ABM Industries Inc (ABM) 2006 Q3 法說會逐字稿

Good morning. My name is Luanna(ph) and I will be your conference operator today. At this time I would like to welcome everyone to the ABM Industries Incorporated third quarter earning 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.

Mr. Slipsager, you may begin your conference.

Thank you. Good morning. I am 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 ended July 31. George will discuss our financials in detail, and then I will conclude our prepared remarks for the summary of our operational achievement for the quarter, as well as provide an update on guidance for the remainder of fiscal 2006. 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 word 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 related to our business are described in our form 10-K annual report, forms 8-K and the form 10-Q that we will file with the SEC shortly.

Thank you, Linda. In general we are pleased with our consolidated operating performance for the third quarter. Top line growth was 6% with both (inaudible) and engineering achieving double-digit increases. The $689.3 million of sales and other income is a quarterly record for ABM. Our income from continuing operations on a year-over-year basis was down. The result exceeded our guidance. There were a number of unusual items expecting comparability. 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 2006 financial results. George.

Thank you, Henrik, and good morning, everyone. I would like to review the consolidated results for the third quarter ended July 31 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 third quarter, income from continuing operations decreased 16.2% to 17.3 million or $0.35 per diluted share when compared to 20.6 million or $0.41 per diluted share for the third quarter of 2005. Net income for the third quarter was the same at 17.3 million or $0.35 compared to 34.8 million or $0.69 per diluted share for the third quarter of '05. The third quarter of 2005 includes the sale of CommAir Mechanical Services, our HVAC California business which was sold for $32.3 million. Sales in other -- sales and other income from continuing operations, as Henrik reported, was 689.3 million which is up 6% when compared to last year's third quarter. The increase in sales includes just a little over $4.4 million from acquisitions made during the last seven months.

As in 2005, the third quarter includes the adjustment of insurance reserves to the latest actuarial estimate. A benefit of $7.9 million has been recognized in the third quarter results pertaining to lower estimates -- ultimates projected on prior period estimated losses. 3.2million is reflected as a direct rebate to our segment for having over charged first half insurance premiums, while $4.7 million is a benefit in unallocated expenses for the reduction of reserves pertaining to 2005 and prior years. Our forecast for the third quarter that we presented to you in June had assumed a $2 million benefit from the favorable trends observed by the actuary in a limited review performed earlier in the year. 7.9million benefit compares to a $9 million benefit reported in the third quarter of 2005 of which 3.5 million was recognized as a rebate to our segments and 5.5 million was reflected as unallocated expenses from favorable prior year reserve development. We continue to see favorable trends coming out of the work we're doing with claims management that has offset the adverse development recognized in 2004.

Income from continuing operations for the third quarter includes a $1 million benefit from the reduction of an allowance for doubtful accounts set up against a receivable from the sellers of SSA who were performing subcontracting services during the security license transition period. While the Company continues to pursue additional amounts, information received from the sellers confirms at least $1 million was owed. Effective November 1, 2005, ABM started recognizing stock option expense which resulted in a $500,000 pretax compensation expense or $0.01 per diluted share. Last year's results as you know did not include stock option expense.

As we have previously discussed, the number of work days shift from quarter to quarter causing positive and negative impacts in the profitability of our fixed price janitorial contracts. For the third quarter the janitorial operation incurred one additional workday in the third quarter compared to the prior year's third quarter. This reflected an increase in pretax labor costs of approximately $2.4 million. For the first nine months and for the full fiscal year of 2006 janitorial work days will be the same as the comparable 2005 period. Income from continuing operations for last year's third quarter included two unusual items, a $1.3 million pre-tax benefit related to a janitorial discrimination lawsuit which we had settled for a lower amount than previously accrued. The effective federal and state income tax for continuing operations for the third quarter was 35.9% compared to 34.2% in last year's third quarter. The higher rate in 2006 is due to a 1% overall increase in the 2006 effective tax rate due to the non-deductibility of certain amounts of the stock option expense recognized and a slight increase in state income taxes. For the 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 third quarter was $30.1 million compared with the use of cash of $2.2 million in last year's third quarter. Cash flow increase was primarily due to greater collections of receivables which held our overall receivables generally level with the amounts at the beginning of the quarter. Additionally we had lower estimated income tax payments. As Henrik mentioned, we continue to have a very strong financial position with over 50 million of cash at July 31 and no debt. The largest component of working capital continues to be accounts receivable which was previously mentioned remained level at the end of the quarter at $373.5 million.

Accounts receivable 90 days past due increased $5 million, however, to 37.2% -- 37.2 million or 9.9% of our total outstandings which compares to the previous quarter end of 31.9 million or 8.5%. Day sales outstanding at quarter end decreased two days to 55 days. Our allowance for doubtful account and sales allowance remain generally level at $8.3 million. Insurance reserves at July 31 were 204 million which is still up from the 198.6 million at the end of fiscal '05. Self insurance claims paid for the first nine months were 43.8 million, a decrease of $2 million or $4.4 million from the 45.8 million paid in the comparable period for 2005. During third quarter no stock was repurchased under our current authorization from the board which expires October 31, 2006. The Company has 1.2 million shares remaining.

As discussed in our August 15th, 2006, press release, ABM has settled its longstanding litigation with its insurance carrier regarding the business interruption claim from the destruction of the World Trade Center. Under the settlement ABM will receive $80 million at the end of September and will recognize approximately $45 million after tax or $0.90 per diluted share in the fourth quarter.

With that let me turn the call back to Henrik who will give perspective on ABM's quarterly performance and update our outlook for 2006.

Thank you, George. I will briefly review the operational results for the third quarter and update our guidance for fiscal 2006.

Janitorial. Our janitorial operations posted a revenue increase of $11.5 million or 3% compared to the same period in 2005. We added new accounts and expanded business within our specialty cleaning and high technology clientele. We experienced growth in the following regions, northern California, northwest, south central, southeast, southwest, and north central. Tax sales also contributed to the top line growth. Sales from acquisitions completed in the fourth quarter of 2005 and the first nine months of 2006 contributed $3.8 million.

Operating profit for the janitorial decreased by 2.1 million or 8.1%. There were a number of unusual items impacting the comparability of quarters. The third quarter fiscal 2006 included one more work day unfavorably impacting janitorial fixed price contracts by approximately $2.4 million. In addition, at the end of the discrimination lawsuit was settled in the third quarter of 2005 for less than previous accrued which increased income from continuing operations by $1.3 million for '05. The last item is insurance repaid for Q3 2006 which is $800,000 lower than Q3 2005. When I compare year-over-year results from operations, exclusive of these unusual items, I am pleased with the performance, and the bottom line improvement over the past three years is very, very impressive in this condition(ph).

Parking. Sales increased $12.9 million or 12.6% while operating profit increased $0.5 million or 11.6% during the third quarter of 2006 compared to the third quarter of 2005. The majority of the sales increase came from higher reimbursement, out of pocket expenses for managed parking lot clients for which there was no associated margin benefit. These improvements were partially offset by the reduction in lease revenue due to the October 2005 sale of the leasehold interest in our off airport facility that had contributed $2 million in sales in the third quarter of '05. We continue to secure new contracts and reasonably add at the Sacramento Airport in California.

Security sales increased $2.7 million or 3.6% during the third quarter of 2006 compared to the third quarter of 2005 primarily due to contributions from acquisitions and sales from new business. While operating profit decreased by $0.5 million or 20.19%(ph) from the comparable period, the security organization made substantial progress on consolidating operations, closing branches, and implementing organizational changes. And while these decisions are difficult to make and equally difficult to execute, we continue to believe we're taking appropriate steps to restore the SSA business to a level of profitability in '07 that is consistent with our original expectations of when we acquired the operations.

Engineering. Sales for engineering increased by $10.8 million or 17.7% during the third quarter of 2006 compared to the third quarter of 2005. Due to successful sales initiatives resulting in new business and expansion of services to existing customers across the country but most significantly in northern California, Los Angeles, and eastern regions. Operating profit increased 300,000 or 7.3% during 2006 compared to 2005 due to the higher sales. Engineering has really performed extremely well in all three quarters of fiscal 2006 on a year-over-year basis operation from the organic growth of 17.4% and operating profit has increased by 10.4% despite increases to general and administrative costs to support the increase in sales.

Lighting. Lighting sales increased by $1.2 million or 4.5% but operating profit decreased by 800,000 or 87.5% in the third quarter of '06 compared to the same quarter a year ago. Project sales for typically have higher margins of 12% so far this year. While contract sales, which carry lower margins, are up 5%. In addition to the sales mix issue, subcontracting expenses has been increasing certain regions due to higher fuel expenses and rates of labor. To combat these particular increases in operational expenses, we are moving towards a heavier sales performing model where appropriate in factoring costs increases in our proposals. We are continuing to actively market our innovative solutions. In the third quarter our lighting backlog increased by $24 million only 33% to over $97 million.

In closing we are pleased with our consolidated third quarter operational performance and believe we have strong momentum going into the first -- fourth quarter. In the fourth quarter we will also record the income and receive the payment of settling the business interruption claim with (inaudible) American Insurance Company for $80 million. Since September 11, 2001, we have devoted substantial resources to enable operations and employees in our northeast region to rebound from this tragic event. We are gratified that our interest and out committment to protect the shareholders interest is (inaudible) in this settlement. The Board and I wish to acknowledge the hard work put in for nearly five years from our leader department and our outside law firms. With this matter now behind us we continue to focus our efforts on increasing shareholder value.

Based on the current economic environment we expect income from continuing operations for fiscal 2006 to be in the range of $1.80 to $1.85 per diluted share which does include approximately $45 million or $0.90 per diluted share for the settlement of the business interruption insurance claim. The guidance is exclusive of future acquisitions and includes $0.06 of stock-based compensation expenses. We are reviewing strategic investments in our information technology infrastructure as well as certain implementation costs. Should we implement these programs and enhancements, that will be one-time costs in the fourth quarter which are not reflected in our guidance. We look forward to updating you on our progress next quarter.

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

[OPERATOR INSTRUCTIONS] Your first question is from David Gold of Sidoti.

Hi, David.

Hey, good morning. A couple of questions for you on the benefit from the insurance. Henrik, you said this year in janitorial the contribution -- the benefit was about 800,000 less than last year, and I guess I have down that last year the janitorial portion was 2.2 million so that would give us 1.4 million in janitorial, is that right?

David, this is George. The 2.2 million in '05, the comparable number for '06 will be 2.1 million. I think the overall increase -- decrease Henrik was talking about was the total rebate that we had done. But, what we disclosed is the prior rebates for the first two quarter and is that was 2.1 million for janitorial.

There is one thing I think might not come across when we discuss this insurance, David, and that is the cost of operations going forward are lower than we've been experiencing in the first couple of quarters, so our competitiveness and the savings that we're talking about are ongoing long-term.

Okay. Now, so, George, you said 2.1 million then in the janitorial portion and the rest spread out or are there any big chunks?

300,000 for parking, 400,000 for security, 300,000 for engineering, 100,000 for lighting, and all that adds up to the 3.2 million in my comments that we had rebated to the field for first half premiums.

Okay. And then presuming, I mean, I guess this is the third year of revisions. The last couple of years positive. I guess, is it better kind of management on the claims side that's driving this or are the actuaries just way off or what's kind of behind it?

I think a number of things are behind it, even though we did take a humongous hit two or three years ago, with the hit on insurance. I did feel that maybe it was too conservative and I think I mentioned that in our conference call that time. Nonetheless the market penalizes pretty dramatic. I think you see a combination of two things, I think, maybe they were too conservative at that time, and a tremendous effort, both by our insurance department and the field to hold these claims down and to control and work with our third party administrators are really paying off, and the trend we see now, we sure hope the trend will continue. There is no reason to believe that the trend won't continue.

One more thing I will add, David, because it's frustrating, sometimes maybe for you and other analysts, but more frustrating to me. The fact that we have an actuary review means that we will have an adjustment once a year, and it is a little easier for me to talk about that adjustment when it's positive, but the fact of life is it is something that you will see because we have to adjust to a single point estimate, and we don't have any ranges. The last one I forgot to mention, which we've seen a tremendous positive impact on now and hopefully is going to last for a while, is that California reform that was introduced a couple years ago, year-and-a-half ago, and now we are finally seeing the impact actuaries have a tendency to wait two, three, four quarters before they actually believe that the development is what we think it is, but now we're seeing the impact in California is dramatically different from what it was.

On that score, Henrik, do you think, say over the past several months, that having the pricing off by way of insurance that that's hurt you competitively at all? Or is this an issue that sort of everyone is grappling with in California? In other words, estimating the insurance be at a little higher than what it's truly costing you, presumably pushes up the pricing that you have to bid out.

Not the last three months, the last three years.

Right.

It has been impacting me for awhile, and especially because we're self-insured a lot of times you're up against companies that were using state funds, and the state funds might be running big deficits while we can't run big deficits when you're self-insured. The fact of life is, and I think the best thing I can do and the best thing I can suggest to look at this development over the last three years is take the bottom line on the janitorial operation and look at the improvement over the last three years. That is impressive and we're up to very close to a level of 5% which I don't think we've been for many, many years. At least it's for me very impressive what's going on.

Okay. Perfect. Thank you.

[OPERATOR INSTRUCTIONS] Your next question is from Jeff Kessler, Lehman Brothers.

Thank you. The janitorial, if you add back the -- if you take out the one day, and add back the what you lost from that one day, you end up with a, I guess a small year-over-year apples-to-apples comp in janitorial, but is that comp in line with the sales percentage gain as well? In other words, X that did the margin operating profit margin improve in janitorial at all for the quarter?

You have to, when you lower that outside, that one day, we do a comparison. Have you to take out the $1.3 million that we did receive back last year. We had over accrued last year on that settlement of lawsuit up in Seattle where we originally put $6.3 million aside but we settled for $5 million. If you take that aside and correct for the $2.4 million, our operating profit percentage is up.

Okay. The fourth quarter is going to contain compared to last year the same amount of workdays or will there be a difference again one-way or the other?

Same amount.

Okay. In security, you folks have been taking some corrective charges now for -- well, for some time. The question is and including legal charges as well. At your investor day, we talked about the beginning of seeing these types of charges beginning to diminish over time. Can you give us some idea of what we're going to be seeing in not just the end of this year but more importantly what we'll be seeing in the next fiscal year? In terms of what you're spending beyond operations in security?

I don't intend to spend anything beyond operations security. I think that's behind us. The effort in security has been to basically emerge my two security companies into one. And I think and believe that will be finalized in the fourth quarter so we can operate as one entity with one call center, one support group, one admin center, and that is of course going to create some savings that we haven't seen yet. Hopefully, running as one company is also going to drive some sales and new opportunities. But I feel for the first time that we are -- we have SSA behind us, and I feel that the morale and the level of activity has increased pretty dramatic. We have added some new business starting up in the fourth quarter, and I don't want to give you any numbers yet, Jeff, because I am not done with the budget process, and I don't want to go into guessing and speculating, but the only thing I am going to tell you is I hope and believe it is going to be dramatic better than this year.

Finally, in lighting. The operating income numbers have been lumpy for several reasons, and the -- it has been inconsistent over the last several years. I am not asking the corporate question, what I am asking is the operational question is, you've got a big -- you've got a bigger backlog in lighting than you've had in quite some time. The question is is can you take advantage of that backlog? Is there margin in that backlog so that we can get back to at least an even year-over-year comparison over the next couple quarters?

Jeff, it's funny, I was hoping that you were asking me about engineering instead of lighting.

[LAUGHTER]

Lighting is a big frustration for all of us. I think and believe that we've done all the right things. I am waiting, and I've been waiting for this to break through for a long time, and the margin is there. The interest is there. The activity is there. It seems like we just can't get started on those project works, so in 2007, hopefully this will happen, but I am a little more cautious this time than I have been the other times because I am looking at the same numbers as you are, but the fact of life is I think it is a huge opportunity as we see it right now, and the activity level and interest is there, but that's one thing. The other thing, maybe George mentioned or talk about that a little bit, is the different way that we are looking at sales today and income today on multiple deliveries compared to the past. We have put on a number of sizable jobs, and, George, can you explain how it works?

Sure. Good morning, Jeff. One of the things that when you go back to say 2000, 2001 when we had 10 and $11 million of income on not too much more of sales that we had, project contract could get bifurcated into the various aspects, and the up-front work could get recognized immediately in the income statement. Today under EITF that came out a few years ago called multiple deliverables, unless you can get objective evidence that sites each one of those components can be separately priced out in the market, and when we're the leader it is hard to get comparables in the marketplace. We have to in essence defer all that revenue and recognize it over the three years that the contract is.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] You have a follow-up question from the line of David Gould of Sidoti.

Can you comment a little bit on the repricing trends in SSA? And if we still think we're on target there to reach break even or maybe some modest profitability fourth quarter? And also, how badly that might have affected us on the third quarter?

There is no doubt that the third quarter was heavily impacted by simply the unrest in SSA and what we've been through. We have made managerial changes during the quarter. We don't have the president there any more and the number two guy is gone as well, and that had made the implementation into our security company much, much, much easier, and that is one-way we are going to function as one company. I do believe you're going to see benefits and improvements in SSA both in the fourth quarter as well as '07, and we have seen very few losses of jobs. We have gone through repricing of jobs. I have not seen any negative reactions on that as well. So, I feel, honestly, that SSA fiasco is behind us and now we can look forward.

Okay. Thanks.

You're welcome.

Thank you. At this time there are no further audio questions.

Okay. Thank you very much for listening to our conference call. We will talk to you in three months.

Thank you. This concludes today's ABM Industries Incorporated third quarter earnings results conference. You may now disconnect.