ABM Industries Inc (ABM) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the ABM first quarter 2012 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 follow at that time. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Henrik Slipsager. Sir, you may begin.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive VP and Chief Financial Officer, and Sarah McConnell, our Senior VP and General Counsel. Today, I will provide an overview of the 2012 first quarter that ended January 31. Jim will discuss the details of our financial results. I will comment on the Company's operational achievement for the quarter and highlights and Jim will conclude our prepared remarks with an update on our guidance for Fiscal 2012. 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 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 statements 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 3 for a review of our financial highlights for the first quarter. Results were in line with expectations. Revenue grew over 4% to $1.1 billion compared to the prior year period. Adjusted EBITDA for the quarter was $35.9 million, up slightly year-over-year. We had anticipated a relatively flat quarter of adjusted EBITDA as there were a number of items that combined offset one another. Cash flow remains very strong. Cash flow from continuing operations contributed approximately $12 million for the quarter. We continue to reward shareholders through the distribution of our quarterly dividends. Yesterday, we announced our quarterly cash dividends of $0.145 per common share. This marks our 184th consecutive dividend. Now I'd like to turn over the call to Jim for a financial review of our first quarter. Jim?

Thank you, Henrik. Good morning everyone. Turning to our first quarter of fiscal 2012 results on slide 4. As Henrik mentioned revenues for the first quarter were $1.07 billion, up 4.3% from the prior year primarily related to revenue associated with the acquisition of the Linc Group which occurred on December 1, 2010. The period-over-period increase in revenues attributable to Linc was approximately $36 million. Gross margins for the 2012 first quarter were 10%, a decrease of 20 basis points from 10.2% in the prior year period. The year-over-year decrease in gross margin is largely a result of lower profits in Facility Solutions due to the mix and timing of government projects. Gross margin was also impacted by higher payroll taxes primarily in the Janitorial and Security segments, partially offset by sustained improvements in historical credits on client receivables.

Our SG&A expense for the first quarter increased $1.4 million to $84 million. The year-over-year increase is primarily the result of expenses associated with the Linc acquisition. Amortization of intangible assets for the first quarter increased $0.2 million to $5.5 million primarily related to the amortization of intangible assets from the Linc acquisition. Depreciation for the first quarter was $7.4 million, flat compared to the year ago period. Interest expense decreased $1.2 million to $2.8 million from $4 million in the 2011 first quarter. The decrease was primarily related to lower average borrowings and average interest rates under the line of credit. The average outstanding balance under the Company's line of credit was $312.1 million during the quarter compared to an average balance of $337 million in the prior year ago quarter due to the acquisition of Linc on December 1, 2010.

Our effective tax rate on income from continuing operations for the quarter for the first quarter of 2012 was 41.2% compared to 38.5% in the prior year period. This increase is primarily the result of the reduced availability of employment based credits compared to the year ago period. Specifically Congress did not extend the Federal Empowerment Zone and Work Opportunity Tax Credit, both of which expired on December 31. In addition, fiscal 2011 benefited from greater tax credits associated with the higher act that was in place for calendar 2011. As a result, we anticipate our effective tax rate for fiscal 2012 to be in the range of 39% to 42%. For 2012, we continue to expect the cash tax rate of 20% to 23% as the effects of one source NOL's diminish. Adjusted income from continuing operation for the first quarter was $11.8 million or $0.22 per diluted share. This compared to $11.7 million or $0.22 per diluted share in the same period last year.

Adjusted EBITDA which excludes items impacting comparability was $35.9 million for the 2012 first quarter, essentially flat when compared to $35.7 million in the prior year period. The benefit from improvements in historical credits and client receivables and new business were offset by residual price compression from the third quarter of 2011, higher payroll related expenses, and lower margin contributions from Facility Solutions. Now turning to Slide 5. We ended the quarter with $295.2 million in working capital, an increase of $4.6 million from the $290.6 million at October 31, 2011. The increase in working capital was primarily driven by the timing of collections received from clients partially offset by the pay down of a portion of the outstanding borrowings under the credit facility. Net trade accounts receivable at quarter end were $573.8 million versus $552.1 million at October 31, 2011. Day sales outstanding at quarter end were 50 days, up 2 on a sequential basis and down 1 compared to the first quarter of 2011. The year-over-year decrease in DSO is attributable to our continued focus on receivables as well as improvements in our end-to-end processes.

Cash provided from continuing operating activities was $11.8 million for the first quarter compared to $0.3 million in the comparable prior year period. The increase of $11.5 million was primarily related to the timing of collections received from clients. Total insurance claim liabilities at January 31, 2012 were $344.9 million compared to $341.4 million at the end of fiscal 2011. Self insurance claims paid during the quarter totaled $20.9 million compared to $20.3 million in the first quarter of 2011. I would now like to turn the call back to Henrik who will provide his perspective on the first quarter operational performance.

Thanks, Jim. Turning to slide 6 & 7, in reviewing our operating revenues and profits the quarter was within the range of our expectations. In total results were notably effected by a few items. This year unseasonably warm winter weather compared to last year's record snowfalls particularly in the Midwest and Northeast adversely impacted Tag revenues. Operating profit for Janitorial was $30.5 million, an increase of $600,000 or 2.2%. Sustained improvements in historical credits and clients receivable was offset by higher payroll taxes, and lower profits from Tag related snow clean up.

Moving to our Facility Solution segment, which is the legacy Engineering division combined with the former Linc business. Revenue increased $41 million or 21% during the quarter. The increase was primarily related to revenue associated with the Linc acquisition. As Jim noted, the period-over-period increase in revenue attributed to Linc was approximately $36 million. There were a few government projects in aggregate about $5 million that we had anticipated starting in the first quarter which are now projected to start in the second quarter. Looking at operating profit for Facility Solutions the segment generated $6.4 million for the quarter, approximately $1 million or about [6%] lower than 2011. Last year, in the first quarter we benefited from an Iraq-based US government contract which was terminated after the successful withdrawal of our troops.

Revenues and operating profits for our Parking segment was flat year-over-year, some unprofitable business that amounted to 1% of revenue, but had no meaningful impact. In concluding our discussion of operating results, Security had a good first quarter in terms of revenue by registering nearly a 4% increase compared to 2011. However operating profit for 2012 was lower by $0.5 million compared to the first quarter of '11 because of higher payroll taxes combined with start up costs of new business. Before moving to guidance, turn to Slide 8 which lists our sales and marketing highlights for the quarter. Sales activity during the quarter continued to improve, and we are very pleased in securing new business in excess of $100 million on an annualized basis. We remain hopeful that the economic recovery is underway in the US and will continue combined with our recent contract wins positioning the Company for a strong second half.

A quick update on DLITE. We are awaiting, along with others, notification from the government on who the winning bidder is and the initial task orders under this particular contract. We recently announced a global partnership with AEG, one of the leading sports and entertainment centers in the world. Under the multi-year, multi-million dollar partnership, ABM will expand its services it provides to select AEG venues around the world. A few comments expect to announce later this year, additional venues both in the US and Europe. One of the most exciting accomplishments we've had in this last quarter or this year is our new brand and logo, which we launched last month. Through growth in our traditional markets and strategic acquisition adding new markets and new capabilities, we now offer more services and more industries and in more places that at any time in ABM's 103 year history.

Leveraging these combined strengths as one ABM, we are now implementing a new vision and new direction to become the global leader in integrated facility solutions. As our new tag line communicates, today's ABM is about building value, reflecting both the tens of thousands of physical assets we service and maintain as well as the asset value we preserve and create. Please see our new interactive Metropolis tool found on our website to garner a keener appreciation of all the services we offer and the number of vertical markets we now serve. Jim will new discuss guidance for 2012. Jim.

Thanks Henrik. Turning to slide 9. Updating our guidance for fiscal 2012, we continue to expect income from continuing operations per diluted share for the 2012 fiscal year of $1.26 to $1.36 and our guidance for adjusted income for continuing operations per diluted share remains $1.40 to $1.50. There are a few key items that I want to remind everyone of for the 2012 fiscal year. First there was one more workday in fiscal 2012 compared to fiscal 2011 which occurs in the third quarter. We estimate a $3.5 million to $4.5 million increase in pre-tax labor expense year-over-year as a result.

Secondly, we have three strategic growth initiatives for 2012 to drive future sales. These are unified workforce, ABM Energy, and public sourcing. Combined, we continue to anticipate spending $3 million to $4 million pre-tax on these strategic growth initiatives and the expenses will go against adjusted income from continuing operations. Thirdly, we have now launched our branding initiative. The cost to rebrand will be part of items impacting comparability. We continue to expect similar seasonality as experienced in 2011 between the first half and second half of the fiscal year. Cash taxes are still anticipated to be between $24 million and $26 million for fiscal 2012. In addition, the effective tax rate estimate is 39% to 42% up from 2011s 35%. As always, our guidance is exclusive of any new acquisitions. At this time, we would like to open the call up to questions. Operator?

Thank you

(Operator Instructions)

David Gold, Sidoti & Company.

Hi, good morning. I wanted to get a little more color if we can on the $100 million of new contracts. Essentially a couple things. One, can you give a sense for how much of that might have related to AEG? And two, what businesses that fell into?

It's in excess of $100 million of new business, not $100 million.

I'm sorry.

And I think there's a point. AEG is very small, if any of that $100 million, $120 million. We do Staples, Nokia Center and other jobs for AEG as we speak, but the strategic relationship we have built up with them will probably not generate new revenue until the third and fourth quarter of this year. The exciting part about the new business we got is it's pretty much associated with all divisions, and what's even more exciting for me is it seems like the Facility Solution part, which is the combined services, is really having a very good start of the year, so if we can continue that, that will be great. One last comment about new business, very little of this started in the first quarter, most of it will start in the second quarter. Most of that will be in April, so the primary effect will be in the third quarter of 2012.

Perfect. And can you give a sense for in there if there were any large contracts?

Yes, there is one $30 million plus account which is a Facility Service account, I can't give you a name, but very exciting job where most of it was in-house and we pretty much have taken over all of the services as of April 1. Other than that, it's jobs between, I'll say, $1 million, $2 million up to $10 million that is the major piece of this growth. So, what makes me excited about it, David, is the fact it's not one job. It seems like we have great momentum everywhere and I've never seen it like this. I think combined with the new rep, the new brand, this place is bubbling right now with enthusiasm.

Perfect. And then one other. In the Parking side of the world, well I guess two pieces. One, just a little more comment on the cancellations and dispositions there. And then, two, thoughts on any, if the recent announcement of Standard buying Central changes anything in your view on that?

Well, first of all, I want to congratulate Standard by doing a very clean acquisition. From our point of view that acquisition, of course, opens up opportunities, and we'll probably launch a pretty active marketing sales campaign in the Parking segment over the next six to nine months. The loss we had over the job we gave up was aloof and as we said, it's 1%, which is, I shouldn't probably have mentioned it, but it was a self-inflicted wound, so that's why we mentioned it.

Got you. Perfect, that's all I have, thank you.

Michael Gallo, CL King & Associates.

Hi, good morning. Jim, the SUI increase in the first quarter, would you expect a similar level of increase in the second quarter?

Yes.

Okay. And so I guess when you look at the SUI increase, is it fair to say that you assumed second quarter, I guess how do you expect to offset that? Obviously you did have the reserve benefit in the first quarter.

Right.

So just help us with some -- I assume you haven't lapped some of the pricing pressure on the Janitorial side from -- you started to see in the third quarter, so any offsetting factors in the second quarter?

Yes, I think we obviously are always looking at our cost structure. The presidents of our divisions are always looking at that cost so we're continuing to see process improvements come out of all the system work we've done too. Just to kind of back up a second, the improvement we saw in the first quarter on the sales allowance really is, we've been working on our billing processes for several years now while our systems, our bills get out faster, they get out cleaner and we're continuing to do other process improvements which will improve expenses going forward. So, it's really the combination of that and the normal good work that the presidents do in their businesses.

Mike, there are two other comments I want to make about that. One is when you deal with SUI, the increased rate in the states where the max hasn't changed means that we will reach max faster so it will have a positive effect in the third quarter, that's one area. And the other area is if you notice what we said, we do expect some jobs that was -- government business that was delayed in the first quarter into the second quarter so it would have a positive effect in the second quarter to offset some of these increases.

All right. The second question I have just on the Engineering profitability and Linc, I guess when I look back to the time of the acquisition, call it about a year ago, a little more than that, I think there was an expectation of call it 6% to 7% operating margins and it seems like its been well below that. Obviously you've had some purchase accounting stuff, but even if I back that out, just help us kind of how we are going to bridge that gap. Is it just a function of revenue and some of the government contracts being pushed out? It seemed like the revenue this quarter was a little bit better, but you still really saw it in the mix shift, so help us with kind of how we should think about that business longer term from an operating profitability standpoint and kind of how we bridge that from where it is right now. Thank you.

Yes, I think first of all, if I look at the business from where we were a year ago, and where we are today, I'm probably one of the happiest guys around here having done that particular acquisition because it positioned ABM in a place and in a spot that we haven't been before. So, the operation has been a success and the integration has been even better. We've been able to integrate it in a year which in itself has been pretty much I would call flawless due to the very professional group we have running Facility Solutions. But first quarter over first quarter, compare the two quarters, makes our first quarter look pretty bad this year, but that is also associated with some great, especially December of last year was a fantastic month for Linc, at least compared to our expectations. If you look long term, if you look this year and hopefully by the end of the year, we will be up doing I'd say 6% or 7% bottom line will happen during the year, it's going to improve a lot associated with a lot of the project work we expect this year. We've made a lot of closes net that are not included in over $100 million of new accounts, but our Energy segment where you see profit of 30% to 35% is moving fast as well, so overall, I would categorize this acquisition as an A-plus. Best thing the Company has ever done, position us great for the rest of the year as well as next year and probably as exciting a time as we've had here.

Thank you.

(Operator Instructions)

Justin Hawk, Robert W. Baird.

Good morning guys. Thanks for taking my questions. So I guess the first question I had was so when we just do a little bit of simple math on the guidance just to kind of understand the range a little bit better, would it be fair to say that the low end of the guidance assumes that organic growth kind of stays in this 1% to 2% range and margins are flat year over year? And then if so, what gets you to the top end of the guidance and what are some of the embedded inputs into that?

Well, you can easily get to the top end of the range success on jobs like DLITE, we have not included anything like that, other government contracts over and above where we are now. If our Energy segment continues to develop the way I see it today, where if we can close another $30 million, $40 million, $50 million of Energy projects at the 30% profit level, that will show the impact, the guidance pretty dramatically. And again as I said earlier, this is from a sales growth point of view, this is probably the best quarter in the history of the Company and I have no reason to believe it won't continue. So I feel if we get the sales growth that we planned for and hoped for, we are within the guidance range, upper end or lower end but we're in the range.

Okay, so are you still assuming, I think last quarter you said 3% to 5% organic growth for the year. Is that still?

What I hope for, yes.

Okay. And then I guess my next question is on the joint venture income, the big step up that we saw here, was there anything that was unusual about that? It had been running closer to $1 million a quarter and I think this quarter it was a little over $3 million.

Yes, as we disclosed, Justin -- this is Jim -- we had some low-income housing tax credits that go back to investments we made more than 10 years ago, so those were $2 million in the quarter.

Okay.

And that went into that line.

So $1 million give or take is a better run rate to think about?

Yes.

Okay. And then just the last question I had was on the foreign corrupt investigation charges, the $1.9 million, is that completed or is there still a possibility of ongoing expenses related to that?

I think that's -- there is an investigation under way and right now we're just seeing what happens, but there's -- that's hard to tell at this point in time.

Okay, but those will be items impacting --

Yes, they will all be below the line and will be called out. It's just hard to call that right now.

Okay, thank you very much.

Thank you.

Adam Thalhimer, BB&T Capital Markets.

Thanks, good morning guys. I wanted to first ask about Janitorial revenue growth, Henrik. Do you think that the potential for organic growth in Janitorial increases as you move throughout the year, or was the price -- were the price declines in Q3 '11, are those just too hard to offset?

No, I'm pretty comfortable that we'll see organic growth in Janitorial, probably greater than last two years. And I can say that based upon, I know what they're starting in new business and in another very good piece of news from our point of view, we measure how much we lose every quarter and I think this was, in my history, probably the lowest loss quarter we ever had, which was below 1% of existing accounts -- which if we can keep it that way, 3% to 4% a year is probably not sustainable, but nonetheless a very strong quarter from Janitorial on retention of existing accounts.

Okay. On the Linc business, Henrik, how do you feel about the government opportunities you're seeing? There are a lot of concerns obviously that there will be spending cuts there. Is that what you're seeing or is the RFP flow better than you would expect?

Well, there's two sides to that. As you can imagine, we are getting used to the government business as well and the lack of predictability is probably the part that frustrates me the most where we expect something to hit in one quarter and it gets delayed to the next quarter, et cetera. But, overall, if we look at the budget presentation, the budget presented by the existing administration, the only area that actually went up in spending was operational maintenance, which is our field, primary area, and I think they budget around 9.5% increase year over year, so that's pretty good news. The activity level according to our government folks is probably greater than they've ever seen it before. And it's probably a combination of their knowledge and reputation combined with our balance sheet that's a little stronger than Linc had in the past. So, I think that combination gives us a much greater upside than it contains a downside in the government business. But predictability is, for a Company like us who pretty much knows within $0.25 what we're going to make next month, this is the tougher part.

Okay. And finally, I wanted to ask about your new unit, the ABM Energy. I'm just curious, what is your sense for how receptive or how willing clients are to making the investment in energy upgrades right now, energy retrofits?

Well, there's no doubt in my mind that the interest is great and we can see that all the time and we have so many projects ongoing. The biggest hurdle has been the financing of these particular projects from the owner side. And if the finance -- if ever the government comes through with the financing vehicle or if we as a Company ever find a way to break that code, I think that business will grow pretty dramatic.

Great. Thanks very much.

You're welcome.

Michael Kim, Imperial Capital.

Hi, good morning guys. Just to drill down a little bit more on your expectations for Janitorial growth, are you expecting to see better volumes with existing clients? Are you finding new client opportunities, lower attrition, can you maybe expand a little bit on how you see the composition of that growth?

It's a combination of both. I would say, in general, we don't go in and budget and plan for existing client growth of 10%, 20%, 30%, though it would be nice if it happens, that's not part of our plan. My comments is based upon activity level as well as closed business, so we had a very successful first quarter in the Janitorial business in closing new accounts which we didn't mention at our call and the activity level is still at a very high level. And if that's combined with a historically low loss of business, then I'll basically tell you that if we made the growth within our existing contracts, the growth will be even greater. But we have no crazy expectation of growth within our existing clients other than you could pick up another region of a bank or stuff like that.

And specific to client attrition, are you seeing any specific verticals or areas where your attrition is elevated or places where you're starting to see that moderate?

No, nothing in particular. I think we're so big in each of the verticals that you'll pretty much see growth everywhere. I would say the commercial downtown business will continue to be a very, very tough pricing environment while the Industrial where you probably see most of the growth is a little more reasonable. And, in general, we see the client relationship on the Industrial side last longer than on the commercial downtown commodity business.

Okay. And then lastly, how are you seeing the strategic environment? Are you seeing valuations come in within this current environment? How are you looking at positioning in terms of whether it's Janitorial or Engineering or other sectors in the market?

What was the question, give me the beginning again. I didn't hear you, I'm sorry. Can you give me the question again?

Oh, yes. Can you talk a little bit about how you're viewing the strategic environment, if you're seeing acquisition opportunities and valuations coming in, in the current environment?

Well, we are still pretty active in looking at the right acquisitions at the right time. We have, as you might know, certain demands about acquisition needs to be accretive right away, which I think is a good principle, but of course sometimes limits the ability to get the price people want. But the activity level is not different than it was last quarter. I feel more compelled, I feel more -- we are more ready now than we were six months ago in the middle of integration of Linc and the system integration that we really don't want to have another acquisition -- well I do but my financial folks will probably be screaming at me -- but now we feel we are ready for one or two little-priced companies.

And is it your preference to expand your Janitorial business or continue down Engineering?

Well, I want to do both. One doesn't exclude the other. I think the Engineering side is, for me, still extremely attractive as the second leg of our business and probably the growth leg of our business, not only short term but also long term. While the Janitorial group and those folks have shown they are probably the best executors of acquisitions in the business and probably get a higher return on the investment short term in Janitorial but probably a greater return long term on an acquisition in Engineering, so depends on availability, I will absolutely be open for both.

Okay, fair enough. Thank you very much.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Slipsager for any closing remarks.

Thank you very much. I appreciate you all listening to our first-quarter call, and we'll talk to all of you in three months. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.