ABM Industries Inc (ABM) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to today's ABM Industries first quarter fiscal year 2009 conference call.

(Operator instructions) 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 Vice President and CFO, and Sarah McConnell, our Senior Vice President and General Counsel.

On the call today I'll be providing the overview of the 2009 fiscal first quarter ended January 31.

Here we'll discuss the details of our financial results, I'll conclude with prepared remarks for the summary of the Company's operational achievement for the quarter, as well as provide an update of management's outlook of fiscal year 2009 as well as guidance for the full year.

In addition, we are 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 presentations tab on the left-hand side of the page.

Today' 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.

Turning to slide 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 report on form 10-KA that we filed 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.

Now, please turn to slides five and six for a review of our consolidated financial results and operating performance for the first quarter.

We delivered a strong performance despite challenging market conditions as we aggressively drove sales, pricing and cost reductions to achieve double digit earning growth.

While our top line for the first quarter was a relatively flat year-over-year at $887.5 million, which includes 12 more days of revenue contributions from OneSource, we significantly improved our profitability by focusing on cost savings, operational improvements and synergies across our operating platform.

Income from continuing operations more than doubled to $14.8 million and our operating profit rose 73%.

All of our core businesses, janitorial, engineering, parking and security, grew their operating profits compared to the year-ago quarter and the strategic acquisition of OneSource continues to enhance financial performance.

While the quarter did benefit from a $9.6 million or $5.8 million after tax claim settlement with a third party administrator that no longer perform these services for ABM, this benefit was partially offset by $6.6 million or $4 million after tax of costs related to corporate initiatives.

Adjusted EBITDA for the first quarter was $30.3 million, a 27% increase for the same period last year.

We improved our operating cash flow from total operations by nearly $51 million compared to the same period last year and we ended the quarter with $227 million in debt on our balance sheet and over $100 million of availability on our credit facility.

Yesterday we announced a quarterly cash dividends of $0.13 per common share.

ABM continues to reward our shareholders as this marks our 172nd consecutive dividend payment.

Turning to slide seven, to (inaudible) in this more challenging economy and to offset the slowdown in commercial real estate, occupancy level, we have on the aspect of our business that are within our power, our pricing and certain strategy, expenses, and generating free cash flow.

We've been actively managing our credit risk and canceling customer contracts where we felt the risk of not getting paid for our work was too great.

We continue to gain and retain customers at acceptable profit margins, pass on cost increases to customers and keep our overall costs down.

For example, in our janitorial business, we negotiate price and scope service position with customers by maintaining profitability through careful management of labor resources and expenses.

We are also eliminating less profitable contracts.

Finally, we continue to make progress in our multi-year project to transform our corporate platform and infrastructure.

We are in the process of implementing a new payroll and human resource information system and upgrading the accounting system and expect to have these initiatives completed by the end of 2009.

Overall, we continue to focus on pursuing your business and increasing operating efficiencies and believe that we can position ourselves well by securing a portfolio of large strategic customers following creative solutions.

For example, we are leveraging our engineering business to have new models of energy services where we can help our customer curb energy consumption and cost.

We believe we are very well positioned to effectively manage our business for a prolonged economic downturn and expect to continue our growth when the economy improves.

Now I'd like to turn the call over to Jim for a financial review of our first quarter.

Jim.

Thank you, Henrik and good morning, everyone.

As I review our financial results for the first quarter, please keep in mind that the results discussed today exclude the results from our lighting segment.

Substantially all of the operating assets of which we sold in the fourth quarter of fiscal 2008.

Results in the lighting segment are classified in discontinued operations.

During the quarter, we recorded a $538,000 loss from discontinued operations, net of taxes or $0.01 per diluted share.

Primarily related to severance and transition costs from the lighting business.

Unless otherwise noted, results discussed today reflect continuing operations.

Turning now to the first quarter of fiscal 2009 results on slide eight.

We are pleased with our solid overall performance, particularly on the bottom line in light of recessionary pressures.

Even though revenues for the first quarter were flat year-over-year at $887.5 million compared to $887.8 million in the prior year period, operating profit increased 73% to $26 million in the first quarter of fiscal 2009 from $15 million in the same period last year.

As Henrik noted, due to our focus on cost savings, synergies and performance improvements, our gross margin percent improved from 9.4% to 11.3% in the quarter ended January 31, 2009 compared to a year ago quarter.

Excluding the margin benefit from the settlement with a former third party administrator, our workers' compensation claims, gross margin was 10.2%.

Income from continuing operations was $14.8 million or $0.29 per diluted share for the first quarter 2009 compared with $6.3 million or $0.13 per diluted share in the same period last year.

Adjusted income from continuing operations before items impacted comparability increased 63% to $13 million in the first quarter of fiscal 2009 from $8 million in the same period last year.

Items affecting comparability showed in total a net gain of $1.8 million after tax or $0.04 per diluted share from the $5.8 million after tax benefit of a settlement related to poor claims management by a former third party administrator of workers' comp claims, partially offset by expenses of $4 million after-tax costs related to corporate initiatives which are expected to be completed by the end of 2009.

Net income for the quarter, which includes the $538 million loss from discontinued operations was $14.2 million or $0.28 per diluted share compared to $6.4 million or $0.13 per diluted share a year ago.

Our SG&A expense for the first quarter increased $4.9 million year-over-year to $71.4 million from $66.4 million, primarily due to a $6 million increase in IT costs, which is due to the upgrade of the payroll, human resources and accounting systems and systems integration with OneSource, combined with higher depreciation costs compared to last year, partially offset by a decrease in severance and related costs applicable to the headquarters move in New York in 2008.

Excluding the costs included in items impacting comparability, SG&A was up $1.1 million which was attributable to higher depreciation.

Interest expense decreased $2.9 million in the quarter to $1.7 million due to the lower average outstanding balance and lower interest rate.

On February 28 of this year, we entered into a two-year swap agreement that effectively exchanged the component of $100 million outstanding out of our line of credit for fixed rate interest payments.

The fixed interest rate under a two-year swap is 2.47% which includes a 1% spread based on the Company's current leverage ratio.

The effective tax rate for the first quarter of 2009 on income from continuing operations was 39.3% compared to 39.8% for the comparable period in fiscal 2008.

We expect our annual effective tax rate to be around 39% in 2009, compared to 37.5% in 2008.

The higher rate is primarily due to certain nonrecurring tax benefits that occurred during fiscal year 2008, including the reversal of certain tax reserves and deferred tax asset rate changes which are not expected to reoccur in 2009.

Given the items impacting comparability and discontinued operations, we believe that adjusted EBITDA is a useful measure.

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and excludes both discontinued operations and items that impact comparability.

For the first quarter adjusted EBITDA was up 27% to $30.3 million from $23.8 million in the same period last year.

Turning now to our balance sheet on slide nine.

We continue to strengthen our financial position and our liquidity remains very solid.

Cash from total operations, which includes both continuing and discontinued operations for the first quarter was a positive $26.1 million compared to a use of $24.9 million the comparable period last year.

Cash provided by total operations during the quarter was positively impacted by the increase in net income, the timing of accounts receivable, collections and payments of accounts payable and accrued liabilities.

We ended the quarter with $279.5 million in working capital compared to $274 million at the end of fiscal 2008.

We had $227 million outstanding under our credit line at the end of the first quarter, down $3 million from the end of the year.

At the end of the first quarter we had $105 million of availability under our line of credit.

Days sales outstanding at quarter end were 56 days up from 53 at the end of fiscal 2008.

This compares to 55 days in the year-ago quarter.

The increase in days sales outstanding from the end of fiscal 2008 was expected due to the concerted efforts to collect outstanding receivables at year end.

Our accounts receivable that were over 90 days remain consistent with the end of fiscal 2008.

Insurance claim liabilities at January 31 were at $347.5 million compared to $346.2 million at the end of the fiscal 2008.

There were no changes to our self insurance reserves for ultimate losses related to prior years during the quarter.

Self insurance claims paid during the quarter totaled $19 million compared to $17.5 million in the first quarter of 2008.

There's been a fair amount of focus regarding the impact the economy has on our tag business.

In prior years revenue from tag business has had a mid-single digits contributor as a percentage of overall janitorial revenue.

The majority of this tag business is related to storm cleanup and other recurring events and not the economy.

Going forward, we do not anticipate significant decreases in janitorial revenues on tag business.

With that, let me turn it back to Henrik who will give us perspective on the first quarter operational performance by segment and update guidance for the first half of 2009 as well as the guidance for the full year.

Thank you, Jim.

I will now briefly review the operational results for the first quarter as well as update our outlook for the first half of fiscal '09.

While the economic climate is causing downward pressure on revenues, we are pleased with our ability to improve our operating efficiencies and drive operating profits across all divisions.

Turning now to slide 10, for the first quarter the revenue increased by $2.4 million, up 0.4% to $608.4 million, which does include 12 more days of revenue contribution from OneSource.

The total operating profit for the quarter increased $11.4 million or 54.3% from $32.3 million as our team continued to re-execute on operational synergies from the OneSource acquisition and improve operational efficiencies across all regions.

In addition, we had one less workday in the fiscal quarter of '09 that accounted for approximately one third of the improvement year-over-year.

We continued to have a solid pipeline of new business and as I mentioned, we remain focused on eliminating less profitable contracts and high credit risk customers.

Turning to slide 11, revenue decreased in the first quarter by $2.3 million to 2%, $215.7 million due to management reimbursement of revenue and reduced expenses at management contract locations, hotels and airports.

These costs are primarily pass throughs, so there's no negative margin impact.

Excluding management reimbursement revenues, target revenues increased by $2 million or 3.7% primarily due to new customers and an increased level of service to existing customers, especially in the midwest, southwest and at HPSA.

Operating profits for the first quarter increased 6.5% to $4.1 million.

Profit from the parking segment remains strong.

Careful expense management plans put in place in advance of the economic downturn continue organic growth at HPSA and a larger concentration of managed lots all contributed to the result.

We are actively pursuing opportunities for college and universities, business parks, hospitals and municipalities to offset our client's needs to reduce expenses.

Turning to slide 12, security of revenue for the first quarter increased $4.6 million or 5.7% to $85.6 million.

Primarily as a result of new customers and a continuation of service expansion through current customers in the northwest and midwest regions.

Operating profit for the first quarter increased 28.9% to $1.8 million due to additional revenues in additional insurance expense.

We continue to have a very solid pipeline of sales.

Turning to slide 13, the revenue for the quarter decreased $4.6 million or 5.6% from the prior year period, primarily due to lost business in early to mid '08 in the east and mid-Atlantic regions, which was partially offset by the expansion of services to existing customers in the northwest region.

Operating profit increased $1.1 million or 32.3% to $4.7 million as much of the new business is higher margin compared to business replaced.

Turning to slide 14, the summary despite the challenging economy, we had an exceptional first quarter and are very pleased with the strength of our performance with every segment posting an increase in operating profit.

The business is solid.

We are taking and continue to take steps to mitigate the impact of the economy on the environment by focusing on the aspects of the business that are within our control.

Our team is leveraging our unmatched size, scale and diversity with strong sales effort to gain new accounts and better penetration of large strategic customers across operating segments.

We are proactively negotiating concessions on pricing and scope of services for existing customers and re-implementing cost reductions that will insure we maintain an improved profitability.

I am confident that this operating business will carry through fiscal '09.

Turning to slide 15, in light of the first quarter results, the Company is improving its guidance for the first half of fiscal '09.

The Company now expects income for continued operation per diluted share in the range of $0.48 to $0.52 and for the same period, adjusted income for continuing operation per diluted share in the range of $0.52 to $0.56.

Full year estimate remains difficult given the challenging and uncertain market environment.

The Company's estimates for the full year '09 is income from continuing operations for diluted share in the range of $1.10 to $1.20 and adjusted income from continued operations per diluted share for the same period in the range of $1.25 to $1.35.

Guidance is exclusive of any acquisition.

At this time I would like to open the floor to questions.

Thank you.

(Operator instructions) We'll take our first question from David Gold, Sidoti.

Hi, good morning.

A couple of follow-up questions.

For one, Henrik, can you speak a little bit more to the climate or essentially what's happening in janitorial along the lines of obviously revenue there is stable, but profitability up a bit, some of it obviously attributed to OneSource, but what's happening when you're presumably going or renegotiating on these contracts?

I think a lot of things.

It's not one or two things isolated, but the fact of life is that we are working very proactively with clients that want cut back in their overall expense for the services and in that process, we of course, want to make sure that we can maintain profitability as much as possible and at the same time also trying to reduce some of our overhead associated with the accounts.

So overall, if you look at it, we will maintain or in certain cases improve overall profitability, but not all directly associated with the account.

How do you reduce overhead on the accounts?

Well, it's the -- some of it is associated with indirect costs associated with the account.

The direct expenses associated with an account could be increased productivity, it could be change of specifications for the client in a changing environment, there might be clients that we work with that will increase new sites so we have a bigger base to do the business on, there could be times where you work with a client if they're closing the offices down, a week, a month and I can go on.

There's no golden rule.

I think the only golden rule is that we are proactive dealing with those clients in order to first to maintain the client and second of all maintain profitability and thirdly, but probably most important, make sure the client is happy.

Okay.

And then on your slides for janitorial, there's a note about a solid pipeline of new business and I'm curious if you can add some color there?

I would guess in this environment that would be winning business away, market share gains rather than sort of new business to the environment or --

That's accurate.

I think the positives in this business, if nonexisting clients are faced with a challenging environment and they're using a number of different contractors, we are very attractive because we are the only one with a national footprint and naturally they would come to us to see if they would have one relationship with one client and achieve some savings that they might not be able to do with the 42 different subcontractors they're using today.

So I think size and footprint in this particular case are driving opportunities.

Okay.

Can you also, I'm not sure if you gave a number, but can you give a sense for integration synergies, where we are with that from the OneSource?

We are running on an annualized basis around $45 million, which I think is up from $44 million last quarter last year and if you remember, the committed goal we had was around $47.5 by the end of '09 and we are still targeting that, but, of course, as you can see, we're very close to our end goal, so the level of increase quarter over quarter is going to be the minimum.

Okay.

And one just last one and maybe this is more appropriate for Jim.

But basically, your comment on tag work, presumably, if we go back a couple of quarters, we had a little bit of an issue there with the financials, New York, San Francisco, say.

It seems like from what I can tell over the last couple of quarters, it's stabilized or maybe that work has bottomed out.

Can you give some color?

Is there still work coming, baked in there from the financials or has that really bottom and what sort of status of that piece of the business?

Thanks, David.

The reason I made the comment on tag work is I think it's not always clear that it's not all at risk.

I mean most of the tag work, as I said, is related to things like storms and floods and cleaning out, you know, universities and things like that.

That's where the bulk of the work is.

The work that we talked about last quarter, which is a small percentage of the overall tag work, that is down, that is primarily in places like the financial industry, etc., and we don't see much more of that going down at this point in time.

So that's pretty much baked into our forecast and baked into where we are at this point.

Got you..

And I mean would it be fair to say or assess that your expectation from those clients is presumably a lot lower, maybe closer to, almost it's very minimal at this point?

Yes, I think the time of having IPO parties and holiday celebrations and that kind of stuff is clearly off the map, especially for some of the big companies that we read in the papers on the front page every single day.

So, you know, those things are fairly minimal right now.

But the bulk of our tag work, which is the work I talked about earlier, that is continuing and that's not the kind of stuff that tends to be at jeopardy in this situation unless act of God goes away, that's what would have to happen.

Got you.

Very good.

Thank you both.

And we have no further questions at this time.

I would like to turn the conference back over to Mr.

Slipsager for any additional or closing remarks.

Well, we are very proud of our first quarter and I want to thank all the employees for a great job for the first quarter and I'm looking very much forward to talking to all of you at the end of the second quarter.

Have a nice day.

Ladies and gentlemen, that concludes today's conference.

We appreciate your participation.