ABM Industries Inc (ABM) 2007 Q2 法說會逐字稿

Good morning. My name is Vichansa, and I will be your conference operator today. At this time I would like to welcome everyone to the ABM Industries second quarter earnings announcement and Investor webcast. 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. Henrik Slipsager, President and CEO, you may begin.

Thank you very much. Good morning. I am Henrik Slipsager, President and CEO of ABM Industries. I am calling from St. Petersburg, Russia today, as you probably can hear, joining me from our New York office is George Sundby, our Executive VP and CFO. Linda Auwers, our Senior VP and General Counsel, who is in San Francisco.

On the call, I will provide an overview of our operational results for the second quarter that ended April 30th. George will discuss our financial details, and then I will conclude our prepared remarks with a summary of operational achievements for the quarter, as well as provide an update on our guidance for the remainder of 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 estimates, expects, and similar expressions are intended to identify these statements. These statements represent our current judgement of 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, Forms 8-K and the Form 10-Q that we file with the SEC.

Thank you Linda. We are pleased with our strong second quarter operating results, which exceeded our expectations and previously issued guidance. New business contracts as well as expanded services and scope of work for our customers, and the gain from the sale of a partner, [Ross Lee], led to a 5.7% increase in sales and other income from the comparable period last year, and a 60% increase in net income of $16.7 million, or $0.33 per diluted share. Organic growth for the quarter was 4.6%.

All segments posted sales increases with Janitorial, Parking, Lighting operations, delivering double-digit growth in operating profits. For Janitorial, it marked the third consecutive quarter of double-digit improvement in operating margins. I am extremely pleased with our operating margins of 5.9% for the quarter, and want to take this opportunity to acknowledge the fine effort of all the Janitorial employees.

Our partner operations benefited from higher reimbursements of out-of-pocket expenses from our new managed partners or clients. A $5 million gain from the termination of an airport parking garage lease in Philadelphia, and $2.5 million in sales contribution from HealthCare Parking Systems of North America, which was acquired on April 2nd this year.

HPSA is a leading provider of parking management services to hospitals, health centers, and medical office buildings, following this acquisition, our partner operations operates in 39 states, up from 29, with much of the expansion occuring on the East Coast, and now has a strong foothold in the growing health care segment of the parking industry.

We view this area as a tremendous opportunity and plan to leverage HPSA's segment phased expertise, and our own existing regional operating infrastructure to further grow this segment. Despite the $7.1 million cash outlay for HPSA, we ended the second quarter with approximately $99 million in cash and cash equivalents, approximately $345 million of working capital and no debt.

We are very confident in our ability to continue to grow our business, and we recently announced an important instructing initiative intended to further increase operating efficiencies, and better enable us to better maximize our growth potential. These actions include the establishment of a Shared Service Center to consolidate certain back office functions in Houston, Texas, and the relocation of our corporate headquarters to New York in 2008.

We also continue to make investments in our technology infrastructure, accounting and human resources, and have started to operate a consolidation of our accounting and payroll systems, which we expect to be fully implemented by 2010.

Before I get into a more detailed discussion of our operating segments, I would like to turn the call over to George for a review of our second quarter and first six months of fiscal 2007 financial results. George.

Thank you Henrik, and good morning everyone. I would like to review the consolidated results for the second quarter and six months ended April 30, as reported in yesterday's earnings press release. We expect to file our quarterly report on Form 10-Q with the Securities and Exchange Commission later this week.

Turning to our second quarter results, as Henrik indicated for the quarter, net income was $16.7 million, or $0.33 per diluted share, compared to 10.4 million, or $0.21 per diluted share a year ago. Total revenue was 698 million, up 5.7% over last year's second quarter. This growth was primarily from internal growth, and a $5 million pre-tax gain in Parking, in connection with the termination of an off-airport lease. As Henrik mentioned, revenue from the acquisition of HealthCare Parking Systems of America on April 7th, contributed $2.5 million to the quarter.

Net income for the second quarter included pre-tax operating profit improvement of $6.5 million in our five operating segments, and 2.3 million of lower unallocated corporate expenses. The 6.5 million segment increase includes the 5 million pre-tax gain in parking in connection with the termination of the lease, higher profits from increased revenues, combined with an overall margin improvement. These benefits were partially offset by a $1.7 million litigation settlement in the Security line.

As mentioned earlier, unallocated corporate expenses were lower in the second quarter of 2007 than in the prior year. The year-over-year comparison is impacted by the inclusion in the second quarter of 2006 of 2.4 million of professional fees, related to the Audit Committee investigation of the 2005 SSA material weakness.

In addition, a $1.4 million litigation liability was taken down in the second quarter of 2007, as it was no longer needed due to the pending settlement. Please note that on a consolidated basis, the litigation settlement impact on the second quarter was only $300,000. Partially offsetting these improvements was a charge of 1.9 million of additional share-based compensation expense, due to the acceleration of price vested options from the common stock, achieving the $25 and $26 accelerated vesting price levels.

Turning to gross margin, as a percentage of sales, gross margin which is defined as sales minus operating expenses and cost of goods sold was 11.3% in the quarter, compared to 10.3% in the second quarter of '06. The increases in margin was primarily due to the $5 million parking lease termination gain and lower insurance rates overall.

Income taxes, the effective tax rate for the second quarter of 2007 was 34.4%, which compares to 37.6% for the second quarter of '06. The lower effective tax rate is primarily due to a $600,000 deferred tax benefit from a tax law change in New York, which will increase our effective tax rate starting in 2008. In addition, the lower effective rate reflects increased work opportunity tax credits, or WOTC credits from the reinstatement of these credits earlier in the year. For the remainder of 2007, we anticipate an effective tax rate of 37%.

Turning to our six month year-to-date results, net income was 25.4 million, or $0.51 per diluted share, compared to 14.4 million, or $0.29 per diluted share a year ago. Total revenue was 1.4 billion, up 5.6% over the comparable period last year. Net income for the first six months of 2007 includes pre-tax operating profit improvement of 11.2 million in our five operating segments, and 5.2 million of lower net cost in unallocated corporate expenses. The 11.2 million segment improvement includes higher profit from increased sales and margin improvement and the previously discussed $5 million pre-tax parking gain on a lease termination, which more than offset the 1.7 million litigation settlement in Security.

For the first six months of 2007, unallocated corporate expenses included a $4.2 million benefit in the first quarter, from the reduction of self-insurance reserves related to prior year insurance claims, which was substantially offset by 3.9 million of additional share-based compensation expense, due to accelerated vesting of certain price vested options. Unallocated corporate expenses also benefited from 5.2 million of lower professional fees, related to the Sarbanes-Oxley internal control certification requirements, and the previously discussed 2006 Audit Committee investigation.

Turning to the statement of cash flows, cash from operations in the second quarter totaled 7 million, compared to 14.4 million for last year's second quarter. For the first six months, cash from operations was a negative 29 million in 2007, compared to positive cash flow of 2.5 million for the six months of 2006. The year-to-date negative cash flow is the result of higher income tax payments, which includes $34.9 million associated with the fourth quarter gain of $80 million on the settlement of the World Trade Center insurance issue.

As Henrik indicated, we continue to have a strong financial position, with over 98 million of cash at quarter end and no debt. The largest component of working capital continues to be accounts receivable, which declined to 383.2 million due to strong collections. Accounts receivable 90 days past due also decreased during the quarter by 1.2 million, to $30 million, or 7.9% of total outstanding.

Day sales outstanding at quarter end decreased for the second time this year by one day in the quarter to 55 days. Our owed receivables allowance totaled 7 million at quarter end, compared to 8 million at the end of last year. Insurance reserves at April 30 are 196.3 million, which is up 1.6 million over the first quarter. Self insurance claims paid during the quarter totaled 15.2 million, which is up from 13.8 million of the second quarter of 2006.

On a year-to-date basis, claim payments totaled 28.7 million this year, versus 30.1 million in the first six months of 2006. No stock was repurchased during the second quarter. Our current authorization has a capacity for 2 million shares, and this expires at the end of October 31, 2007.

With that, let me turn the call back over to Henrik, who will give his perspective on the second quarter operational performance, and the outlook for the remainder of 2007.

Thank you, George. I will now briefly review the operational results for the second quarter, as well as provide guidance for the third quarter and the remainder of fiscal 2007. Sales in second quarter and first half of 2007 have been very encouraging. As I noted in prior conference calls, sales activity hadn't been this high for many years. I am pleased with our results, and anticipate this trend will continue for at least the remainder of the year. We continue to focus on owner-occupied sales and national contracts, and have several large bids pending.

In addition, we are placing more emphasis on our ABM Green Care program, which is another way for ABM to differentiate themselves from the competition. Janitorial remains the core of our facility services business, accounting for over 57% of our ABM sales, and over 68% of its operating profit in the first six months of '07. In Q2 '07 Janitorial sales increased by $16.9 million, or 4.4%, to 399.5 million. In particular, North Central, South Central, Southeast and Southwestern regions, posted strong topline growth, as we secured new business and expanded services to existing customers. Operating profit increased 2.8 million, or 13.4%, to $23.8 million. The Mid-Atlantic, Northeast, Northern California, Southeast and Southwestern regions also posted solid improvement in operating profits on a year-over-year basis.

Parking sales increased by $12.5 million, or 11.7%, to $118.5 million, mainly as a result of a $5.1 million increase in reimbursement by out-of-pocket expenses for managed parking lot clients, and the $5 million gain in connection with the termination of an airport parking garage lease in Philadelphia. Although the loss of the airport parking revenue in Philadelphia partially offset the gain. In addition, as we mentioned earlier in the call, our latest acquisition of HealthCare Parking Systems of America contributed $2.5 million of revenues.

Operating profit increased $5 million, 164.6%, $8 million due to the $5 million lease termination gain, and operating profits from increasing this allowance revenue. These benefits were offset by additional operating costs associated with adverse weather conditions in the second quarter of '07. Portions of the Midwest were hit hard by late season storms, that increased snow removal costs and cancelled sporting events, which otherwise would have contributed to quarterly revenues and profits.

In our Security business, sales increased by $2.3 million, or 3%, to $77.5 million primarily due to new business. Security had an operating loss for the second quarter of $400,000, compared to an operating profit of $300,000 in the same period last year, primarily due to a $1.7 million litigation settlement in Q2 '07, which would have made the operating profit $1.3 million before taxes for the quarter.

Engineering sales increased by $3.9 million, or 5.8%, to $72 million due to new business and the expansion of services to existing customers in Northern California and other regions. However, operating profit decreased by $90,000, or 23%, to $2.9 million due to lower margin work and higher costs associated with increased management staff necessary to support the growth we have seen in the business.

These infrastructure investments were needed given the dramatic growth over the past few years. I am encouraged by the recent increase in the sales pipeline, and anticipate improving second half of the year for our engineering operations, and expect them to continue to the impressive run they have had.

Our Lighting segment continues to show year-over-year improvement, with second quarter sales increasing by $1.7 million, or 6.1%, to $28.9 million, primarily due to special project business with the Southwest and South Central regions. Operating profit increased by $300,000, or 136.9%, to $590,000 due to increased sales. The Lighting backlog remains strong, and we continue to anticipate further improvement in our Lighting segment as fiscal year progresses.

In closing, we are pleased with our second quarter performance, and are encouraged that we will carry forward this momentum in the second half of the year. We are committed to gaining and retaining new customers at acceptable profit margins, and keeping our overall costs down. We will continue to utilize our strong balance sheet and operating cash flow for the quarter to support our internal growth opportunities, and to make strategic acquisitions.

Based upon the current economic environment and our results of the first two quarters, we are increasing our guidance of net income to $1.05 to $1.10 per diluted share, which includes $0.02 per diluted share negative impact from the increase in shares outstanding, due to recent exercise of employee stock options, and $0.03 per diluted share for certain products associated with our implementation of new capital IT systems.

For the third quarter we expect diluted earnings per share of $0.25 to $0.29 per share, and the Company's net income for the third quarter of '06 to $0.35 per share, included in the 7.9 million pre-tax gain on insurance, or $0.10 per diluted share of payroll development for the period. As a reminder, all of our guidance is exclusive of huge acquisitions.

We look forward to updating you on our progress in the quarter, and at this time, I would like to open the call for questions.

(OPERATOR INSTRUCTIONS) We will pause for just a moment come pile the Q&A roster. Your first question comes from Jeff Kessler.

This is actually Sam in for Jeff. First, a quick clarification regarding your 2007 guidance. The $0.03 a share in IT costs, is this incremental to the $0.08 mentioned last quarter?

Sam, this is George Sundby. The $0.03 is the total impact on 2007. It is down from the previously reported $0.08. We have been able to move the project along a little further, and start the capitalization now that we have got the software design under way.

Great. Thanks. And could we get a little more color around the litigation expenses which impacted your security margins? Could we expect these, more of these expenses moving forward?

Sam, this is George again. Hopefully it is not a sign of future things to come. We thought the settlement was extremely favorable on our side, and so we took the charge this quarter. We do have other items that we feel very strong that we have adequate defenses against those.

Okay. Thanks a lot.

Thank you.

Again, (OPERATOR INSTRUCTIONS) Next question comes from David Gold, Sidoti.

Hi, good morning. Couple questions for you. George, for the second quarter, can you break out for us what the IT implementation costs were?

Second quarter IT costs pretax was like $310,000.

Okay. And I guess if we go back on that project a quarter or so ago, I guess initially we thought it would start a little earlier, then it was expanded a little bit, and so just curious on total timetable as well. I think when we talked a quarter ago it was, thoughts were 26 months or so, something like that?

Yes, that timetable still remains the same today, David. What we have been able to do is move quicker into the design phase, and that allows us to capitalize the cost quicker than what we had earlier anticipated.

Okay. And Henrik, give us as much as you can say anyway, an update on thinking these days on the acquisition front.

I am thinking a lot about acquisitions.

(LAUGHTER)

David, we are trying hard to make good acquisitions, and be as active as I think we have been in the past, or probably more active than we have been in the past. The key thing for me is, I think it is more important that we do the right acquisition instead of doing fast acquisitions. So we are doing the same process which we always do, which is looking at acquisitions that will be accretive to earnings, as well as acquisition that will fit into our organization and companies that will fit into our culture, and that hasn't changed.

I would like to see acquisitions faster than, probably as fast as you would like to see them. But at the same time, we have to do it prudent and we do continue to be looking, and hopefully we can come with news to you over the next couple of years.

Just on that note, costs or pricing these days in light of all the private equity money that is sort of chasing everything.

Pricing? I think private equity is an interesting situation because it is changing the customer landscape a little bit, as you can imagine. I think a lot of times you will see probably getting parked for a period of time, where the private equity firm will hold it for a period, and then sell it to somebody else, probably an end user or a long-term investor.

We have not seen any major impact neither positive nor negative, with respect to private equities involvement in our business. There are in some places increased bidding activity, but that is both good news and bad news, because sometimes it benefits us, we don't have, and other times its business that is being a contender. The fact of life is that the way I see it right now, I do not look at private equity as such being a major concern, and private equity in consolidation means bigger, bigger in general is better for ABM.

Okay. Good deal. Thank you both.

Thank you.

Thank you, David.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions.

Okay. Thank you very much. I would like to thank everybody for listening in. I don't have the pleasure of listening to myself, so I hope everybody heard me from Russia, but we are very proud of the quarter, and look forward to talking to you next quarter. Thank you.

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