ABM Industries Inc (ABM) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the ABM Industries second quarter fiscal year 2011 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time.

(Operator Instructions)

As a reminder this conference call is being recorded. And now, I would like to 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 VP and CFO, and Sarah McConnell, our Senior Vice President and General Counsel. On the call today, I will provide an overview of the 2011 second quarter that ended April 30. 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 and highlights for the quarter, as well as provide an update for our guidance for fiscal 2011. 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'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 2 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 of 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 slide three for a review of our financial highlights for the second quarter. During the second quarter we continued to execute well against our plans, and our financial results were in line with our expectations. Revenue expanded approximately 24% and surpassed $1 billion for the second consecutive quarter. Income from continuing operations per diluted share increased 64% to $0.26, while adjusted income from continuing operations per diluted share increased 20% to $0.28. And adjusted EBITDA grew 43% to $42 million, compared to $29 million in the year-ago quarter.

These results reflect the strength of our acquired business -- Diversco, In and Out Parking, and The Linc Group -- that together contributed nearly $200 million of revenue. In addition, we achieved slight organic growth, both year-over-year, as well as sequentially.

Engineering in particular delivered a strong performance driven by The Linc Group, with revenue and operating profit growing triple and double digits, respectively. Overall, we are pleased with the pace of integrating our acquisitions and continue to expect the full impact of synergies to be achieved in 2012.

We were encouraged to see the new business across all operating divisions and further expansion into key vertical markets, including financial services, healthcare, education, telecommunications, and commercial real estate. The pace of sales activity is certainly higher, notwithstanding continuing economic pressure on many clients.

We also continue to reward shareholders through the distribution of our quarterly dividends. Yesterday, we announced our quarterly cash dividend of $0.14 per common share, which marks our 181st consecutive dividend.

Now I'd like to turn over the call to Jim, for a financial review of our second quarter and for the six months ended April 30.

Thank you Henrik, and good morning everyone.

Turning to our second quarter of fiscal 2011 results on slide 4. As Henrik mentioned, revenues for the second quarter were $1.06 billion, up 23.9% from the prior year. The combined businesses acquired in 2010 contributed $196.6 million, while organic revenue was $8 million. Gross margins for the 2011 second quarter increased 10.4%, from 9.8% in the prior-year period. The year-over-year increase in gross margins is largely the result as a decrease in labor expense in the janitorial segment, as the result of one less work day during the quarter, partially offset by higher state unemployment, insurance, and fuel costs. Gross margins exclusive of the benefit from the one less workday were 10.1%, an increase of 30 basis points compared to the prior-year period.

Our SG&A expense for the second quarter increased $13.1 million to $78.3 million, from $65.2 million. The year-over-year increase is primarily due to expenses attributable to the acquisition and the operation of The Linc Group, partially offset by the absence of a $4.4 million litigation we recorded in Q2 of 2010.

Amortization of intangible assets for the second quarter increased $3 million to $5.7 million, primarily related to the amortization of intangible assets acquired from the Linc acquisition. Interest expense increased $3.1 million to $4.3 million, reflecting higher average borrowings and average interest rates under the line of credit as a result of the financing for the Linc acquisition. For the full year, we continue to expect an increase of $10 million to $12 million due to the higher leverage ratio and borrowing rates. The average outstanding balance under the Company's line of credit was $419.8 million during the quarter ended April 30, 2011, compared to an average balance of $164.9 million in the prior-year-ago quarter due to the acquisition of Linc.

Our effective tax rate on income from continuing operations for the second quarter of 2011 was 38.3%, compared to 39.5% in the prior-year period. For the full year, we are anticipating an effective tax rate of 38% to 39%.

Net income for the second quarter of 2011 was $14.2 million, or $0.26 per diluted share, compared to net income of $8.6 million, or $0.16 per diluted share in the prior-year period.

Adjusted income from continuing operations for the second quarter was $15 million, or $0.28 per diluted share, compared to $11.9 million, or $0.23 per diluted share, in the same period last year. The increase of $3.1 million was primarily related to the benefit from lower labor expense in the janitorial segment from one less work day, and acquisitions, partially offset by higher interest, higher state unemployment insurance, and fuel costs. Items impacting the comparability for the quarter represent a net expense of approximately $0.8 million related to acquisition costs, and a purchase accounting adjustment related to the Linc acquisition.

Adjusted EBITDA, which excludes items impacting comparability, was $42 million for the 2011 second quarter, compared to $29.4 million in the prior-year period. This is a 43% increase from the same period last year, and reflects our recent acquisitions and the benefit from one less work day, partially offset by higher state unemployment and fuel costs.

Adjusted EBITDA margin, as depicted on slide four for the quarter, was 4%, compared to 3.4% for the second quarter of 2010. The primary reason for the increase was the benefit of one fewer day of labor expense.

Looking at our financial results for the six months ended April 30, 2011, also on slide 4. Revenues were $2.1 billion, up 21.1% from $1.7 billion in the same period last year. Net income for the first six months ended April 30, 2011, increased 5.8% to $22.6 million, or $0.42 per diluted share, from $21.4 million, or $0.41 per diluted share, in the prior-year period.

Adjusted income from continuing operations for the first six months of fiscal 2011 was $26.7 million, or $0.50 per diluted share, from $26 million, or $0.49 per diluted share, in the first six months of fiscal 2010. Items impacting comparability represented a total net expense of $4.1 million, or $0.08 per diluted share, for the first half of the year -- basically flat, with a net expense of $4.5 million, or $0.08 per diluted share, in the prior-year period.

For the first six months ended April 30, 2011, adjusted EBITDA was $77.7 million, an increase of 25.3%, from $62 million in the same period last year. Acquisitions made in 2010 drove the year-over-year growth in adjusted EBITDA, which more than offset the higher state unemployment, taxes, fuel costs, and unanticipated weather-related costs experienced in the first quarter.

Now, turning to slide 5. We ended the quarter with $313.6 million in working capital, a $38.7 million increase from $274.9 million at the end of fiscal 2010. The increase in working capital is primarily related to the Linc business.

Trade accounts receivable at April 30, 2011, were $555.9 million, versus $450.5 million at October 31, 2010. Day sales outstanding at quarter-end were 48 days, down 3 days on a sequential basis, and up 1 day compared to the second quarter of 2010. The year-over-year increase in DSO is attributable to the Linc acquisition, since government receivables generally have longer collection period.

Cash flows from operating activities, which includes both continuing and discontinued operations, were $33.2 million for the first six months ended April 30, 2011, compared to $44.3 million in the comparable prior-year period. Cash flow from operating activities were negatively impacted by the timing of collections received from clients and an increase in cash tax paid, partially offset by the timing of payments made on vendor invoices. For the full year, we continue to 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.

Total insurance claims, liabilities at April 30, 2011, were flat, with year-end at $348.3 million. Self-insurance claims paid during the quarter totaled $18.5 million, compared to $17.8 million in the second quarter of 2010.

As I mentioned on our Q1 call, the second half of our fiscal year is always positively impacted by lower payroll taxes. Also, with the acquisition of Linc, there is an additional element of seasonality related to timing of project work that historically ramps up in the third quarter. This year, however, with the delayed approval of the federal budget, the majority of the government project work we had anticipated in the third and fourth quarter from our engineering segment will shift forward two quarters.

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

Thank you, Jim.

Turning to slide 6. As for last quarter, all of our operating divisions posted year-over-year top-line growth. The highlights were engineering and parking, which grew top-line 144% and 37%, respectively. Our engineering division has been particularly successful at expanding the number and scope of solutions we offer to reduce energy consumption and costs for a variety of clients, ranging from educational institutions to biotechnology centers and governments. However, as for many other service providers to the government, we experienced a slowdown in start dates of currently awarded contracts and new contract awards while the US Congress sorted out the 2011 federal budget.

That said, as I mentioned earlier, our sales pipeline is strong. We expect to see additional contracts as the government obligates the remaining budgetary funds for 2011into a won number of new contracts and expanded business among existing clients in the financial service sector, particularly in the Northeast, and priority continues to add clients in the commercial real estate and heathcare sectors.

The view of operating profits on slide 7. Operating profit, excluding corporate, was approximately up 19% from the same period last year. (inaudible) benefited from lower labor expenses as a result of one less work day during the second quarter, which added $3.8 million pre-tax to operating profit, ancillary savings generated from regional consolidation. This was particularly offset by the increases in state unemployment insurance expense of $700,000, and higher fuel costs of $800,000.

Engineering operating profit was $1.8 million, or 36.2% increase over year-over-year, resulting from operating profit associated with the Linc acquisition. Parking operating profit was down $300,000. A couple of items impacted the year-over-year comparison. Higher state unemployment insurance costs and a contract settlement accounted for $400,000 of additional expenses, which was partially offset by the profits from the Illinois acquisition. Security operating profit was especially flat year-over-year.

Looking at our recent operating highlights on slide 8. In the quarter, the engineering division helped a government client with the successful installation of electric vehicle charging station. They also recently won integrated facilities service contracts for the entire site of the national historic landmark and global destination (inaudible) visitors. They also won new contract and expanded business among existing clients in the financial service sector, particularly in the Northeast and with a major telecommunication company. During the quarter, part of our management contracts in the commercial real estate sector, with one of the largest office buildings in Houston and a historic site in San Francisco. And just recently, ABM was awarded an integrated facilities service contract from a client in the industrial vertical market.

We also continue to gain traction with our Green Care service in janitorial, as more clients begin to see air quality, recycling, and water conservation as good for both business and the environment. As of today, ABM provides green care services for 285 million square feet. That's an increase of 35 million square feet since we published our corporate sustainability report back in February.

We will continue to (inaudible) on the integrated facilities service because they represent a key vertical market, leveraging our experience and expertise in meeting our clients' needs, and building a more extensive revenue. Our recent new business wins and strong pipeline of prospects combined with continued cost control efforts gives us confidence that we will achieve our financial targets for fiscal 2011.

Turning now to guidance on slide nine. We are reaffirming our previously issued full-year 2011 net income in the range of the $1.23 to $1.33 per diluted share, and adjusted income from continuing operations in the range of the $1.43 to a $1.53 per diluted share.

For the year, we continue to anticipate slight accretion from our acquisition of The Linc Group, which is exclusive of transaction and integration costs. As a reminder, for comparison purposes, fiscal 2011 will be negatively affected by one more work day compared to 2010, which now will occur in the fourth quarter. As always, our guidance is exclusive of any new acquisitions.

At this time, I would like to open the call up for questions. Operator, please?

(Operator Instructions)

Michael Gallo of CL King.

Hi, good morning.

Good morning, Michael.

Just a question on the engineering side, particularly at Linc. I was wondering if you could quantify at all, how much you think the budgetary, or lack of a federal budget, hurt you in terms of revenue in the quarter? And, if the budget was passed today, how quickly can some of those projects -- how long will it take to get some of them, started generating revenue for you? Thank you.

Michael, I think your guess is as good as mine about when and the timing of projects, because we just don't control that part. According -- if you compare to our plans for the second quarter, we believe that we were impacted on the top line by $5 million to $10 million, and we believe compared to our plan that could be up to $50 million for the year.

And it really would just be a push forward? Is there anything you'd expect would be canceled or change? Or it's just purely just a transitory, or timing?

We -- I'm not aware of anything canceled or changed. There is more activity than we've seen in the past and so, it's just a push to the right.

Right. Okay, thank you.

You're welcome.

Andrew Wittmann of Robert W. Baird.

Just to keep going with the government theme, it sounded like some of it was already-awarded contracts that you haven't started on, and some of it was contracts that maybe you thought you were going to bid for and eventually win. Can you give us a bit of a breakdown as to how much of the impact on the quarter that $5 million to $10 million was maybe already existing contracts that you just weren't authorized to get going on?

Well, the way it works is that you get a contract awarded -- all these contracts we're talking about are already-awarded contracts -- and then you get a notice to proceed. We didn't get the notice to proceed because they can't do that without having a budget in place. So these are awarded contracts, the work will be done eventually, but it's the government portion, (inaudible) everything is pushed to the right. There's nothing else I can do about it, other than hope the government acts fast next time.

Okay, but would you say that already-awarded contracts were the majority of that? What I'm trying to get at here is just the confidence that on stuff that hasn't been awarded, just given that the budget hasn't been nailed down, how certain the level of confidence you have that it eventually will get awarded, and not canceled or otherwise delayed or cut in size, something different?

To my knowledge, the business we are talking about was all based upon what already was awarded, but not started.

Okay, that makes sense. And then can you just talk a little bit about the early successes that you may have had with the Linc Group and looking for some of those IFS contracts? Clearly, Linc is part of ABM now, and maybe you don't look at it that way, but just how well have you been able to cross-sell from that, and what inning do you think maybe we're in with some of those cross-selling and revenue synergies that you're hoping for?

Well, first of all, as you know, when you do an acquisition of the size, it's always good to report after 6 months that what I thought we were going to buy, we bought. And also to clarify a couple of things, Linc is part of ABM, it's one integrated Company, and that's how we are going to work moving forward.

Thirdly, on the sales, we see I'll say we're probably in the second or third inning, they are working together, things are happening, I see more cross-selling opportunities in this world than I've seen in the past. So hopefully, we are going to see some sizable impact in 2012 and 2013, but the relationship between the divisions and the activity level on the cross-selling side is better than I expected, and higher than I've seen in the Company before.

Okay, that's helpful. And maybe just one final one for me. Just wanted to get your thoughts on the dividend. I think historically, you've gone 4 quarters or so and usually given a dividend bump. We're 3 quarters in since the last dividend bump. Just given the balance you leverage as supportive of deploying more capital toward dividend but still probably may be considered on the higher end of things? Just wanted to get your thoughts about -- do you feel like maybe you want to de-lever a little bit more through cash flow, or that the dividend maybe is an option here?

First of all, I cannot even start to speculate on what's going to happen next quarter, so let's look at the past, and historically we have increased the dividend on an annual basis. I am a great believer in -- and I know there's a lot of philosophies -- but I'm a great believer in giving the shareholders, the long-term shareholders, a dividend in a type of Company like ours. When you have dividend for 47 years in a row, there might be a certain expectation among certain shareholders, especially ones that have been with us for 47 years. So it's a philosophy thing. I believe our balance sheet is very strong, and we can easily afford the dividends, and we've done that historically as well. Right now, I can't predict the future, but my philosophy hasn't changed.

All right, that makes sense. And maybe just to ask that a different way. Just in terms of the investment capacity of the balance sheet today, maybe Jim, how would you classify the amount of capital that you have without doing some sort of equity deal or something like that on the balance sheet today?

We have, probably somewhere between $100 million and $150 million going forward, in making acquisitions. Because again, we will not, at any point of time, as long as I'm here, and that's not a guarantee, but it's nearly a guarantee, go above the leveraging of 3.25, which is our existing leverage level.

Perfect. Thank you so much, guys. Thank you.

(Operator Instructions)

I am showing no further questions at this time. I would like to turn the call over to Mr. Henrik Slipsager for any closing remarks.

Well, thank you very much for listening to our second quarter. We look forward to talking to you in 90 days. Have a nice, hot day here in New York. Bye.

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.