ABM Industries Inc (ABM) 2007 Q1 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time I would like to welcome everyone to the ABM Industries Inc. first-quarter earnings 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). I would now like to turn today's conference over to Mr. Henrik Slipsager, President and CEO of ABM Industries Inc. Please go ahead, sir.

Good morning. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are George Sundby, Executive VP and CFO, and Linda Auwers, our Senior VP and General Counsel. On the call today I will provide an overview of our operational results for the first quarter ended January 31st. George will discuss our financials in detail and then I'll conclude our prepared remarks with a summary of our operational achievements for the quarter as well as provide an update on our guidance for the remainder of fiscal 2007. Linda?

Thank you, Henry. 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 are 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-Qs that we file with the SEC.

Thank you, Linda. Before George's review on our consolidated financial results and operating performance I would like to make a few points. We have begun fiscal 2007 with strong first-quarter results as all of our business segments achieved top-line growth during the quarter due to a combination of sales in new customers and expanded services to existing customers. In particular our (indiscernible) business benefited from higher lease and fixed allowance revenues and our lighting business was driven by very strong backlog for special projects.

I'm also pleased to report that our security business continues to make improvements and we achieved growth in this business even as we terminated unprofitable contracts during the quarter. We also continue to strengthen the management team of this business with the appointment of Larry [Schmidt] as President of ABM Security. Larry has proven to be a strong leader at ABM and in his new position we are confident that it will enable our combined security enterprise to obtain the level of operating margins this segment has historically achieved.

Also in the first quarter our net income was up approximately 118% compared to the same period last year and we generated $13.5 million in operating income in the first quarter -- I'm sorry, in the first quarter we benefited also from lower than anticipated expense associated with our IT outsourcing initiative. We ended our first quarter with approximately $91 million in cash and approximately $324 million in working capital and no debt. We are in a very good position to expand our leadership position in facility services and we are very excited about our future.

Now I would like to turn the call over to George for a review of our first fiscal quarter of 2007. George?

Thank you, Henrik, and good morning, everyone. I'd like to review the consolidated results of the first quarter ended January 31 as reported in yesterday's earnings release. We expect to file our quarterly report on Form 10-Q with the Securities and Exchange Commission later this week.

Turning to our first-quarter results, as Henrik indicated, for the quarter net income was $8.7 million or $0.18 per diluted share compared to $4 million or $0.08 per diluted share a year ago. Total revenue was $703.5 million, our first $700 million plus quarter, up 5.5% over last year's first quarter. This growth was solely from internal growth. Net income for the first three months of 2007 includes a $4.2 million pretax benefit from the further reduction of the Company's self-insurance reserves related to prior year insurance claims and pre-tax operating profit improvements of $4.7 million.

In addition, professional fees related to the Sarbanes-Oxley internal control certification requirement were $3 million lower in the first quarter of 2007. These improvements were partially offset by $2 million of additional share based compensation expense due to the acceleration of price vested options for the common stock achieving the $22.50 and $23.00 accelerated vesting price levels and a $1.4 million pretax litigation related contingent loss provision.

Gross margin -- as a percent of sales gross margin, which is defined as sales minus operating expenses and cost of goods sold, was 10.4% in the quarter compared to 9.1% in the first quarter of 2006. The increase in margins was primarily due to the lower insurance rate and the elimination of unprofitable customer contracts in security.

Income taxes -- the effective tax rate for the first quarter of 2007 was 34.8% compared to 31.6% for the first quarter of 2006. Both rates are below the annual effective tax rates due to the inclusion of a $300,000 tax benefit in each period. For the remainder of 2007 we anticipate an effective tax rate of 37%.

Turning to the statement of cash flows -- cash from operations in the first quarter was a use of $36 million compared to a use of $11.9 million for last year's first quarter. Cash flow usage is primarily due to a $34.9 million tax payment associated with the receipt of the $80 million of World Trade Center insurance proceeds in 2006. As Henrik indicated, we continue to have a very strong financial position with over $90 million of cash at quarter end no debt.

The largest component of working capital continues to be Accounts Receivable which remained level at $392 million. Accounts Receivable 90 days past due decreased during the quarter by $1.3 million to $31.5 million or 8% of our total outstanding. Days sales outstanding at quarter end also decreased one day to 56 days. Our receivable allowances totaled $7.9 million at quarter end compared to $8 million at the end of the year.

Insurance reserves at October 31 were $195.2 million and at the end of the quarter came in at $194.7 million, down slightly. Adjusting for the favorable actuarial results on prior year reserves, the reserves actually increased $3.7 million. Self insurance claims paid during the quarter totaled $13.5 million which is down from the $16.3 million in the first quarter of 2006. No stock was repurchased during the first quarter; our current authorization has capacity for 2 million shares and expires at the end of -- October 31, 2007.

With that let me turn the call back to Henrik who will give his perspective on the first-quarter operational performance and the outlook for 2007. Henrik?

Thank you, George. I will now briefly review the operational results for the first quarter as well as provide GAAP and non-GAAP guidance for the second quarter and the remainder of fiscal '07. Janitorial had an excellent start to fiscal '07. For the first quarter janitorial sales increased by $13.9 million or 3.6% to $400.2 million primarily due to a $13.7 million increase in sales in the Midwest, Southeast, Southwest, Northwest and North Central. The sales growth was due to new business, expansion of services to existing customers, and price adjustments to pass through a portion of union cost increases.

Our operating profit in the business increased by $2.1 million or 14.6% to $16.8 million. The increase was primarily due to an improvement in our operating profit margins partially offset by higher legal expense due to an $800,000 litigation settlement and expenses. Parking sales increased by $9.1 million or 8.6% to $114.8 million, mainly as a result of a $7.1 million increase in reimbursement for out of pocket expenses for managed parking lots clients due to new contracts. Higher lease and fixed allowance revenues of $3.5 million also contributed to the sales increase.

Operating profit increased $1.4 million or 85.5% to $3 million due to the increased lease and fixed allowance revenues and a $600,000 reduction in legal expense from the comparable three months of 2006. In our securities business sales decrease by $2.5 million or 3.2% to $80.8 million primarily due to new business, although this was partially offset by the elimination of unprofitable customer accounts in both the mid-Atlantic and South Central regions.

Operating profit increased $900,000 to $1.1 million in the first three months of '07 compared to an operating profit of $200,000 in the same period of '06. The improvement was due to a $500,000 reduction in the first quarter 2007 in the reserve for the amount of the company estimated overpaid SSA LLC in 2004 and a $400,000 increase in profit resulting from the elimination of unprofitable customer contracts.

Engineering sales increased by $7.8 million or 11.7% to $74.7 million which was mainly due to new business and the expansion of services to existing customers in the mid-Atlantic, Northern California and Eastern regions. However, operating profits decreased by $100,000 or 3.6% to $3 million primarily due to higher costs associated with increased management staff necessary to support the growth in the business and higher subcontracting expenses.

Lastly, I'm very pleased to report that lighting sales increased by $2.2 million or 7.5% to $31 million due to an increase in special project business in the Southwest and South Central regions. Operating profit increased by $300,000 or 101.5% to $675,000 due to increased sales. The lighting backlog remains strong and we continue to anticipate further improvement in our lighting segment as the fiscal year progresses.

Guidance -- for the second quarter we expect to achieve earnings per diluted share in the range of $0.28 to $0.32 on a GAAP basis. This does include a pre-tax gain of approximately $5 million on the sale of one of our airport parking visas and a pre-tax expense of $1.9 million from the vesting of additional price vested employee stock options. Substantially all of the non-cash expense associated with price vested options will be recognized in the first two quarters.

IT expense -- based upon the results for the first quarter the current economic environment sale of the airport lease and the additional expense associated with price vested options and $1.9 million pre-tax cost of additional IT expense, we're increasing our fiscal 2007 guidance for net income to a range of $1.04 to $1.08 per share on a GAAP basis in the range of $1.12 to $1.16 per diluted share on a non-GAAP basis. The difference being additional expense for the major information technology system operations.

Keep in mind that all of our guidance is exclusive of future acquisitions. 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). David Gold, Sidoti & Co.

Good morning. A couple of clarification questions. George, can you expand a little bit on the vesting. I guess it wasn't up on what the provisions are there and sort of what that stock is attributed to?

Sure, David, this is George. For several years the Company has had what's called a price vested stock option plan. And in that we grant options and if during the first four years of the period they're outstanding, if the price hits certain target levels, the stock price, then the vesting gets accelerated. If they don't achieve those thresholds in the first four years then the options cliff vest at the end of eight years.

And so our amortization expense assumes that the options will be outstanding for the full eight years when the fact that we hit the earlier price vesting point we had to recognize all that future expense forward. So it's really just a timing item, bringing expense forward from several periods.

Okay. I guess the other side of that is presumably can you give us a sense for how much of an adjustment we'd look at say in your diluted share count as we go out the next couple of quarters?

It has no impact on diluted earnings per share because we're already factoring those options into our diluted factors.

So essentially -- even before under the cliff vest it was in there -- it was hitting you for the same amount as it would now?

Exactly, yes.

And then part two and I'll offer this to either George or Henrik, whoever feels like answering. I guess as I look at the first-quarter performance which was pretty good and your guidance for the second quarter, if you back that out of where you are for the year that basically implies a deceleration in the second half of the year versus -- different from say the historical pattern where it's (indiscernible) in October or a little better. But just curious if you might comment on that or if I'm thinking about it improperly.

Well, as you might recall the second and the third quarter -- third and forth quarter last year was impacted somewhat by some insurance take backs and I think there was a lot of discussion of we should take credit for or not. But the fact is we cannot expect to get that every year. The other thing that does impact the third and fourth quarter is we had a benefit this quarter, $1.2 million on the IT expense. I think we mentioned that in our call because of the delay in our project. We will pay that back, unfortunately when it comes to IT you save 1.2 and you pay 1.9, and we're going to pay $1.9 million the last three quarters. If I look at the segment I do not see an additional raise in the third and the fourth quarter as such.

I guess the thinking is I certainly have tried to -- have adjusted for insurance. And what winds up happening basically is your guidance implies full at $0.30 a quarter for each of the last two quarters, you've been sort of adjusting for that. And obviously there is the IT cost, but making an adjustment there too, it just seems like there might be some more upside there.

You are cutting in and out a little bit here; I didn't get the whole thing. I think the fact is we're giving the quarter guidance which includes onetime hits and onetime benefits, I give the full year and if I don't get all the segments for the year they are compared to the prior year. There could be some quarters in and out, but overall the segments are up quarter-by-quarter.

Okay. And then just one last if I might. If we could talk a little bit about the timing of the insurance adjustment. I guess this is say a different period than we've done it in the past. Is that something that we might expect every quarter or is it once or twice a year we'd see it?

David, part of our S-Ox internal control procedures, we now have three actuarial studies; they're done at the end of January, the end of May and then at the end of September. And so what we're trying to do is to stay on top of our reserves given the size of the reserves almost $200 million. So I would expect to see it happening hopefully three times a year, but hopefully it will settle down. But we always like good news like we got this quarter.

Perfect. Thank you both.

David Leibowitz, Burnham Securities.

Looking to the second half -- good morning, by the way. Looking to the second half of the year, which of the operations faces the most difficult period?

I think that's a very, very good question, David. The way I see it now is that (indiscernible) who we look very positive at I think janitorial, security, engineering and even parking will do well. Engineering is an operation where we have experienced double-digit growth in both top and bottom line over the last three years plus. And we have right now some expenses and some investments we need to do an infrastructure on the engineering. So if I look at engineering for the year, I expect it to be better than last year but not up the same amount it has been in the past. So you can say it's not achieving the double-digit bottom line growth as we've seen, but we still expect growth in the bottom line.

Okay. And given the price of the stock at the moment, might you be using shares to make a larger acquisition rather than the cash component you've been using in the past?

I would not. It depends on acquisition size, availability, etc., etc. But I will agree with you that the stock as a currently is much more attractive at this level than it was at different levels I've seen in the past.

And lastly, staying with acquisitions, are you further in negotiations with any of the deals you've been looking at that we might see a transaction consummated in the next three to six months?

You know, if I was very far away you would have seen a press release probably. David I can't respond to that. We are aggressively looking at possible acquisitions all the time and I can't wait to inform the market if we are successful in doing one of those acquisitions in the near future.

Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. Mr. Slipsager, are there any closing remarks?

I want to thank everybody for listening to our first-quarter earnings report. We're very proud of what we have achieved and look forward to talking to you after the second quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.