ABM Industries Inc (ABM) 2006 Q4 法說會逐字稿

Good morning. My name is Bishanta, and I will be your conference operator today. At this time, I would like to welcome everyone to the ABM Industries Inc. fourth quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 achievement as a company for fiscal 2006. George will discuss our financials in detail, and then I will conclude our prepared remarks with a summary of our operational results for the quarter, as well as provide a guidance for the fiscal 2007. 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 they are 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 Annual Report on Form 10-K, Forms 8-K, and the Form 10-Q that we file with the SEC.

During this conference call, we will refer to certain non-GAAP financial measures. You can find a reconciliation to the most comparable financial measures calculated in accordance with GAAP on our Website at www.ABM, Investor Relations, Presentation (http://www.abm.com/ilwwcm/connect/ABM/Home/Investor+Relations/Presentations/).

Thank you, Linda. Before George and I review our consolidated financial results and operating performance for the fourth quarter and year, I would like to highlight a few of the achievements we made as a Company in fiscal 2006. We strengthened and enhanced our insurance and risk managed processes. This included among other things, increasing the number of actuarial reviews, adding and operating personnel to ensure efficient, accurate, and timely processing of claims.

As a result of our focus, our efforts, and our commitment, as well as favorable development in California Worker's Compensation legislation, and enhanced safety programs, we recorded significant reduction in our insurance reserves. And we now have lower insurance rates for fiscal 2007, which puts us in a stronger competitive position.

We acted decisively to address the issues at our security subsidiary, SSA. During the year, we closed branches, eliminated positions, and made changes in leadership, and renegotiated contracts. We set an objective to return SSA to profitability by the end of the fourth quarter. I am pleased that not only did we achieve profitability in the quarter, but grew the to top line by 5.9%, and for the year sales increased by 12.6%.

As a result of the realignment, we were able to combine our security operations. We have strengthened our management team with key new hires across all operations. We have increased the rigor of our compensation program by strengthening the length, the financial, and key operating goals. It is critical that our leaders are aligned with short and long-term shareholder objectives. We outsourced our Information Technology services to IBM Corp. In the short-term, we will experience additional costs, but over the life of the seven-year contract, we expect to achieve more value for our IT investment, by having the strength of IBM as the backbone of our Information Technology services.

After five years, we settled our World Trade Center business interruption insurance claim. I am pleased that our dedication and commitments to protecting our shareholder's interest ended successfully. We repurchased over 1.4 million shares at an average cost of $18.17 per share, and paid $21.6 million in dividends.

In aggregate, we returned approximately $48 million to our shareholders in fiscal '06. And yesterday, we increased our dividends by 9.1% to a quarterly rate of $0.12. We authorized a buyback of up to 2 million shares, and our Board approved a strategy that calls for customer-driven international expansions through acquisitions. Through these and other achievements, we have strengthened our position as a leader in facility services, and in my tenure as President and CEO, I have never felt better about the future of our Company.

I would like to turn the call over to George, for a review of our fourth quarter and fiscal '06 financial results. George?

Thank you, Henrik. Good morning and Happy Holidays to everyone. I would like to review the consolidated fourth quarter ended October 31, 2006 as reported in yesterday's earnings press release. We expect to file our Annual Report on Form 10-K with the Securities and Exchange Commission later this month.

Turning to the quarterly results, as Henrik indicated for the quarter, income from continuing operations was $61.6 million, or $1.24 per share, which compares to $8.5 million, or $0.17 per diluted share a year ago. Total revenue, which includes the $80 million insurance settlement previously discussed is up 17.9%, while sales and other income, which totalled $696.7 million, was up 5.8%. The increase is primarily from internal growth.

Income from continuing operations for the fourth quarter of '06 includes a $45 million after-tax gain, or $0.91 per diluted share, from the previously-announced resolution of the World Trade Center insurance claim. The quarter also includes a $5.7 million after-tax, or $0.12 per diluted share benefit, from the reduction of 2005 and prior year insurance reserves, resulting from the receipt of the September 30, 2006 independent actuarial report.

The benefit is from continued favorable trending of our claims, and further favorable impact of the California 2004 Worker Comp reform. These items were partially offset by a 1.9 million after-tax, or $0.04 per diluted share, of initial cost associated with the start-up of a corporate initiative related to the outsourcing to IBM of our Information Technology infrastructure. We anticipate incurring approximately $8 million of additional costs in 2007.

Income from continuing operations for the fourth quarter of 2005 included a $4.7 million after-tax charge, or $0.09 per diluted share, related to the settlement of two major lawsuits, which was substantially offset by a $2.6 million after-tax gain, or $0.05 per diluted share, for the successful completion of the sale of the off airport lease in Houston, Texas, and a $1.3 million after-tax, or $0.03 per diluted share benefit, from the reduction of prior-year reserves, related to three small specialty risk programs.

The effective federal and state income tax rate from continuing operations for the fourth quarter was 43.2% compared to last year's fourth quarter of 40.2%. The higher rate is associated with state income taxes applicable to the World Trade Center insurance settlement.

Turning to our statement of cash flows, cash from continuing operations for the quarter was $97.8 million, compared to $37.3 million for last year's fourth quarter. The cash flow increase was again primarily related to the receipt of the $80 million insurance settlement, offset in part by an increase in accounts receivable. $35 million of income taxes related to the settlement will be paid in the first quarter of 2007.

As Henrik mentioned, we continue to have a very strong financial position, with over $134 million of cash at October 31 and no debt. The largest component of working capital continues to be accounts receivable, which as previously mentioned, increased $14.8 million to $392 million. Accounts receivable over 90 days past due decreased during the quarter by $4.5 million, to $32.8 million, or 8.4% of our total outstanding. Day sales outstanding at quarter end increased 2 days to 57 days.

Our receivable allowances totalled $8 million at the end of the year, compared to $8.3 million at the end of the third quarter. Insurance reserves at October 31 totalled $195.2 million, which is down slightly from the $198.6 million reported at the end of '05. Adjusting for the favorable actuarial results, the prior year reserves increased $10.7 million.

Self-insurance claims paid during the year totalled $57.4 million, up slightly from $55.2 million of a year ago. Shares repurchased during the fourth quarter totalled 628,500 shares, at an average price of $19.12. As reported yesterday, the Board of Directors authorized a new 2 million share repurchase program for 2007.

As previously mentioned, we anticipate filing our Annual Report on Form 10-K later this month. The Form 10-K will contain the report on our internal controls over financial reporting as required by Section 404 of Sarbanes-Oxley. As we have previously discussed, our decentralized structure, materiality considerations that result from our level of profitability, requires a significant effort to evaluate and test the systems and processes for management to make this report. We are currently finalizing management testing of key controls performed in the fourth quarter, and our overall evaluation of our system of internal controls.

We believe the 2006 remediation activities have cured the material weakness that was reported in our '05 certification. The timely and successful completion of management's assessment of the effectiveness of our internal controls under Section 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 the '06 performance, and the outlook for 2007. Henrik.

Thank you, George. I will briefly review the operational results for the fourth quarter and year, as well as provide GAAP and non-GAAP guidance for fiscal '07. Our Janitorial operations posted a revenue increase of $15.3 million, or 4% compared to the same period in 2005.

For the fiscal year, Janitorial sales were up $38.2 million, or 2.5%, to 1.6 billion. Minor contributions from acquisitions, sales growth in the majority of our regions, and expansion of services to existing customers contributed to the increase. Of the $38.2 million increase for 2006, the majority, $26.8 million, came in the second half of the year. Our Janitorial segment enters fiscal '07 with good sales momentum.

Operating profit for Janitorial increased by $2.8 million, or 14.2%, compared to the fourth quarter of '05. Operating profit increased by $13.8 million, or 20.4%, in 2006 compared to 2005, primarily due to higher sales and improved margins. Acquisitions contributed $2.5 million operating profit for the year.

In Parking, our sales increased by $5.7 million, or 5.4%, while operating profit increased $2.8 million, or 17.6% during the fourth quarter of 2006, compared to the fourth quarter of 2005. The fourth quarter in 2005 including two extraordinary items, which impacted profitability. The majority of the sales increase came from higher reimbursement of our out of pocket expenses for managed Parking lot clients.

Overall 2006 was a very good year for our Parking operation. Sales were up by $30.1 million, or 7.4%, while operating profit increased $3.1 million, or 29.7%. A stable economy, increase in air traffic, solid consumer spending, and lower vacancy rates, all favorably impact operating results.

In Security 2006 was a transitional year for our security operations. Security sales increased by $3 million, or 4.1% during the fourth quarter of '06, compared to the fourth quarter of '05. Operating profit increased by $700,000, or 53% from the comparable period. For the year, sales increased by 13.6 million, or 4.6%, primarily due to new business. Operating profit increased $1.2 million, or 40.1%. The security organization continues to make progress towards regaining the level of profitability these operations are capable of achieving.

Engineering. Our sales for Engineering increased by $15.8 million, or 25.2% during the fourth quarter of '06, compared to the fourth quarter of '05, due to successful sales initiatives resulting in new business and expansion of services through existing customers across the country. But most significantly, in our northern California, L.A. and eastern regions. Operating profit increased by $1.4 million, or 37.8% during the fourth quarter of '06, compared to '05 due to higher sales.

2006 was a very successful year for ABM Engineering, topline growth of 19.5%, all organic, and operating profit that increased $2.5 million, or 17.9%, despite increases to G&A costs to support the new business. Lighting sales decreased by $2.4 million, or 7.6%, and operating profit decreased by $700,000, or 51.2% in the fourth quarter of '06, compared to the same quarter a year ago.

As I noted in our third quarter conference call, lower project work coupled with higher subcontracting expenses have adversely impacted performance. We continue to believe that the corrective actions we have taken to date will either turn around, and we still believe that the high energy costs our customers are experiencing will eventually translate to an increase in project work. There are promising signs of this turnaround. In the fourth quarter, our Lighting backlog increased 5% to over $102 million.

In closing, we are pleased with our consolidated fourth quarter operations and performance, and believe we have strong momentum as we enter fiscal 2007. Based on the current economic environment, we expect non-GAAP operating earnings for fiscal '07 to be $1.10 to $1.15, which exclude our estimate of $0.10 for additional IT expenses in fiscal '07.

We expect income from continuing operations for fiscal '07 to be in the range of $1.00 to $1.05 per diluted share. All guidance is exclusive of future acquisitions. For the first quarter, we expect income from continuing operations to be in the range of $0.12 to $0.14, and we expect non-GAAP operating earnings for the fourth quarter to be in the range of $0.16 to $0.18. We look forward to updating you on our progress next quarter.

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

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

Hi, Henrik, hi, George.

Good morning.

Good morning.

Well, obviously you have surprised us with this quarter. This was not trend line, that's if sure. I guess the question is, I guess from my perspective, was this quarter predictable given that it really is, is this something that you believe is, let's say, retainable type of growth for the next several quarters? Or were there any other contributions to this quarter that made it so much above the growth of the remaining, the other quarters of the year? Was it more, it's got to be more than just the insurance side of it, which we didn't give you credit for to begin with.

I know, I know, Jeff, I know you don't [know about] the insurance, I know it.

I noticed. I should.

I hope you remember that I already once had an insurance hit. But nonetheless, the quarter, I think the key thing for the quarter is the trends. The trends in most of our operations is very, very good.

Depending on how you look at insurance, a good portion of that was -- not a good portion, all the insurance George talked about was from prior years. But the key thing about that is, it is truly also a result of the hard work that people put in this year that is showing in those particular numbers. And the key thing I think to the insurance development, is the very positive impact it's going to have on our competitiveness going forward to '07 and '08.

That is why I feel pretty good about the whole thing. The fourth quarter, I think, it's fair to say overall, was very close to what we expected. There are a number of one time smaller hits in it. There are a number of small benefits in it, and then we have that big insurance benefit. So I just feel momentum is good, and I feel that basically all businesses are very optimistic about '07, and I think for good reasons.

The reason I asked the question I way I did, was because for a while now, we have been asking you, your business is perhaps slightly later cycle than other real estate-related businesses, particularly getting benefit from higher occupancy, lower vacancy rates, as you begin to deal on some of these other contracts with tenants that are filling up the buildings. Are you beginning to see the benefits of that at this point, or are you attributing this to some other factors?

No, I think we've seen some benefits to it, and if you -- when you get the 10-K, into the segment reporting, I think especially on the Janitorial, Engineering, and Parking areas, you will see two or three very encouraging things. All of them had double digit growth in the bottom line.

All of them grew probably organically more than we have seen in the last three or four years, but I think the key thing that is very encouraging to me, is the improvement in the percentage of profits, which part of it is a result of the higher tenant sales in certain areas with higher profitability than the regular sales. So of course it doesn't have as huge impact on the topline, but we are starting to see the benefit on the bottom line.

All right. If I could go back to the insurance policy issue. The lower insurance reserves are good in and of itself for your company. However, what I want to get at is, your lower insurance reserves going forward. How does that improve your competitiveness, and what do you see the ability to do, with regard to some of these small companies, particularly in the state of California?

The lower insurance rate is the result of an actuarial review. We have had two this year, we had one in May, and we had one in September. We are trying to get these actuarial reviews more often than in the past, because then I don't have to fight and discuss with you about insurance corrections, if that's part of operations, or prior periods. I am trying to avoid prior periods.

As part of that actuarial review, we also get projections for next year based upon our history of these particular claims. And the rates we have received for '07 puts us in a much better competitive position than we would have been in a year ago, let me put it that way to you, simply due to the development factors that we see in our insurance program. So it's a result of all the hard work people are doing, we received fewer claims, the claims are not as bad, and the development and trend is extremely positive.

All right. Final question. On Security, how far along are you in, let's call integrating SSA with the other part of your business, and will this result, should this result in higher margins in 2007?

Yes. My goal first of all, let me answer these two questions. The first question is, we started the process pretty much four or five months ago of integrating the back offices of Security, and I will say we probably are a little more than halfway there, and I'm seeing some positive impact on that.

We have retained some key managers who are all doing a wonderful job for us in SSA, and we expect or our plan is to be back on pro forma by the end of '07, the end of fiscal '07, back to where we thought SSA was reported. One of the things I think I communicated to the market three quarters ago, was it was my goal to be profitable with SSA in the last quarter of this year, and even though it was not very profitable, it is profitable, and we achieved our goal.

And I am very excited about that, and I think the most amazing part is in spite of all the disruption and the changes, we achieved topline growth as well. Which promises very well for the future. So the short answer is, yes, we expect higher profitability in Security next year, both on a dollar basis and a percentage basis, and based upon the reasons I just gave you.

Okay. Final question. That is Lighting. You have talked about a big backlog in lighting, but the real question is, what's in that backlog? Is that backlog going to be enough? Is there enough margin in that backlog to make you happy for the coming year, or is that backlog still low margin backlog?

With Lighting, I don't need too much to be happy. The fact is that the fiscal '07 has had a very strong start, very unique start for Lighting, I would say because first quarter, because we are very retail-based is often very slow because we can't get into the stores. We were very surprised to see how we are starting '07.

We have very good vibes about the first quarter, and I sure hope that when you and I talk 91 days from now, we will be talking about how wonderful a surprise Lighting was for you, because I do expect great things and big things for Lighting this year.

So what you are saying is that the backlog you are seeing, you have better margin than you were initially expecting?

I have a better backlog today than I had in the past, yes.

All right. All right, thank you very much, and congratulations on the quarter!

Thanks, Jeff.

Your next question comes from David [Leeds, inaudible].

Happy Holidays!

How are you, David?

Two quick questions unrelated. The first, do you still have any open insurance issues regarding 9/11?

No, we don't. We have settled with Zurich on our business interruption, and other than ongoing claims, which are primarily covered by outside insurance, we have none.

Okay. Secondly, Henrik, you mentioned international expansion in your opening comment. Is that Europe, or are we just talking Mexico and Canada for international?

No, we might even, we might even include Guatemala, no, I'm kidding. I think the most encouraging thing is that both the Board and management feels it's time for us to think global. It's time for us to really put the customer in the middle, and follow the customer and the needs worldwide. So the Board yesterday agreed with management, that international expansion is not only needed, but a must for the future.

Okay. And following up on that, would the international expansion since one presumes you are talking acquisition here, not starting your own --?

Yes, there is just no way we can start from scratch. I think we need an infrastructure in place. If you follow your clients, you want to make sure that the service level that is delivered to the clients is as high as here, because you don't want to put the business here at risk, so absolutely we are talking about acquiring a platform for growth outside the U.S.

And in acquiring the platform, are we talking about a company that might already have U.S. operations, or would this be companies that do not have U.S. operations?

I don't want to be specific. It was something that was decided yesterday, and I think the fact of life is that the Board is looking for a sizable operation outside the U.S., and we are very excited about, but there's no specific goals.

One last point, and when you say sizable, can you quantify is that it has to be at least 50 million, or 20 million, or 100 million, or whatever it might prove to be?

No.

Okay, thank you.

It's way to too early, I just thought it was important that everybody knows that our long-term strategy includes expansion outside the U.S. and the Board was fully supportive of that yesterday.

Okay. Thank you very much. Have a great holiday to everyone!

Thank you very much. You too!

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

Good morning.

Good morning, David.

A couple of questions. One, George, the insurance benefit that you pointed, did you say $5.7 million, or $0.12 a share?

That's correct.

Okay. So essentially we had $0.91 from World Trade, $0.12 from insurance, and then the $0.04 of outsourcing costs?

That's correct. And as we discussed, we had stock option expense of a penny a share, and some other minor stuff.

Sure. So if we Xed all that out, it would be a call it, $0.25 quarter?

Or a little higher. We have had some additional tax hits, most of it was in the World Trade Center, but there was some true-up of deferred taxes as well.

Got you. So a penny or so --

And we also had some losses that we settled for the quarter, a lot of one-time hits as well, David.

So another penny or two or something like that?

Correct.

And Henrik, can you go over with me, on the outsourcing strategy, I think when you guys initially announced it, you said over the seven years, it would be a long-term positive. So I guess, curious, how should we think about when we see the benefit, is that '08, or '09, or--? Presumably we at least catch back the $0.10 we are giving up, right?

First of all, the thing we are separating out is the implementation piece of the IT. IT will still be more expensive next year than it was, and that's included in our guidance than it was this year, you will see slight benefits starting in '09, and the end of the contract looks like pretty sizable benefits on that particular contract. But you also know with IT, then you are at the end of that contract, and something else you need to invest in. It's a never-ending situation, but nonetheless we are very pleased with the contract, and looks like overall it's beneficial to the company.

But outside the money side of it, it is also mediating risk, and that's something we are looking at as well. Plus, not at least, it gives us a much better base for growth, in other words, having [IP MS] to support these major acquisitions is a key for me.

Got you. And just so I understand it a little better, presumably the implementation costs really are sort of one-time. In other words, maybe they fall into '07, maybe some into '08, but once that's done, if you continue with IBM, for say 20 years, not just the 7, you wouldn't see that again. Basically it's just getting everything on-board?

Correct. We have duplicate costs, David, in 2007 as we transfer systems and platforms over to IBM, and so 2008 we expect to be back at a level of really 2006, so it's a one-year blip, and then savings will go down other than large initiatives.

Okay. And one more for you, George. The $0.10 in '07, you expect that to be pretty evenly spread, or front end loaded?

It's front end loaded, probably $0.04 to $0.05 of that will be in the first quarter.

Got you. Okay. Terrific. Thank you both so much.

Thank you.

You are welcome.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions.

Thank you. Well, thank you very much. Before we end up, I would like to thank all our wonderful employees, our shareholders for being very supportive this year. We had a rough start, but ended up with a wonderful year, and I wish everybody a Happy Holiday! Thank you very much.

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