ABM Industries Inc (ABM) 2007 Q4 法說會逐字稿

Good morning. 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 speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Thank you, Mr. Slipsager. You may begin your conference.

Thank you. 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 achievements as a company for fiscal 2007. George will discuss our financials and then I will conclude our prepared remarks with an update on our recent OneSource acquisition as well as provide guidance for fiscal '08. Linda.

Thank you, Henrik. Our presentation today contains predictions, estimates and other forward-looking statements. Our use of the words estimate, expects 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 annual report on Form 10-K, Form 8-K and the Forms 10-Q that we file with the SEC.

In addition we will be providing non-GAAP guidance in today's call. A reconciliation of non-GAAP guidance can be found in our fourth quarter fiscal year 2007 financial results press release and on our web site at www.ABM.com Investor Relations.

Thank you, Linda. Before we review our consolidated financial results and operating performance for the fourth quarter and year, I would like to highlight a few of ABM's accomplishments in fiscal '07.

We completed two meaningful acquisitions that will accelerate our growth in the increasingly competitive and global service provider marketplace. In April we acquired Healthcare Partner Systems of America, HSPA, a leader in the [parking] management services for hospitals, health centers and medical office buildings nationwide, along with their management team.

HPSA provides an important and strategic entry into the health-related segment of the parking industry and immediate expansion into ten new states, primarily on the East Coast. Our parking division now serves 39 states and we plan to leverage HPSA's expertise in our existing regional operating infrastructures to further grow this sector.

In October we announced plans to acquire the service provider of OneSource, and we closed this section in November. OneSource is the leader in janitorial landscape and other specialized services for more than 10,000 commercial, industrial, institutional and retail accounts in the U.S., Puerto Rico and British Columbia.

Our janitorial division has been ABM's best and most consistent performer in recent years and this investment will provide that team a broader base to continue expansion domestically as well as open new international opportunities, as well. In fact, OneSource will truly change the profile of ABM, increasing our annual revenue by nearly 30%, adding more than 30,000 employees and enhancing our overall scale, breadth, and financial strength.

We continue to strengthen our balance sheet and recently established a new $450 million credit facility replacing our existing $300 million facility.

In fiscal '07, net cash from continuing operations was $54.3 million; and that included a $34.9 million income tax payment relating to the $80 million settlement for the World Trade Center insurance claim in fiscal '06.

Our working capital increased by $40.6 million to $353.1 million from $312.5 million due to record revenue and incremental income generated in fiscal '07. We increased our dividend in '07 by 9.1% to an all-time high quarterly rate of $0.12.

Through these and other achievements we have further strengthened our position as the leader in the facility services and enhanced shareholder value.

I would like to turn the call over to George for a review of our fourth quarter and fiscal '07 financial results. George.

Thank you and good morning and happy holidays to everyone.

I would like to review the consolidated results for the fourth quarter ended October 31 as reported in yesterday's earnings release. We expect to file our annual report on Form 10-K with the Securities and Exchange Commission later this month, hopefully before Christmas.

Turning to the fourth quarter results, as Henrik indicated for the quarter net income was $15 million or $0.30 per diluted share compared to $61.6 million or $1.24 per diluted shares a year ago. The decline is due primarily to the fourth quarter of 2006, benefiting from the $80 million pretax or $0.91 per diluted share World Trade Center insurance settlement.

Quarterly comparison is also adversely impacted by the 2006 fourth quarter, including an insurance benefit of $9.4 million pretax or $0.11 per diluted share from the takedown of prior year insurance reserves as compared to $2.5 million or $0.03 per diluted share benefit in 2007.

Fourth quarter 2007 insurance benefits is from the receipt of updated actuarial studies and includes a $1.7 million benefit, primarily from the continued favorable impact of the California 2004 Worker Comp reform that is included in the corporate expense segment, a $200,000 pretax benefit in parking from its smaller airport specialty program and a $600,000 benefit in janitorial from its Midwest Worker Compensation program.

Total revenue was $723.9 million compared to last year's fourth quarter of $776.7 million. That includes that previously mentioned World Trade Center settlement of $80 million.

Sales and other income which totaled $723.9 million for the quarter was up $3.9 million and this increase is primarily from internal growth.

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 11.1% for the quarter compared to a 12.4% in the fourth quarter of '06. Previously discussed insurance adjustments are included in the operating [and] expenses in cost of goods sold and therefore included in the previously mentioned gross margin.

Excluding the effects the insurance adjustment had a beginning of period insurance reserve, the fourth quarter and full year 2007 gross margin was 10.6% for each period versus comparable 2006 margin at 10.6% for the fourth quarter and 10.2% for the full year. We believe this is a better indicator of our health of our current portfolio of customer contracts.

Effective federal and state income tax rates for the fourth quarter of 2007 was 38.1% compared with last year's fourth quarter of 43.2%. That higher rate in 2006 is associated with the higher state income tax applicable to the World Trade Center settlement. For 2008 we expect an effective tax rate of 37.5%.

Turning to the statement of cash flows. Cash from operations for the fourth quarter was $63.9 million compared with the $97.8 million from last year's fourth quarter. Again, the cash flow decrease is due to that fourth quarter receipt of $80 million, which was partially offset by excellent cash collections in the fourth quarter of '07, resulting in the $30 million decrease in accounts receivable during the quarter.

As Henrik mentioned, we continue to have a very strong financial position with $136 million in cash at year end and no debt. With the November 14th acquisition of OneSource we are now in a debt position with approximately $280 million outstanding today under our new five-year $450 million line of credit agreement.

At October 31, 2007, the largest component of working capital continues to be accounts receivable which, as previously mentioned, decreased $30 million to $370 million at the end of the year.

Day sales outstanding at quarter end decreased five days of the quarter to 52 days. Accounts receivable 90 days past due also decreased by $9.1 million to $27.9 million or 7.9% of our total outstanding. Our receivables allowance totaled $6.9 million at the end of the year compared with $7.5 million at the end of the third quarter.

Effective with our fourth quarter reporting, insurance reserves are now shown on our balance sheet without the benefit of our outside insurance coverage. This has resulted in the recognition of a $56 million estimated insurance recoverable and a correspondingly $56 million increase in the insurance reserves. This change has no impact on earnings for cash flow.

Insurance reserves net of the insurance receivables at October 31 were $205.1 million which is up almost $10 million from the $195.2 million of a year ago. [Self-insurance] claims paid during the year totaled $56.3 million, down slightly from the $57.4 million a year ago. Those shares were repurchased during the fourth quarter; our 2007 authorization for 2 million shares expired unused at the end of the year.

As previously mentioned, we anticipate filing our Form 10-K annual report later this month. Form 10-K will contain the report on our internal controls of -- [over] financial reporting as required by Section 404 Sarbanes Oxley.

As previously discussed over the years our decentralized structure and the 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 that are performed at year end and our overall valuation of our system of internal controls.

We expect to receive a clean certification from our auditors as we did in 2006.

On a personal note as announced last March, I will not be moving with the Company to New York and, accordingly, this is my last earnings call for ABM Industries. It has been a pleasure working with many of you that follow ABM.

I would like to take this opportunity to thank the Board of Directors, the employees of ABM, and especially Henrik Slipsager - an excellent CEO and boss - for the great support received over the past six years. With that it is my pleasure to turn the call back to Henrik who will give his perspective on our 2007 performance and our outlook for 2008. Henrik.

Thank you, George. I will briefly review the operational results for the fourth quarter and year as well as provide guidance for fiscal '08.

Our janitorial operation posted a fourth quarter revenue increase of $14 million or 3.5% compared to the same period in '06. For the fiscal year janitorial sales were up $57.8 million or 3.7% to $1.6 billion with growth across the U.S.

Our janitorial segment entered into fiscal '08 with solid sales momentum. Operating profits for janitorial increased by $2 million or 8.8% compared to the fourth quarter of '06. Operating profit increased by $5.9 million or 7.2% for the full year. Operating margins for the year were 5.4%, up 20 basis points from fiscal '06 - a very, very good year for the janitorial team.

With the addition of OneSource and the initial progress we are making in achieving the $45 to $50 million of (inaudible) savings, this organization is very well positioned for '08.

Parking sales increased $10.5 million, 9.3% but operating profit increased $0.5 million or 11.6% during the fourth quarter of '07 compared to '06. Sales increased by $39.3 million or 8.9% during '07 compared to '06, primarily due to HPSA reimbursed (inaudible) expenses for managed parking lot clients, then due to new contracts and growth of existing contracts and a $5 million gain in connection with the termination of the (inaudible) lease.

HPSA accounted for $18 million of revenue for the year. Operating profit increased $6.5 million or 47.9% during '07, comparing to 2006 operating results were favorably impacted by lease termination, additional profits of HPSA and increased sales.

Security sales increased $4.5 million or 5.8% during the fourth quarter of '07 compared to the fourth quarter of '06. Operating profit increased by $300,000 or 14% from the comparable period. For the year, sales increased by $13.6 million or [400.4]% primarily due to new business and increased service to existing clients.

Operating profit increased $400,000 or 9.8% in '07 compared to '06, primarily due to additional profits from increased sales and the elimination of unprofitable contracts.

Results were negatively impacted by a $1.7 million litigation settlement during '07.

Sales for engineering increased $400,000 or .5% and operating profit increased $100,000 or 2.2% during the fourth quarter of '07, compared to fourth quarter of '06. Sales were up by $16.4 million or 5.7% in '07 compared to '06 mainly due to new business and expansion of services to existing clients in the eastern Northern California and Mid-Atlantic regions. Operating profit decreased by $1.1 [billion] or 6.8% due to reduce profit margin and new business and higher G&A cost to support the growth in this business unit.

Lighting for the quarter saw increasing activity due to larger projects. GAAP lighting sales though decreased by $3 million and operating profit GAAP-wise decreased by $900,000 in the fourth quarter of '07 compared to the same quarter a year ago.

For the full year, sales and profit was pretty flat compared to '06.

In summary, we are pleased with our fourth quarter performance and believe we have strong momentum entering into fiscal '08. We will continue to focus our financial management resources in the business in which we can grow to be a leading national provider and have a number of exciting initiatives underway.

Before I turn to guidance, though, I would like to provide a brief update on the progress we are making with the integration of OneSource into our janitorial organization. First and foremost we are on schedule with our goal of recognizing joint fiscal '08 $28 to $32 million of cost savings synergies.

As of this week, we will achieve more than 50% of the target staff reductions in the [personal] opportunities we have identified. Yet through this process, we have been able to retain the key member of the OneSource organization. We thank [Cheryl Jones], former CEO of OneSource, for her capable assistance with integration process and also positioning OneSource to achieve better than we anticipated earnings for '08. We are currently evaluating the [IC] and payroll systems to determine how we can leverage the infrastructure in the two organizations.

It is very, very difficult not to feel extremely good about the addition of OneSource as part of our family. We expect to drive OneSource's business to realize the improvement for operating margins fiscal '08 and expect their position to be accretive excluding one-time implementation already in the second quarter. Long term we expect continued margin improvement into '09 and anticipate an additional $0.15 to $0.20 from OneSource.

Now turning to guidance. For fiscal '08 on a non-GAAP basis, the Company expects diluted earnings to be the range of $1.15 to $1.25. This guidance excludes onetime expenses of approximately $20 million or $0.25 per diluted share associated with achieving synergies on OneSource as well as the major financial system upgrade, share service implementation and relocation of corporate headquarters.

The Company expects these expenses to be evenly distributed over the four fiscal quarters. In addition, fiscal '08 has one additional work of labor which increased cost in janitorial fixed-price contract by approximately $4 million or $0.05 per diluted share.

On a GAAP basis the Company expects fiscal '08 diluted earnings per share to be in the range of $0.90 to $1.00. For the first quarter the Company expects diluted earnings per share on a non-GAAP basis to be in the range of $0.14 to $0.18 and on a GAAP basis to be between $0.08 and $0.12. All guidance is exclusive of future acquisitions.

In addition, we expect to realize $14 million in incremental cash flow in fiscal '08, from acquiring net operating loss carryforwards and existing (inaudible) related to the acquisition.

Before I open the call to questions, I would like to take a moment to thank George for his significant and valuable contributions to ABM over the past six years. He has played a substantial role in establishing ABM as an industry leader particularly as he enhanced our financial and control environment and more recently facilities that transition to our new CFO, Jim Lusk, who will assume responsibilities on December 31st.

This foundation of financial excellence will enable us to continue to grow our business. We wish him continued success in his future life.

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

(OPERATOR INSTRUCTIONS). Jeff Kessler.

Thank you. Jeff Kessler with Lehman Brothers. First, George, it's been great working with you these years and congratulations and I hope you do well in whatever you're doing. Stay in on the West Coast and having an easier time of it over there.

I guess we have a few questions here. In our -- in your 2008 guidance what sort of topline numbers and growth rates are you assuming in the segment? Roughly adding on -- are we just roughly adding on $800 million from OneSource or what are the other areas that you are looking at?

Also, just to clarify about OneSource, are you going to be -- can you give us any other -- are there any other segments inside of OneSource -- which I used to cover, obviously -- that might be adding on to the other segments as well?

Okay. There are several questions there, Jeff.

Well it's all around OneSource.

Yes. Let me start with OneSource. Fiscal '07 or the '07 revenue that we are dealing with is $827 million. But I actually think the run rate is around $840 million based upon the last one or two months, but you have to understand we are still looking into it. But it looks to be a very positive surprise, not a negative surprise.

Talking about growth, also for '08, we have had a very, very strong sales month which hopefully will reflect higher-than-normal growth for the fiscal '08. It is early in the year, but I'd rather start with something positive than trying to catch up later on in the year.

On the segmented side, we will be looking at engineering. They have a small engineering piece as part of OneSource. If it's truly what we define as (inaudible) we will eventually move it over to that line of business during the course of the year. We should know that before the end of the first quarter what exactly is part of that particular line of business.

Did I answer all of your questions?

Yes. Can you talk about the landscaping business?

I would be happy to talk about landscaping business. As we look at it now, we have a very small piece of landscaping business that we, at one point in time, were merging. So the existing landscaping business of OneSource was the major operator of landscaping, compared to (inaudible) companies. I look forward to learning much more about their landscaping operations in the future than I know about it right now. (multiple speakers)

Okay. Your pro forma $1.15 to $1.25 guidance I am assuming includes the synergies that you are talking about. Are we talking $28 to $32 million and ultimately $45 to $50 million I guess of synergies?

Correct.

Clearly this is -- let me just put it as mildly conservative from any way, shape or form, I would -- somebody might say it's disappointing, I will just describe it as conservative. How conservative are you, especially since it's below the street and our estimates with regard to adding on if you just add on the -- on the savings on to what our estimates have been?

I think the key thing you have here are two factors. If you just looked at the $28 to $32 million you do have to subtract the interest in the $365 million; and also you do have an impact, if you look at pure earnings per share, of depreciation of value of contracts. So I won't call that too conservative. I think it's pretty realistic from that perspective.

We [will not] have a negative impact in the first quarter and we are going to have a positive impact already starting quarter number 2. But if you take 6 plus percent of $365 million, I'm adding $20 million of interest per year that I didn't have before, and some of the reductions - even though we are slightly ahead of plan - are taking their place today and yesterday. And we continue with some of the space consolidation in the second and third quarter.

So we are moving as fast as we can, but I think the major, major, major benefit you'll see that in year two and three.

Just a couple more questions. The self-insurance reserve adjustments, clearly a cause of confusion over the last couple of years and yet again in the fourth quarter I think again -- can you go through without going through it in too much detail -- going to the reserve adjustments and should we basically be taking out that the benefit that you received in the fourth quarter from your -- from what we deem to be the normalized earnings?

In other words how do you look at these insurance adjustments? Because we -- are these a normal course of business that we are going to have to -- that obviously we deal with? As an analyst are we going to just to excise these every single quarter or is it something that -- is there a way for us to put a trendline through this?

I'm -- trust me. I'm as frustrated with the way we do it as anybody else. It seems like people covering us, looking at us are penalizing for us when it's bad and we don't get the benefit when it's good.

If you look across the year, it's amazingly flat. We went from doing one actuarial study a year up to now we are doing three actuarial studies a year. One major study and two minor studies. That was in order to minimize the variation in the old years. And if you look at the ultimate refurb which I think is running $[8] to $900 million, I will let George talk more about it afterwards, 1% variance in the actuarial numbers is $8 million on old years. And unfortunately that has a major impact on our border.

The accounting rules are very clear. I don't like them but they are very clear and that means that we have to accrue to a point estimate. If you have a better estimate than a range, I prefer the range but the accounting rules doesn't exact -- (inaudible) what I prefer.

I will let George go through it again, but I think overall, Jeff, the old years, you will see we are accruing exactly what the actuarial tells us what to accrue. And it is as frustrating for us as it is for them, but if you ask me if you should exclude it, I think if you exclude it in your valuation when I got damaged, yes you should exclude when I get benefits. You don't -- you have to give me benefit if you penalize me when it's not good.

Finally, yes, a question I ask every quarter is about cross selling and upselling of the divisions and how that may help or hopefully help your operating margin. Are you satisfied with what is going on in that area?

I'm nervous as to what is going on in the cross selling area. I think I've been crying about that for years. I'm very pleased with the overall improvement in operating profit incentives. I think it is moving up. It's just a very stable move and it has been a constant move especially in the janitorial world. And I think you will see that continue especially when the addition of OneSource where size is going to be very, very important. I think that cross selling might not be the biggest asset as part of this, but multistage and multinational and multiregional sales - as part of this deal - is going to hopefully add more business than we expected to this deal.

Jeff, this is George just to and give you a little further information on insurance reserves.

If you look over the year, first quarter we had a $4.2 million benefit and then we had a $4.9 million adverse development and then the $2.5 million in the fourth quarter. I think you'll see those numbers continued to shrink as the portfolio claims is under now one third party administrator and I think we were getting our hands better around those claims going forward.

But as Henrik said we do actuarial study each -- three times the year. It's projecting losses since 1986 which is now over $1 billion in ultimate. And so minor movements by the actuary or what the actuary does believe is minor does impact ourselves.

So I would concur with Henrik that those results should continue to dwindle, and the size of the magnitude but they definitely are part of our earnings.

Thanks and again it has been great working with you.

Thank you, Jeff.

David Gold with Sidoti.

Good morning. George, I definitely concur with Jeff on that one. It has been a lot of fun and certainly best of luck.

Couple of questions. Hopefully you can help me out. First off, the $20 or so million, the one-time, can you give us a sense for how much of that is related to OneSource versus some of the other industries you're undertaking?

Yes I can give you some sense of this. Of the $20 million around $5 million is specifically expected to be OneSource-related. Another major chunk, I don't want to give you a specific number, but yes I think it is around $12 million is associated with project transform which also includes -- no. I'm sorry. J.D. Edwards conversion and it is something we are looking at right now because one of the major. major positive surprises as part of the OneSource acquisition is that they, as a matter of fact, they might have an older system but they have a bit of functional system than we do and they might have a system that is more efficient than our existing business.

So we have planned, as we mentioned when we went to IBM to do a major transformation this year to a much greater J.D. Edwards platform, but the findings as part of the acquisitions has led us to now investigate to see if the direction that we already decided is the proper direction to make sure we do it in the most economical and cooperation is the best possible way.

So the biggest chunk of the whole thing is probably 60% of the whole thing is associated with the conversion of IT. Then you've got $5 million and 25% of that whole thing associated with OneSource, and that is associated primarily with severance costs as well as elimination of leases.

Those are the major factors there and lastly, the last piece is related to the move to New York and (inaudible) . Okay?

And on the IT conversion/J.D. Edwards. Are you viewing that at this point as a one-year project or does it continue?

The conversion?

Yes.

No, we expect the project to be done -- if we continue the direction we are going right now the project will be finalized sometime (technical difficulties) '09, but right now based upon our findings, I can't give you if we decided to go the OneSource route, if that is going to change any timing. It's too early for me to tell you that. As I said, we are looking into it now and as a matter of fact my new CFO is going through a two-day, full-day meeting discussing exactly the direction of the Company going forward.

Then a question for George on the G&A. Even if I blend back in the -- I think you said $.7 million would have been there in the quarter -- you still have a lower showing or a better showing than we would have expected and certainly on a year-to-year basis you're making progress there.

Anything missing or not thinking about or are you guys just making real good progress there?

In our costs -- in our SG&A?

Right.

I think we continue to make good progress in that area. Just on the -- going back to the OneSource, the accounting rules are a little bit unique in that as we consolidate, if we eliminate a OneSource branch that goes to purchase accounting, but if we decide to eliminate the ABM branch because the OneSource branch is better suited for our operations and that goes through P&L; and that is why is why we put up a $5 million target for next year - is some of those costs on the ABM side.

Then just a couple of others. Can you give a sense for what you would expect D&A and CapEx to be for 2008?

For 2007, depreciation and amortization is going to be about $18 million. That excludes the share-based compensation which we typically add back in there and that is another $8 million.

Going forward with OneSource now being in there, I would say it would probably be close to $25 million.

25 out of --

Depreciation and amortization.

And then the share base will be on top of that?

Right. Share base should return back to -- probably to a $5 million level. Last year we had accelerated and the first three quarters from our price vested options are now behind us.

And then just a sense on CapEx if you might.

CapEx for the year was $22 million. With the project on the J.D. Edwards you'll probably be closer to $27 to $28 million next year.

Appreciate the help from you both.

There are no further questions at this time.

Thank you very much for listening to us. Have a happy holiday and we will see you after the first quarter of '08. Thank you.

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