ABM Industries Incorporated (ABM) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ABM First Quarter 2012 Conference Call. [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 achievements for the quarter and highlights and Jim will conclude our prepared remarks with an update on our guidance for fiscal 2012. In addition, there's a slide presentation that accompanies today's prepared remarks. You may access this presentation now by going to our website at www.abm.com, and on the Investor Relations tab, you will 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 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 for 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 dividend 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 the 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 hire 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 OneSource NOLs diminish. Adjusted income from continuing operations 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 through 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 paydown of a portion of the outstanding borrowings on the credit facility. Net trade accounts receivable at quarter end were $573.8 million versus $552.1 million at October 31, 2011. Days 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 and 7 in reviewing our operating revenues and profits, the quarter was within the range of our expectations. Janitorial results were notably affected by a few items. This year's 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 improvement in historical credits on clients receivable was offset by higher payroll taxes and lower profits from tag-related snow clean-up. Moving to our Facility Solutions segment, which is the legacy Engineering division combined with the former Linc business. Revenues increased $41 million or 21% during the quarter. The increase was due -- was primarily related to revenue associated with the Linc acquisition. As Jim noted, the period-over-period increase of revenue attributed to Linc was approximately $36 million. There were a few government projects in aggregate of about $5 million that we had anticipated starting 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 15% lower than 2011. Last year, in the first quarter, we benefited from an Iraq-based U.S. Government contract which was terminated after successful withdrawal of our troops. Revenues and operating profits for our Parking segment was flat year-over-year. We gained [ph]some unprofitable business 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 our first quarter of '11 because of higher payroll taxes combined with start-up cost of new business. Before moving to guidance, turn to Slide 8 with 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 that’s underway in the U.S. will continue, combined with our recent contract wins, position the company for strong second half. A quick update on DLITE. We are awaiting along with others notification from the government on who the winning bidder is on the initial task orders on this particular contract. We recently announced a global partnership with AEG, one of the leading sports and entertainment presenters in the world. Under the multiyear multimillion dollar partnership, ABM will expand its services and provide some select AEG venue around the world. The 2 comments I expect to announce later this year: additional venues both in the U.S. and Europe. One of the most exciting accomplishments we've had in this last quarter or this year is our new branded logo, which we launched last month. Through growth in our traditional market and strategic acquisitions adding new markets and new capabilities, we now offer more services and more industries and in more places than at any time in ABM’s 103-year history. Leveraging these combined strength as 1 ABM, we're now implementing a new vision and new direction to become the global leader in integrated facility solutions. As our new tagline communicates, today's ABM is about building value to effectively both the tens of thousands of physical assets we service and maintain as well the asset value we preserve and create. Please see our new interactive metropolis tool found on our website to garner a cleaner appreciation of all the services we offer and the number vertical markets we now serve. Jim will now 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 is one more work day in fiscal 2012 compared to fiscal 2011, which occurs in the third quarter. We estimate $3.5 million to $4.5 million increase in pretax labor expense year-over-year as a result. Secondly, we have 3 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 pretax 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 re-brand 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 2011's 35%. As always, our guidance is exclusive of any new acquisitions. At this time, we'd like to open the call up to questions. Operator?

[Operator Instructions] Our first question comes from David Gold of Sidoti.

I wanted to get a little more color if we can on the $100 million of new contracts. Essentially couple of things. One, can you give a sense for how much of that might have related to AEG? And 2, what businesses that fell into?

It’s in excess of $100 million in new business, not $100 million. I think there's a point. AEG is very small, if any, of that $100 million, $120 million. We do STAPLES, Nokia Center and others, dropped 4 AEG as we speak, but the strategic relationship we have built up with them will probably not generate new revenue until the third or 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 Solutions 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 would be the third quarter of 2012.

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

It's -- yes, there is one $30 million plus account, which is a facility service accounts. I can't give you a name but very exciting job where most of it was in-house, and we’ve pretty much taken over all 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 one [ph]. So what makes the excited about it, David, is the fact that it's not the one job. It seems like we have great momentum everywhere. And I've never seen it like this. I think combined with the new web, the new brand, this place is bustling right now on enthusiasm.

Okay, perfect. And then one other in the Parking side of the world. Well, I guess 2 pieces. One, just a little more comment on the cancellations and dispositions there. And then 2, 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 big 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 6 to maybe 9 months. The loss we had or the job we gave up was a loser, 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.

Our next question comes from Michael Gallo of CL King.

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

Yes. I think we, obviously, 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 on 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's 2 other comments I want to make about that. One is, when you deal with SUI, the increased rates in the states where the max hasn’t changed means that we will reach max faster more, so it could 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 the government business that was delayed in the first quarter into the second quarter, to have a positive effect in the second quarter to offset some of these increases.

All right. The second question I have, just the engineering of profitability on Linc. I guess when I look back to the time of 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 it's 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're 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 this business longer-term from an operating profitability standpoint and kind of how we bridge that from where it is right now?

Yes, I think, first of all, if I look at the business from where we were a year ago we're reporting [ph] 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, very professional group we have running Facility Solutions. But first quarter over first quarter compared to 2 quarters makes our first quarter look pretty bad this year, but that is also associated with the 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 the I'll say 6% to 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's not included in the over $100 million of new accounts. But our Energy segment where you see profits of 30%, 35% is moving fast as well. So overall, I would categorize this acquisition as an A-plus, best thing the company's ever done, positions are great for the rest of the year, as well as next year and probably as exciting a time as we’ve had here.

[Operator Instructions] Our next question comes from Justin Hauke of Robert W. Baird.

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 in margins or flat year-over-year? And then if so, what gets you to the top end of the guidance and kind of what are some of the embedded inputs into that?

Well, an easy answer to the top end of the range, success on jobs like DLITE, we have not including anything in 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 now $30 million, $40 million, $50 million of energy projects at the 30% profit level, that would surely 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...

That's what I hope for, yes.

Okay. And then I guess my next question is on the joint venture income, the big step -p that we saw here. Was there anything 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. We -- 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. And that went into that line.

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

Yes, 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 there is an investigation underway. And right now, we're just seeing what happens, but that's hard to tell at this point in time.

Okay. But those will be items impacting…

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

Our next question comes from Adam Thalhimer of BB&T Capital Markets.

I want to first ask about Janitorial revenue growth, Henrik. I mean, do you think that the potential for organic growth in Janitorial increases as you move throughout the year? Or 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 2 years. And I can say that based upon -- I know what they're starting in new business. And 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 way, 3% to 4% a year, which is probably not sustainable but nonetheless, a very, 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? I mean, there are a lot of concerns obviously that there'll be spending cuts there. Is that what you're seeing, or is the RFP flow better than you expect, better than you would expect?

There are 2 sides to that. As you can imagine, we get used to the government business as well. And the lack of predictability is probably the part that frustrates me the most, but we expect something to hit in one quarter and it gets delayed to the next quarter, et cetera, 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 operation and maintenance, which is our field, primary area. And I think the budget around 9.5% increase year-over-year, so that's pretty good news. The activity level according to our government folks [ph] is probably greater than we’ve ever seen it before, and it's probably a combination of their knowledge and reputation combined with our balance sheet that was stronger than Linc had in the past. I think that combination gives us a much greater upside than a potential 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 toughest part.

Okay. And finally, I want 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?

There's no doubt in my mind that 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 financing -- if ever the government comes through with a financing vehicle or if we as a company ever find a way to break that code, I think that business will grow pretty, pretty dramatic.

Our next question comes from Michael Kim of Imperial Capital.

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 is 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% or 30%. 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, very successful first quarter in the Janitorial business. In closing new accounts, which we did mention on our call, and the activity level is still at a very high level. And if that's combined with the historically low loss of business, they now basically tell you that if we see major 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 areas where 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 we do 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 in 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 its current environment? How are you looking at positioning in terms of whether it’s Janitorial or engineering or other sectors in the market?

Well, what's the question? Give me the beginning, I didn't hear it. I'm sorry. Could you give me the question again?

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

Well, we're still pretty active in looking at the right acquisitions at the right time. We have, as you might know, certain demands about how acquisitions need to be accretive right away, which I think is a good principal. 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 6 months ago in the middle of the integration of Linc and the system integration, we really don't want to have another individual item, but my financial portfolio was screaming at me. But now we feel we're ready for 1 or 2 little sides to the company.

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 over the long-term. While the Janitorial group and those folks have shown that they’re probably the best executors of acquisitions in the business, so you’d probably get a higher return on investment short-term in Janitorial but probably greater return long-term on an acquisition in engineering. So it depends on the availability of absolutely all the people [ph].

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 3 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.