ABM Industries Inc (ABM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries first quarter fiscal year 2011 conference call.

(Operator Instructions).

As a reminder, this conference call is being recorded. And now, I'll turn the call over to Henrik Slipsager. Please begin, sir.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive Vice President and Chief Financial Officer, and Sarah McConnell, our Senior VP and General Counsel. On the call today, I will provide an overview of the 2011 first quarter that ended January 31st. Jim will describe the details of our financial results, and I'll 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 of fiscal 2011. In addition, there's 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'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 slides 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 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 at the end of the presentation, and on the Company's website under Investor Relations. Henrik?

Thank you, Sarah. Now please turn to slide five for a review of our highlights for the first quarter. During the quarter, we continued to execute our plans, and successfully integrate the business we acquired in 2010, Diversco, L&R Parking companies and The Linc Group. We are very pleased with the pace of integration, as well as the performance of these companies. Our revenues were up 80% year-over-year, as the recent acquisitions contributed more than $156 million in revenues, and we experienced modest gains -- modest organic growth as well. I'm very pleased at the first quarter, marked the first time in ABM's history that our quarterly revenue surpassed $1 billion.

Our adjusted EBITDA was $35.7 million, compared to $32.7 million in the year-ago quarter, despite one additional workday, higher state unemployment taxes, and unanticipated costs associated with snow removal that impacted certain areas of our Janitorial and Parking segments. For the first quarter, our net income per diluted share was down 34%, primarily due to the transaction costs associated with the acquisition of The Linc Group, the additional day of labor expense, higher interest and amortization expenses resulting from the acquisitions made in 2010. These costs were partially offset by additional operating profits from these new businesses.

In December, we acquired The Linc Group for $300 million in cash. This acquisition has transformed our Engineering and (inaudible) business, and significantly strengthened our position in a higher growth segment. We expect The Linc Group to be slightly accretive for 2011, and anticipate approximately $7 million of synergies for the year, primarily impacting the second half. The full impact of synergies is on schedule to be achieved in 2012.

Our sales activity Company-wide remains strong, and we have a resurgence of new business in the northeast, which is a positive sign of the economic recovery that is under way. And we also announced a quarterly cash dividends of $0.14 per common share, which marks our 180th consecutive dividend. Before turning the call over to Jim for financial review of the quarter, I want to make one final point. The Company's financial results met our expectations for the first quarter, and were consistent with our guidance target for the fiscal year. Jim?

Thank you, Henrik. Good morning, everyone. Turning to our first quarter results for fiscal 2011 on slide six, revenues for the first quarter were $1.03 billion, up 18% from the prior year, and 14% up on a sequential basis. Gross margins for 2011 first quarter decreased slightly to 9.9%, from 10.1% in the prior year period. The year-over-year decrease in gross margins is largely the result of a $3.7 million increase in labor expense in the janitorial segment, as a result of one additional workday during the quarter. Excluding the extra workday, gross margins on a year-over-year basis increased ten basis points to 10.2%.

Our SG&A expense for the first quarter increased $16.4 million to $79.2 million, from $62.8 million. The year-over-year increase is primarily due to expenses attributable to the acquisition and operation of The Linc Group. SG&A expense associated with Linc's operations was $13.1 million in the first quarter. Also included in SG&A is $4.1 million of transaction costs from the acquisition of Linc. Interest expense increased $2.8 million to $4 million in the first quarter of 2011, reflecting an increase in average borrowings under the line of credit, as a result of financing the acquisitions made in 2010, and higher borrowing rates. For the full-year, we continue to expect an increase of $10 million to $12 million in interest expense, due to the higher leverage ratio and borrowing rates. The average outstanding balance under the Company's line of credit was $337 million during the quarter ended January 31, 2011, compared to an average balance of $169.6 million in the prior year-ago quarter. This was driven by the acquisition of Linc.

Our effective tax rate on income from continuing operations for the first quarter of 2011 was 38.5%, compared to 38.8% in the prior year period. For the year, we are anticipating an effective tax rate between 39% and 40%. Net income for the first quarter of 2011 was $8.4 million or $0.16 per diluted share, compared to net income of $12.8 million or $0.24 per diluted share in the prior year period. Adjusted income from continuing operations for the first quarter was $11.7 million, or $0.22 per diluted share compared to $14 million, or $0.27 per diluted share in the same period last year. The decrease of $2.3 million was primarily related to the additional workday and higher state unemployment taxes.

Items impacting comparability for the quarter represent a net expense of approximately $3.3 million, or $0.06 per diluted share, primarily related to transaction costs associated with the Linc acquisition and legal contingency expense. Adjusted EBITDA, which includes -- excuse me -- excludes items impacting comparability was $35.7 million for the first quarter of 2011, compared to $32.7 million in the prior year period. This is a 9.3% increase from the same period last year. Adjusted EBITDA from acquisitions made in 2010 drove the year-over-year growth, which more than offset the additional day of labor, higher state unemployment taxes, and anticipated costs -- unanticipated costs associated with snow removal.

Cash from total operations, which includes both continuing and discontinued operations, was $1.3 million for the three months ended January 1, 2011, compared to a net cash used of $8.9 million in the comparable prior year period. Cash provided by total operations was positively impacted by year-over-year changes, and trade accounts payable and accrued liabilities primarily due to the timing of payments made on vendor invoices, partially offset by changes in prepaid expenses and other current assets. For the full-year, we expect operating cash flow to remain strong, but lower year-over-year due to the diminishing net operating losses from the OneSource acquisition made in 2007.

Moving to slide seven, we ended the quarter with $316.2 million in working capital, a $41.3 million increase from $274.9 million at the end of fiscal 2010. The increase was primarily related to the working capital of $38.3 million contributed by Linc. Trade accounts receivable at January 31, 2011 were $574.5 million versus $450.5 million at October 31, 2010. The increase of $124 million was primarily due to Linc receivables of approximately $90 million.

Day sales outstanding at quarter-end were 50 days, up three days on a sequential basis, and down one day compared to the first quarter of 2010. Total insurance claim liabilities at January 31, 2011 were $346.8 million, compared to $348.3 million at year-end. Self insurance claims paid during the quarter totaled $20.3 million, compared to $17.6 million in the first quarter of 2010. Henrik will talk about guidance in a few minutes.

As a reminder, the second half of our fiscal year is always positively impacted by lower payroll tax expenses. Also, with the addition of Linc, there is an additional element of seasonality related to timing of project work, which typically ramps up in the third quarter, as well as the impact of synergies.

I'd now like to turn the call back over to Henrik, who will provide his perspective on the first quarter operational performance, and conclude with our outlook for the year. Henrik?

Thank you, Jim. Turning to slide eight, which shows the first quarter revenue of our operating divisions. Revenues on a year-over-year basis were up 18%, driven largely by contributions from our Linc, L&R, and Diversco acquisitions, which added $156 million to our top line. All of our operating divisions posted year-over-year revenue growth, and sales activity remained strong across all of the operating segments. Excluding the acquisitions, our revenue continues to demonstrate signs of stabilization, with a slight improvement year-over-year. In particular, our Janitorial division revenue was up organically on a year-over-year basis, for the first time in eight quarters, which is a positive indicator for the remainder of 2011.

Reviewing operating profits on slide nine, operating profit, excluding corporate, was down 4.6% from the same period last year. While we continue to focus on job profitability and expense management, operating profit was impacted by a number of items. Janitorial profitability down $3.9 million, or 11.6% compared to the prior year period, was impacted by $4.7 million of costs from the combination of the one additional work day in the quarter, higher state unemployment insurance rate, and snow removal expense in the northeast. The 41.2% increase in Engineering's operating profit was the result of higher revenues from the Linc acquisition. Parking's operating profit down $300,000 was also adversely impacted by snow removal and unemployment insurance costs, which took another impact of the result by $600,000. And Security essentially flat in dollars year-over-year, experienced higher unemployment insurance costs of $200,000, the operating result was in line with expectation for the first quarter.

Moving now to slide ten, in summary, we are encouraged by our performance and trends, as we look to the remainder of 2011. We continue to anticipate a gradual improvement in our organic growth revenue, as the economy recovery rebuilds. We remain focused on controlling costs, and leveraging our recent investment in key vertical markets to drive increased profitability, and deliver on our financial plans for the year.

Turning now to guidance, we are reiterating our previously issued full-year 2011 net income in the range of $1.23 to $1.33 per diluted share, and adjusted income from continuing operations in the range of $1.43 to $1.53 per diluted share. For the year, we continue to anticipate modest accretion from our acquisition of The Linc Group, excluding transaction and integration expenses associated with the acquisition of $8 million to $10 million pre-tax. As a reminder, in the first quarter, we recorded $4 million of these expenses.

For comparison purposes, fiscal 2011 will be negatively affected by one more workday compared to 2010, which will have an impact of $3.5 million to $4 million pre-tax. As you are aware, there are one additional day in the first quarter, in the second, [they] will benefit from one less workday and in the fourth quarter, there will be one more workday. In addition, we continue to anticipate a year-over-year increase in state unemployment insurance expense of $6 million to $7 million pre-tax. As always, our guidance is exclusive of any new acquisition. At this time, I would like to open the call to questions.

Thank you, sir. (Operator Instructions) Our first question is from Michael Gallo of C.L. King. Your line is open.

Hi, good morning.

Good morning.

Jim, question on the state unemployment insurance increases, it really wasn't that, as much as I would have thought in the first quarter. Is the expectation still the $6 million to $7 million for the year? And how much of that would you expect of the remainder -- would you expect to hit in the second quarter?

Most, most, we had a little increase year-over-year in the first quarter. Most of that delta will hit in the second quarter due to February and March, and based on your wages and your state, that could actually trickle out, but most will hit in the second quarter of the delta.

In general, you'd expect that to be probably a little bit more of a negative factor, than the benefit of the one less day in the second quarter?

Yes, they are about going to offset each other.

Okay.

Yes, better from one, which is basically offset by the incremental taxes.

All right, okay. Can you talk a little bit about just the early findings at Linc, as you've had it now for I guess a couple of months. What you're seeing in the integration process? How you feel about some of the longer term synergy numbers you put out there, and whether there's some learnings that might be, or some things you're finding that might be incremental to that ultimately?

Let me, let me respond to that. First of all, the integration of Linc has been going very well. And after 90 days, I'm very proud to say that what we thought we were going to get, we got, when we bought Linc Group. It's a very, very good Company, and some great growth opportunities. We believe, even with the latest spike in oil prices and energy prices, the opportunities might be even greater than we thought, when we bought it, on a long-term basis. On a the synergetic side, it's relatively small synergies compared to the prior acquisition we made -- you talk about $7 million this year and $12 million next year respectively. I think the excitement of Linc -- we are still very, very excited about the opportunity side. And up to this point, we have found great management, and we have pretty much integrated our engineering group into the old Linc Group, which was -- went very, very successful. So, up to this point, I'll give it very high grades.

Great. Thank you.

You're welcome.

And your next question is from David Gold of Sidoti. Your line is open.

Hi. Good morning.

Good morning.

So, the largest variance to our model during the quarter, essentially was on the G&A line. And so I was hoping you could help me a little bit, in thinking about the rest of the year, and how to think about G&A, both breaking them down to two pieces. One, amortization, how much of the first quarter was rapid versus what will continue with us? And then part two, G&A broadly, how much increase we might see, or is this a good run rate, or how best to sort of think about that?

I think, David, on the SG&A, you got to exclude the transaction costs that we talked about of the $4 million.

Sure.

And there will be some additional probably in the second quarter, as we think through everything we do. But I think when you take that out, it is a fairly good run rate for SG&A. Some of the synergies that Henrik talked about, will come out of, will come out of that run rate, but if you take the transaction costs out of it, that's your run rate, but it will come down slightly for some of those synergies that are SG&A.

Okay. So, just to be sure I understand, the $4 million is the piece that you break out as sort of one-time or adjusted, right?

Correct.

Okay. And then part two, so I mean, just looking at the huge sequential jump in the amortization piece, are you suggesting that will carry with us?

Yes, basically you had two months of the incremental amortization for Linc, you'll now have three. It'll tail off a little bit, but for this year, you basically have two-thirds of a quarter this time. So, you got to normalize that for three months, and then that will carry. And then in subsequent years, that it, obviously tails off, because we do some of the year's digits. So, it tails off pretty quickly.

Okay. So, it's with us this entire year?

Yes, pretty much this year, but then it starts tailing off, yes.

Okay. And then another question that might be a little bit harder to answer. Henrik, when you say you met expectations during the quarter, and I mean, I know you reiterated guidance, so that's a good thing. But I guess the range of guidance, well, you were about a $0.05 shy of my estimate in the street, and the range of guidance has $0.10. Is this right, where you were thinking? Or are we a little bit lower than where you're thinking? And I guess part two of that, more strategically, does it make sense to think about in the future giving quarterly guidance, if the answer is yes?

(Laughter). David, according -- when I say met our expectations, I run this business based upon plans and budgets.

Yes.

And we were right where I expected to be after the first quarter. So, there's a gap from my number to your number, or your -- my number to other people's numbers. You know what? I gave up trying to explain that, because I think the key thing is, the base for my annual guidance was the earnings that I've achieved in the first quarter. So, that's why I said, I met my expectations.

Okay.

When it comes to quarterly guidance, believe me, when I saw your estimate -- I'm thinking about it. I will not commit to anything, but clearly there was the gap this time. And -- but, I'm -- I'm somewhat pleased with, from my perspective, that both Linc, the other acquisitions we did, and all the operating units actually came in exactly on plan. And that makes me feel very good for the year. Okay.

I would like to add one thing to that, Henrik. David, in the last year, when you look at our second half versus the first half, we did about 61% of our profitability in the second half versus the first half. And that's fairly typical pattern for us, given unemployment expenses, et cetera. This year, you will continue to have that pattern, and you'll have the synergies in the second half, and you have Linc, which also has a seasonality due to project work. As I mentioned in kind of my prepared remarks. So, that's going to take our normal pattern, and add a few things to it. But -- so that's part of how you kind of reconcile what Henrik was saying to our guidance, and based upon how we always have a much bigger second half than first half.

Got you. Got you. And just one quick one, if I could sneak it in. On Linc, now that it's integrated and has achieved certainly profitability and a little bit of accretion, do you expect it to be a decent contributor this year? Or will the amortization offset most of it, and is it a next year or 2013 thing?

Yes, it's slightly accretive this year. There is a lot of incremental interest. The way we think about this, is your -- the incremental amortization and incremental interest, it will clearly be -- it will clearly give you some bottom line benefit. But there's a much bigger number next year.

Got you. Perfect. That's all I have. Thank you both.

Thanks, David.

Thank you, sir. (Operator Instructions) Our next question is from Andrew Wittmann of Robert W. Baird. Your line is open.

Good morning, guys. Henrik, just to clarify, I think before you said, the synergies were five this year, and 12 next year. Did you mean to say that was five this year, and seven more next year for a total of 12?

No, I said it was seven this year, and five more next year, so 12 next year.

Okay. Seven, seven plus 12 more next year for a total of 19?

No. Yes, 7 this year, 12 in 2012.

Yes, wait a -- (Multiple speakers).

12 incremental or?

What? (Multiple speakers).

12 incremental, or 12 from the 2009 basis?

No, five more. Five more.

Got it. Okay. Thanks for clarifying that. And then, I guess, just one more kind of related to this. The amortization, Jim, did you give an expected useful life of the intangible that you're amortizing this year, So that we can just get a little bit better handle on what the drop-off could be for next year?

There's various piece parts of it. It goes from 12 to 20, but it's kind of a -- I guess on average, it's about a 15 years. And if you did some of the digit, you could kind of see how it would tail off. So, I would say on average, it's about 15, and it's a sum of the year digit tail-off.

Interesting. Okay. That's helpful. One of the things you mentioned, Henrik, in your script, was talking about the sales activity being strong. I guess, just want to dig into that a little bit. Are you feeling that's just, you're in a better environment here today, that you're selling into? Is this, is this same customer taking more space in office buildings, or is this new customers that you haven't previously talked to? Can you just give us a little bit more color on what you mean by that?

Yes, I think in general, I think we are dealing in a better environment today, than we did the last two or three years. I think you see all the [fine] people making decisions. We felt for a long period of time, the -- a lot of decisions were delayed. And we see both, we see some good activity in our so-called tack work -- the extra work that we hope to get out of account. And that's up a little bit year-over-year, but it's a good trend. And I'm happy to say, especially in janitorial, we've been taking market share. And that's always a good thing to take market share, because the market itself is not really growing.

As I said when we had the beginning of the recession, we are not really impacted that much by vacancy rates, and if that varies by 1%, you won't see it on our numbers. And so unfortunately, when it goes the other way, that we add 1% more in occupancy rate, you won't see that in our numbers. But I think overall, the market looks a little better now, than it's done probably last three or four years.

Got it.Can you just talk a little bit maybe on the pricing contribution side of that? I think in the past that you've said, that you feel like it's bottomed. But are you starting to have discussions about even small price increases for this year, in the janitorial and engineering business?

Well, I think overall, I think our increases, the January 1 increases went through pretty well. I think we are getting to a normalized situation. We are trying to offset some of the last year's high unemployment rates in our price increases. So, some of that impact, you will see also in the second quarter because as you understand, state unemployment insurance from an expense point of view, hits us the first four calendar months, while if you get it as a price change, will benefit you over a 12 month period. So overall, I think it's a better environment probably from all sides right now, compared to what I've seen in the past.

And that's helpful. If you don't mind, I'm going to jump in with one more. This one's probably for Jim. Can you just talk a little bit about the IT systems that you had invested in over the past several quarters? And maybe if you can, just give us an overview of what that was, and what maybe you think the contribution this year could be in terms of your margin improvements, if any?

I think in terms of the systems, we're pretty much done with what I'll call classic ABM, we've given ourselves some additional channels -- challenges with these acquisitions, which we have to bring in. But kind of pre-acquisition, we pretty much had everybody on the common systems right now. And what we're working on is the end-to-end processes, which are really the heart of what's behind your question. I mean, the good news about the systems being done is, we don't have those one-time costs to invest anymore. But right now it's doing things like improving visibility, giving people like Jim McClure and Steve Zaccagnini, better customer profitability information, things like that, being able to budget by job, et cetera. And there is some, some bottom line, but I think margin expansion will happen more over time, probably next year and out years, as we implement more of the end to end processes.

Got it. Do you have a number for last year's numbers, what the implementation of the systems was, as a hit to G&A, that we don't have again this year?

Yes, it's in what we call, items impacting comparability, and for the year, for the year or for the quarter?

For the year.

Let me see if I have that in front of me here for the year. I don't know that number off the top of my head. I can get right back to you on that. We did publish it. I just don't have it on my fingertips right here.

Sounds good.

I'll get right back to you on that one.

That sounds fine. Thank you.

Sure.

Thank you. Our next question is from Adam Thalhimer from BB&T Capital Markets. Your line is open.

Thanks. Good morning, guys.

Hi. Good morning, Adam.

Good. First question, I really want to dig into the outlook for organic growth. And you said you expect modest improvement as the year goes on. Can you quantify, where do you think you'll be in the back half of the year, in terms of organic growth?

My best guess right now, based upon the activity level we are seeing, and I have to be careful because if you include in organic growth, the growth we expect to see in the Linc acquisition, I think you will see us -- the growth being higher than five and less than ten.

Okay, that's really helpful. And then Henrik, I know this question's really been answered, but I just wanted to get some additional color from you. In terms of, when we think about what happened last year with some disappointing quarters, that you maintained annual guidance until you just couldn't maintain it anymore. I mean, what do you say to give a holder of your stock comfort that, that won't happen again this year? I mean, you're below the street in Q1, and you're saying, well, the street was too high. My earnings were in line with what I expected, when I gave annual guidance. I mean, what kind of confidence can you give us that we won't see anymore misses, and you really can make the annual guidance range?

Well, first of all, I'm very consistent when I give guidance. It's based upon our plans. And if in fact, those plans are holding up, like they are holding up right now, I have no intention to change guidance, and that's the way I've been doing for many years. You're right. We did miss overall guidance for last year, but if you looked at our performance in 2008, 2009 and 2010, I think very few companies can actually say they increased earnings every year, in spite of the market changes and the very rough conditions out there.

Sometimes I'll be behind analyst expectations, and I really do not want to take over your job from that perspective, because it's what you do, it's not what I do. I can only tell you what we base our plans on. We've spent this particular call in explaining, why you'll see higher than normal second half numbers, because of certain things that happened. And I don't know what else to say to it. If you go back to our expectations when we did OneSource, we came up with $47.5 million of synergies. We hit that number exactly. I think we've been pretty good over the years, but don't ever make me responsible for the analyst's forecast.

But it just sounds like, I mean -- if I'm reading into your comments, probably don't expect another -- Q2's going to be another tough quarter, but as you get to the back half with synergies, with some organic growth, with the SUI costs going away for the time being. All that adds up to -- that's where your year-over-year growth is going to come from.

Absolutely. Absolutely.

And SUI costs in fiscal 2012, I mean when do these SUI costs -- are these costs you're in incurring, because you're laying off people, or just because the rates are going up, and you're employ so many people?

This is a result of unemployment going up from 7% plus, up to close to 10%. The states are -- an after thought from that perspective, so you are paying to the state what they are behind, in those so-called state unemployment contributions to the individuals. Basically, all the unemployment states -- all state unemployment is pretty much funded by the employers in the state. And we are giving a rate by the state, based upon the overall number of unemployed people in the state. And there is a factor involved for your business, and for your own performance as well.

And, Adam, most states are not only raising the rate, they are also raising the base on which they apply the rate. And I think as long as, as long as we -- as Henrik said, as long as we have unemployment, and as long as these states have issues financially, that's going to be something we have to deal with. By the way, the previous question on the investment in IT, it was $2 million round numbers last year, and it was $21 million the prior year, but it was only $2 million last year.

That's it for me. Thanks, guys.

Thank you. And ladies and gentlemen, because of time, this ends the Q&A portion of today's call. I would like to turn the call over to Henrik Slipsager for any closing remarks.

Thank you very much. Again, we are very, very pleased with our performance for the quarter. We look forward to talk to you after the second quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.