,000,000 to 17,000,000 dollars With that, operator, we are now ready for questions.
Thank you.
Thank you. Our first question comes from the line of Michael Gallo with CL King. Please proceed with your question.
Hi, good morning. I might have missed it, but the organic growth of 4.5% in the quarter, was that a function of some of these issues allowing you to gain share? Or is there something unusual that drove that?
Hey, Mike. Yes, there was nothing unusual that drove that as part of our normal business. We had a good acceleration from the TFL contract in the U. K. Towards the end of last year, but no anomalies in the business.
So it's just business as usual.
And in terms of just cycling contracts, assuming the labor environment is not going to improve, how long do you think it will take to kind of get through around where between the mitigating and other issues that we'll be able to start to see some of the margin progress. Obviously, you'll have the synergies coming through from GCA. But at what point will we actually be able to see margins progressing forward? Is that sometime next year? Or what would you anticipate?
Yes. So the way we're thinking about that, Mike, is that our contracts on average are 3 year contracts. So they have normal cycle periods. So if you think about that, you kind of could take this midpoint of 18 months, right, between starting on some contracts that are coming due right now to contracts that are coming due in 3 years. But on top of that, we're just not waiting for the contracts to expire.
There are some contracts that we're being more aggressive about and going after price now. We're always in conversations with our clients through our quarterly business review process. So we're taking a very prescriptive look at all of our contracts and who we can have near term conversations with and who it just doesn't make sense to have conversations with right now. So I'd say on a high level kind of 12 to 18 months where we'll start seeing that pickup once the markets normalize.
Thank you. Our next question comes from
the line of Andy Wittmann with Robert W. Baird. Please proceed with your question.
Great. Hi, guys. Anthony, some of the numbers that you were given in your script were a little bit fast there. I just wanted to understand the quantification that you gave on some of these labor headwinds. The one I picked up was there's 80 basis points headwind to the second half, but for the full year something and something else.
Can you just kind of go through that more slowly so that we can all understand that a little bit better? Sure. No problem. So we're facing labor and related cost pressures. And on an absolute basis, it's roughly 60 basis points for the year.
The 80 basis points referred to in the script was
for the second half. And that's pre mitigation efforts that we have in place, which include labor costs, speaking with our customers, ensuring that we have the escalations in place as well as being more diligent from an HR onboarding standpoint to try to mitigate some of these costs. So for the full year, our expectations right now on a full year basis is roughly 20 basis points.
Net. Net. Yes.
Yes, 20 basis points net of when after you take your mitigation efforts. So it's like it was 60 basis points for the year. How do you get from the 60 basis points what's the difference between the 60 basis points for the year and the 20 basis points for the year, the 40 basis points of mitigations to the full year?
40 basis points of mitigation. And some of that is going to also be holding on some SG and A costs as well. So it's not just all labor related. We do have some mitigation efforts in our SG and A areas to help mitigate some of the pressures. Okay.
And in the quarter then with the revised view of the year, I heard there was a $1,400,000 reversal to incentive comp, but there was one other factor in there too. Can you what was that other one that you mentioned?
It was a client KPI. It was a reversal of effectively a rebate from a client for roughly $2,000,000
$2,000,000 reversal and a $1,400,000 pickup on the incentive comp. Okay.
And then Scott, just something Andy, on the incentive comp, that should double for the full year given the trends. So this is just a half year impact. So you could anticipate that being doubled for the full year.
Yes. You'll get another maybe like $700,000 $700,000 in the last two quarters, something like that?
That's right.
Yes. Okay. Then on sales force investment, Scott, I think the organic growth rate pickup is notable here. When you look are we seeing returns from the new hires yet? Or is this stuff that was kind of in the pipeline?
I mean, it sounds like transportation for London was a lot of it. But are you getting the productivity out of the hires is I guess the question? And where do you think the organic growth rate can go from here?
Yes. So with the productivity, I mean it's mix, right? 35% of our new hires or I should say 35% of our total workforce in terms of sales are what we call the rookies, the people that are anywhere from new to 9 months in and they'll typically be less productive, right? But if you think about our overall headcount, we're up 17% year over year. And we are being really prescriptive about the bottom portion of that and managing out.
So we're really raising the bar on performance. And when you look at the overall organic rate year to date, we're at 3.7%. And we're optimistic that we're going to be able to maintain that range through the rest of this year. Our pipeline is really strong. We brought in $460,000,000 of new accounts in the first half of the year, which is an incredible pace.
That's up 16% from this time last year. So I think the investment in sales, I think the investment in sales tools and just the overall messaging that's happening in the firm. I think it's really starting to gain traction. And unfortunately, we are seeing it in the numbers as well.
Okay, good. That's helpful. And then just on the implementation of the 2020 vision and all the strategies that you're now taking down to the field level, we talked about, I think in the script here, going to the centralized shared services center for a lot of those things. It sounds like you're making some progress on your billing. I know that's a big hurdle there.
Through all of these changes, I guess the 2 constituencies that I wanted to hear about were your employees and your employee turnover that you've had to this. I think you've changed a lot of people's job descriptions in other words. I want to understand how that's affected the franchise. Also want to understand if these things if the slower billings, the more challenging billings or just the changes in billings and things like that have affected your customers and their level of happiness with you and their levels of retention that you're able to maintain?
Yes. So I would look at I think there really is a bifurcation between staff and management and field. And from a turnover standpoint, our staff and management is much less in terms of absolute turnover versus the field. And just to give you some perspective on field turnover and what we're seeing in the marketplace, if we look at turnover in the field back in November, which is just a few short months ago, year over year, there was no difference in turnover in the field. Right now, if you look at April's numbers, we're talking about a 20% difference in turnover.
So this has happened pretty dramatically, hasn't affected the customers because we're everyone in our business is in the same boat, right? I think we have a little bit of competitive advantage here because of our scale versus our competitors. But this is not anything that's happened here as a result of this labor environment is not translating into customer dissatisfaction or anything with our retention rate. And shared services making really good progress. We just are in the early innings of standing it up and it's just and we still have a long way to go, which is exciting, right, because we see upside.
Yes. And just as it relates to how you're talking to your customers about this, I appreciate the fact that you got through your contracts, some of them are given that they are I mean, I guess, technically, most of your contracts are canceled on 30, 60, 90 days, something like that. That does give you the opportunity to have a conversation earlier. In those initial conversations where you've had them, where you're trying to recover some of the labor costs, how have those been met so far? And what source of optimism or lack of optimism have you gained from those conversations so far?
Yes. So I think it's mixed, right? And it depends on the client and the situation. There are some accounts that are impacted, but are still really profitable, right? So, you don't want to get into a situation where you're going to force a bid if you're still over market, right, even though you're having labor pressures.
And then there are other conversations where we can be a little bit more forceful because it's putting us in a position where you never want to say you're indifferent to something going out to bid, but you're willing to roll the dice on that because you're seeing those kinds of pressures. So I think the good news for us is that when we have these conversations everybody is in the same boat. I've gone around and I've talked to global heads of some of the most renowned facilities people that are working for the biggest firms and they're having the same problems with their own staff. So when we have these conversations, they get it and they're trying to work with us. But like everyone else, Andy, like they have their budgets, they have their procurement process.
So it's not an uncomplicated issue, but the first piece of this, which is the important piece is they're aligned, they understand it. So I think it's just something that we're going to have to make our way through client by client where it makes sense.
Okay. I might have a couple more, but I'll yield the floor for now and maybe jump back in later. Thank you.
Okay. Thanks.
Thank you. Our next question comes from
the line of Marc Riddick with Sidoti and Company. Please proceed with your question.
Hi, good morning.
Good morning, Marc.
Couple of things I wanted to start with. I guess if we're looking at the $0.15 change in guidance, how do you see that flowing as far as the last two quarters of the year? Are we looking at about an equal mix there? Or is there any seasonality that we should be aware of?
There's no particular seasonality that you should be aware of. I think we don't break out the quarters. But if you look at it from a pure where operations contribution, it's always heavily weighted in Q4. So I would disproportionately weight the $0.15 in the Q4.
Okay. And then going back a little bit touch to follow-up on the pricing conversations have been to be had with customers going forward. And I can understand that it will be a various range depending on the type of customer. But ballpark, how should we be thinking about the types of price increases that you're looking to secure in order to not only mitigate the labor cost pressures, but also to get a nice return going forward?
Yes. So I think it's really conscious. The way I would look at it is, it's affected by geography, right? So in the kind of the lower wage geography, the nonunion geography, it could be more pressured, right? And there's different conversations to be had versus a union environment.
And then we also look by contract type. So on the cost plus contracts, it's easier to have that conversation and pass through, although there's still some guardrails on cost plus contracts. But for the most part, that's 25% of our business and again easier pass through. On the fixed price stuff, which is about half of our contract base, that's where it ends up being a more protracted conversation and it does depend on geography and industry group type. But what we do is we look at our increased cost base.
We look at it based on local statistics that we can back it up so we can have some data. We just don't go to clients and say, hey, our costs are going up. We're striving to be a data driven company. So we have a whole playbook on how we have these conversations with clients. And a lot of them do start when we have our quarterly business review.
So this won't be when we're talking to clients now about price increases, this won't be the first time they're hearing from us, right? There's a cadence to this and you don't just show up and start talking about it. You make it as part of a process. And thankfully, we baked in labor cost increases in our guidance for original guidance for 2018. So we were ahead of this and we feel like we're on good pace to have these conversations with clients.
But I just want to make sure I'm clear. This does take time and there's just again a natural cadence to this.
Okay. And the last one for me is I was wondering about there was a commentary around the, I guess, getting recruiters involved and what have you. I was wondering if you could dig in a bit more of that and where we might see that and maybe what segments we might see that usage? Thank you.
Sure, Mark. So, yes, so one of the things that we've been hiring is more recruiters oddly enough, right, hiring recruiters. And when we've done it, it's just we're not necessarily just peanut buttering it all over the portfolio. We're looking at those geographies that are more pressured in the industry groups like we talked about in the prepared remarks with Aviation and Education. They tend to have higher turnover because of the dynamics of those markets.
So that's where we'll embed more recruiters. So we're being very strategic about where we place these recruiters because that's key because you want to get people into the funnel and you want to get them through the background check. We background check all of our employees. It's a real process, right? So we're just putting more kind of feet on the street right now to increase that pipeline.
Okay. Thank you very much.
Thanks, Mark.
Thank you. At this time, I'll turn
the floor back to management for any final comments.
I just want to say thanks to everyone and we look forward to updating you in the Q3 and have a great summer. Thank you.
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