ABM Industries Inc (ABM) 2005 Q3 法說會逐字稿

Good morning. My name is Jodie and I will be your conference facilitator. At this time I would like to welcome everyone to the ABM Industries, Incorporated third 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on telephone keypad. Thank you, Mr Slipsager, you may begin your conference.

Thank you. Good morning, I'm Henrik Slipsager, President and CEO of ABM. Joining me today are George Sundby, Executive VP and CFO, and Linda Auwers, our Senior VP and General Counsel. On the call today I will provide an overview of our operational results for the third quarter and nine month ended July 31st. George will discuss our financials in details and then I will conclude our prepared remarks with a review of our operational achievement for the quarter, as well as provide an update on guidance for the remainder of fiscal 2005. Before we begin, I want to say a few words regarding the recent development in New Orleans and along the Gulf coast. I would like to express our deepest sympathies to the people adversely impacted by hurricane Katrina and especially those who are members of the ABM family.

We have many hundreds of employees in our janitorial, security, lighting, parking and engineering operations that are dealing with the aftermath of this natural disaster. We're working very hard to help all of our displaced employees. It is a challenging task that requires additional resources but we are committed to make our best effort. Our janitorial and security operations are offering to assign our New Orleans employees temporary jobs in Houston, San Antonio, Austin and Dallas. In addition, we will make contributions to the American Red Cross to help all of those in need. We believe our janitorial lighting offices in New Orleans are under water. Our lighting office in Mobile was able to resume limited operations. We assume most, if not all, of our equipment and supplies have been destroyed. We are searching for temporary offices for our New Orleans operation at this time.

When we're allowed to enter New Orleans and assist in the cleanup effort, we will be poised to do so. I'm very proud that a number of our employees who are members of the National Guard have responded to the nation's call for service. While the rebuilding of levees and infrastructure will take time, I believe the communities impacted will pull through. Returning to the conference call, Linda will now present the Safe Harbor statement. Linda?

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 our actual results to differ materially. Some of the important factors relating to our business are described in our form 10Q quarterly report, forms 8K and the form 10K that we filed earlier this year with the SEC.

Thank you, Linda. We are pleased with our performance and with the progress we made in the first nine months of 2005. The environment remains challenging but it continues to improve and we continue to meet our strategic goals to increase revenue, to grow our market share and to increase earnings. All five of our operating segments posted double-digit growth in operating profits. And all except lighting experienced top-line growth. In particular, our security and engineering businesses achieved year-over-year growth of 14.9% and 12.1% respectively.

We achieved record revenues and earning gains due to contributions from acquisitions, new customers across all operating segments, and expansion of services with existing customers. During the first nine months of the fiscal year we've grown revenue by 9.9% and recorded a 51.5 increase in income from continuing operations as compared to the same period in fiscal 2004. We completed three acquisitions. We've sold our mechanical operation for pre-tax gain of approximately $21 million and our water treatment business for pre-tax gain of $300,000. We've improved our claim management and safety processes which resulted in a significant reduction in our insurance reserves. We increased our credit facility by $300 million while obtaining lower pricing. We paid over $50 million in dividends. And we've repurchased 1.6 million shares of stock at an average price of $19.57.

All of this has occurred while the ABM team diligently works on the first year Sarbanes-Oxley Section 404 reporting. I am very gratified by the extra effort many of our employees have made over the past nine months. 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 third quarter and first nine months of fiscal 2005 financial results. George?

Thank you, Henrik, and good morning, everyone. I'd like to review the consolidated results for our third quarter ended July 31, as reported in yesterday's earnings release. Our quarterly report on Form 10Q is scheduled to be filed later this week with the Securities and Exchange Commission. For the third quarter net income was 35.9 million or $0.72 per diluted share compared with 13.1 million, or $0.26 per diluted share. That income includes after-tax gains totaling 14.2 million, or $0.29 per diluted share, from the sale of the mechanical business. We received a total of 32.3 million in cash at the closings of the two transactions, and are in the process of performing true-ups with Carrier for changes in working capital and resolution of other potential purchase price adjustments. Additionally, we received a $250,000 note receivable from the sale of water treatment that we expect will be paid off in October.

Income from continuing operations for the third quarter was 21.7 million, or $0.43 per diluted share compared to 12.9 million or $0.25 per diluted share for the third quarter of 2004. Sales and other income was 650.1 million, which is up 6.1% when compared with last year's third quarter. The increase includes 21.8 million from acquisitions and 15.5 million from internal growth. Income from continuing operations include the adjustment of a majority of our self-insurance reserves to the new actuarial estimate. This resulted in the recognition of a 5.5 million pre-tax benefit in the corporate line for favorable developments in the 2004 and prior year insurance reserves. Additionally, ultimate losses for 2005 are projected to be lower. Third quarter results for the five operating segments includes credits for excess insurance charges in the first half of 2005, that totaled $3.5 million.

These improvements, we believe, are attributable to the continued focus on safety and changes in claim management including the transfer of all prior-year open claims to our current third-party administrator. The second item I wish to bring to your attention is a 1.3 million pre-tax benefit in the janitorial line from the $5 million settlement of a discrimination lawsuit which, as you may recall, negatively impacted our second quarter results due to the recognition of the 6.3 million pre-tax charge that was required with the denial of our appeal. Acquisitions completed in fiscal 2004 and the first nine months of 2005 generated earnings that were 1.2 million pre-tax higher than reported in the prior year's third quarter. As we have discussed on our earlier conference calls, the number of work days can shift from quarter to quarter, causing positive and negative impacts on the profitability of our fixed-price janitorial contracts. For the third quarter, the janitorial operation had the same number of work days as last year's third quarter.

I wish to remind you in the fourth quarter, janitorial will have one additional workday which is expected to increase pre-tax labor costs by approximately $2.2 million. The effective federal and state income tax rate for continuing operations for both third quarters of 2005 and 2004 was 34.5%. Both periods include small benefits from adjusting our income tax accounts to reflect actual prior-year tax returns. For the fourth quarter, I would anticipate a combined effective tax rate of approximately 36.5%. Turning to the statement of cash flows, cash from continuing operations for the third quarter was 1.8 million compared with 7.5 million for last year's third quarter. Cash flow decrease was primarily due to the quarterly growth in receivables as collection efforts suffered due to the regional accounting centers focus on our Sarbanes Oxley certification project.

We are taking steps to remedy collection efforts and expect to return to normal cash flow generation in the fourth quarter. We continue to have a very strong financial position with 43 million of cash at July 31 and no debt. The largest component of working capital continues to be accounts receivable, which increased to 357.6 million, up from 333.8 million at the end of last quarter. Day sales outstandings at quarter end increased 3 days to 55 days. Accounts receivable that were over 90 days past due increased 5.7 million, to 26.8 million, or 7.5% of our total outstandings. Our allowance for doubtful accounts decreased slightly during the quarter from 7. 7 million to 7.5 million. Insurance reserves at July 31 were 193.6 million, which is up from 187.9 million at the end of fiscal '04.

Self insurance claims paid in the first nine months of 2005 totaled 45.8 million, which represents an increase of $1 million or 2.2% from those paid in the first nine months of 2004. During the third quarter, we repurchased nearly 1.4 million shares at an average price of $19.57. Under the current authorization from the board, which expires on October 31, 2005, the Company has 400,000 shares remaining. Fiscal year 2005 will be our first year of reporting on our internal controls over financial reporting, as required by Section 404 of Sarbanes Oxley. Due to our decentralized structure and the materiality considerations that result from our level of profitability, the effort to evaluate and test the systems and processes and the actions required to take remedial steps for management to make this report has greatly exceeded our initial expectations. Results-- which has resulted in a greater reliance on outside resources.

For the third quarter of 2005 our external costs totaled $3.7 million compared to just 200,000 in the third quarter of 2004. Work continues and we are now in the testing phase of our internal controls and expect the fourth quarter costs to exceed the third quarter level. The timely and successful completion of management's assessment of the effectiveness of the internal controls over financial reporting under Section 404, is one of the Company's highest priorities. With that, let me turn the call back to Henrik who will give his perspective on ABM's quarterly performance and update our outlook for 2005.

Thank you, George. I will briefly review the operational results for the third quarter and update our guidance for fiscal 2005. Janitorial. Our janitorial operations had another solid quarter, posting a revenue increase of $16.8 million, or 4.6% compared to the same period in 2004. The initial Ampco acquisition contributed $14.2 million. In addition, new business and expansion of services to existing customers in the Mid-Atlantic, Northern California, Northwest and Midwest contributed to the year-over-year growth. Our operating profits for janitorial increased by $7.3 million, or 40.8% during the third quarter 2005 compared to the same period in 2004. Operating profit for the third quarter of 2005 included a benefit from the reduction of insurance expense for the first six month of fiscal 2005 due to the favorable development in the Company's self-insured claims and a reduction in our liability previously recorded in the second quarter.

Our janitorial operations, in particular, through their renewed focus on safety awareness and implementation of return-to-work programs, have accomplished meaningful year-over-year reductions in the number of recorded Workers' Compensation and general liability claims and the severity of claims. It is these types of efforts that have in large part led to the reduction of fiscal year 2005 insurance reserves. The remainder of the operating profit improvement was due to higher tax sales which provided better margins and tight control of labor costs. Parking. Sales increased $4.9 million or 5%, while operating profit increased $600,000 or 18% during the third quarter of 2005 compared to the third quarter of 2004. Approximately two-thirds of the sales increase came from higher reimbursements for out-of-pocket expenses for managed parking lot clients for which there was no associated margin benefit.

Operating profit for the third quarter of 2005 included a benefit from the reduction of insurance expense for self-insured claims. The remainder of the operating profit increase was due to new contracts, determination of unprofitable contracts, high margins of renegotiated contracts as well as improvement at airport locations due to increased air traffic across the country. We continue to secure new contracts and recently added the city of Phoenix's Phoenix Civic Plaza for park management services. Security. Security sales increased $9.7 million or 14.9% during the third quarter of 2005 compared to the third quarter of 2004, primarily due to SSA, Sentinel and Amguard acquisitions, which contributed $7.6 million in sales increase. Operating profit increased $1.7 million or 65.8%, primarily due to profit contributions from acquisitions, new business, and the benefit from insurance. Our integration of SSA as well as other recently acquired security businesses continues to go very well.

Engineering. Sales for engineering increased $6.6 million or 12.1% during the third quarter of 2005 compared to the third quarter of 2004, due to successful sales initiatives resulting in new business and the expansion of services to existing customers across the country. Operating profit increased $900,000 or 26.6% during 2005 compared to 2004, due to higher sales and the benefit from insurance. Engineering has really performed well in all three quarters of fiscal 2005. The operations have continued to exceed internal goals and I'm confident that the operational momentum will continue. Lighting. Lighting sales decreased by $600,000 or 2.3% to $26.9 million, but our operating profit increased by $0.5 million or 109.7%. Our lighting operation is stabilized and we're optimistic that future results will show improvement in year-over-year comparisons.

I believe that for lighting to significantly improve, we need to offer solutions that generate lower costs for our customers. We continue to investigate new products and look for ways to form strategic partnerships. In closing, given our improving operational strength and the current economic climate, we are increasing our fiscal 2005 guidance for net income to between $1.36 to $1.04 per diluted share, of which, though, $0.29 is from discontinued operations. This is exclusive of any future acquisitions but includes the net effect of higher than anticipated costs related to the first-year Sarbanes Oxley Section 404 reporting and the expected fourth quarter gains from the sale of one of our parking leases. As a reminder, the fourth quarter has one more workday which increases the labor cost in our fixed-price janitorial contract when compared to fourth quarter of fiscal 2004. We look forward to updating you on our progress next quarter. At this time, I would like to open the call up for questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from David Gold of Sidoti & Company.

Hi, good morning.

Good morning, David.

Just gone through those numbers then with -- it was about 14.2 million of acquired revenue in janitorial and 7.6 in security. That would give us, presumably, a total 22 million -- did I catch those numbers, right? Just wanted to confirm had.

Yes, that's correct, David.

Okay. And then, it would be helpful, if you can, to take the 3.5 million that you've allocated to the operating segments and maybe break that down by segment, if possible, just so we can have a pure look, sort of year to year at the margins.

The way we did the credit back to the field was based on exposure, which basically was revenue-related.

Okay.

So -- .

So presumably the bulk of its in janitorial?

That's correct, with smaller pieces going to the other operations.

Okay. So clearly the most -- it's the most significant in janitorial?

Right. About 2.2 million.

2.2. Perfect. That's helpful. Going forward on the insurance side, is this going to be a, presumably, a third quarter event each year when they do the audit and the analysis?

Well, we're hoping that we'll be able to set better expectations on rates so that we don't have as large a pickup as we have. But our practice is we get an actuarial study done as of May 31 and that usually takes about two months.

Okay. And Henrik, can you comment -- a couple of things. One, maybe you can comment on the release about the sale of a parking lot lease and was curious how significant that -- the profit from that could be? In the fourth quarter?

We expect that profit to be somewhere between $4 and $4.5 million.

4, 4.5.

Pre-tax, pre-tax.

Okay. And then kind of stand now, when you started -- initiated a pretty significant buyback and were pretty successful at it during the quarter, I'm curious as we get towards the end of your authorization, which presumably maybe you finish at the end of this year, thinking on a go-forward basis, with the cash that you have, if you put the two side by side, share repurchases versus acquisitions, what sort of holds a higher spot in your mind these days?

From my side of the -- no, David, for sure, it is acquisitions because the return is much greater than buying your own stock. But if we don't see the acquisition pipeline digging deep into our cash, then we'll continue to do the buyback. But for sure, acquisition has a much greater priority.

And what's the pipeline looking like now?

Look good.

All right. And pricing still reasonably attractive?

Some attractive, some not attractive. You won't get an answer out of me, but it looks good.

Okay, all right. Terrific. Thanks so much, thanks to both of you.

Thank you, David.

Your next question comes from Jeff Kessler of Lehman Brothers.

Thank you. Earlier this year, Henrik, you were grousing about the -- some of the insurance actuarial assumptions that had to be made. Is this third quarter reversal, is this related to some of the estimates that to be made earlier on in the year? That had negatively impacted you?

Well, yeah, you know, the $5.5 million, which is not part of our segment of reporting, is a reflection or a return on some of the money we put away by the end of last year. So my feeling was, as I said at that time, that it was very conservative and it turned out to be right. But I think the key thing is not the $5.5 million, as well as I was not that upset about the $17 million, because I think that's, unfortunately, history. The key thing, though, is the insurance amount that relates to this year and also relates to stuff going forward, which are based upon reduced rates on our operations. I think that's a key thing because that hopefully has a long-term impact on earnings.

Okay. Can I get some type of breakdown, even if it's an estimate, on -- you know, you've only broken it down in one lump on how it helped your operating income. Is there some way to allocate some of this to your cost of goods and to your SG&A expense? The insurance I'm talking about.

Jeff, this is George. All of the insurance expenses is in cost of goods sold, so the full $9 million is a credit against cost of goods sold.

Okay. Very good. The -- let me just see here. The operating profit, it appears that -- are you beginning to see the benefits now from, as we see occupancy rates going up, vacancy rates going down in large cities, are you beginning to see -- is this the beginning of the fruits of that? And we've already seen the property management companies do very well in transactions. It means they're filling up the space in those buildings. It means that there's more tenants for you folks to service, at least on side contracts. Are you beginning to see at least some of that come through?

Yes, we are starting to see that -- some of that come through. I think we overall are seeing an increase of tax throughout our Company and, you know, you still have major contracts lost and gained on bid situations, it doesn't stop people from bidding jobs. But on existing jobs, we do see improvements in general terms.

They have. What does New Orleans represent as a percentage of your business?

It's insignificant. It's less than -- much less than 1% of our business.

All right. So and this is already in your guidance for the year, I assume?

It's in our guidance for the year, yes, Jeff.

Okay. Let me just see if I have anything else, because obviously this was a -- it's hard to ask lots of skeptical questions when you have a good quarter like this. I do want to drill down a little bit to -- you know, you're looking at -- if you're looking to fill in with acquisitions when you're looking at application of capital this year, are there specific areas, either your vertical market or geographic market within those verticals, that you still have holes in? And I'm -- if you take a look at your janitorial or, for that matter, your larger businesses like parking or security, are there geographic areas that you're still looking -- that you're looking at right now?

That's a good question. Let's do the easy one first, that's janitorial. Our weakest area by far is the New England area.

You've been saying that for a long time.

I'm saying that for a long time and, obviously, I'm not doing anything about it, Jeff. But that's why I have to leave that open for you to ask some critical questions.

All right.

So, no, we are low in New England and it is a high priority. And if you take parking, the biggest hole by far, you know, is just New York City. But the cost of entry in that marketplace exceeds my willingness for investment. So I don't think you'll see parking go into New York City through an acquisition, we might one day start off from scratch. Security, we need general strength throughout, but Midwest is probably our weakest area in the security world. In engineering, it's very difficult to find any acquisition candidates at all in that world, but in between the two coasts we will need to grow those areas. So, there are domestically a lot of opportunities still within our existing operations.

Okay. Finally, you've said before that you believe that there are Justice Department issues with regard to OneSource. Are you still saying that?

I don't know if there's any Justice Department issues with regard to OneSource, but if you're talking about us acquiring OneSource or being together with OneSource, I do think the combined size of the two operations could create questions. So that -- I think that's all I've said.

Okay. Even if the industry remains highly fragmented?

You know, I'm not on the other side, I'm not the one asking the questions, I'm the one answering. So I don't know, but obviously, we had a good quarter, Jeff, because those questions are really, really broad and not specific. So I am --

This is the first time I haven't drilled you on something -- this is my off handed way of saying it was a good quarter to you.

Thanks, good-bye, Jeff.

Okay, bye-bye.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause again for just a moment to compile the Q&A roster. Your next question comes from David Liebowitz of Burnham.

Good morning.

Good morning, David.

A few items. One, did I understand that the earnings estimate that -- guidance, excuse me, that you gave us a few moments ago includes $0.29 from the businesses sold?

Yes, sir.

How much revenue and earnings did those businesses generate over the last 12 months?

How much business last year, I think it was around 40 million, George.

Yes, sales were about 40 million, pre-tax profit was about 1.4 million.

Okay. So when we do our modeling for next year, we take off $0.29 from the ultimate number and an incremental 1.4 million pre-tax?

We've restated our prior financials to put mechanical down into discontinued. So when we are giving revenue and pre-tax income from continuing operations, it already excludes that.

Oh, okay. Fine.

Most of the $0.29 is related to the gain on the sale that occurred in the third quarter.

Second of all, I'm not sure if I missed it, but I heard no mention about the World Trade Center and any litigation expenses, settlements or anything else. Where do we stand on that at the moment?

Well, David, as you recall from our earlier conference calls, we were successful in the appeal of the lower court decision. And, in fact, won summary judgment with regard to the right of business interruption. The case has been remanded down to the lower court and we're waiting for the lower court to contact us to set up a calendar of events.

And those events would mean what?

Setting up for a trial to determine the monetary damages that we incurred.

In other words, the other side has no more route of appeal and now it's simply a function of the dollars involved, not liability or anything else?

That's correct.

And at the moment, what are you claiming to be the total dollars involved and what is the other side claiming?

Well, the other side -- our policy was for $127 million, of which we have received about $13 million. The building generated revenue of over $75 million with pre-tax profits of 10 million. Additionally, we've incurred extra expenses associated with higher state unemployment insurance. So we think we've been damaged pretty much to the fullest extent of the policy. You'd have to contact Zurich to see what their position is, but they've only paid us $13 million.

Also is there a time clock with interest attached that is running?

Yes. With the summary judgment, we now are entitled to interest at the state rate of 9% going back to when we filed the claim, which was December 2001.

So we got five years of interest as well coming to us, another 50% on top of whatever the award ultimately turns out to be unless there's a settlement?

That's correct.

Excuse me?

It's four years from the date of filing at the end of this year.

Okay. Also, are you at liberty to say whether or not Zurich has approached you about possibly settling before going back into court?

We haven't heard anything from Zurich. Lawyers are trying to set up procedures with regard to additional discovery, things of that nature.

Okay. And the last question, I, again -- you may have mentioned it, but I haven't heard it, what is the status with your European ventures where you're going to recommend them and they're going to recommend you when customers on either side move to one side or the other of the Atlantic?

Oh, our Alliance? Our Alliance is still alive. I would say that it's been difficult with Alliance because they are partners and they're not owned by us. And among some of the Alliance partners, there have been acquisitions into areas where some of the partners are in competition with each other, which does not make our life easier. So the growth has not been there, but we still do business over there through our partners.

Thank you very much.

You're welcome.

Thank you, David.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. At this time, there are no further questions. Are there any closing remarks?

Well, thank you very much for listening to our conference call. We look forward to talking to you in another three months. Thank you.

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