ABM Industries Inc (ABM) 2013 Q2 法說會逐字稿

Welcome to the ABM Industries second quarter fiscal-2013 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Henrik Slipsager, President and CEO. Please go ahead, sir.

Thank you. Joining me today on the call are -- Jim Lusk, Executive Vice President and Chief Financial Officer; Tracy Price, Executive VP; and Sarah McConnell, our Senior VP and General Counsel. Unfortunately, Jim McClure is unable to attend due to a family matter.

Today, I'll provide an overview of the 2013 second quarter that ended April 30. Jim Lusk will discuss the details of our financial results. In Jim McClure's absence, I will provide an update of our Onsite businesses, and results for Air Serv. Tracy will comment on the Company's operational results for Building and Energy Solutions, as well as our sales and marketing initiatives. We'll then conclude our prepared remarks with an update on guidance for fiscal 2013.

There's a slide presentation that accompanies today's call. You may access this presentation now by going to our website at www.ABM.com, and under the tab Investors, you'll see the Events and Presentations tab. Today's presentation will be the second listed.

Sarah?

Thank you, Henrik. Please turn to Slide 2 of the presentation.

Before we begin, I need to tell you that our presentation today contains predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements. These statements represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies this presentation.

During the course of this presentation certain non-GAAP financial information will be presented. A reconciliation of those numbers to GAAP financial measures is available at the end of the presentation, and on the Company's website under the Investors tab.

Thank you, Sarah. Now please turn to Slide 4 for an overview of our second quarter. We continue to be encouraged by our operating results, starting with $1.17 billion in revenues -- are very good for the second quarter, and up 11% from the same period last year, primarily due to the three businesses we acquired in November, and organic growth in our Janitorial, Facilities Service and Security segment. Adjusted income from continuing operations per diluted share was up 20%. Net income was up 65%, due to a number of factors Jim will review. Adjusted EBITDA was up over 28% to $52 million, a record for the second quarter.

As we discussed in detail at our analyst investor briefing on March 6, we have realigned our operational structure to improve long-term growth prospects and generate additional cost synergies. I'm pleased with the progress we are making with our Onsite businesses, and in our sales and marketing initiatives. The integration of our recent acquisitions is progressing very well. The contributions made by Air Serv are above our initial expectations.

With a strong quarter of cash flow, we've reduced outstanding debt by $39 million. We continue to reward our shareholders. I announced yesterday our quarterly cash dividend of $0.15 per common share. This marked our 189th consecutive dividend.

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

Thank you, Henrik. Good morning, everyone. Turning to Slide 5. Revenues of $1.17 billion for the second quarter were up 11% compared to the prior year. As Henrik mentioned, this was due to continued sales contributions from our November acquisitions, and organic growth of approximately 2% on a consolidated basis. Excluding the Government business, organic growth was 2.8%, compared to the second quarter of 2012. In addition, I want to highlight that our Janitorial operations achieved organic revenue growth of 2.7%, which is the first time since 2008 this segment has been over 2%. Gross margins for the 2013 second quarter were 10.7%, an increase of 40 basis points from 10.3% in the prior year period. The increase in gross margin is primarily the result of decreased operating costs from lower payroll expenses of $3.8 million associated with one less work day, which contributed 32 basis points.

SG&A expense for the second quarter decreased $0.7 million to $84.5 million as a result of lower legal expense of $6.5 million, partially offset by an increase of $4.5 million from acquisitions. Amortization of intangible assets for the second quarter increased $2 million to $7.3 million. The increase was primarily related to intangible asset amortization expense from our November acquisitions.

Interest expense increased $0.6 million to $3 million, from $2.4 million in the 2012 second quarter. The increase was from higher average borrowings to fund the November acquisitions. The average outstanding balance under the Company's line of credit was $425.9 million during the quarter, compared to an average balance of $300.1 million in the prior year-ago quarter. During the second quarter, we entered into swap agreements to fix the interest rates on a portion of our outstanding borrowings over the next three years.

Our effective tax rate on income from continuing operations for the second quarter of 2013 was 39.2%, compared to 33.3% in the prior year period. We continue to expect our effective tax rate for fiscal 2013 to be in the range of 36% to 38%, which is higher than our fiscal-2012 effective tax rate of 32.3%. Net income from continuing operations for the second quarter was up $7.6 million or 65% compared to the prior year. A total benefit of $5.6 million after tax was from lower payroll tax expenses in Janitorial, contributions from acquisitions, net new business, and the absence of $3.2 million in legal settlements. This was partially offset by higher income tax expense of $1.9 million as a result of a nearly 600-basis-point increase in the tax rate compared to the prior year quarter.

Adjusted EBITDA, which excludes items impacting comparability, was $52 million for the 2013 second quarter, up $11.5 million or 28.4% year over year. This is the first time adjusted EBITDA has surpassed the $50 million threshold for a second quarter.

Regarding year-to-date financial results, I'd like to focus on adjusted income from operations and adjusted EBITDA. Both measurements demonstrate the improvement we are seeing in our fundamental business trends developing in our operations. Adjusted income from continuing operations for the six months ended April 30 was $34.9 million, up 24.6%, while adjusted EBITDA was $90.6 million, up 18.6%. We expect to continue benefiting from improved growth in revenue, with the second half of the year results being sequentially better as recently won jobs are fully ramped up in the fourth quarter.

Now turning to Slide 6. Days Sales Outstanding at quarter end were 50 days, down 2 days on a sequential basis, and flat year over year. Cash generated in operating activities for the quarter ended April 30, 2013 was $49.3 million, up $5.8 million compared to the same period in fiscal 2012.

Turning to insurance. Total insurance claim liabilities at April 30, 2013 were $350.7 million, compared to $343.8 million at the end of fiscal 2012. Self insurance claims paid during the quarter were $23.1 million, compared to $18.5 million for the second quarter of 2012. As is customary practice, in the third quarter, with the assistance of an independent external third party, we will conduct an actuarial review of the ultimate cost of self insurance reserves.

I would now like to turn the call back to Henrik.

Thank you, Jim. Please go to Slide 7 and 8. I will now provide some operational highlights of our Onsite services for the second quarter, and Air Serv, before turning the call over to Tracy for an update on Building and Energy Solutions.

Janitorial revenues increased 2.7% compared to the second quarter of 2012, due to an improvement in new business, and a continued focus on client retention. I'm pleased to see organic growth exceed the 2% level, as we are benefiting from an improvement in sales across many of our regions and in certain verticals. In particular, the South Central region achieved growth in the high-single digit. Revenue from tag work for the second quarter was up $1.4 million, or approximately 4% on a year-over-year basis. Operating profit was up nearly 11%, primarily related to lower payroll expenses, as the Company benefited by $3.8 million from one less work day. Please note, going forwards, work days on a year-over-year basis will be identical for the fiscal -- for the next six fiscal quarters.

Looking at client retention, best viewed on a year-by-year basis, we achieved approximately 97%. We continue to see very good sales activity. We expect to have continued growth in many of our verticals. Our pipeline up through the business is also stronger than it's been in recent years. I'm hopeful that the momentum in the operating environment continues as we progress through the remainder of fiscal 2013.

Turning to Facility Services. Revenues were up 8.4% compared to the second quarter of 2012, due to increased scope of business from existing clients and new jobs. Operating profit was strong with an increase of 39.4% from an improved mix of jobs, which contributed to a 93-basis-point increase in operating margin to 4.2%. We continue to have a solid pipeline. On the first-quarter call, we believe Facility Service is well positioned for a good fiscal 2013.

The Parking business experienced another quarter of revenues that were essentially flat compared to 2012, as new business was offset by termination of certain unprofitable contracts, and a reduction in scope of work by existing lease locations. Operating profit was flat at $6.1 million. I'm anticipating organic growth, though, to return in the third and fourth quarter, and an increase in operating profit compared to fiscal 2012. This is based upon jobs recently won, and a solid sales pipeline.

Security continues to post year-over-year gains in its top and bottom lines, as the segment benefits from new business and effective cost-control measures. Revenue up 3% to $91.5 million, while operating profit was up over 100% to $2.1 million. Small numbers compared to the other businesses, but I'm pleased with the progress the Security team has made in turning this business around.

Before discussing Air Serv, I want to give an update on some of the initiatives we discussed at our analyst and investor briefing in March. During the second quarter, we continued to make good progress towards our 2013 goals with our Onsite businesses. Our effort to rebrand and realign the businesses to better capture market opportunities and leverage our vertical expertise is showing tangible results both in financial performance and in terms of our competitive position, especially in the South Central region. We continue to consolidate operations where appropriate, and develop methods to reduce operational costs, which will generate savings consistent with the numbers we have provided. Recently, we have started the process of reorganizing our Northeastern and Midwest markets. In addition, I'm pleased with the level of collaboration among the different services, comprising the whole Organization. This is a critical element in generating sustained growth in years to come.

Moving to our new segment, Other. As noted on Slide 7 and 8, it's comprised of the Air Serv business that was acquired in November. This segment generated $79.8 million [of] revenues, and $2.9 million in operating profit, both of which was exceeded -- both of which exceeded our expectations for the second quarter. The operating profit includes amortization expenses of $1.6 million, and depreciation expenses of $1.5 million. We continue to be very excited about the opportunity in the aviation industry, and the ability to leverage our sales with Air Serv. We will be starting on July 1, the Ambassador Program at Heathrow Airport, a job that will contribute about $11 million annually in sales.

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

Thank you, Henrik. Continuing on Slide 7 and 8, I will provide an update on our Building and Energy Solutions segment, which includes ABES, Government Services, and our recent acquisition of HHA Services. Revenues increased over $7 million, or 8.4%, to $91.5 million, as we benefited from the acquisitions of HHA and Calvert-Jones, and organic growth in our ABES business. Combined, our two acquisitions contributed $17.9 million to the revenue for the quarter. Sales for our government operations year over year was approximately $32 million, down 27%, while revenue from ABES was $50.4 million.

We recently won a number of significant contracts, including two of the largest Energy jobs in our history. I'm very pleased that our signed contract backlog for Energy-related projects is at record levels, exceeding $35 million. This is up over $20 million compared to the prior year period. In addition, business sold year to date for ABES is 220% higher than the comparable period for fiscal 2012. While some of this has already been converted to revenue, our expectation is for additional conversions and continued sales trends to contribute to organic growth in the second half of the year, with the fourth quarter benefiting most as projects ramp up, along with seasonally warmer temperatures, which benefits our HVAC business.

I also want to highlight that during the quarter, our Government group entered into a joint venture with Building Energy, an Italian-based independent power producer, significantly expanding our solar and distributed energy capabilities in large scale commercial and utility scale solar power markets. We will be executing our first contract later this week. Moving to operating profit, in the second quarter, we experienced slightly higher sales costs, and an increase in amortization expenses, which kept operating profit essentially flat at $2.5 million year over year. We continue to make good progress integrating the HHA acquisition, and are pleased with their strong pipeline of new business and client retention rate, both of which are exceeding initial expectations.

Turning to Slide 9, I want to mention a couple of the sales and marketing highlights that are in addition to the solar joint venture. In April, we announced ABM Building Services was selected by Orange County, Virginia public schools to implement division-wide energy and infrastructure upgrades. This project, the third largest won by the ABS team, along with previous allowance -- Wright State, the largest deal ever, are reasons why the backlog is to strong.

We continue making good progress on our sales initiative. In particular, are pleased with the initial results of our Solve One More program With Solve One More, we're encouraging employees to learn more about ABM service offerings so they can tell clients about our capabilities, and help address their facility challenges. When a client needs a solution, the employee enters or calls in the lead to our Solve One More portal, which then flows to the appropriate local sales resource. We are about three months into the program, and to date we have over 450 Solve One More leads. More importantly, we've closed approximately 50 new contracts, generating more than $5 million in sales, while incurring no additional SG&A. A very solid start, and it's great to see the level of enthusiasm and collaboration taking place at the point-of-service level, Company-wide.

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

Thanks, Tracy. I would like to add that our sales momentum and sales collaboration is really going well. It's probably the best I've seen in all my years at ABM. In addition, I'm very encouraged by the results we're initially seeing from expanding our sales resources, and the benefit from unifying under the one ABM brand.

Please turn to Slide 11 for a review of our financial guidance for 2013. Based on year-to-date performance and current outlook, the Company's raising guidance for fiscal 2013 to $1.21 -- between $1.21 to $1.31 for income from continuing operations per diluted share, and $1.40 to $1.50 for adjusted income from continuing operations per diluted share. Annual depreciation and amortization expense, because of the acquisitions made in November, is still expected to increase approximately [$16 million] compared to fiscal 2012. Interest expense is anticipated to be approximately $15 million. As Jim said, we continue to anticipate the effective tax rate of 36% to 38%, up from 32.3% in fiscal 2012.

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

(Operator Instructions)

Joe Box, KeyBanc Capital Markets.

Question for you on the growth rates in your Janitorial business. Can you maybe just give us a sense of how much that 2.7% growth is stemming from improvement in the end markets as opposed to maybe your integrated approach or just share gains?

It's very tough to tell -- to say if we got a job because the market is improving or not. I really can't do that. But I can tell you that our tag work is up $1.4 million, which doesn't appear to be that much, but due to the profitability of tag work, it's pretty important for us to see that trend. I think you can say that $1.4 million in tag work is somewhat related to the improved economy. The rest of the growth -- basically, we're seeing nice growth everywhere. I'm not going to single anybody out, except the South Central, which really had a great quarter. We expect great things from the Janitorial group for the remainder of the year as well.

Excellent. Thanks. Obviously, you guys are really early in the restructuring program. I get it that the saving's basically going to be redeployed this year. But since you've at least restructured Houston or the South Central market, can you maybe talk about what some of the primary buckets are that you're seeing savings in now? Whether it's labor or rent expense? Maybe how some of these savings are coming in versus your expectations?

Right. First of all, the savings are all on or slightly above our expectations. So, let's put that aside. We expect that to continue for the rest of our program, so we're not concerned about our expectation and the cost savings. The cost savings in the beginning -- I think we have let go only 21 people or so. So it's not a dramatic change, but some of the benefits we expect to receive later on is savings of lease expenses where the groups are moving together. So it's a combination of lease expenses and labor, if you want me to generalize. But we have started with the individuals and then now moving to the lease expenses.

Changing gears a bit. Henrik, in your earnings release, you noted that sequential improvement should happen in the back half. Yet, you called out 4Q. I guess why did you call out 4Q? Should there be anything that we should be prepared for in 3Q? Is it just a function of --

It's a very good question. The reason I'm calling out 4Q is exactly to make sure that people are aware of the major improvement expected for the year is associated with a number of major job starts we're seeing in the third quarter. In our business, when you have job start-ups, there are expenses associated with that particular start-up. We do expect the profit from those new jobs will be generated in the fourth quarter and not the third quarter.

Great. That's helpful. Last question, then I'll turn it over. Obviously, you guys have two quarters of Air Serv under your belt now. Could you maybe just give us a better sense on where revenues could shake out at for the full year? I understand that you've won some new contracts?

Well, I would probably -- well, let me think about that. I would say revenue for the full year would probably be in the $160 million to $170 million level, because the major start-up we have in Air Serv is July 1 in Heathrow, which happens to be a very exciting contract, close to $1 million a month. But that will only be around four months of revenue for that particular business. So, if we say we're doing around $80 million for the first two quarters, I would say $160 million, $170 million. I'm sorry. Second quarter -- third quarter was that number.

David Gold, Sidoti.

Just four I guess. Henrik, could you just go over what you just said. I'm slightly confused about the $80 million number you just threw out.

Because I didn't say the right thing.

Oh, okay.

The expected revenue for last two quarters -- the remainder of the year is between $160 million and $170 million. So for the full year, you talk about $320 million to $330 million.

Got you.

Does that make it clear now?

Yes. It does for me. Thanks. So, just really a couple of follow-ups in there. Was curious, I guess in a few of the different lines and a few different times, you spoke about new job wins and some of them potentially significant, many of them ramping up in the second half. Is it possible to give us a sense of what type of revenue we may be looking at in the second half coming from these job wins?

I would say all-in-all with all-in, we're probably starting up annualized businesses of between $70 million and $100 million for the second half of this year. The reason I'm giving you the range here is some of the major start-ups could include more or less work -- but of businesses that basically hasn't started yet, we're talking about additional $70 million to $100 million annually, not the second half.

Okay. Perfect. The bias of that $70 million to $100 million, is it more towards Janitorial or sort of across the board or -- I know we have some Air Serv.

It's just across the board. We've been very successful in our ABM Health part, where the old Linc Health as a matter of fact started up, was rewarded a $1 million a month business. We've been -- as you saw the ambassador contract in Air Serv. We got some school systems in that vertical. Then we were very successful in a major contract with an assisted living group. It's a little all over, which makes me pretty happy because I'll be more concerned if it was just one job in one area. As Tracy talked about earlier, the Energy jobs are really going to step in, in the second half of this year. We started a major job in the second quarter, but the third and fourth quarter is going to be ramping up.

Got you. With that, I know you commented that the fourth quarter would see profit contribution, third quarter we could have some costs. Basically in the third quarter on the start-up costs, could we see that being, let's say detrimental to sort of core earnings? Or is it more just we wouldn't see profitability from the newer contracts.

Again, that's a good question. The reason I'm talking about the third quarter is, we really don't expect to see any profits from those particular jobs in the third quarter. We expect the profits to offset the start-up costs. So the profit from those particular jobs will be seen in the fourth quarter.

Perfect. Perfect. Then just lastly, little hard to put your finger on, I know. Basically, when we look through the release and your commentary and we talk about a few factors -- we have project wins; we have the economy working with us; and presumably some other help. When you think about the business, where we sit now and based on -- you have a better view than I do looking at all the different verticals. Is it as simple as market share gains right now on the newer contracts or do you think you are getting a little bit of help from the economy?

I still think the primary reason for us to look at the world a little differently than we've done in the past is related to our reorganization and focus on growth and have the internal structure in place to facility growth and maintain growth. I clearly believe that this environment is much better to deal in and that surely is helpful as well. But I also can tell you, if we didn't do what we did with the reorg and refocus and rebranding, I don't think you'll grow good growth rates that we're looking at right now. Internal management here, I think feels that hopefully we're in this for the long run. We're not even to first base yet. The initial responses on our reorg has been very, very good and very positive, including the reaction from clients.

Got you. Okay. That's all I have. Thank you.

Thanks.

Andrew Whitman, Baird.

So I might have missed some of the numbers in Tracy's prepared remarks on the BES segment. Did I hear that the Government business was down? Can you just quantify that again? Can you talk about just kind of the outlook for Government business from here?

I have the numbers here on Government business. For the quarter, the sales were down pretty dramatic by around $12 million from $44 million to around $32 million. Government group has done a tremendous job in offsetting a lot of the costs, a lot of the lack of sales, so profit was only down around $600,000 for the quarter.

Okay.

Tracy, why don't you talk about the outlook?

Okay. Sure. I think as we've talked about in previous quarters, it's basically being a story of uncertainty followed by sequestration followed by departures from Iraq, et cetera. I think the good news on our front is that we have diversified that business in some other areas, the joint venture with Building Energy looks very promising. We're going to be signing some of our initial contracts very shortly. But we're also seeing activity levels in that business that we have not seen for quite some time. So our proposal activity is probably 3X what we've seen in recent quarters and provided that traditional close rates hold, I think we're a little more confident that business is going to at least maintain where they're at for plan for the year.

I'd like to just add one thing. Government sales right now represent approximately 3% of our overall revenue.

Yes. So as you looked at that segment as a whole, as you kind of move in the back end of the year, just kind of recognizing there's some new work that's lined up on the engineering front, does this -- does the top line in that segment get sequentially better, recognizing that it sounds like some of the government headwinds are probably going to continue at least for another couple of quarters. I was trying to think about how the pluses and minuses add up to the segment.

Yes. I would say that the top line is going to continue along the lines that it is. However, we do have four, five different contract opportunities that could dramatically impact that. Given what's happened over the past couple years, we're not planning for it. But I believe that we've got enough different opportunities to redeem the profit number that we're reasonably saying, we're under the belief that we can hit that. We could get some nice contract wins over the next six months but given the amount of uncertainty that we faced in the past it's a little hard to predict that.

Okay. Just stepping back and looking at the total Company adjusted for the day and the acquisitions EBITDA was up about 1% for the quarter. Revenue a little bit better than that. Henrik, with the actions that you're taking and the restructuring, do you expect that we should see some positive operating leverage in the second half of the year or do you think it will be kind of more flattish or slightly negative as seen here?

I think we're looking at the second half of the year -- I hope it came across pretty positive, with the wins we have already in place. Overall, it's very difficult for me to look at anything negative right now. I think we're at the right place at the right time and third and fourth quarter I'm really looking forward to.

Okay. So, then, as you kind of look at the guidance and what's implied in the guidance, obviously you took the number up in the quarter. Is there a view today that's different than the last guidance on the top line in terms of I guess organic growth rates that are maybe a little bit better today than what you thought before. Just recognizing, it sounds like you've got a couple more contracts in hand. What are the bigger drivers as you think about what happened with the guidance here.

Well, I think the bigger drivers are that we did perform a little better than we expected ourselves for the second quarter, first of all. Second of all, we're looking at not only pipeline of business, we're looking at start-ups. We're looking at signed contracts, where the businesses have been sold and not -- hopefully will be sold or waiting for the start-up date. My forecast is based upon the facts we have in front of us and not a hopeful or wish that we could close more contracts before the end of the year.

That's what I like to hear. Final question maybe just on the acquisitions, I think at the Analyst Day, Henrik, you kind of suggest that obviously very busy late last year, early this fiscal year, some of the new platforms that you rolled in. Kind of sounded like you probably slowed down a little bit in the near term. Is that still a fair characterization as you look at the business here today? Or has there been any change in your view on acquisitions at least for the near and the regular term?

I think acquisitions will always be somewhat opportunity-driven at least when you look at a Company like us. We have capacity levels up to $140 million to $150 million, so we could do more acquisitions because our cash flow is still very strong. But with the organic growth, with the reorg, all the stuff that's going on, we have in my opinion enough on the plate right now, with the exception that if a great opportunity comes by we will of course look at it. But with the growth potentials we see in our pipeline and the activity level we have both with the reorg and start-ups, it would have to be a very good acquisition before I'll consider it.

Okay. Thank you.

Michael Gallo, CL King.

Congratulations on the improved results. Most of my questions have been answered. Couple questions for Jim. When we look at the spread right now between GAAP and reported operating earnings, obviously it looks like there's a pretty big spread in the back half of the year. So is that just charges on the restructuring at this point? Or is it just timing? Because it didn't look like you've had that much here in the first half. Help us just reconcile out of what remains in the back half, how much you expect the cash cost of that to be?

Yes, I think the cash piece of that will be relatively small. There will be some restructuring. We've dealt with some of the higher levels of management. There will probably be some real estate, but the cash piece will be small. The bigger piece is really a place holder for what will or will not happen on our actuarial report for insurance, which will be non-cash. So that will be the bulk of what's in there right now. So the cash piece should be relatively small.

Okay. So that's the bulk of it at this point? Likely that will occur in the third quarter?

Yes. At the end of the third quarter, there will probably be some in the fourth. The other potential cash which won't be a lot either will be the continue of our rebranding.

All right. Okay. Second question, Jim, I think you mentioned you plan to fix some of the debt for three years. I was wondering on the interest rate swap, how much you plan to fix? What you expect that will cost you in incremental interest expense?

I mean, right now we have about half of our outstanding debt fixed in between like 2.2% to 2.5%. If you look at our other comprehensive income in the Q when it goes out, you'll see there was a slight negative before. I can tell you right now there's a slight positive so the swap's already working for us. So I think we -- I'll take luck any day. I'll call it great planning by our Treasurer, Anthony Scaglione. I think we fixed it at the right time. Right now kind of life to date I see a net benefit on our interest expense. It's going to go up and down, but I think the long rates are starting to edge up a little bit and maybe that is a sign of the economy strengthening. We'll see. But I don't think it's going to be much benefit on interest, because I had a little hurt in the third quarter. I see the benefit already now. I'd say the swap is doing what's it's supposed to do.

All right. Okay. Then just final question. Facility Services, obviously, good improvement there over the last two quarters. Some of that probably some pent-up demand after what was a pretty soft second half of last year. So I was wondering as you look forward and I guess some of this was asked around. Why not see a bigger pick-up in the third quarter as opposed to the fourth quarter. Do you see it kind of leveling off in this range based on what you see in bookings or would you expect to just continue to see it build on a sequential basis as you kind of go through the year?

I see it continuing to build pretty much in all our services. If you notice, I also had a comment on Parking, which has essentially been flat. Due to some recent wins, we're looking at organic growth in Parking as well. So I look at this and hopefully I'm right -- I look at this as the beginning of something very good and exciting, where we're generating more growth than we've seen in the past and that includes Facility Services as well.

All right. Okay. Thanks very much.

Thank you.

Adam Thalhimer, BB&T Capital Markets.

Congrats on a nice quarter.

Thanks.

Henrik, in the Janitorial business, your margin -- your operating margin was 5.7% last year. Now that you're seeing some nice organic growth there, where do you think margins in that segment can go?

I think on the margin side you might -- you will not see great improvement on a short-term basis. The improvement can happen if we can maintain this growth over a longer period of time, but short-term 5.5% to 6% profit in the Janitorial business is pretty much as good as it comes in this country. But if we can keep growing like we're growing right now, it could sneak up to around 6% but not on a short-term basis, I'm talking about two or three years.

What do you think your share of -- what would you peg your market share at nationally, in Janitorial?

Maybe 10%. Depends on how you define the market. But no matter how I define, it always seems like I'm back to 10%.

Is that as competitive as it's ever been? Or because there's some organic growth in the industry, is the competition a little less?

If you go to our operators, there will never be a time when they say it's not worse than last year. So, they will always believe it's much more competitive. I think I've been in this business [180] years now, it's been the same argument year over year. I think the competitive environment is pretty much the same. There will be pockets where it's just unreasonable and there will be areas where it's just a great big opportunity. But the key thing for us has been to change the focus a little bit. One is to focus on the verticals. The verticals are already experiencing greater growth than the rest of the Company and that will include Janitorial. The referral program that Tracy talked about has already increased sales at levels we haven't seen as part of referrals before.

So we have some different pockets that hopefully are slightly more profitable than the rest of the business. So I know it's a long-winded answer, but it's -- you have to remember, Janitorial Services is probably $2.3 billion or close to $2.4 billion. So it takes a little to move that needle. It's a big needle. The good news, though, if you want to look long-term is, if the unemployment continues to go down as we've seen over the last couple of quarters, that might have a positive impact on SUI, maybe not next year, but the year after that. At least you won't hear me talk about SUI, the first and second quarter every year, about (technical difficulty). But that's where the economy really can help us and SUI rates will actually have a direct impact on the percentage of profit from that division.

Just as a reminder, for 2013, where are you on SUI costs in the first half vis-a-vis 2012?

I'm so happy I reminded you (laughter). For the first time, we are slightly under plan. We actually have seen rates a little lower than we did expect, which could be or is part of some of the improvement in our results. Year over year -- I don't have that number right in front of me because when you do year over year, you also have to adjust for new business, so you can get a real feel for it because of course, it's included in every job. So I will have to come back to you with that later.

Back on the margins, you said a good range for Janitorial, 5.5% to 6%. Some of the other verticals as they get larger, do they have a greater margin potential than Janitorial?

Yes, for sure. The healthcare for sure when we get -- we have now the infrastructure to grow on the Healthcare side. The margin opportunity is much greater than the single service opportunity is. If you talk about margins, if Tracy and his team continues to be successful on the Energy side, you're talking about rates, profit numbers of 30% plus. So we're very excited, even though it's a small $1 million growth, you're talking about in Tracy's business there, it has a sizable major impact on our bottom line. So the verticals in general when they get to the right size will have a higher probability than the single service will, while the Janitorial, Security and even Parking will be very difficult to move in a radical way.

Okay. Finally, just on SG&A. You had some good -- actually great leverage there in the quarter, down to 7.2% of revenue. Is that a good run rate? This kind of 7% to 7.5% range for the next couple quarters?

I think so. It's -- we're slightly below our expectations and that has a lot to do with -- we have had difficulties finding especially on the IP side -- finding people, it's tough to find people that do the business. I think you can expect it to be between 7%, 7.5% on a long-term basis.

Great. Thank you.

You're welcome.

(Operator Instructions)

Dan Dolev, Jefferies.

Just a very quick question again on the Parking segment. Everything seems to be improving and getting better. The only thing that seems to be lagging is Parking, even though the comps have been much easier this quarter. What needs to happen for this segment to start to shine again? Is it lack of scale? Is there anything structural there? Or is it just those contracts that you mentioned? Thanks.

Well, it's -- when you're in the business like we are, a lot of things -- a lot of it has to do with timing. With Parking, their timing happens to be the third and fourth quarter this year. They've picked up a number of very exciting jobs. Their pipeline as well is very, very, very strong. So I would say it's more a timing issue, more than anything else. You will also see with Parking, we're somewhat dependent on third party and customer reactions. If customers want to have cutbacks in jobs where we're getting reimbursed on a dollar by dollar basis, that will impact the revenue. (Inaudible) I'm very pleased with the fact that they have been able to maintain their profit level for this particular quarter, knowing the effort they've put into the long-term growth of the Parking division. I don't think you have any reason to be concerned about that.

Okay. Thank you.

You're welcome.

Michael Kim, Imperial Capital.

Just going back to Air Serv. Just given kind of your outlook for the second half -- it sounds like you're seeing some stronger activity and momentum there. How much of that is driven by some more global opportunities? Obviously Glasgow should be a nice ramp. But are you seeing more opportunity to expand outside the US?

Yes, absolutely. We started -- in this quarter, we started a reasonable size job in Doha Airport, Heathrow. We have a very impressive operation in Heathrow, something I'm very proud of and was part of the Air Serv deal. I think the ambassador contract is just the beginning. In the quarter, that first quarter -- we picked up Glasgow Airport, which also is very exciting. The possibility of cross-selling in our international segment is unlimited. I can tell you, just and it's the funny part, it's a relatively small operation but I can actually say with the jobs that we have closed, we're looking at least at 20%, 30% growth in our UK operations in Aviations next year, simply based upon start-ups and none of the jobs are going out for bids. So, I'm very comfortable with that. No more sales -- we have more than 20%. I don't think too many people can say that about their European operations.

How do you feel about the earnings accretion? Do you feel stronger about the ability for Air Serv to drive a little bit more accretion than what you had been planning at the time of the acquisition?

The growth potential for sure is as great as we had hoped for. The biggest -- it's not a surprise, but the biggest intangible that you get when you make the right acquisition is the quality of the people. We have been very, very, very lucky in the quality of the people and the quality of the business that we have received and bought. I'm proud to say that everybody that was in top management with Air Serv is still with us. They're actually running the business. They're doing it very successfully. Lastly but not least, Air Serv has shown an ability that I haven't seen to this level before and that is, they have reached out to Tracy's group and some of the other groups to get help. They see the opportunity of growing further into the Aviation business to services they've never provided before, which opens up for tons of opportunities that's not in our initial numbers because we're pretty conservative. But actually, if you look long-term should create tremendous growth in that business.

Great. Then turning to Building & Energy Solutions, you called out a pretty nice increase in proposal activity. Where is that being driven from? Are you also seeing some larger opportunities in the $25 million plus range versus sort of $10 million, $15 million type range?

Well, I think the reality is we've gone from typically hunting in the $2 million to $5 million range to be willing to take on larger projects. We've also pretty significantly ramped up the headcount in the Energy Services business across the Company and have been bundling services, which gives us a higher revenue threshold as well as better overall gross margin. So I think it's a combination of getting better coverage across the country in the markets that we intended to be able to open up in and then bundling services amongst the groups, that's paying off.

Great. Thank you very much.

With no further questions at this time, I would like to turn the conference back over to Mr Slipsager for closing remarks.

Thank you very much for listening in on our second quarter call. Hopefully, we can continue our momentum. Looking forward to talk to all of you after the third quarter. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a wonderful day.