ABM Industries Inc (ABM) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the ABM Industries Inc. fourth-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Slipsager, you may begin your conference.

Thank you. Good morning and thank you for joining us for our review of fiscal 2003 fourth-quarter and year-end results ended October 31, 2003. I am Henrik Slipsager, President and CEO of ABM. Also in the room with me today are George Sundby, Senior VP and CFO, and Linda Auwers, Senior VP and General Counsel, as well as Jay Benton, our Chief Operating Officer and Executive VP.

On this call today, I'll provide an overview of our operational results for the fourth quarter and year ending October 31, 2003, and then George will review detailed financial results for the quarter and year-end 2003. I will conclude the call with a summary of current trends in the business and how we believe we will capitalize on growth opportunities in fiscal 2004. Before we begin, I would like Linda to present the Safe Harbor statement.

Thank you, Henrik. 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-Q quarterly report, Form 8-Ks, and the Form 10-K that we will file shortly with the SEC.

Thank you, Linda. In fiscal 2003, we achieved record revenue of 2.26 billion and significantly improved our overall cash position through positive operating cash flow and the successful sale of Amtech Elevator Services. Some of the highlights include improving shareholder value through dividends and share repurchases, completing accretive acquisitions, and working to expand our existing businesses.

Specifically, we strengthened our leading facility services (indiscernible) position by acquiring three businesses during 2003. All were funded from cash generated by operations, all were accretive to earnings, and all were successfully integrated. We sold a nonstrategic business, Amtech Elevator Services, which improved an already strong balance sheet and provided us with additional resources by expansion of other business segments. We achieved a number of contract wins and expanded our broad universe of customers. We added a number of talented people to ABM in both operations and management, and would like to acknowledge all of our employees' contribution to our results. We also completed this year with positive (ph) momentum, as the fourth-quarter fully diluted EPS from continuing operations was 26 cents, slightly above expectations.

While we achieved some major milestones for ABM in 2003, we believe we have areas we can approve improve upon in 2004. This along with recent upticks in business activity makes me optimistic about the year ahead. But before I go into more details about 2004, I would like to turn the call over to George for a review of our fiscal 2003 financial results.

Thank you, Henrik. Good morning and happy holidays to everyone. I would like to review our results for our fourth quarter and fiscal year 2003. I hope that you've all had a chance to review the earnings release that was issued after the market close yesterday, which included summarized financial segment information for the quarter and year and comparable 2002 results. I will discuss our segments in greater detail in a moment. But first, let me discuss the highlights of our consolidated results.

For the fourth quarter, income from continuing operations was 12.8 million, or 26 cents per diluted share. This is up 15 percent compared to the 11.1 million, or 22 cents per share, in the prior fourth quarter. The improvement is due to a combination of the inclusion of profits from the acquisition of HGO Inc., a premier janitorial company, the self-performed janitorial operations of Horizon National Commercial Services and Valet Parking Services, and also increased earnings in our security and mechanical divisions.

As Henrik mentioned, during the quarter we completed the sale of our Elevator segment to Otis Elevator, which resulted in cash proceeds of 112 million and an after-tax gain of 51.5 million, or $1.03 per share. This amount has been included in our fourth-quarter results as a part of discontinued operations. As you may recall, with the announcement of the sale of Elevator on July 9th, we restated all prior financial periods to reflect the Elevator segment as a discontinued operation. As a result of the gain on sale of the Elevator division, net income for the quarter is 90.5 million, or $1.81 per diluted share, which compares to 46.7 million, or 92 cents, for fiscal 2002.

Sales and other income for the quarter was 578.4 million, up 4 percent over the prior year. The increase is due primarily to the 2003 acquisitions, as revenue from new business was offset by lower revenue from existing contracts as well as the cancellation earlier in the year of unprofitable contracts. Sales continue to be impacted by the higher real estate vacancies and lower capital budgets of our customers.

Gross profit margin, which is defined as sales and other income less operating expenses and cost of goods sold, was 11 percent for the fourth quarter, up from 10.7 percent for last year's fourth quarter. The increase is primarily attributable to higher margins (technical difficulty) from the acquired businesses. For the quarter, selling, general and administrative expenses increased 4 percent to 44.1 million, but remained constant as a percentage of sales. Expenses increases were primarily associated with the acquisitions, as well as higher insurance costs.

Interest expense, which includes loan amortization and commitment fees from our revolving line of credit, was 255 million for the quarter compared to 326 million. The decrease was primarily to the lower utilization of our total line of credit, which includes letters of credit for our self-insurance program, offset partially by the higher loan amortization costs from the midyear expansion of the line of credit to 250 million. The effective state and federal income tax rate for the quarter was 33.5 percent compared to 33.3 for last year's fourth quarter.

Turning to the full year, income from continuing operations was 36.4 million, or 73 cents per diluted share, down from 44.1 million, or 86 cents per share. A number of events affected the comparability of the years. Income from continuing operations for 2002 benefited from the 10 million pre-tax gain on the receipt of two partial settlements related to our World Trade Center insurance claim. A $2 million non-reoccurring tax benefit also added 4 cents per share. Fiscal 2002 was adversely affected by a 3.2 million pre-tax provision, or 4 cents per share, for costs associated with the elimination of the Chief Administrative Officer, the early retirement of our former Corporate General Counsel, and the replacement of the President of ABM Facility Services. Fiscal year 2003 benefited from the previously discussed acquisitions that were completed in the year, as well as receipt of a full year of revenue and operating profits from the highly successful Lakeside Building Maintenance acquisition in July of 2002.

Sales and other income for the year, as Henrik reported, was 2.26 billion, up 9.4 percent or 194 million from the prior year. As with the fourth quarter, the growth in revenue was primarily due to the 2003 acquisitions plus having Lakeside for a full year. Revenue from other new business was offset by declines due to the cancellation of unprofitable contracts, as well as the general impact of higher real estate vacancies and tight capital budgets. Gross margin for the year was 10 percent compared with 10.3 percent in the prior year. The decrease is primarily due to the first quarter performance of our Lighting and Northeast Janitorial operations. The effective federal and state income tax rate for the year was 33.6 percent compared to 32.2 percent in the prior year. 2002's income tax provision included a $2 million favorable adjustment from the elimination of tax liabilities no longer needed, while 2003, the benefit of such benefits was 900,000. Going forward, I would anticipate that our combined effective tax rate will be closer to 36.3 percent.

Now I would like to discuss the full year performance of each of our operating divisions, before wrapping up my comments with cash flow and balance sheet highlights. For 2003, janitorial sales were up 4 percent to 1.4 billion. This represents 60 percent of ABM's total sales, which is up from 58 percent of the prior year. That increase is due to the previously mentioned acquisitions. Fiscal year 2003 continued to experience a decrease in the demand for tag work for extra services as our customers kept their budgets fairly tight. These services generally earn higher margins; as a result, pre-tax income for the year fell 1.9 percent to 53.5 million from the prior year 54.3 million.

Sales for parking services increased 17.1 percent, or 4.7 percent, to $380 million. Operating profits, however, declined 600,000, or 8.6 percent, from the prior year. Sales increase includes higher reimbursement for out-of-pocket expenses and managed facilities, for which there is no income tax -- no margin benefit, and the acquisition of Valet Parking. As you may recall, under EITF 0114, we are required to report all reimbursements as revenue. The sales increases experienced in the year were partially offset by lower parking lot usage associated with the high office building vacancies in high-tech markets, such as San Francisco and Seattle, and declines in sales at airport and hotel facilities. Operating profits were also negatively affected by increased insurance costs, as well as the effect of the war against Iraq and the outbreak of SARS, which impacted sales at both airport and hotel facilities. The fourth-quarter results includes a $1.0 million settlement for prior services performed at a managed parking lot, and this was offset primarily by a $1 million provision for parking sales taxes for prior years that was based on a sales tax audit.

Sales for the engineering division increased 3.8 percent to 180.2 million, due primarily to sales to new businesses. While existing customers have reduced their spending, we believe there is a potential in engineering services as we view these services as core to facilities management. We are currently exploring expanding into new markets and broadening the scope of services offered. Operating profits decreased 1.1 percent to 9.9 million in 2003 due to several contract settlements and consulting costs related to our plans for expansion.

For the year, the securities services division increased 13.6 percent to slightly less than 160 million due to new business. Operating profits increased 15 percent to 6.5 million. Sales for the lighting division decreased 2.5 percent to 127 million. The operating profits declined 31.7 percent to 5.7 million in the year. The decrease in sales, primarily in the Northeast and North Central regions, was due to fewer retrofit projects and the termination of certain national contracts. Customers, especially in retail, have significantly reduced capital budgets and are spending less on energy-saving devices. The decline in operating profits was primarily due to the lower sales, combined with higher SG&A costs. The Northeast and North Central regions have hired additional managers in several branches and have incurred higher labor-related costs.

Our final segment is our other division, which is combined of the mechanical services and service network facilities. The division for the total was down 26.7 percent in 2003 on sales to 45.4 million, due to again the decrease in capital project works that we've seen. The other segment, however, produced a profit of 1.3 million for 2003, which compared to a loss of 1.2 million in the prior year. The operating loss in 2002, as you may recall, was due to the write-down of work in process, as well as a $1.3 million bad debt provision related to the bankruptcy of Consolidated Freightways.

Turning to our statement of cash flows, cash from operations for the quarter was 11.1 million, which compared to 47.8 million last year. For the year, cash from operations totaled 60.1 million versus 110.9 million in the prior year. The decline from the prior-year results is primarily due to the lack of World Trade insurance proceeds that we received in fiscal year '02, as well as the timing of vendor payments, which has caused a decrease in payables year-over-year and a smaller decrease in our accounts receivable as compared with the prior year. Capital expenditures for the quarter totaled 3.5 million, which compares to 1.7 million in the fourth quarter of '02. On a year-over-year basis, capital expenditures for 2003 was 11.2 million compared with 7.3 million in the prior year.

During the fiscal year, we repurchased a total of 2 million shares as part of our stock buyback program at an average cost of $15.15. Under the current authorization, which expires December 31, 2003, the Company has 600,000 shares remaining, and we look to continue to opportunistically buy in the market. The Board of Directors yesterday authorized management with a new $2 million share repurchase program. This new program will expire at the end of calendar year 2004.

Finally, moving on to our balance sheet, we finished fiscal year 2003 with over 110 million of cash and cash equivalents and no debt. In January, we will be required to make a $34 million estimated tax payment associated with the fourth quarter gain realized on the sale of the Elevator operations. We are very pleased with the strong financial position we are in and believe it gives us a competitive advantage as we continue to explore ways to strategically deploy our capital.

The major asset on our balance sheet continues to be accounts receivable, which declined year-over-year from 296.6 million to 287.9 million, and this decrease goes against sales increase of over $190 million. Our goal continues to be to manage our balance sheet aggressively and to reduce days sales outstanding. DSOs at the end of the year was 51 days compared to 55 days at the end of the third quarter. Our over-ninety-day delinquency decreased during the quarter and the year to $28.2 million versus 31.8 million at the end of third quarter. This represents a 7.6 million decline for the overall year. Our allowance for doubtful accounts is at 6.3 million, which is down slightly from the prior quarter end; however is up over $900,000 from the prior year. Our reserve is considered to be very adequate, especially in view when combined with the decline in our over-ninety-day delinquency.

Finally, our other major item on the balance sheet is our insurance reserves, which at the end of the year finished at 126.6 million, which is up 8.2 million over the year. For fiscal year 2003, you may recall, we increased our insurance charge to our divisions by 20 percent. Most of this increase was related to our umbrella protection as we came off favorable three-year renewals. As you know, the insurance market continues to be exceedingly challenging. With that, let me turn the call back to Henrik, who will give his perspective on our performance and the outlook for 2004.

Thank you, George. We stated in our third quarter conference call that our fourth-quarter 2003 guidance would be 25 cents. I am pleased that we were able to exceed our goal and report fully-diluted EPS of 26 cents. I am also pleased that despite a challenging start to fiscal 2003, the management team made the appropriate adjustments throughout the year, thus enabling ABM to finish 2003 strong and position the company well as we enter fiscal 2004.

I will now briefly describe the operational results for the quarter and highlight some of the areas where we focus for 2004. Janitorial. Results for the quarter matched management's expectations. Solid performance occurred in the southern mid-Atlantic regions, and the Northwest and Northeast continues to experience weaknesses. However, we are starting to see progress in these regions as the new management team in the Northeast repositioned operation and was (indiscernible) making plans for the quarter. For 2004, we project a moderate improvement based on recent business activity, which in my opinion is at a level within janitorial and other business segments that I have not experienced for a long time.

Parking. As I noted in our prior conference call, parking is the division most directly affected by the economy overall. Our fourth quarter performance marked the second consecutive quarter of improvement, which makes us very optimistic about the economic climate. For 2004, we expect parking revenues and operating profits to show significantly improved performance year-over-year, as we anticipate the recent economic performance in the U.S. will lead to a rebound in airport travel and increased lot occupancy in metropolitan areas.

Engineering. We experienced another solid quarter for this organization. The engineering division has consistently demonstrated growth over a number of years and economic cycles. While we downsized (ph) earlier in the year, we are positioned to benefit if the economy continues to improve. In addition, we are continuing to focus on some of the key competitive drivers in this business segment that we believe can provide value to our customers through reduced expenses.

Lighting. 2002 and 2003 were challenging years for our lighting business. The good news, though, was that lighting came in as expected for the quarter, and recent sales wins coupled with the expectation of improved performance in the retail sector gives us reason to be cautiously optimistic that for fiscal 2004, lighting will be able to show an increase in profitability year-over-year.

Security. Security had a good quarter and another rock solid year. With the addition of a major national account, security is demonstrating some of the key competitive advantages that ABM has to offer, namely the ability to effectively bundle different services and do so on a national basis. We anticipate that security will grow operating profits in line (ph) with past performance.

In fiscal 2004, we will continue to utilize our strong balance sheet and positive operating cash flow to improve shareholder value. First, we will continue to position the Company to increase our organic growth opportunities. While past economic conditions were challenging, we continue to secure new contracts. Today, we see an increased level of sales activity across a number of our businesses. We believe our investment technology over the past couple of years will continue to enable ABM to differentiate ourselves from the competition.

Second, we have been very successful in growing ABM's revenues through our acquisition strategy, and will continue to strategically deploy the Company's capital based on sound fundamentals and analysis of financial opportunities through additional acquisitions. And third, we plan to stay focused on increasing values with our dividend plan, which is currently yielding greater than 2.25 percent, and by remaining active in our share repurchase plan. Yesterday after the market closed, we announced a first-quarter (ph) cash dividend of 10 cents, which is 5.3 percent above the per-share quarterly dividend rate paid in 2003. In 2003, it made economic sense to repurchase shares. We will continue to monitor our share price, share dilution and other factors we take under consideration before determining the best use of our free cash flow.

Concerning guidance for fiscal 2004, which is exclusive of any future acquisitions, we believe ABM can deliver greater than 10 percent earnings growth in our current economic environment. We have the operations, a strong balance sheet and management team to support this growth. We therefore expect full-year 2004 earnings per diluted share will be in the range of 80 to 90 cents. Our expectation for the first quarter is fully-diluted earnings per share in the range of 12 to 15 cents. Also, it is important to highlight that while there are the same number of work days in fiscal 2004 on a comparable basis, the second quarter will have two fewer days. This will impact earnings per share for the period by approximately 4 to 5 cents, and therefore, our expectation for the second quarter will be slightly below this year's results.

We are excited about ABM's future growth prospects and believe that we are well-positioned, both financially and operationally, to expand our business, and that we have the vision required to continue to build upon our leading facilities service to (ph) market position. We have a tremendous platform to build upon and look forward to delivering on our goals and our long-term focus of increasing shareholder value. At this time, I would like to open the call for questions and hopefully some answers.

(OPERATOR INSTRUCTIONS) Scott Chinenberger (ph).

Just if you could add any more color to commercial occupancy, how that is working. Any outlook on that?

I think if you look at all the statistics, the occupancy rate has not changed dramatically and will probably be the last part of the upswing that will change. So our (ph) optimism is more based upon internal growth opportunities than decreased vacancies in buildings, and when that time comes, the (indiscernible) looks great.

And for the color on cross-selling opportunities in the business with relationships, and also, just any add-on services in the janitorial segment.

I'm not sure I understood the last part about add-on services in this janitorial segment.

Just the higher-margin additional services that you provide.

The higher margin service, let me start with that, is the first place where we do see a reaction on an improved economy. People's tendency to buy our extra services goes up. On the facilities services, on combined services, we have seen greater activity the last three months than I have seen in my career. So the combined services -- I wouldn't call it cross-selling -- but the combined service opportunities are much greater than they've ever been.

Great. Thanks very much.

David Liebowitz (ph).

Congratulations on a great quarter.

Thank you, David.

Very briefly, two questions totally unrelated. Question number one, there was an item in today's New York Times about various public or municipal buildings going out to private management. Is this an area you have explored at all?

We have very little business in the municipal and in the public area, especially if you talk about janitorial. If that turns into be more commercially run, it will have our interest.

And second of all, how much of the growth over the next two to three years do you expect to come from acquisitions versus internally generated from what is already in place?

I have no clue. But I can be honest with you, David. We are looking at opportunities all the time and the way we are managing this business is we are looking at our internal growth, and when the acquisition comes along, we will add it to our business. But I can't give you a spread here.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

Thank you very much. Have a happy holiday, and we will talk to you after the first quarter's over. Thank you.

This concludes today's conference. You may now disconnect.