ABM Industries Inc (ABM) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's ABM Industries fourth quarter 2009 conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Henrik Slipsager.

Mr.

Slipsager, please go ahead.

Thank you.

I'm Henrik Slipsager, President and CEO of ABM.

Joining me today is Jim Lusk, Executive VP and Chief Financial Officer and Sarah McConnell, our Senior VP and General Counsel.

On the call today, I'll provide an overview of 2009 fourth quarter and fiscal year ended October 31.

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 discuss an outlook for fiscal 2010.

In addition to the slide presentation that has accompanied 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 at the left-hand side of the page.

Today's presentation will be the first listed.

Sarah?

Thank you, Henrik.

Please turn 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.

These factors are described in the slide that accompanies this presentation.

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 fourth quarter and fiscal year.

The Company delivered outstanding results for the quarter and the full year, particularly in what was an exceptionally challenging economy through the course of the 2009 fiscal year.

In the previous investor conference call, I commented that I believe our revenue base was stabilizing and I was anticipating fourth quarter revenue to be essentially flat on a sequential basis.

This proved to be the case.

While the recession continues to have an impact on our business, its impact are diminishing.

Our emphasis on improving operating margins, by focusing on (inaudible) profitability and expense management clearly contributed to successful fourth quarter and fiscal year.

Adjusted income from continuing operations increased 10% for the quarter and 22% for the fiscal year.

On an adjusted basis, per share basis, we achieved $0.39 for the quarter and $1.33 for the year.

For fiscal '09, arguably one of the most difficult economic periods in the Company's first hundred years of business, operating profits excluding the corporate segment increased 14% on a year-over-year basis.

We also achieved these results while executing Company's comprehensive upgrade of our systems infrastructure.

Throughout the fiscal year, we have remained diligent of our credit exposure and we've concentrated our efforts on generating strong operating cash flow.

Cash flow from operating activity, which includes discontinued operations for the fourth quarter was approximately $64 million compared to $31 million in the first quarter of -- in the fourth quarter of '08.

For the fiscal year, the Company generated over $140 million in cash flow from operating activity, an increase of over $72 million from the prior fiscal year.

This is an all-time high for ABM.

Our strong cash flow enabled the Company to reduce outstanding debt at quarter end to $172 million.

On a year-over-year basis, we reduced our debts by over $57 million, or 25%.

And yesterday, we announced a 4% increase in our quarterly cash dividend to $0.135 per common share, making our 175th consecutive dividend.

Our sales pipeline and sales activity continue to look healthy.

During the quarter, we had major sales wins across our operating segment, including premier properties such as Stable Center and Nokia Theater.

The Company continues to build sales momentum in fiscal 2010.

While our strong fundamentals core line of business and proactive measures helped us weather the -- negative economic cycle, it ultimately is our employees who made our centennial year so successful.

I'm extremely proud of their efforts, the commitment to excellence and the exceptional service on behalf of our clients.

Now I would like to turn the call over to Jim for a financial review of our fourth quarter and fiscal year results.

Jim?

Thank you, Henrik.

Good morning, everyone.

Turning to our fourth quarter fiscal 2009 results on slide seven.

In the quarter we continued to take proactive steps to manage the factors of our business within our control.

We sharpened our focus on the primary drivers of working capital, including accounts receivable.

Our strong liquidity position at year end speaks to the strength of our business model.

We believe we are well positioned as we enter fiscal 2010.

While revenues for the fourth quarter decreased 4.2% to $868 million from $905.8 million in the prior year period, sequentially revenues were flat compared to Q3 2009 and in line with our expectations.

We continue to expect to see sequential growth in our revenue base beginning with the first quarter of 2010.

Gross margins for the 2009 fourth quarter declined to 10.5% from 11% in the prior year period.

The year-over-year reduction in gross margin is largely the result of a $5.9 million expense to increase insurance reserves related to prior year compared to $7.7 million reduction in self-insurance reserves related to prior years recorded in the fourth quarter of 2008.

We have increased oversight of our claims management process and we do not expect the continuation of the unfavorable developments of this magnitude to continue.

We are taking action to manage legacy claim expenses and to swiftly process and close new claims.

The company is committing additional resources to ensure claim handling process remains efficient and setting up reserves continues to reflect current market trends.

Reflecting the success of our strong focus on cost containment and operational efficiency, our SG&A expense for the fourth quarter decreased $16.7 million to $63.2 million from $80 million.

The year-over-year decrease is primarily due to an aggressive cost control in the janitorial division, a decrease in costs associated with the move of our corporate headquarters in fiscal 2008, a decrease in professional fees, a reduction in expenses associated with the integration of One Source, and in 2008, the Company expensed $6.3 million of deferred cost related to the services agreement with IBM.

This is partially offset by an increase in information technology costs, including higher depreciation costs related to the upgrade of our payroll, human resources and accounting systems.

For fiscal 2010, we expect depreciation costs and maintenance costs related to the upgrade of our payroll and accounting systems to be approximately $4 million higher compared to fiscal 2009.

Interest expense decreased $1.8 million to $1.4 million in the fourth quarter of 2009, from $3.3 million in the prior year period reflecting a lower average outstanding balance and average interest rate under our credit facility.

As compared to the fourth quarter of 2008, we reduced our line of credit by $57.5 million to $172.5 million at October 31, 2009.

On a sequential basis, the reduction in our line of credit was $23.5 million.

Our effective tax rate on income from continuing operations for the fourth quarter of 2009 was 29.1%.

Our tax rate in the 2009 fourth quarter includes certain discreet tax benefits, which favorably impacted the rate.

We expect our annual effective tax rate for fiscal 2010 to be approximately 39% as compared to 34.5% in fiscal 2009.

The cash tax rate for the year, which benefits from the NOL acquired from the acquisition of One Source was approximately 2% for fiscal 2009.

We expect the annual cash tax rate for fiscal 2010 to be approximately the same as 2009.

Adjusted income from continuing operations before items impacting comparability increased 10% to $20.8 million, or $0.39 per diluted share in the fourth quarter of fiscal 2009, from $18.9 million, or $0.36 per diluted share in the same period last year.

Items affecting comparability for the quarter represented a net expense of $5.5 million after-tax, or $0.10 per diluted share related to corporate initiatives and the increased insurance reserves related to prior years.

This is compared to a net expense of $4.1 million after-tax, or $0.08 per diluted share in the prior year period.

Adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, and excludes both discontinued operations and items that impact comparability for the fourth quarter decreased slightly by 1.7% to $41.2 million from $42 million in the prior year period.

However, adjusted EBITDA margin, which is adjusted EBITDA over revenue improved 12 basis points to 4.75% for the quarter when compared to the prior year period.

Net income for the fourth quarter of 2009 was $15 million, or $0.29 per diluted share, up nearly 30% compared to net income of $11.6 million, or $0.21 per diluted share in the prior year period.

Turning briefly now to our results for the fiscal year ended October 31, 2009 on slide eight, revenues for fiscal year 2009 decreased 3.9% to $3.5 billion from $3.6 billion in 2008.

Income from continuing operations increased to 5.2% to $55.5 million, or $1.07 per diluted share from $52.7 million, or $1.03 per diluted share in the prior year period.

Adjusted income from continuing operations before items affecting comparability increased 22% to $68.8 million from $56.4 million in fiscal 2008.

Items affecting comparability for the fiscal year ended October 31, 2009 showed a total net expense of $13.3 million after-tax compared to a net expense of $3.7 million after-tax in fiscal 2008.

For the 2009 fiscal year, adjusted EBITDA increased 9% to $145.5 million from $133.5 million in fiscal 2008.

For the physical year, adjusted EBITDA margin was up 50 basis points to 4.18% when compared to the prior year.

Net income for fiscal 2009 increased 19.5% to $54.3 million, or $1.05 per diluted share from $45.4 million, or $0.88 per diluted share in the prior year period.

Net income includes a loss from discontinued operations of $1.2 million and $7.3 million for the fiscal years ended October 31, 2009 and 2008 respectively.

Turning now to cash flow on the balance sheet on slide nine and 10.

In the quarter we continue to build on our solid financial position and generated strong cash flow from operations.

Cash from total operations for the fiscal year, which includes both continuing and discontinued operations was a positive $140.9 million compared to a positive $68.3 million in the comparable prior year period.

Cash provided by total operations was favorably impacted by collections of accounts receivable, including $19.6 million from discontinued operating activities and the income from total operations generated in fiscal 2009.

We ended the quarter with $278.3 million in working capital compared to $274 million at the end of fiscal 2008.

Excluding discontinued operations, working capital decreased to $268.6 million from $249.6 million at the end of fiscal 2008.

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

Trade receivables at October 31, 2009 was $445.2 million versus $473.3 million at October 31, 2008.

Day sales outstanding at quarter end were 48 days compared to 50 days at fiscal 2008 year end.

Total insurance claim liabilities at year end were $346.3 million compared to $346.2 million at the end of 2008.

Self-insurance claims paid for the year totaled $81.5 million compared to $74.5 million in fiscal 2008.

In summary, combined efforts of our employees enabled ABM to successfully manage our business during a difficult economic climate and generated operating results that include the strongest operating cash flows in the Company's history and achieve year-over-year growth in all key financial metrics.

We entered 2010 in a solid financial position and ready to leverage the investments we've made in our systems infrastructure.

That concludes my prepared remarks.

I would like now to turn the call back over to Henrik, who will provide his perspective on the fourth quarter operational performance, as well as discuss our guidance for fiscal 2010.

Thank you.

Turning to slide 11, which shows fourth quarter revenues of our four operating divisions.

On a sequential basis as previously noted, revenues for the quarter were essentially flat, demonstrating our ability in the second half of the fiscal year to successfully respond to economic challenges, including the impact of the commercial real estate markets.

In particular, I was pleased with the top line growth in engineering, which achieved on a sequential basis in our year-over-year basis increases at 8.9% and 4.3% respectively.

As we entered fiscal 2010, I expect to build upon our fourth quarter revenue base.

However, we anticipate revenue from (inaudible) work will remain below pre-recession levels.

Reviewing operating profits on slide 12, I emphasize an improving operating margin by focusing on job profitability and expense management, clearly contributing to a solid fourth quarter.

Operating profit from our four divisions increased nearly 4%.

Our [parking] business was up over 10% with an improved mix of business, coupled with sound management of expenses.

We continue to experience good growth from our hospital parking division, which has doubled its revenue since we made the acquisition in this key market sector.

Although the security segment did not post a year-over-year gain, the steps this division have taken in the quarter and throughout the year, as well as recent sales wins, positions the segment for a successful 2010.

Moving to slide 13 and 14, in summary, as ABM embarks on our next hundred years, we know that our business is sound, our financials are solid and we are well positioned to increase profitability in light of our accomplishments for fiscal '09 and based on improving US economy.

The Company estimates that the full year -- full fiscal year 2010 income from continuing operations per diluted share will be in the range of $1.25 to $1.35 and adjusted income from continuing operations per diluted share for the same period will be in the range of $1.35 to $1.45.

Our guidance is exclusive of any acquisition.

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

Operator, we are now prepared to take questions, please.

(Operator Instructions).

And we'll take our first question from Michael Gallo with CL King.

Hi, good morning.

Obviously good job managing through the downturn.

Couple questions.

Just wanted to focus a little bit on the top line as we go forward.

Bounced around here, around flattish the last couple quarters.

You indicated you think it will start to show some sequential growth in Q1.

Would you expect to be able to get back to levels in Q1 where on a year-over-year basis things will flatten out, or do you expect a more modest improvement?

And when you look by segment, would you expect all of the segments to start to grow on a sequential basis, or will some be growing and others not?

Thank you.

Very good question.

Thank you, Michael.

Start by looking at the expected growth.

I'm looking at '09 as being where we are right now in a new base of our business and we look at 2010 as being a normal year compared to '09, which means we expect single-digit growth on our top line.

I do believe that the segment third quarter will be back to the '09 levels and by the end of next year we'll be well ahead of '09 levels.

I hope that answered one question.

The other question was the division and if there is a different impact on different divisions.

I have not seen that.

In the smaller division, you'll be more effective at gaining or losing a major job, but I believe all four divisions will improve on revenue throughout 2009, 2010.

Okay, great.

Second question, I just want to come back to the insurance adjustment.

You've obviously had -- it's been a pretty significant item over the last couple of quarters.

Could you talk a little more about, what you're doing to kind of prevent this from becoming a, certainly been a recurring item over the last couple of quarters of reasonable magnitude.

So what gives you confidence that we're not going to continue to see this and what kind of changes have you made?

Can you talk a little bit more about what caused it to arise and why wasn't it corrected coming out of the third quarter when the announcement was made that you needed to make another adjustment here in the fourth quarter.

Thank you.

Hi, Michael.

It's Jim Lusk here.

First of all, the hits we took this quarter for some old years where we have settlements above reserves and as we've said in the past, as long as the rules are that we have to book to a point estimate, you're going to have variance.

Recall that the reserve is over, around $350 million, as I mentioned earlier.

But in terms of what we're doing, I have added additional resources that are basically looking at every single claim as it arises.

We're going to do a full evaluation of every single claim we have on the books, and add additional people.

And I've actually brought in some outside resources to help work with our third party administrator who looks at it.

We're also adding some additional people in-house.

We've been experiencing good current year kind of, kind of trends, which is good.

So the key for us is continuing to stay on top of current cases which we've been doing really well on and then to really redouble our efforts on the older cases, which is what I'm bringing additional resources in, both external and internal.

So that's kind of what we'll be doing.

And I want to add one thing, Michael.

And that is that the reason we had an adjustment in the third quarter and adjustment in the fourth quarter, the adjustment in the fourth quarter just reflects actions or what's happening at the market after the end of the fourth quarter.

So it's, it's the recent development.

Right, okay.

And then I guess a follow-up for Jim.

As you go through this kind of claim-by-claim evaluation, do you think it's possible that we might see something else come out of that, or are you confident that this is just sort of dotting the I's and crossing the T's and that the prior years are reasonably close from an estimate basis?

Yes, I think we feel good about the reserves at the end of the year, which is why we have them.

We have started the effort that I've already talked about, looking at all the old claims.

There are a lot of things that we can do to help ourselves.

For example, the sooner you settle claims, the better they are long-term, but, yes, based on the work we've done already, I feel good that we can make progress on it.

Okay, great.

And then just final question, when you look at the difference in fiscal '10 for the guidance between the operating and reported numbers, I think there's about a $0.10 difference.

So what, what are -- what's in that -- what's assumed in that $0.10?

It is, as we mentioned earlier, part of it is the finalization of our IT operate -- I think we mentioned -- that we expect that to be done in the first or second quarter of 2010, and the other part of it is miscellaneous, things we don't know about yet.

But I mean just -- so the IT upgrade, would you say that's two-thirds of it, or just kind of--

Between half and two-thirds, yes.

Okay, thank you.

(Operator Instructions).

We will go next to David Gold with Sidoti.

Hi, good morning.

Just wanted to go over a couple of things.

One, on the JV side, did you say there was $4 million worth of incremental that you would expect for 2010?

Yes.

Yes so.

You're asking about -- you were breaking up a little bit there, David.

I'm sorry.

I'm on the road.

So forgive me.

No problem.

You got to earn a living like the rest of us.

Basically, basically what it is, is, half of it is depreciation basically from, the cost for capitalizing the system and the other half is ongoing maintenance associated with the new systems.

But it's about $4 million year-over-year.

Okay, and as we think about the new systems, still I think as I remember you thought that we would be pretty close as we get to second half of the year -- implementation, completing different phases.

Yes.

Okay.

So presumably as we roll into second year 2010, you'll see some of the quote, unquote, implementation costs roll off?

Absolutely, which is what we've been capturing in the items impacting comparability.

The basic -- the main system conversions are all done.

We're in the process of a couple extra programs here and there, which is why there's more stuff and things like cleanup and common process work and those kinds of things.

But the main, the main work is done.

So hopefully in the second half of the year, we start seeing some good operational benefits coming out of all this stuff.

Okay, and then Henrik, I think you said the way you're thinking about 2010 is single-digit top line growth.

Yes, sir.

Okay.

Just drilling down a little bit there, as to the tag work for incremental, I think you also said it's not, it's not quite come back just yet.

Generally speaking, what does it take to get that moving again?

Is it rocking and rolling economy, or are there other areas where you might be able to add services and get tag work?

I think it's timing and I think sustainability in the economy.

I think a lot of clients are not investing the money until they feel very comfortable about the economy.

So our expectations for 2010, we have not added any major growth coming back to the levels we were before, so I, I think the thing, the key thing is time.

It's going to take time, and we don't like time and our investors don't like time, but that's the way the world is.

It's going to take time.

Fair.

And just one last one.

In the release from the slides, I remember you made -- there was some incremental commentary as to acquisitions.

And so I was just curious if you can add color there.

Is overseas still an important focus and what business lines?

Any changes since probably the last time I've asked that question.

First of all, I want to make sure of the guidance excluding acquisitions and I think you know that.

Yes.

We are still looking and think there is -- I think we're getting closer to the bid opportunities.

I think there's a time where there's a huge spread between what the company wants and what we want to pay for it -- cash for the quarter -- and if the right deal comes by, we will do it and if the right deal doesn't come by, we won't do it.

I don't think we're changing strategy there.

And on the national front, we keep looking until we find the right, the right situation for us.

Got you.

Can you give a little bit of a sense, a little more color as to size?

Would it be traditional tuck-in as you used to do pretty regularly, or are you looking for something bigger?

In the US, we look -- we think we can handle the bigger ones, handle the smaller ones, and we are looking for I would say any and every opportunity we can for companies in this business, will all be considered tucking because of our size right now.

So anything (inaudible) any kind of investments we can make, but as you know with One Source and others, it's always a question of timing and we are ready now, systems in place and One Source was a great deal and ready to rock and roll and expect another strong cash flow next year because of our taxes.

So it could be much worse.

Got you, got you.

Terrific.

All right, thank you all.

Thank you.

And ladies and gentlemen, that does conclude our question and answer session.

I would now like to turn the conference back to Henrik Slipsager for closing statements and concluding comments.

Thank you very much.

I want to wish everybody a happy holiday and especially to our employees and our shareholders that have supported us in a very challenging year, but hopefully if you are a shareholder, you got a little dividend to maybe buy a little extra Christmas present.

Happy holidays.

Ladies and gentlemen, that does conclude today's conference.

We thank you for your participation.