ABM Industries Inc (ABM) 2004 Q1 法說會逐字稿

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

Thank you. Good morning and thank you for joining us for our review of fiscal 2004 first quarter, which ended January 31, 2004. I'm Henrik Slipsager, President and CEO of ABM. Also in the room with me today are George Sundby, Senior VP and CFO, Linda Auwers, Senior VP and General Counsel, and Jay Benton, our Chief Operating Officer.

On this call today, George will provide an overview of our financial results for the first quarter and comparable periods. Then I will conclude the call with a few remarks regarding ABM's different business segments, the acquisition of Security Services of America and expectations for the remainder of 2004.

Before we begin, Linda will present the Safe Harbor statement.

Thank you. 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, which will be filed this week with the SEC, Form 8-K, the Form 10-K filed for the fiscal year 2003 and the other filings that we make with the SEC.

Thank you, Linda. One area of business I would like to highlight before I turn the call over to George is our Janitorial Services in the Northeast. As you know, this division was not performing up to ABM standards last year and based on our many years of experience, we took the appropriate steps to improve this division by making key managerial and operational changes. I'm encouraged by the progress our new team is making and I look forward to continued improvement in their financial performance.

Before I give some more details about the first-quarter achievement and future expectations, I would like to turn the call over to George for a review over first-quarter financial results. George?

Thank you, Henrik, and good morning, everyone. I would like to review the consolidated financial results for our first quarter ending January 31 as reported in yesterday's earnings release. Included in the press release are summarized financial segment information for the first quarter. As Linda has indicated, our first-quarter 10-Q will be filed later this week with the SEC.

For the first quarter, net income was 7.2 million, or 14 cents per diluted share, compared with 4.3 million, or 9 cents per share, for the first quarter of 2003. As you may recall, with the sale of the Elevator operations in the fourth quarter of 2003, we reclassified all revenue and expenses of Elevator as results from discontinued operations. As a result, first-quarter 2003 net income includes 588,000, or 1 cent per share, of after-tax income.

Income from continuing operations was also was 7.2 million, or 14 cents per diluted share, in 2004, up approximately 91 percent compared with 3.8 million, or 8 cents per share, in the same period last year. The increase was primarily due to improvements in operating profits in Janitorial, Parking, Engineering and Security, which all achieved double-digit growth over the comparable period.

Additionally, our Other segment, which is comprised of the Mechanical and Facility Services operations, generated a profit in 2004 compared to a loss in the first quarter of 2003. Lighting results were down $62,000 or 9.1 percent.

Sales (indiscernible) other income for the first quarter increased 18.4 million, 3.3 percent, to 570.8 million, up from 552 million. Janitorial experienced the largest increase, as sales from acquired businesses led to a 19.8 million, or 6 percent, increase from the same period last year.

Both Security and Engineering improved as well. Security increased by 3.1 million, or 8.2 percent, while Engineering showed an improvement of 2.5 million, or 5.6 percent.

Due to significantly fewer retrofit projects in 2004 and the termination of certain underperforming national contracts, Lighting sales decreased 6.5 million, or nearly 20 percent.

Sales for the Parking division were slightly lower due to the cancellation of an unprofitable contract last summer with a large metropolitan airport. Parking revenue includes reimbursed costs of approximately $54 million in both periods.

Gross profit margin, which is defined as sales and other income less our operating expenses and cost of goods sold, was 9.5 percent in the first quarter of '04. This is higher from the 8.8 percent for the prior year's first quarter due primarily to the termination of unprofitable contracts as well as one fewer workday in the 2004 quarter compared to the same period in 2003, which favorably impacts profitability on fixed-price contracts in Janitorial.

For the quarter, Selling, General & Administrative expenses was 42.6 million, down slightly from the 42.7 million in the corresponding quarter. Expenses were reduced in Lighting and Mechanical in response to fewer capital projects, as well as cost reductions in other segments. These savings were partially offset by the SG&A expenses from the three acquisitions acquired in the last nine months of 2003 and higher corporate expenses for professional fees primarily related to Sarbanes-Oxley.

Interest expense, which includes line of credit amortization and commitment fees for the revolving facility, was 300,000 for the first quarter compared to 100,000 in the prior period. The increase was due to the expansion in 2003 of the line of credit to $250 million.

The effective federal and state income tax rate for 2004 first quarter was 36 percent, compared to 32.6 percent in the first quarter of '03. The increase was due to the fact that the same level of estimated federal tax credits were applied to a higher level of income in '04. For the remainder of the year, I would anticipate a combined effective tax rate of 36 percent.

As Henrik mentioned, yesterday we announced that ABM has entered into an asset purchase agreement to acquire substantially all of the operating assets of Security Services of America, also known as SSA, for initial consideration of 40.7 million plus the assumption of liabilities totaling $300,000. Additional consideration will include contingent payments equal to 20 to 25 percent of earnings before interest and taxes for each of the years in the five-year period commencing on the closing date.

Based on SSA's 2003 year operations, which generated revenue of $90 million, and factoring anticipated contingency payments, the multiple in this deal is eight to nine times earnings before interest and taxes. However, additional expenses will be incurred as we improve insurance coverage and hire additional personnel to strengthen internal controls and integrate certain aspects of SSA's operations. With approximately 60 percent of the fiscal year remaining, the accretive impact to current-year earnings per share is estimated at 2 to 3 cents per share.

Turning to the statement of cash flows, cash from continuing operations for the quarter was 14 million compared to 17.5 million last year. The decline from the comparable period is due primarily to an increase in trade Accounts Receivable.

Capital Expenditures for the quarter totaled 2.1 million, which compares to 2.7 million in the prior year. We anticipate our quarterly Capital Expenditures to be in the range of 2.5 to 3.5 million for the remainder of the year.

Turning to the stock repurchase program, during the first quarter, we repurchased a total of 100,000 shares at an average cost of $16.90. Under the current authorization, which expires at December 31, 2004, the Company has 2 million shares remaining. We expect to continue to use our cash flow to opportunistically repurchase shares in the market from time to time.

Moving to the balance sheet, we continue to have a very strong financial position with over 90 million of cash and cash equivalents and no debt. The increase in our cash position from year end was primarily due to 30.5 million payment of estimated taxes primarily related to the gain on sale of the Elevator segment in 2003.

The major asset on our balance sheet continues to be Accounts Receivable, which, on a gross basis, increased just over 3 percent quarter-over-quarter, from 294 million to 304 million. DSOs at the end of the quarter is under 54 days, compared to slightly over 51 days at the end of the year.

Over 90 day delinquencies decreased 5.7 million, or 20 percent, to 22.5 million versus the 28.2 at October 31, 2003. Our allowance for doubtful accounts is at 6.7 million, which is up slightly from the prior quarter end.

Insurance reserves at January 31 were 130.1 million, which is up 3.5 million from the prior quarter. For fiscal year 2004, we increased our insurance charge to our divisions by 9.1 percent. Most of this increase was related to the cost of our Workers' Compensation program. Generally speaking, pricing in the insurance market remains firm.

With that, let me turn the call back to Henrik, who will give his perspective on our quarterly performance and the outlook for the remainder of 2004.

Thank you, George. In our last conference call, we (indiscernible) a number of steps that ABM took in fiscal 2003 to position the Company for future growth and expansion. In addition, we provided guidance for the first quarter of between 12 and 15 cents per share. I am pleased that, in Q1, ABM successfully met its EPS objectives by earning 14 cents and the highest amount of revenue recorded for a first quarter in ABM's history.

I will now briefly describe the operational results for the quarter and highlight some of areas we have focus on for the remainder of 2004.

Janitorial -- results for the quarter slightly exceeded management's expectations. (indiscernible), most regions were at or above plan for both revenue and profits. Our recent acquisition contributed as we expected. I'm pleased with the positive momentum generated by the Janitorial division and will continue working with the team on expanding market share. As I noted in our previous conference call, moderate growth is a reasonable expectation for this division.

Parking achieved higher revenue than planned but slightly below our expectation of profit. Nonetheless, results were much improved versus Q1 2003. We expect improvement for the remainder of 2004, 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 -- our Engineering division had an excellent first quarter and continues to impress. Sales and profit were above plan, as the division secured new business. We are continuing to focus on some of the key competitive drivers in this business segment and are targeting new customers.

Lighting -- another difficult quarter for this division as the expectations for capital project work did not materialize. The division did a good job of reducing expenses and bidding activity remains strong. However, until the retail sector and other customers of Lighting release their flow of capital for retrofit projects, performance of this division will be adversely impacted.

Security had a good quarter. Its operating income increased 10 percent compared to last year and was on plan. To strengthen our fastest-growing segment, we announced yesterday that we decided a definitive agreement to acquire the operations of SSA, a North Carolina-based company that provides (indiscernible) investigative security services. SSA, as it is referred to, is a perfect complementary fit with our American Commercial Security Services. Combined, the two will give ABM a nationwide security company, which is important, as customers move their business to national accounts. With this acquisition, ABM will be one of the largest American-owned security companies.

Although an accretive transaction, there are some incremental costs required to bring SSA compliant with the ABM government (ph) standard, as George mentioned. I believe the synergies created by the combination will be significant in the long term.

Concerning guidance for the remainder of 2004, we believe, based upon our first-quarter performance coupled with the SSA deal, that ABM can deliver earnings in the range of 85 to 90 cents per fully diluted share.

For Q2, we expect to earn in the range of 15 to 18 cents. It is important to highlight that fiscal 2004 will have one fewer day compared to fiscal 2003. The first quarter had one fewer day compared to the same period last year. The same quarter has two more days and the third and fourth quarter have one fewer days each compared to the same period last year. The reason I bring that up is because how it relates to Janitorial labor expense on fixed-price contracts.

For the second quarter, we believe the two more days will have a negative impact on our fully diluted earnings by approximately 4 cents.

We are excited about ABM's future growth prospects and as a company, we are well positioned to benefit as the U.S. economy recovers. We will continue to use our operating cash flow to (indiscernible) shareholders through long-term investments in our solid platform, accretive acquisitions, such as SSA, dividends, and stock repurchases. I look forward to delivering our goals for 2004 and beyond.

At this time, I would like to open up the call for questions and answers.

(OPERATOR INSTRUCTIONS). David Gold (ph).

Good morning. George, can you go over again the terms of the SSA acquisition? I'm sorry, I caught some of it but you are a little quick for me.

Sure, it's early, at least out here! With regard to the transaction, SSA in 2004 generated approximately $90 million of revenue. Because they are equity investors, we are making a large down payment -- approximately 90 percent -- which is equal to about $40.7 million. Then, as we do with all of our transactions, there is a component based on an earn-out over the five-year period to incentivize the management to become a part of our team. They will receive 20 to 25 percent of adjusted earnings before interest and taxes.

I guess you commented that you're going to do a little bit of investment there by way of I guess suring up the insurance and some other investments. Do you have a handle on how significant that could be?

Well, we factored it into our accretive earnings for the remainder of the year but as we find when we do a lot of acquisitions, to be part of a publicly held company, we need to strengthen internal control and then our insurance coverages are usually well beyond what a small operator might have, and so we factored that in. So that's why the multiple on the prior-year earnings is probably 8 to 9 percent but our first-year return will be less than that.

That's fair. Henrik, can you just give us a little bit of color? I guess, over the last several months, we've been focused on buying in the Janitorial space, and this is a little bit of the shift and obviously the Security business looks like it's a little more expensive than some of the Janitorial acquisitions you've done. Going forward, the thinking now -- should we expect to see you buy more in the Security space? Are you back to Janitorial, or is it just opportunistic?

No, I think we made very clear our goals were to invest in two or three of our businesses, large businesses. Among them was Security. The reason I like Security is there is some growth expectation in that marketplace that exceeds the growth expectation in general in the marketplace in Janitorial and other services.

Also, this particular acquisition put us in a situation that we truly are nationwide, which we had not any other possibility of becoming before. So, in general, we will still be focusing on janitorial acquisitions but also security and hopefully one or two of our other lines of business.

That's helpful. Lastly, George, can you give me a number for revenue that was acquired during the quarter? I don't mean acquired during the quarter, but I mean acquisition-related revenue in the 571 million?

Yes, we did three acquisitions. Horizon was done actually on January 31st, so there was no impact on last year's first quarter. Additionally, we had valet parking that was done in April and then the acquisition of HGO, the premier janitorial operation in Philadelphia. Revenue associated with those three operations was about $25 million.

I got you. Okay, thanks a lot.

Kevin Monroe.

Good morning. A couple of questions -- on the Parking side of the business, your revenue growth turned negative after several quarters of positive growth. Any particular reason for the downturn there?

The major item, which I commented on, was we terminated a contract last August with an airport. It generated a lot of revenue for us but the profit return wasn't what we expected, and so we terminated that contract.

So that will continue to be a drag for the next --?

Quarter-over-quarter, it will impact us really throughout the year.

Same kind of question for the Security business -- I mean, it was the fastest-growing segment, as it has been again this quarter, but it slowed down a bit from the double-digit range it had been doing. Any particular reason for the slowdown on the Security side of the business?

Well, yes. There was a lot of new contracts that we expected to get but due to the change in the alert level right around Christmas, there was a lot of delays in new contracts and very few companies change contractors during high alert times. So, we still have great expectations for the future of this.

Was there a contract -- George, you mentioned there was a contract lost in that segment? (multiple speakers).

Not in the Security area.

Will Marks.

Good morning, George and Henrik. A quick couple of questions -- the acquisition -- did you give any kind of bottom-line number so we can figure out a multiple of EBITDA or operating income?

No, we didn't.

Okay. Can you comment at all on that?

Well, basically what I said was, if you look at their '03 performance, the multiple of EBIT was about eight to nine times. But as I commented earlier, we're going to have to add some additional costs as we bring them up to a public company, ABM standards.

Will Marks. Okay. Should we just assume that, given the number you gave on the costs, that the cash that you report at year-end is reduced by that amount and no more -- I'm sorry, not year-end but January 31st?

That would be correct. We haven't closed the transaction; it's actually scheduled to close this Saturday with funding on Monday, at which time we would make the $40 million payment.

Just one other question on Parking -- did you give a breakdown of what was reimbursement, or could you if you didn't in the press release? I didn't see.

I did in my oral comments. It was 54 million in both periods.

Scott Schnieberger (ph).

Good morning, guys. Any pick-up in tenant occupancy in the buildings that you serve? Any comments on that?

We have not seen a tremendous change yet in the tenant occupancy. We sure hope it's going to show up soon but in general, we've not seen a major change, no.

Okay, thanks. In the SSA acquisition, in the press release, you labeled it as guard services and other investigative security services. Is this branching out a lot from your core guard business, or is more of the same? Could you just talk a little bit on that please?

It's branching out a little but from our core business but also, we felt that if we wanted to be a true nationwide player, we could not only come in with unarmed guard services in isolated areas such as downtown areas and commercial properties. We have decided strategically we want to be a player in this marketplace and therefore, you have to expand your service levels somewhat.

Okay, thanks. Assuming the run-rate of 90 million, that will pop you from about a 160 million revenue run-rate to 250 million. What type of margin should we look for, going ahead? You mentioned it would be accretive but there would be a little bit of investment. What should we be expecting for '04 and beyond margin-wise in the Security business?

Well, first of all, I would love to have a situation where we actually have closed a deal before I want to go into details (indiscernible) combined operation is going to do. We are, as you heard from George earlier, investing some money in the infrastructure of the business. But I can only say, in general, we expect the margins of the Security business to equal or be better than the average of our other businesses.

Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Pat English (ph).

Good morning. Henrik, could you do a little bit more detail by region in the Janitorial Services area and then maybe talk generally about how much opportunity there is in Janitorial Service, getting back to more normalized operating activity there?

(indiscernible) it's all (indiscernible) very, very decent quarter. Sales year-over-year and quarter-over-quarter was (sic) up by 6 percent, of which some of it was associated with acquisitions.

On a market-by-market area, we did see remarkable improvements in the Northeast. It's easy to have those improvements because we had a pretty bad first quarter last year. But in general, I would say the rest of the areas showed pretty much results on or slightly above expectations, so overall, I think we have a very, very stable operation right now. We are somewhat more active in the bidding process than we've been in the past, and it's my hope that we will be growing, particularly in the industrial side, because on the commercial side, we do have a pretty big market share but on the industrial side, we have tremendous opportunities that we still haven't tapped yet, in my opinion.

Any sense that a downturn weakened competitors, such that in your bidding activity, the pricing is perhaps a little better than it was a year or two ago?

We've talked pricing many, many times. I've been in the business unfortunately for many years. We always feel that the pricing this year is little worse than last year. I don't think that there's major changes in the pricing structure. It's very regionally based and you will have regional competitors being very aggressive in a particular market for a particular period of time, but I don't see any major changes, no.

Then finally, just a qualitative comment on the Northeast. How far below optimal levels is that running right now? I know it's in a recovery mode. How much opportunity is there?

A lot!

There are no further questions at this time.

Okay, thank you very much for listening to our call and we look forward to talking to you in three months. Thank you.

Thank you for participating in the ABM industries Inc.'s first-quarter earnings results conference call. This concludes today's call. You may now disconnect at this time.