ABM Industries Inc (ABM) 2010 Q2 法說會逐字稿

Good day everyone and welcome to the ABM Industries second quarter fiscal year 2010 conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr.

Henrik Slipsager.

Please go ahead, sir.

Thank you.

I'm Henrick Slipsager.

I'm 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 second quarter that ended April 30.

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

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 word 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 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 financial result and operating performance for the quarter.

During the second quarter we continued to execute well against our plans and our adjusted earnings were as expected.

Revenues were relatively flat on a year-over-year basis which is evidence of the continual and gradual improvement of the economy compared to the overall climate in fiscal 2009.

While we did continue to experience some economic pressures on the scope of services provided to customers, contract pricing and availability of discretionary tag work, we were encouraged to see new business across all operating divisions and in key vertical markets during the quarter.

Our engineering division had another strong quarter with both revenue and operating profit growing double digits and we increased profitability in our parking division due time program and our continued focus and management of intellect expenses.

We continue to aggressively managed expenses across all our divisions particularly in janitorial given large labor component.

Effectively managing both our expenses and our capital were key elements of our strategy during the economic downturn.

For the second quarter the Company generated strong net operating cash flow for the six month ended April 30, cash flow from continuing operating activity was $37.7 million compared to $44.3 million in the prior period a year ago.

Despite the stabilization of revenue and ongoing cost controls, our adjusted income from continuing operations was down 27% in the second quarter to $0.23 per diluted share and our adjusted EBITDA was down approximately 19% from the same period last year primarily due to the impact of calendar shifts and higher costs from state unemployment insurance.

The second quarter of 2010 contained one additional working day compared to the prior year.

Which increased labor expenses associated with our fixed price inventory contract compared to the prior year.

In addition, we experienced higher payroll related costs from unexpected increases in state unemployment insurance rates that went into effect on January 1, 2010 and higher depreciation expense associated with our IT operation.

We estimate that the one additional day of labor expense reduced our diluted earnings per share by approximately $0.04 and the increase in payroll related costs from increases in state unemployment insurance rates reduced our diluted earnings per share by approximately $0.03.

We expect impact of the increase in state insurance rates to be mitigated in the second half of 2010 primarily through government hiring incentives.

During the quarter, we continued to strengthen our balance sheet.

In addition to our strong cash flow we ended the quarter with $145 million in debt on our balance sheet.

Down $27 million from the first quarter and over $200 million of available on you are credit facility.

We also continue to reward shareholders through the distribution of our quarterly dividends.

Yesterday, we announced our quarter cash dividends of $0.135 per common share which marks 177th consecutive dividend payment.

We are proud to have one of the longest record of paying increasing dividend among all companies on the US stock exchanges.

Looking into the remainder of the year, we will continue our successful operating strategies to drive sales and manage labor and overhead expenses to improve profitability and believe that we will achieve year-over-year top and bottom line growth in the second half of the fiscal year.

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

Jim.

Thank you, Henrik.

Good morning everyone.

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

Revenues for the second quarter were $855.5 million flat with the prior year period.

As Henrik mentioned, we believe that this is a reflection of the improved economic climate compared to 2009.

Gross margins for the 2010 second quarter declined to 9.8% from 10.5% in the prior year period.

This year-over-year reduction in gross margin is largely the result of additional day of labor in the second quarter compared to a year ago.

The one additional day of labor cost approximately 42 basis points to our gross margin.

SG&A expense for the second quarter increased $1 million to $65.2 million.

The year-over-year increase is primarily due to a $4.4 million expense for a specific legal contingent fee and an increase in depreciation and maintenance partial offset by cost control measures in the janitorial division and a decrease in IT costs associated with the upgrade of our systems in fiscal 2009.

Interest expense decrease $0.1 million to $1.2 million in the second quarter of 2010 from $1.3 million in the prior year period reflecting a lower average outstanding balance and average interest rate under our credit facility.

Our average outstanding balance is $164.9 million in the second quarter of 2010 compared to $217 million in the same period last year.

At the end of the quarter, we had $204 million of availability.

Our effective tax rate on income from continuing operations for the second quarter of 2010 was 39.5% compared to 38.8% in the prior year period.

Adjusted income from continuing operations for the second quarter was $11.9 million or $0.23 per diluted share compared to $16.4 million or $0.32 per diluted share in the same period last year.

Items impacted comparability for the quarter represented a net expense of $3.3 million after tax or $0.07 per diluted share related to a specific legal contingency expense and corporate initiatives.

This compares to a net expense of $3.3 million after tax or $0.07 per diluted share in the prior year period related to corporate initiatives.

Adjusted EBITDA which is defined as earnings before interest, taxes depreciation and amortization and excludes both discontinued operations and items that impact comparability for the second quarter was $29.4 million compared to $36 million in the prior year period.

Net income for the second quarter of 2010 was $8.6 million or $0.16 per diluted share compared to net income of $12.8 million or $0.25 per diluted share in the prior year period.

Turning briefly to our financial results for the six month ended April 30, 2010 on slide eight.

Revenues for the six month ended April 30, 2010 were essentially flat with the prior year period at $1.7 billion.

Net income for the first six months entered April 30, 2010, decreased 20.9% to $21.4 million or $0.41 per diluted share from $27 million or $0.52 per diluted share in the prior year period.

Adjusted income from continuing operations for the first six months of fiscal 2010 was $26 million or $0.49 per diluted share from $29.4 million or $0.57 per diluted share in the first six months of fiscal 2009.

Items impacting comparability represented total a net expense of $4.5 million after tax or $0.08 per diluted share for the first half of the year as compared to a net expense of $1.6 million after tax or $0.03 per diluted share from the prior year period.

For the six months ended April 30, 2010, adjusted EBITDA was $62 million a decrease of $6.6 million from $66.4 million in the same period last year.

Moving now to cash flow and the balance sheet on slides 9 and 10.

Cash flow generated from total operations which includes both continuing and discontinued operations for the first six months ended April 30, 2010, was $44 million compared to $67.2 million in the comparable period last year.

Cash flow was impacted by $16.3 million decrease in net cash provided by discontinued operating activity.

We ended the quarter with $285.5 million in working capital, a $7.2 million increase from $278.3 million at the end of fiscal 2009 due to timing of payments made on vendor invoices.

Excluding discontinued operations working capital increased by $12.2 million to $280.8 million from $268.6 million at the end of fiscal 2009.

Net trade receivables April 30, 2010, were $442.7 million versus $476.9 million at January 31, 2010.

Sales outstanding at quarter end were 48 days down from 51 days at the end of the first quarter.

Total insurance claim liability at the end of the second quarter were $345.4 million compared to $344.6 million in the prior year period.

Self-insurance claims paid for the quarter totaled $17.8 million compared to $20.3 million in the prior year period.

Before turning the call back over to Henrick, I want to say a few words about our expected performance in the second half.

First, the unexpected increase in state unemployment insurance in the first two quarters will be more than offset by the unexpected government hiring incentives in the last two quarters.

Second, recall that we will have one less day of labor expense which will benefit EPS by $0.04.

Third, historically our Company benefits in the third and fourth quarters, due to reaching payroll tax limits and other seasonal benefits such as vacation replacements.

And finally, we have completed our system upgrade.

Now I would like to turn the call back to Henrik, who will provide perspective on the second quarter operational performance as well as speaking to the outlook for the remainder of the year.

Thank you, Jim.

Turning now to slide 11, which outlines the second quarter performance of our four operating divisions.

Revenues were basically flat year-over-year which is evidence that the economy is showing signs of improvement and our revenues have stabilized.

All of our divisions continue to generate new business and the pipeline in all our businesses remain strong.

The length of the sales cycle is starting to diminish in some of our segments although janitorial continues to deal with longer time frames than prerecession levels.

Engineering had a very strong quarter with revenues growing by 22.8% in the second quarter of fiscal 2010.

The sales pipeline for engineering continues to expand and we are in discussion with a number of large national companies.

We continue to expect double digit growth from engineering in the second half of fiscal 2010, along with securing new business related to the energy group.

Part of revenue was essentially flat year-over-year but we did experience some improvement of several of our airport locations based on our existing portfolio part of business, we expect to benefit from the economy as continues to improve and business travel and tourism start to rebound to normal levels.

Security revenues was slightly down for the quarter with new client wins partially offsetting reductions in contract growth and pricing compression.

During 2009, janitorial experienced loss of client contracts that exceeded new business, reductions in the level and scope of client services.

Contract price compression and declines in the level of tack work which continues to influence results in the three month ended April 30, 2010.

While these results were somewhat disappointing the janitorial organization is keenly focused on a number of clients and sales initiatives which we anticipate will drive revenues higher in the second quarter up to fiscal year progresses.

For the quarter revenue from our tax business was consistent with Q1.

Reviewing operating profit in slide 12.

While we are maintaining and profitability of expense management, operating profit was impacted by the one additional working day and higher than anticipated state unemployment insurance tax rates.

Operating profit for the four divisions was down 11.5% for the second quarter but excluding these items we would achieve a slight increase year-over-year.

In the second quarter, engineering operating profit grew 20.3% operating profit increased by 6.7% driven by strong performance by several airport clients and continued frozen in management indirect expenses.

Janitorial continues to aggressively manage labor and other costs to offset pressures and revenues but the extra workday and unemployment insurance substantially offset our cost control measures.

Security drop in profitability was related to the decrease in revenues.

Moving to slide 13.

In summary, we are encouraged by our performance and trends as we look to the back half of 2010.

We believe that we are both positioned to benefit as the economy continues to gradually improve.

We will continue to focus our efforts and client retention, expanding the sales pipeline and building our market shift to road revenue.

At the same time, we'll continue our successful operating strategies to boost profitability and generate bottom line savings and cash.

This combination of continued bottom line savings and anticipated soft line growth, calendar shift, government hiring initiatives and traditional seasonal reduction in labor expenses is what gives us confidence that we'll meet our financial targets for the second half of fiscal 2010.

Turning now to guidance.

We are reiterating our previously issued full year 2010 income from continuing operations 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 third quarter of 2010 will benefit from less one workday compared to 2009.

As usual, our guidance is exclusive of any acquisitions.

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

(Operator Instructions).

We'll go first to David Gold with Sidoti.

Good morning.

Just a couple of points to follow up.

One, as to sales pipeline you had some positive commentary both in the release and sort of live about some pickup there and maybe about the sales cycle being less extended.

Can you speak more specifically a little more to that where you are seeing it or in certain geographies or what sort of is driving that?

About a quarter ago you were bidding on bigger jobs and I think you said the sales pipeline was a little more extended so just curious if that shifted some.

I can expand on it.

I think it's a result, you never know the true answer, but I think it's a result especially in janitorial that we are bidding on much bigger jobs.

So when your nationwide jobs, the decision making process with the client includes management as well as essential management, corporate management and from, we have seen from a presentation, we have a handshake that is another three to six months before we get started on the job and that seems to be longer than we have seen in the past and seems to be affecting janitorial more than anybody else.

Okay.

And then as to the good news in there, basically where are you seeing, say, you know, certain geographies of client types?

I didn't get that.

As to sales activity or the more positive sales activity, can you give a sense if there is certain client types or geographies basically where that is coming from.

I would say most of the growth is coming from educational sectors, schools as well as industrial.

That's where we see it coming from.

As you can see in engineering, we are hitting all cylinders and the good thing with engineering is a high, mostly profitable division.

So it's a good place to have extraordinary growth, and I think 20% plus growth on top and bottom line defines a very good quarter for me.

Okay.

And then one other.

State unemployment commentary as to both a little bit more on the surprised government initiatives if you will, how you think that plays out and helps.

And B, a quarter ago we, we were surprise by you thought you could pass through 50% of the incremental increase and I'm curious how that has played out.

Let me answer on the, on the ability to pass through increases.

The impact on the quarter is less than I expected and that is a result of two things.

One is a couple of states changed their minds with respect to the increase of, so there was I think the state of Florida is one of them which resulted in a refund in the quarter regarding tin crease in, and we were able to 50% of increase is a pretty good number.

The advantage we have going to neck year is we will be able to pass all these increases and also the expected increases in 2011 to the client.

This is not an ABM issue as I've said before.

It's not an ABM issue.

I'm not that concerned because price is pretty competitive out there.

On the government incentives Jim please.

On the other incentives they go on the other direction.

There is a higher act which is hiring incentives to restore employment act.

For hiring employees that have been out of work for 60 days.

Given the amount of churn, that is a nice positive number for us.

The second one is in California it's a wage subsidy program through September, the end of September.

And basically reimbursing quite a bit up to 100% of wages in some cases.

The combination of those two things are more than offset the negative we had in the first half so we expect that positive in the second half.

Perfect.

Okay.

Thank you both.

Thank you.

And our next question comes from Michael Gallo with CL King.

Your line is open.

Hi.

Good morning.

I just want to drill down a little bit on the government hiring incentive.

Is that something you expect to flow evenly into the third and fourth quarter?

I think if I go back to the first quarter, you noted the expected, you didn't expect this so you expected to recapture some of it through the form of pricing so just want to drill down a little bit.

Is the pricing environment been stable, have you not been able to get as much pricing as you had anticipated and the flow through on whether you expect the government hiring incentives to be relatively even in the third and fourth quarter?

Thank you.

Thank you.

Okay.

Let me do the pricing first.

The pricing, the market is competitive but I don't see any major changing either in pricing or the competitiveness.

It is competitive.

We remain competitive.

But I think we should be able to maintain our gross profit and numbers with respect to new business and old business and Jim on the incentives?

On the incentives Michael, we'll have a little more in Q4 than Q3, so not quite 50/50 but not much worse than that.

We will have a little more towards the end.

Okay.

Great.

Second question I thought I heard you indicate in your prepared remarks that some of the IT implementation stuff was complete.

Should we expect to see reported an operating earnings conversion.

There's been a significant questioner sequential there over the last several quarters or any other thing you might expect to impact the second half.

On the systems stuff, you recall that we called those out below the line and items compacting capability.

As we had said a couple of quarters ago we'd be finished now.

We are finished now.

We are please today report that we have a state-of-the-art system which is great.

The dollars we had below the line, those will now be gone.

In future years the benefits from this system and the process work that is associated with it, the ultimate support system, services excuse me will benefit us but the dollars I'm talking about are the ones below the line, those go away.

Okay.

Thank you.

Our next question comes from Andrea Wirth with Robert W.

Baird.

Your line is open.

Good morning, gentlemen.

Good morning.

I wonder if you can talk a little bit about airport.

Sounded like you are seeing some strength there but when I look at the statistics for the industry, it seems like they are still struggling.

Curious why you are assuming to buck the trend there a little bit?

We can only, I'll announce that it's not based upon the overall transportation analysis out of airports and activity in the airports.

It's based upon our airports and the revenue recognition we have in our airports.

So we might just be in a situation that we are doing better than others, our airports are doing better than other airports.

This is a true reflection of the numbers for the quarter.

Okay, fair enough.

Specifically in the quarter, it sounds like tag revenue was equivalent to last quarter.

I think the Winter storms generally sell into this quarter.

How did that impact you overall?

Some of your contracts in New York probably all ready covered the storms but how do we think about that how that impacted you.

If we can have storms anyplace but New York City we would be doing fantastic.

The pricing in New York is as such that snow removal is included.

Not only did it snow in New York in this quarter but someone decided to snow over the weekend which is doubling expensive.

It was a very, very expensive quarter for New York City.

The good news was that areas like Washington, Philadelphia that was hard hit was a sizable benefit for us.

So, I think overall for the quarter it was a break-even and the reason it was a break-even is New York is so much greater than anyplace else.

It hurt us more even though it's a small area.

In terms of your outlook for the back half of the year in terms of what potentially could be planned, do you expect that to get better or should we expect this run rate to continue through most of this year?

I should expect it to be better based on the activity level and the promise startup date of already sold and executed jobs unless I have something unexpected hitting us from now until the end of the year.

I truly expect the sales to be up.

n the everything nearing margins they've been a little bit depressed the past, the past two quarters.

I guess I was looking for something closer to something like 8%.

How do we think about is there something that is going on that is keeping the margins lighter the last couple of quarters and when do we think about the margins get close to that 8% range again?

Two things and you do it quarter-over-quarter is based engineering is being impacted.

It's higher wages so they hit us hard in the beginning of the year so the benefits are greater in the last two quarters of the year.

And that is probably the biggest impact.

I would also say some of the jobs we sold which are sizable jobs, you will see the size of the quarter pretty dramatically.

Those jobs, new jobs, sizable jobs, normally you will see lower profitability in the beginning of the job, that's going to working hopefully a little greater over the period of time.

It's is pretty natural and we expect engineering profitability as a percentage of revenue to be greater than any other division.

I don't think 8% is achievable but greater than 6.5% would be achievable.

Okay.

Fair enough.

In terms of your expectations for to returning to revenue growth in the second half of the year.

Should we expect that already in Q3 or is this more of a 4Q event particularly when you look at your larger janitorial?

I sure hope for Q3 and I feel very certain about Q4.

We have one advantage, and that is most of our business is portfolio relate business as you know, but the way looks and the startups we've had, I would be, I'm hopeful that we'll see growth in the third quarter and I trust I feel stronger we'll have growth in the fourth quarter.

Just one final question.

The government hiring incentive question again.

I wonder if you can give us better bound around the magnitude.

You said would more than offset the cost, but what level of magnitude are we talking about or can you give us more bounce so we can figure out what the potential benefit is around this government hiring incentive.

It will be $0.03 to $0.04.

A couple of million dollars.

Per quarter?

Just the one hiring incentive, Andrea, then we also have a California wage subsidy program.

Combined thereof, they will be bigger to date.

Okay.

So $0.03 to $0.04 for the second half of the year?

At least.

At least.

Great.

Thank you so much.

Thank you.

(Operator Instructions) Our next question comes from Adam Thalheimer with BB&T Capital Markets.

Your line is open.

Thanks.

Good morning guys.

Good morning.

Henrik can you touch on the acquisition outlook a little bit?

I'll be happy to.

There's nothing more I would like to do than present to you two or three great acquisition that we did in the quarter but unfortunately you probably heard it we didn't do that.

That is not because we are not active.

Not because we are not looking.

Acquisition has nothing to do with timing and activity, and I would say the activity is as -- the highest I've seen it.

I've not been able to close the pricing and the kind of opportunity that is available, but I feel very good about the pipeline.

Okay.

Thanks for that.

And then Jim, the auction rate securities, is that something that will continue impact the P&L going forward?

This quarter it was only up $100,000.

So the market seems to be opening up, so we are kind of hopeful and the balance that we have right now a little over 19 million, we feel good about.

But there are some positive signs.

There are, behind the seen tenders going on, less than a dollar, not as good as I'd like to see them but those are some positive signs.

This quarter was a minor amount of dollar but we watch this one every quarter.

Okay.

Finally, I'm just curious on your prepared remarks you mentioned the green initiatives.

How big is that opportunity for you guys now and what is the growth rate there?

I don't think we mentioned the green initiatives but I'm happy to respond to it.

The green, the green initiatives, I think it's fair to say that a year, two years ago it was a marketing tool.

Now it's a combination of a marketing tool and a defensive tool.

You need to have it available.

We are by far the biggest provider of green clean services nationwide.

There's no comparison.

We have the state-of-the-art building in New York and it's something we have a program that we are proud of.

So it's something that I think we'll continue to grow and with the more focus you'll have on green and environment, maybe these days people are focusing on oil but maybe they'll come back to the building one day, and that is the day when I think you'll see us attacking that market even greater than we have.

We clearly the alternative when it comes to green cleaning.

Okay.

Henrik finally maybe you can just comment as to what extent you think things, you talked about the sales cycle a little bit.

To what extent do you think things have normalized out there in terms of customer outsourcing patterns?

I can only view it from our customer point of view.

I think that the commercial of real estate market is not an area where we have seen growth or loss of business.

The growth for us seems to become more on the industrial side and on the schools, schools could be politically initiative in certain states where they have to find savings and I think that is a huge opportunity coming.

But I think the outsourcing side is pretty stabilized right now because the ones that really want to deal with outsourcing side are the side of multinational companies such as the pharmaceutical industry that was been -- that has been very little impacted by the whole crisis.

I was disappointed in the sales for the quarter which was 1.5% lower than I expected.

At the other end I was very positive surprised with the engineering than I expected.

So I'm not changing my outlook on the economy as such and our impact on that and I do believe that you are going to see growth coming from now on and continue hopefully for a long time.

Okay.

Thanks for the color.

Thank you.

Our next question is a follow-up from David Gold with Sidoti.

Your line is open.

Just wanted to get a little bit, I don't think you mentioned anything on the litigation contingency.

Just curious what that related to.

It's a specific case I'll not go into because it's not finalized yet but it was our evaluation that we did not have a good case in this particular situation so we decided to accrue an appropriate amount to cover the potential settlement.

Okay.

Are there others that we should be aware of?

Others that can be --

If there were others, I would have spoke to them.

Okay.

Got you.

Is this something that just popped up?

You know what?

We live in a society where legal and unfortunately is a major part of our lives and in this particular case, which is not what we believe is with any other case we have, the facts were not good for us and we decided to an appropriate amount to cover what we believe is the cost of this case.

Got you.

Okay.

Thanks.

Thank you.

At this time, we have no further questions.

I would turn the call back to Mr.

Henrick Slipsager for any closing remarks.

Thank you very much for listening to our second quarter 2010 conference call.

I look forward to talking to all of you in three -- in a three month period.

Hopefully we'll look to increase sales and shareholders.

Thanks for listening.

That concludes our call for today.

Thank you for your participation.