ABM Industries Incorporated (ABM) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ABM Industries fourth quarter full year 2015 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

Thank you, Michelle. Welcome, everyone. I’m David Farwell, Senior Vice President, Investor Relations. Here with me today are President and Chief Executive Officer, Scott Salmirs; and Anthony Scaglione, Executive Vice President and Chief Financial Officer. 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 Events. Please select this tab and click View Presentation. Now, turning to slide 2 of the presentation is our agenda. 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. I will now turn the call over to Scott.

Thanks, David. Good morning and thanks everyone for joining us today. By now, I'm sure you all had a chance to review last night's press release discussing our fiscal 2015 fourth-quarter and full-year results as well as this morning's announcement of the Westway acquisition in the UK, a providers technical services. 2015 was a defining year for ABM in which we announced a bold new vision and began our transformational process from a service company to a solutions driven business. I'm very proud of what our company and our employees have accomplished this year and feel an increased level of energy and excitement and commitment throughout the entire business as we begin the journey towards our 2020 vision. Antony will go through the numbers in much more detail, but at a high level, we reported a good quarter with revenues up 6% to nearly $1.3 billion compared to the same period in fiscal year 2014, and we achieved solid organic growth of 3.7%. Our adjusted EBITDA for the quarter was $69.4 million, which translated into 5.4% margin. So the takeaway here is that we are keeping our eye on the ball as we move through our transformation. Something that I always signaled is critically important. Our adjusted income from continuing operations per diluted share came in slightly above our narrowed guidance, which was last communicated at Investor Day. This was not only a result of our operational performance, but due to our decision to adjust a portion of the year-end bonuses to reflect our insurance results we spoke about in the third quarter. We felt this was important to do as we are focused on aligning our compensation to our business strategy and financial performance. I'm also proud of the fact that in fiscal 2015, we were able to return just over $67 million in the form of dividends and share repurchases. And our board approved a 3.1% increase in our quarterly dividend. I now want to spend a few minutes highlighting some exciting and growing areas of our business. We continue to see strong growth within our Air Serv segment. Air Serv revenues have grown double-digit over the past year and has one of our highest client retention rates in the company at roughly 98%. Going into 2016, the Air Serv segment has a strong pipeline to new business opportunities and is well-positioned for the new year. Within our Building & Energy Solutions segment, our ABES technical services business demonstrated record sales in the fourth quarter, which was enhanced by new bookings from our CTS acquisition which we completed in May of this year. You may remember that in my first quarterly earnings call as CEO, I said that I believed in this group and their ability to accelerate their performance given a slow start in the first and second quarter. I'm happy to report that they exceeded every expectation I had. In onsite, which comprises janitorial, facilities and parking; revenue closed the quarter, up 2.6% and was so pleased with our TAG sales in our janitorial business, which were up 16% for the quarter. We've also seen good expansion in high-tech and in our sports and entertainment business, including announcing an extension of our contract with the New Orleans Saints. In addition, we continue to stay focused on technology innovation. A great example is the enhancement of the ABM applications to leverage BLE [ph] technology, which is more commonly referred to as beacon technology. [ph] BLE allows ABM to track employees, and assets in real-time within facilities. As an example, by tracking employees and hard assets within airport terminals; we can dynamically allow employees to arrivals and departures that require wheelchair services or to facilities that need attention. This has tremendous implications to the management of human logistics in driving improvements for our clients. We've been working closely with Microsoft and AT&T on this initiatives. So if you think about 2015, we achieved solid performance in a year that saw a great deal of change. This included transitions at some of the most senior levels of management and the announcement and articulation of our new strategy to align our business to a vertical industry focused model. I was also pleased that we are able to accelerate one of the components of a 2020 vision with the sale of security business to Universal Protection Services. We are now in a key transition here, where we will align our new organization structure to fit our vertical approach and we will be investing in the necessary tools to support our 2020 vision initiatives. This is critical, as it's going to position our company for long-term top and bottom line growth that we expect to achieve through our new operating model. The entire management team is focused on our business transformation, but also clearly understands how necessary it is to continue to run our day-to-day business and I believe that our results in the fourth quarter are a further indicator that we can definitely handle that balance. Looking ahead at the macro environment, we believe our business will remain stable as we move through 2016 and we do not foresee any immediate headwinds. Finally, I am excited to announce today’s acquisition of Westway Services. [indiscernible] very positive note, the acquisition is an excellent strategic fit and in line with our focus on technical services that deliver higher margins. This also builds upon our strength in the UK with Omni Serv and last year’s GBM acquisition and this will allow us to deliver complete facility solutions. To summarize, for me, 2016 is about navigating a year of transition and delivering on the results you expect from us and the guidance we provided. With that, let me turn the call over to Anthony Scaglione, our Chief Financial Officer who will provide further details on our financial results.

Thank you, Scott, and good morning, everyone. As Scott discussed, fiscal 2015 was a defining period in the company’s 160-year history. Our 2020 vision clearly provides a roadmap for enhancing shareholder value and [indiscernible] pretax proceeds of $131 million was a significant step. I will start with a high level review of the fourth quarter. Note that the company's financial results taking into account the sale of securities which is now classified as discontinued operations. Please turn to slide five. Revenues were up 6%, 3.7% organically compared to the prior year. Adjusted income from continued operations increased 16.7% when compared to the fourth quarter of fiscal 2014. There are a number of items in the quarter that impacted results. The contribution from one less working day, the strong performance of our technical services business and a bonus reversal of certain incentive plans more than offset the increase in SG&A payroll and higher insurance expense, resulting in an increase of adjusted EBIDA margin of 5.4%. During the quarter our continuing operating cash flow was $39.5 million down 40% primarily from the timing of changes in working capital from Q3 to Q4. For the year, continuing operating cash flow was $144.4 million, up 26% and the full year benefited from approximately $20 million of cash flow from our insurance captive. Now let’s move to slide six for a review of operations for the fourth quarter. The Janitorial segment recorded overall growth of 3.4% benefitting from the acquisition of GBM, which has been rebranded to ABM UK. Organically, the Janitorial segment grew by $8.1 million primarily due to strong work order or tag revenue. The Janitorial operating profit margin benefitted from low labor expense resulting from one less working day and for the year Janitorial operating profit margin was 5.6%, consistent with the guidance we provided on the third quarter call. Moving to facilities services, revenues were slightly down compared to the prior year period. As anticipated, operating profit margin was down for the quarter due to the timing of the KPI award which will now occur in the first quarter of fiscal 2016. For the year, operating profit margin was higher than the guidance given on the third quarter call. Rounding off the onsite business, our Parking segment was generally in line with expectation with margin slightly down due to certain one-time account adjustments compared to the previous guidance. Turning to slide seven, operating profit margin increased due to higher revenues from jobs associated with our technical services. As previously communicated, we expect that our ABES business to have a strong fourth quarter and they delivered. In addition, the ABES business ended the year with a record backlog. Wrapping up the fourth quarter segment operational results, Air Serv achieved another quarter of double-digit organic growth due to strong sales in our US operations. Omni Serv, our aviation presence in the UK continued to perform well and contributed to the growth in operating profit due to higher margin tag project work. Turning to fiscal 2015 results on slide eight, overall revenues increased by 5.3% as compared to fiscal ’14. The increase in revenues was attributable to organic growth of 2.9% and $112 million of incremental revenues from acquisition. Adjusted income from continuing operations for fiscal 2015 was $92.9 million or $1.62 per diluted share compared to $80.2 million or $1.41 per diluted share for fiscal 2014. The increase was primarily driven by contributions from discrete tax items and the operational points previously provided. Adjusted EBITDA grew to $206 million and we ended with an adjusted EBITDA margin of 4.2%. Moving to our capital structure, please turn to slide 10 for the look at the company's leverage profile. We ended the quarter with approximately $158 million of debt outstanding under our $800 million line of credit. Including letters of credit of approximately $113 million, we ended the quarter with an adjusted leverage of 1.31. As mentioned, we announced the acquisition of Westway Services today, which will increase our pro forma adjusted leverage ratio going forward. Turning to slide 11, during the quarter, we repurchased 403,000 shares at a cost of approximately $11 million, leaving 189 million available for future repurchases under our 200 million share repurchase program. We will continue to allocate capital prudently to drive long-term shareholder value, while maintaining a strong balance sheet to ensure we have adequate liquidity to execute our strategic plan. And yesterday, I'm pleased to announce the board increased the quarterly dividend by 3.1% to $0.165 per share. This will be the company's 199th consecutive dividend. Before going into our fiscal 2016 guidance, I wanted to ensure we explain the impact of a couple of significant items for fiscal 2015 that when recast impact the beginning run rate for fiscal 2016. Now, turn to slide 13. Purpose bridge adjusted income from continuing operations per diluted share. As provided in our press release, including securities, we would have achieved adjusted income of $1.81 per share, which was $0.01 better than the top end of the guidance previously provided. Factoring for the sale of security, adjusted income from continuing operations was $1.62 per share. Now, let me bridge a few significant items. As previously described, our insurance expense for 2015 is expected to increase by roughly 35 basis points or $0.16 to $0.20 per diluted share due to the increase in our main insurance programs. Other changes include the estimated benefit of our 2020 vision savings, which is primarily driven by the organizational design, the projected absence of the bonus reversal in fiscal ‘15 and one additional working day. With these adjustments and no assumed benefits of discrete tax items, which I will discuss in further detail, the 2016 guidance for adjusted income from continuing operations is $1.30 to $1.40 per diluted share. Now, a little more detail on the discrete tax items. The GAAP effective tax rate for 2015 was 25.3%, compared to 39.5% for 2014. The effective tax rate for 2015 was lower than the rate for 2014, primarily due to employment-based tax credits, a benefit related to the recognition of previously unrecognized tax position and tax deductions for energy-efficient government buildings. In aggregate, on an EPS basis, fiscal 2015 included approximately $0.21 of these discrete tax items. For fiscal 2016, we have not assumed any discrete tax items will be recognized. Therefore, our guidance does not include benefit of up to $0.40 per diluted share from the potential 2015 and 2016 work energy tax credits or other unrecognized tax benefits. Moving to adjusted EBITDA margins on slide 14, as mentioned on our third quarter call and at our Investor Day, the increase in our insurance rate is anticipated to adversely impact adjusted EBITDA margins going forward. In addition, the reversal of the bonus accrual in the fourth quarter fiscal 2015 increased margins for the full year. Taking into consideration these two items, our recasted adjusted EBITDA margin would have been roughly 3.8%. Adding in the projected saving benefits from our 2020 vision plus one additional working day, we expect full-year adjusted EBITDA margin to be in the range of 3.9% to 4.1% in fiscal 2016. Turning to slide 15, which summarizes our main assumptions for our fiscal 2016 outlook. Fiscal 2016 is the year when ABM will begin the transformation for achieving 90 to 110 basis points of adjusted EBITDA margin improvement by fiscal 2018. We recognize that the improvement will come from a combination of operational realignment and better business mix as we move towards becoming a more vertically focused solution provider. Our 2016 guidance assumes savings between $10 million to $20 million from 2020 vision, which is consistent with the numbers I shared at our Investor Day. This is primarily related to organizational design, including putting the right people in the right seats to accelerate our vertical focus. Let me emphasize, this is realized savings, not run rate savings. Partially offsetting these savings is one additional working day. To note, the acquisition of Westway is not expected to materially impact our guidance. With that, I will turn the call over to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Andrew Wittmann with Baird. Your line is open, please go ahead.

Hey guys, thanks for taking my questions. I wanted to I guess start and just dig into a couple of things on the guidance. And maybe Anthony, I will pick up with the tax up to $0.40 of tax. So the items for ‘15 were $0.21, WOTC, energy, employment tax credits and like the buckets where that came in, obviously you’re not guiding but $0.21 is probably the benchmark that most people will work off of, what gets you the other $0.19 seems kind of like a lot? Maybe some color on that would be helpful.

Sure. So Andy, when you look at the tax credit that came into fiscal ‘15, primarily the WOTC, energy tax rate, and we had some reversals from previously unrecognized tax benefits. If you think about retroactive and prospective WOTC, that could be anywhere in the range of 20% to 25% and it's hard to pin down based on cumulative impact. The remaining items which we described are like the energy tax credits 179, again based on legislation passing and then there is certain unrecognized tax position from the previously positions that we have on our balance sheet that will bridge the remaining $0.19 in your model.

What has to happen for the previously unrecognized items? What has to break for those to come out to you that you have to – is it – those don’t sound like legislation at all but it seem like operational things that the company would have to achieve or not achieve for those to be recognized, is that right?

It’s really based on an passage of time; we have positions that we have taken related to previously unrecognized items associated with acquisitions in the past. And those positions based on passage of time, so it's really the statutory passage of time that will allows us to recognize that but it's always subject to risks and audits.

So those passage of time credits would have been part of the $0.21 last year, and some amount of those is certain for ’16, you just don’t know how much you're not guiding how much, is that fair way to summarize that?

I would say it's reasonably certain.

And then, was there any -- what’s the share count Anthony that's assumed in the guidance?

Roughly 57 million.

So nothing incremental beyond what you’ve already announced here today then?

That's correct.

And then Scott, on Westway, I guess any more details that you could provide there in terms of what you expect. We heard EPS not a lot of accretion, probably because of the amortization, but EBITDA expectations out of that deal, a deal multiple. And then, it's always been our assumption that your UK business was largely through your Serv business, I know that's not totally true. But I'm trying to understand the cross selling opportunity here. Is your base business there big enough to cross sell through or is this really the launch point for your UK on-site work.

So first of all I want to say we’re just so excited about this acquisition because when we started -- so we’ve had the Omni Serv business through the Air Serv acquisition as you know and that's really sequestered towards airports, airlines, and we did the GBM acquisition, which got us into kind of our core onsite businesses that we’re traditionally known for but that was primarily janitorial. So we didn't have a complete facility solutions, we didn't have a high-tech portion, which is, as you Andy in our 2020 vision, we’re looking to do is leverage these high margin businesses. So for us, this kind of completes our ability in the UK to now service clients in a more I would say more thorough and complete way because before we couldn’t offer these services. So we’re excited about this and it is such a high-quality company, we’ve spend a lot of time on due diligence talking with the principles. So I think what you’re going to see now has – our total UK business approaches $250 million, which is a big shift right from where we were a few years ago, you're going to see us really be able to operate as a complete ABM business in the UK with this offering, and again for what we're trying to articulate as a firm which is to move up our margin profile. This is going to be tremendous for us.

Are there any financial details at this time that you can give us and when do you expect this to close?

Andy, we actually close today, so we are excited about having Westway as part of our portfolio. It’s a great book of business as Scott mentioned. It’s a high single-digit, low double-digit EBITDA margin business, so the plant is going to be a great story over the next couple of years.

Yeah, Andy, what I would say is, if you think about our ABES business in the US and how that’s been performing and what it does, it’s literally a mirror image.

Okay, thanks, guys.

Thanks, Andy.

Thank you. Our next question comes from the line of Michael Gallo with CL King. Your line is open. Please go ahead.

Hi, good morning. One follow-up and then couple of questions. Anthony, I want to make sure if I heard you right in response to Andrew’s question. Did you say that WOTC in perspective, WOTC was $0.20 to $0.25 or 20% to 25% of the tax items?

20% to 25%, so that’s –

Okay, that’s right. So I thought you said about 100%, but great. Second question obviously just what kind of organic growth rates do you have embedded in ’16? I mean obviously you had a very strong quarterly organically. Do you think you can continue to grow organically in the 3% area, because 3.7% was quite strong and obviously you had a good quarter in a couple of areas there?

Yeah. So, as you guys know, we don’t give revenue guidance, but I would tell you, you could look to 2015 as you think about 2016, we feel like there is no real economic headwinds that’s going to get in our way. The business continues to perform just as it’s been performing. So for us that’s kind of how we want you to look at 2016.

All right, okay, great. And then question for you Scott. I know you’ve had a little more time now to kind of start the transformation and the integration and start to really move the company forward on the new path. I was wondering what you are seeing early on, what kind of reaction you are seeing in the organization and kind of how that’s going relative to your expectations at this point.

So that’s great. It’s a tremendous amount of work as you can imagine, because we are – this is really a process where we are changing our operating model, right, our go-to-market model moving from a company that’s been focused on services and thought about as janitorial, engineering, parking to now moving towards industry focus. So there is just a lot of work and redesigning the organization. But I think one thing that’s been so positive for me is people are really embracing it in the organization. I think our employees know that this is essential for our long-term. So it’s just a lot of energy around it and because of such interesting and I think exciting work, people are just energized by it, because typically it’s around the holidays you don’t want to be working twice as hard as you have been working, but again so far so good. We are on track. And we’ve laid out a pretty well articulated process that we are sticking by. We are on track and so far I just have to say double thumps up right now.

Okay.

Thank you. And our next question comes from the line of Joe Box with KeyBanc Capital Markets. Your line is open. Please go ahead.

Hey, good morning, guys.

Hey, Joe.

Good morning, Joe.

So, Scott, thanks for the commentary on the organic growth in FY16. I just want to dig into that a little bit and the EPS bridge slide that you have, one thing I noticed was, there wasn’t a EPS contribution from organic growth or M&A in that 130 to 140. Clearly, you guys have some good momentum in a few of your businesses and if you are expecting more of the same in 2016, why aren’t we seeing that contribution in the bridge. Is that really just maybe conservatism as you start to execute on 2020 vision.

When we build these bridges, there is so many things we can add and what we are trying to do is kind of be as simple as we can to create clarity and not overwhelm and because we see so much consistency, we didn’t think it was relevant enough to highlight it as a major bridge, but Anthony being the architect of the bridge you may have another comment on that, Anthony.

And I think you articulated well. So, Joe, if you think about what we’ve tried to accomplish is the major drivers of the change year-over-year to try to provide transparency around items that impacted FY15 and how those items would impact FY15 or unique items for FY16. So if you think about the base book of business and then what we characterize as other, that’s intended to capture some of that pull through business from an organic standpoint or pull through margin from an organic standpoint.

Okay. Thank you for that. What is pro forma debt accounting for Westway and I guess is Westway the sole reason why interest expense is going to end up being flat year-over-year?

Yes. If I think about Westway, obviously we’re not disclosing the purchase price at this point, but if you think about Westway, the impact is going to increase our leverage for where it ended on FY15 and then projecting going forward, we see slight increases in base rates based on where we think the Fed may increase rates. So we’ve built a little bit of that into our plan for FY16. So the combination of those two events is why we see our interest expense to be relatively flat year-over-year.

Okay. And then Anthony, can you just talk to your insurance claims in the quarter. I’m curious if maybe they took a step back from that more elevated level that we’ve had over the last couple of quarters, maybe implying that there could be an insurance reversal at some point next year?

Well, Joe, that’s really tough for us to forecast any adjustment to insurance at this point. What we’ve committed to is to continue to look at safety and risk management as the key component of our strategy going forward. We feel confident that the rates that we have built in our plant for FY16 are the right rates for the business. Those rates have been cascaded down to the business. So fully transparent from that standpoint. So it’s too early to say whether that’s the right rate on a long-term basis, either up or down.

Okay. I mean, did you see a trend in line with the claim levels for last quarter or has there been a significant change?

No significant change at this point.

Okay. Great. I’ll turn it over. Thank you, guys.

Thank you. And our last question for today comes from the line of David Gold with Sidoti. Your line is open. Please go ahead.

Hey, good morning. Just a couple of points of follow-up. So first when we look at the $1.30 to $1.40 guidance, so given I guess everything we put out there, is the $0.10 variance largely from that $0.10 to $0.20 band that you gave for 2020 savings. In other words, is that the only area of upside right now that we’re pointing to?

No. I don’t think so. I think that the $1.30 to $1.40 typically, we provide guidance range for other things that are unknown. So we want to have some flexibility in the range for things based on our budget or based on our view or unknown. So $0.10 to $0.20, we feel real confident about that. I mean, we articulated that and as I mentioned earlier, that’s a realized savings component. It could play a factor in the $1.30 whether there is at the low end or the high end, but we feel confident that the plan that we have in place will allow us to achieve the range or the guidance that we’ve provided.

Okay. All right. And then just following up on Joe’s question, it sounds like on the organic side of contribution, you’ve taken a fairly conservative approach then to next year. Would you consider that to be fair?

That’s fair. I think as you look at 2020, and as we start to migrate from a service led business to a vertical business, one of the things that we want to make sure that we articulated, that process is obviously going to take time, but it’s also going to allow us to continue to look at our contracts and where we may want to grow more aggressively or not grow as aggressively. So the pluses and minuses makes it a little bit challenging in 2016 to really peg what we feel comfortable from a long term trajectory, our organic growth rate could be and that’s why with those changes, why we have the guidance as Scott articulated.

Perfect. And then just one last one, on the tag revenue side, can you give a little bit more color there as to if there are particular pockets where it’s coming from, obviously it’s consistent with the ABM story and what we’d expect there certainly supports what we’d expect at this point in the cycle, but just outlook there and how are you feeling about things and what the drivers are just now?

Sure. So particularly in this quarter, we had strong tag revenues in the northeast and west and there is not a lot of strategic reason why it’s happening in one region versus another, as the stuff runs in cycles, David. So I think the bigger picture here about TAG revenue is as we’re going through this 2020 vision, as we’re learning more and more about our business, we’re figuring out where the focus and as you know over the years, tag revenue is higher margin business, right. So, and as we get focused on raising our margins, we’re keenly adept to areas where we can pull those levers. So for us, there’s been a big focus on tag revenue and I’m hoping, we're going to continue to be able to tell you the story about how TAG revenues are increasing because when you hear that you know that that means it's a focus on margin. So I don't think, it's necessarily an economic trend, I don't think there is good reason again why East versus West. Next call, we may say it’s in the Midwest. We don't know but we do know that there is a tremendous focus on where we can push our margins.

Perfect, thank you both.

Thanks David.

Thank you. And I’m showing one final question from the line of George Tong with Piper Jaffray. Your line is open, please go ahead.

Hi, this is Adrian Paz on for George Tong. Can you discuss how pricing turns have evolved over the last few quarters in the janitorial segment and where do you think those trends could go to?

I don't know that there has been any significant trends in pricing over the last few quarters like anything else, we are always working in a difficult environment where we're fighting everyday for business or come in force with the right pricing to retain and win business. So for us, no real pricing trends. And the good news is, as the economy remains relatively strong, we’re not seeing pressures from customers to cut back on services. It's been very stable environment right now in the janitorial business.

So I know previously you guys had pushed back on some of these customers that were really looking for pricing concessions and walking away from some of these contracts. I don't know if you know do you expect that to continue or are you seeing better negotiation leverage now that the economy has improved?

No, I think for us, I would take us back to kind of that 2020 vision and how we're trying to grow in certain segments. And we’ll be looking at our portfolio constantly now of where we are making money, where we're not making money, clients that we can grow with. So I don't think there is any real change here.

All right, great. Thank you.

Thank you.

Thank you. And I'm showing no further questions at this time and I would like to turn the conference back over to Mr. Scott Salmirs for any closing remarks.

Well, thanks everyone, thanks for joining and hopefully we answered everybody's questions and I just want to wish everyone a safe and happy holiday season. Thank you very much.

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