ABM Industries Inc (ABM) 2008 Q3 法說會逐字稿

Good day, everyone. Welcome to today's ABM Industries Q3 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, sir.

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 third quarter ended July 31. Jim will discuss our financial details and then I'll conclude our prepared remarks with a summary of our operational achievements for the quarter as well as provide an update on our guidance for the remainder of fiscal 2008. 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 estimates, 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 operating profit to adjusted operating profit as well as a reconciliation of the 2008 guidance of net income from continuing operations per diluted share to adjusted net income from continuing operations can be found at the Investor Relations section of our website, www.ABM.com under the heading presentations.

Thank you, Sarah. Before I talk about our third quarter results, I would like to briefly discuss the divestiture of our Lighting business. Lighting has been our weakest performing segment and while we've been focused on improving the segment's operations for several years, we have also been periodically reviewing our strategic options. Based on our long-term goals, and growth in our overall business, we determined that Lighting, the segment was simply not a good fit with our core business and not where we wanted to put our financial resources. Following the close of the quarter on August 29, we signed an agreement to sell substantially all of the operating assets of Amtech Lighting Services to Sylvania Lighting Services. Proceeds from the sale of the lighting business as well as amount anticipated to be realized over time from retained assets primarily accounts receivables are expected to yield approximately $70 million to $75 million. I would like to thank the employees at Amtech Lighting for all their hard work and positive contributions over the past many years and wish them good luck under the new leadership. We are very pleased with the outcome for Lighting as we believe it is in the best interest of ABM and our shareholders and will enable us to apply our attention and capital to the organic and strategic expansion of our janitorial, engineering, parking and security businesses.

Now on to our results. We are very pleased with our healthy third quarter sales and profit increases. Which demonstrate the effectiveness of our broad geographic footprint and customer base in the challenging economic and business environment. For the quarter we posted a 35% increase in revenue of approximately $931 million. Primarily due to $212 million contribution from OneSource. Organic growth for the period was a solid 4%. Income from continuing operations grew 40% to $16.3 million as we benefited in a decrease in self insurance reserves related to prior year claims and benefited from improved operational leverage. Despite weakness in certain regions and economic sectors we continue to execute well and posted top and bottom line increases in all operating segments. The acquisition of OneSource has provided the scale to enable us to better capitalize on growth opportunities, while minimizing the impact of economic slowing in individual regions.

The integration of the OneSource acquisition remains on schedule. With $9.9 million in synergies recorded during the third quarter. We continue to anticipate over $28 million of synergies for the fiscal year as previously communicated. Additionally, we expect $3 million to $5 million beyond the $14 million in annual tax cost savings from acquiring OneSource net operating loss carry forwards and from deducting goodwill amortization. We also continue to effectively manage our free cash flow, reducing our outstanding debt by $16.5 million and paying out quarterly cash dividend. Now I'd like to turn the call over to Jim for a financial review of our third fiscal quarter of '08. Jim.

Thank you, Henrik and good morning everyone. As Henrik previously mentioned, we are pleased to announce that we've reached an agreement to sell substantially all the operating assets of Amtech Lighting. As a reminder we are accounting for the historical results in the lighting segment in discontinued operations. So unless otherwise noted, results discussed reflecting operations.

The Company expects to realize a gain for tax purposes from the sale, which will result in a tax charge to discontinued operations of approximately $2 million to $3 million in the fourth quarter of fiscal 2008. In aggregate, we anticipate that Amtech Lighting will have approximately a $0.10 per diluted share impact to net loss from continuing operations.

We are very pleased with our third quarter results. Income from continuing operations was $16.3 million or $0.32 per diluted share, a 40% increase from $11.6 million or $0.23 per diluted share for the prior year third quarter. Net income, which includes the Lighting segment was $16.4 million, or $0.32 per diluted share, compared to $12 million or $0.24 per diluted share a year ago. Our operating profit increased 86% to $29.9 million in the third quarter of fiscal 2008, from $16.1 million in the same period last year. Primarily due to the $9.9 million of cost saving synergies. Our adjusted operating profit before items affecting comparability increased 37% to $28.8 million in the third quarter of fiscal 2008, from 21 in the same period last year, as several one-time items affect the comparability. The adjusted operating profit excludes expenses of $6.5 million, associated with corporate and infrastructure initiatives and the integration of OneSource and a benefit of $7.6 million from the reduction of the Company's self insurance reserves from prior years that increased operating profit. Net these items, reduced operating profit by $1.1 million in the third quarter of 2008, and increased operating profit by $4.9 million in the third quarter of 2007.

Our SG&A expense increased $26.1 million year-over-year, due to the $17 million of expenses associated with the acquisition of OneSource. Excluding OneSource, SG&A increased $9.0 million due to the integration of OneSource operations. IT costs, severance bonuses related to headquarters move to New York and an increase in share based compensation expense. Interest expense increased $3.2 million in the quarter, due the drawdown of our credit facility for the OneSource and Southern Management acquisitions as well as interest accretion related to the OneSource insurance claims, liability assumed as part of the acquisition. The estimated annual effective tax rate on income from continuing operations excluding discrete items for the three months ended July 31, 2008 was 38%. Compared to 37.5% in the prior year, mostly due to higher overall tax rate. The effective tax rate on income from continuing operations was 38.6%, and 27.5% in the third 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 nine month results, income from continuing operations was $37.9 million or $0.74 per diluted share, on revenue of $2.7 billion compared to $35.8 million or $0.71 per diluted share on revenue of $2 billion in the same period last year. Net income in the first nine months of fiscal 2008 was $33.9 million, or $0.66 per diluted share, compared to $37.4 million or $0.74 per diluted share. On a nine month basis, sales from discontinued operations were $80.4 million, a decrease of 7.2%, and operating loss was $4.1 million compared to a profit of $1.6 million in the first nine months of fiscal 2007. The difference is primarily due to the $4.5 million goodwill impairment charge taken in the second quarter of fiscal 2008. Operating profit for the first nine months of fiscal 2008 was $73.7 million, compared to $53.1 million in the same period last year. As with Q2 results, there were a number of items affecting comparability relating to the corporate relocation, acquisitions and changes to self insurance reserves, among others. Excluding these items, adjusted operating profit increased 49.4% to $72.9 million in the first nine months of fiscal 2008, from $48.4 million in the same period last year.

Turning to the statement of cash flows, cash from operations for the first nine months of 2008 was $36.6 million, compared to a net cash use of $9.6 million for the comparable period last year. Last year cash flow uses 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 a 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 $3.1 million increasing our purchase price allocation to goodwill to bring it to $285.2 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 $5.3 million in cash, down from $136 million at the end of fiscal 2007, primarily due to the acquisition of OneSource and Southern Management. We had $285 million outstanding under our line of credit as we continue to reduce our outstanding debt by $16.5 million during the third quarter and approximately $30 million since the inception of our borrowing which resulted from the acquisition of OneSource. Days sales outstanding at quarter end were down one day to 53 days, compared to 54 days for the second quarter. Insurance reserves at July 31, were $344 million, which includes claims acquired from OneSource, compared to $261 million at the end of fiscal 2007. Self insurance claims paid during the quarter totaled $19.3 million, compared to the $14.6 million in the third quarter of 2007.

Before concluding I want to remind everyone that we are approximately one year into a multi-year project to transform our corporate platform and infrastructure. We have now successfully moved our corporate headquarters from San Francisco to New York and we had our first major system cutover on July 1. We remain on track with the implementation of our new ERP and payroll systems. And we continue to expect to have the installation of all the major systems and the move to shared services completed during fiscal 2009. I want to thank all the employees inside of ABM that have worked on this. It's been a tremendous effort.

With that, let me turn it back to Henrik who will give his perspective on the third quarter operational performance by segment and the outlook for the remainder of 2008.

Thank you, Jim. I will now briefly review the operational results for the third quarter as well as provide an update on our guidance for the remainder of fiscal '08. We remain encouraged by our growth from continuing operations as our geographic diversity and broad customer base has enabled us to offset weakness in certain regions and economic sectors. For the third quarter, janitorial sales increased by $229.6 million, or 56.1% to $638.5 million due to (inaudible) of revenue contribution from OneSource which was acquired in the first quarter. Excluding the impact of our OneSource acquisition, janitorial sales were up 4.4%.

The majority of regions performed well with the exception of the Southeast and Northeast region. The operating profit in both of these regions were adversely impacted by performance in our financial services sector, as demand for our higher margin discretionary services. Janitorial operating profit increased by $9.8 million or 44.9% to $31.7 million, the increase was primarily due to $9.9 million of synergies generated from OneSource including the reduction of (inaudible - highly accented language) positions and back office functions, consolidations of facilities and reductions in professional fees and other services. Overall, solid execution on achieving cost saving synergies and good growth despite a soft US economy.

Parking sales increased by $3.8 million or 3.1% to $126.8 million, due to higher lease and fixed allowance revenues and increased services to existing customers. Operating profit for the third quarter of '08 was $5.5 million, up 12.9% due to additional profit from higher revenue. I'm very pleased with these results as we have benefited from our strategy to decrease exposure to all airport and leased lots.

Our Security sales increased $3.5 million or 4.3% to $85.3 million due to growth in the North and continued growth in the Midwest region from both new and existing customers. Operating profit for the third quarter increased nearly 7% to $2.1 million. We continue to make progress in our Security segment although the pace of growth is slower than we expected. Engineering sales increased $3.8 million or 5% due to new business and expansion of our services for the existing customers, particularly in the Northern California and Eastern regions. Operating profit increased by 32% to $5.5 million, as we benefited from operating leverage. Another solid quarter from our fastest growing segment.

In summary, we continue to deliver solid top and bottom line growth. Organically and through recent acquisitions. While we have seen weakness in certain regions and economic sectors, our size and scale, particularly following the acquisition of OneSource, have enabled us to minimize but not eliminate the impact of the economic slowing in the individual regions. Acknowledging a general decline in discretionary spending in some customer sectors and regions, we're narrowing net income from continuing operations per diluted share guidance for fiscal year '08 from $1 to $1.05 and expect adjusted net income from continuing operations per diluted share for fiscal '08 of $1.10 to $1.15. The net income from continuing operations per diluted share guidance excludes the Amtech Lighting Service business which is presented as discontinued operations. At this time I would like to open the call to questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll take our first question from David Gold with Sidoti & Company.

Hi, good morning.

Good morning, David.

Just a couple of questions for you. One, Henrik, can you elaborate just a little more on the comment about the general decline in discretionary spending and particularly how that relates to janitorial.

Yes. There are certain parts of the janitorial services that are very dependent on extra service of discretionary spending and that is particularly the Northeast region and particularly New York, where the sales of business and the pricing is separated from the main building towards tenant services. So when tenant service demands are lower, like it's been in primarily the financial sectors, over the past I would say three months, you will see a major impact because our fixed cost base in the buildings don't change so it's basically our revenues are dropping at the same rate as our extra services decline. But our cost base stays the same. So it's primarily on the financial services piece. I've not seen it in many other areas. And it's not a vacancy thing, it's more a spending thing.

So I guess on that basis, if I'm understanding you correctly, essentially it's business -- it's incremental business that presumably is higher margin at these clients because you don't have high related costs with it, you already have the people on staff and there and it's just extra work that they can do; right?

Correct.

Okay. So, I guess the flip side of that question is, if that continues, is there anything that we can do to sort of reduce related -- costs related or capacity related with that or is it not that easy?

Well, I don't think you're going to see any changes in the way we are running the jobs because basically with the existing union situation it would be very difficult to cut labor. But the key thing is, when these contracts are up for renewal which happens pretty much annually, if this continues and we see it's continuing in the long-term future, we'll renegotiate the price because everybody is in the same boat. It's not an ABM problem. It's a business problem.

Okay. Got you. And then one other question. On the Lighting business, the sale price, can you give us a sense of how much of that, say, would be up front and how much of that is, say, accounts receivable buyout that maybe comes over time.

It's approximately half up front and I would say probably of the remaining half, you'll see 70, 80% of that coming in the first six months and the rest over the period, over the next two years. So to give you big numbers, 50 million, $60 million over the first six months and the remainder over the next two and-a-half years.

Got you. Terrific. Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) We'll go next to John Emerich with Iron Works Capital.

Hi, thanks. Three separate questions, if I could, ask one at a time. One, are there any receivables and other current assets or other non-current assets?

No.

No.

In previous releases you've broken out long-term receivables, not a big number, like $9 million. Is that gone then? Or is that--?

Part of that is related to the disposition of Lighting and that would all go into the non-current assets and discontinued operations.

What was long-term receivables is now in non-current assets?

Yes. All the assets associated with the business go into either -- go into those discontinued operations lines on the balance sheet.

But what you're saying is all of the non-current receivables were associated with Lighting?

Yes, almost -- most of them, yes.

Okay. What's allowance for doubtful accounts this quarter, the provision?

It pretty much didn't change from last quarter.

Okay. And then the last question, what is, then, in other non-current assets, the $306.5 million this quarter? What's in there?

What is it made--?

Comprised of. It's a big number relative to your assets. I'm just wondering what it's comprised of.

Big pieces are -- you've got insurance, deposits, things like that, investments, got our auction rate securities in there, which we had classified to long-term assets and things -- those are big chunks of them.

How much are the adjustable securities these days?

We have about 22 -- between 22 million and $23 million.

Okay. Thank you.

It appears we have no further questions at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Well, we would like to thank everybody for listening to our conference call for the third quarter and we are looking forward to talk to all of you after the end of our successful fourth quarter. Thank you.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.