ABM Industries Inc (ABM) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to today's ABM Industries Incorporated fourth quarter 2008 investor conference call. Today's call is being recorded. At this time, I'd 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 Vice President and General Counsel. On the call today I will provide an overview of the 2008 fourth quarter and fiscal year ended October 31. Jim will discuss the details of our financial results. I'll conclude our prepared remarks with a summary of the Company's Operational achievements for the quarter as well as provide Management's outlook for fiscal '09. In addition we're providing a slide presentation to accompany today's prepared remarks. You can access the presentation now by going to our website at www.ABM.com and under the Investor Relations tab you'll see the presentation tab on the left-hand side of the page. Today's presentation will be the first listed. Sarah?

Thank you, Henrik. I will pause for a moment to allow everyone a few moments to access our presentation on the ABM website. Referring to slides three and four of the presentation, 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 quarterly reports on Form 10-Q, current reports on Form 8-K, and Annual Reports on Form 10-K that we file with the SEC. During the course of this presentation, certain non-GAAP Financial Information will be presented. A reconciliation of those numbers to GAAP financial measures is available on the Company's website under "Investor Relations".

Thank you, Sarah. Before we review our consolidated financial results and operating performance for the fourth quarter and year, I'd like to highlight a few of ABM's accomplishments in fiscal '08 which we refer to in slide five of the presentation. We are pleased with our performance and ability to finish the '08 fiscal year in line with the guidance that we previously communicated. We successfully continue to execute our strategy to strengthen and extend our portfolio of leading facility services through a combination of acquisitions and organic growth. The acquisition of OneSource created an unmatched national footprint and provided the scale to enable us to better capitalize on growth opportunities and minimize the impact of economic slowdown in certain regions and industries. Despite one of the most historical challenging economic environments for doing business we delivered double digit growth and operating profit, demonstrating the strength of our core business and effectiveness of our broad geographic and customer bases.

We also prudently managed our operations and working capital and believe we are in a strong competitive position for the 2009 fiscal year. I'll highlight some of our 2008 results on slide six. For the year, we posted 34% increase in revenue to approximately $3.6 billion. OneSource contributed [$880 million] to revenue for the year and our organic growth exceeded 3%. Adjusted EBITDA for 2008 measuring GAAP through the heart of our operation was $133.4 million, a 46% increase from last year. Income from continuing operations improved 4.2% to $52.7 million and benefited from a decrease in self-insurance reserves and we improved operational leverage. Given the economic conditions we've been very carefully managing our resources and expenses. We improved our operating cash flow from continuing operations by $4.7 million from fiscal 2007 and $15.1 million since the third quarter. We continue to strengthen our balance sheet, reducing outstanding debt by $86 million from the first quarter. We ended the fiscal year with $230 million of debt on our balance sheet and over $100 million of availability on our credit facility that expires in 2012. Yesterday, reflecting the confidence we have in ABM, we announced an increase in our quarterly cash dividend of 4% to an all-time high quarterly rate of $0.13 per common share.

I'd like to briefly discuss our key strategic initiatives highlighted on slide seven. First, the strategic acquisition of OneSource, which has exceeded our expectations of both top and bottom line. As I mentioned OneSource generated [$880 million] of revenue in fiscal '08. We also continue to make excellent progress in the integration of OneSource and have realized nearly $30 million in cost savings synergies. By the end of fiscal '08 we achieved on a run rate basis over 90% of the previous communicated cost savings synergies and into fiscal '09 at an annual run rate of over $40 million in synergy savings. Second, we completed the sales of our Lighting division of Sylvania Lighting service. Lighting had long been our weakest performing segment and the sale had allowed us to focus our resources for core engineering, parking and security businesses, while anticipating a total exceeding $70 million in cash for the Company from the disposition of Lighting.

Finally we continue to make very soft progress in our multi- year project to transform our corporate platform and infrastructure. We continue to consolidate certain back office function and leverage our enterprise system and our shared service center to improve both internal operations and the quality of information and transaction support for our customers. Taking these factors together, we believe they are very well positioned to effectively manage our business, and to accelerate our growth when the economy improves. Now I'd like to turn the call over to Jim for a financial review of our fourth quarter and fiscal '08. Jim?

Thank you, Henrik and good morning, everyone. As I review our financial results for the fourth quarter and full year 2008, please keep in mind that the results discussed today exclude the results from our Lighting segment, substantially all of the operating assets are which we sold in the fourth quarter of fiscal 2008 and which are accounted for in discontinued operations. Therefore, unless otherwise noted, results discussed today reflect continued operations. In addition, as a result of the impact of the Lighting business, net income for fiscal 2008 includes a $7.3 million loss from discontinued operations or $0.15 per diluted share. Turning now to the fourth quarter and fiscal 2008 results.

On slide eight, you'll see that despite a recessionary macroeconomic backdrop, we generated solid performance in the fourth quarter. Revenue for the fourth quarter grew 31% to $905.8 million from $691.4 million in the prior year period. Organic revenues increased 3% year-over-year. Income from continuing operations was $14.8 million, (inaudible) per diluted share for the fourth quarter 2008, equal to a year ago quarter. Net income for the quarter which includes the loss from discontinued operations was $11.6 million or $0.22 per diluted share compared to $15 million or $0.30 per diluted share a year ago. Our operating profit increased 7% to $25.8 million in the fourth quarter of fiscal 2008 from $24.1 million in the same period last year. Our adjusted income from continuing operations before items impacting comparability increased 28% to $18.6 million in the fourth quarter of fiscal 2008 from 14.5 in the same period last year. As several one-time items affecting comparability.

Adjusted income from continuing operations excludes expenses of $4.7 million associated with corporate and infrastructure initiatives, and the integration of OneSource, a $3.9 million IT deferred expense and a benefit of $4.8 million from the reduction of the Company's self-insurance reserves from prior years that increased operating profit. Our SG&A expense for the fourth quarter increased $30.8 million year-over-year to $80 million from $49.2 million which includes $16.2 million of expenses associated with the acquisition of OneSource. Excluding OneSource, SG&A increased $14.6 million due to the integration of OneSource Operations, IT costs, severance bonuses related to head quarter move to New York and an increase in share based compensation expense. Interest expenses increased $3.1 million in the quarter due to the drawdown of the credit facility for OneSource and Southern Management acquisitions. During the quarter, LIBOR unexpectedly spiked due to the credit market dislocation driving interest expense up. The annual effective tax rate on income from continuing operations for the year-ended October 31, 2008, was 37.5% compared to 34% in the prior year. This is primarily due to non-recurring favorable federal and State tax benefits recorded in 2007 that did not reoccur in 2008.

Included in the quarter was an increase of $1.7 million of intangible amortization expense related to the trueup of the amount allocated to intangible assets for the OneSource and Southern Management acquisitions. The magnitude of the change, which is non-cash, is one of the reasons the Company believes it's important to focus on adjusted EBITDA as a key metric going forward. Adjusted EBITDA is up 52% for the quarter. Turning to our fiscal 2008 results displayed on slide nine, revenues increased 34% to $3.6 billion from $2.7 billion in the prior year. Organic revenues excluding OneSource sales increased 3% over the prior year. Income from continuing operations was $52.7 million or $1.03 per diluted share compared to $50.6 million or $1 per diluted share in the prior fiscal year. Net income for fiscal 2008 included the loss from discontinued operations was $45.4 million or $0.88 per diluted share compared to $52.4 million or $1.04 per diluted share. Sales from discontinued operations for fiscal 2008 was $114.9 million, a decrease of 2.3% and operating loss was $7.3 million compared to a profit of $1.8 million in 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 fiscal 2008 was $99.5 million compared to $77.2 million last year, as with our fourth quarter results, there were a number of items impacting comparability related to the corporate relocation, acquisitions, the IT deferred expense and changes to self-insurance reserves among others. Excluding these items, adjusted income from continuing operations increased 15% to $56.3 million in Fiscal 2008 from $48.8 million in the prior year. As noted for Q4, $1.7 million of additional amortization expense or $0.02 per diluted share is included in our results. Again this is a non-cash charge. Adjusted EBITDA is up 46% for the year.

Turning now to slide 10. Our financial position continues to strengthen. Cash from continuing operations for fiscal 2008 improved by $4.8 million to $60 million compared to $55.2 million for fiscal 2007. Working capital of $284 million at year-end which decreased from $371 million at the end of fiscal 2007, primarily due to the use of cash to acquire OneSource. At fiscal year end we had $230 million outstanding under our line of credit, as we reduced our outstanding debt by $55 million during the fourth quarter and approximately $86 million since the first quarter. Day sales outstanding at quarter end were flat sequentially at 53 days and up a day year-over-year from 52 days. Insurance reserves at October 31 were $46 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 $16.7 million, compared to the $13 million in the fourth quarter of 2007.

The Company also announced that the Board of Directors has declared a first quarter cash dividend of $0.13 per common share payable on February 2, 2009. This marks ABM's 171st consecutive quarterly cash dividend and is $0.005 or 4% above the $0.125 per quarterly dividend declared and paid for the first quarter of 2008. We are pleased that our quarterly cash dividend enables us to continue to return value to our shareholders. With that, let me turn it back to Henrik who will give his perspective on the fourth quarter operational performance by segment and outlook for 2009.

Thank you, Jim. I will now briefly review the operational results for the fourth quarter as well as provide our preliminary outlook for fiscal '09. We are pleased that despite the continued challenging economic and market conditions, we delivered double digit growth in both revenue and operating income, demonstrating the diversity of our business model.

Turning now to slide 11. For the fourth quarter, janitorial revenue increased by $209.3 million or 50.7% to $622.2 million, which included $203.7 million of revenue contribution from OneSource. Excluding the impact of our OneSource acquisition, janitorial revenue was up 1%. We continue to experience softness in revenues within the Southeast and Northeast regions, where we experienced reduction in accounts and revenues from existing accounts. Janitorial operating profit for the quarter increased $11.1 million or 44% to $36.1 million. I'm very pleased with these results given the scope of the OneSource integration and challenging business environment. We saw the testament to the great team effort by the janitorial segment not only for the quarter but for the year.

Turning to slide 12. Hardware revenue increased in the fourth quarter by $2.6 million or 2% to $119 million due primarily to increased services to existing customers. Operating profit for the fourth quarter increased $700,000 or 15% to $5.7 million. The result of our partner segment reflects the impact of the acquisition of HPSA and our concentration of garages operated through management contracts, which generally perform better in a recession.

Turning to Slide 13. Security revenue for the fourth quarter compared to the comparable period in '07 increased $3.6 million or 4% to $84.9 million, primarily due to the result of new customers and expansion of current customers in the Northwest and Midwest region. Operating profit for the fourth quarter increased $600,000 or 30% to $2.8 million. During the quarter we continue to monitor all operating expenses with our newly implemented centralized purchasing program. Importantly, we have a strong revenue pipeline entering 2009 as our focus on integrating technology drives expansion in a number of vertical markets.

Turning to slide 14. Engineering revenue for the quarter was essentially flat compared to the prior year period. Operating profit increased $300,000, or 6% to $5.8 million, benefiting from our continued focus on higher profit business, lower insurance cost, and ongoing expense reduction. There was a (inaudible) about the opposition in engineering segment entering 2009. We continue to focus on marketing our outsourcing capabilities, which typically gain momentum in a period of cost reduction and expense control. We are excited about the opportunity to expand sales of energy services based on our recent success of two large scale projects. Operationally, an outstanding year, exclusive of the $4.5 million gain recorded in fiscal '07 from a lease termination in parking, operating profit for all segments were up more than 20% year-over-year.

If you would now please turn to slide 15. In summary, despite the challenging economy and upheaval in the financial services sector, 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, scale, and diversity in operations have enabled us to minimize but not completely eliminate the impact of the economic slowdown in individual regions. In addition, our financial position continues to strengthen as we outlined earlier in the call. We generated cash from operations of $60 million in the fourth quarter and continue to reduce our debt position. Our prudent management of operation and cash puts ABM in a strong position.

In '09, we will continue to execute our proven strategies of one, leveraging our strong financial condition and national footprint; two, focusing on outsourcing trend on customer integrated solutions and three, selling energy savings through our engineering platform. Even while navigating the challenging market environment, we'll be holding the line on expenses and conservative management of our resources. But make no mistake, an environment like this will present great opportunities on a number of fronts for ABM. As such, we anticipate improved bottom and top line results for fiscal '09. In light of the economic uncertainty, we are initially providing guidance for only the first two quarters of the fiscal year. We expect income from continuing operations in the range of $0.42 to $0.50 on a diluted per share basis, excluding items impacting comparability, we expect adjusted income from continuing operations in the range of $0.46 to $0.54 on a diluted per share basis. Our guidance is exclusive of any acquisitions.

With that, I would like to thank you for your participation in today's call and your continued interest in ABM. We look forward to updating you on our progress in the first quarter '09 conference call in early March. At this time, I would like to open the call for questions.

Thank you. (Operator Instructions). We'll take our first question today from David Gold with Sidoti.

Hi, good morning.

Good morning.

A couple of questions surrounding janitorial. First, we go back a quarter, we were seeing some issues there with tag work and some of the incremental work you're doing particularly at the financials and I think at that point, the view was that it maybe had bottomed out. Can you give an update on how that's progressed?

Yeah, I think it has bottomed out. I think looking at what happened in the quarter, that was a reflection of that plus a loss of a couple jobs in the Southeast, but I think that whole thing has bottomed out but for the time being, I can't tell you what we do business with certain banks and there will be some consolidation coming up, and I don't know the impact of that but it's not going to be material that's for sure.

Okay. And then sticking with janitorial, I think it was a little softer certainly than we had expected, it was the first time in recent memory to actually see sequentially down, traditionally it's been sequentially flat to up third to fourth and so just curious there if you can give some color on what's happening, is that a function of less of the incremental work? Is it lower office occupancy or are we losing some business from a competitive standpoint?

I don't think we're losing any business from a competitive standpoint. I think there was some adjustments that you will see in a market like this where we have done reductions with existing clients which as you can see did not impact the bottom line, but it had a slight impact on the top line, and so it's not loss of customers but in some cases, we have some savings that we gave to certain customers due to the economic environment. Also, I think that this particular quarter I don't think is representative of what you'll see going forward, the activity on the sales side is probably pretty compared to what we seen in the past pretty good right now.

So you're saying we might see a little bit of pick up there then?

I would not expect it to go further down.

Okay. And then one other question. Presumably on a run rate basis, we're up to about $44 million of synergies from OneSource and your initial goal was 45 to 50, so essentially we're there. Do you still view the 45 to 50 as a good range or do you think there's even further potential?

It's getting tougher and tougher to clearly define what is the result of the acquisition and what's not a result of the acquisition. Now I'll put it this way, that the areas that we have targeted and defined specifically as part of the synergies has been achieved to a 99.5% level as you can see. Will we have opportunities where we finalize our shared services fully to make further cuts? I think so. I believe so, but is that associated with the acquisition level? I think that can be discussed, but the acquisition is producing exactly what we expect and the other initiatives we are taking on should produce further savings in our overall.

Got you. Very good. Thank you.

You're welcome.

(Operator Instructions). We do have a follow-up question from Mr. Gold with Sidoti.

Henrik? Can you walk through a little bit line by line the business line I'd say by business line, just where you think you'd see the most impact from the downturn and what sort of, let's say, economically scares you the most from a business standpoint?

You talking about the segments?

Right, by segment.

Okay, I think and believe that you seen the worst on janitorial and it was, as you know, very heavily hit on the financial segment but we were pretty sizeable. If you look at engineering, I'm very encouraged with the activity we've seen in the engineering group and I believe the growth in engineering might be even greater than what you've seen in the past. I think on security, based upon activity and not necessarily the economy, but based upon activity, we see continued growth in that area. Parking, I think you'll see there might be essentially flat going forward. We are very fortunate because we have been able to get much more into the Management side of contracts versus leasing, so our financial risk is much less than it was in the past and basically all of the results that we just went through, parking is the result of a price that's been most positive because they've been able to manage the expenses achieving growth with pretty flat sales, but so if I sum up, parking and janitorial, flat to small growth and security and engineering represent the opportunities in this tough market.

Okay, and any of the segments, particularly janitorial, would you expect further let's say pricing negotiation given the environment?

Yes.

So you think the pricing environment gets a little tougher?

Well not necessarily. Pricing negotiations also opens up opportunities. There might be pricing negotiations where we do part of a plan and you can include the whole plan and give more work associated with it. Pricing negotiations from our point of view is not necessarily a negative, because it gives us the opportunity to manage and operate the job probably better than anybody else can do it, so I don't think that's going to have any kind of impact on the margins. It might have a positive impact on the margin percentage, and I think it's going to have no negative impact on the dollar margin.

Okay, and then just one last question. Based on assuming let's say janitorial and parking to be flat and security and engineering to have some growth, it sounds like you'd expect as we go into '09 to see a flat to modestly up year from a revenue perspective on an organic basis.

Yeah. I do expect an up year but probably not to the extent we've seen in the past, but we still expect an up year.

Got you. Perfect, thank you.

You're welcome.

(Operator Instructions). It appears we have no further questions at this time. I'd like to turn the conference over to Mr. Henrik Slipsager for any additional or closing remarks.

Well thank you very much for listening and I would also like to use this opportunity to thank our shareholders, our Board, and our employees for a great '08 and looking forward to working with all of you in '09. Have a Happy Holiday. Thank you.

Thank you. That does conclude today's conference. We want to thank you for your participation and you are now free to disconnect.