ABM Industries Inc (ABM) 2009 Q2 法說會逐字稿

Good day everyone, and welcome to today's ABM Industries second quarter fiscal year 2009 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 you Jim Lusk, Executive Vice President and CFO, and Sarah McConnell, our Senior VP and General Counsel.

On the call today, I'll provide an overview of the 2009 second quarter ended April 30th.

Jim will discuss the details of our financial results, and I will conclude our prepared remarks with a summary of the Company's operational achievements for the quarter as well as update management's outlook for fiscal 2009.

In addition, we are providing a slide presentation to accompany today's prepared remarks.

You may access the presentation now by going to our website at www.ABM.com and under the Investor Relations tab you will 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.

Turn to slides three and four of the presentation.

Before we begin, I need to tell you that 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.

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

Our second quarter fiscal 2009 performance was characterized by strong cash flow, prudent expense management around improved operating margins.

We delivered double-digit increases in net income and earnings per share, generated strong adjusted EBITDA, and exceeded our first half fiscal 2009 guidance.

We experienced a modest decline in quarterly revenues year-over-year of 5.6%.

Sometimes the decline in revenue indicated an issue with the fundamentals of the business.

However, to an extent, our modest decline in revenues is a reflection of proactive measures we've taken with our client contracts, including working with our clients to meet their cost pressures and need to reduce their monthly expenses.

While this contributes to a slightly lower revenue, our prudent management of our job and labor expenses has given us the ability to effectively manage profitability and retain the customer.

Also, we are monitoring and in some cases cancelling contracts with high risk clients that are in danger of bankruptcy.

Our actions year-to-date have impacted revenues, yet, we are proactively managing our credit risk and as an example recently you voided a significant receivable write-off.

Also we are eliminating less profitable work, and redeploying some of the resources to work that may generate less revenue, but produce higher margins.

Despite the weak economic environment, our janitorial and parking businesses grew their operating profits year-over-year by 16.9% and 11.3% respectively.

These increases reflect our promise of delivering acceptable margins at both the gross profit and operating profit level.

In addition, margins within our janitorial division benefited from synergies realized from the OneSource acquisition.

Adjusted EBITDA for the second quarter of 2009 increased 10.4% to $36.1 million over the prior period.

Operating cash flow from total operations improved by $46.1 million in the six months ended April 30th, 2009, as compared to the prior year period.

Driven by the income from operations, generated in the period and tight management of our trade accounts receivable.

During the first six months of 2009 we reduced our outstanding debt under our credit facility by $48 million.

With a strong cash flow, our business generates combined with our solid balance sheet, we expect to continue to improve our long-term shareholder value through strategic acquisition, and to reward our shareholders through the distribution of our quarterly dividends.

Yesterday we announced a quarterly cash dividend of $0.13 per common share, marking our 173rd consecutive dividend payment.

Turning to slide seven.

As we discussed previously, our market has experienced changes, and while we are by no means immune to these events, we will remain actively attuned to them and we'll respond as necessary to meet these challenges.

We aggressively focus on the aspects of our business that are within our power, including our pricing strategy, expense management, working capital management and cash conservation.

We are carefully keeping our overall job costs within levels that are competitive while maintaining acceptable profit margins and reducing or eliminating less profitable contracts.

We continue to focus on increasing operating efficiencies and achieving the remaining synergies from the OneSource acquisition.

We also continue to make progress on our multi-year projects to transform our corporate platform and infrastructure, including implementing a new payroll and human resource information system.

We expect to sustain our efforts to manage our working capital with a focus on timely receivable collections and greater risk management.

Effective May 1st, we acquired certain assets of Control Holding Group Incorporated.

The business associated with acquired assets generated annual revenues of approximately $50 million, by providing a range of facility maintenance and engineering services to commercial, retail, institutional and pharmaceutical clients, primarily in New Jersey and New York.

This acquisition completes our existing business in the Northeast region, expands our growing presence in the pharmaceutical space, and is accretive.

In summary, our financial condition is solid, and we are appropriately prepared to manage the business during the economic downturn, and well positioned for continued growth once the US economy recovers.

Now I'd like to turn the call over to Jim for a financial review of our second quarter and the first half of fiscal 2009 results.

Thank you, Henrik and good morning everyone.

Turning now to our second quarter fiscal 2009 results on slide eight.

Revenues for the second quarter decreased 5.6% to $855.7 million, from $906.3 million the prior year period.

Reflecting the negative impact of the weak US economic environment, which resulted in reductions in the level and scope of of services provided to customers, contract price compression, and a decline in the level of discretionary tag work.

However, as Henrik noted, the proactive steps we have taken to manage customer cost pressures, credit risks, and job profitability also contributed to the modest decline in revenue.

In addition, approximately $7 million or 13% of the decrease in revenues is due to the reduction of expense incurred on behalf of managed parking facilities, which are reimbursed to the Company.

These reimbursed expenses are recognized as parking revenue and expenses, which have no impact on operating profit.

Despite this year-over-year decline in revenues, net income for the second quarter increased 15.4%, to $12.8 million, or $0.25 per diluted share, from $11.1 million or $0.22 per diluted share in the year ago quarter.

This improvement in our bottom line profitability reflects our focus on maintaining or improving profitability, stringent cost controls, and ongoing synergies and performance improvements.

Gross margins for the 2009 second quarter declined to 10.5%, from 11.1 in the prior year quarter.

The decline was due to the recording of a $7.2 million reduction in self insurance reserves related to prior years in the second quarter of 2008, compared to a $1 million reduction in self insurance reserves recorded in the second quarter of 2009.

Excluding the impact of these insurance benefits, gross margins year-over-year were essentially flat.

Our SG&A expense for the second quarter decreased $4.7 million or 6.8%, to $64.3 million from $68.9 million in the prior year period.

The year-over-year decrease is primarily due to the realization of synergies for the OneSource acquisition, offset by an increase in information technology costs, including higher depreciation costs related to the upgrade of our payroll, human resources and accounting system.

I will discuss in further detail the items impacted comparability associated with SG&A that we anticipate in the second half of 2009.

Interest expense decreased $2.7 million, or 67% in the second quarter of 2009.

Primarily due to a lower average outstanding balance and lower interest rate.

For the quarter, we reduced our line of credit by $45 million.

Effective tax rate for the second quarter of 2009 on income from continuing operations was 38.8%, compared to 38.1% for the comparable period in fiscal 2008.

We expect our annual effective tax rate to be around 36.7 in 2009, compared to 37.5 in 2008.

During the second half of this year, we expect to record additional unemployment tax credits that will reduce our annual effective tax rate to 36.7%.

Income from continuing operations was $13 million or $0.25 per diluted share for the second quarter of 2009 compared to $15.3 million or $0.30 per diluted share in the same period last year.

The decline was primarily due to previously mentioned $7.2 million reduction in self insurance reserves, related to prior years in the second quarter of 2008.

Adjusted income from continuing operations before items impacted comparability increased 16% to $16.3 million, or $0.32 per diluted share in the second quarter of fiscal 2009, from $14 million or $0.27 per diluted share in the same period last year.

Items affecting comparability for the quarter represented in total a net loss of $3.3 million after tax or $0.07 per diluted share, related to corporate initiatives.

This is compared to a net gain of $1.3 million after tax or $0.03 per diluted share in the prior year period.

Given the items impacting comparability and the 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 second quarter, adjusted EBITDA increased 10.4% to $36.1 million from $32.7 million the same period last year.

Turning briefly to our financial results for the six months ended April 30th, 2009.

Revenues for the six months ended April 30th, 2009 decreased 2.8% to $1.7 billion from $1.8 billion in the comparable period in the prior year.

Net income for the six months ended April 30th, 2009 increased 54.8% to $27 million, or $0.52 per diluted share from $17.4 million or $0.34 per diluted share in the prior year period.

Income from continuing operations for the first six months of fiscal 2009 increased to $27.8 million or $0.54 per diluted share, from $21.6 million or $0.42 per diluted share in the first six months of fiscal 2008.

As a reminder, guidance for income from continuing operations for the first six months was $0.48 to $0.52 per diluted share.

Adjusted income from continuing operations for the first half of fiscal 2009 was $29.4 million, or $0.57 per diluted share, compared to $22 million or $0.43 per diluted share in the comparable period in the prior year.

As a reminder, guidance for adjusted income from continuing operations was $0.52 to $0.56 per diluted share.

Items affecting comparability represent in total a net loss of $1.6 million after tax or $0.03 per diluted share for the first half of the year, as compared to a net loss of $0.4 million after tax or $0.01 per diluted share in the prior year period.

For the six months ended April 30th, 2009, adjusted EBITDA increased 17.5%, to $66.4 million, from $56.5 million in the same period last year.

Turning now to our balance sheet on slide nine.

We are pleased with our financial position which continues to strengthen.

Cash flow generated from total operations, which includes both continuing and discontinued operations for the six months ended April 30th, 2009, increased to $67.2 million from $21.1 million in comparable period last year, primarily due to the income from total operations generated in the first half of 2009.

In addition, cash provided by total operations during the quarter was positively impacted by tight accounts receivable management, and an increase in deferred income taxes, primarily due to the utilization of the acquired OneSource deferred tax assets during the six months ended April 30th, 2009.

As Henrik noted previously, we are effectively managing our working capital.

We ended the quarter with $260.3 million working capital, compared to $274 million at the end of fiscal 2008.

Excluding discontinued operations, working capital increased to $256.3 million from $249.6 million at the end of fiscal 2008.

Trade accounts receivable at April 30th, 2009 were $467.6 million compared to $473.3 million at April 30th, 2008.

Working capital depends both on the timing of accounts receivable collection as well as the quality of our related receivables.

Despite the current economic conditions, our accounts receivable aging over 90 days improved by $0.7 million.

Days sales outstanding at quarter end were 50 days, down three days from the end of the first quarter.

We had $182 million outstanding under our credit line at the end of the second quarter, a decrease of $45 million from January 31st, 2009.

At the end of the second quarter, we had $149.5 million of availability under our line of credit.

Total insurance claim liabilities at April 30th were at $344.6 million compared to $352.6 million in the second quarter of 2008.

Self insurance claims paid during the quarter totaled $20.3 million compared to $20.2 million in the second quarter of 2008.

As we continue to make steady progress on our corporate initiatives, I want to highlight our costs associated with items impacting comparability.

For the remainder of fiscal 2009, we expect expenses from the initiatives of approximately $0.12 per diluted share.

While we expect the upgrade of systems to be predominantly completed by the end of 2009, there will be some additional IT costs that are expensed in the first half of fiscal 2010.

We estimate fiscal 2010 IT costs will not exceed $0.05 per diluted share.

In summary, as Henrik noted in his remarks earlier, our Company has proactively taken a number of steps, including strong management of receivables, expenses, and cash.

While in the short-term these measures contributed to reduced revenues, our actions also enabled us to achieve strong financial results, while positioning the Company for anticipated growth in the second half of the fiscal year.

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

Thank you, Jim.

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

Turning now to slide 10, which outlines the performance of of our janitorial division.

For the second quarter revenue decreased 5.8% to $589.3 million, from $625.5 million in the prior year period.

Our pipeline of new business remains solid and the rate of decline in tag revenue has stabilized.

Operating profit for the quarter increased 16.9% to $34.9 million, from $29.8 million in the second quarter of '08.

As we continue to realize operational synergies from the OneSource acquisition and focus on maintaining job profitability.

I'm pleased with the performance, especially considering the current economic and competitive environment.

Turning to slide 1, which outlines the performance of of our parking division.

Revenue decreased in the second quarter by 4.4% to $113.3 million from $118.5 million in the prior year period, due to reduction in management reimbursement revenues related to managed parking facilities.

This was partially offset by an increase in allowance, lease, and visitor parking revenue for new customers, and an increased level of service to existing customers.

The healthcare segment of parking continues to perform well and recently secured business from two of the premium healthcare providers in the US.

We anticipate these sales will drive growth in revenue in the second half of fiscal 2009.

Operating profit for the second quarter increased 11.3% to $4.9 million from $4.4 million in the prior year period.

The solid increase in operating profitability is due to our continued focus on profitable client contracts which result in incremental margin dollars from the increase in allowance, lease and visitor parking revenues.

Turning to slide 12, outline performance of our security division.

Security revenues for the second quarter increased slightly to $82.4 million, from $82.3 million in the prior year period.

The increase is primarily due to additional revenues from new customers in the Midwest.

And the expansion of services to existing customers.

Our existing business, along with recent sales in the Northeast and in Northern California should provide growth in revenues for the second quarter of fiscal 2009.

Operating profit was essentially flat at $1.4 million from the comparable period in 2008.

Turning to slide 13, which outlines performance of the engineering division.

Engineering revenues for the quarter decreased 11.5% to $70.2 million from $79.3 million in the prior year period, primarily due to customer losses associated with lower margin business.

Continue to develop our energy service business, which is part of this segment.

They have a suite of offerings to address the growing demand for reduced energy consumption, and costs of smaller carbon footprint.

Taking recent sales and with the growing energy business pipeline, we anticipate a reversal in the revenue trend for the second half of fiscal 2009.

Operating profit decreased 5.8% to $4 million, compared to $4.3 million in the prior year period, primarily due to higher expenses or reduced revenues which was partially offset by the shift in revenue mix away from lower margin business.

Turning to slide 14.

In summary, we are pleased with our financial performance, particularly in light of the challenging US economy.

We believe our ability to deliver growth in net income and adjusted EBITDA reflects the focused actions we've taken to contain costs and maintain profitability.

As a leading provider of facility service in the US, that is unmatched in size, scale, diversity of customer accounts, and financial strength, I firmly believe we are well positioned to drive sales through the addition of new accounts and increased penetration of large strategic customers across operating segments once the US economy rebounds.

We expect the broader economic conditions to remain challenging throughout 2009.

However, we believe that we have positioned ourselves accordingly and are well resourced to continue executing business objectives and to meet our financial targets.

While the issue regarding the DIP financing of certain commercial properties is well publicized these days, we believe this situation will have minimal impact on our operating margins.

In light of our 2009 year-to-date results, and our visibility into the back half of the year, the Company's reiterating its guidance for fiscal 2009 income from continuing operations per diluted share is expected to be in the range of $1.10 to $1.20, and adjusted income from continued operations per diluted share for the same period will be in the range of $1.25 to $1.35, exclusive of any additional acquisition.

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

Thank you.

(Operator Instructions).

We will pause momentarily to assemble our queue.

And our first question today comes from David Gold of Sidoti.

Hi, good morning.

Wanted to see, Henrik, if you can give a little bit more color.

Fairly impressed with the margin improvement that you're making, particularly janitorial.

Wanted to get some more color on a couple of fronts.

One, essentially, have you changed the way that you're pricing, particularly for newer customers and even for existing?

And then two, what changes when the economy swings the other way, if anything?

Those are two big questions.

I think we have a little time.

Let me start with the first one.

I think this economy has simply driven a very aggressive approach from operations to ensure that we maintain our profitability on the jobs and in the branches and the overhead associated with that, and the other thing we've done, I think very well, I think we've been proactive going to clients that we knew had some financial challenges and see if we can work with them to get those cost reductions to the client early, to avoid of course bidding the property and retaining the customer and hopefully at these margins.

Overall, margins aren't crazy, so these margins is not unreasonable to expect.

So when the economy turns, I think the fact that we've been able to work with our existing clientele, and we have seen cutbacks among some of our manufacturing clients, whether from three shifts down to one shift.

Hopefully, one day, we'll go back up to three, so we'll have some implied growth in some of those clients where we reduced services but not necessarily lost any properties, as such.

So I feel we're pretty well positioned through the turn in the economy.

Okay.

And how you're pricing?

Essentially I guess what I'm trying to get at or what I'm trying to understand is presumably you've been very proactive and it's worked but basically what are we really doing here and how do we sort of hold that?

Because I guess I'm just not clear on that.

Well, I think the key thing is, I don't think it's -- I think it's fair to say, we have not changed anything dramatic in our pricing model.

I think the only thing that's changed dramatically this time around is our proactiveness with clients, both clients with credit issues as well as clients that have financial pressures.

Overall, our pricing model hasn't changed so we're not committing our self to a lower price for a longer period of time going forward and I do not intend to do that either.

If you think about it as rate and volume, the rate has really not changed, the volume is coming down a little bit from the customer perspective.

The reason profitability is being maintained is we're even more aggressive on our own expenses.

It's really a volume issue related to customers and us being aggressive on our side of the equation.

Can you give some examples on where you can be more aggressive on your costs?

Where we can be more aggressive?

Or where you've been more aggressive.

Essentially, business as you know is fairly -- I mean, you run a pretty tight ship, so presumably there isn't a ton of room to cut and it's a labor business.

Where can we cut?

Where are we getting these savings?

If you think back, back in July and August when it looked like the economy was starting to be a little tight, I started by freezing salaries so we froze salaries very early in the game, had a hiring freeze going on for at least a six, nine month period, and also we were able to execute the synergies both in janitorial and the overall business from the OneSource acquisition.

So I think those are examples of what we've done.

We also had some projects going on.

We had a project where we were going to look at our name and the way where we were going to look at our name and the way we presented and we decided to delay that particular effort and there are some, what you call not necessary expenses that we have delayed for a period of time.

And I think it all comes together right now, and I think also lastly, but not least, I've been through a couple of these before, unfortunately.

And I think the key thing is to react fast and get adjusted right away because it's not going to last forever.

If it lasts forever, we have a different problem.

Right, right.

I think we adjusted appropriately and for the first time, last maybe 30 days, starting to feel a little better about what I'm hearing, so I -- maybe it's turning.

I don't know.

Okay.

All right.

No, fair.

That answers the question.

That gives a better understand so I appreciate that.

Just one other, engineering, it's the only place I can really pick at you a little bit.

A little just more color there as to you're feeling a little bit better about it looking forward but why that business was getting hit so hard, say, in the period.

We did lose one major job.

It was a job we lost where there was -- in New York City, where our engineering services carries a tax on it, and the client due to the financial situation decided to take it in house and save the taxes.

Obviously, it was what we indicated somewhat low profitable job but did represent probably in excess of $5 million a quarter in revenue.

So that was one thing.

And the other thing is, on the energy projects that we are working on, which are projects that we do for clients to improve the energy efficiency, some of them have been delayed due to I think waiting to see where the state support and government support will come in.

We hope some of them will come in earlier and they're not.

The pipeline is full so hopefully they'll come in eventually.

I'm very, very upbeat on engineering still and feel that this was a blip that hopefully will last only one or two quarters.

Got you.

Very good.

Thank you both.

On the improved profitability in the business, Henrik was answering kind of on the economic driven stuff and customer stuff but as we've been talking these last several quarters we've invested a lot of money in our infrastructure, upgrading systems, et cetera.

We are starting to see the beginnings of some fruit coming out of that.

They're not real big right now but we're just starting and I think despite -- even not given the economy, we're doing these things kind of our infrastructure which will clearly improve now and going into the future, that's why we've been spending this money and we are starting to see some of the benefits.

Got you.

And then presumably, it sounds like you're done with those investments, I don't know, maybe nine months from now, say.

You say they come into early 2010?

The majority of the systems will be done by the end of this fiscal year.

We will have some carryover of some things we have to do.

Perfect.

Perfect.

Thanks.

(Operator Instructions).

We'll pause for another moment.

And having no further questions in queue, I'd like to turn the conference back over to Mr.

Slipsager for any additional or closing remarks.

I want to thank everybody for listening to our second quarter earnings report.

We are very proud of the results and look forward to seeing you in a few months.

Thank you.

That does conclude today's conference.

We appreciate everyone's participation today.