ABM Industries Inc (ABM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM first quarter 2013 teleconference. 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, today's conference is being recorded. I would now like to introduce to this conference call Mr. Henrik Slipsager, President and CEO. You may begin, sir.

Thank you. I'm Henrik Slipsager, President and CEO of ABM. Joining me today is Jim Lusk, Executive VP and Chief Financial Officer, Jim McClure, Executive VP, and Sarah McConnell, our Senior Vice President and General Counsel.

Today, I will provide an overview of the 2013 first quarter that ended January 31. Jim Lusk will discuss the details of our financial results and Jim McClure will provide an update of our on site businesses. And, in Tracy's absence, I will then comment on the company's operational results for building and energy solution segment as well as provide an update on Air Serv. Jim will conclude our prepared remarks with an update on guidance for Fiscal 2013.

There is a slide presentation that accompanies today's call. You may access this presentation now by going to our website at www.abm.com and under the tab Investors you'll see the Event and Presentation tab. Today's presentation will be the first listed. Sarah?

Thank you, Henrik. Please turn Slide 2 in 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 the Investors tab.

Thank you, Sarah. Now, please turn to Slide 4 for an overview of our first quarter. We are encouraged by our first quarter operational results starting with $1.18 billion in revenue, a record, and up 10% from the same period last year due to the three businesses we acquired in November, Air Serv, HHA Services, and Calvert-Jones, and organic growth in our janitorial facility services and security segments.

As we discussed in our 2012 year-end call, we have realigned operational structure to an on-site, mobile, and on demand market-based structure. And, this new segment reporting better reflects how we manage and evaluate our businesses. Adjusted income from continuing operations was up over 18% on a per diluted share basis as we benefited from the November acquisitions, the retroactive reinstatement of employment based tax credits, and new sales. Adjusted EBITDA was up over 7% to $38.6 million. And, excluding the one-time benefit from historical credits in 2012, increased by over 16%. The integration of all our recent acquisitions is progressing well and I'm pleased with the contribution each business made in the quarter.

We signed a large energy retrofit contract with Wright State University and won two contracts under the government DLITE program. And, we continue to reward our shareholders and announced today that our quarterly -- yesterday, I'm sorry, our quarterly cash dividends of $0.15 per common share. This marked 188th consecutive dividend. Now, I'd like to turn the call over to Jim Lusk for a financial review of our first quarter.

Thank you, Henrik, and good morning, everyone. Turning to our first quarter of Fiscal 2013 results on Slide 5. Revenues of $1.18 billion for the first quarter were up 10.1% compared to the prior year. As Henrik mentioned, this was due to sales contributions from our November acquisitions and organic growth. The revenue growth was partially offset by lower sales in building and energy solutions. This segment was impacted by lower revenue of $17.6 million primarily as a result of the comparative mix and timing of certain awarded and completed US government contracts.

Gross margin for the 2013 first quarter was 9.7%, a decrease of 30 basis points from 10% in the prior year period. This year-over-year decrease in gross margin is a result of an unfavorable quarter-over-quarter comparison from a sales allowance reserve adjustment in the prior year. This was a sustained improvements in credits on clients receivable. Without that, gross margin was flat at 9.7%.

SG&A expense for the first quarter increased $3.7 million, or up 4.4%, to $87.7 million as the result of November acquisitions and new growth initiatives which we invested $1.5 million in. Amortization of intangible assets for the first quarter increased $1.6 million to $7.2 million. The increase was primarily related to a $2.2 million intangible asset amortization expense from the November acquisitions.

Interest expense increased $0.5 million to $3.3 million from $2.8 million in the 2012 first quarter. The increase was from higher average borrowings to fund the November acquisitions. The average outstanding balance under the Company's line of credit was $447.4 million during the quarter compared to an average balance of $312.1 million in the prior year ago quarter.

Our effective tax rate on income from continuing operations for the first quarter of 2013 was 22.2% compared to 41.2% in the prior year period. The lower rate reflects the retroactive application of employment-based tax credits from calendar 2012 that were recognized during the quarter. Inclusive of these credits we expect our effective tax rate for Fiscal 2013 to be in the range of 36% to 38% which is higher than our Fiscal 2012 effective tax rate of 32%.

Adjusted income from continuing operations was up $2.9 million, or 24.6%, as we benefited from the recent acquisitions, employment-based tax credits, and new sales. Congress voted to extend the Workers Opportunity Tax Credit and based on our hiring practices, the Company realized a $2.9 million tax benefit in our first fiscal quarter of 2013. In addition, on a comparative basis to first quarter of 2012, included a $1.6 million after-tax benefit related to improvement in historical credits on client receivables. Adjusted EBITDA, which excludes items impacting comparability, was $38.6 million for the 2013 first quarter, up $2.7 million from the prior year period due to a $5.4 million contribution from the Air Serv acquisition. In addition, the first quarter of 2012 included a $2.7 million benefit before tax related to the sustained improvement in historical credits on client receivables.

Now, turning to Slide 6. Day Sales Outstanding at quarter end were 52 days, up three days on a sequential basis and one day up year-over-year. Cash used from operating activities for the first quarter of 2013 was $11.5 million, down $23.5 million compared to the same period in Fiscal 2012. This is in line with our expectations. Typically, total operating cash flows in the first quarter are lower than the remaining subsequent quarters.

Turning now to insurance. Total insurance claim liabilities at January 31, 2013, were $353.5 million compared to $343.8 million at the end of Fiscal 2012. Self-insurance claims paid during the quarter, the total expenditure was $20.1 million compared to $20.9 million for the first quarter of 2012. I would like to now turn the call over to Jim McClure to discuss our on site services.

Thank you, Jim. Please go to Slides 7 & 8. I will now provide some brief highlights of our janitorial, facility services, parking, and security operations for the first quarter before turning the call over to Henrik for an update on building and energy solutions and Air Serv. Janitorial revenues increased 1.9% for the quarter due to an improvement in new business and a continued focus on account retention.

Operating profit was down 4.7% primarily related to a $1.5 million benefit in the first quarter of 2012 that reduced our sales allowance on client receivables. In spite of the impact of Hurricane Sandy on building closures, we met our revenue and profit expectations with new sales and additional tag work from the hurricane. Tag revenue for the first quarter was up approximately $3 million on both a sequential and year-over-year basis.

Moving to client retention, for the first quarter janitorial achieved a rate exceeding 98%. We are seeing good sales activity and expect to have continued growth in healthcare, hospitality, and our educational verticals. We are in the process of phasing in a new healthcare account that has a potential to reach $75 million revenue this fiscal year.

Our pipeline of future business is also stronger than it has been. Facility services is a newer portable segment. The business represents on site engineering services. This segment reported better than expected revenues, up 8.2%, due to an increased scope of business from existing customers, new business, and additional tag work.

Operational profit was basically flat due to a reduction in the sales allowance that we saw similar in janitorial. We have a solid pipeline and are short listed on a number of contracts in the second quarter. I feel this business is positioned for a good Fiscal 2013.

Parking revenues decreased 1.4% in the first quarter compared to prior year due to lower management reimbursement revenues. Excluding these fee arrangements, revenues were flat with the prior year and operating profit was on budget for the quarter. Security had another good quarter continuing to post year-over-year gains in its top and bottom lines as the segment benefits from new business.

Revenues were up over 5% while operating profit was up nearly 100% due to effective cost control measures and new business. I look forward to sharing some of the initiatives we are working on on our on site business tomorrow at the analyst and investor briefing. With that, I will now turn the call back to Henrik.

Thanks, Jim. Looking at Slides 7 to 9, I will provide an update on our building and energy solution segment which includes energy services, government services, the franchise network, as well as our new acquisitions of HHA Services and Calvert-Jones.

Building and energy solutions revenue decreased 1.3%. We posted a slight decrease in operating profit of $0.5 million compared to the first quarter of Fiscal 2012. The decrease is primarily due to the government business partially offset by $16.4 million of revenues from the acquisition of HHA Services and Calvert-Jones in November.

Our target pipeline is extremely strong and our cross-selling and national accounts activity is showing tangible results. In fact, we just signed a $25 million energy retrofit contract with Wright State University. It's a game changer for Wright State in terms of sustainability and will reduce their energy consumptions significantly.

Although it has only been one quarter, we are very pleased with our new HHA acquisition and their strong pipeline of new business. Furthermore, with Obama Care on the horizon and the healthcare reform cost pressures, and we expect this will lead to greater long term outsourcing and more opportunities for ABM in the future.

Our new segment, other, is comprised of the Air Serv business that we acquired in November. This segment generated $84 million in revenues and $2 million in operating profit, both of which exceed our expectations for the first quarter. We're very excited about the opportunity in the aviation industry. We recently won the new business with a large US based carrier at the Dallas Fort Worth airport and commenced work at Glasgow airport in Scotland. Over the next 18 to 24 months we'll integrate Air Serv with our existing aviation business under one brand and thereby position it as a platform for our aviation vertical. With that, I'll turn the call back to Jim Lusk for the outlook for Fiscal 2013. Jim?

Please turn to Slide 11. Moving now to guidance, for today's call I'm going to provide a list of items that affect our current outlook and guidance for the 2013 Fiscal Year. Based on the Company's operating results for the first quarter, and its current expectations, the Company is providing guidance for Fiscal 2013 of income from continuing operations of $1.16 to $1.26 per diluted share, adjusted income from continuing operations of $1.35 to $1.45 per diluted share. Labor workdays are 261 which is one workday less than Fiscal 2012. The second quarter of Fiscal 2013 has one fewer labor workday. The Company estimates one workday of labor expense for the janitorial segment in the range of $3.5 million to $4.5 million on a pre-tax basis.

Annual depreciation and amortization expense because of the recent acquisitions still expected to increase from Fiscal 2012 in the range of $19 million to $21 million. Interest expense anticipated to be in the range of $14 million to $16 million. Capital Expenditures are expected to be in the range of $39 million to $43 million. Cash taxes are expected to be in the range of $23 million to $27 million as the NOLs from the OneSource acquisition near full utilization. Now anticipating an effective tax rate of 36% to 38% versus 32% for 2012. At this time, I'd like to open the call up to questions. Operator?

(Operator Instructions)

Adam Thalhimer, BB&T Capital Markets.

There's some new segments here -- just curious what kind of margins you anticipate during 2013? I guess, maybe we start with the Air Serv business?

If you look at the Air Serv business, you have to be a little careful because the way we do the segment reporting, we include the amortization of the job of that particular vertical. I would say the EBITDA margin that we are looking at will be in the 6% area for fiscal '13.

Got it. And then, on security, Henrik, you had some nice margin improvement there in the quarter. Is that sustainable, in your mind?

Yes. It is. Well, I think, as you might have heard me from prior time, security had a couple of tough years. We saw the improvement starting I would say middle of last year, we have seen continuous improvement in the Business both on the top line and on the bottom line. We're very pleased with the direction of the Company right now.

Okay, and then, in the janitorial business, where do you feel like that business is on a core organic basis? I mean, are you starting to feel whether it's better employment trends or economic indicators, does that business -- is it starting to feel better to you, Henrik?

I would say all our businesses right now are feeling pretty good. But I will even tell you that janitorial is probably the, I wouldn't say the star, but I have not seen growth opportunities as I've seen right now. Jim did mention in his presentation that we expect to start some sizeable jobs up in the third quarter, fourth quarter. I'll be happy to report on it when we start it up because we learned from the past, things can be delayed. But we have probably seen more positive activity, and I'll say the atmosphere in the janitorial group is -- the morale is great. They are absolutely winning more than they are losing.

Great. And then, lastly for me, just sequestration -- you were a little bit hesitant to provide an outlook for the Business last quarter because of the sequestration risk. That has gone into effect. What impacts do you see from that?

No, I think that that's -- I don't want to say not accurate, what you're saying, but I didn't want to do it when we were looking at the fiscal cliff because nobody knew what that was going to mean. With the sequestration, we have a better feel what it's going to mean, not that I want to tell you that I completely understand what it will mean, but for us, we expect it could have a minor impact on our government business for fiscal 2013. We don't expect to see anything major. That's why I didn't bring it up in the press release because we feel it's pretty much under control from our perspective. 2014, 2015, who knows.

The other thing I want to bring up is, the government business represents now 3% to 4% of our overall business. So, it's not going to be impacting it as much as it has in the past. Lastly, but not least, on a comparison basis, as you might know, the big job we lost in Iraq is now a year ago. And the comparable numbers year over year is a little better for the rest of the year.

Good point. Okay, thanks a lot. I'll see you tomorrow.

Mike Gallo, CL King.

Hi, Henrik, good morning. Couple questions. Jim, the increase in DSOs in the quarter -- what drove that? And do you expect that to reverse here in the coming quarters?

Yes, I think DSOs -- we'll get it back like we always do. It's definitely one of our core strengths, so just a timing issue for this quarter. I have no concerns about that at all. It's one of the strengths of the Company.

Great. Second question I have is for Henrik on the security business -- I was wondering, post the Newtown tragedy, whether you've seen an increase in demand for security services in terms of inquiries?

No, and I've not seen any changes in it. I saw that people were trying to also give janitors guns in schools, et cetera. It's not -- it doesn't fit my risk profile. I think that's the best way that I can say it to you. So, we have [filled] absolutely nothing associated with that.

Okay, great. How much was the increase, and how much did the tag business from, related to Sandy, help you from an incremental revenue or operating profit standpoint in the quarter?

Hi, this is Jim McClure. The tags were up about $3 million, and that was -- pretty much offset the loss in contract revenue that we lost with the closure of the buildings. So, it was pretty much a flat event for us.

Okay, great. Thank you.

Justin Hauke, RW Baird.

Just going back to the new segments that you're reporting under now, I guess, could you talk a little bit more about the management structure? And the last couple quarters you've talked about having an on-site versus a mobile offering, and those being run separately. And I'm just wondering how that integrates with the new six businesses that you'll be reporting under this structure, and the hierarchy of the management team there?

Right, we moved the facility services over to -- which is primarily the on-site engineers -- over to Jim McClure. So, Jim now is in charge of all on-site services, with the purpose of -- and if you're coming tomorrow you'll see it probably a little more in detail -- with the purpose of creating tremendous cross-sell opportunities combined with back office synergies that we expect to generate out of merging under one hat.

The rest of the business, with the exception of Air Serv, is under Tracy. So, Tracy is the guy who's on call for all other services on the building that Jim doesn't provide. So, combine those two individuals, will combine all facility services in the building.

Right now, the HHA is under Tracy. The old link group had a group called Malco ABM Health. We are looking into merging these verticals together under Tracy's watch, and Air Serv is under my watch. It was a sizeable acquisition; it was an international acquisition. And I want to make sure it's going the right direction before I hand it over to one of my operators.

Okay, and then, on the Air Serv division then, will the other division go away as that gets integrated into the other groups? Or is the plan there to build out these continued vertical silos and have a --?

The vertical silos, in my opinion, are two things. One is -- the reason it's called vertical is that with your service offering, you can match that particular vertical's need. The other major benefit by looking at the vertical is from the sales and marketing point of view, where you have people educated in that vertical selling these services.

We have seen, historically, that we get double-digit growth -- we have had double-digit growth in those verticals ourselves, and with the [Company's report], we saw the same double-digit growth. I think it's very, very important on the vertical market to just realize one shoe doesn't fit all. Very good example on the aviation vertical -- we see some great international opportunities, and we have seen growth on the international side under Air Serv, and I think you're going to continue to see that for the long-term future.

Okay, and then, just one final question here. On the two DLITE task orders -- I think one was $35 million and the other was $11 million -- was there any contribution in the first quarter, or does that start to flow through in the second quarter and beyond?

There was nothing in the first quarter.

Okay, thank you very much.

You're welcome.

David Gold, Sidoti.

Can you speak a little bit in the three spots where you saw organic growth, in particular focused on the janitorial side? Can you give us a sense as to what you'd attribute it to, or what we should read into? Is it some early success in the verticals, or market share gains, or somewhere in between?

I think finally it is a result of the hard work done by the janitorial group over a longer period of time trying to focus on certain markets, both within geography as well as verticals. And I, honest to God, believe, for the janitorial guys, it looks like it's their turn to get a little luck that I don't think we've had the last two years. So, I think -- I can't pinpoint in one area, other than it seems like we, on the sales side front, as well as the operational front, are one, two or three steps ahead of our competitors, which is not a bad place to be.

And same question on the security side.

What was the question? Same question?

Same question, yes.

Yes, I think security, again, it's growing from a lower base, which makes one or two contracts much more important on the organic growth point of view. But, in general, I think they've stopped the bleeding. They have now performed growth, not double digit, but nice growth over the last three or four quarters. And based upon the pipeline and the activity level and the expected cross-selling, I don't see it's going to stop there. I think you might even see greater growth, maybe not in the short-term future, but in the long-term future.

Got you, okay. And then, on the shift toward industry verticals, what do you think the timetable is until that's humming along and fully implemented?

Well, we have been focusing on at least the aviation vertical ourselves for a while. And we are somewhat focused on the educational vertical. We just haven't announced it and closed on it as we are doing now. These two acquisitions, I think, are going to drive the changes, so we're doing this more public and faster than we have done in the past.

So, I think you're going to see some impact in the second, third and fourth quarter this year. Maybe not material. But long term, I expect these verticals to grow greater than the janitorial services for the coming [future].

Perfect. One more, just to make Jim do a little bit of work. On the receivable side, what should we expect for the rest of the year -- obviously some change in the first quarter?

Yes, I think we'll do better the remainder of the year than we did in the first quarter. It's just a timing issue for us.

Okay, perfect. Thank you both.

Thanks, David.

(Operator Instructions)

Joe Box, KeyBanc.

Jim, you mentioned earlier a $75 million potential healthcare contract. Can you maybe just talk to the timing on when you expect to get that signed? And when the contract would potentially start? And just note if it was a multi-year contract or just a single year?

Yes, the contract is signed. The rollout is proceeding, and will be finalized by the end of July of 2013.

I would just add one thing on that. That is, it's our expectation we'll have it rolled out by the end of July.

Yes, thank you.

And was that a multi-year or was that a single-year contract?

It is a single-year contract.

Okay, great. And maybe just taking a step back, I guess, what was the main selling point that won ABM the deal?

Well, really our footprint. This is a national, 317-site location opportunity, and our ability to self-perform it in not only primary cities but secondary cities was very attractive to the client.

Okay, understood. Switching gears, other than the well-publicized contract loss that you guys had in Iraq, were there any other contracts that rolled off in the building and energy business? And can you maybe just put some color around what some of the recent wins and the pipeline looks like there?

Yes, let me first say one thing about that wonderful contract that we are in the process of implementing. When Jim mentioned it's a one-year contract, that doesn't mean that we expect to have it one year. It's just, contract terms are one year, but we hope to be there for many, many, many, many years.

On the other question, as you know, these energy retrofit jobs are pretty much what I would call hit and miss in a quarter, not in a quarter. Some quarters you close some of them, other quarters you don't close them. If I look at our sales success this year, we are way ahead of plan, and we do expect that year over year our energy retrofit part will do very, very, very well.

We also expect our franchise piece to do well. We sold 15 franchises this year, where we all of last year sold 21, I believe. So, I'm not saying that we're going to exceed that, but it's not a bad a start of the year selling 15 compared to 21 for the whole last year.

And on the government side, they are doing as well as they can in a very difficult market. We do expect the next big order to be very respectable. And with a little luck, and normal days in Washington, that segment is going to do very, very well long term.

Right. Henrik, last quarter I think you mentioned about a $5 million to $7 million potential cost savings from branch consolidation. Can you maybe just tell us where you stand on closing some branches, and what's included in your FY '13 guidance?

Right. First of all, I would like to again point out, tomorrow we have this investor call -- investor meeting where we will be going into details on some of these situations. For the year, I think we have estimated a $4 million savings for this fiscal year in our forecast. And for next year, we're looking at the $10 million to $12 million level all-in, so $8 million more for fiscal-year 2014. It's still very difficult for us to estimate because there are a lot of leases that we need to see if we can negotiate our way out of.

On a location-by-location basis, we have started the process primarily in the South and Southeast. After that, we're going to move to the Northeast and Midwest, finishing up in the West. The whole process will take around 18 months, is our best estimate as of right now. Up to this point, the rollout has been received tremendously, and it's going much better than expected, and on plan.

And just to clarify, did you say that there was $4 million of the total $12 million potential savings that's included in your $1.35 to $1.45 guidance?

Yes.

Okay, thanks. And last question, then, on the capital structure. If you go to slide 6 of the slide deck, you give the cadence of debt paydown following some of your past acquisitions. Should we think about the debt paydown following your most recent acquisitions as following a similar cadence as in the past?

Little slower because, as Jim mentioned before, we've lost the NOLs. And on the end of the NOLs, so our cash, we unfortunately have to pay a little more taxes going forward. But other than that, the pattern's going to be the same.

Great. That's it for me, thank you.

I'm not showing any further questions at this time. I'd like to turn the conference back over to Mr. Slipsager for closing remarks.

Well, thank you very much. This was a very good quarter for us. We feel momentum is great.

I want to remind everybody that we have this investor call tomorrow, and you all are welcome to come and participate. So, thanks for listening, and hopefully see you tomorrow.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.