ABM Industries Inc (ABM) 2003 Q3 法說會逐字稿

Good morning, my name is Tramika, and I will be your conference facilitator today. At this time I would like to welcome everyone to the ABM Industries Incorporated third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period.

[Operator Instructions]

Thank you, now I'd like to turn the call over to Mr. Henrik Slipsager. You may begin, Sir.

Thank you. Welcome to our conference call for the third-quarter of fiscal 2003. Available for the conference call are George Sundby, Senior VP and CFO, Linda Ayers (ph) Senior VP and general counsel and Jay Benton, our Chief Operating Officer. George will address the financial aspects of our earnings and I will concentrate on the operational aspect of our earnings for the quarter as well as discussing and [indiscernible] our expectations for the remainder fiscal 2003. Before we begin, I would like Linda to present the Safe Harbor statement.

Thank you. 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 is intended to identify these statements. These statements represent our current judgment on what the future holds. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of the important factors relating to our business are described in our Form 10-K annual report, Form 10-Q quarterly report, and the other filings we made with the SEC.

Thank you, Linda. And now I will ask George to present our financials for the quarter. George.

Thank you, Henrik and good morning, everyone. I would like to review the consolidated results for our third-quarter and nine-month periods ended July 31 as reported in yesterday's earnings release. Included in the press release are summarized financial segment information for the two periods and the comparable fiscal year 2002 period.

Our quarterly report on Form 10-Q is scheduled to be filed with the Securities and Exchange Commission later today. As a result of -- as reported Aug. 15, 2003, ABM successfully completed the sale of its elevator segment to Otis Elevator, a wholly-owned subsidiary of United Technologies. At closing, ABM received 112 million in cash. Over the next 90 days, there will be a true up for changes in working capital and the resolution of potential purchase price adjustments.

The expected gain from the sale is approximately 1 dollar per diluted share and will be reported in our fourth-quarter results. As a result of this transaction, the historical results of our elevator segment have been reclassified as "income from discontinued operations". This is shown in our income statement on a net of tax basis.

Earnings per share additionally has been segregated into income for continuing and discontinued operations. The revenue and expense numbers shown in the income statement relates solely to the continuing segments of our business.

Sales and other income from continuing operations for the third quarter was 569.1 million, which is up 10.7 percent when compared with last year's third quarter. The 54.8 million increase is primarily due to sales from our 2002 acquisitions of Lakeside, and the 2003 acquisitions of Horizon Janitorial Business and the Valet Parking Operations.

The remainder of the increase was attributable to new business, partially offset by the impact of contract terminations and declines in sales and increase due to increased real estate vacancies and decreases in higher margin capital project work, and extra services as our customers continue to tighten their budgets. Our Janitorial Operations had a 16.2 or 47.8 million increase in sales.

Substantially, all of this was from the Lakeside and Horizon acquisitions while new business offset other business loss.

Our security operations were up 13.2 percent or 4.8 million. Parking and Engineering also had higher sales while Lighting was down 1.2 million or 3.8 percent and our other segment -- which consists of CommAir Mechanical and our facilities service operation -- had lower sales due to less project work and the loss of the Consolidated Freightways account.

Gross margin which is defined as sales and other income, less operating expenses and cost of goods sold was 10.1 percent for the quarter compared to 10.4 percent for the prior year. The decline was primarily attributable to decreases in higher margin sales and competitive pressures, particularly from nonunion janitorial companies, leading to the pricing of new business at lower margins and preventing certain regions of Janitorial from passing on the full amount of the insurance increase for 2003.

Selling, general, and administrative expenses for the quarter were 41.7 million compared with 44.3 million in the prior year. The decrease is primarily attributable to a 3.1 million pretax charge that was taken in last year's third quarter for severance costs in connection with the replacement of the Facility Services President, the early retirement of our former General Counsel and the elimination of the Chief Administrative Officer position.

The SG&A costs associated from our new acquisitions totaled 3.6 million and this was offset by reduced expenses in the existing businesses.

While sales were up for the quarter, income from continuing operations was 10.1 million or 21 percent -- 21 cents per share, which is down 1.3 million or 11.2 percent from the 11.9 million or 24 cents per share reported last year.

In comparing the quarterly results, it is important to remember that the third-quarter 2002 results include a 5.7 million or 3.6 million after-tax, 7 cents per share, second payment on our World Trade Center insurance claim, a 2.6 million or 5 cents per share tax benefit from the elimination of a deferred tax liability that was no longer required, and the reduction of our tax rate to 36.3 percent, and a 3.1 million or 2 million after-tax or 4 cents per share charge for the previously mentioned severance costs.

For the third quarter of 2003, the adjustment of the tax accounts from the filing of over 300 state and federal tax returns during the quarter generated a $700,000 or 1 cent per share benefit. The lower net benefit generated by these unusual items accounted for the decline in our income from continuing operations.

On a segment basis, pretax income from Janitorial was up 1.4 million or 11.4 percent while security was up $400,000 or 29 percent and Parking was up 250,000 or 12 percent. Engineering was relatively flat when compared with last quarter while Lighting was down $500,000 or 27 percent. Our other segment, return to profitability, with pretax income of 300,000 versus a loss of 2.2 million in last year's third quarter due primarily to the bankruptcy charge associated with the bankruptcy of Consolidated Freightways, and the replacement of the facility's service president.

Included in our operating results are pretax profits totaling 2.9 million from the previously mentioned Lakeside, Horizon, and Valet Parking acquisitions.

For the quarter, our effective tax rate was 31.8 percent versus the 18.1 percent in the 2002 quarter. The lower effective tax rates in both periods was due to the previously mentioned tax benefit adjustments from adjusting our tax accounts for the filing of our tax returns. For the remainder of the year, I would anticipate a combined effective tax rate closer to 36.3 percent for our continuing operations.

In addition to the 21 percent -- 21 cent per share income from continuing operations, the Elevator segment generated after-tax earnings of 1.2 million or 2 cents a share. In total, ABM Industries' net income for the quarter was 11.7 million or 23 cents per share.

Turning to the nine-month period, sales and other income from continuing operations was $1,684,000,000 -- which is up 11.3 percent when compared with last year's nine-month results. The $171 million increase is primarily due to a 155 million increase in sales from, again, our 2002 acquisitions of Lakeside and the 2003 Horizon and Valet parking acquisitions.

Our Janitorial Operations had 151 or 17.4 million increase in sales, again, substantially due to the acquisitions as new business obtained offset business loss or capital by ABM.

Our security operations are up nicely at 14.3 percent or $15 million. Parking, engineering, and lighting also had a slightly higher sales for the nine-month period.

As with third-quarter performance, while sales were up for the nine-month periods, income from continuing operations was 23.6 million -- which is 47 cents per share -- which is down $9.3 million or 28.5 percent. The decline is primarily due to the first quarter performance in our Janitorial Northeast lighting and parking operations combined with the unusual items included in the third-quarter 2002 results which were previously discussed, plus the inclusion in our second quarter of 2002 of the initial payment of $4.3 million, 5 cents per share from the World Trade claim.

These were all offset in part by pretax operating profits of 7.7 million from the previously mentioned acquisitions. In addition to the 47 cents per share income from continuing operations, the Elevator segment for the nine-month period generated after-tax earnings of 2.4 million or 5 cents a share resulting in a net income of 26 million or 52 cents per share.

Turning to the statement of cash flow which remains an area of focus for management, cash from operations for the quarter was 25.8 million compared with 22.8 million last year. For the first nine months cash flow from operations totaled 49.1 million versus 63.2 million in the prior year. The decline from the prior year nine-month results is due to the lack of World Trade insurance proceeds, which were realized in 2002, plus the working capital requirement to fund the operations for the January 31 acquisitions of Horizon and the growth in receivables during the quarter as compared with a reduction in the comparable 2002 period.

Capital expenditures for the quarter totaled 2.2 million which compares to 1.7 million for the third-quarter of 2002. On a year-to-date basis, 2003 capital expenditures are 7.7 million, compared with 5.6 million.

During the quarter, following the announcement of the agreement with Otis to sell the Elevator segment we reentered the stock market and acquired 175,000 shares under our 2 million share repurchase program. The year-to-date purchases totaled 775,000 shares at a total cost of 12.1 million or $15.60 per share.

In regard to our balance sheet, we finished the quarter with 26.9 million of cash. There were no outstanding borrowings under our line of credit. Standby letters of credit associated with our self-insurance program totaled 120.8 million.

New GAAP category has been formed for the assets related to the sold Elevator segment which is referred to as assets held for sale. This is primarily the receivables and inventory of the operation that was sold to Otis. Prior periods have been restated for the reclassification of these assets.

A major asset on our balance sheet continues to be accounts receivable with a quarter-end balance of 302.9 million. This represents a 5.5 million decline since second-quarter end. Our goal continues to be to reduce day sales outstanding. DSOs at quarter end is 55 compared with the 56 reported at the prior quarter end. Our over 90 day delinquency increased slightly during the quarter of (indiscernible) 31.8 (ph) million versus 29.4 million at April 30, 2003.

For the year, 90-day delinquency has declined 4.9 million. Our allowance for doubtful [indiscernible] is at 6.4 million which is up slightly from the quarter end -- both these -- all these numbers are on a restated basis excluding the Elevator asset.

Insurance reserves at July 31 totaled 125.1 million which is up 5.8 million for the nine-month period. For the fiscal year 2003, we increased the insurance charge to our divisions by 20 percent. Most of this increase was related to the cost of our umbrella protection as we came off favorable three-year renewals.

There are 2 transactions that have occurred since July 31 that I wish to bring to your attention. Both were included in yesterday's earnings release. The first, as previously discussed, was the successful completion of the Elevator segment to Otis Elevator. Cash proceeds again were 112 million which was received on Aug. 15. The estimated cash taxes associated with this gain will not be paid until Jan. 15, 2004. The gain on sales estimated to be a dollar per share and will be included in our fourth quarter results as a part of the discontinued operations.

The second transaction is the acquisition of the Janitorial Operations of HGO, Inc. HGO is a premier regional base (indiscernible) Janitorial Operations in the Philadelphia area. Cash down payment of 12.8 million was paid at closing on Aug. 29th. Additional contingent payments will be based on income improvement and contract retention during the three years following the acquisition. Annual revenues from the acquisition are estimated to be approximately $40 million. And the operating results generated from these assets will be included in our consolidated financial results effective September 1, 2003.

That completes the consolidated financial highlights and I have the pleasure of returning you to Henrik who will give our CEO's perspective on our third-quarter performance of the division and the outlook for the remainder of 2003.

Thank you, George. Earnings for the third quarter is pretty much in line with our expectations. As always, it happens that you have a couple of positive and negative surprises in the quarter and this quarter was no exception.

On the negative side, we still have not gotten the extra work in special assignment in our Lighting division. Also we have concluded that the problems we faced in the North East with the aftereffects on World Trade Center in the management change were greater than originally participated.

On the positive side, just after quarter end, we concluded a very successful sale of our Elevator division. We have received the cash for the transaction and it is our hope that in a worst-case only minor adjustments to the sale price will happen. Also in the quarter and by the end of August, we finalized 2 acquisitions that we feel very good about.

At the end of our last quarter we bought [indiscernible] which already has proven successful. Also we just finalized the acquisition of HGO, the leading janitorial company in Philadelphia with a great reputation and superb management. Both deals are expected to be accretive to earnings from day one.

When you do a comparison on operations for the same quarter last year, you must realize that last year we had a very positive impact on insurance payment in taxes as well as a negative impact on costs associated with changes in our organization. We had another strong cash flow quarter and we continue to have cash flow exceeding earnings. On a comparative note remember we've taken results from Elevator and categorized them as discontinued operations which of course will affect our estimate for the year in continuing our corporations.

And now for a short operating review. Lighting. Our lighting division compared to previous years is still struggling. We are not getting extra work we had anticipated but we do expect the extra work to come eventually because we're dealing with delays as well as cancellations. We have ongoing been cutting costs in order for us to maintain (indiscernible) get back to historical performance.

Parking. Parking had a good quarter being the division's most directly affected by the economy, overall, it does create a basis for optimism with respect to the economic climate we're in. VPS (ph) was acquired at the end of last quarter and the performance of this acquisition has more than (indiscernible) to our expectations. We also successfully [indiscernible] Airport. The parking business in my mind looks very interesting going forward.

Janitorial. Our Janitorial divisions did well, except for the Northeast region. We're not pleased with the Northeast results for the quarter. Our detailed evaluation of where we are right now surprises a bit but we had to conclude today that the effect of the World Trade Center incident combined with underperforming management had put us in a greater hole than we originally anticipated. With new strong leadership and clear directions, I do not doubt this region will solve the problem as [indiscernible] successfully as possible. The other areas in Janitorial including Lakeside performed well overall for the quarter.

After the close of the first quarter, we acquired HGO, the leading janitorial company in Philadelphia. Strong management in HGO in my opinion will make this acquisition very successful.

Engineering. Engineering had a solid quarter downsizing on existing job [indiscernible] division's on the revenue side while on the other hand [indiscernible] division decision is to pickup revenue on existing job sites when the economy rebounds.

Security. Security had a good quarter -- they've been reasonably steady all year and it is a division where we have great expectations for the future. CommAir facility services had a somewhat difficult quarter with many projects delayed not canceled which means we anticipated [indiscernible] following quarters will pick up additional work.

Expectations. This will be a year that will be very difficult to measure and match. In our forecast for the fourth quarter we have included the sale of our Elevator division and the expected gain on the sales of [indiscernible] share. Our other divisions, excluding Janitorial in Northeast and Lighting, I expect it to come in as previously anticipated. Our earnings and continuing operations for the quarter I expect to come in at around 25 cents. For comparisons with past estimates, please keep in mind that this was normally the strongest quarter for [indiscernible] elevator division and Q4 2003 without Elevator was 24 cents a share.

I'm confident in the strength of our long-term outlook we have not yet finalized our budgets for 2004 but there's no doubt that our level of success will be closely impacted by our ability to invest our surface cash in prudent acquisitions. Our recent acquisitions speak to our strength in this area.

Thank you for joining us this morning and now I'd like to open up the forum to questions from the audience. Now I'd like to open up for questions for the audience.

[Operator Instructions] David Gold (ph) Sidoti & Co.

Good morning.

Good morning.

Henrik -- little bit more color on the janitorial side, I think in George's comments, you mentioned that some of the [indiscernible] during the quarter came from some competitive pricing from some nonunion shops. Is that specific to the Northeast or is that sort of all over?

That's specifically not the Northeast. The Northeast -- we don't get any pressure from nonunion companies. It is more related to, primarily, the Northwest (indiscernible) companies. Any other smaller areas where you see [indiscernible] unions.

Okay and as you look at sort of (indiscernible) issues that you have in the Northeast and I guess you kind of finished the evaluation there. Do you think we see any more sort of pain in that area or is it just a matter of it's sort of turned around the pricing now as sort of (indiscernible) just a function of continuing to deal with some of the contracts that are on the backlog there --?

First of all, let me start by saying that I have the utmost confidence in our new management there. They have already shown their ability to run the operations. I think that we were somewhat surprised in the development in the Northeast, especially the last year and a half, we are aware of the impact of the World Trade Center but I would say the weak management that we have replaced, in hindsight, you can always be smart but the impact of that weak management hurt us more than we did anticipate. And now, we have a base to deal with we have a very very strong revenue base and they will have an action plan to make this a very successful operation long-term.

And as far as on the repurchase, are you still out there buying?

Well, right now we have a blackout period for the next 2 days, but we do anticipate to keep buying.

That is good news and (indiscernible) George, as we look at next year and I know your forecasts aren't done but at least with regard to tax rate I guess for this year, the net would be a little bit lower than historic comes in at about 30-- 35 percent for this year, last. Is that a good number to trend off or do you think we are back to say 36 1/2 percent next year?

There are two components of the tax calculation. Our incremental tax rate is about 38.2 percent. And then, with tax credit, we get both (indiscernible) and Enterprise zone credits and we have low income housing investments. That brings it down to about 36 1/2 percent. So I would use 36 1/2.

Thanks a lot.

Jeff Kessler with Lehman Brothers.

Henrik, I'm interested in some of your comments on Parking because it is the most cyclical, most sensitive and because it does have some bearing on what's going on at airports. I am just wondering if you could comment on what's going on? Are you actually seeing airport traffic beginning to fill up a little bit more than it had been because you've been crying the blues up until into this second quarter on the parking situation?

I admit I've been crying the blues and this time, I didn't cry, [indiscernible] that is news, I admit that. Yes, we do see a certain pickup in both airport and other places and I hope it is not short-term. I, of course, hope it's long-term but this quarter did surprise me in a positive way with respect to activity in our parking division.

Was it any one area, geographically, in particular? Or was it across the board?

Pretty much across the board.

Secondly, this may be a little early but clearly with some of the incremental margins being higher in tenant-related work that you do are you hearing anything from the management companies that you talk to with regard to any pickup in interest on the part of their tenants, either fill up more space or get new tenants in space that has so far been vacant? Or is that just something that you haven't heard anything about it?

It's not something I've heard a lot about but, Jeff, my theory, though, is that if we have a turnaround in the economy and parking could absolutely be an indication that there could be a turnaround. You will not see a fast turnaround in new leases. This is the last thing people want to do is commit themselves to 10, 15, 20 years in 2 or 300,000 square feet in their business. They'll be crowded in offices for a while until they go out and get the new leases. So I think it's a good long-term prospect, but I don't think any short-term effect will happen.

Okay. Very good, and I see that you did give out in the release there was -- there were numbers on operating income for the divisions -- more than just the revenue?

Yes, Jeff, we put out revenue and operating profit, which is pretax earnings.

Okay. Fine. Thank you very much.

Will Marks from J.P. -- I'm sorry -- from JMP Securities.

Thank you. Good morning, Henrik and George. A few questions. The parking reimbursement number? Probably in there, just couldn't see it.

For the third quarter reimbursement was 55.1 million which is up about 3.8 million from last year's 51.3 million.

Okay and I missed, Henrik, you started to mention how the Elevator division usually has a strong fourth quarter. What is -- I don't know if you can quantify that or maybe you did. I missed your comments.

Yes. It normally has a pretty strong fourth quarter and I think the fourth quarter was expected to be in -- on the high-end of the 2 cent range.

Last year's third --

[indiscernible] contributions from Elevator.

Last year's fourth quarter, Will, was 3 cents a share.

That's helpful. How about depreciation levels for the quarter?

Depreciation levels was about the same. Let me just get the exact number for you.

And while you're looking, any comment on further insurance from World Trade Center?

Right now, we continue to move our case before the judge. We've had a couple of other summary judgment rulings against us. And, based on that, we're finalizing with Zurich to move directly to the appeal process on the summary judgments where the judges ruled that our loss is limited to by the contingent [indiscernible] clause of the policy. On depreciation and amortization for the nine months, it was 11.1 million which is just down 200,000 from the comparable last year period.

Okay. And last thing is for Henrik. On acquisitions, would you look overseas? I'm sure you're familiar with a lot of businesses over there or are you totally focused on the U.S.?

Right now we are not looking overseas. If you look at our market share in each of our segments in the U.S., still a lot of opportunity here we would like to benefit from.

Actually one other thing. Just looking at what's available for acquisitions. Is the way to look at it essentially take -- you mentioned the cash balance of 26.9 million and add (ph) about 75 million of after-tax from the sale less what you're spending on this recent HGO acquisition?

That's pretty accurate.

David Leibowitz from Barnham (ph).

Good morning. Usually or at least from the last several conference calls you spent time discussing the security subsidiary. Is there anything new there to report and is the outlook there in any way diminished or enhanced because of your recent events?

No we probably have a tendency to unfortunately focus on the negatives, not the positives. Security had a very good quarter, had a very good year and we had great expectations for the future of security. It is absolutely an area in which we will look at acquisitions going forward.

Thank you very much.

[Operator Instructions]. At this time Mr. Slipsager, there are no more questions.

Well, I'd like to thank everybody for participating in today's call and have a nice day. Thank you.

Bye.

Thank you for participating in today's conference call. You may all now disconnect.