ABM Industries Inc (ABM) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your ABM Industries third-quarter fiscal 2010 conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, this program is being recorded.

I would now like to introduce Mr.

Henrik Slipsager.

Please go ahead.

Thank you.

I am Henrik Slipsager, President and CEO of ABM.

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

On the call today, I will provide an overview of the 2010 third quarter that ended July 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 achievement for the quarter as well as provide an update for our guidance for fiscal 2010.

In addition, there is a slide presentation that accompanies today's prepared remarks.

You may access this presentation now by going to our website at www.ABM.com, and on 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 slides 3 and 4 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 at the end of the presentation and on the Company's website under investor relations.

Thank you, Sarah.

Now please turn to slides 5 and 6 for a review of our consolidated financial results and operating performance for the third quarter.

Overall, the Company produced very good financial results for the quarter.

Revenues were flat as the Janitorial business in particular was somewhat affected by the slower pace of economic recovery which continues to pressure client spending.

We have focused on client retention to sustain and build revenues, streamlining the Janitorial organization to strengthen sales performance, service delivery, and cost controls.

We also continue to aggressively manage cash, cost, and margins to mitigate slow economic growth and maintain profitability.

These combined efforts continue to yield positive results as income was up significantly in the quarter and adjusted EBITDA, a key measure of our performance, grew nearly 22% year-over-year.

During the third quarter, we acquired Diversico for just over $30 million.

Diversico employs about 3,000 people and had annual revenues of over $79 million.

The acquisition strategically expands ABM's Janitorial and Security business within key regions across the country and among key client segments.

Diversico's business also complements our operational infrastructure and national presence.

We are moving along as planned with the integration of Diversico's operations and I am pleased with their contributions during the quarter.

Throughout this fiscal year we have concentrated our efforts on generating strong operating cash flow while remaining diligent in managing our credit exposure.

I am very pleased with the results of these efforts for the third quarter and year-to-date.

Cash flow from continuing operations increased to $35.2 million compared to $8.3 million in the year-ago quarter.

Year-to-date cash provided by continuing operations is approximately $73 million, a 39% increase over the first nine months of fiscal 2009.

Despite the acquisition costs of Diversico during the quarter, debt under our credit facility increased only $5 million during the quarter and yesterday we announced a quarterly cash dividend of $0.135 per common share, making our 178th consecutive dividend.

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

Jim?

Thank you, Henrik, and good morning, everyone.

Turning to our third quarter of fiscal [2000] and results on slide 7.

Revenues for the third quarter were $869 million, flat with the prior-year period and up $13.6 million sequentially.

Gross margins for the 2010 third quarter increased to 10.7% from 10.1% in the prior-year period.

The year-over-year increase in gross margins is largely the result of a $3.6 million benefit from one less day of labor expense partially offset by a $1.1 million of higher state unemployment costs.

Our SG&A expense for the third quarter decreased $10 million to $54.7 million from $64.7 million.

The year-over-year decrease is primarily due to aggressive cost controls in the Janitorial division, a decrease in information technology costs, and lower compensation expense including a reversal of previously recorded compensation expense.

Interest expense decreased $0.3 million to $1.1 million in the third quarter of 2010, reflecting a lower average outstanding balance and average interest rate under our credit facility.

The average outstanding balance under the Company's line of credit was $148.2 million during the quarter ended July 31, 2010, compared to an average balance of $205 million in the prior year-ago quarter.

Our effective tax rate on income from continuing operations for the third quarter of 2010 was 38.6% compared to 29% in the prior-year period.

Our tax rate in the 2009 third quarter included a tax credit amounting to $1.8 million.

Net income for the third quarter of 2010 was $21 million or $0.40 per diluted share compared to net income of $12.3 million or $0.24 per diluted share in the prior-year period.

Adjusted income from continuing operations for the third quarter was $22 million or $0.42 per diluted share compared to $18.6 million or $0.36 per diluted share in the same period last year.

Items impacting comparability for the quarter represent a net expense of approximately $1 million or $0.02 per diluted share related to a specific legal contingency expense and acquisition costs.

As previously discussed, we have completed our system upgrades and therefore have no costs this quarter or going forward in items impacting comparability related to those systems.

Adjusted EBITDA defined as earnings before interest, taxes, depreciation, amortization, and excluding both discontinued operations and items impacting comparability, was $45.9 million for the 2010 third quarter compared to $37.8 million in the prior-year period.

Turning now to cash flow on slide 8.

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

Cash from total operations, which includes both continuing and discontinued operations, was $80.3 million for the nine months ended July 31, 2010 compared to $76.5 million in the comparable prior-year period.

Cash provided by total operations was positively impacted by year-over-year changes in income taxes and other current assets, partially offset by a decrease in net cash provided from discontinued operating activities.

Moving to slide 9, we ended the quarter with $281.5 million in working capital, a $3.2 million increase from $278.3 million at the end of fiscal 2009.

Excluding discontinued operations, working capital increased by $8.2 million to $276.8 million from $268.6 million at the end of fiscal 2009.

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

Trade accounts receivable at July 31, 2009 were $458.7 million versus $445.2 million at October 31, 2009.

Days sales outstanding at quarter end were 48 days, flat on a sequential basis and down two days compared to the third quarter of fiscal 2009.

Total insurance claim liabilities at July 31, 2010 were $345 million compared to $346.3 million at year-end.

Self-insurance claims paid during the quarter totaled $17.9 million compared to $20.8 million in the third quarter of 2009.

Before turning the call back over to Henrik, I want to provide a brief update regarding our government hiring credits and self-insurance.

For the third quarter, we were $1.2 million below our plan for government hiring credits because of lower-than-expected wages on qualifying hires than we initially forecasted and a lack of funding of the California program.

For the fourth quarter we anticipate generating $0.01 to $0.02 per diluted share of government hiring credits which combined with the prior-year credits will mostly offset the unexpected increase in state employment insurance that impacted the Company in the first half of 2010.

Turning to insurance, an actuarial report on claims in prior years is expected to be completed during the fourth quarter of 2010.

As we look at results for year-end, we have adjusted the range between income from continuing operations and adjusted income for items impacting comparability by $0.08 to $0.18 to capture the additional costs during the fiscal year for a specific litigation contingency expense, acquisition costs, and any actuarial adjustment for prior self-insurance claims.

I would now like to turn the call back over to Henrik, who will provide his perspective on the third-quarter operational performance and conclude with our outlook for the remainder of the year.

Thank you, Jim.

Turning to slide to 10, which shows the third-quarter revenues of our operating divisions, revenue on a year-over-year basis was essentially flat despite having one less working day compared to the prior-year period which has a negative impact on reported quarterly sales.

I was very pleased with the topline growth in Engineering, which grew over 14%, marking the third straight quarter of double-digit growth.

Janitorial revenue was slightly below what I had anticipated.

However, with the acquisition of Diversico, recent client wins, strong sales activity, we expect to see growth in the fourth quarter on a year-over-year basis.

Reviewing operating profits on slide 11, our continued emphasis on improving operating margins and expense management clearly contributed to a successful third quarter.

The year-over-year increase is attributable to growth in operating profit within our Janitorial, Engineering and Parking divisions.

Janitorial benefited from lower labor expense due to one less day and continued cost controls.

Engineering continues to increase profits from growing revenues and an improving mix of clients.

And Parking benefited from higher lease and allowance revenues and cost control measures.

Moving now to slide 12, in summary, we will continue our successful operating strategies to boost profitability and generate bottom-line savings and cash while mitigating the impact of the slow pace of growth in the economy.

The Company now estimates that full fiscal year 2010 income from continuing operations per diluted share will be in the range of $1.15 to $1.19 and adjusted income from continuing operations per diluted share for the same period will be in the range of $1.33 to $1.37.

As always, our guidance is exclusive of any new acquisitions.

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

Operator?

(Operator Instructions) David Gold, Sidoti.

Good morning.

I was hoping you could walk me through a little bit of -- I'm very impressed with the cost cuts during the quarter and the adjustments.

But wanted to get a sense for sustainability.

I think a good way to do that might be to walk us through the breakdown between, say, the aggressive cost cuts you noted, and then the reversal.

I think there was one other factor in there and how significant the reversal was in there?

Well, I think what we like to do, David, is look at year-over-year and right now we are finalizing our expected costs for 2011 and I think that's the best way for us to look at sustainability.

Jim?

I think, David, if you look at our year-to-date expenses on an SG&A perspective, we expect to be at a very similar level all in next year.

So yes, there is a little noise but all in when you look at it, that's a pretty sustainable base going forward and that's a result of all the improvements we have done in systems, processes, and all the work the divisions have done, etc.

So -- but that's probably the best way to look at it and that kind of nets all the noise out.

But that is kind of what we expect going forward.

So make that more simple for me.

If you look at our SG&A year-to-date, that's pretty much what levels should look like next year.

The year-to-date for the first three quarters will be your level for the whole next year or you are saying annualized?

Yes, thank you.

We are good, we're not that good (multiple speakers) annualized, yes.

Like I said, we are good, but we are not that good.

Got you, got you.

And then presumably can you speak a little bit about where the cost cuts are coming from?

Is this all the technology kicking in or are there other things that you did during the quarter?

I think it's a couple things.

If you look at pure operations, we did a very big acquisition a couple of years ago, one source.

As Jim McClure would describe it, you always have kind of a second and third round of things you can do as you look at the whole organization, so that's one set of things the divisions are doing.

The other thing is I think as we said, all the one-time costs that are kind of now behind us with systems and process, we are able to consolidate accounting centers and move more stuff into shared services, so that's another piece of it.

And I think as the team has worked together over the last -- the new team over the last several years, the team is just working more efficiently together.

So I think those are the three big things.

I would like to add, if you look forward, David, the divisions on the process of adjusting the organization to the 2011-2014 future, which I think will be starting in additional savings going forward on a divisional level.

When you say they are adjusting to the future, what do you mean, Henrik?

I mean we have historically had X number of regions that we might cut back to a lower number of regions in all divisions in order to focus and benefit from our systems, first of all, and then have a greater focus on major regions, and we're in the process of doing that as we speak.

Okay, got you, so presumably there are more initiatives to come so to speak.

Yes, sir.

Okay.

And then one other, if I can.

When you talk about pricing pressure -- well not pricing pressure -- but when you talk about the economy and the effect on the business, I guess from where we sit, give me a little -- give us a little more color, if you can, on what you are seeing different today than maybe six months ago.

It seems like to the extent that it matters, vacancy rates are peaking out, yet presumably tag hasn't come back but --.

What's really happening -- what is happening out there that's a little different?

Well, I would very much like to go back a little bit and maybe make a longer speech out of this, but nonetheless, if all of you remember when we went into this recession, I think we said very clear that we will probably be the last one impacted of a recession and we only expect to be marginally impacted.

I'm somewhat proud to look back at '09 and maybe '10 and '11 and say, you know what, we had a major recession but if you look at our earnings, the impact was not noticeable.

And if you look at sales, yes, sales dropped last year of 3% or 4%.

We might be flat right now but the overall impact was not great.

The thing I said also at the time when we were into the recession is we were the last one to come in but we were also the last one to get out.

And the fact is, we still see a lot of times where you have increases to clients that basically the clients say we are not going to give you an increase.

Why don't you try to do the job for less?

In other words, keep doing what we're doing, maybe cut specifications, maybe adjust labor accordingly but we are not the getting the increases as we got in the old days.

We are maintaining profitability because of our ability to manage the jobs.

In other words, we do change the hours in the job so we have been able to control the bottom line, but you can see some impact even though it's very marginal right now on the top line.

So they come back, they want you to do the same thing for the same money, and you basically say, look, we can keep it the same money but we have to cut back a little bit of the service we're giving you?

Is it that simple?

Pretty much, that's pretty much what you're saying.

Very simple, yes.

Got you, perfect.

I appreciate it.

Thank you both.

Mike Gallo, C.L.

King.

C.L.

King.

Good morning.

Just a couple of questions and then a follow-up.

You've done a terrific job managing the cost side of things obviously through a very difficult macro environment.

My question is if the environment does not improve 12 months out and the Janitorial business continues to decline on an organic basis, are there further costs you think that you can take out of the business?

Or do you sort of get to a point where the easy costs I presume by this point have been taken out already?

Thank you.

I think when we look at the cost side, first of all we still expect long-term benefits from our shared service center that we started up two years ago and you will see some ongoing cost benefits hopefully over the next one or two years.

But even more important, if the economy is getting sluggish and everybody is impacted by it, we have been very successful in one area and that is cash flow.

We -- in a bad economy, I think we are going to have some opportunities on the acquisition side because one, we have the cash to do it.

Two, if we do bad, everything else is going to do bad.

So a bad economy from one perspective will be helpful for me on the acquisition side and a good economy will be helpful for us on an organic growth side.

So either way I feel pretty good about the whole thing.

That is helpful context.

You kind of led into my next question.

When you look at the acquisition pipeline as things have softened a little bit or the Janitorial business generally has not strengthened as much as some people thought it would six months ago, are you seeing a more robust pipeline of acquisition candidates and are expectations or multiples for what people think their businesses are worth coming down to what -- let's call it reality of what you might be willing to pay for those businesses?

I think I can say yes to both.

We have been through a very active quarter from an activity level.

We did close the deal in the quarter which was the first deal we closed in a while.

The cost of that particular acquisition was pretty much within our expectations.

I see more activity going forwards and I do see in general a more realistic approach from a sales point of view than we have seen in the past.

Great, and then just final question for Jim.

Just on the difference between reported and operating earnings in Q4, is that all just allowance for potential adjustments through insurance reserves or was there something else?

I think there's about a $0.07 difference if I adjust the guidance.

Yes, it's deal costs potentially, kind of catching up on some of the legal stuff, but the bulk of what's in there would be related to expectations on insurance, which we don't know what that number is yet, but we're trying to have a reasonable range to capture it.

Okay, thank you.

Adam Thalhimer, BB&T Capital Markets.

Good morning, guys.

I guess most of my questions have been answered here.

I do just want to follow up, Jim, with you and see if we can come back to one of David's questions.

On the -- I guess we talked about the four buckets that were involved in the cost cuts.

One of which being that reversal of previously recorded compensation expense.

How much was that?

It was about $0.03, three pennies or so round numbers.

A little less than three pennies, actually, but you also have going the other direction the fact taxes went up a lot year-over-year.

So there is a lot of noise going both ways.

So I think it's not like it's only a positive, you also have negatives going the other direction, plus you've got additional SUI year-over-year.

So all those things kind of net overall.

So when you back all that stuff out, Henrik was talking about cash, which we focus on as a business.

If you look at kind of EBITDA and you take all the noise out, we are increasing EBITDA a little even though revenue was flat, which is kind of the heartbeat of the business, if you will.

And the cash is the real proof of that.

So yes, there was some comp stuff and the comp stuff was kind of related to when we predicted revenue three years ago, revenue looked a lot different.

So it wasn't an execution of any sort; it was revenue based at that point in time.

But if you -- I just want to add one thing.

But if you look at our expectation and our original forecast, we did expect certain tax credits from certain states that we did not receive.

But thank God, we were able to reverse some salaries or compensation to offset our expectations on the tax credits.

And on the tax credits, you -- they shorted you a little bit in Q3.

Right.

But it seems like in Q4, we think they are going to come back.

Yes; well, there's two issues.

The general hiring credits, which are kind of like FICA holidays, there's two main drivers there.

One is what is the average salary of people that you are hiring?

And for good cost control, we actually were hiring a little bit lower than we had expected.

So therefore you had less than expected credits.

I think that's kind of -- that piece has kind of leveled out at this point in time.

The second one which we talked about is related to a program that California had that basically was giving you a salary rebate, for lack of a better term.

The counties in California, no surprise, have serious cash flow issues and therefore were not able to get to avail ourselves of that one.

And if you can predict what's going to happen in fiscal governments, please give me a call.

But I don't expect much out of that either.

So I don't think the California stuff will come back.

If it comes back, great.

We're not counting on it, and I think the hiring credits have kind of leveled out at this point in time.

So I think all in, it will hopefully offset most of the SUI increase that we saw for this year.

Okay, and then like you said, great cash flow performance in the quarter.

You know, absent a deal, what would you look to do with all that cash?

I would like to answer that question.

I would like to make accretive acquisitions that fits into our strategic goals and our growth expectations.

And it is my hope that we will do that for sure in the next fiscal year.

But the only thing we can do is try -- I think we show great discipline by not going out and buy stock at the wrong price.

We can wait.

We can afford to wait.

But at the same time, the systems, the organization, management, everybody is ready to put the right acquisitions at the right place, so that's what we'd like to use the money for.

I do not intend to recommend to my Board to buy back stock if that was the indication because I do believe we can get a much greater return to the shareholders by acquisitions instead of buying back shares.

So I don't know if that was --

The only other issue would be you have a nice history of raising the dividend.

Is that something you might recommend to the Board?

That's a conversation between the Board and I at the time when we normally we do it, which is in December.

Historically I think we have a pretty good track record when it comes to that but for sure, I cannot commit about the future.

Okay.

Thanks, guys.

(Operator Instructions) Justin Hott, Robert W.

Baird.

Good morning, guys.

I just -- one more quick question on the tax credits from the Federal Hire Act.

I guess I was just curious on the guidance reduction, was part of the expectation to get to the high end of the range previously, was that kind of building in a cushion for some of the California stuff to flow through and maybe get more than a benefit offsetting the SUI?

Or what was kind of the driver to bring the guidance down?

I think the higher end of the range initially was really depending what would happen with the economy and overall revenue.

I think the hiring credits were just based on how many people we hire, what the average rate is, and that's also tied to revenue because the higher the revenue, the more people.

So it really wasn't expecting more credits per se.

I think it was just what would happen with the economy.

And the other thing I would like to add to that is that our adjusted income guidance for the year, a good portion of that is still within our original guidance and the other thing is that we now have one quarter to go.

So we feel it's prudent to have the spread between the lower and higher numbers go down dramatically.

And if I look at it going to a very, very difficult 2010 when we knew very little about the economy, I feel pretty good about that guidance, which is primarily still within our original guidance when we started the year.

Sure, okay, that's helpful.

And then just a couple of clarification questions.

On your expectation for Janitorial to be up year-over-year in 4Q, just curious if that also includes on an organic basis or with the acquired revenue?

I sure hope it will be on or slightly above -- on a same-store sales basis, is that what you mean?

Yes.

And hopefully Diversico will be in excess of that.

We have been very successful lately in a number of sales.

Some of the business unfortunately doesn't start until November 1.

Other businesses start October 1, so unfortunately it starts late in the quarter, but it's pretty sizable business.

But overall we feel that my estimate is Janitorial will be worst case even on a same-store sales comparison.

Okay, great.

And then just the last question, just housekeeping, on the tag revenue, is that still in the $12 million to $14 million range a quarter, I'm assuming?

I think we've been saying $12 million to $13 million, so I think that's kind of where we are.

It is pretty -- it leveled out.

Okay.

Great, thank you very much.

Matt Sherwood, Cooper Creek Partners.

Hi guys.

Solid quarter in a tough macro environment.

I just had two quick questions.

First, in terms of the acquisition landscape, when you look at the sort of companies that you could potentially look at, are you looking at more little sort of tuck-in deals or are there any companies that are just real elephants or transformational deals that are potentially out on the horizon?

There is a lot on the horizon.

I would say in general if you look at domestic, I would say most of the deals are -- the deals we are looking at we will have synergistic benefits and will be very accretive to earnings.

I am generalizing.

And when we look outside the country, the deals we are looking at are still accretive, but not having the synergistic benefits of it, it's more of a strategic type but accretive.

So I will say the foreign ones are more what you call transformational but the domestic ones are within our lines of business by the way.

We are not moving outside the lines of business.

Great, then just had a housekeeping question.

Sort of going through the corporate expense and I know some of this is the reversal of the compensation, but it's surprising to see just $17 million relative to a $24 million average in the first half and a $26 million average over the last four quarters.

I just was curious, that's a huge difference.

I was curious what was driving that.

Yes, I think it's the items impacting comparability.

It's the items below the line, if you will, that we carve out in the press release.

It is the one-time system costs, etc.

Those are going away and we are now back to a more steady state in operations.

Okay, and if you look at last year, it looks like at one quarter you had a similar real dip in corporate to $17 million in the first quarter of '09, but then it sort of bounced back to historical levels.

Do you now --?

(multiple speakers) you go back to the one-time hit below the line, that's why we quoted below the line.

Because that's an insurance pick up in the first quarter of '09.

I even remember that.

Yes, exactly, got you, so it's all the below the line items.

That makes sense.

It's just tough because you don't do it by division.

Okay, great.

Yes, yes, yes, yes.

All right, thanks a lot.

I am not showing any other questions at this time.

Well, thank you for listening to our third-quarter financial results.

We look forward to talk to all of you next quarter.

Thank you.

Have a nice day.

Have a nice Labor Day weekend.

Ladies and gentlemen, this does conclude today's program.

You may now disconnect and have a wonderful day.