ABM Industries Inc (ABM) 2007 Q3 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the ABM Industries Incorporated third quarter earnings 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'm Henrik Slipsager, President and CEO of ABM Industries. Joining me today are George Sundby, our Executive VP & CFO, and Linda Auwers, our Senior VP and General Counsel. On the call, I'll provide an overview of our operational results for the third quarter that ended July 31st. 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 estimate, expect, and similar expressions are intended to identify these statements. These statements represent our current judgment 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-K and the Forms 8-K and the Form 10-Qs that we file with the SEC.

Thank you, Linda. For the quarter we achieved record revenue of $718 million. Our top line growth was driven by new business and expansion of services in four of our five operating segments. Exclusive of the increase in insurance research for prior years, net income for the third quarter was within the range of our guidance. Adjusting for changes to insurance research for claims associated with previous periods, gross margins were 10.5% compared to 10% for the comparable period in 2006. A reconciliation of this non-GAAP number can be found on our website. Approximately three to four times a year we have an independent third party review our estimated insurance claim cost and liabilities to ensure that we have adequately accrued self-insurance reserves to cover these and future claims. It's not an exact science. Estimates are based on recent experience and trends can vary significantly due to changes in the frequency and severity of claims as well as changes in the regulatory requirements.

In the third quarter, we determined that an increase in our self-insurance reserves in the amount of $4.9 million was necessary compared to a $4.7 million reduction in our self-insurance research in the comparable quarter last year. This adverse development was directly related to the claims formerly managed by a third party administrator, which has been replaced. We are currently seeking damages against the former third party administrator and hope the issues will be resolved in 2008. This was the first full quarter of operations for HealthCare Parking Systems of America, which we acquired in April, and we are on track with its integration. In addition, we secured a number of new contract wins and expanded a number of existing accounts across all systems for lighting due to fewer special business projects. As I mentioned on our last call, we are committed to improving energy efficiency at our facility and we recently took another step towards -- forward in our agreement initiative.

ABM has partnered with Lighting Science Group, a leading provider of energy efficient and environmentally responsible lighting technologies, for a feasibility assessment at our partner facilities nationwide. The partnership calls for continued product installation for our lighting segments to allow for independent product testing at various third party locations. We are very excited about the potential for overall energy savings.

Before I get into more detailed discussions of our operating segments, I would like to call over to George for a review of our third quarter and first nine months of fiscal 2007 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 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 third quarter results. As Henrik indicated, net income for the quarter was $12 million, or $0.23 per diluted share, compared with $17.3 million, or $0.35 per diluted share a year ago. As will be discussed in greater detail later in my remarks, the decline is solely due to a $12.8 million pretax, or $7.7 million after-tax, which equals $0.15 per diluted share, swing in the insurance adjustments made during the two periods that pertain to claims from previous periods. Excluding these adjustments, pretax income would have been up over 13%. Total revenue was $718 million, up 4.1% over last year's third quarter. The increase was primarily from internal growth, with about $7.5 million contribution from the acquisition of HealthCare Parking Services earlier in the year.

Company, as you -- we've discussed, performs three evaluations of its self-insurance reserves during the year. The May 31, 2007 evaluation indicated net adverse development of $4.9 million in the self-insurance reserves for claims incurred during prior years. The comparable evaluation for May 31, 2006, indicated favorable development in the Company's self-insurance reserves, resulting in a $4.7 million pretax benefit for prior year claims, with an additional $3.2 million benefit for reserves established during the first half of 2006. As is our policy, the prior year reserve developments have been recorded in our corporate segment line, while the $3.2 million benefit was reflected as third quarter 2006 benefits in the five operating segments. Current quarter adverse development was due to development in the workers' compensation claims outside of California, which, as Henrik indicated, is subject to ongoing arbitration. This adverse development was reduced by continued favorable development in the Company's California workers' compensation, general and auto liability reserves.

Turning to gross margin as a percent of sales, gross margin, which is defined as sales minus operating expenses and cost of goods sold, was 9.8% in the quarter compared to 11.1% in the third quarter of 2006. The previously discussed insurance adjustments are included in operating expenses and cost of goods sold and, as Henrik indicated, excluding these effects of the insurance adjustment, the 2007 third quarter gross margin was 10.5% versus the prior year third quarter of 10%. We believe this is a better indicator of the health of the current portfolio of customer contracts.

Looking at insurance income taxes, the effective tax rate for the third quarter of 2007 was 28% compared to 35.9% for the third quarter of 2007. Both periods reflect a true-up of our prior year tax provision to the filing of over 450 federal, state and city income tax returns. Principally as a result of new tax requirements in New York and Texas, the Company's incremental tax rate has increased from 39.3% to 40%. This increase generated a $1.2 million deferred tax benefit from the increased benefit to be realized when temporary timing differences are reflected in future tax returns. The third quarter of 2007 provision also reflected a $600,000 benefit, principally from the elimination of reserves on closed tax years. For the remainder of 2007, we anticipate an effective tax rate to remain at 37.5%, as higher work opportunity tax credit, or WOTC credits, have offset the increase in the Company's state income tax rate.

Turning to the statement of cash flows, cash from operations in the third quarter totaled $19.4 million compared to $30.1 million from last year's third quarter. For the nine months, cash used by operations was $9.6 million compared to $32.5 million of cash generated from the first nine months of 2006. The year to date cash flow -- cash outflows are a 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 be in a strong financial position with over $107 million cash at quarter end and no debt. The largest component of working capital continues to be accounts receivable, which increased to $407.9 million during the quarter. Days sales outstanding at quarter end has increased 2 days to 57 days. Accounts receivable 90 days past due also increased during the quarter by $7 million to $37 million, or 9.1% of total outstanding. Our receivable allowance totaled $7.4 million at quarter end compared to $8 million at the end of last year.

Insurance reserves at July 31 are $204 million, which is up $7.7 million over the third -- over the second quarter and includes a $4.9 million adverse development discussed earlier. Self-insurance claims paid during the quarter totaled $14.6 million, which is up from $13.7 million of a year ago. On a year to date basis, claim payments totaled $43.3 million, down slightly from $43.8 million in the first nine months of 2006. No stock was repurchased during the quarter. Our current authorization has the capacity for 2 million shares and expires at the end of October 2007. With that, let me turn the call back to Henrik, who will give his perspective on our third quarter operational performance and the outlook for the remainder of 2007. Henrik?

Thank you, George. I will now briefly review the operational results for the third quarter, as well as provide guidance for the fourth quarter and the remainder of fiscal 2007. Janitorial sales increased $13.1 million, or 3.3%, to $408.9 million. The top line growth, which we experienced in seven out of nine janitorial regions, came from new business and the expansion of services to existing customers, as well as price adjustments related to union cost increases. Operating profit decreased $1.1 million, or 4.6%, to $22.1 million, due to the third quarter of 2006 benefiting from a $2.1 million reduction in insurance reserves pertaining to the first six months of 2006. Additionally, the third quarter of 2007 includes $1 million of higher legal expense, which included $400,000 to settle a lawsuit. Parking sales increased by $7.3 million, 6.3%, to $123 million, mainly as a result of $7.5 million of additional revenues from our regionally acquired HealthCare Parking Systems of America. This offset the loss of an airport parking garage lease in Philadelphia which was terminated in the second quarter of '07.

Operating profit increased $300,000, or 6.3%, to $4.8 million during the third quarter of '07 compared to the same quarter of '06, as a result of $300,000 of additional operating profits from HealthCare Parking and $400,000 received from a lawsuit. In addition, the third quarter of '06 operating profit included a $300,000 benefit from the reduction of self-insurance reserves. In our security business, sales increased $4.4 million, or 5.7%, to $81.8 million due to new customers and more business from existing customers. Operating profit was basically flat year-over-year at $1.9 million in the same period last year as Security benefited in Q3 '06 from a $1 million reduction of the reserves related to the overpayment of SSA. It also recorded a $400,000 benefit in the third quarter of '06 from the reduction of self-insurance reserves from prior periods.

Engineering sales increased $4.2 million, or 5.8%, to $75.8 million due to new business and the expansion of services to existing customers, most significantly in the eastern, Northern California and mid-Atlantic regions. Operating profit decreased by $300,000, or 6.2%, to $4.2 million primarily due to lower margins on no new business in the third quarter of '06, benefiting from a $300,000 reduction of insurance reserve pertaining to the first six months of '06. Our lighting business posted the only top line decrease for the quarter, with sales down by $1.5 million, or 5.3%, to $26.6 million due to the decrease in special project business, primarily in the northeast and southeast regions, that benefited sales last year. On a positive note, operating profits increased $200,000, or 187.9% to $300,000 due to higher gross margin.

In summary, we are pleased with the operating performance for the quarter and first nine months of '07 and believe we're in good position to continue to make improvements in our top and bottom line in the fourth quarter of '07 and beyond. We have a strong balance sheet and operating cash flow and will continue to drive new business and expansion of our existing service contracts both organically and through strategic acquisitions. In addition, we'll seek operational efficiencies and ways to enhance our competitive positions, such as our planned shared service center. We remain on track to consolidate our back office functions in Newton by '09. We expect net income for the fourth quarter to be $0.27 to 37 -- $0.27 to $0.31 per diluted share.

Net income for the fourth quarter of '06 of $1.24 per diluted share included $45.1 million or $0.91 per diluted share from the settlement of the World Trade Center insurance claim, and $5.7 million or $0.12 per diluted share from the reduction of sales insurance reserve related to prior years' claims. These improvements were partially offset by $1.9 million, or $0.04 per diluted share in charges related to the outsourcing of information technology infrastructure and services. For fiscal '07, we expect net income in the range of $1.01 to $1.05, which is consistent with the guidance of $1.00 to $1.05 per diluted share provided at the conclusion of fiscal '06. As a reminder, all numbers are exclusive of any 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. Thank you. Operator?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeff Kessler with Lehman Brothers.

Good morning.

Good morning.

Good morning.

Can you -- can you go through the, the trends that you're seeing right now in the, in the various, in the various divisions? You know, we went through them as you normally do, but clearly some of the trends have changed from where they were a couple months ago. Obviously the question of lighting comes up again. Better margins, but your revenues did not improve and also the issue of the parking margins, what really effected the parking margins. So if we could go through -- if you could go through the divisions with a little more detail, I would really appreciate it.

Okay, Jeff. I don't think the trends are that different from what I communicated last quarter because we're pretty much within the range of what I expected. There will always be pluses and minuses. If I start with janitorial, the janitorial world hasn't changed significantly. I think if you look at where the market will go, I think it is -- it's been a very difficult time for us to do any acquisition in any of the marketplaces we are in, simply due to the fact that private equity have been in there with different price model than we have. So maybe this change in the environment will help us in the future. But I don't see any different trend in janitorial.

I'll go straight to lighting. Lighting, I think is somewhat misleading when you look at the revenue number, because I also look at the activity level. Activity level includes work associated, or what we deal with multiple deliveries, so we have to take the income in over the next probably 30 months. We added in excess of $2 million in the quarter to our balance sheet on revenue that we could not post for the quarter, simply due to that accounting treatment. Security is -- I think it's moving ahead. As I say, it's profitable and should it move faster, yes, I'm always pretty impatient when it comes to the security, but I feel security is moving the right direction, not to the speed that I would like, but it's now profitable in all segments.

Parking, parking, it's very difficult to talk margins in parking in my opinion because part of it is associated with reimbursable expenses and activity level, where we deal with reimbursable expenses, but no profit, can be up and can be down, which will effect the bottom line percentage. But parking as a matter of fact, came in slightly better than we expected on an overall basis. And engineering, you know, we had one or two tough quarters, but I think engineering's back on track. I'm very pleased with this quarter for engineering and I'm looking forward to a very good fourth quarter as well as a good '08 for engineering. So I don't think -- I don't see any different trends from what I saw last time from my seat.

Okay. As occupancy levels, or the inverse vacancy rates seem to be settling down into, into equilibrium at this point. Are you finding more business coming out of existing tenants?

I would say that you can see the improvement in the results. You know, if you think back about all the conference calls we have been through, you remember we had our issues in New York way back when. You have not heard about New York being an issue lately. That is clearly because it's benefiting from that additional tenant sales in a better market outside the fact that we have excellent management there. But in most other markets, it is very marginal, it is primarily New York City that's benefiting from the (inaudible).

Okay. Finally, a question on the, on your planned shared services center. How is that progressing? When are we going to see perhaps material contribution from it, given that it would seem to be a -- it's something that's been on, that's been on at least conceptually been a part of this Company now for 10 or 15 years, and it seems that you now have something actually physically in place. Where are you actually in the operations of this?

I'm not sure I understood the 10 to 15 years.

Well, that's in my mind.

In your mind, okay.

In my mind, that potential's been there for 10 to 15 years, Henrik.

Okay. That's fair, Jeff.

Okay.

We are on plan with, with the service center. I think we will be able to make the move without any significant hits to the bottom line over the next year, year and a half. There will be some costs associated with the move. Janitorial has started utilizing the service center. We have a nice crew down there already and the benefits on the shared servicing on the bottom line and efficiency, because not only the bottom line, but is also efficiency discussion because it will make it easier and better for us to make acquisitions in the future if we have a structure we are dealing with all the admin. But I expect to see some small benefit in the end of '09 and in 2010, hopefully will kick in fully. But I just don't have a number on the full impact yet. It's, it's a job that's, -- it's a significant change for us and it's something that's changing overnight, but we do expect 2009 and 2010 to see some benefit.

And the compensation, the compensation from that services center, will there be people who will be compensated on selling multiple services?

The service center, I think I have to clarify what the service center is.

No, I understand what it is. This is a slightly -- a shift in my questioning.

Okay.

I apologize.

So your question was, again--

My question now goes to multiple service, multiple service offerings.

The multiple service offerings we are doing is primarily done through our engineering group and the facilities arm. It's going on, still going on. We've -- in spite of losing one or two major accounts due to some mergers between our clients, we still see growth in the engineering group and part of that growth is associated with the facility services piece, which I believe you will see growth in over the next, very long period of time.

Okay. Thank you very much.

Thanks, Jeff.

Your next question comes from David Gold with Sidoti.

Hi, good morning.

Good morning, David.

Couple of questions. First, George, on the $4.9 million insurance reversal, and forgive me, you went through this pretty quick, so I'm not sure if you spoke to it, but can you give the breakdown then between the operating segments? Was it all in operations?

The 4.9 adverse development that we took in the third quarter is all in corporate.

All in corporate?

Yes. It's all old years.

Got you.

It was last year when we had favorable development that that favorable got split between corporate, which was pertaining to prior years and the segments, which were pertaining to the first six months of 2006.

Okay, and then I guess part two of that question is -- Henrik, in the release you spoke about changing admins and going after the admin. I guess is this -- basically, this is the same thing that happened, say, two years ago, right? We changed admins and we went after them for screwing things up, or is this just -- or is this residual from what happened way back then? In other words, we've just switched admins the second time in two years?

No, no, no. It's the same change we talked about all the time.

Uh-huh.

I was just trying to remind you.

I see, I see. So really it's just ongoing from way back then.

Yes, sir.

Got you. And then part two, the janitorial business, top line was a touch softer than I had looked for, but the margin's quite a bit better. I'm curious there if there's any shift to maybe passing on some of the lower margin business, or if it's just sort of a function of the environment.

I think it's a function of the environment. The management of the janitorial services has done a great job in managing the bottom line, if you compare to any other public company in this field, and we have made a decision that there might be certain low profit business that we are just not attacking aggressively. We would rather see conservative growth and hopefully adding some accretive acquisitions at one point at a time instead of ending up with long-term break-even contracts that I have to explain every quarter to you on a conference call.

Got you. Fine. And then also, if you could just speak about thoughts on repurchases, presumably shares are down quite a bit over the last three months and I guess the window opens, I would think, in the next couple of days?

I'm not going to talk about the future. Basically saying we have a purchasing plan in place. If we believe that it's the right thing to do, we'll buy shares back. The problem you always have is it could be 20 or 50 or a hundred reasons why we wouldn't buy back or couldn't buy back, so I cannot make a commitment. But we have never had a purchasing -- a repurchasing plan without the intent of buying back stock if we feel it's appropriate.

Right, but just remind me, your blackout period starts basically when the quarter closes?

It starts -- exactly, when the actual quarter closes, so we'll be in blackout period for 40 days.

Okay, got you. That helps. And just one last one for George, going forward on tax rate, we thought about it, is that 37.5% good sort of run rate number to use, say, if he we were thinking about next year?

That's correct.

Perfect. Thank you, both.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from David Leibowitz with Berman.

Are you there, David?

David, your line is open. (OPERATOR INSTRUCTIONS) Your next question is a follow-up from Jeff Kessler with Lehman Brothers.

Henrik, given the fact that your stock price has likely been effected by its association with the commercial real estate world, which I also cover on the transaction side, I'm wondering if you can make any comment, not specific to your stock, but specific to your Company with regard to, are you seeing anything in the market at this point in time that leads you to a more negative perspective, given that there may be less transactions next year? And I know your answer could be what do transactions have to do with our business, but I would kind of like to hear it from you, where your Company's position is relative to -- or where your stand, I should say, as a Company, relative to what you're hearing and what you're reading in the newspapers.

You basically answered your own question. Transactions-related business has nothing to do with us. More transactions, and there have been some major transactions this year. I would say half of them are beneficial to us. The other half are not beneficial to us. It could be existing client is selling to another party, where they could do the services in-house or use another contract, which I know sounds unlikely, but it does happen. We had not -- you will not see any, in my opinion, any impact at all on the transaction-related businesses up and down if I don't know the actual names and people buying and selling. I think you talk about activity level versus our performance.

That's correct.

Activity level in the transaction business has absolutely nothing to do with our performance.

All right. Thank you.

You're welcome.

At this time, we have no further questions.

Well, I want to thank everybody for listening and look forward to talking to you in three months. Thank you.

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