ABM Industries Inc (ABM) 2005 Q4 法說會逐字稿

Good morning. My name is April, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AMB (sic) Industries Incorporated fourth-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

Miss Auwers, you may begin your conference.

Good morning. As I hope everyone on the call knows, it is ABM. I'm Linda Auwers, Senior Vice President, General Counsel and Secretary of ABM. Joining me today are Henrik Slipsager, our President and Chief Executive Officer, and George Sundby, Executive Vice President and Chief Financial Officer. On the call, Henrik Slipsager will provide an overview of our fourth-quarter and full-year performance. George will discuss and review in detail our unaudited financial results. Henrik will then discuss our segment results and our expectations for fiscal 2006.

Before that, let me present the Safe Harbor statement. 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 10-Q quarterly report, Forms 8-K, and the Form 10-K that we filed earlier this year with the SEC. Thank you.

At this point, I will turn the call over to ABM's President and CEO, Henrik Slipsager.

Thank you, Linda.

The 2005 revenue growth and operating results were obviously gratifying, but we are also quite proud of having achieved several objectives that position us very well for fiscal 2006 and beyond.

First, our results -- for the year, we have record revenue of over $2.5 billion, up nearly 9% year-over-year, and our operating profit from continuing operations was $82.9 million, a 84.4 increase compared to fiscal 2004.

Operating margins for fiscal 2005 were 4.6%, up 60 basis points from prior fiscal year. For the fourth quarter, operating margins were 5.2% compared to 4.8% for the prior-year period.

I'm pleased that our operational team delivered such strong results to offset the higher than anticipated cost of $11.9 million after-tax in 2005 related to initial compliance with Sarbanes-Oxley internal control certification requirements.

For the quarter and the year, we delivered double-digit growth in our operating profits across all of our operations and strictly on organic growth, our engineering operations posted a 17.4 increase in profits from fiscal 2004 to fiscal 2005. The impact of the hurricanes on the Company's sales and operating profits for 2005 was not significant, which was in line with our initial expectations.

I will close here and turn it over to George by noting that, in addition to our strong operations operational performance, we also completed a number of strategic goals in fiscal 2005 that strengthened our positions. Included among those, we improved operating margins by enhancing our claims management and safety programs; we completed four acquisitions during the fiscal year, two in janitorial and two in security; we sold our mechanical services operation for which we realized an after-tax gain of $14 million; we started implementing a new revenue control system in our parking business. We developed an energy program to enable our customers to take advantage of general rebates that will be available starting in 2006; we paid over $20 million in dividends, and we repurchased 1.6 million shares of stock; and we generated $52 million in cash from continuing operations.

George will now provide a detailed overview of our consolidated financial results. George?

Thank you, Henrik. Good morning and happy holidays to everyone. I'd like to review the consolidated results for the fourth quarter and fiscal year ended October 31, as reported in yesterday's earnings release.

Our annual report on Form 10-K, which will be filed with the Securities and Exchange Commission in January of 2006, will contain for the first time both management and the Company's independent auditors' reports regarding the evaluation of our system of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Security Act of 2002.

Turning to our fourth-quarter results, as Henrik indicated, for the fourth quarter, income from continuing operations was 15.2 million or $0.30 per diluted share, compared to 3.3 million or $0.06 per diluted share a year ago. Sales and other income was 658.7 million, which is up 6.3%. The increase includes 22.5 million from acquisitions, 4.3 million from the sales of parking leasehold, and 12.1 million from internal growth. Income from continuing operations for the fourth quarter of 2005 includes a 2.6 million after-tax gain, or $0.05 per diluted share, for the successful completion of the previously announced sale of an off-airport parking lease in Houston, Texas. It also includes a 1.6 million after-tax or $0.03 per diluted share benefit from the reduction of 2004 and prior-year insurance reserves on three specialty risk programs resulting from the receipt of independent actuarial reports. These items substantially offset the 4.3 million after-tax or $0.09 per diluted share professional costs associated with our first year of Sarbanes-Oxley certification.

Income from continuing operations for the fourth quarter of 2004 included a 10.5 million after-tax charge or $0.21 per diluted share charge related to the adverse development principally related to worker compensation claims that were not being adequately managed by our third-party administrator. These claims were transferred in the second quarter to our current third-party administrator. In addition to moving the claims we are actively pursuing recovery of damages against the former TPA.

Acquisitions completed in fiscal year 2004 and 5 generated earnings that were $700,000 pretax higher than reported in the fourth quarter of last year.

As we have discussed in our earlier quarterly 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 fourth quarter, the janitorial operation had one additional workday as compared with last year's fourth quarter. This resulted in higher labor costs of approximately $2.3 million.

The effective federal and state income tax rate from continuing operations for the fourth quarter of 2005 was 39%, compared with 2004's rate of 25.8%. Tax credits were comparable in both periods. However, there was a -- represented a greater percentage of the overall tax provision in last year's fourth quarter, resulting in the lower overall rate last year.

Turning to the full year, income from continuing operations for 2005 was 55.1 million or $1.09 per share, compared with the 29.6 million or $0.59 per diluted share of a year ago.

Sales and other income for 2005 -- 2.5865 billion is up 8.9% when compared with last year. The increase includes 126 million from acquisitions and 85 million generated internally. Income from continuing operations for 2004 -- 5, excuse me -- includes the aforementioned fourth-quarter items as well as the 3.4 million after-tax or $0.07 per diluted share benefit from the third quarter actuarial adjustment of our insurance reserves, a $700,000 after-tax gain in the second quarter from the 1.2 million of additional insurance proceeds received on our ongoing World Trade Center insurance claim, as well as the 2.7 million tax benefit from the settlement of prior years' state tax audits. These benefits substantially offset a 3 million after-tax or $0.06 per diluted share settlement for a discrimination lawsuit, as well as the higher professional costs associated with our first year Sarbanes 404 certification.

Acquisitions completed in fiscal 2004 and 5 generated earnings that were 5.2 million higher -- pretax higher than reported in 2004. Additionally, like the quarter, 2005 had one additional workday, which increased pretax labor costs by the $2.3 million.

The effective federal and state income tax rates from continuing operations for 2005 was 33.6% compared to 34.1% in 2004. For 2006, 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 fourth quarter was 37.5 million, compared to 22.2 million for the last year's fourth quarter. The cash flow increase was primarily due to the receivable collection efforts discussed during our third-quarter conference call, which reduced our Days Sales Outstanding from 55 days to 54 days. Capital expenditures for the quarter was 2.8 million and totaled 17.7 million for the year.

We continue to have very strong financial position with $64 million of cash at October 31 and no debt. The largest component of our working capital continues to be Accounts Receivable, which as previously discussed declined to $353 million from 358 at the end of last quarter. Accounts Receivable that were over 90 days past due remained relatively flat at 26.7 million or 7.6% of our outstandings. Our receivable allowances during the quarter increased from 7.5 million to 7.9 million. Insurance reserves at October 31 finished at 198.6 million, which is up approximately 12 million from the end of last year. Self-insurance claims paid in 2005 told 55.2 million, which represents a 5.5 million decrease or 9.1% from the amount paid in 2004.

There were no stocks repurchased during the fourth quarter. For the year, we repurchased a total of 1.6 million shares at an average price of $19.57.

Fiscal year 2005, as previously announced, will be our first year reporting on our internal control over financial reporting as required by Section 404 of Sarbanes-Oxley. Due to our decentralized structure and the materiality consideration, the results from our level of profitability, the effort to evaluate and test the systems and processes and actions to take any remedial steps required from management to make this report has greatly exceeded our initial expectations, resulting in greater reliance on outside resources. As previously indicated, our professional costs totaled 11.9 million this year, of which 7 million was incurred in the fourth quarter of 2005.

We are currently performing management's testing of key controls performed in the fourth quarter and performing our overall evaluation of our system of internal controls. The timely and successful completion of management assessment of the effectiveness of our internal controls under 404 remains one of the Company's highest priorities.

With that, let me turn the call back to Henrik, who will give his perspective on our 2005 performance and the outlook for 2006. Henrik?

Thank you, George.

Before providing our 2006 guidance, I will briefly review of the operational results for the fourth quarter and full year (indiscernible) by operating segment, and then provide guidance for fiscal 2006.

Janitorial -- our janitorial operations delivered a solid performance for the fourth quarter and full year. Revenue increased 3.8% for the quarter and 5.7% for the year. The initial Northeast, initial Baltimore and (indiscernible) acquisitions contributed $66.2 million to the increase in annual sales with the impact showing in the Mid-Atlantic and the Northeast regions. In addition, the Mid-Atlantic, Midwest, Northern California, Northwest, South Central and Southwest regions all increased sales due to new business and expansion of services to existing customers.

Operating profit for the janitorial business increased approximately 13.5% when compared to the same quarter in fiscal 2004, despite one extra workday in the quarter. For the year, operating profit increased 14.3%. The increase in operating income was (indiscernible) through acquisitions, the benefit from the reduction of insurance expense due from the favorable development in the Company's insurance claims, and an increase in tag (ph) sales.

Operating margins for the quarter improved to 5.6% and for the year to 4.5%. As mentioned last quarter, we've been really focused on safety awareness and programs that will serve to reduce the number of reported workers compensation and general liability claims and the severity of claims. We've been very successful with these efforts and I know that our janitorial team will continue to focus on this critical area.

Parking sales for the fourth quarter increased 7.7% while operating profit increased by 66% compared to the same quarter last year. For the year, we experienced a 49% increase in operating profits. Both numbers exclude the gain from the sale of the parking lease. Results improved due to new projects for several major airports and better airports sales, which generally improved the increase in airline travel nationwide. In addition, results reflect the insurance benefits.

For the quarter, excluding the profits from the sale of the airport lease, parking's margin increased to 3.5%. We (indiscernible) renew contract and secure new contracts and recently added a number of multi-year, multi-million dollar contracts to our portfolio.

Sales of our security services increased 10.6% for the fourth quarter and 31% for the year, primarily due to the SSA, Sentinel and ABM (ph) product positions, which contributed $60.4 million of sales increase in fiscal 2005. This was our first full year to market ourselves as one of the largest national U.S. owned and operated securities enterprises, and we've been successfully getting new business. Operating profit increased 19.2% for the quarter and 51% for the year, primarily due to acquisitions and the benefit from insurance. Profit margin for the year was 4.6% and 5.2% for the quarter.

Sales in our engineering operation increased 14.2% during 2005 and 14.6% in the fourth quarter due to new business and the expansion of services to existing customers. Operating profit increased 17.4% during 2005 compared to 2004 and 13.7% for the fourth quarter due to higher sales and a benefit from insurance. ABM facilities services was combined with ABM Engineering in 2005, and this has given us a stronger strategic platform to market our services. Our engineering team has performed extremely well in fiscal 2005 and we believe our business model continues to gain traction.

Lighting sales increased 3.7% for the year and 7.3% for the quarter compared to last year. For the year, operating profit was $3.8 million, up 34.8% (indiscernible) operating profit for the fourth quarter was $1.4 million, up 26.3% from the fourth quarter of 2004. Results reflect a small benefit from the reduction of insurance expense and self-insurance claims. We continue to be encouraged by the progress our lighting organization has made. They have really embraced the challenge before them and are beginning to aggressively market energy solutions to meet one of the biggest challenges that we face in the U.S -- pricing energy and utility costs. Lighting has developed a program that will enable customers to obtain substantial rebates for implementing energy-saving bulbs. These projects on average have a two-year payback for the customer. I'm going forward to monitoring the progress in fiscal 2006.

In closing, as a result of our performance for fiscal 2005, we believe we have strong operational momentum that will carry us into fiscal 2006 and beyond. We are hopeful that the recent increase in sales activity across all of our operations will gain momentum as the year unfolds, especially because ABM's national presence, diverse service capabilities and our financial strength enable us to meet the increasing demand of customers and to extend our leadership position in the industry.

Based on the current economic environment, our strong operational momentum, and the recent increase in sales activity, we expect income from continuing operations in fiscal 2006 to be in the range of $1.08 to $1.14 per diluted share. This is exclusive of future acquisitions but does include $0.06 of stock-based compensation expense as the result of the adoption of FAS 123R in fiscal 2006. Excluding 2006 stock-based compensation and 2005 insurance tax benefits related to prior years, we expect this increase income from operations to be more than 20%.

For the first quarter, we are expecting diluted earnings per share of $0.15 to $0.17, which includes higher expenses of approximately the $3 million after-tax due to Sarbanes-Oxley, as well as stock-based compensation.

At this time, I would like to open the call up for questions. Operator?

(OPERATOR INSTRUCTIONS). Jeff Kessler with Lehman Brothers.

Thank you and good quarter, guys. I have a couple of questions regarding what we will call the extraordinary gains and we will say charges that you took in the fourth quarter and how they may or may be ongoing.

First, you had a couple of gains in the quarter that helped the quarter. Your SOX costs were obviously higher than you expected. Now, the question is, is what part of that SOX cost do you expect to be one-time in nature, given the fact that it's the first real SOX audit that you had to go through? What part of that SOX cost is going to be a continual, ongoing operational cost that we're just going to have to put into our P&Ls when we do our modeling?

Yes, on the SOX cost side, we believe that, ongoing, we will probably see 50% of the costs we've experienced in '05 to continue in '06. Most of that or a good portion of that, let me put it that way, will be in the first quarter because we're still finalizing the process in November and December and maybe in through a couple of days in January as well.

In the fourth quarter, would you say your SOX costs were 50% above what the normal run-rate would be, or was it higher because it was the fourth quarter?

It was much higher in the fourth quarter than we anticipated starting the year. It was higher in the fourth quarter than we anticipated going into the fourth quarter, but not as much as we expected at the beginning of the year. The fact of life is that the fourth quarter and this for us was as much related to getting all our systems in place, which a good portion of that is one-time investments.

Right. I was interested in looking at the leverage that you're getting in the parking business. Can you go into that a little bit on how a dollar of revenue translates into a very, very high percentage of change on the operating-income side?

Yes. I can tell you, for the year, we did get out of a couple of bad contracts at the beginning of the year, and the activity has increased mostly in the airports. If you remember back, Jeff, I was crying to last two, three or four years about our airport leases. Basically, they were big losers at that time and now finally they are -- the worst ones are -- we might have one bad left but in general, they are now making money. So overall, that is a huge thing for us and that's probably the biggest thing for us.

Okay. In attempting to generate a little bit more granularity in terms of getting down to the free cash flow number as opposed to just cash flow from operations, George, do you have both D&A and CapEx for the quarter and for the year?

Yes, I do, Jeff. For the quarter, depreciation and amortization was just under $5 million, and for the year, it was just below 20.

Okay, and CapEx?

CapEx, as I indicated, for the quarter was $2.8 million and for the year, 17.7.

All right, great. Finally, one final question, and that is and everybody is going to ask you this anyway -- your acquisition plate for the first part of 2006, obviously you're not going to tell us who you're going to acquire, but you can tell us what you're looking at. Is this going to be more of the same? More security? More janitorial? Is there any acquisition possibility in some of these other areas as well?

In general, you know, I've said before, we primarily are looking at the janitorial and the security fields. We have also been looking in the parking area. Jeff, you know I'm not going to commit if I'm going to do anything in the first quarter, second quarter, third quarter, and fourth quarter. The only thing I can tell you is, from an activity base and an activity evaluation, we are as active in this area as we have been in the past.

All right, very good. Thank you very much.

Kevin Monroe with Thomas Weisel.

I was wondering if you could disclose or let us know where the one-time gains related to the sale of leasehold and the write-down of the insurance, where they are on the income statement. Are they in cost of goods sold or in SG&A, or both?

With regard to the gain on the parking operation, that is included in sales and other income. The reductions in the insurance rates, the prior-year reserves is in cost of goods sold.

You ran through your internal growth; I caught two of them. What was the third, though? You said there was 22.5 million from acquisitions, 12.1 million internal. There was another component there I think you mentioned.

I mentioned the 4.3 million from the sale of the parking lease -- (multiple speakers).

Okay, so that's on there. Okay, that's what I thought; okay.

Your lighting business had a nice acceleration of growth this quarter. It has been lumpy in the past; we've had some declining quarters and a good quarter. You know, what are you seeing there? Going forward, what do you think? Is this business finally turning, or what are your thoughts on lighting going forward?

I'm so happy you asked that because lighting is, in my opinion, one of the greatest opportunities we have as a company. We are facing -- this country is facing, in my opinion, energy costs rising at a rate we haven't seen before. It is our belief that we will be able to change the strategic focus in that division from being the lightbulb-changing company it has been in the past to hopefully be a strategic energy-solution company for our partners and our customers. This business, in my opinion, has a huge upside; I hope we can execute it.

Then can you maybe give us a little more color on how you do that, like, what are you doing to kind of I guess change the whole culture of the segment it sounds like, or your -- (multiple speakers)?

Well, the fact that life is historically -- if you go back in history and see where we were really profitable in this business, it has been through these scenarios -- back in 2001 and 2002, when we had this perceived energy crisis in California, that's when lighting has the best years. The reason for that is, the retrofit jobs we do where we can go into clients with the energy savings component and lightbulbs and save them up to 30, 40, 50, 60%, all depending on the lightbulbs they have as we speak and the lighting system they have in place as we speak. So we represent a huge upside for the client.

Good. Thank you.

David Leibowitz with Burnham.

Good morning. Briefly, on your security division, which is now a full entity unto itself, the accounts you've gotten so far -- are these local, regional or national?

I would say we've experienced growth and we're happy to report that we've experienced growth as a result of being a true, nationwide company. We've seen growth that we would not have seen in the past. So, we still hopefully will have the growth on a local basis, because it was not the intention of being a nationwide company to lose that growth cycle, but we feel that we've entered a new area and we are being considered among clients who are looking for nationwide solutions. So, absolutely we've seen growth there and we expect more growth there.

But at the moment, what percentage of your business is local versus national?

David, I have no idea.

In terms of the acquisitions in this specific arena, is there any feeling, as you view it, that you would not want to gain more than X number of dollars worth of revenue in this business via acquisitions?

I have no -- very few concerns about how big it should be; I am more concerned about the pricing. When we look at acquisitions, we're looking at the janitorial world but we're one of the few buyers out there and therefore probably the pricing is not that high. I know the growth in janitorial is probably not -- internal growth is probably not as great as security and the future (indiscernible) security, but we're still dealing on sizable security companies. You're dealing with multiple, two or three times what we've seen janitorial. I would like to invest the shareholders' money in the best possible way and I still believe that if we can do acquisitions at multiples of 5, 6 instead of 13 and 14, I will continue to do that.

Last question -- turning to parking for one moment, it has been the Company's policy virtually since inception not to own any of the real estate underneath the parking spaces. Is that, as you view it, the position going forward?

I have the position, David, that there are a lot of people out there and a lot of very qualified people who understand real estate much better than me.

Very fine. Thank you very much.

(OPERATOR INSTRUCTIONS). David Gold with Sidoti & Company.

Just a couple of questions -- George, on the Sarb-Ox side, if we pull that in, you know, by about half, it sounds like that would contribute, say, $0.07 of growth next year, so to speak, or $0.07 to the bottom line.

Not quite that much.

It's I think somewhere -- it seems like it cost you $0.14 this year.

Well, we had $12 million of charge, which would be close to that.

I got you. So I guess, if we cut that in half, that's about $0.07, and then we have one less workday and that's another $0.03, so about $0.10 there. I know you have $0.06 of options expense, what basically would give you sort of a base case of, call it, $1.04 (indiscernible). I'm just curious if you could flush this through -- out a little bit your thinking and where you are looking for some of the upside and maybe on the low end why we are being so conservative on the guidance.

There's two other items that we consider more one-time in nature; that's where we are adjusting prior years' expenses. So the third-quarter charge of 5.5 million on the insurance reserve adjustment, we are hopeful to have that again, but we're not anticipating it. Additionally, we had the favorable settlement of 2.7 million with the state income tax on prior years. So, when we take those out, we see growth more in the 15 to 20% range.

Just sort of following up there, maybe Henrik, you can give us some color on, divisionally, where you'd look for, say, the most progress as we go into '06.

Well, it is the first time in my career, David, that I have five divisions, all divisions giving double-digit growth, which is unheard of in my world. Trust me; I always have to come up with an excuse about one of them! (LAUGHTER). I think you will see engineering, based upon the sales activity we see, I really expect engineering to have an outstanding '06.

I'm seeing sales activity in the janitorial world at a level we haven't seen before. There's certain things. It gives me a good chance to say something, David, because janitorial makes so many very, very good decisions and I can give you an example of a good decision they made this year. This does hurt my growth a little bit, but I have good people who understand when to back out of a client. We were trying to, with one of our major, major airlines, we were trying to make sure they prepaid and the customer did not want to prepay, so that particular airline then went bankrupt four or five months after we went out of it. The fact of life is we took a decision to say we want to give up the business and running the risk. That hurts growth but surely helps my shareholder because we didn't lose the money through a company going into bankruptcy.

This year, I see sales activity in janitorial that I haven't seen before; I see them (indiscernible) say half of the opportunity at least being on the industrial side, which makes me very, very positive.

The Lighting side, as I tried to mention before, I think we have a two or three or four-year window that we have to execute, and I'm sure we have some very talented people in the Lighting division. I part of their strategic meeting two or three months ago and I was very encouraged and very impressed with the direction of the Company.

Security -- hopefully this year it's going to be a year we're really going to benefit from having one strong nationwide security company. Parking -- Parking has had a very, very solid year, and I see growth in Parking and I hope Parking is going to continue what they've done.

Lastly but not least, I'm one of the few people who looks at SOX maybe being something very positive for our company. It's away for us to separate ourselves from the pack. The clients know that we have internal control systems in-place. Take parking, for instance, where we feel (indiscernible) cash every day. I'm sure that the major, major customers who have owned these (ph) parking garages are interested in the fact that we have rules and regulations for separations of duties, etc. So '06 to me looks extremely positive, and it's very difficult for me to say that without stumbling (LAUGHTER) but I'm very pleased with the quarter and look forward to next year.

Just to touch on this, you look at janitorial, do you think the progress you're making there presumably (indiscernible) topline and profitability, is more a function of increased marketshare or do you think it's more a function of improved vacancies in occupancy or some combination?

Let's separate these things. Last year, we had very little growth in the Janitorial division, but I think we were able to concentrate on the highly profitable piece of our business; Janitorial is not highly profitable -- but the more profitable piece of our business. I think that they did a very, very, very good job in controlling the cost associated with our business.

This year, I do think and feel we have momentum and I think that the sales increase I'm looking for is primarily related to new business, less than tag (ph) sales and extra services.

Okay. Then just lastly, thinking on the repurchase side, I think your authorization expired at the end of October. Just thoughts there?

It is, as you know, a Board decision, and at our next Board meeting, it is something we want to discuss.

I got you. Thanks so much.

At this time, there are no further questions.

Well, thank you very much and enjoy your holidays and we will still try to enjoy ours. So, thank you for listening.

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