ABM Industries Inc (ABM) 2005 Q1 法說會逐字稿

At this time I would like to welcome everyone to the ABM Industries first-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.

Good morning. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are George Sundby, Executive VP and CFO; Terry Petty, Executive VP and Chief Operating Officer; and Linda Auwers, our Senior VP and General Counsel. On the call today I will provide an overview of our operational results for the first quarter ended January 31, 2005. George will discuss our financials in detail and then I'll conclude our prepared remarks with a summary of our operational achievements for the quarter as well as provide an update on guidance for fiscal 2005. Before we begin I would like Linda to present the Safe Harbor statement.

Thank you, Henrik. 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, forms 8-K and the Form 10-K that we filed earlier this year with the SEC.

Thank you, Linda. We are really pleased with our first-quarter results. During the past year we brought in new management in targeted areas, combining ABM's newest team members with our existing (indiscernible) enabled the Company to continue executing on our growth plan. We made changes to our sales force to secure new customer accounts and more attractive contract renewals. We have continued to eliminate unprofitable contracts across business units and we have continued to make strategic, complementary and accretive acquisitions.

Our strong first-quarter performance is the result of the investments we made in our business. In the first quarter revenue increased 13.4% from the same period last year. Net income for the quarter increased over 25% to $7.9 million or $0.16 per diluted share, up from 6.3 million or $0.13 per diluted share in 2004. This was at the high end of our range we previously provided.

All of our operating units, excluding the segment known as "other", experienced gains in both sales and operating profits and our lighting business performed ahead of expectations. Last year we made some management changes and the combination of a strengthened and refocused sales force and better closing rates we saw an over 10% increase in lighting sales. We also improved our gross margins and decreased our SG&A as a percent of sales due to more profitable acquisitions, new business and the continued elimination of unprofitable contracts.

During the quarter we acquired Sentinel Guard Systems, a provider of security officer services primarily to high-rise commercial and residential structures. Sentinel generates over $13 million in annual revenue and significantly enhances our market position in California, especially in Los Angeles and San Francisco.

We also acquired Colin Service Systems, a New York-based provider of professional on-site management, commercial office cleaning and specialty cleaning services that generates over $70 million in annual revenue. Colin expanded our existing facility service offerings in the Northeast, particularly strengthening operations throughout New Jersey, Washington D.C. and Long Island.

Additionally, our cash flow from continuing operations increased approximately 6% year-over-year. We ended the quarter with nearly $63 million in cash and cash equivalents with $35 million in working capital and no debt. We believe that we have the right combination of service, sales, infrastructure and financial strength to capitalize on the recent improvement in commercial office occupancy and an improving economic climate in the United States.

Before I get into more detailed discussions of our operating segments, I would like to turn the call over to George for a review of our first-quarter financial results.

Thank you, Henrik, and good morning, everyone. I'd like to review the consolidated results for our first quarter ended January 31 as reported in yesterday's earnings release. Included in the press release, our summarized financial segment information. Our quarterly report on Form 10-Q is scheduled to be filed later this week with the Securities and Exchange Commission.

As Henrik reported, for the first quarter net income was 7.9 million or $0.16 per diluted share compared to 6.3 million or $0.13 per diluted share for the first quarter of 2004. Net income increased 25.1% for the first quarter due to recent security and janitorial acquisitions and internal growth generated by sales to new customers and increased sales to existing customers. All segments, with the exception of "other", showed gains in both sales and operating profit.

Security was the leading performer with a 78.9% increase in revenue and a 109% increase in operating profit. Parking, engineering and janitorial also turned in solid performances for the quarter. However, janitorial was impacted by one more workday in the first three months of fiscal 2005 which increased pretax labor costs by approximately 2.2 million. As the number of work days shift from quarter to quarter we will experience the negative and positive impacts on our fixed-price janitorial contracts. In the second quarter our janitorial operations will have one fewer day of labor expense compared with the second quarter of 2004.

As Henrik mentioned, sales and other income for the first quarter of 2005 increased 13.4% to 647.4 million from 570.8 million in the first quarter of 2004. Acquisitions completed in fiscal '04 in the first quarter of '05 contributed 43.4 million of the increase. Security experienced the largest increase of 32.2 million from the same period last year due to the SSA and Sentinel Guard acquisitions which contributed 29.2 million of the increase. Janitorial sales increased 7.3 million or 25.5 million -- 7.3%; excuse me, or 25.5 million. The increase was due to 14.3 million from the initial acquisition completed last April and the Colin Services acquisition as well as new business really across all regions.

Engineering showed an improvement of 9.9 million or 20.5% also from both new business and additional sales to existing customers more significantly in Northern California. Parking was up 7.3 million of which 4.5 million was from higher reimbursed cost for managed parking lot clients for which there is no margin benefit. New contracts contributed to the remainder of the increase. Lighting sales increased 2.8 million or 10.5% due to the efforts of our strengthened and refocused sales force.

On November 1, 2004 Facility Services merged with engineering. Mechanical and Facility Services were included in the other segment until the end of fiscal 2004 and, on a going forward basis, mechanical will be included in the other segment. Sales for the other segment show a 1.3 million or 12% decline due to sales at Facility Services being reported with engineering following their merger.

Gross profit margin, which is defined as sales and other income less operating expenses and cost of goods sold, was 9.5% in the first quarter of '05 compared to 9.3% for the same period last year. The increase is due to higher margin contributions from the security acquisition completed in '04 and first quarter '05, the termination of unprofitable airport contracts and parking, and lower labor costs in the Northeast region of janitorial. Positive effects of these changes were partially offset by the one more workday that impacted our janitorial operation.

For the quarter SG&A expense was 47.1 million compared to 42.4 million for the corresponding '04 period. The increase was primarily due to 2.8 million of SG&A expenses attributable to the four acquisitions, higher professional fees principally related to Sarbanes-Oxley, and the costs associated with transitioning in our new Chief Operating Officer. Intangible amortization expense for the first quarter was 1.4 million compared to 900,000 for the prior year. The higher amortization was due to intangibles acquired in the recent business acquisitions.

Effective federal and state income tax rates for the period was 37.9% compared to last year's 35.7% reflecting the higher level of pretax income while the estimated federal tax credits remain substantially the same. The estimated tax rate also reflects a higher estimated state income tax rate due to the combined income tax filing requirements in certain states where separate income tax returns were previously filed. For the remainder of the year I would anticipate a combined effective tax rate of approximately 38%.

Turning to our statement of cash flows; cash from continuing operations, as Henrik reported, for the first quarter was 14.9 million, up from 14 million reported last year. The increase is primarily due to the higher profits. Capital expenditures for the quarter was $4.8 million. We continue to have a very strong financial position with 63 million of cash, working capital of 235.1 million and no debt. Our cash balance remained relatively flat with the 63.4 million at the end of fiscal '04 and our working capital increased 6.6 million despite the 13.6 million cash payment made in the Colin acquisition.

The largest component of working capital on our balance sheet continues to be Accounts Receivable which increased to 331.7 million from the 317.7 million at the end of last year due to higher sales. Accounts Receivable that were over 90 days past due increased slightly by 900,000 to 20.1 million which is 5.9% of our total outstandings from the previous year-end reported numbers of 19.2 million, also 5.9% of the outstandings.

Days sales outstandings at quarter end remained level at 53 days and our allowance for doubtful accounts was flat at $8.4 million. Insurance reserves at January 31 were 192.7 million which is up from the 186.5 million at the end of fiscal 2004 primarily related to workers' compensation. The self-insurance claims paid in the first three months of 2005 were $14.7 million which is just a slight increase of 300,000 over the amounts paid in 2004's first quarter.

There were no stock repurchases during the quarter. Yesterday we announced that the ABM Board approved a new stock buyback authorization of 2 million shares which will expire at our fiscal year end of October 31, 2005. The Board also approved a 10.5 cents dividend payable on May 2nd; this will the ABM's 156th consecutive dividend paid.

One other financial matter that I wish to bring to your attention; in the fourth quarter of 2005 ABM will be adopting the new Standard 123 share based payments. This will require us to report as an expense in our financials the fair value of stock options granted over the vested -- and this will be reflected over the vesting period along with the discount provided to the employees through the employee stock purchase program. While we have not finalized the method by which we will adopt the new standard, we estimate the impact will be approximately $0.02 per share per quarter.

With that let me turn the call back to Henrik who will give his perspective on ABM's quarterly performance and our outlook for 2005.

Thank you, George. I will briefly review the operational results for the first quarter and update our guidance for fiscal 2005. Our janitorial operations had an excellent quarter posting a 25.5 million or 7.3% increase in sales. The initial (ph) and Colin acquisition contributed $14.3 million to the increase, but sales across all regions were solid. The Mid Atlanta, Midwest and Northwest regions were especially strong and we were able to expand services to customers in Northern California and pass through a portion of the higher labor expense in the form of the price increases.

On the operating profit side the gain was small at 1% primarily due to the impact of the extra workday in the first quarter. As George mentioned earlier, this amounted to approximately $2.2 million of additional labor cost on a pretax basis. So comparing quarter-to-quarter, the janitorial division was significantly up in profit for the quarter. In 2005 the janitorial business continues to work to drive new sales and expand to services provided to existing customers.

Following the close of the quarter we were awarded a multiyear multimillion dollar contract with DTE Energy covering cleaning and maintenance services for 68 DTE customer centers and business locations. In addition, in a great example of how we can combine our services, we won a contract from Ford for facility maintenance solutions including janitorial and engineering for several of Ford's buildings in Dearborn, Michigan.

Harden (ph) continued to make solid progress and posted a 7.7% increase in sales to $101.1 million, the first $100 million quarter and a record for Ampco while operating profit increased by an impressive 141.5% compared to the same quarter last year. Over half of the top line increase came from higher reimbursement from managed parking lot clients. New contracts contributed to the remainder of the increase. The increase in operating profit resulted from the new contracts, the termination of unprofitable contracts, and higher margins on renegotiated contracts. I'm pleased that our partner business, which is generally a leading indicator, continued to perform well.

Sales at our security service increased 78.9% in the first quarter primarily due to the SSA and Sentinel acquisitions. These acquisitions contributed $29.8 million combined; the remainder of the increase is due to new business including several major contracts awarded in the latter half of 2004. Operating profit increased 109% for the quarter, primarily due to the operating profit from SSA, Sentinel and new business. We are one of the largest U.S. owner/operator security enterprises and we expect that over the course of 2005 we will market our national capabilities and work towards expanding our customer base.

Friday we announced the acquisition of Amguard Security and Patrol Services. Amguard, with annual revenues of approximately $5 million, is a tuck-in acquisition to strengthen our position in the metro areas of Maryland, Northern Virginia and Washington D.C. We are pleased to have the dedicated men and women of Amguard join our Security team.

Our engineering operation posted an impressive 20.5% increase in sales to 58 million. In the first quarter we continued to realize success from our sales initiatives, generating new business and expansion of services to existing customers. Northern California remained a geographical strong point. This also was the first quarter that engineering included the operation of ABM Facility Services. Long term we believe that this is the right strategic decision as the combined entities should be more efficient and provide a stronger marketing platform.

However, in the short-term engineering's expenses increased since on a year-over-year basis. First quarter 2005 includes the expense from the addition of the facility services staff. This offset some of the higher sales. Operating profit, though, for the quarter increased $436,000 or 17%.

Lighting is beginning to show signs of improvement. For the first quarter sales increased 10.5% and operating profit increased 10.2% compared to last year. As I mentioned earlier, we've worked hard to implement the right action to improve top- and bottom-line performance and we expect to see further improvement in lighting over the next 12 to 18 months. Already in the second quarter we've been awarded a multi-year, multi-million dollar contract with Trammell Crow Company, one of the largest full-service commercial real estate service companies in the U.S. The contract includes re-lamping; energy saving retrofits and ongoing maintenance of interior, exterior and (indiscernible) for more than 5,000 Trammell Crow managed buildings in the Eastern United States.

Finally, I'd like to address the status of our World Trade Center insurance claim. In February the United States Court of Appeals for the Second Circuit granted summary judgment in favor of ABM regarding our insurance length of business interruption losses resulting from the World Trade Center disaster. The court also ruled that we are entitled to recovery for the extra expenses incurred after 9-11 which include millions of dollars related to increased unemployment claims and costs associated with its redeployment of World Trade Center personnel at other facilities.

In 2001 the World Trade Center was our largest single job with annual sales of approximately $75 million and we estimate our total losses at over $100 million of which we have received $10 million to date. On February 24th Zurich, our carrier, filed a motion to have this appeal heard by the full court of the Second Circuit Court of Appeals and we are waiting for a ruling.

In summary, we are extremely pleased with our performance in the first quarter and believe we are in a good position to continue to make improvements in our top and bottom line in fiscal 2005. We have a strong national presence, diverse service capabilities, and growing momentum as a leading facility services contractor in the U.S. By utilizing our financial strength including a strong balance sheet and operating cash flow we will capitalize on organic growth opportunities, make complementary and accretive acquisitions, and increase shareholder value through our dividend plan and stock repurchase program.

We remain focused on strategic acquisitions that will expand ABM's market share in major metropolitan areas and strengthen our presence in key customer segments such as the recent Sentinel and Colin acquisitions demonstrate. Given our strong sales and marketing momentum, continued organic growth, and the benefit of recent acquisitions, we're increasing our fiscal 2005 guidance to $0.98 to $1.03 per diluted share. This is exclusive of future acquisitions and does not include the adoption of SFAS 123R which will become effective in the Company's fourth quarter beginning August 1st.

At this point in time the Company estimates that stock based compensation expense for the fourth quarter of 2005 will be $0.02 per diluted share. For the second quarter of fiscal 2005 we are projecting earnings per diluted share of $0.21 to $0.23 per diluted share. Please note that the second quarter has one less work day compared to the same period last year. We look forward to updating you on our progress next quarter.

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

(OPERATOR INSTRUCTIONS) Jeff Kessler, Lehman Brothers.

Good quarter. Three questions. First, on the -- what's gone on in New York has been interesting over the course of the last couple of quarters if we watch a couple of companies that we've covered in the leasing and services area, see their vacancy rates begin to fall down toward areas that are like 10%. This is exactly the type of business that should be generating incremental margins for you as you start doing more business with the tenants as opposed to just the base contracts. And I'm wondering, are you beginning to see the effects of this? And you're obviously going to tell me that look at janitorial, it was up 7.7% and you could have done a better job had you not had that extra work day. But are you beginning to see the effects of falling tenant vacancy rates on your janitorial business? And for that matter on the other businesses as well?

Yes.

I was expecting you to say -- now I'm going to have to find out why.

Jeff, I had to do that. Yes, we are starting to see the effect of it. And also -- what you also will see normally in a market like this is that because of the momentum among the building owners you will probably see less pressure on new bids. In other words, they're concentrating on leases instead of contractors like us. And we hopefully will see a positive affect in areas like New York. New York is probably more impacted than any other place due to the fact that the tenant services as a percentage is much greater in New York than it is in any other place in the country.

So yes, you see that and I think you can see also the effect of the improved economy maybe -- especially in our engineering division where we're experiencing a 20% growth organically, there's no acquisitions in this and it is a combination of new sales, but primarily new sales but also growth within our existing accounts. So yes, we start to see it all over.

Okay. The second question is on alarm response and verified alarm response. You're making -- and you have been making a very aggressive push into the guarding area. Up to this point we haven't heard very much from you, although we've heard a lot for those of us who cover the security industry, about verified alarm response and either fines or the lack of response to alarms that are not verified. Are you getting any proposals from either municipalities or from the alarm companies themselves to start adding on verified guard response to alarms to get away from some of the limitations that the alarm companies are facing with regards to city ordinances? Are you seeing any of that at this point?

At this point we're seeing little of that and I think it's primarily due to the fact that our concentration has been on the major buildings and a lot of these also relate to small buildings. We're also still a small player and that's why we're not making a big fuss about it. I think that the other company you talked about has a much more developed alarm station based business and we are not in that position yet.

Finally, last quarter you spent a lot of time talking about workmen's comp, two specific issues. And I'm wondering if you could update us on what is going on on the worker's comp side and who you're working with now, what you're saving and what you believe that as far as potential surprises or your ability to mitigate any new surprises on the worker's comp side?

That was a simple question.

Yes, it was a simple question. It was a big deal last quarter.

It was a big deal last quarter and also because we were somewhat taken by surprise -- I'm the first one to admit that. And we are in the process of changing third party providers. We'll be moving all our claims to ESIS (ph) who happens to be the provider we've used on all claims for the last year and a half. And we're taking away from that old provider of services. We are also looking to possible legal actions with respect to what happened last year, but to respond to let's say workmen's comp now and going forward, as you probably heard from George's presentation, our research is up significantly again for the quarter, of course combined with the fact our services have grown which makes sense.

But we believe both our safety efforts and other efforts will result eventually in lower rates or at least maintaining what we have. We don't expect any problems and what you saw from the fourth quarter -- I think there was some confusion amongst some of our investors because there was a belief that this would have a major impact going forward. It has a very small and minor impact going forward both on what we restated and also on the specific claims which are related to the 2000 to 2003 time period.

So we feel very comfortable right now on our workmen's comp side and we're not aware of anything we should be concerned about. Hopefully we will be able to get some of the money back that we expensed last year.

Okay. So hopefully a combination of World Trade Center and some of the money that you lost in worker's comp you can get back on the legal end over the course of the next 18 months?

I think that's a good shot, yes.

Thank you very much and, again, good quarter.

David Gold, Sidoti.

A couple of questions for you both. Henrik, I guess if I ex out the contribution from acquisitions we're looking at about 6% organic growth and that's fairly impressive given your history. And I guess what I was curious on is where you see that trend going? A, can we hold this up, and, B, in your press release you talk a little bit about some new contracts and expansion of service to existing and I'm curious if part of that is really more successful pitch activity or are we seeing the benefit of this improved occupancy?

I think it's a combination of a lot of things, David. We're a little gun shy. Do we really believe it is going to continue at 6 to 10% going forward? I can only tell you, and I think I said this last quarter also, I see more activity out there than I've seen in the past and that normally results in organic growth. The growth we had this quarter was a little bigger and greater than we had budgeted, which is always a good sign, but I don't think there's any reason that I'm aware of that should stop that momentum.

And the second part of the question, do you think -- or maybe it's hard to pigeonhole -- you're more successful on your pitching activity or you think occupancy is helping you or a little bit of both?

I think it's a little bit of both.

And then the repurchase plans, presumably -- I know it's a lot of stock that you could buy by October of this year. Can we expect you guys to be pretty aggressive on that or is it more opportunistic?

I would say I think you should look at our history. I really don't want to go into what exactly we're going to do and how many shares we're going to buy on Friday. But I think our history has proven that we're not one of those companies who announce it and don't buy back stock. So we will in all likelihood be in the market, but you know things could happen and we could be blocked out for several reasons -- it could be because of possible acquisitions or whatever. So I really can't commit to anything other than I'm saying we would not announce it if we didn't have the intention to be acting on it.

Okay. And then just one last one. On the lighting side of the business, I think last quarter one of the comments you made was as you restructure the sales effort there it would cost you some money near-term and presumably we see the benefit in the second half of the year. I guess we're starting to see the momentum on the revenue side. But would it still be pretty consistent? You'd expect margins to step up from here as we progress through the year?

Yes, again I think -- as I mentioned in my speech also, this is a long-term improvement plan and I think for the first time you're seeing the effect of it. And I have no reason to believe that this will not be a very positive experience over the next one to two years.

Fantastic, thanks so much.

(OPERATOR INSTRUCTIONS) Kevin Monroe, Thomas Weisel Partners.

Looks like you're starting to see some operating margin leverage in the model and it was masked a bit this quarter by the janitorial segment extra day. Where do you think margins can go assuming that you continue to see the growth rebound on the top line here? I guess if you go back a couple of years your operating margins were north of -- around 4% on a consolidated basis. Do you think you can get back there any time soon? And specifically on the janitorial side do you think you can get back north of 5%?

The percentage on the bottom line is a reflection of the combination of services we provide. And of course we've been growing in the janitorial area. We've been growing in the security area which historically are not the 20% bottom-line companies. So there is, of course, pressure on the bottom line when it comes to those companies. But let me be specific. I do believe long-term we will get back to the 4% level if the economy stays the way it's going. And I think you've seen improvement in this particular quarter. And as you know, our first quarter is normally our worst quarter, so it is an encouraging start.

Two, I do think long-term you will see a slight improvement in the janitorial bottom line again based upon the model that we emphasized. We can add acquisitions in nearly every single area without adding overhead. So it will help long term. To give you an exact time on it I can't do because it depends on the opportunities in the area. But I think I'm comfortable for the first time to say that I do believe that margins will improve in this particular economy.

In terms of the janitorial business, if you back out the impact of the extra workday it looks like margins were up 30 basis points or so year-over-year. What's the primary driver of that? Is that acquisitions or is that improvement in the base business?

Outside great management by my local leader there I would say it is driven by a number of issues. But I think one of the primary ones is we have, like any other business I would say in corporate America, always a white elephant. Our problem child has been our Northeast region and the improvements we've seen in the Northeast region over the last two years had probably the most material impact on the bottom line percentage for that particular division, but we turned it from a loss situation to very close to a breakeven situation the first quarter. And for the first time in three years we expect a sizable profit in that particular region. So that isolated will impact the bottom line greater than anything else.

Okay. Thank you.

At this time there are no further questions. Mr. Slipsager, are there any closing remarks?

No, thank you very much for listening to our first quarter earnings call and we look forward to talking to you after the second quarter in three months. Thank you.

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