ABM Industries Inc (ABM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the ABM Industries third-quarter fiscal year 2013 conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the call over to your host, Henrik Slipsager, please go ahead.

Thank you. Joining me today are Jim Lusk, Executive Vice President and Chief Financial Officer; Jim McClure, Executive VP; Tracy Price, Executive VP; and Sarah McConnell, our Senior VP and General Counsel. Today I'll provide an overview of the 2013 third quarter that ended July 31. Jim Lusk will discuss the details of our financial results. Mr. McClure will provide an update of our Onsite businesses and Tracy will comment on the Company's operational result for Building and Energy Solutions, as well as our sales and marketing initiatives. I will then comment on Air Serv's performance for the quarter and then conclude our 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 event and presentation tab. Today's presentation will be the first 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 slides that accompany 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 website under the investors tab.

Thank you, Sarah. You now please turn to Slide 4 for an overview of our third quarter. We continue to be encouraged by our operating results, starting with $1.22 billion in revenues, a record for the third quarter and up nearly 13% from the same period last year. And organic growth for the quarter on a consolidated basis was approximately 3%.

Adjusted income from continuing operations per diluted share was up 11%, and net income per diluted share was up 26% as we benefited from recent acquisitions and new business. Adjusted EBITDA was up nearly 15% to $57.2 million, and year to date, up 17%, $148 million. We are positioned well to pierce the $200 million mark in adjusted EBITDA for the first time in the Company's 100 plus year history.

With another strong quarter of cash flow we reduced outstanding debt by $36 million. Free cash flow for the nine months ended July 31 was $63 million, up $3 million compared to 2012. And we announced yesterday a quarterly cash dividend of $0.15 per common share, this marked our 190th consecutive dividend. Now I'd like to turn over the call to Jim Lusk for a financial review of our third quarter. Jim?

Thank you, Henrik. Good morning everyone. Turning to Slide 5. Revenues of $1.22 billion for the third quarter were up 12.8% compared to the prior year. This was due to sales contributions from our November acquisitions, which continued to exceed our initial expectations and organic growth on a consolidated basis of 3%. Jim McClure and Tracy will provide some additional comments behind the improvement in our topline.

Gross margins for 2013 third quarter were 9.94%, essentially flat compared to fiscal 2012, primarily due to costs associated with ramping up new jobs in janitorial and Air Serv. SG&A expense for the third quarter increased $6.2 million to $85.3 million as a result of $4 million of incremental SG&A from acquisitions, and $2.4 million primarily associated with investments in marketing and sales initiatives, which we believe will help to drive our long-term growth.

As previously communicated, cost saving synergies in our Onsite businesses are funding these initiatives. As a percentage of revenues, SG&A expense decreased by 32 basis points to 7%. Amortization of intangible assets for the second quarter increased by $1.6 million to $7 million. The increase was primarily related to intangible asset amortization expense from the November acquisitions.

Interest expense increased $0.9 million to $3.3 million, from $2.4 million in the 2012 third 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 $401.4 million during the quarter, compared to an average balance of $283 million in the prior year-ago quarter. As mentioned on the second-quarter call, we entered into a series of interest rate swap agreements totaling a notional amount of $155 million.

Our effective tax rate on income from continuing operations for the third quarter of 2013 was 40.4%, compared to 41.3% 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 third quarter was $3.5 million, or 27.8% compared to the prior year, due to contributions from acquisitions and net new business. Adjusted EBITDA, which excludes items impacting comparability, was $57.2 million for the 2013 third quarter, up $7.4 million or 14.9% year over year.

Regarding year-to-date financial results, I'd like to focus on adjusted income from operations and adjusted EBITDA, both measurements demonstrate the continued improvements we are seeing in our fundamental business and trends developing in our operations. Adjusted income from continuing operations for the nine months ended July 31 was $58 million, up 19.8%, while adjusted EBITDA was $147.8 million, up 17%.

Now turning to Slide 6. Days sales outstanding at quarter end were 51 days, up 1 day on a sequential basis and flat year over year. Cash generated in operating activities for the quarter ended July 31, 2013 was $46.5 million, up $18.2 million, compared to the same period in fiscal 2012.

Turning to insurance. Total insurance claim liabilities at July 31, 2013 were $359.8 million, compared to $343.8 million at the end of fiscal 2012. Moving to self insurance claims paying during the quarter, the total expenditure was $23.5 million, compared to $20.4 million for the third quarter of 2012.

As is customary practice in the third quarter, with the assistance of an independent external third party, we conducted actuarial evaluations for the majority of our casualty insurance programs. As a result of these evaluations, we increased our expected reserve for prior-year claims, which resulted in increase of $9.9 million. This compares to $9.5 million increase of insurance reserves in fiscal 2012. Over the past six years, the cumulative change to this reserve for prior year's insurance claims is an increase of $6.2 million. I'd like to now turn the call over to Jim McClure.

Thank you, Jim. Please go to Slide 7 and 8 and I will provide some operational highlights of our Onsite Services for the third quarter before turning the call over to Tracy for an update on Building and Energy Solutions. Janitorial revenues increased 3.2% compared to the third quarter of 2012, due to new business and our continued focus on client retention. This is the first time we have experienced organic growth over 3% since 2008.

We continue to benefit from the improvement in sales across many of our regions, in particular, the south central and midwest, as well as certain verticals. Our scale, technology, and breadth of capabilities, coupled with the investments we are making in growth initiatives are continuing the improvement in the janitorial revenue trends. Operating profit was $34.4 million, down slightly by $0.5 million compared to the third quarter of 2012. The decrease in operating profit is related to costs associated with the new business we begin in the quarter. These expenses, which we alluded to in our second-quarter call, will diminish over time. I anticipate the fourth quarter -- in the fourth quarter we will continue to see very good sales activity and expect janitorial to finish a very strong fiscal 2012.

Turning to facility services. Revenues were up 6.3% compared to the third quarter of 2012, due to an increased scope of business from existing clients and new jobs. Operating profit was strong, with an increase of 21.5% from the improved mix of jobs and effective cost controls which contributed to 57 basis points increase in operating margins to 4.6%. We expect fourth-quarter revenue growth compared to 2012 to trend lower, although recent operating and profit trends should continue and sales growth should pick up in the first quarter of 2014, fiscal 2014, when recently won contracts are expected to start.

The parking business experienced another quarter where revenues were essentially flat compared to 2012, but in the month of July we did achieve slight organic growth and expect this trend to continue and improve a little as we start new jobs beginning in the fourth quarter. Despite the revenue challenges the team did a good job in managing costs, which along with cancellation of unprofitable lots led to a 4.3% increase in operating profit to $8.1 million.

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. Revenues were up 5% to $96.2 million, while operating profit was up 36.7% to $4 million. Operating margins increased 98 basis points to 4.2%. I continue to be pleased with the progress the security team has made in turning this enterprise around.

Before turning the call over to Tracy I want to mention that we continue to consolidate operations to reduce operating costs, which will generate savings consistent with the numbers we provided earlier this year. As Henrik noted in our second-quarter call, we started the process of reorganizing the northeast and midwest markets, and I maintain confidence that our ability to execute our plans. In addition, I continue to be very pleased with the level of collaboration along with the different services comprising the Onsite organization and our result date year to date. With that I will turn the call to Tracy.

Thanks, Jim. 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 $18.7 million or 21.6%, to $104.9 million as we benefited from the acquisition of HHA and increase in service and maintenance contracts, which includes energy projects, as well as recently announced Memorial Health contract. The acquisition of HHA contributed $13.5 million, and the ABES business, another $10.4 million from a combination of organic growth and revenue from Calvert-Jones acquisition.

ABES revenue for the quarter was $60.7 million, which was up 20.7% compared to the third quarter of fiscal 2012, an excellent quarter for the ABES team, and reflective of the record backlog and sales we mentioned on the second-quarter call. With year-over-year growth in revenue by ABES, contributions from HHA, and improvement in margins associated with our government services, Building and Energy Solutions achieved operating profit of $6.7 million, an increase of 82.5%. Outstanding results and we are well positioned for a successful fourth quarter as strong sales momentum and improving margins are anticipated to remain intact. We continue to make good progress integrating the HHA acquisition and remain very pleased with their pipeline of new business and client retention.

Turning to Slide 9 I want to mention a couple of the sales and marketing highlights from the past quarter. We recently announced sales wins in our healthcare and government verticals. ABM Health is providing clinical engineering and healthcare technology under a long-term contract to Memorial Healthcare System in Florida. ABM Health is part of ABM's healthcare support services business that joins together three healthcare service leaders, ABM Health, Healthcare Parking Systems of America, and HHA Services, which provide a range of clinical engineering and healthcare technologies, environmental services, facility management, patient observation, food service, hospitality, parking, and security.

MHS is the second largest public healthcare system in the country. With this business our healthcare vertical is generating in excess of $200 million in annual revenue. We now feel given the breadth of our services, especially with the addition of HHA, that ABM is uniquely positioned to accelerate growth in this specialized area.

In our government vertical we were able to secure some new business with a contract by the Department of the Navy to provide base operations service report at its Sigonella Italian air station, and outlying support sites in Italy through a 50-50 joint venture with Derichebourg Multi-Services. We continue to make good progress on our sales and marketing initiatives, enthusiasm and collaboration remain high, and the investments we've made over the past two years are helping to drive the increase in our revenue. And with that, I will turn the call back to Henrik.

Thank you, Tracy. Before discussing our outlook for the remainder of fiscal 2013, want to say a few words about Air Serv. This segment listed as other in our financials generated $86.8 million in revenue and $3.8 million in operating profit, both of which exceeded our expectations for the third quarter. The operating profit includes amortization expense of $1.5 million, and depreciation expenses of $1.6 million. We continue to be very excited about the opportunities in the aviation industry and recently announced a small acquisition that augments our Ambassador Program at Heathrow Airport. As we discussed on the second-quarter call, we started the Ambassador Program in July and we expect this job will add approximately $10 million to $12 million annually in revenue.

Please now turn to Slide 11 for a review of our financial guidance for 2013. Based on our year-to-date performance and current outlook, the Company's moving guidance to the upper range, $1.26 to $1.31 for income from continuing operations per diluted share, $1.45 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 $15 million to $17 million from fiscal 2012. Interest expenses is anticipated to be $13 million to $14 million. And we continue to anticipate an effective tax rate of 36% to 38% for 2013, up from 32.3% in fiscal 2012. At this time we would like to open the call for questions. Operator, please.

(Operator Instructions)

Our first question comes from David Gold with Sidoti. Your line is open.

Hi. Good morning.

Good morning, David.

Wanted to just go over with you the organic growth, particularly in janitorial, impressive and a nice step-up there. And was curious if you could add a little bit of color there, I guess just really want to get a better sense for how much of that is pure market share gains, how much would you attribute to the economy, and how much would you attribute to pricing environment maybe getting a little easier.

First of all, the pricing environment is not getting easier. I wish it was but it's not. Normally you will see very little pricing activity in this particular quarter, most union agreements and other increases will be more year-end oriented.

Number two is the environment, I really think it has very, very limited impact as well. So I would say two things drives the growth. I think Jim and his team has been very successful in controlling loss of contracts, which remains very low. And at the same time, we've seen success in sales at a level we haven't seen before. This quarter was a very busy quarter. They start up a lot of stuff and the reason we feel very comfortable about the opportunity for the fourth quarter is a lot of the business we started, started in the latter part of the quarter, so it's going to have a full effect in next quarter.

Got you. Okay. So it sounds like for the most part you'd attribute it really to market share gains so-to-speak.

Yes.

Okay, perfect. Can you talk a little bit about -- I know you started a nice, large contract in the month of July. Talk a little bit about contribution from the newer contracts in the quarter and then how that basically should look in the fourth quarter?

Well, the ambassador contract at Heathrow, which is one of the bigger ones, I really don't want to go too much into details about exact profit sizes. What you normally will see is a contract like that will start to generate sizable profit after the first six to nine months or expected profit. The first three months is normally associated with start-up expenses, training, et cetera. Same thing with most of the other janitorial work. So I would say the profitability on the new business will start to show in the fourth quarter but we really expect next year to be impacted more on the profit side of the new business.

Got you. Okay. Perfect. And then just one last. As we think about the sales reorganization, it seems to be making nice headway. But anything that you can point to a little more tangible as to either new wins or successes there?

Well, we have a number of new wins. The interesting part is the sales team we have in place now and the cooperation we see throughout the Company is generating a lot of activity. This activity level will eventually end up in giving us growth that we haven't seen in the past.

Some of these jobs that we have put on, that activity started maybe 6 months, 12 months, or 18 months ago. So not everything is associated with the new organization. But I'm very excited with the way they're moving ahead, but can't give you any tangible explanations other than saying the activity level is at an all-time high, compared to what I've seen in the past.

Perfect. That is helpful. Thank you much.

Thank you.

Our next question comes from Joe Box with KeyBanc Capital Markets. Your line is open.

Hey, good morning everyone.

Good morning.

Just have a question on the consolidation of locations. I think Jim you mentioned earlier that you're seeing more growth within the south central and the midwest regions, which I know are regions that you're kind of in the process or you've completed the consolidation. One, can you just give us a sense on the growth rates here versus some of your other unconsolidated regions? And two, other than the revenue growth, is there anything that you could point to that suggests that the strategy is working?

Yes, the growth rates in south central predominantly are probably double that of our Onsite growth. We started that consolidation roll-out first. It's complete. We're experiencing the positive profit pick-ups of those consolidations, and we're, as we implement all of the back room operations, it's bringing a level of collaboration into this operation to where everyone's on the same team, selling across lines.

And that momentum we're very excited with that momentum in the south central and as we continue to roll out and get some traction in the midwest and the northeast, and then finally the west, I think everything that we anticipated with that Onsite strategy is hitting on all cylinders and we're very positive on what we're looking for also in 2014.

Great. And so would you consider the doubling of growth rates within the south central, is that solely a function of the collaboration there or is it just by chance that that happens to be maybe the strongest region geographically?

I think it's a little of both. You've got some good wins with the collaboration and we've had some big opportunities come our way and that's more of a timing issue. But it's both.

Okay. Great. And then just a follow-up on David's question on organic growth. Obviously you guys did nice sequential acceleration to 3% from 2%. Can you maybe just flush out how much of that growth is coming from your new contract starts that you're talking about as opposed to maybe growth at your existing customers or better customer retention?

The retention number definitely helps and the other majority of that is coming from new customers with the trailing modifier in that being the growth of existing clients. So we're seeing a lot of good, bigger opportunities on the customer side and as we hold onto the business we have at a more successful rate, that will drive the growth. So those two areas are the drivers.

Great. And Tracy, I think last quarter you alluded to a number of sizable potential government contracts that could materialize in the back half of this year. Can you just maybe put some color around that and if you've signed any of those contracts and maybe what the pipeline looks like going forward.

Yes, I don't know specifically which ones you're alluding to. But we have had some government wins. I think the government business is slated to be near plan at year end. We're always hopeful that between sequestration and the other things happening around the world that we're going to see some normalcy. But it's still a bit opaque, but they are holding their own. The pipeline and the bid rates are comparable to where they were last year. So we're anticipating year-over-year growth in that business going forward.

Excellent. Thank you guys. Nice quarter.

Thank you.

Our next question comes from Dan Dolev with Jefferies. Your line is open.

Thanks for taking my question. I've got three questions, hopefully quick. So the first one is on janitorial. It looks like the comps in 4Q are more difficult, so I think it's going from like 0.6% organic last year to 1.3%. Do you expect growth to accelerate from that 3.2% benchmark or stay roughly the same in the fourth quarter? Thanks.

It will accelerate, simply due to the fact that we started up a lot of contracts in the latter part of the quarter. We're going to have a full quarter impact in the fourth quarter, so the 3.2% I think will be in excess of 4%.

Excellent. So 4% in the fourth quarter?

Yes, sir.

Okay. Excellent. And two quick -- two more quick questions. On the parking -- if I remember correctly, this seems to be falling a little bit behind expectations. I hope I'm not wrong. It seems that in the last quarter you said H2 will be looking very good and something has happened. Can you maybe talk a little about of what actually happened? And is there a chance that this is something that's maybe more structural and if not, then why not? Thanks.

Parking is slightly behind plan on sales, but on-plan or on-expectations on the profit side. As a matter of fact, I'm very proud of what they have accomplished this year. And the activity that we've seen and the new business we have signed up will come into effect in the fourth quarter, and I think Jim alluded to the fact that we do expect to have growth year over year in the fourth quarter in parking.

A lot of it has to do with timing, sometimes we expect to get a business in the second quarter, drags their feet and we get it in the fourth quarter. Overall, parking is living up to our expectations. We've got a great team there and they seem to be on the right track. So both profit wise and sales wise in the fourth quarter I expect to see continuous improvement.

Okay. Great. And then my final question, can you maybe touch on the organic growth in the BE&S or BNES department? I think last quarter it was still slightly negative. Can you maybe kind of walk us through how you get from 21.6% to the organic growth, so what was government and then what was the M&A contribution in 3Q?

I will let Tracy take over, but there was -- on the government side, sales were down year over year. They were able to offset some of that impact by reducing costs. As a matter of fact, they did a fantastic job in doing a decent job on profitability.

I'll have Tracy talk. As you know, there's been a lot of discussion about the Linc acquisition over the years, but this is a true reflection of what we started 2, 2.5 years ago. I'll give Tracy a chance to explain why we had the quarter of a lifetime in ABES, and why we expect it to continue not only short-term, but long-term. So Tracy.

Thanks, Henrik. I think the nice thing for us is the model that we put together and the restructuring that Jim and I and Henrik and Jim worked through is absolutely having the traction and the intended result, and we're seeing it everywhere that we've got all of the complementary components in place.

But just to give you an idea, we're having a record year. Last year was a record year in four of the five businesses. This again is going to be a record year for the Company. We talk about year-over-year growth numbers for the maintenance space, up 29%, for our core projects, up 27%. Our spot work, given the moderate to light weather in a lot of the country this summer, still up 7%. The ABM Health business with the nice wins we've had, up 23%. Our franchising group revenues up 17%.

You heard about the profit numbers. So pretty much off-the-charts growth. And what's happened is the investment that we've made in sales headcount especially in our Bundled Energy Solutions business has paid off pretty dramatically and we have sales that are 50% higher than they were last year and we'll see the benefit of a lot of that in Q4.

And can you actually walk us through, I'm sorry, maybe misheard, can you walk us through that organic growth calculation of what were the exact components of government and M&A in the third quarter? If you don't have it, we can talk about it later.

We only have the segments here. We haven't split it up into different pieces.

Okay.

But we can come back to you on that.

Okay. Thank you. Did you -- just one last thing. Did you say just before the previous question, did you say that government is expected to be positive next quarter? I didn't quite understand.

No, I did not say that. I'm just basically say -- what we're saying is government is very close to our own internal plan for the year on the bottom line but on sales they're behind. But in Tracy's group he was able to more than offset that shortage by sales in the other segments he just went through.

Got it.

Fourth quarter we expect the same trend that sales will be down but on the profit side we hope it's going to live up to 2012.

Got it. Thank you very much.

Our next question comes from Michael Gallo with CL King. Your line is open.

Hi, good morning. Just a follow-up question on Building and Energy Solutions. It seems a lot of initiatives around green government buildings and the like, obviously for the last several quarters the organic growth there has been negative. I was wondering if you see any signs that that stuff may perhaps start to get traction or is it still far off? Certainly a lot of talk about it but it doesn't seem like that much activity in the result. Thank you.

Yes, and I concur. There's a lot of thought leadership and not a lot of action. But we are seeing some of those opportunities break loose. As a matter of fact we were just awarded the first ever job for ABM in the federal space and we're bringing that one to contract. We have the verbal award, once we have the contracts we'll make a pronouncement on that one.

But we are seeing a lot of the kind of built-in pipeline starting to break loose, and there are a lot of things happening in the finance world that will lead to facilitating work at the federal level, the state level, and the city and county level. So there are a number of different I guess movements afoot in the financing world that will help us. And as that breaks loose, there's a $29 billion backlog opportunity in just BES work in the US to work through and lots of great opportunities for us.

Alright.

Our next question comes from Andrew Whittmann with Baird. Your line is open.

Good morning, guys. Thanks for taking my question. I wanted to dig -- one of the things I'm hearing a lot about here is cost savings. I think in the prepared remarks you talked about the investments being offset by cost savings, that was kind of what you guys talked about for the year. Wanted to just get a little more granularity if we could on that. Some of your thoughts there. And really do you like have a like a utilization rate that you track that maybe you can give us that helps us understand how billable all your people are today? Just any color around the cost savings initiatives and kind of where you are today and how much might still be left, would be I think helpful.

Yes, I can do that very quick. Basically up to this point the process we started nine months ago and I will say our savings year to date is in the $2 million plus range and that equals the investments we made in the sales and marketing. These are the numbers that we presented six, nine months ago, and we exacted that plan. When the plan is up and running complete, when Jim is done, the savings will be -- the net saving's probably going to be in the $5 million to $8 million level, considering the investments we are making in the sales and marketing effort. Talking about a one, two year project.

Got it. Okay. And then just wanted to dig, Henrik, into kind of your international. It seems like this has been an area where you've done some recent acquisitions. Are you at all concerned about scale there and your ability to manage that business as profitably as you can, the stuff that you're more familiar with in the last 100 years or so?

I'm not that concerned about scale, because you have to look at where we're expanding. We're expanding in certain verticals where we have vertical knowledge that is transferable across borders. So as a matter of fact, if I have the same growth the rest of the country as I see right now in Heathrow, I'll be a very happy guy.

And Heathrow as an example is big enough to be a self-contained job. We've got excellent management over there. We've got an excellent team over there and from when we started, so now I think we're up 20%-plus in sales just there.

The other areas where we've done a very good job is on arenas, the stadiums. We do some in Germany. We do some in the UK. But again, it's a vertical that we're very, very comfortable with.

So the growth we've seen in those particular areas, you will not in my opinion see a short-term see us do general cleaning office buildings in London or in Berlin or anyplace else. But you might see us in major industrial jobs and/or major airports throughout the world.

Got it. So it sounds like you're going after just larger general contracts when you're over there, so you have scale.

Larger general contracts where our expertise separates us from the pack.

Okay, that makes sense. As you look at the M&A outlook here today, Henrik, are more overseas acquisitions probably more likely than domestic or kind of how are you targeting things today and what's your overall look for M&A?

I would say that our focus is much more on the vertical side as we've seen the last two or three acquisitions we made, than on the general service side. We believe the growth initiatives we have started in the Onsite business are starting to work and hopefully will work next many years and I really don't want to do a major acquisition, those areas that can take our foot away from the accelerator because things are going pretty well right now. But on the vertical markets we might still be very interested in making acquisitions that moves us to a different scale. So vertical focus and that could be within the US or outside the US. But the vertical focus is clearly there.

Thank you very much.

You're welcome.

Our next question comes from Adam Thalhimer with BB&T Capital Markets. Your line is open.

Good morning, guys. Nice quarter.

Thank you.

Henrik, you talked about the growth in the janitorial segment and attributed that mostly to I guess market share gains. When do you feel like you might start to feel an economy tailwind?

Well, we've had this discussion many times and the whole -- first of all, I don't know if we're in tailwind or headwinds right now, but the good news for a Company like ours is -- and we have short memories, but the fact of life is we went through a very, very tough time in '08 and '09. Our sales were down 4%. So we're really not impacted as much as anybody else and everybody else when it comes to headwinds and tailwinds.

So we have our own strategy. You can at the same time even say Europe or about the UK, why would you grow in the UK. We experienced 20%, 30% growth in the UK because we are focused on verticals that are very, very little impacted by the overall economy. So I hope for everybody's sake we're going to get some tailwind, but I'm not going to expect that's going to have a major impact on our numbers.

Okay. And then I wanted to ask about gross margins and you gave some nice color, you think gross margins could start to improve next year as some of these new contracts start to mature a little bit. What kind of -- looking at the overall business, what kind of margin improvement could we see when that occurs?

Well, again, I'm not trying to avoid the question here, but if you look at Tracy's business and some of the Energy projects and the project work we're doing, the margins there exceed the janitorial standard profit 3X. And so if our mix is continuing to improve towards more of these project work, it's going to impact our overall profitability.

If you take janitorial isolated, again Jim had sizable investment, and if you notice, when we do start-up costs we expense it right away which is very conservative but the right way of doing it. That of course is going to have a -- we don't have that start-up cost on those particular jobs going forward, and working those particular jobs over time will improve the profitability. But again, if you lower janitorial, it's a big elephant and we look at 0.1% and 0.2% improvement as a major, major move. So we will continue to move on that and work on that.

Okay. Thanks.

The other thing that could impact it also, I should say that, is if we have some tailwind in the economy as it brings it up, it could eventually have a positive impact on our state unemployment insurance rates where we are expecting the increases we've seen in the past to level out this year or going forward and if we get the tailwind, they'll go down.

Okay. And then margins in Tracy's business they took a big stair step function up this quarter. Sounds like that's sustainable.

I sure hope so. It is sustainable. The problem you have with project work and project work in general is that we can't always control when they close or finish a job, so that might be business that pushed in from one quarter to another quarter. But if you look at it year over year, I think it's sustainable.

Okay. Great.

Thank you.

Thanks.

Our next question comes from Michael Kim with Imperial Capital. Your line is open.

Hi. Good morning. Henrik, in the past you've talked about cracking the code and breaking down some of the silos. Can you talk a little about maybe quantitatively or qualitatively about the increased cross-selling of multiple services, whether percentage or number of clients taking on multiple services, and just more evidence of the cross-selling opportunity. Thanks.

I'll have Tracy talk about a program that we started on Tracy's sales and marketing group started nine months ago called Solve One More. Where we started with one lead. So Tracy?

Sure. And this is indicative of what's happening across the Company and a lot of it is awareness. You're dealing with companies that were very traditionally operated that are now restructured under one leadership with Jim McClure and the Onsite business and me having more the mobile and on-demand components.

But the sales and marketing function is really being tied together quite nicely, and we originated a program called Solve One More. And really with the intent of adding one additional service to any existing customer relationship, obviously ABM has tremendous relationships, it's a relationship business and Henrik's kind of talked about when he acquired our Company, it's more of a know-how business. So if you can combine the relationship with know-how, you're bringing added value to that customer.

We've gone from a dead start on this program where we're literally creating the awareness, incenting everybody in the Company, not just the traditional sales base, to find opportunities and to Solve One More customer problem, and the program's been in place about six months now. We have 950 qualified leads that it's led to $24 million in incremental sales that we incurred no additional SG&A to get.

So that's the kind of thing that's happening and I'd say we're in the second inning of the game. We haven't even rolled this out to all our locations yet. But where we're doing it we're literally bringing in all of the services, whether they're mobile or Onsite, whether they're janitorial, security, parking, creating the awareness, driving the information downstream to the point of service, getting tremendous response, and have I think a genuinely good feel for how it's being embraced across the Company, and there's a lot of fertile ground here to till. We just need to keep the ground game going.

Is there any particular service pairing where you're finding low hanging fruit, maybe the easiest cross-over between service, janitorial, and then going into parking or security. Are you finding any trends in that in any direction?

I think it's been pretty broad-based. So I'd like to say that we zeroed in with a laser focus on one particular piece of business and it's knocking it out of the park. But we've got mechanical leads, electrical leads, EV charging station leads, security leads, janitorial leads. It's been really across the board.

So the cool thing is that people are actually paying attention and saying when they hear a customer grumbling about one of the other 50 services that we provide in the building, they now know we have a solution and they feel very, very confident that the guys that are going to be coming into the building are not going to be creating risk in that relationship, they're going to be enhancing it. And that's been terrific.

That's great. Switching gears to the strategic side, ABM's about to annualize some fairly sizable November acquisitions from last year. Henrik, I think you briefly talked about a vertical focus and possibly some international opportunities. Are you seeing these opportunities of similar size that we had last year? And from a timing perspective, I know it can be a little variable, but is it something that you would view as fairly imminent this year or maybe longer term?

I really don't want to go into specific discussions about acquisitions, other than saying that companies sized between $50 million and $250 million in revenue is our sweet spot and that's what we're looking for and, but it's opportunity-driven. Prices are driven sometimes by very -- this particular time of my life, it's driven by private equity, driving the prices up because financing is cheap. So sometimes we just have to be patient and wait for the right price and the right Company and we've been pretty successful with our patient strategy.

I'm happy to say that our EBITDA is getting very close to -- our data's going to be very close to 1.5 times EBITDA by the end of the year which I think is a pretty good accomplishment if you've seen what we've did done over the last three, four, five years in acquisitions.

Great, well thank you very much.

I'm showing no further questions. At this time I will turn the call back over to Mr. Slipsager for closing remarks.

Thank you very much for listening on to our third-quarter call. It's a quarter we're very proud of. And from our side we surely hope it's going to continue, not only through the fourth quarter but in '14, '15 and '16. So thank you very much for listening in. Talk to you in the fourth quarter.

Thank you, ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.