ABM Industries Inc (ABM) 2004 Q2 法說會逐字稿

Good morning. My name is Hazel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ABM Industries' second quarter earnings 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. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Slipsager, sir, you may begin your conference.

Thank you. Good morning and thank you for joining us for our review of fiscal 2004 second quarter results ended April 30th, 2004. I'm Henrik Slipsager, President and CEO of ABM, joining you from New York. And joining me from San Francisco are George Sundby, Executive VP and CFO, Terry Petty, Executive VP and Chief Operating Officer, Dave Benton, Executive VP and Linda Our (ph), Senior VP and General Counsel. On this call today I will provide of our operational results for the second quarter and then George will review detailed financial results for the quarter and the first six months of fiscal 2004.

I'll then conclude the prepared remarks section of this call with a summary of the operational aspects of our earnings for the quarter, as well as discussing our strategics for the remainder of fiscal 2004.

Before we begin, I would like Linda to present the Safe Harbor Statement. Linda.

Thank you, Henrik. Before we begin, I need to tell you that our presentation today contains predictions, (inaudible) and other leading 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, Form 8-K and the Form 10-Q for the second quarter that we will file shortly.

Thank you, Linda. In the second quarter of fiscal 2004 we achieved record revenue of over $590 million and continue to experience very strong operating cash flow. Our GAAP earnings were 14 cents per diluted share. This includes 3 cents of non-cash amortization expense for 2003 and year-to-date 2004. We will grow within our quarterly guidance of 15 to 18 cents, if you exclude this (indiscernible) expense.

During the quarter, we had a number of significant achievements. As you know we strengthened our position in the growing security industry with the acquisition of Security Services of America. With an increased awareness of security risks, this industry continues to grow as more companies and institutions turn to outsourcing Security Solutions. In the quarter, we also achieved a number of new contract wins across our Janitorial, Engineering, and Parking (ph) business lines as well as renewing a number of existing accounts.

We added a number of talented people so we will be able to grow operations and management during the quarter and I'd like to specifically highlight the addition of Terry Petty, our new Chief Operating Officer.

Terry brings a wealth of knowledge and experience that will be invaluable to ABM as we continue to seek innovative ways in which to manage our business and expand our service capabilities.

We are pleased with our operating results for the first six months of fiscal 2004 to the majority of our service and operations. We did, however, continue to experience weakness in our lighting divisions, but believe we have taken the proper steps to increase profitability.

But before I get into more discussions of our lines of business and what we expect for the latter half of 2004, I would like to turn the call over to George for a review of our financial results. George.

Thank you, Henrik, and from San Francisco, I would like to wish everybody a good morning. I'd like to review our consolidated financial results for the second quarter and six months ended April 30, as reported in yesterday's earnings press release. Included in the release are summarized financial segment information for the two periods. Our second quarter Form 10-Q is scheduled to be filed later today with the Securities and Exchange Commission.

First. Turning to the second quarter, net income was 6.8 million or 14 per diluted share, compared to 9.9 million or 20 cents per diluted share for the second quarter of 2003. As you may recall, with the sale of the Elevator operations in the fourth quarter of 2003, we have reclassified all revenue and expense of Elevator as income from discontinued operations. Second quarter net income in 2003 includes 644,000 of after-tax operating income from Elevator or 2 cents per diluted share.

Please note that we have independently calculated the first share amounts for net income and income from continuing operations for the 2003 periods. And this results in the per-share impact of the income from the Elevators division.

Turning to income from continuing operations for the quarter was 6.8 million or 14 cents per diluted share, down 2.4 million or 27 percent compared to the 9.2 million or 18 percent -- 18 cents per diluted share in the same period last year. The decline is due to lower earnings in Janitorial and lighting which were partially offset by continued improvements in the operating process, in our parking, security, engineering and our other segment. All which achieved double-digit growth over last year's second quarter.

Lighting continues to be impacted by lower sales due to the continued lack of capital project-related work. The Janitorial decline was primarily caused by two extra days of labor in this year's second quarter versus last year's second quarter that impacts the profitability of our fixed-price Janitorial contracts. Based on approximately 1.8 million of pre-tax labor per day for fixed-price contracts, the impact on earnings of the two extra days is about 5 cents per diluted share.

Second item which impacted Janitorial and, to a lesser extent, Parking relates to the Company's recent adoption of emerging issues tapped for Statement 02-17, Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination.

This statement requires the Company to value acquired customer intangibles using the expected life of the relationship versus the previously used contractual life. This pronouncement was effective for all acquisitions completed after October 25th, 2002. With the late adoption of this accounting pronouncement in the second quarter of 2004, ABM was required to make a catch-up adjustment of $900,000 after-tax or 2 cents per diluted share for the amortization related to the 2003 fiscal year and first quarter 2004.

I will have further comments on the adoption of EITF 02-17 later in my presentation.

Sales and other income for the second quarter of 2004 increased 27.8 million to 590 million or 4.9 percent (indiscernible) from the 562 million for the second quarter of 2003. Security experienced the largest increase through sales from the acquired SSA businesses led to a 13.1 million or 33 percent increase for the same period last year.

Janitorial, Parking, and Engineering improved as well. Janitorial increased by 11.8 million or 3.4 percent while Engineering showed an improvement of 4.9 million or 11 percent. Parking increased $2 million or 2.2 percent.

Due to the continued fewer retrofit projects in 2004, lighting sales decreased 4.6 million or 13.8 percent. Parking revenue for reimbursed costs include $52 million (technical difficulty).

Turning to gross profit margin which is defined as sales and other income, less operating expenses and cost of goods sold was 9.7 percent in the second quarter of 2004. This was lower from the gross profit of 10.2 percent for the second quarter of 2003, primarily due to the two more work days in the second quarter compared to the same period last year that negatively impacted the fixed-price contracts and Janitorial. The impact was about $3.7 million pretax.

For the quarter, selling, general, and administrative expenses were 43.9 million compared to the 42.3 million for the corresponding three months of 2003. Expenses were reduced in Lighting and Mechanical in response to fewer capital projects, as well as cost reductions in other segments. These savings were offset by SG&A expenses from the three acquisitions acquired in the last half of 2003 and the acquisitions in the second quarter of 2004.

For improved clarity, we have segregated (ph) the intangible amortization expense in our income statement. Amortization expense in the second quarter of 2004 totaled 2.5 million compared to $300,000 in last year's second quarter. The second quarter of 2004 includes 1.5 million in expense associated with the previously discussed catch-up adjustment.

The effective state and federal income tax rate or income from continuing operations is 35.4 percent for the second quarter of 2004, compared with 36.4 percent for the second quarter of 2003. The decrease was due to the effect of the same level estimated federal tax credits supplied to a lower level of pre-tax income.

Turning to the six months, net income was 13.9 million or 28 cents per diluted share, compared with 14.2 million or 29 cents per diluted share for the six months of 2003. Net income includes 1.2 million of after-tax income or 3 cents per diluted share from the discontinued Elevator operations.

Income from continuing operations was 13.9 million or 28 cents per diluted share, up 900,000 or 7.2 percent compared to the 13 million or 26 cents per diluted share in the same period last year. The increase is primarily due to the impact of business acquired after April 30, 2003, and higher earnings in Parking, Security, and Engineering, which were partially offset by declines in Lighting and Janitorial.

Sales and other income for the first half of 2004 increased by 46 million to 1 billion, 161.2 million for a 4.1 percent increase. With the exception of Lighting, all operations generated higher sales, primarily from business acquired after April 30, 2003.

Gross profit margin was 9.6 for the first half of 2004 which compares with the 9.5 gross profit for the first half of 2003. And this is a result of primarily lower expenses in the Northeast region of Janitorial and the termination of unprofitable contracts, partially offset by one more work day in the first half of 2004 compared to the same period in 2003 that unfavorably impacts fixed-price contracts in Janitorial.

For the first half, Selling, General, and Administrative expenses were up slightly by 1.7 percent, primarily due to the impact of the acquisitions. Intangible amortization expense for the first half of 2004 totaled 2.8 million compared to 600,000 in 2003. The 2004 number includes 900,000 in catch-up from the 2003 acquisitions for the 2003 fiscal year.

The effective state and federal tax rate from income from continuing operations for the six months is 35.7 percent compared to 35.3 percent in the first half of 2003.

For the remainder of the year, I would anticipate a combined effective tax rate of approximately 36 percent.

Turning back to acquired intangibles. As previously discussed, our second quarter and six-month results include the amortization of customer-related intangible assets acquired in the three acquisitions completed in fiscal 2003 and the two acquisitions completed in the second quarter of 2004. As previously discussed, the EITF statement requires that the expected life of the customer relationship be used in establishing the acquired intangible assets versus the contractual life of the acquired contract, which had been the Company's purchase accounting practice for the past several years.

The evaluation of each acquisition. We determined the acquired operations expected customer life will be in the historical annual attrition or the average life for the acquired customers. This information, combined with an expected cash flow from that customer portfolio, provides a discounted cash flow evaluation to be computed to derive the value of the acquired intangible.

The amortization of the intangible is over the life used in the valuation (ph) on a declining balance methodology. This means that the amortization declines over the portfolio life which parallels the expected economic value to be derived. This is also referred to as some of the year's digit amortization methodology. As an example, for a 12-year life, first-year amortization is computed as 12 over 78 or 12 represents the remaining years, while 78 represents the sum of the digits one through 12th. For first-year amortization, we would have an expense of roughly 15.4 percent of the intangible.

It is important to know that there's no impact on the cash flow of the Company, as these items are already being amortized over 15 years for income tax purposes. In essence, the accounting change is similar to impact that we had when goodwill was amortized.

The catch-up in the second quarter was the result of our not identifying the impact of this new standard on a timely basis. Formal procedures have been put in place to promptly identify new and pending accounting pronouncements and their impact on the Company. Ultimately, a new assistant controller will be hired to assume these tasks as their first priority.

Turning to the statement of cash flows, as from (ph) continuing operations for the second quarter was 22.3 million compared to a use of cash of $500,000 in the second quarter last year. For the six-month periods, cash continuing operations totaled 36.3 million compared to 16.9 million in the comparable 2003 period. The increase from the comparable periods last year is primarily due to the higher collection of sales in accounts receivable.

Capital expenditures for the quarter totaled $4 million which compares to $2.7 million for the second quarter of 2003. We anticipate that our quarterly capital expenditure rate to be in the range of $3 to $4 million per quarter for the remainder of the year.

Turning to our stock repurchase program, during the quarter, second quarter, we did not buy any stock. For the six months, we have purchased a total of 100,000 shares at an average cost of $16.90. Under the current authorization from the Board, which expires 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 on to our balance sheet. We continue to have a very strong financial position with over 60 million of cash and cash equivalents and no debt. The decrease in our cash position from the $90.7 million at the end of the first quarter was primarily related to the 44.2 million of cash payments made on the SSA and initial acquisitions.

The major asset on our balance sheet continues to be accounts receivable, which on a gross basis decreased just below 2 percent quarter over quarter from 304 million down to $298 million.

Day sales outstanding at quarter end is under 51 days compared with slightly over 54 days at the end of the first quarter. Our over 90 day delinquency decreased $4 million dollars or 18 percent to 18.5 million versus the 22.5 million at the end of the first quarter. This is the first time since October 1998 that our over 90 day AR balance is below $20 million. Our allowance for doubtful accounts remains at $6.7 million. Insurance reserves at April 30 totaled 132.6 million, which is up 2.5 million from the prior quarter.

For the first half of 2004, insurance reserves have increased $6 million as we increased the charge to our operations by 9.1 percent. Most of this increase was related to the cost of our workers compensation program.

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

Janitorial. Our Janitorial operation exceeded the revenue gross for the quarter and year-to-date. Quarterly and year-to-date profits, excluding the non-cash intangibles and amortization expense, is likely to hit our plan (ph) as well. Despite additional work days in the quarter as compared to last year. One additional work day on a year-to-year basis and slightly higher SUI cost.

Contribution from Horizon and HGO were solid as these acquisitions are performing as we expected.

(indiscernible) Janitorial we acquired in early April to strengthen our margin leading positions in several Northeastern cities and expand all operations in Connecticut as mentioned was with our North East operation. And they integrated this proceeding at a good pace.

During the quarter the Northeast under its new leadership continues to make good progress for operational growth with the ongoing elimination of unprofitable contracts and focus on jobs in the Manhattan area. The debt revenue increase from continual operations in Janitorial came from Northern and Southern California. The Greater Bay Area, which was severely impacted by not only the national recession but also by the (indiscernible) is starting to show signs of growth. Janitorial will gradually benefit as this economic turnaround continues to take shape.

Parking. Parking had a very good quarter. As the operation was most directly affected by the economy and without the lag, the effect experienced by other operations continues to keep us optimistic about the economic recovery. We saw an improvement in our airport sales for increased activity at airport locations. This is truly a good sign and we are expecting this trend to continue as more jobs are created by the expanding economy.

Security. Security had a very strong quarter. Separation of (indiscernible) growth and sales and operating profit due to organic growth, and 45 days of sales from Security Services of America. The SSA acquisition security operation as a top (indiscernible) supplier of security services on a national basis. We're very excited from the initial results we have seen from SSA and remain confident that, longer term, ABM will benefit from having expanded our geographical operations and constant base throughout this strategic investment.

Engineering. In September 2003, I spoke how the engineering operation had downsized in certain jobs without sacrificing opportunity of growth once the economy rebounded. In subsequent conference calls, I continue to focus on this theme. So we are gratified with the significant growth in sales and operating profit and engineering compared to prior years. The growth resulted from new accounts and new operations has good momentum hitting into the second half of the fiscal year.

Like Janitorial an improving business climate will benefit engineering operations as commercial and industrial (indiscernible) see gradually decline.

Lighting. Our Lighting operations became underperformed as a capital project where it did not materialize in any meaningful way and expense reductions although severe were not enough. First we announced that Eric Lazear rejoined ABM as president of Lighting. As you may recall, Eric ran on (indiscernible) Elevator. In addition to making changes within the management structure he is currently evaluating (indiscernible) accounts to determine how to improve profitability. We continue to aggressively market (indiscernible) increases in sales and operating products. (indiscernible) city of Dallas and city of (indiscernible) in Texas to replace traffic signal lights with more energy-efficient (indiscernible). The reason for (ph) all these contracts, service assessments of the quality of maintenance and savings that were initially achieved in the pilot program that began in 2002.

In addition, we continue to grow and monitor expenses and look for ways in which we can reduce operational and overhead costs without compromising the level of service.

Primary (ph) and facility services. Primary results as the lighting and include level of capital project work. And so we see improvement in this area, operating results were made under pressure. Facility service was not a positive performance for the quarter and is very near operating profit grew from new accounts.

In concluding my remarks, on the operation performance I want to emphasize that on a consolidated basis the quarter and first half of the fiscal year went according to plan. We have very good momentum for the first quarter. We will accomplish our goals for the remainder of fiscal 2004. We will first continue to utilize our strong balance sheet (indiscernible) operating cash flow to include our organic growth opportunities, with renewals and the security of new contracts. Today we see an increased level of sales activity across a number of our businesses. We believe our investment technology, our national presence, our outsourcing capabilities, the operation's strength enable ABM to differentiate ourselves from the competition.

Second. We have been very successful in growing ABM's revenue profits through our acquisition strategy and we continue to strategically deploy the Company's capital based on sound fundamentals and the analysis of opportunities through additional acquisitions.

And third, we plan to stay focused on increasing value without dividend plan which is currently yielding greater than 2 percent in our share repurchase plan. Yesterday we announced that our quarterly dividend which will be paid in August 2nd, this will be the 151st consecutive dividend paid by ABM. We will continue to monitor our share price, share dilution and all of the factors which are under consideration before considering the best use of our free cash flow.

In providing guidance for fiscal 2004, which is exclusive of any future acquisitions that includes approximately $1 million of non-cash intangibles amortization expenses in the second half of the year, we expect to earn 80 to 85 cents. For our fiscal third year quarter we believe 24 to 27 cents per diluted share. We are excited about ABM's strategic growth prospects and believe that we are well positioned both financially and operationally to expand our business in what we believe will be a period of continued economic growth. We look forward to delivering on our goals and our long-term goals of increasing shareholder value.

At this time I would like to open the call for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). David Gould (ph) of Sidoti & Co.

Henrik, can you speak a little bit on the progress that you're making in Janitorial, particularly in New York with the -- I guess relatively recent management pain change there and some of the contracts that you've rolled off?

Yes, David, I'll be happy to do so. We have over the last 12 months changed the management team here, a number of new faces, but the leadership especially has been changed. And we've been successful both in getting new accounts. I can't name names but in regard to various good accounts in the financial industry and we've been able to get out of some of the long-term contracts that were signed up by former management. Former management, though, also signed up contracts at a time when the economy was better so when you're in a period of time where which we've been after 9/11 with declining tenant sales, it did have a negative impact on our existing accounts.

So we either have been able get rid of most of those or to get the increases to offset some of the negative profit providers.

Okay, so you feel that -- made some pretty good progress?

I think they made tremendous progress. I am personally amazed at the progress that was made, the problems were pretty deep. They've solved them and I think we have a wonderful future in New York.

Okay, this is clearly profitable in that division now?

It is getting there.

Okay. And then on Lighting, if you could just speak a second. I know, I guess you talked a little bit toward some of the changes you might be able to make. But is that business going to be more a reflection of a change in your direction or waiting for these capital projects to come back or some mix?

Well, as you know, we changed leadership in the division and I think that's the first step. We are changing the focus a little bit. We are trying to get away from being 100 percent retail-dependent. And I named some examples of areas in which we are -- have seen sales in this quarter on these traffic lights in Texas. The key thing for us is to make sure that we have an organization in infrastructure that exactly fits the marketplace. And I don't think we have that right now but we will have it soon. We are not going to sit back and wait for the market to come back. That's for sure.

Okay that's all right. That's helpful. And then, George, do you have a number of acquisition-related revenues in the quarter?

Yes. Good morning, David. Revenue from the acquisitions in the second quarter totaled about $29 million. This would be the impact of those acquisitions made after April 30. So on a comparable basis.

Okay, perfect, thank you.

Thank you.

Kevin Monroe of Thomas Weisel Partners.

Morning. Just wondering if you could give me a little more detail on the kind of the internal growth in the acquisition contribution? How much was from SSA? And how much was from that Janitorial acquisition you made?

Good morning, Kevin. With regard to Janitorial, we'd picked up about 12.7 million of revenue in the second quarter from the HGO acquisition that was completed last August. And then, one month of revenue from the initial acquisition that closed in April. And then, with regard to Security, we closed Security Services of America mid-quarter March 14th and that operation generated 11.8 million of revenue.

Okay. The engineering business. You had a pretty strong acceleration of growth there. And that's all internal growth, I believe, so what's kind of the big driver going on in that business?

There's two or three things that's going on in that business. First of all, we tried to explain, we have been able to maintain most of our jobs when the economy went down. And in that process, we had some cutbacks in the existing job sites with activity coming back to normal. We have now increased that labor back and we've also been very successful in adding two or three new major accounts. Some even start in the second quarter so we expect to see continued good results in Engineering at least for the year. It's a very, very, very positive development in that division.

Good. And going forward in the third and the fourth quarter, are any extra or less days?

Yes. We have one less day in the third quarter. We have one less day in the fourth quarter, compared to same period last year.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions, Mr. Slipsager. Are there any closing remarks?

Well, thank you very much for listening to our conference call. Have a wonderful day.

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