ABM Industries Inc (ABM) 2010 Q1 法說會逐字稿

Good day everyone and welcome to the ABM Industries first quarter 2010 conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Henrik Slipsager, President and CEO.

Please go ahead, sir.

Thank you.

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

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

On the call today I'll provide an overview of the 2010 first quarter that ended January 31.

Jim will discuss the details of our financial results and I'll conclude our prepared remarks with a summary of the Company's operational achievements for the quarter as well as provide an update on our guidance for fiscal 2010.

In addition, there's a slide presentation that accompanies 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'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.

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 estimates expect and similar expressions are intended to identify these statements.

These statements represent our current judgment on the 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 slides that accompany 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 facilities financial result and operating performance for the quarter.

We are encouraged by our first quarter results which were generally in line with our expectations entering the quarter.

Despite lingering recession pressures our core business has shown continuing signs of stabilization and this is reflected in our revenues.

This top line stability combined with the decisive cost control initiatives implemented early in 2009 and continuing weaker around cash and expense management enabled the Company to increase underlying profitable.

Adjusted income from continuing operations increased over 8% for the quarter.

On an adjusted per share basis we achieved $0.27 for the quarter.

Adjusted EBITDA for the quarter was $32.7 million, up nearly 8% compared to 2009.

Operating profits excluding the corporate segment increased approximately 6% year-over-year.

Our core janitorial, engineering, and apartment divisions all grew their operating profits compared to a year ago quarter.

Securities continued to see some compression of service hours by assisting customers but this division is taking a number of steps to increase its scale and secure new contracts which should benefit the business in the second half of the fiscal year.

While we benefited from cost savings, operational improvement across our operating platform, all our segments were negatively impacted by the increase in state unemployment insurance rates which exceeded the increases we have internally projected by $0.01 to $0.02 per diluted share.

Where this really impact the second quarter we have taken the appropriate actions across the Company to mitigate the effect of these taxes going forward.

Our divisions also do a tremendous job of analyzing our contracts on an ongoing basis and proactively working with our clients to negotiate concessions and the pricing and scope of service.

At the same time our team has been reviewing jobs to see where we can better manage labor, resource, and expenses and increase productivity to ensure improved profitability.

We had an unusual amount of cash usage during the quarter which was primarily due to the timing of accounts collections received from clients and payments made to our vendor in (inaudible) and was anticipated for the period.

Cash used in operating activities for the first quarter was $8.9 million compared to cash provided by operating activities of $26.1 million in the prior year.

We expect to be cash flow positive in the remaining quarters of fiscal 2010.

We ended the quarter with $172 million in debt on our balance sheet and over $176 million of available -- availability on our credit facility.

Yesterday we announced the quarterly cash dividend of $0.135 per common share which marks 176 consecutive dividend payment.

Overall we are confident in the strength of our business, the improving sales out across our market and the operating efficiencies we will achieve in 2010 by leveraging the investments we have made in our system infrastructure.

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

Jim?

Thank you Henrik.

Good morning, everyone.

Turning to our first quarter fiscal 2010 results on slide seven.

During the first quarter we continued to make progress in stabilizing revenues as the year-over-year decline slowed.

First quarter revenues decreased 2% to $870 million from $887.5 million in the prior year period.

However, revenues were up slightly from the fourth quarter of 2009.

Additionally approximately $4.5 million or over 25% of the year-over-year decrease in revenues was due to a reduction of expense occurred on behalf of our managed marking facilities which are reimbursed to ABM and reported as revenues.

While these reimbursed expenses have no impact on operating profit they do negatively affect our year-over-year revenue comparability.

Gross margins for the 2010 first quarter declined to 10.1% from 11.3% in the prior year period.

This year-over-year reduction in gross margin is largely the result of a legal settlement of $9.6 million received in January 2009 from a former third party claims administrator related to poor claims management.

Excluding this margin benefit gross margin was 10.2% in the prior year.

Reflecting our continued commitment to managing expenses and increasing operating efficiencies our SG&A expense for the first quarter decreased to $8.6 million, $62.8 million from $71.4 million.

The year-over-year decrease is primarily due to aggressive cost measures in the janitorial division and a decrease in IT costs associated with the upgrade of our payroll, human resources and accounting systems in fiscal 2009.

This was partially offset by deferred acquisition cost of $1 million in connection with the adoption of accounting standards codification topic 805 purchase accounting for business combinations.

Interest expense decreased $0.5 million to $1.2 million in the first quarter of 2010 from $1.7 million in the prior year period reflecting a lower average outstanding balance and average interest rate under our credit facility.

Our average outstanding balance was $169.6 million in the first quarter of 2010 compared to $237 million in the same period last year.

At the end of the quarter we had $176.5 million of availability.

Our effective tax rate on income from continuing operations for the first quarter of 2010 was 38.9% compared to 39.3% in the prior year period.

Adjusted income from continuing operations increased 8.3% to $14 million or $0.27 per diluted share in the first quarter of fiscal 2010 from $13 million or $0.25 per diluted share in the same period last year.

Items impacting capability for the quarter represented a net expense of $1.2 million after tax or $0.03 per diluted share related to corporate initiatives.

This compares to a net gain of $1.8 million after tax or $0.04 in the prior year period primarily due to the legal settled related to claims management.

Adjusted EBITDA which is defined as earning before interest, taxes, depreciation, amortization, and excludes both discontinued operations and items that impact comparability, for the first quarter increased by 7.7% to $32.7 million from $30.3 million in the prior year period.

Adjusted EBITDA margin which is adjusted EBITDA over revenue improved 34 basis points to 3.76% for the quarter when compared to the prior year period.

Net income for the first quarter of 2010 was $12.8 million or $0.24 per diluted share compared to net income of $14.2 million or $0.28 per diluted share in the prior year period.

Turning now to cash flow and the balance sheet on slides eight and nine.

Cash flow and operating activities in the first quarter was $8.9 million compared to cash provided by operating activities of $26.1 million in the prior year.

Cash flow was negatively impacted by $31.7 million increase in net trade accounts receivable primarily due to the timing of collections received from clients and a $5.2 million decrease in trade accounts payable consistent with our expectations.

We ended the quarter with $295.8 million in working capital, a $17.5 million increase from $278.3 million at the end of fiscal 2009 due to the timing of accounts receivable collections as well as payments made on vendor invoices.

Net trade receivables at January 31, 2010, were $476.9 million versus $445.2 million at October 31, 2009.

Day sales outstanding at quarter end were 51 days compared to 48 days at fiscal 2009 year end.

This first quarter increase is consistent with our experience in prior years.

Total insurance claim liability at the end of the first quarter were $346.1 million compared to $346.3 million at the end of 2009.

Self insurance claims paid for the quarter and totaled $17.6 million compared to $19 million in the prior year period.

I would like now to turn the call back over to Henrik who will provide a perspective on the first quarter operational performance as well as speak to our guidance for fiscal 2010.

Henrik.

Thank you Jim.

Turning to slide 10 which shows the first quarter of revenues of our four operating divisions.

Revenues were down about 2% from the first quarter of '09 but up $2 million sequentially with the fourth quarter of '09.

Continuing to deliver a strong performance as we continue to secure new clients and expand our scope of work with existing clients.

The engineering division totaled a 15.7 increase in revenues year-over-year and an 8.3% increase from the fourth quarter of '09.

Although the sales cycle of our images service business is being extended the sales pipeline continues to grow.

With the price of oil remaining above $70 and the payback of cost around two years for energy project, I remain confident that prospective clients will release their capital and footprint and energy cost.

Our janitorial division continues to be impacted by prior client losses and the reduction in demand for tack work.

The amount amongst the tack work has remained steady around $12 million to $14 million per month and we continue to expect modest increases as the year progresses.

I'm pleased that we continue to meet our clients demand by a mentally sustainable approach to facility services, as during the quarter we surpassed mother than 200 million square feet of space under ABM janitor industry leading Green cleaning program including more than 50 million square feet of space that lead certify for the US Green Building Counsel.

As Jim mentioned apartment division's top line was negatively affected by management reimbursement revenue which was down approximately $4.5 million over 25% from last year.

There's no impact on our operating profit.

Reviewing operating profit on slide 11 our focus on expense management enabled us to achieve operating leverage despite the decrease in year-over-year revenues.

The actions we took in '09 along with the gradual turn in our business led to a 5.9 increase in our operating profits from our four divisions primarily driven by our janitorial parking and engineering segments.

The parking recorded over 21% increase while janitorial engineering recorded 5.5% and 7% respectively.

These expenses savings were partially offset by higher state unemployment insurance rate expenses experienced across all divisions but in particular our janitorial and security segments.

Moving to slide 12 and 13.

In summary we are pleased with our performance and ability to achieve operating leverage despite a challenging economy and top line compression.

2010 we have focused on building shares, managing expenses and increasing operating efficiencies while maximizing our operating platform.

This operational advantage will come not just in terms of our shed service centers but from ultimately leveraging our national branch network as the industry leader in janitorial and rising performance engineering and (inaudible - highly accented language) and security.

Also we will continue to explore strategic acquisitions including both tuck in acquisitions and large acquisitions that may build the client market segment.

Turning now to guidance.

We are reiterating our previously issued full year 2010 income from continuing operations for in the range of $1.25 to $1.35 and adjusted income from continuing operations with diluted share in the range of 1.35 to 1.45.

For comparison purposes, the second year of fiscal year 2010 has one additional workday compared to the year ago quarter.

Third quarter would have less one workday compared to '09.

As usual, our guidance is exclusive of any acquisition.

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

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

(Operator Instructions) We'll go first to David Gold with Sidoti.

A couple of questions for you today.

First can you fill in a little bit of color on the unemployment insurance and basically how we mitigate that?

A, does the climate lend itself to you being able to pass that through as the year progresses or do we look for savings in other ways?

First of all, there are two things about it, David.

First of all, there is a timing issue.

We got most of these rates late January, the rate increases and they are greater and I think most businesses start the same way but they were greater than expected.

So for us we have to go back to clients but we already went to these clients with increases back in December.

So the way we look at it is we believe probably 50% of those increases will be, we will be able to charge clients especially on cost plus jobs, there shouldn't be any issue and the other 50% will have to be made up of formal improved efficiency and productivity.

Got you.

I guess I'm not as familiar with sort of how well is that assessed as you guys, but essentially is some of that -- or much of the rating is it specific to ABM or is it really state by state basis and different states increase sort of across the board?

Our rates are specific to ABM but the problem is not specific to ABM.

Everybody is fighting it right now.

Our rates are accretive based upon our track record but I feel our track record with respect to unemployment is probably better than most.

Yes, it's a general problem but it's a specific rate for us.

Got you.

And then Henrik can you then speak a little bit about the confidence in the pipeline.

I think the commentary was pipeline was robust but the cycle was a little bit extended.

Just what you seen out there trendwise if you can add any color to all of that?

The extended pipeline was specifically associated with the energy jobs and I think there is still some hesitance among our clients to actually close the deal because they are expecting at one point in time that the government/state will come with further support to these particular energy projects.

On the general pipeline, I think the fact of life is we are bidding bigger jobs than we've done in the past, more consolidated jobs and every time you bid a bigger job the decision making process is slower and longer which somewhat is frustrating on our side but at the same time it's part of the real world.

So I think those are the two major issues involving bids.

Got you.

And then one last one if I might.

The extra day.

Remember back in the day sort of coming through that that Q3, $2.5 million across for the quarter, is that still a good number to use?

Between $4 million and $5 million I think is more accurate number now because the old number excluded OneSource.

Between $4 million and $5 million, which is $0.05 to $0.06 I guess.

Got you.

Okay.

Perfect.

Thank you.

For the year, David, the number of days are the same.

Fortunately it has a quarter impact that is material.

I see.

So that means it's really a shift between second and third?

Correct.

Okay.

Just before I let you go and then on the unemployment side how big of an impact do you think that could have in the second quarter?

I know you said it would be more significant.

The unemployment impact for the month is somewhere between $1.2 million and $1.4 million and you'll see the impact is primarily first five months of the year and there you hit maximum and it slowly disappears throughout the year.

So the second quarter will have some impact but at the same time, we will start to get some of the money back from the clients.

We can go back to the clients.

We couldn't do that in the month of January.

So there will be some negative impact.

Again over the year we feel pretty good about it.

Got you.

Perfect.

Thank you.

Thanks David.

We'll go next to Andrea Wirth with Robert Baird.

Good morning, gentlemen.

Good morning.

Wondering first if you could just clarify a little bit your expectations for revenue growth?

It sounds like you are expecting revenue to continue to improve sequentially although you made the comment that you are not expecting year-over-year growth really, it sounds until 3Q.

I guess I'm just trying to understand what you are expecting for 2Q because it looks like if you continue to improve revenue sequentially you should actually be up year-over-year.

I wonder if you can give me a little bit more clarity in terms of what you are thinking for the growth rate?

Two or three things to that question.

First of all, if you look year-over-year, a major negative impact in '08 started in the second quarter of '08.

So that's where we had the big drop.

We do expect second quarter of 2010 to be year-over-year better than the second quarter of '09.

When you look out quarter and you look at sequential sales, second quarter is the only quarter that pulls it out of line simply due to the fact that number of days are lower for the fourth quarter than any of the other quarters because we go through the month of February, and on cost plus jobs, et cetera there's one less day or two less day of revenue.

So sequential I think it's going to be challenged to break-even but year-over-year I feel pretty comfortable in second quarter of 2010.

So Q2 should still be up year-over-year but sequentially it may be challenging to grow.

Is that correct?

Yes.

Kind of going back to the earlier question and the confidence in the pipeline.

I understand that the energy jobs are there.

Maybe a little bit of hesitation to close those deals but still sounds like the bidding process on the general pipeline is still pretty slow.

I'm trying to understand where the confidence comes in improving, continue to improve sequentially during the second half of the year.

Is it just mostly assuming the economy gets better or just trying to get a little bit more color in the confidence there.

The confidence is there.

When you go through a recession, there are two steps.

First of all, there's a bleeding taking place and that took place for us in the second and third quarter and then there's activity levels increasing in the fourth quarter and the first quarter, and hopefully we are going to see some benefit of that increased activity level at fourth and the first quarter and generate some business in the the second, third and fourth quarter.

I think you can see on our engineering, we see some very nice growth.

Parking if you take that isolated, it's still year-over-year behind on a revenue basis but it's all associated with reimbursable expenses and the major cutback on reimbursement expenses came in second quarter of '09 as well.

So you should see some positive improvements there.

Security has not done badly.

I think it's been flat and I feel pretty good about going forward.

Janitorial had some challenges but I think from the second quarter on I think you will see janitorial year-over-year being better than prior years.

So I don't feel, I feel we are back to a normal growth situation, and I think by the end of the year you will see that mid single digit growth year-over-year could be (inaudible) that.

Okay.

And then final question just trying to again pin down the unemployment insurance impact.

I don't know if you have the break down but do you have specifically what the impact was for each of the segments for the quarter?

And then finally as we look into Q2, so essentially we should assume it's about $1.3 million per month but essentially you should be able to offset half of that with price increases.

Is that correct?

That is correct.

And the segment side, I think that security on a dollar compared to revenue base is hit the hardest.

Then it's janitorial and very little impact on engineering and parking.

Great.

Thank you.

You're welcome.

(Operator Instructions) We'll go next to Michael Gallo with CL King.

Good morning.

Good morning, Michael.

Just a couple of questions.

I wanted to come back to the unemployment insurance question.

Obviously the rates hit you more than expected.

Were there some of the states where it was prevalent or was it pretty much across the board where the incremental was more than you anticipated?

It's pretty much everywhere but the key thing is in a situation like that regarding January we talked about a number of challenges out for the states and questioning some of the rates.

So it's early but in the second quarter I can give you more of a breakdown than I can do right now.

Are you concerned given obviously state budget deficits across the board, that this becomes more of a multi-year trend and secondly, are there any concerns that while the economy has certainly improved and you believe you can price a fair amount of it are their concerns that if the economy weakens again that you won't be able to price it or do you feel comfortable that you will be able to pass it through?

I think I said many times before when you have an increase that is not ABM related but a general increase where it hits my competitors as well, and maybe in some instances worse than us, I feel very comfortable that we can recover those increases.

It's not a problem we created and thank God the state didn't single ABM out and say you are going to have state employment increases, nobody else is going to have it.

I am very comfortable with that part even if the trend continues.

Again we are not a production facility.

We are a service Company.

We are charging the clients for the services we do.

The cost of our service might increase, but as long as it does the same with our competitors, we are as competitive as we were yesterday.

Great.

And then just wanted to touch on the security business.

Obviously you are relatively small in that segment.

It's had certainly a tough time the last year or so as have a lot of things.

Is there a point when you look at that segment and start to think it's non-core or you can't get enough scale?

Do you think you need to bolt-on to that business and get more scale or do you think you have enough scale and it's just a function of you need a better economy?

Thank you.

As part of our strategy process is our job as management as well as the Board's job to review our strategies going forward and clearly security long term is if I have the right size, and if we find opportunities we would like to add to that size because we have got the niche more infrastructure but simply don't have the probability associated with the $300 million operation as we should have.

Thank you.

That concludes the question-and-answer session.

At this time I would turn the conference back over to Henrik Slipsager for any additional or closing comments.

Well, thank you very much for listening to our first quarter conference call.

We look forward to seeing you next quarter.

Thank you.

That does conclude today's conference.

We thank you for your participation.