ABM Industries Inc (ABM) 2008 Q2 法說會逐字稿

Good day, everyone and welcome today's ABM Industries Q2 fiscal year 2008 conference call. Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Henrik Slipsager. Please go ahead.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive VP and CFO. And Sarah McConnell, our Senior VP and General Counsel. On the call today I'll provide an overview of the second quarter ended April 30. Jim will discuss our financial results 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 fiscal '08. Sarah?

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 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 annual report on Form 10-K, Forms 8-K and Forms 10-Q that we file with the SEC. A reconciliation of ABM Industries' non-GAAP earnings from operations to consolidated operating profit and items affecting comparability of results as well as a reconciliation of non-GAAP guidance can be found at the Investor Relations' section of our website, www.ABM.com under the heading presentations.

Thank you, Sarah. We're very pleased with our strong top and bottom line second quarter performance. Revenue expanded 35% to approximately $939 million and non-GAAP earnings from operations increased 25.2% to approximately $26 million. These results reflect continued organic growth of our broad customer base as well as improving synergies from our recent acquisition and strong cash flow. Despite the current economic environment, our business remained robust and we executed very well against our operating plans and experienced strong revenue and operating profit gains, in (inaudible) Engineering and Security segment.

We continue to make excellent progress on the integration of OneSource and made many of our key milestones including $6.8 million in synergies, a $14.5 million reduction of our outstanding debt and I'm very proud to point out that we achieved accretion from OneSource acquisition in the second quarter. To date on an annualized basis we have achieved approximately 50 to 60% of the cost saving synergies related to the integration of OneSource which is slightly better than anticipated.

In fiscal '09, as we previously communicated, we expected OneSource to contribute $0.20 to earnings per share in addition to what we expect in '08. We will have a full year of impact of our synergies in fiscal '09. As a direct result of the strength of our overall business we declared what will be our 169th consecutive quarterly dividend. Before I hand the call over to Jim to review our financial results and operating performance, I would like to mention we continue to be on schedule with the transformation of our business process and infrastructure platform. These are critical towards achieving the goals we have set for ABM as part of our five and five in ten initiative. I'm very pleased with the efforts of our employees across the business. These are indeed exciting times for ABM. Now I would like to turn the call over to Jim for a review of our second fiscal quarter of '08.

Thank you Henrik and good morning everyone. As with the first quarter, a number of significant items affected our reported results for the second quarter including acquisitions. We are pleased with our strong underlying fundamentals and solid overall performance. Net income was $11.1 million, or $0.22 per diluted share, compared to $16.7 million or $0.33 per diluted share a year ago. There was one additional workday in the second quarter of '08 which reduced net income by $2.3 million or $0.05 per diluted share. However, our non-GAAP earnings from operations before items affecting comparability increased 25.2% to $25.8 million in the second quarter of fiscal 2008, from $20.6 million in the same period last year as a number of one-time items impacted the results.

The non-GAAP earnings from operations excludes the following items affecting comparability in Q2 2008. An impairment charge of $4.5 million related to our Lighting segment, most of which was not tax deductible. Expenses of $4.8 million associated with corporate and infrastructure initiatives and the integration of OneSource. A benefit of $7.2 million from the reduction of the Company's self insurance reserves from prior years that increased net income. The second quarter of 2007 included a $5 million benefit from the sale of an off airport parking garage lease that increased net income. Net these items reduced net income by $2.1 million in the second quarter of 2008 and increased net income by $5 million in the second quarter of 2007.

OneSource contributed $7.9 million in Q2 operating profit of which $6.8 million was attributed to synergies with our existing Janitorial business and elimination of corporate redundancies. Our SG&A increased $22.8 million year-over-year, due to $16.3 million of expenses associated with the acquisition of OneSource. Excluding OneSource, SG&A increased $6.5 million due to the integration of OneSource operations, severance bonuses related to the headquarters move to New York and an increase in share based compensation expense.

Interest expense increased $3.8 million in the second quarter, due to the drawdown of our credit facility for the OneSource and Southern Management acquisitions, as well as interest accretion related to OneSource insurance claims, liabilities assumed as part of the acquisition. The estimated annual effective tax rate use for the three months ended April 30, 2008, was 38%, compared to 37% in the prior year, mostly due to higher overall tax rate. The effective tax rate was 44.3 and 34.4 in the second quarter of 2008 and 2007 respectively, due to certain discrete tax items. For fiscal 2008, we continue to anticipate an effective tax rate of approximately 38%.

Turning to our six month results, net income was $17.4 million, or $0.34 per diluted share, compared to $25.4 million or $0.51 per diluted share, total revenue for the six months ended April 30, 2008, was $1.9 billion, up 33% over the comparable period last year. As with Q2 results, there were a number of items affecting comparability related to the corporate relocation and acquisitions, impairment of goodwill in our Lighting segment and changes to self insurance reserves among others. Excluding these items, non-GAAP earnings from operations increased 46.8%, to $43.9 million in the first six months of fiscal 2008, from $29.9 million in the same period last year.

Turning to the statement of cash flows, cash from operations for the first six months of 2008 was $21 million, compared to $29 million for the comparable period last year. Last year cash flow usage included a $34.9 million tax payment associated with the World Trade Center insurance proceeds. In the first quarter, we closed the acquisition of OneSource for a total purchase price of $390 million, under purchase price accounting at the time of closing we allocated $34.4 million to customer contracts and intangible assets and $278.6 million to goodwill. During the quarter we made an adjustment of approximately $4 million, increasing our purchase price allocation to goodwill to bring to it $282.2 million. We have not completed the allocation of the purchase price of the acquisition and anticipate it will be finalized during the remainder of 2008.

We ended the quarter with $17.4 million in cash, down from $136 million at the end of fiscal 2007, primarily due to the acquisition of OneSource and Southern Management. But this is up from $3 million at the end of Q1 due to strong sales and cash management. During the quarter, accounts receivable decreased by $5.4 million to $498.4. Days sales outstanding at quarter end were 54 days, down one day sequentially. Our receivable allowance totaled $10.4 million at quarter end compared to $6.9 million at the end of the year. $2.4 million increase was attributable to OneSource. Insurance reserves at April 30, were $351 million which includes claims acquired from OneSource compared to $205 million at the end of fiscal 2007. Self insurance claims paid during the quarter totaled $20.2 million, compared to the $15.2 million in the second quarter of 2007. With that, let me turn it back to Henrik who will give his perspective on the second quarter operational performance for the segment and the outlook for the remainder of 2008.

Thank you, Jim. I will now briefly review the operational results for the second quarter as well as provide an update on our GAAP and non-GAAP guidance for fiscal '08. Sales in the first half of '08 have been very encouraging. Despite challenging economic environment, we are finding that our services remain in demand and we are improving our assistance to recessionary pressures. For the second quarter, Janitorial sales increased by $226 million or 56.6% to $626 million due to $213 million of revenue contribution from OneSource which was acquired in Q1. OneSource continues to perform better than expected and as I mentioned was accretive in Q2 as anticipated. Excluding the impact of the OneSource acquisition, Janitorial sales were up 3% with most regions turning in solid performances.

Janitorial operating profit increased by $6.1 million or 25.6% to $29.8 million. The increase was primarily due to $7.9 million of additional profit contributed by OneSource of which $6.8 million is attributable to synergies from reduction of duplicative positions and back office functions. Consolidation of facilities and reduction in professional fees and other services. There was one additional workday in the second quarter which negatively impacted operating profit by $3.8 million compared to '07.

Parking sales increased by $6 million or 5.1% to $124.5 million, due to $6.1 million of revenue contribution from HIPSA, which we acquired in the second quarter of '07. $5 million of higher lease and fixed allowance revenues. Operating profits for the second quarter of '08 was $4.4 million. On a year over year basis that is down 45% due to a $5 million gain recorded from the termination of an off airport lease in '07. Operating profit for Parking excluding that gain from '07 is up 47% year-over-year. Our Security sales increased $4.7 million or 6.1% to $82.3 million. With growth in the Southwest and Midwest regions from both new and existing customers. The second quarter operating profit increased $1.9 million compared to a loss of $400,000 last year. I'm encouraged by the level of sales activity in Security and the recent operating performance.

Engineering continues to perform extremely well. With sales increasing $7.3 million or 10.1%, as we won new business and expand our services with existing customers. Operating profit increased by $1.4 million or 48% as we benefit from operating leverage. Lighting continues to be our weakest performing segment and during the quarter we took a charge of $4.5 million associated with the impairment of goodwill significantly impacting our operating income. Second quarter Lighting sales decreased 9.4% to $26.2 million. Recently though the joint effort of our engineering team we sold two energy saving projects in the Northeast but we continue to evaluate strategic opportunities for this segment.

In summary we're encouraged by our results for the first half of 2008. ABM's fundamental business is very strong and we continue to deliver solid top and bottom line growth organically and through recent acquisitions. Our people have been performing extremely well across our core operating segment and I'm confident that this momentum and our operating discipline will carry through the second half of the year.

Now for our guidance. Based upon our first half of fiscal '08 and positive outlook, we are reiterating our fiscal '08 non-GAAP diluted earnings per share guidance up $1.20 to $1.35 on a GAAP basis we continue to expect fiscal '08 diluted earnings per share to be in the range of $1 to $1.15. Keep in mind that all of our guidance is exclusive of future acquisitions. At this time I would like to open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from David Leibowitz with Burnham. Please go ahead.

Good morning.

Good morning, David.

Your guidance for the second half and the full year, how much of that is foreign currency translation, if any?

The only foreign currency we have is Canadian dollar and that is so small that it basically has absolutely no impact at all.

Okay. Second of all, the Security operation, you had very high hopes when you got into it and the growth rate appears to have slowed. Is that because of hardware or is that because of changes in the industry itself?

As a matter of fact I think we have been through seven, eight, or nine quarters of disappointing growth in security, but the last quarter we saw some very encouraging moves and we just announced some additional new sales last week. We are very encouraged by the growth in Security, and to be quite frank, I'm very, very encouraged with the improvement on the bottom line and if it continues like this I hope this will be a Company where we can do some acquisitions in the future.

Lastly, you mentioned acquisitions. Are you at the moment in discussions with any companies in any of your business areas?

You know, David, I will never tell you that over a conference call, and I wouldn't tell you that probably either. That will be something that will be announced, if in fact it's going on, but you know very well that acquisition is part of our genre.

Lastly then, would you look into other arenas that the Company is not yet involved in at this juncture, or would that be something to be pushed off?

If you talk about different trades, the answer is probably no, if you talk about different geographical areas, the answer is yes, we would very much like to move on the international front very soon.

Our next question comes from David Gold with Sidoti. Please go ahead.

Wanted to delve a little bit more into the synergy progress. A couple of things, or a couple of questions. One, can you speak a little bit to -- well, we're moving a little bit quicker than we had thought, and then presumably you had thought, if there's any change to the timeline now, that you're looking at for realizing the full synergies? And then also, if you can comment a little bit on what we've done so far and what's next to do?

Yes, I'll make some general comments about that, if you have more specific questions I have Jim right in front of me, he can reply. We have achieved, what I would say on the operational side, most of the synergies associated with people and the remaining part are very much associated with leases and termination of leases and joint offices, which is something that will take effect when we finalize some of those moves. So on the operational side, we are very much where we expected to be, probably slightly ahead.

On the admin side or the corporate side, we have had some changes in our estimates, not on dollars but more on timing. What we had to take into consideration our implementation of our new systems, so there will be cuts but the timing of that might have been delayed a little bit. But if I sum it up from what we originally said and where we are today, we are pretty much in the same area as we said six months ago, which I'm very proud about.

David, it's Jim Lusk. I would just add to what Henrik said, we're all in, we're on target for our synergies. The ones that hen Henrik talked about, basically as we look to integrate the OneSource systems and processes into ABM's new systems and processes, and as you know, we're going into a brand-new set of systems, we're taking the best of the OneSource systems, the best of our plan and kind of putting them together. So by getting the best of breed we're delaying the OneSource people coming onto the brand-new systems a little bit but at the end of the day we get everything better than we had individually. But all in, we're on target for our synergy plans.

Perfect. Henrik, could you also talk about, I'm actually fairly pleased with how your business line is treating you, or how business has held up. But curious, I think a quarter ago you said you're still looking over your shoulder. Is that still right or do you have reason to think that maybe the benefits that you guys bring to the table basically will give you maybe better stability than we've seen in the past?

I think it's fair to say that this is more stable than I had expected. I'm still looking over my shoulder, David, but I guess that's my nature. I think what you see, we see some price pressures, some pressure in New York and some tenant cutbacks of services, but on the other side, we, as you saw in Engineering, we picked up some new business in Engineering, which probably could be part of a process of outsourcing from our clients' point of view. So overall, I think we are -- to show organic growth in this particular marketplace and not only maintaining but increasing our profit percentages on our lines of business, I do feel very good about the whole thing and hopefully the worst is behind us.

Perfect. Then just one last one. Jim, if you can, on the I guess the adjustments at the end, just looking at that on an EPS basis, I tried to sort of figure based on assumed tax rates and all of that and I get about a nickel of adjustment. Is that about right? So in other words, on a net basis.

Yes.

Yes? Perfect.

And the one issue as I pointed out in my comments is that the goodwill impairment is, most of it is not tax deductible because the tax basis of the assets that we acquired a long time ago was actually lower than the book basis. So you might have a write-off for book basis, you actually have a slight gain for tax things. So you don't have a perfect correlation between operating income and net income.

Perfect. Perfect. Thank you all.

You're welcome, David.

(OPERATOR INSTRUCTIONS) And there are no further questions from the phone lines at this time. I would like to turn the conference back over to management for any additional or closing remarks.

I just want to thank everybody for listening to our Q2 conference call. We're very proud of what was achieved and hope we can continue to good momentum in the third quarter. Thank you for listening.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.