ABM Industries Inc (ABM) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries Q3 FY14 conference call.

(Operator Instructions)

As a reminder today's conference is being recorded. I would now like to introduce your host for today's conference call, CEO and President Henrik Slipsager. You may begin, sir.

Thank you. Good morning. Joining me today are Jim Lusk, Executive VP and Chief Financial Officer; Jim McClure, Executive Vice President; Tracy Price, Executive Vice President; and Sarah McConnell, our Senior Vice President and General Counsel.

Today I'll provide an overview of the 2014 third quarter that ended July 31, Jim Lusk will discuss the details of our financial results, Jim McClure will provide an update of our Onsite business, and Tracy will comment on the Company's operational results for building and energy solutions and provide a brief update on sales and marketing. I will then comment on Air Serv's performance for the quarter and then conclude our prepared remarks with an update on our outlook for FY14.

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 will see the events and presentations 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 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 website under the investors tab.

Thank you, Sarah. Now please turn to slide 4 for an overview of our third quarter. The Company's operating performance in the third quarter was outstanding.

Revenues for the quarter were a record and up nearly 5% from the same period last year. Janitorial posted top line growth of 3% again. Building and Energy Solutions had another very good quarter, achieving top line growth of 21% and on an organic basis over 14%.

Air Serv's performance was exceptional, with revenue up nearly 18% and organic growth exceeding 11%. Our janitorial, parking, building and energy solution Air Serv business posted double-digit growth in operating profit, which contributed to a 16.5% increase in adjusted net income for a year-over-year basis.

These results reflect the hard work that we've done in transforming the Company and putting us in a stronger position to compete as companies gradually move on to integrated facility service models. These results are even stronger when you consider that third quarter FY13 had a work opportunity tax credit benefit of $0.02 per share.

During the quarter the Company repurchased over 377,000 shares of stock at a cost of $10 million. And yesterday we announced a cash dividend for the fourth quarter of $0.155 per common share. This marks our 194th consecutive dividend.

Yesterday we announced -- now I would like to turn the call over to Jim Lusk for a financial review of our third quarter.

Thank you, Henrik, and good morning, everyone. Turning to slide 5. As Henrik noted revenues of $1.28 billion for the third quarter were up 4.9% compared to the prior year, including organic growth of $45.8 million, or 3.8%. Gross margins for the 2014 third quarter were 10.3%, up 34 basis points compared to the third quarter of 2013, primarily attributable to enhancements to the Company's risk management and safety programs, savings from the Onsite realignment, and newly awarded contracts within our building and energy solutions segments which generally have higher gross margins. SG&A expense for the third quarter increased $5.8 million, or 6.8%, to $91.2 million, primarily from a $4.1 million increase as a result of hiring additional personnel to support certain growth initiatives and IT.

Amortization of intangible assets for the third quarter decreased by $0.5 million to $6.5 million. Our effective tax rate for the three months ended July 31, 2014 and July 31, 2013 were both 40.5%.

Adjusted net income, which excludes items impacting comparability, was up $3.8 million to $26.9 million for the third quarter, primarily due to new business and Onsite realignment savings. In addition, enhancements to our safety and risk management programs led to a decrease in our insurance expense for FY14.

Now turning to slides 6 and 7. Days sales outstanding at quarter end were 54 days, up 3 days on a year-over-year basis and up 1 day sequentially. Cash generated from operating activities for the quarter ended July 31, 2014, was $19.3 million. This was a decrease of cash generated of $27.2 million compared to the same period in FY13 primarily related to the timing of collectible receivables and higher cash taxes paid.

Turning to insurance, 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 those evaluations our current year insurance expense on a year-over-year basis is lower due to the enhancements made in our safety and risk management programs.

Included in net income is an after-tax charge of $6.1 million related to expected insurance reserves for policy years before 2014. This compares to an after-tax charge of $6 million recorded in the third quarter of FY13.

As Henrik noted earlier, we repurchased 377,364 shares of stock at an average price of $26.50 for a total of $10 million. We paid $8.6 million in dividends, and yesterday we announced our 194th consecutive dividend, continuing the long-established pattern evidenced by the chart on the bottom half of slide 7.

I would like to now turn the call over to Jim McClure.

Thank you, Jim. Please go to slides 9 and 10. I will now 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 top line growth for the quarter was 3.5% compared to 2013, with revenue of $468.3 million. Janitorial sales momentum continues with recent job starts in our sports and entertainment, financial services, high-tech, and educational verticals.

Our Midwest and West regions achieved year-over-year revenue growth in the third quarter of 4.7% and 4.6% respectively. Tag revenue were solid in the quarter, and compared to FY13 grew over 7% to $42.2 million.

As we discussed on prior calls, there is some seasonality related to our business with the second half of the fiscal year results traditionally being stronger. Janitorial segments earned $40.4 million in operating profit for the third quarter of FY14, an increase of $6 million or 17.4%.

Operating profit margins increased by 74 basis points to 6.23% compared to the third quarter of FY13. This significant growth was primarily related to lower labor and labor-related expense as a result of our safety initiatives and realignment savings and the new business we've added across all of the regions.

Moving to facility services, as previously communicated we expect their revenue to be flat to slightly lower for the quarter. Revenue was $151 million, was down a little over 1%.

On a year-over-year basis operating profit improved by $0.5 million, or 7.1%, and profit margins increased by 39 basis points. There were a handful of items positively impacting margins for the quarter.

For parking revenue was $156.5 million, up $2.5 million compared to 2013. Management reimbursement revenues were up $2.6 million to $78 million, and continue this type of gradual growth and parking revenue as microeconomic trends improve.

Recently we were successful in retaining two key airport accounts that amount to approximately $35 million in annual revenue. So a solid effort by the parking team. Parking operating profit increased by $1.2 million, or 14.6%, as compared to the fiscal third quarter of 2013.

Operating profit margins increased by 69 basis points during this period. The increase in operating profit margin was from reduced insurance expense, lower expense from the realignment of our Onsite operational structure, and lower legal fees. It was nice to have no adverse effect from weather this quarter and to see continued improvement in margins.

Turning to security, the top line was at $95.4 million, essentially flat on a year-over-year basis. The team is working on some significant opportunities and the pipeline continues to be solid.

For the third quarter security generated operating profit of $3.9 million. Operating margins decreased by 7 basis points to 4.09%. This slight decrease was a result of a one-time bump in labor costs associated with overtime incurred due to some system issues that have largely been resolved, offsetting the higher labor costs were savings from Onsite realignment and lower legal fees and insurance costs.

I want to provide an update on a few items before turning the call over to Tracy. First a comment regarding client retention.

We currently remain in a 92% to 93% on a rolling four-quarter basis. On analyzing the recent for recent retention patterns, we identified approximately 2% to 3% of the lost Onsite business for reasons other than performance and price.

Examples are contracts we canceled, jobs taken in-house, and reduction in scope. This information provides a deeper appreciation for the growth achieved in the quarter and year-to-date, and supports my belief that we can over the long term improve our retention by a couple of points.

Next I want to provide a brief update on where we stand with the Onsite realignment. For the third quarter we achieved a pretax basis savings of approximately $2.2 million compared to the third quarter of 2013.

We have successfully completed all of the essential elements of the reorganization and are really seeing a significant amount of opportunity across sales services among the four operating segments. This will of course take time, but what really makes me very excited about the future is the continued collaboration I see in the organization and the amount of opportunities we have to drive long-term sales.

Before concluding my portions of today's remarks, I would like to comment on some changes we made to our safety and risk management programs. In moving to the Onsite model we seized an opportunity to reevaluate the programs we had in place as well as our safety culture.

One of the critical steps we took in the Onsite organization was transferring corporate safety personnel to the field and upgrading talent in critical areas. In addition we have more active participation by members of the senior team in terms of our safety and insurance programs.

We will continue to focus our efforts and resources in these areas, and we believe longer term there are opportunities to prevent certain claim types and to reduce the severity of injuries. The Onsite team enters the fourth quarter with solid momentum, and I look forward to sharing our results in December.

I will now turn the call over to Tracy.

Thanks, Jim. Continuing on slides 9 and 10, I will provide an update on our building and energy solutions segment which includes ABES, government services, and ABM Healthcare Support Services. This was another strong quarter for the team and we're very pleased to share these results.

Starting with revenues, we accomplished a 21.5% increase to $127.5 million. Excluding acquisitions we achieved organic growth of 14.2% as we benefited from an increase in energy retrofit projects, service and maintenance contracts, and continued improvement in our government business.

Another outstanding quarter for the ABES team, with organic growth at 14% and reflective of our continuing record backlog and strong sales momentum. During the quarter the ABES team continued to rollout EV charging stations under a program with BMW of North America. In addition, ABM Healthcare Support Services continued its successful revenue trend with growth of 17%.

For the fourth time in the past five years our healthcare support services business has been selected as one of Modern Healthcare's best places to work. All of the credit goes to our leadership and the talented associates working to deliver our complete portfolio of end-to-end services designed to support hospitals and healthcare systems.

With year-over-year growth in revenue by ABES, contributions from ABM Healthcare, government services, BEST IR, our San Diego acquisition Alpha Mechanical, BESG generated operating and profit of $6.8 million, up 15.3%. In addition, adjusted EBITDA for BESG was 7.5%, up nearly 10% compared to third quarter of FY13. For the year-to-date adjusted EBITDA is 6.2%. These are outstanding results, and based on the strength of our pipeline we remain well positioned as BESG moves into the final quarter of FY14.

Turning to slide 11 I want to mention a few of the sales and business highlights from the past quarter. We continue to gain momentum across many of our vertical markets, and as I mentioned in my previous calls, we continue to strengthen collaboration among the Company's service businesses.

To this end we announced ABM Facility Services was selected to provide a full range of engineering services for Commonwealth Partner's properties across the western and Midwestern United States. This deal builds upon the existing contract Commonwealth has with ABM Parking.

On August 1 we completed the acquisition of a northern California-based company called Airco Commercial Services. This acquisition is part of BESG's continuing strategy to deliver our entire portfolio of services in major metropolitan areas and in markets where we have significant client concentrations which drives the type of growth the business has been experiencing. The combination of Airco and our previously announced acquisition of Alpha Mechanical completes our coverage of California, a state where ABM does approximately $1 billion in revenue and has over 20% of its employees.

And with that I'll turn the call back to Henrik.

Thanks, Tracy. Before discussing our final outlook for FY14, I want to say a few words about Air Serv. This segment, listed as Others in our financials, had revenue of $97.5 million, up $14.8 million or 17.9% compared to the third quarter of 2013.

The Blackjack acquisition contributed revenue of $5.6 million. Organic revenue growth was 11.1% driven by the recent start of a shuttle operation in Heathrow Airport and new business in the US. Operating profit of $4.5 million was up $700,000, or 18.4%.

UK operations drove the improvement in operating profits and I want to acknowledge the fine work they are doing. The acquisition has really exceeded our initial expectations and the Air Serv team is well positioned for the fourth quarter.

Please now turn to slide 13 for a review of our financial guidance for 2014. Based on the Company's year-to-date operational result and its current expectations, the Company is lifting guidance for adjusted net income to $1.65 to $1.69 per diluted share.

As for net income, guidance is $1.42 to $1.46 per diluted share. This guidance continues to assume an $0.08 diluted share benefit based on the Work Opportunity Tax Credit, which the Company assumes Congress will retroactively reenact by the end of Company's fiscal year-end of October 31, 2014.

Please review the other items listed on slide 13 which contribute to the EPS guidance we have provided. And as is customary our guidance is exclusive of any future acquisitions.

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

(Operator Instructions)

Michael Gallo, CL King.

Hi, good morning. Congratulations on the good quarter.

Thanks, Mike.

A couple questions. Henrik, are we completely through some of the startup costs you had from some of those new projects in the first half of the year? Or would you expect we'll see some more of that as some other projects roll in?

I think our startup cost was pretty similar in this quarter as compared to the last quarter. On one side I'm really hoping we're going to have a lot of startup costs coming in the coming quarters because that means we're going to get a lot of new business, but I think if you look at where we are right now they might be going down a tiny bit in the coming quarters. But in general it is a good problem to have these startup costs.

Oh sure. Second question I have, I was wondering if you could elaborate at all on the commentary towards security. I think you mentioned you expect to secure some new high-tech business. So would you expect we'll start to see growth in the security segment again on the top line in Q4, or will that probably take the first half of next year before we start to see growth there?

This is Jim McClure. This good momentum in project in the pipeline coming into security, I think it will be due to some lost business in the second and first quarter of this year. More of a first quarter result on when we'll get the top line growth back in place for security.

You got to remember they're coming off two very aggressive years of success and we just hit a little flat point. But that's all I consider it right now. I think they're going to be well positioned for FY15.

Okay great. And then final question; obviously was a very nice increase in janitorial operating profit. It seemed to be due to some of the realignment savings and the safety initiatives, which I would think would recur going forward.

Was there anything unusual that drove that growth so much greater than the revenue growth that would prevent it from recurring at the same rate? Or should we see very, very strong operating profit growth in janitorial, assuming we continue to see good organic growth numbers?

The realignment exercises over the insurance you're correct on, that as reoccurring, so we're very pleased with the margin growth. And as it stands for the janitorial business it's really unheard of in the territory we're at; we're very pleased with our performance and expect it to continue.

Great, thanks very much.

Thank you.

Andrew Wittmann, Robert W. Baird.

Hi. Thanks for taking my questions. I wanted to actually just build on that last question on the janitorial margins.

You saw some of the same benefits in the facilities services and even in the parking stuff. Was there anything one-time in those issues, or would you generally expect those to continue at the levels of year-over-year in terms of, if you look at the margins the year-over-year gains that you posted, should we expect those similar types of gains recognized in the seasonality from the [suee] things that come in in winter and things like that?

I think you're going to see a little bit. I think janitorial answered that question. I think in facilities we're going to see, due to some lost business we're going to see some margin compression, and I'll put it short-term that we talked about last quarter.

But that business industry still is a very solid 7% plus bottom line margin business and we continue to grow that aggressively in 2015. But we have lost some business at no result of our own actions here lately and that's impacting the short term into the fourth quarter. Security like I said they will be turning their top and bottom line around in the first quarter of 2015.

Got it. So it looks like you had your normal third quarter insurance reserve releases and adjustments there, but it sounds like better safety programs are contributing to overall cost savings. I guess maybe just a little bit of detail as to what are you doing there specifically and how comfortable are you with saying that that is just a new way of doing business as a contributor to your overall margin gains?

I think when we took the risk people out to the field and had real-time data communicating to the operator so they understand the risk profile you see a great involvement with all levels of organization on the operational piece in regards to safety and risk. We're treating safety and risk like we treat cash flow.

We talk about it every week. We're dealing with it. We see it as a large bucket of potential improvement. It takes time but we're very aggressive and very bullish on what the future looks like in our insurance risk profile.

I would like to add also one other benefit of the safety is also a key thing for us which is safety for our employees. The better we are the fewer of our employees are hurt which of course is one of our main goals.

Yes. Okay. I guess I had one other question and that was around the buyback. That's something new that you did this quarter we haven't seen you do in a very long time.

Henrik I guess I'd just be curious as to did you see a unique opportunity in your stock this quarter, or do you think that a certain amount of buyback every quarter as kind of a new way of allocating capital is something that investors should expect? I think some your philosophy on this would be helpful.

It's something we evaluating every quarter and this particular quarter we made the judgment this was the right time to buy back. There is no commitment on buying back tomorrow, and we are looking at it, we have the permission I think for another $40 million to buy back if it's opportune for us.

But as you know there's a lot of other things into consideration, acquisition opportunities, et cetera, et cetera. This particular quarter we felt it was the right quarter. We felt our cash position was perfect for that particular investment so we did it.

Great, that makes sense. And you know what guys, I did have one last question, I apologize. You talked about margin benefit to the overall company from greater mix of BES work. I was always a little curious, I know that you exited a fairly sizable loss-making contract, and you kind of got out of that.

How much of a benefit was the -- first of all is that contract now fully behind you and does that also contribute to the overall Company margin benefit. When you talk about labor being lower as a percent of revenue, is the fact that that's over one of the contributors to your margins and is it therefore sustainable going forward as a result of that?

I think you're talking about the contract where we canceled a good portion of it, probably 20% of the contract because it was a loss-giving part of that particular job.

Yes.

That happened to be in the janitorial side, so I'll let Jim talk to it.

That was in janitorial and that does increase the overall performance of that account and reduce that negative impact that we were absorbing on a historical basis.

And it's behind us now.

And it's behind us.

Thank you.

Thanks.

George Tong, Piper Jaffray.

Digging a bit deeper into overall gross margin performance this quarter, what proportion of your margin expansion came from Onsite realignment versus business mix versus lower insurance expense? I'm just trying to determine the sustainability of margin expansion moving forward and what the potential drivers could be.

Well George, there are so many moving factors in that question that I can't exactly tell you if the realignment gave you 0.1% in one area. And there's also the mix of business where you see higher growth in Tracy's business in general will drive an overall higher margin for the Corporation which makes a lot of sense.

And that's what we believed in from the get-go. And the more growth we have in Tracy's businesses you will see the overall impact via an increase to EBITDA percentage for the combined Company.

But I can't really break it out for you in small numbers because some of it was also maybe increases we got, we probably canceled some big contracts, I can go on and on right there. 5,000 things impacting the bottom line.

Okay, got it. This quarter you had several strong contract wins in the janitorial segment which helped drive organic growth expansion or acceleration from the prior quarter. Based on your pipeline of contracts and ramping contract activity, how should we think about the organic growth outlook in janitorial over the next one to two quarters?

I feel very solid about the organic growth possibilities and pipeline at janitorial in the near future. And we're seeing the benefit of the Onsite realignment and those opportunities that are coming are larger. And so the wins are bigger and we're getting a lot more consideration in the large opportunities than we have ever in the past.

Overall that is going to continue at least for the next year, and if we continue to execute the way we've been executing in the past I hope this is a long-term development based upon a new organization, new kind of focus on the business. With the new sales and marketing programs the combination of all those should hopefully create more growth.

Got it. Lastly what's your visibility around the WOTC tax credit, specifically how confident are you that the tax credit will be reinstated in time to benefit 4Q results?

I'm not as optimistic as I was 9 months ago and 6 months ago and 3 months ago. The reason that we still have it in there in our guidance is the fact that I think we've had it and pointed it out every quarter since the beginning of the year. I don't think we have any doubt that the WOTC credit is going to get through.

We're very concerned if it's going get through within this fiscal year. So if we don't get it this fiscal year it's probably we're going to have a $0.16 impact next year.

So for me it's a timing issue, and unfortunately the way some people wrote the accounting rules this had to happen before October 31. So even though our call won't be until December of this coming year, and hopefully it will be implemented by December of next year. We might not be able to say into this fiscal year, but it's a timing issue.

Thanks very much.

Joe Box, KeyBanc.

Question for you on CapEx. Looks like about a 22% decline from last quarter's guidance. Curious if this is a timing thing or we should expect to see higher CapEx in FY15 or if you're purposely spending less?

Overall on CapEx what drives CapEx mostly happens to be IT. IT happens to be in different quarters.

This is more of a timing issue. I don't think you're going to see any major difference in 2015, but unfortunately IT drives major one-time payments.

Okay. So kind of going forward we should be thinking about it being $34 million to $36 million-ish for next year?

Yes, I think so. I think that's the right level.

It could probably be up $5 million from that, it could below $5 million of that. That is the level if you look at it over a longer period of time.

Perfect, thanks. And then I want to go back to the business pipeline. I know you guys put a lot of commentary around it and it does seem favorable.

I'm just hoping we could try to quantify that. Is the pipeline of new deals that you're seeing, are you seeing it grow or has it maybe normalized at a strong level? Any directional color you have on how it compares to the last couple of quarters?

I think the pipeline overall is as strong as it was at the end of last quarter. The reason that -- we're still trying to get accurate data in order to provide the Street with a strong pipeline definition.

We are very close of getting it, but I'm not going to commit to a date for that. But when we have that it should give you that information and give you much better feel for tomorrow's growth and tomorrow's business than we are providing today.

Okay. Fair enough. We'll look forward to that then.

I just want to follow-up on a prior question on startup expenses. I think you guys explicitly quantified the up front expense at Air Serv and said it was flattish sequentially.

That was pretty helpful. Can you maybe give us that detail on janitorial and building and energy, just given they've seen some solid new growth?

It's flat year-over-year and I think there's very little startup costs associated with Tracy's business overall. It is much more project-based, but it's primarily Jim and the major jobs he's starting.

And I think you're going to see on a stabilized basis it's going to be probably between $1 million and $1.5 million on an ongoing basis. And I think this quarter is $1.7 million. That level and it's a little higher because Jim, thank God, is starting up a lot of nice business.

I think it's stabilized. We had that little tough startup, but that was also a startup with a piece of the business losing money that we had to get out of, so we included that in the startup cost which could be discussed as part of that. It was part of a new contract for sure.

And just so I understand, Henrik, are you saying the $1.7 million was for the total company or was that janitorial?

No, it's for the total company but the major startups happened to be in the janitorial group.

Okay. Was $1.7 million?

Yes.

Maybe just to dig into customer mix a little bit, you just alluded to larger customers becoming a bigger percent of the mix. Can you maybe talk to what some of the primary differences are between the large customers that you're bringing on and maybe some of your existing smaller customers? How pricing typically compares, contract duration, maybe profitability of these contracts?

I can tell you that in general we expect those major contracts, which for us in general means multi-site throughout the country, will be longer lasting as long as we perform up to the expectations of the client because we're somewhat difficult to replace. Because we are basically the only true nationwide company in this particular business.

So they will last longer I would say probability-wise it's probably tighter the first year or two. But after a period of time they move up to the average of the rest, and if you have the account for 10, 15 years it could even be more profitable than the average.

And that's also we have to pay the startup cost. I know Jim's startup project with 700 different sites starting over a three day period, that does cost a lot of money but nobody else can do it and we are in a pretty unique position when it comes to that.

Understood. Thanks for the color on that.

One housekeeping item for Jim Lusk and then I'll turn it over. And I apologize if you said this earlier, but Jim, did you quantify what the insurance expense savings was overall?

Not overall year-over-year. It's definitely down a little and continuing.

Can you give us the number? It seems like it was a fairly meaningful driver?

It's not a big number year-over-year. It's combined with the on-site reorg combined with the new business, so in and of itself it's not a big number.

But it is improving. And this stuff takes time over time.

I would like to add one thing to it. And that is with all the money that we have put in safety that we have expensed over the last period [without crying] we expect that payback to be not the short term but be long term. We still believe there is a long way to go, a lot of opportunities to be met, and it is clearly a factor that is both important for us competitively but as well also from an earnings point of view is very important.

Alright guys. Nice quarter. Thank you.

Thank you.

Adam Thalhimer, BB&T.

Good morning, guys.

Good morning.

Trying to understand a little bit more the guidance for Q4. What would be your expectations for revenue growth in janitorial? Does kind of a mid-single-digit growth number sound about right to you?

I have never given revenue guidance and I'm not going to start now.

Okay. In terms of, maybe this is a tough question too, but just thinking through margins you typically do get a sequential improvement Q3 to Q4. What would be your thoughts on sequential margin improvement this year?

We expect the margins, and again I've never given margins guidance, but we do expect the margins to stay at the same level as they are right now. You have to understand also in our number for the guidance number we have included $0.08 of WOTC credit in the adjusted numbers.

So when you look at that number and compare it to this particular quarter you have to take $0.06 out of period that's associated with the guidance. You know what I'm saying?

Yes. I see that, I'm just trying to get to the GAAP guidance the $1.42 to $1.46.

I have the same issue with the GAAP guidance. Because again we have WOTC credit included.

Even if I strip that out it's a very strong quarter, so that's what I was asking about. Revenue and --

For the quarter if you take that out and you lower the midpoint of the guidance it's slightly better than this particular quarter, but it's not crazy good.

Okay. Maybe there's something else then. Maybe corporate costs, is there any -- corporate costs were higher in Q3. What drove that and could those come down in Q4?

Corporate cost we expect to stay at the same level in Q4. Corporate cost was up a little bit because we were finally able to address some of the vacancies we were seeing in our IT department primarily over a longer period of time. Plus some of the safety initiatives we have invested in you'll see the investment, but as you can see from this quarter you also get a payback.

Okay. I'll follow up offline. Thanks, guys.

Thanks.

David Gold, Sidoti.

Hello David.

Good morning. Just a couple points of follow-up. One, curious on the tag work where you saw some nice growth, if you can speak a little bit there as to drivers and thoughts on sustainability?

Hi David. Jim. We are pleased with the growth in tag work and we're seeing I think as the economy gets stronger we're seeing that rebound to pre-2008 rates and even exceeding that. And I think it's a focus on our managerial team's attention. So now that the Onsite organization is one, we're able to crosslink over and expose ourselves to more tag opportunities, so I believe it's sustainable.

Okay, perfect. Are there any specific drivers that we should be looking at there? Other than the economy as a whole?

David, it's across the board, so it's just the fact that two things. The economy is helping us. Vacancy in major cities, especially with the high tech boom in San Francisco and Silicon Valley and even overflowing into Seattle, the West Coast is feeling that benefit. And for that we have greater opportunities in the tag business. As office vacancy gets healthier and better the tag revenues trail along.

Perfect. And then as a companion question here on the janitorial side, can you give us a sense with the new contract wins and the opportunities that you are seeing there, do you think you'll be able to hold the improved margins that we're seeing?

Well David, the margins with the reorg and the insurance is helping dramatically. I think some of these larger accounts that we've gotten are multi-site, heavy capital investment up front, a little longer to cure out, but ultimately we usually are very pleased in the end of maybe a year's period with the performance of those type of accounts.

Because again we're the only person that can self-perform it in the country and we get locked in and the knowledge of the business allows us to become more efficient. These larger opportunities are complex. They are costly at the outlay of them, and we look to hold them for a very long time like historically we do and be very happy with the profitability of those in the long term.

Perfect. And then, Jim, on the insurance reserves just curious I guess you could help me understand a little bit better. I guess we're in year two of having to step up reserves for prior years so to speak, and historically that caused you to actually have to step up your account reserve, but in this case it sounds like it's gone down a little bit. Just curious how we bridge that a little bit?

If you look at things like general liability and auto and that kind of stuff they tend to be event driven. You can have a handful of cases.

I'd look at insurance over a very long period of time. So if you look at the last seven years or so, we've had some years of big positive numbers coming in.

We've had some years flat and some years down. On average it's been about $2 million plus out of period. But the good news is all the work we're doing now will stem future tides.

Jim and Tracy and I, just like we did on workers' comp, which is really the insurance we have been focusing on, we're going to double down our efforts on GL and auto liabilities, other things we can do there. They were little more lumpy, but the reason it's below the line is because some years in the past we had huge positives if you remember. On average it's a couple million in the last seven years negative, but we hope to turn those tides, but they tend to be driven by a handful of small cases especially in general liability.

Got you. And one last one. I know Henrik you said earlier no commitment to buybacks, but I guess just curious on maybe updated thinking between when you think about uses of capital between acquisitions and buybacks sort of at this point and given valuations out there?

Well in general I would of course focus, as I've shown over the last many years, focus on acquisitions that keep bringing some value to the Company both in the form of could be verticals, could be geography, could be services like the one investment that we made in Tracy's group business this particular quarter. But it's something we sit down and evaluate and if buyback of stock is an alternative that ends up getting a higher return to the shareholders and we are not doing something negative on the opportunity side with respect to acquisitions, then of course I'm looking at buybacks very positively.

Got you. And the other side of that acquisition pricing right now?

We have a number of opportunities and we normally don't comment too much on acquisitions, but clearly we feel we have appropriate cash availability to do the acquisitions that we see in the short term if any comes through.

Perfect. Thank you all.

Thanks.

Michael Kim, Imperial Capital.

Hi Michael. He gave up. Are you there?

Yes, on mute. Can you hear me now?

Now I can hear you.

Okay. Good morning, guys. For facilities services you can scale some of the new jobs that are ramping up and I think the business has been sort of in this range for a little while and through the balance of the fiscal year. I just want to get a better sense if you think facilities services can start to see growth rates similar to janitorial? What kind of timeframe we could see a recovery in that business?

I believe probably in the second quarter of 2015 we will return facility services to a growth element, if not at the level of janitorial, exceeding janitorial. They lost some business at no fault of their own that impacted their top line and bottom line this year and I reference that in our retention numbers.

That's nonrecurring, so it's just going to take us a little time to get them back on their feet. But the model is solid, the opportunities are there and then the consolidated facility market engineering still is the driver and the source of a lot of leads that we are getting. So we feel that they will be profitable and growing in the future.

Are you starting to see a lot more of the cross-sale contribution and collaboration with some of the other parts of the organization on the Onsite side? Is that where you are seeing a good amount of lead activity as well?

Absolutely. All of the real estate consolidation and getting everyone together and breaking the walls down and having people look at their businesses as one Onsite operation and not the silos, it takes time to change that culture. Now we're in that culture implementation period and we're absolutely seeing the benefits in the cross-selling.

Great. And then on the building and energy solutions side, can you talk about if you're seeing the acceleration of the pipeline for the energy retrofit business? It seems like there's a pretty compelling ROI argument; curious if there's any particular verticals or activity that you're seeing some good pickup?

Yes, we're seeing the kind of traditional growth opportunities in K through 12 and the universities and colleges. We have cracked the code in the federal space so we had our first contract there and we're working on some other large contracts in the federal space, which is pretty intriguing for us because that's not a market that we've been in before.

And we are actually making headway in the healthcare business too for BES. So I think we're seeing it broad-based, it's being embraced by the Onsite teams and we're partnering with their incumbent customer relationships and it's going quite well. Pipeline is very solid and it's more a function of our ability to onboard competent qualified salespeople which is going to drive our growth.

Great. And then Henrik, you briefly talked about Air Serv and the aviation business. One of the comments you made was some opportunities on for some US airports. Are you seeing maybe a larger pipeline of opportunities in the US and some carry over to the capabilities you have both domestically and in the UK?

I see a very good trend in our aviation business. I think we have proven that the vertical focus does drive higher growth than we saw in the past with a trade-based focus.

I think Chemical sees that as well. And it's my hope it's going to continue. I'm not saying are going to continue with 14% growth, but the UK operation has performed I can only use the word outstanding and been a very pleasant surprise for us.

And the US operation has done very well. We've had some tight markets in the US compared to UK, but I've got a very talented team there and I hope they're going to continue this double-digit growth. But there will be a little dip here and there, but overall I think you'll see the growth being much higher than the average growth in the standard trades.

And does your performance in the UK give you an opportunity to leverage into the continental Europe? And are there different dynamics by country markets, and are you making some investments to build your go-to-market in those areas?

Well they're clearly different dynamics as you can understand, different rules, different laws, different mentality, but it's clearly one of our focuses is to use the verticals for more global expansion. We started at the UK, we were pretty conservative and it will take a little time before we expand further out from the UK, but clearly you'll probably see expansion in our verticals into continental Europe over the next 2 or 3 or 4 years.

Great. Thank you very much.

You're welcome. Operator any more questions? I think the operator resigned on us.

I apologize my headset was muted. I apologize.

(Laughter) That's all right. I want to thank everyone for listening to the third quarter and I look forward to talking to all of you in December. Thank you.

Ladies and gentlemen this does conclude today's presentation. You may now disconnect and have a wonderful day.