ABM Industries Inc (ABM) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ABM Industries' Q2 FY14 conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Henrik Slipsager. You may begin, sir.

Thank you. Good morning. Joining me today are Jim Lusk, Executive Vice President and Chief Financial Officer; Jim McClure, Executive VP; Tracy Price, Executive VP; and Sarah McConnell, our Senior VP and General Counsel.

Today I'll provide an overview of 2014 second quarter that ended April 30. Jim Lusk will discuss the details of our financial results. Mr. McClure will provide an update of our onsite businesses and Tracy will comment on the Company's operational results for Building & Energy Solutions as well as our sales and [marketing] initiatives. I will then comment on Air Serv's performance for the quarter and then conclude our prepared remarks with an update on our outlook for FY14.

There's 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 will see the event and presentation tab. 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 the investor tab.

Thank you, Sarah. Now please turn to slide 4 for an overview of our second quarter. Revenues for the quarter were in excess of $1.2 billion, a record for the second quarter and up nearly 5% for the same period last year. Janitorial posted top line growth of over 3%. Building & Energy Solutions had another exceptional quarter posting revenue and operating profit. BESG achieved top line growth of 26% and on an organic basis 21%. And operating profit increased over 105%.

The growth came from all three parts of our business with revenue from ABM Healthcare Support Services increasing 35% and the Government business increasing 20%. Air Serv revenue was up 12% benefiting from organic growth and the Blackjack acquisition. There were a number of items that affected same-quarter results of FY14.

Legal expenses were higher than anticipated, higher start-up cost and weather in March impacted our parking, Janitorial and the Air Serv businesses. In addition, the same quarter FY13 had a Work Opportunity Tax Credit benefit.

Cash flow improved significantly in the quarter compared to FY13 second quarter and on a year-two-year basis. Cash generated from operations is consistent with FY13 and in line with our expectations. Our six-month results, with the exception of the Work Opportunity Tax Credit on our internal plan and we expect to be on plan for the fiscal year.

Yesterday we announced a cash dividend for the third quarter of $0.155 per common share. This marks our 193rd consecutive dividend. Now I'd like to turn the call over to Jim Lusk for a financial review of our second quarter.

Thank you, Henrik, and good morning, everyone. Turning to slide 5. As Henrik noted, revenues of $1.23 billion for the second quarter were up 4.9% compared to the prior year. This was due to net sales contributions of $48.2 million from organic growth or 4.1% and $9.5 million from acquisitions.

Gross margins for the 2014 second quarter were 10.39%, down the 30 basis points compared to the second quarter of 2013 primarily attributable to higher operating expenses from net new business and the impact of unfavorable weather conditions in the current year quarter. This decrease was partially offset by contributions from newly awarded contracts within our Building & Energy Solutions segment and savings realized from our organizational realignment.

SG&A expense for the second quarter increased $8.8 million, or 10.4%, to $93.3 million primarily as a result of a $3.4 million unfavorable arbitration decision, a $3.2 million increase as a result of hiring additional personnel to support certain growth initiatives in IT and a $1.4 million increase in legal expense. These items were partially offset by a $1.4 million decline in depreciation expense mostly associated with the previously upgraded enterprise resource planning system.

Amortization of intangible assets for the second quarter decreased by $0.6 million to $6.7 million. Our effective tax rate on income before income taxes for the three months ended April 30, 2014 and April 30, 2013 were 42.4% and 39.1% respectively. The year-over-year difference consists primarily of the WOTC credits that occurred during the second quarter of FY13.

Adjusted net income, which excludes items impact to comparability, was down $1.4 million to $18.8 million for the second quarter as a result of lowering operating margins due to new business. Also impacting operating margins were higher legal expenses of $0.9 million, start-up costs of $0.9 million and the impact of that adverse weather of $0.5 million. These items were partially offset by profits from new business in the Building & Energy Solutions and organizational realignment savings.

Now turning to slide 6 and 7. Days sales outstanding at quarter end were 53 days, up 3 days on a year-over-year basis but down 3 days sequentially. Cash generated from operating activities for the quarter ended April 30, 2014 was $76.6 million. This was an increase of $27.3 million compared to the same period in FY13, primarily related to timing of collecting receivables and payment to vendors.

Turning to insurance. Total insurance claim liabilities at April 30, 2014 were $357.1 million compared to $350.7 million in the second quarter of 2013. For self-insurance claims paid during the quarter, the total expenditure was $23.1 million, down $0.5 million year over year.

As Henrik noted earlier, we announced our 193rd consecutive dividend continuing the long-established pattern as evidenced by the chart at the bottom half of slide 7. I'd now like to turn the call over to Jim McClure.

Thank you, Jim. Please go to slides 9 and 10 and I'll now provide some operational highlights of our Onsite services for the second quarter before turning the call over to Tracy for an update on Building & Energy Solutions.

Janitorial top line growth for the quarter was 3.1% compared to 2013 with revenue of $631.7 million. Janitorial sales momentum continues with recent contract wins in our financial services, education and technology verticals as well as national bids. Discretionary tag spending increased 2.3% over second quarter of 2013 while client retention on a rolling four-quarter basis was at 92%. The Janitorial segment earned $36.2 million in operating profit for the second quarter of FY14, down $1.3 million compared to FY13.

For some time clients have been moving towards aggregating and centralizing their purchasing decisions. This is causing an increase in bids for big packet bus on a national basis. The on-site focus has made us very successful in winning these types of bids and sales remain strong. However, these larger and national jobs initially have low lower margins and start-up costs can be significant.

Partially offsetting the lower margins on the new business was savings from our realignment. In addition, the second-quarter operating margins for Janitorial were impacted by higher legal expenses, start-up costs on significant new jobs, weather, and as I mentioned on the first-quarter call, we canceled a large unprofitable job in March. All of these items were approximately $1.8 million of impact on a year-over-year basis.

Moving to Facilities Services. As previously communicated, we expected revenue to be lower but we managed a small increase of $2.1 million. Despite the slight revenue growth in the second quarter, operating profit for Facilities services was $5.4 million, down $800,000 primarily from legal expenses of $400,000 associated with the two closed cases.

For parking revenue was $156 -- $152.6 million, up $1 million compared to 2013. Management reimbursement revenue was up $900,000 to $77.1 million. Parking operations achieved a 4.9% increase in operating profit of $6.4 million based on realignment savings and a one-time benefit. Partially offsetting these items was $200,000 unfavorable impact from weather -- from adverse weather. We're very pleased that parking generated both top and bottom line growth for the quarter.

Turning to Security. The team accomplished another quarter of top line growth with a 2.5% increase on a revenue of $93.8 million. For the second quarter, Securities generated an operating profit of $2.2 million, a 5% increase compared to the second quarter of FY13.

Before concluding my portion of today's scripted remarks, I want to provide an update of where we stand on the Onsite realignment. In the second quarter we achieved, on a pretax basis, savings of approximately $2 million compared to the second quarter of FY13. We are on course to have cumulative synergy savings of approximately $10 million for FY14, and since inception, approximately $13 million for Onsite, all of which is consistent with the numbers we provided last year when we announced our Onsite realignment program. With that I will now turn the call to Tracy.

Thank you, Jim. Continuing on slides 9 and 10 I will provide an update on our Building & Energy Solutions segment which includes ABES, Government Services, ABM Healthcare Support services. This was another strong quarter for the team and we're very pleased to share these results.

Starting with revenues, we accomplished a 26.2% increase to $118.5 million. Excluding acquisitions, we achieved organic growth of 21% as we benefited from an increase in energy [refit] projects, service and maintenance contracts and continued improvement in our Government business. Another outstanding quarter for the ABES team and reflective of our continuing record backlog and strong sales momentum.

Revenue from our ABM Healthcare Support services was up 35% to nearly $26 million compared to the second quarter of FY13. And our Government operations grew revenue on a year-over-year basis achieving top line growth of over 20% with revenue in excess of $38 million.

With year-over-year growth in revenue by ABES, contributions from ABM Healthcare, Government services, BEST IR and our newest acquisition, Alpha Mechanical, BESG generated operating profit of $3.5 million, up 105.9%. These are outstanding results and based on the strength of our pipeline we remain well positioned as BESG moves further into FY14.

Turning to slide 11, I want to mention a few of the sales and marketing highlights from the past quarter. We continue to make strategic investments to drive organic growth and enhance our sales capabilities by utilizing our automated sales and marketing tools and ensuring our sales personnel have the best skills by putting them through our trusted advisor training program. Approximately 84% of our 250 salespeople have been through the Challenger program to date.

At quarter end, our [sold one more] program has generated nearly 1800 leads and a sales pipeline of approximately $100 million. The corporate sales team is working across operations to strengthen collaboration to help drive sales of multiple services and we are concentrating our efforts in a number of key areas including aviation, education, healthcare, energy and government, all of which sustained the growth rates we've been experiencing across ABM. And with that, I'll turn the call back to Henrik.

Thanks, Tracy. Before discussing our outlook for FY14, I want to say a few words about Air Serv. This segment listed as other in our [financials] have revenue of $85.2 million, up $9.1 million or 12% compared to the second quarter of FY13.

The Blackjack acquisition contributed revenue of $4.6 million. Organic revenue growth was 5.9% with the recent start of a shuttle operation at Heathrow Airport. Air Serv is in a position to achieve top line organic growth in the high-single digits for the remainder of FY14. Operating profit of $2.4 million was essentially flat for the quarter as Air Serv had $900,000 of cost associated with significant new jobs on a year-over-year basis.

Please now turn to slide 13 for our view of our financial guidance for 2014. The Company continues to expect the following. $1.38 to $1.48 per net income per diluted share, $1.58 to $1.68 for adjusted net income per diluted share. The adjusted guidance reflects the exclusions of charges consistent with our past practices and it's based on an effective tax rate for FY14 in the rate of 36% to 38%. This is based upon [current rates] extending the Work Opportunity Tax Credit for the end of our fiscal year October 31, 2014.

We continue to anticipate depreciation and amortization expense in the range of $60 million to $62 million. Please review the other items listed on slide 13 which contribute to the EPS guidance we have provided. And as is customary, our guidance is exclusive of any future acquisitions.

At this time, we'd like to open the call for questions. Operator, please.

(Operator Instructions)

Michael Gallo, CL King.

Congratulations on another good quarter of organic growth. I wanted to just dig in a little bit on the cross sell. It seems like that's really starting to gain some traction, obviously you had the nice win at Heathrow. So I was wondering if you could update us on what you're learning as you start to bundle and send, how you're making adjustments and how you can bring that to the next level where we really see a fully integrated ABM going to market in more and more areas? Thank you.

Yes, Michael, this is Tracy Price. So I think the learnings over time are that we have an enormous opportunity in front of us if we can do a good job of educating and training our folks in the local markets about the myriad services ABM provides. Herefore most of these people have been focused on their existing service line. And with the restructuring and reorganization they're learning about multiple services within Onsite as well is being exposed to the services provided by the mobile group in power and lighting and mechanical. And this is a lot to digest in a small period of time.

What we've been doing is conducting day in the life meetings and taking all of the management and sales talent in local markets through all of the different services that ABM provides and we've also been hosting Solve One More meetings where literally people who have worked for the same company for 20 plus years are meeting for the first time. So the exchange of information is terrific. The behavior is more like the musketeers that we were hoping for.

People are rallying around the brand. They get the reorg. They like the vertical strategy and where we've been able to infill with mechanical or electrical locations in markets where we have client concentrations, we're driving terrific growth.

That's great. And then a question on the acquisition pipeline, obviously the balance sheet is deleveraged at this point. I was wondering if you can give us an update on what you're seeing out there in the acquisition pipeline and whether you expect that we'll see some additional tuck-ins or whether multiples are at reasonable levels? Thank you.

In my world the multiples are never reasonable. They have been moving up a little bit, the multiples in the business simply because of I would say private equity and the interest level in the market and the financing opportunities. But we do see some decent activity. We have not been very aggressive on the, especially the Onsite services the last 1.5 years simply because we have gone through an enormous restructuring and has done a fantastic job of getting us to where we need to be. So the focus has been more on the technical services and on future verticals, so that will probably be also the short-term focus going forward.

As you go forward, do you feel like Onsite's where you want it to be? Where you might look a little bit more aggressively at this point or should we expect more of the same?

Well, I hope we're going to see Onsite having a more consistent organic growth at these new levels, the 3% to 5% will be something that we would like. And I really don't want to have an acquisition -- always exceptions if somebody prompts, something comes by that's very attractive. But nonetheless we don't want to disturb the organization with an acquisition right now because I think they are on the track of developing a wonderful organization where an acquisition can be more of a distraction instead of having the focus on growth and the (inaudible) profitable growth.

Okay, great. Thanks very much.

Joe Box, KeyBanc Capital Markets.

Hey, good morning everybody this is Sean Egan in for Joe Box. A quick [schematic] question for you. I wanted to go back to something that you mentioned on the Janitorial side, you talked about the trend for contracts being bundled, larger national contracts and coming in at a lower margin. Should we be thinking about the Janitorial operating margins then potentially drifting lower or do you see that offset by your realignment efforts?

Hi, this is Jim McClure. I believe that margins will stabilize. This is a product right now of a job mix impact. These larger accounts do initially have lower margins that always has been the case but we're seeing much larger opportunities which are fantastic because we're able to enter those opportunities at a senior level communication above procurement level. And over time we will get the revenue growth we're looking for and we've always been able to mature these jobs to where the margins come in line. So I think you can consider the Janitorial margins in the past to be what to expect for the future.

Okay, great. Thanks, that's all for me this morning.

Andy Wittmann, Baird.

Build on that last question a little bit, it sounds like, Jim, from your comments on the Janitorial segment that you have one of these new larger jobs maybe than you've won -- in other words, the job size has been larger than what you've won in the last couple of years, hurting your margins for now, you'll get it back over time. Can you talk about what the pipeline for new work looks like? What's the complexion of that? Are you -- it sounds like there are more larger jobs in there. Do expect that to be the growth driver? And are these levels in the 3 -- north of 3% range for Janitorial sustainable as you look into next year?

I'll start with the last part. Yes, they are sustainable, the 3% plus for next year. The pipeline is as robust as I've ever seen it. We've got pending commitments that are tremendous, and of those commitments, a majority are falling in that medium to large contract size.

And as this continues, the market catches fire when they feel us getting these bigger opportunities and they become the norm. We get continued looks from companies both nationally and internationally to expand. And so we're getting a lot of action and our national sales team is earning their money these days because they're covered up with opportunities. So we're feeling very good about our pipeline.

Okay. Before we go on to the margin side of that, can you talk about the win rate that you're having? It seems like you've got pending commitments meaning you've got bids that you're waiting to hear back on. Can you talk about the win rate that you've had recently? Is it in line with historical norms or is there something about the one ABM selling process which is improving your win rate?

Let me jump into this one also because I think it's very difficult to talk win rates because most of the jobs that we have received has been negotiated jobs. If you talk about these bigger bid jobs because I would want to say very few companies, if any, can do those jobs, they're simply too big. So to give you a ratio number I think would be very wrong but at least the last two or three major jobs are negotiated and not bid, which is great.

Okay. Maybe just one last one here for Tracy. On the BES segment, I don't know, I think of -- because there's some project based work in there that that business can be lumpy. Can you talk about what you're seeing today as underlying trends? Is the quarter growth rate benefiting from some lumpy business or do you see that some of these new business levels, revenue levels as fairly sustainable too?

Yes. And what you have to understand is that we have been backfilling with additional BES sales talent as we've made strides. So we've been paying it forward and putting in place in the markets where BES is attractive the talent to drive more business, so it shouldn't be very lumpy. We have benefited from a lot of wins. I mean, last year we had the largest deal in the history of the Company which was $25 million. Last quarter we signed the second largest deal which was $13 million.

The pipeline is currently larger than it was at the same time last year even though the largest job in the Company has effectively been worked off. So we've got a broader talent base. We're covering more markets and we're going to continue investing in that headcount.

I just want to add one thing again there. It's not going to be lumpy if you look at it over time. But you might have quarters where you either finish up more than you expected or finish up less jobs than you expected simply due to the fact that the projects have work. So if you have a rainy quarter, some of the work might be delayed into the following quarter. That's one area I want to make a comment on.

The other area is Government right now, we're enjoying Government and the comparison to Government. But I'd like to say our history tells us we really don't know about Government in the future so we are just hoping and praying this is continuing the way it's been going this year.

Yes. Guys, pardon me but I want to do a last, last question. I want to involve Jim as well a little bit here. On some of the adjustments to the adjusted net income, Jim, if you read the press release you hear about litigation charges that were added back and the adjusted number but you've got legal -- other kind of comments on legal related charges that flowed through and impacted your margins. Is that just because -- is the litigation just added back of substantial size and the other ones expensed because they're smaller? Can you talk about what the hurdles were to add back and what was added back and what was not?

Yes. The one that's added back which is in items impact to comparability was an arbitration case. So that's a finite thing. Yes, there are legal expenses for ongoing things that we have. So that's the differentiation, so we are trying to use the word arbitration for below the line and then legal for above the line to avoid that confusion, but -- so it was the fact that it was an arbitration settlement that we backed out.

Okay. Thank you very much.

I would like to add about that arbitration settlement also, that it is a decision we very much disagree with and we are challenging the decision. But due to our experience when it comes to arbitrations, it's going to be very difficult for us to overturn it, but nonetheless we are challenging it.

Okay, thanks.

(Operator Instructions)

Michael Kim, Imperial Capital.

So not to neglect parking, obviously weather wasn't particularly great this quarter, but can you talk about some opportunities to align the growth rate close to the Corporate average or at least closer to Janitorial? What are some steps you can do to bring that business up?

Well, obviously our weather was better than standards was for the quarter, but nonetheless the growth we've seen in parking and the growth we expect for the third and fourth quarter, I think it's going to be pretty close to the [vertical] side and there's nothing unforeseen is coming up. We're aware of some start ups. I think starting this month is a [major] job (inaudible). So I hope for the rest of the year, you will see parking be in line with the rest of the business.

Okay. And then maybe to a lesser extent security as well, do you see an opportunity to gain share there, cross sell with some of the other existing Onsite clients?

Yes, this is Jim. Security has benefited from the Onsite environment. I think if you go back over the last year you've seen tremendous bottom line improvement and top line enhancement. They had some minor negative top line impact this last quarter but they've got a robust pipeline on some exciting national industrial accounts that are really their sweet spot. So we feel good about security and like I said, their profit contribution has increased dramatically and it's getting it more in line with the rest of Onsite.

Okay, great. And then on the -- turning back to Solve One More, I think you called out a pretty significant increase in leads and somewhere around $100 million in pipeline. Can you help us maybe get a better sense of what this pipeline conversion could look like? At least maybe what you're targeting and how much of that could occur in the current fiscal year?

Yes. I can tell you that we closed about $36 million to date. I don't have the conversion ratio off the top of my head. But understand that the whole value statement in Solve One More is we're going to existing clients and solving additional problems that they have with services that we're quite competent in delivering. So the close rates tend to be higher.

There's just a lot of enthusiasm and upwelling of excitement but keep in mind we're rolling this out serially across the country. So we just don't have the headcount or the resources to go do 80 Solve One More meetings in every market that we could. So we're taking those systematically by region and making sure that we're doing a deep dive on cross training and that we've got the systems in place to track the leads, to nurture the leads, but then qualify the sales, process them through our sales force CRM program. And then once they get into the JDE, they become opportunities for additional Solve One More programs. So it's probably two to three X the close rates of our traditional sales activity but I don't have that at my fingertips.

Okay. No. That's fair enough. Great, well thank you very much.

Adam Thalhimer, BB&T Capital Markets.

I had a question. What -- as it relates to your full year guidance, what are you assuming for EPS in Q2? Is it the $0.33 or are you adding back the $0.04?

$0.33, the actual. Yes, we're assuming the actual.

Okay.

And the guidance is -- the overall guidance is dependent on the WOTC credits that we mentioned before within our fiscal year.

Okay. How big were those if you don't mind?

$0.08 for the year.

$0.03, Henrik?

$0.08.

Approximately $0.02 per quarter. It has only been $0.03 year to date, but it's around $0.02 a quarter, $0.08 for the year our original budget in play.

Okay, so there's incremental $0.05 in the back half that could show up on the tax line?

$0.05 in the second half is what we expect to benefit from the WOTC credits and if the law comes through, we have the $0.03 for the first half then we can take it [straight].

Got it, okay. Thanks for that. And then I wanted to ask about the Alpha Mechanical acquisition. Strategically would it make sense to be bigger in the HVAC service business?

Absolutely. I'm not going to argue with you on that one. Yes, what's happening and we can show evidence of Washington DC market, Atlanta, LA, Orange County and dropping in San Diego, we went about undertaking a California strategy where we wanted to more or less conquertize the backbone of the mobile services to leverage off the existing client base. And we do $1 billion worth of revenue in California, it's over 20% of our employee headcount. So it makes sense to try and connect the tissue between the service lines in those markets.

And what we're finding is where maybe in years gone by there was little to no communication between groups, with the restructuring of Onsite and the tying together of the technical competencies that we have in mechanical and electrical and the power business, we're getting tremendous pull through. And as you know, if you've got a $10 million to $15 million branch location and you're pulling through $800,000 to $5 million jobs, the growth tends to be pretty eye popping.

So in the markets where we've been able to put the multiple service lines due to Solve One More, due to day in the life, we're seeing terrific growth. So to the extent that we could land mechanical and power and electrical business in all of our markets where we have client concentrations for ABM, it would be wonderful but also we're not a serial acquirer of small companies. So we're picking our markets, looking at the right opportunities and getting things that are more impactful. We can't go buy tiny companies all over the place, but it's a terrific infill strategy and it's working quite well.

And then you're not -- Tracy I don't think before the acquisition how much construction did you do? You're not -- you would welcome a construction recovery benefit.

I welcome a construction recovery because then the construction companies go back to doing construction and they get out of our market. So they tend to create a lot of confusion and low margins when the economy is not doing well. And we do construction management in our Government group, but we're a pure service play on mechanical and electrical.

Got it, okay. And then last question as it relates to guidance for the full year, Henrik. Janitorial margins are good but in some of the other segments like facility services, security BES, Air Serv, it looks like you'll need margin improvement in the back half and there has been a lot of moving parts in the first half of the year. So what's your confidence level in that margin improvement in the back half?

I'm very confident about the overall result for the year in our guidance. And it is associated with a lot of things. We look at our business it's a really unique compared to other businesses with respect to the quarters where we earn the bigger bucks. The way we book or expense [suwee] it's primarily hitting us the first and second quarter and coming May, June suwee is going to drop dramatically. We go through the summer with a lot of vacation replacements.

We have a pipeline that we are aware of. We had a lot of start ups earlier this year that we will benefit from in the second half. As (inaudible) can tell you, Air Serv I'm very comfortable they're going to live up to our expectations for this year because they've started the business, we know what we have for the rest of the year. And we heard from Tracy before, we are basing our forecast on the backlogs and what we have in front of us and not with the hope that we're going to get a job or two in the next three months. It looks pretty good for the remainder of the year.

Okay, great. Thank you.

And I'm not showing any further questions at this time, I would like to turn the conference back to Mr. Slipsager for closing comments.

Thank you very much and thanks for listening to our second-quarter call. We will be back to you after the third quarter. Enjoy the summer. Thank you.

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