ABM Industries Inc (ABM) 2006 Q2 法說會逐字稿

Good morning. Good morning. My name is Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the ABM Industries Incorporation second quarter earnings results conference call. [OPERATOR INSTRUCTIONS]

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

Thank you. Good morning. I'm Henrik Slipsager, President and CEO of ABM. Joining me are George Sundby, Executive VP and CFO, and Linda Auwers, our Senior VP and General Counsel. On the call today, I'll provide an overview for our operational results for the second quarter ended April 30, 2006, George will discuss our financials in detail, and then I will conclude our prepared remarks with a summary of our operational achievement for the quarter, as well as provide an update on guidance for the remainder of fiscal 2006. 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 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-K annual report, Forms 8-K and the Form 10-Q that we file with the SEC.

Thank you, Linda. We are pleased with our strong operating results and in comparison to the perio -- prior year period. Contributing to our revenue and earnings growth were acquisitions in janitorial security, new business in all operating segments and expansion of services with existing janitorial and engineering customers. In the second quarter, sales and other income increased over 3% from the last period last year, and income from continuing operations for the quarter ended by over 17% to $10.4 million or $0.21 per diluted share. Our janitorial, parking and engineering operations posted double-digit growth in operating profit and all of our business segment, except lighting, experienced top-line growth. Gross margins during the quarter improved by 77 basis points year-over-year due to acquisitions, new business, elimination of unprofitable contracts, and one fewer work day in the quarter. During the quarter, we made solid progress on working towards our goal of returning SSA to profitability by the fourth quarter. We repurchased 800,000 shares in the open market at a cost of $13.9 million and we paid our 160th consecutive dividend. We ended the quarter with $25 million in cash and cash equivalents, approximately $242 million in working capital, and no debt.

Before I get into more detailed discussions of our operating segments, I would like to call over to George for a review of our second quarter and first six months of fiscal 2006 financial results. George?

Thank you, Henrik, and good morning, everyone. I'd like to review the consolidated results for our second quarter ended April 30, as reported in yesterday's earnings release. Our quarterly report on Form 10-Q is scheduled to be filed later this week with the Securities and Exchange Commission. For the second quarter, income from continuing operations increased 17.5% to $10.4 million or $0.21 per diluted share, as compared to $8.8 million or $0.17 per diluted share for the second quarter of 2005. Sales and other income from continuing operations was $660.1 million, which is up 3.2% compared to the last year's second quarter. The increase in sales includes $4.6 million from acquisitions. Income from continuing operations for the second quarter includes a $700,000 after-tax charge or $0.01 per diluted share for the expensing of stock options that became effective this year. Our results last year does not include stock option expense.

Income from continuing operations for last year's second quarter includes three unusual items which virtually offset one another in consolidation. These items were: A $6.3 million pretax charge or $0.08 per diluted share related to a janitorial discrimination lawsuit, which we appealed and ultimately settled for a lower amount; a $2.7 million or $0.05 per diluted share income tax benefit from the settlement of prior year's state tax audit; and a $700,000 after-tax gain or $0.01 diluted per share related to additional proceeds received in connection with the Company's World Trade Center insurance claim. With regards to our business interruption claim related to the destruction of the World Trade Center, which we continue to vigorously pursue, the trial is currently scheduled for mid-August.

As previously discussed, the number of work days shift from quarter-to-quarter causing positive and negative impacts on the profitability of our fixed price janitorial contracts. For the second quarter, the janitorial operation benefited from one fewer day of w -- one fewer work day in the second quarter of '06 compared with the second quarter of fiscal year '05, which decreased pretax labor costs by approximately $2.4 million. For the remainder of fiscal year '06, janitorial will have one additional work day as compared with 2005, which will occur in the third quarter of 2006. The one fewer work day benefit substantially offset the $2.4 million pretax expense associated with the audit committee's independent investigation of the accounting issues in the securities segment. These issues, which involve the operations acquired in 2004 from SSA LLC were what led to a material weakness in our SOX 404 certification and delayed the filing to March 29th of our 2005 Form 10-K annual report.

The effective and state income tax from continuing operations for the second quarter was 37.6% compared with 10.4% last year. The lower rate in 2005 was due to the $2.7 million tax benefit from the resolution of prior tax matters. For the third and fourth quarter, I would anticipate a combined effective tax rate of approximately 37.5%.

Turning to the statement of cash flows, cash from continuing operations for the second quarter was $15.2 million compared with a use of cash of $1.5 million for last year's second quarter. The cash flow increase was primarily due to greater collections of receivables, combined with lower estimated income tax payments, which more than offset the payment of litigation settlements in the second quarter of '06. As Henrik mentioned, we continue to have a very strong financial position, with over $25 million of cash at April 30 and no debt. The largest component of working capital continues to be accounts receivable, which remained level at $373.5 million with the balance at the end of the first quarter. Accounts receivable that were over 90 days past due decreased $2.5 million to a total of $31.9 million or 8.4% of our total outstandings. Previously at quarter end we had $34.4 million or 9.2%. However, day sales outstanding at quarter end did increase one day to 57 days. Our allowance for doubtful accounts and sales allowance remained level during the quarter at $8.4 million.

Turning to insurance reserves, at April 30 our total reserves were $207.5 million, which is up from the $198.6 million reported at the end of fiscal year '05. Self-insurance claims paid in the first six months of '06 were $30.1 million, a decrease of $800,000 or 2.6% from the $30.9 million paid in the first half of 2005. Also, as Henrik reported, during the second quarter, we repurchased 800,000 shares at an average cost of $17.43. Under the current authorization from the board, which expires on October 31, 2006, the Company has 1.2 million shares remaining.

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 2006. Henrik?

Thank you, George. I'll briefly review the operational results for the second quarter and update our guidance for fiscal 2006. Janitorial -- our janitorial operations posted a revenue increase of $1.1 million compared to the same period in 2005. Acquisition coupled with new business in California, northwest, south central, southwest, and north central, as well as expansion of existing customers contributed to the increase. The increases were partially offset by reduction in sales from lost accounts in the midwest and northeast regions. Our operating profits with janitorial increased by $10.8 million, 105.5% during second quarter 2006 compared to the same period in 2005.

Sales activity of late has been encouraging. I'm pleased that our janitorial team has recently won new business and expanded existing services with companies in the high-tech, pharmaceutical and financial service industries. Our parking business had a solid second quarter, rebounding from the soft performance in Q1. The parking sales for the second quarter increased by $6.9 million or 6.9%, while operating profit increased $600,000 or 23% compared to the same quarter last year. The increase in operating profit is due to higher margin contributions from new contracts and lower lease expenses. In May, Ampco was offered a multi-million dollar contract with the city of Minneapolis. The contract covers parking operation management, as well as security, janitorial and engineering services for the city's 30 parking. facilities.

Security sales increased $2.6 million or 3.6 from the prior period, due to contributions of $1.5 million from acquisitions and new business. Operating profit increased 7.5% during the second quarter of 2006 compared to the second quarter of 2005. We have continued to make solid progress in returning SSA to profitability by the fourth quarter. And more importantly, we expect that the changes we are currently implementing will enable SSA to achieve a level of sales and operating profit in fiscal 2007 consistent with our original expectations when acquired of annual sales of over $100 million and operating income north of $5 million.

Our engineering team delivered another strong quarter of operating performance. Sales for engineering increased $11 million or 19.2%, due to successful sales initiatives resulting in new business and the expansion of services to existing customers across the country, most significantly in the mid-Atlantic and eastern regions. Operating profits increased by 18.3%. We continue to benefit from our decision to combine ABM facility services and ABM engineering, which gives us a stronger platform to market our services.

Lighting sales decreased by $1.6 million or 5.3%, and our operating profit decreased approximately $600,000 or 69.4% during the second quarter. While I'm disappointed with the result, I believe that lighting will see marked improvement during the coming months. The sales pipeline is an all-time high and the project backlog as increased dramatically. I continue to believe that our customers will start to take advantage of the energy tax incentive act of 2005 commercial building deduction, which enables business that make improvements to the energy system eligible for tax deductions up to $1.80 per square foot.

In closing, we are pleased with our second quarter operational performance and believe they have a strong momentum for the second half of the year. We will continue to utilize our strong balance sheet and operating cash flow to capitalize our organic growth opportunities, to make complementary and accretive acquisitions, and to increase shareholder value through our dividend plans and stock repurchase program. Based on the current economic environment, we continue to expect income from continuing operations for fiscal 2006 to be in the range of $0.85 to $0.95 per diluted share. This is exclusive of future acquisitions and includes $0.06 of stock-based compensation expense as a result of the adoption of FASB 123(R) in fiscal 2006. For the third quarter, we expecting diluted earnings per share of $0.28 to $0.31. We look forward to updating you on our progress next quarter.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Jeff Kessler of Lehman Brothers.

Thank you very much. Henrik, can you clarify this for me. Even though when we get down to your bottom line, we are talking about $0.21 versus $0.17. But when we go up the line into your divisional operating profit, it appears that you had a rather large, much larger increase in your operations and offset by income tax rate. Can you go through that for a second, what the difference in the income tax rate was? It looks like it was a regular statutory rate this year and the question is, is what happened in comparison from last year?

Jeff, I'll let George talk about taxes.

Jeff, it's George. In last year's second quarter, we had a $2.7 million tax benefit. We had been under audit by several state agencies and as a result of resolving those matters, we were able to -- while we did have to make a payment, we were able to bring down some reserves. So there was a $2.7 million benefit in our tax line and that's why the tax rate for second quarter 2005 was 10.4%.

Okay, so you -- but your pretax number was up 68.5%?

Yes, tha --

That's a real operating pretax number.

That's a real operating pretax number, but you have to take -- I would like to say, that's our normal way we run our business -- but you have to take out that settlement we had last year of $6.3 million on that discrimination lawsuit in Seattle, which hit operation last year.

Okay.

So that's a one-time hit last year. This year is normalized from operating -- from an operational point of view.

Okay. Nevertheless, you add back 6.3 -- okay, fine.

It was still a good quarter from that perspective.

Yes. The second, can you go over, once again, the World Trade Center numbers/ Just permit me, you know, with my memory going on me, what is the total amount that you stand to get if you win and what is the number that is currently out on the table?

Jeff, let me try to answer that. As you know, over the years, we've gone to various summary judgments. Currently, we're scheduled to go to trial mid-August. We lost $10 million of profit each yea -- annually from the destruction of the World Trade Center. We had three operations that were there. Additionally, we have incurred extra expenses. Our suee rate, as an example in New York, went from 3.6% to over 9.5% for a certain of the subsidiaries operating there. Our policy limit is $127 million, of which we've collected about $15 million, so depending on how the trial goes, we could recover up to $112 million. In recent summary judgment motion, the judge has ruled that we're entitled to the theoretical period to rebuild the World Trade Center, subject to contrac -- the period that the existing contract was there and the likelihood of renewal. Additionally, as a result of the legal situation we're in, we earn interest on the settlement, and that'll go back to December of 2001, and that rate is 9%. And the third component is we will recover our legal fees associated with this matter.

Okay. So this could -- if you win everything, this could ultimately be more than the $127 million minus the $15 million?

That's correct.

Okay. There was a -- there seemed -- there's apparently a fairly large increase -- percentage increase in your corporate expenses this year, year-over-year. Can you go through that?

I think we mentioned on the corporate expense side -- George can be more specific -- on the corporate expense side, we were hit by the investigation -- the independent investigation that we have talked a lot about of $2.4 million in the quarter, which resulted in a higher expense on that side.

Yes, and that's why I refer to it. My question is it's not just about the magnitude of the corporate expenses, but the timing. When do you -- when are we going to see this episode, particularly on what you're paying out, put behind you?

It's behind us. The way I look at it, we have finalized the investigation. We have a complete action plan in place for SSA. It's moving ahead operationally. We have seen great improvements this quarter. We've seen trends for next quarter looks very good. We have a savings plan in place as well. So as I mentioned in my call, I hope 2007 will bring us very close to our original plan, at least that's what we're targeting.

Okay. Final question, that is, lighting seems to be somewhat of a -- we'll call it an economic yo-yo for you folks; one quarter it's good, one quarter it's bad. I'm not suggesting anything strategic with it. What I am asking you is more with regard to your visibility. Tight now you're talking about very good visibility from a contractual -- a forward contractual point of view. Is there enough visibility to have some confidence that lighting is going to be a bit more of a consistent performer over the course of the next six to nine months?

Yes. I don't know if it's been a yo-yo effect because I only remember it being down lately. But I do expect it to be -- if you look at the yo-yo effect, I think it's going to be a very positive surprise over the next hopefully 12 to 18 months. When I talk about levels increasing, we've never seen it like this before. It's an all-time high. And the only comparison I have, Jeff, if you go back to 2000, 2001, in California where we were experiencing the same energy crisis situations, we had some superior months for years and quarters, associated with that. So the fact of life is, compared to the rest of our business, the profitability associated with these projects if, in fact, they get going, are greater than the average profits we see in our business. And I have, based upon what I see in the backlog, delays are happening, but a lot of work also being released as we speak, which I believe is going to result in some good surprises for us going forward.

Okay, and finally my -- I promise, last question here. Vacancy rates, whether they're put out by Torto Wheaton or Newmark, any of the studies of the commercial real estate guys are showing that vacancy rates in New York and in some other cities are beginning to get to a level at which you should be seeing some tenants putting in place some ancillary contracts for you and making -- you making some money off of these tenants, where you're getting vacancy rates down to the 10%, 11%, 12% area. Are you beginning to see any effect from better occupancy in the buildings that you service?

In general, the way I would respond to it, Jeff, is if you go back the last two or three years in our janitorial operations and look at the improvement overall in the bottom line percentages of our business, it's clearly an indication of the improved economy, where our bottom line percentage has gone up, pretty steady over the last three years. We have not grown to the level we would like to grow internally, because we have been focusing on getting us back to the 5% level bottom line, and I think we're going to be close this year and we've seen steady improvement. And you're right, the economy and the result of that, we're seeing every day right now.

Okay. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next question comes from David Gold of Sidoti.

Hi, good morning.

Good morning, David. Just a couple more questions on the security side of the business. One -- essentially, I guess by reiterating the guidance and your comments, it sounds like you still feel like we're on track there in the repricing for breakeven by year end in the SSA piece? It's a combination of repricing and adjustments in overhead to get back to a proper operating level, and yes, we are on track with our plan.

Okay. Can you talk a little bit about progress on the repricing side? Are you seeing much pushback? Are customers amenable to it, or what are we seeing in the early stages of -- presumably 30-day notices, at least, have gone out, right?

Yes, we started in February and the only conclusion I can make right now is sales for SSA is up for the period, it's up for the month, so it has not resulted in any kind of mass cancellations. I'm not aware of any cancellations, but I'm sure there's been one or two but nothing major.

Okay. And I think coming through the last quarter, it said you lost a little bit north of $1 million in that business in that quarter. Would you guys have handy a similar number for the second quarter?

Yes, David, for the second quarter, SSA lost close to $0.75 million. Part of that was some minor further accounting clean up. That was less than what we had forecasted, so that's part of the why we are confident in the turnaround of SSA.

And then, Henrik, did I hear you right in saying that for next year, you think you could have that back to about $5 million of operating income?

No, I didn't say. I said the targeting goal for next year is to get back to that level. If that happens in the first, second or third quarter, I don't know, but our target for sure is to get it back to the level of profitability we expected when we acquired them.

I thought that was similar to what I said. But, so presumably, if we have that $5 million this year, looks like -- well, year-to-date I guess we've lost a couple of million there, so right there we could have a $7 million swing.

No, I think, David, I have to -- I would love to have that situation, but that's not what I said.

Okay.

I did say that, during 2007, we'll hopefully have them back to our operating level. If that doesn't happen to the second quarter or third quarter, then you will have a little trailing impact in first and second quarter.

I see , I -- okay, so you're saying on a run rate basis?

Yes, sir.

Got you, got you. Okay. Missed you there. Thanks. Fair enough. Good deal. Thank you very much.

Thank you, David.

[OPERATOR INSTRUCTIONS] At this time, sir, there are no further questions. Are there any closing remarks?

Just want to thank everybody for listening and look forward to talking to you again in 90 days. Thank you.

Thank you. This concludes today's ABM Industries Incorporation second quarter earnings results conference call. You may now disconnect.