ABM Industries Inc. (NYSE:ABM)
F4Q08 Earnings Call
December 16, 2008 9:00 am ET
Henrik Slipsager - President and CEO
Jim Lusk - Executive VP and CFO
Sara McConnell - Senior Vice President and General Counsel
David Gold – Sidoti
(Operator Instructions) Welcome to today’s ABM Industries Inc. Fourth Quarter 2008 Investor Conference Call. At this time I would like to turn the conference over to Mr. Henrik Slipsager.
I am Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive VP and CFO, and Sara McConnell, our Senior Vice President and General Counsel.
On the call today, I will provide an overview of the 2008 Fourth Quarter and Fiscal Year ended October 31st. Jim will discuss the details of our financial results. I’ll conclude our prepared remarks with a summary of the company’s operational achievements for the quarter as well as provide management’s outlook for fiscal ‘09.
In addition we are providing a slide presentation to accompany today’s prepared remarks. You can access the presentation now by going to our website at www.ABM.com and under the Investor Relations tab you’ll see the Presentations tab on the left hand side of the page. Today’s presentation will be the first listed.
Referring to slide three and four 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 on 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.
Some of the important factors relating to our business are described in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Annual Reports on Form 10-K that we file with the SEC. 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 on the company’s website under Investor Relations.
Before we review our consolidated financial results and operating performance for the fourth quarter and year I’d like to highlight a few of ABM’s accomplishments in fiscal ’08 which we refer to in slide five of the presentation.
We are pleased with our performance and the ability to finish the ’08 fiscal year in line with the guidance that we previously communicated. We successfully continue our strategy to strengthen and extend our portfolio of leading facility services through a combination of acquisitions and organic growth.
Acquisition of OneSource created an unmatched national footprint and provided the scale to enable us to better capitalize on growth opportunities and minimize the impact of the economic slowdown in certain regions and industries.
Despite one of the most historical challenging economic environment we’re doing business we delivered double digit growth in revenue and operating profit demonstrating the strength of our core business and effectiveness of our broad geographic and customer bases. We also prudently managed our operations and working capital and believe we are in a strong competitive position for the 2009 fiscal year.
I’ll highlight some of our 2008 results on slide six. For the year we posted 34% increase in revenue to approximately $3.6 billion. OneSource contributed $880 million of revenue for the year and our organic growth exceeded 3%. Adjusted EBITDA for 2008 and measuring with regards to the heart of our operations was $133.4 million a 46% increase from last year.
Income from continuing operations grew 4.2% to $52.7 million as it benefited from a decrease self insurance reserves and improved operational leverage. Given the economic conditions we’ve been very carefully managing our resources and expenses. We improved our operating cash flow from continuing operations by $4.7 million for fiscal 2007 and $15.1 million since the third quarter. We continue to strengthen our balance sheet reducing the outstanding debt by $86 million through the first quarter.
We ended the fiscal year with $230 million of debt on our balance sheet and over $100 million of availability on our credit facility that expires in 2012. Yesterday, reflecting the confidence we have in ABM we announced an increase in our quarterly cash dividend of 4% to an all time high quarterly rate of $0.13 per common share.
I’d like to briefly discuss our three key strategic initiatives highlighted on slide seven. First the strategic acquisition of OneSource which has exceeded our expectations on both top and bottom line. As I mentioned, OneSource generated $880 million of revenues fiscal ’08. We also continue to make excellent progress on the integration of OneSource and have realized nearly $30 million in cost saving synergies. By the end of fiscal ’08 we achieved on a run rate basis over 90% of the communicated cost saving synergies and ending fiscal ’09 at an annual run rate of over $40 million in synergy savings.
Second, we completed the sale of our Lighting division in October to Sylvania Lighting Service. Lighting has long been our weakest performing segment in the sale has allowed us to focus our resources toward janitorial, engineering, parking and security businesses while anticipating in total exceeding $70 million in cash for the company from the disposition of Lighting.
Finally, we continue to make very solid progress in our multi-year project to transform our corporate platform and infrastructure. We continue to consolidate certain back office functions and delivered our enterprise system operates in our shared service center to improve both internal operations and the quality of information and transaction support for our customers.
Taking these factors together we believe that we are very well positioned to effectively manage our business and to accelerate our growth when the economy improves.
Now I’d like to turn the call over to Jim for a financial review of our fourth quarter and fiscal ’08.
As I review our financial results for the fourth quarter and full year 2008 please keep in mind that the results discussed today exclude the results from our Lighting segment, essentially all the operating assets of which we sold in the fourth quarter of fiscal 2008 and which are accounted for in discontinued operations. Therefore, unless otherwise noted results discussed today reflect continued operations. In addition, as of the result of the impact of the lighting business net income for fiscal 2008 includes a $7.3 million loss in discontinued operations or $0.15 per diluted share.
Turning now to the fourth quarter and fiscal 2008 results, on slide eight you will see that despite a recessionary macro economic backdrop we generated solid performance in the fourth quarter. Revenue for the fourth quarter grew 31% to $905.8 million from $691.4 million in the prior year period. Organic revenues increased 3% year over year. Income from continuing operations was $14.8 million. Diluted share for the fourth quarter 2008 equal to a year ago quarter.
Net income for the quarter which includes the loss from discontinued operations was $11.6 million or $0.22 per diluted share compared to $15 million or $0.30 per diluted share a year ago. Our operating profit increased 7% to $25.8 million in the fourth quarter of fiscal 2008 from $24.1 million in the same period last year. Our adjusted income from continuing operations before items impact comparability increased 28 to $18.6 million in the fourth quarter fiscal 2008 from $14.5 million in the same period last year as several one time items affecting comparability.
Adjusted income from continuing operations excludes expenses of $4.7 million associated with corporate and infrastructure initiatives and the integration of OneSource a $3.9 million IT deferred expense and a benefit of $4.8 million from the reduction of the company’s self insurance reserves from prior years that increased operating profit.
Our SG&A expense for the fourth quarter increased $30.8 million year over year to $80 million from $49.2 million which includes $16.2 million of expenses associated with the acquisition of OneSource. Excluding OneSource SG&A increased $14.6 million due to the integration of OneSource Operations IT costs, severance bonuses related to headquarter move to New York and an increase in share based compensation expense.
Interest expense increased $3.1 million in the quarter due to the draw down of the credit facility for OneSource and Southern Management acquisitions. During the quarter, Libor unexpectedly spiked due to the credit market dislocation driving interest expense up. The annual effective tax rate on income from continuing operations for the year ended October 31, 2008, was 37.5% compared to 34% in the prior year. This is primarily due to non-recurring favorable federal and state tax benefits recorded in 2007 that did not reoccur in 2008.
Included in the quarter was an increase of $1.7 million of intangible amortization expense related to the true up of the amount allocated to intangible assets for the OneSource and Southern Management acquisitions. The magnitude of the change, which is non-cash, is one of the reasons the company believes it’s important to focus on adjusted EBITDA as a key metric going forward. Adjusted EBITDA is up 52% for the quarter.
Turning to our fiscal 2008 results as displayed on slide nine, revenues increased 34% to $3.6 billion from $2.7 billion in the prior year. Organic revenues excluding OneSource sales increased 3% over the prior year. Income from continuing operations was $52.7 million or $1.03 per diluted share compared to $50.6 million or $1.00 per diluted share in the prior fiscal year.
Net income for fiscal 2008 included the loss from discontinued operations was $45.4 million or $0.88 per diluted share compared to $52.4 million or $1.04 per diluted share. Sales from discontinued operations for fiscal 2008 was $114.9 million a decrease of 2.3% and operating loss was $7.3 million compared to a profit of $1.8 million in fiscal 2007. The difference is primarily due to the $4.5 million goodwill impairment charge taken in the second quarter of fiscal 2008.
Operating profit for fiscal 2008 was $99.5 million compared to $77.2 million last year. As with our fourth quarter results there are a number of items impact to comparability related to the corporate relocation, acquisitions, IT deferred expense, and changes to self insurance reserves among others. Excluding these items adjusted income from continuing operations increased 15% to $56.3 million in fiscal 2008 from $48.8 million in the prior year.
As noted for Q4 $1.7 million of additional amortization expense or $0.02 per diluted share is included in our results, again this is a non-cash charge. Adjusted EBITDA is up 46% for the year.
Turning now to slide 10, our financial position continues to strengthen. Cash from continuing operations for fiscal 2008 improved by $4.8 million to $60 million compared to $55.2 million for fiscal 2007. Working capital $284 million at year end which decreased from $371 million at the end of fiscal 2007 primarily due to the use of cash to acquire OneSource.
Access goals at year end we had $230 million outstanding under our line of credit as we reduced our outstanding debt by $55 million during the fourth quarter and approximately $86 million since the first quarter. Day sales outstanding at quarter end were flat sequentially at 53 days and up a day year over year from 52 days.
Insurance reserves as of October 31st were $346 million which includes claims acquired from OneSource compared to $261 million at the end of fiscal 2007. Self insurance claims paid during the quarter totaled $16.7 million compared to the $13 million in the fourth quarter of 2007.
The company also announced that the Board of Directors has declared a first quarter cash dividend of $0.13 per common share payable on February 2, 2009. This marks ABM’s 171st consecutive quarterly cash dividend and its $0.005 or 4% above the $0.125 per quarterly dividend declared and paid for the first quarter 2008. We are pleased that our quarterly cash dividend enables us to continue to return value to our shareholders.
With that let me turn it back to Henrik who will give his perspective on the fourth quarter operational performance by segment and outlook for 2009.
I will now briefly review the operational results for the fourth quarter as well as provide our preliminary outlook for fiscal ’09. We are pleased that despite the continued challenging economic and market conditions we delivered double digit growth in both revenue and operating income demonstrating the diversity of our business model.
Turning now to slide 11, for the fourth quarter Janitorial revenue increased by $209.3 million or 50.7% to $622.2 million which included $203.7 million of revenue contribution from OneSource. Excluding the impact of our OneSource acquisition Janitorial revenue was up 1%. We continue to experience softness of revenues within the Southeast and Northeast regions where we experience reduction in accounts and revenues from existing accounts.
Janitorial operating profits for the quarter increased $11.1 million or 44% to $36.1 million. I’m very pleased with these results given the scope of the OneSource integration and challenging business environment. Our results are a testament to the great team effort by our Janitorial segment not only for the quarter but for the year.
Turning to slide 12, Parking revenue increased $2.6 million or 2% to $119 million due primarily to increased services for existing customers. Operating profit for the fourth quarter increased $700,000 or 15% to $5.7 million. The results of our Parking segment reflects the impact of the acquisition of HPSA and our concentration of garages operated through management contracts which generally perform better in a recession.
Turning to slide 13, Security revenue for the fourth quarter compared to the comparable period in ’07 increased $3.6 million or 4% to $84.9 million primarily due to the result of new customers and expansion of current customers in the Northwest and Midwest regions. Operating profit for the fourth quarter increased $600,000 or 30% to $2.8 million.
During the quarter we continued to monitor all operating expenses with our new implemented centralized purchasing program. Important we have a strong revenue pipeline entering 2009 as our focus on integrating technology drive expansion in a number of vertical markets.
Turning to slide 14, Engineering revenue for the quarter was essentially flat compared to the prior year period. Operating profit increased $300,000 or 6% to $5.8 million benefiting from our continued focus on higher profit business, lower insurance costs and ongoing expense reduction. We also feel positive about our position in Engineering segment entering 2009.
We continue to focus on marketing our outsourcing capabilities which typically gain momentum in a period of cost reductions and expense control. We are excited about the opportunity to expand sales of Engineering services based on our recent success with two large scale projects. Operationally an outstanding year exclusive of the $4.5 million gain recorded in fiscal ’07 from a lease termination in Parking operating profit for all segments were up more than 20% year over year.
If you will now please turn to slide 15, in summary, despite the challenging economy and upheaval in the financial services sector we continue to deliver solid top and bottom line growth organically and through recent acquisitions. While we have seen weakness in certain regions and economic sectors our size, scale, and diversity in operations have enabled us to minimize but not completely eliminate the impact of the economic slowdown in individual regions.
In addition, our financial position continues to strengthen as we outlined earlier in the call. We generated cash flow from operations of $60 million in the fourth quarter and continued to reduce our debt position. Our prudent management of operations and cash put ABM in a strong position. In ’09 we will continue to execute our prudent strategies of:
Leveraging our strong financial condition and national footprint,
Focusing on outsourcing trends as customers look for integrated solutions,
Selling energy savings through our Engineering platform.
Each are navigating the challenging market environment will be holding the line on expenses and conservative management of our resources. Make no mistake, in an environment like this represents great opportunities on a number of fronts for ABM.
As such, we anticipate improved bottom and top line results in fiscal ’09. In light of the economic uncertainty we are initially providing guidance for only the first two quarters of the fiscal year. We expect income from continuing operations in the range of $0.42 to $0.50 on a diluted per share basis excluding items impacting comparability we expect adjusted income from continuing operations in the range of $0.46 to $0.54 on a diluted per share basis. Our guidance is exclusive of any acquisition.
With that I would like to thank you for your participation in today’s call and your continued interest in ABM. We look forward to updating you on our progress on our first quarter ’09 conference call in early March. At this time I would like to open the call for questions.
(Operator Instructions) Your first question comes from David Gold – Sidoti
David Gold – Sidoti
A couple of questions surrounding Janitorial, first, if we go back a quarter we were seeing some issues there you had tag work and some of the incremental work that you were doing particularly at the financials at that point the view was that maybe had bottomed out. Can you give an update on how that’s progressed?
I think it has bottomed out. Looking at what happened in the quarter that was a reflection of [inaudible] and also the problems in the Southeast. I think that whole thing has bottomed out for the time being. I can’t tell you what we do business with certain banks and there be consolidation coming up. I don’t know if the impact of that but its not going to be material that’s for sure.
David Gold – Sidoti
Sticking with Janitorial, it was a little softer than we had expected it’s the first time in recent memory actually seeing it sequentially down, traditionally its been sequentially flat to up third to fourth. Just curious there if you can give some color on what’s happening, is that a function of less of the incremental work, is it lower office occupancy or are we losing some business from a competitive standpoint.
I don’t think we’re losing any business from a competitive standpoint. I think there some adjustments that you will see in a market like this where we have done reductions with existing clients which as you can see did not impact the bottom line did have a slight impact on the top line. Its not loss of customers but in some cases we have some savings that we gave to certain customers due to the economic environment.
Also I think that this particular quarter I don’t think is representative of what you see going forward. The activity on the sale side is probably pretty compared to what we seen the past pretty good right now.
David Gold – Sidoti
So you’re saying we might see a little bit of pick up there?
I would not expect it to go further down.
David Gold – Sidoti
Presumably on a run rate basis we’re up to about $44 million of synergies from OneSource and your initial goal was $45 to $50 million so essentially we’re there. Do you still view the $45 to $50 million as a good range or do you think there’s even further potential.
It’s getting tougher and tougher to clearly define what is the result of the acquisition and what’s not a result of the acquisition. I’ll put it this way that the areas that we have targeted and defined specifically as part of the synergies has been achieved to a 90%, 95% level as you can see. Will we have opportunities when we finalize our shared services fully to make further cuts? I believe so.
Is that associated with the acquisition or not I think that can be discussed. The acquisition is producing exactly what we expect and the other initiatives we have taken on should produce further savings in our overhead.
David Gold – Sidoti
Can you walk through a little bit business line by business line where you think you see the most impact from the downturn, what economically scares you the most from a business standpoint?
Are you talking about the segments?
David Gold – Sidoti
Right, by segment.
I think and believe that you’ve seen the worse on Janitorial and it was, as you know, very heavily hit on the financial segment but pretty sizable. If you look at Engineering I’m very encouraged with the activity we’ve seen in the Engineering group and I believe the growth in Engineering might be even greater than what you’ve seen in the past.
I think on Security, based upon activity and not necessarily the economy we see continued growth in that area. Parking I think you’ll see that might be essentially flat going forward. We are very fortunate because we’ve been able to get much more into the management side of contracts versus leasing. Our financial risk is much less than it was in the past. Basically all the results that we just went through, Parking is the result that surprised me the most positively because they’ve been able to manage their expenses achieving growth with pretty flat sales.
As I sum up Parking and Janitorial are flat to small growth and Security and Engineering represent greater opportunities in this tough market.
David Gold – Sidoti
In any of the segments, particularly Janitorial, would you expect further pricing negotiation given the environment?
David Gold – Sidoti
You think the pricing environment gets a little tougher?
Not necessarily. Pricing negotiations also opens up opportunities. There might be pricing negotiations where we do part of a client and you can include the whole client and get more work associated with it. Pricing negotiations from our point of view is not necessarily a negative because it gives us opportunity to manage and operate the job probably better than anybody else can do it.
I don’t think that’s going to have any kind of impact on the margins. It might have a positive impact on the margin percentage and I think its going to have no negative impact on the dollar margin.
David Gold – Sidoti
Based on assuming Janitorial and Parking to be flat and Security and Engineering have some growth it sounds like you’d expect as we go into ’09 to see a flat to modestly up year from a revenue perspective on an organic basis.
Yes, I do expect an up year. Probably not to the extent we’ve seen in the past but we still expect an up year.
It appears we have no further questions at this time. I’d like to turn the conference over to Mr. Slipsager for any additional or closing remarks.
Thank you very much for listening and I would also like use this opportunity to thank our shareholders, our Board and our employees for a great ’08 and looking forward to working with all of you in ’09. Have a happy holiday.
That does conclude today’s conference. We want to thank you for your participation and you are now free to disconnect.
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