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Executives

Henrik C. Slipsager – President & Chief Executive Officer

Sarah Hlavinka McConnell – Senior Vice President, General Counsel & Secretary

James Lusk – Executive Vice President and Chief Financial Officer

Analysts

David Gold – Sidoti & Co.

ABM Industries Incorporated (ABM) F1Q09 (Qtr End 1/31/09) Earnings Call March 3, 2009 9:00 AM ET

Operator

Please standby we are about to begin. Good day everyone and welcome to today’s ABM Industries First Quarter Fiscal Year 2009 Conference Call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Henrik Slipsager. Please go ahead sir.

Henrik C. Slipsager

Thank you. I am Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive Vice President and CFO, and Sara McConnell, our Senior Vice President and General Counsel.

On the call today, I will provide an overview of the 2009 fiscal first quarter ended January 31. Jim will discuss the details of our financial results. I’ll conclude our prepared remarks with a summary of the company’s operational achievement for the quarter as well as provide an update of management’s outlook for the first half of fiscal ‘09 as well as guidance for the full year.

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. Sarah?

Sarah Hlavinka McConnell

Thank you, Henrik. I will pause for a moment to allow everyone a few moments to access our presentation on the ABM website. 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 risk 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 Report on Form 10-K/A 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.

Henrik C. Slipsager

Thank you, Sarah. Now, please turn to slide five and six for a review of our consolidated financial results and operating performance for the first quarter. We delivered a strong performance despite challenging market conditions as we aggressively drove sales, pricing, and cost reductions to achieve double-digit earning growth, while our top line for the first quarter was relatively flat year-over-year at $887.5 million, which includes 12 more days of revenue contribution from OneSource, we significantly improved our profitability by focusing on cost savings, operational improvements, and synergies across our operating platform.

Income from continuing operations more than doubled to $14.8 million and operating profit rose 73%. All of our core businesses janitorial, engineering, parking and security grew their operating profits compared to the year ago quarter and the strategic acquisition of OneSource continues to enhance financial performance. While the quarter did benefit from a $9.6 million or $5.8 million aftertax claims settlement related to a third-party administrator that no longer perform these services for ABM, this benefit was partially offset by a $6.6 million or $4 million aftertax of cost relating to corporate initiatives.

Adjusted EBITDA for the first quarter was $30.3 million, a 27% increase for the same period last year. We improved our operating cash flow from total operations by nearly $51 million compared to the same period last year. And we ended the quarter with $227 million in debt on our balance sheet and over $100 million of availability on our credit facility. Yesterday, we announced the quarterly cash dividend of $0.13 per common share. ABM continues to reward our shareholders as this marks our 172nd consecutive dividend payment. Turning to slide seven, to drive result in this more challenging economy and offset the slowdown in commercial real estate, occupancy levels, we are focused on aspects of the business that are within our power of pricing and service strategy expenses and generating free cash flow.

We've been actively managing our credit risk and cancelling customer contracts, but we felt the risk of not getting paid for our work was too great. We continue to gain and retain customers at acceptable profit margins, pass on cost increases to customers and keep our overall costs down. For example, in our janitorial business, we negotiate price and scope, service concession with customers by maintaining profitability through capital management of labor resources and expenses. We are also eliminating less profitable contracts. Finally, we continue to make progress in our multi-year project to transform our corporate platform and infrastructure. In the process of implementing a new payroll and human resources information system and are upgrading the accounting system and expect to have these initiatives completed by the end of 2009.

Overall, we continue to focus on pursuing new business and increasing operating efficiencies and believe that we can position ourselves well by securing a broad portfolio of large strategic customers for our integrated solutions. For example, we are leveraging our engineering business to invent new models of energy services, where we can help our customer curb energy consumption and cost. We believe we are very well positioned to effectively manage our business with the prolonged economic downturn 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 first quarter. Jim?

James Lusk

Thank you, Henrik and good morning everyone. As I review our financial results for the first quarter, please keep in mind that the results discussed today exclude the results from our Lighting segment, substantially all of the operating assets of which we sold in the fourth quarter of fiscal 2008. Results from the Lighting segment are classified as discontinued operations. During the quarter, we recorded a $538,000 loss from discontinued operations, net of taxes or $0.01 per diluted share primarily related to severance and transition cost from the Lighting business. Unless otherwise noted results discussed today reflect continuing operations.

Turning now to the first quarter fiscal 2000 (sic) (2009) results on slide eight. We are pleased with our solid overall performance particularly on the bottom line in light of recessionary pressures. Even though revenues for the first quarter were flat year-over-year at $887.5 million, compared to $887.8 million in the prior year period, operating profit increased 73% to $26 million in the first quarter of fiscal 2009 from $15 million in the same period last year. As Henrik noted, due to our focus on cost savings, synergies and performance improvements, our gross margin percent improved from 9.4 to a 11.3 in the quarter ended January 31, 2009, compared to a year ago quarter.

Excluding the margin benefit from the settlement with a former third-party administrator of workers' compensation claims gross margin was 10.2%. Income from continuing operations was $14.8 million or $0.29 per diluted share for the first quarter of 2009, compared to $6.3 million or $0.13 per diluted share in the same period last year. Adjusted income from continuing operations before items impacted comparability increased 63% to $13 million in the first quarter of fiscal 2009 from $8 million in the same period last year. Items affecting comparability showed in total a net gain of $1.8 million aftertax or $0.04 per diluted share from the $5.8 million aftertax benefit of a settlement related to poor claims management by a former third-party administrator of workers' comp claims partially offset by expenses of $4 million aftertax costs related to corporate initiatives, which are expected to be completed by the end of 2009.

Net income for the quarter, which includes the $538 million loss from discontinued operations was $14.2 million or $0.28 per diluted share, compared to $6.4 million or $0.13 per diluted share a year ago. Our SG&A expense for the first quarter increased $4.9 million year-over-year to $71.4 million from $66.4 million primarily due to a $6 million increase in IT costs, which is due to the upgrade of the payroll of human resources and accounting systems and systems integration with OneSource combined with higher depreciation costs compared to last year partially offset by a decrease in severance related costs applicable to the headquarters move in New York in 2008.

Excluding the costs included in items impacted comparability, SG&A was up 1.1 million, which was attributable to higher depreciation. Interest expense decreased $2.9 million in the quarter to $1.7 million due to the lower average outstanding balance and lower interest rate. On February 28 of this year, we entered into a two-year swap agreement that effectively exchanged the LIBOR component of a $100 million outstanding under our line of credit for fixed rate interest payments. The fixed interest rate under a two-year swap is 2.47%, which includes a 1% spread based on the company's current leverage ratio. The effective tax rate for the first quarter of 2009 on income from continuing operations was 39.3%, compared to 39.8% for the comparable period in fiscal 2008.

We expect our annual effective tax rate to be around 39% in 2009, compared to 37.5% in 2008. The higher rate is primarily due to certain non-recurring tax benefits that occurred during fiscal year 2008 including a reversal of ceratin tax reserves and deferred tax asset rate changes, which are not expected to reoccur in 2009. Given the items impacted comparability and the discontinued operations, we believe that adjusted EBITDA is a useful measure. Adjusted EBITDA is defined as earnings before interest taxes, depreciation, amortization, and excludes both discontinued operations and items impacting comparability. The first quarter-adjusted EBITDA was up 27% to $30.3 million from $23.8 million in the same period last year.

Turning now to our balance sheet on slide nine. We continue to strengthen our financial position and our liquidity remains very solid. Cash from total operations, which includes both continuing and discontinued operations for the first quarter was a positive $26.1 million, compared to the use of $24.9 million for the comparable period last year. Cash provided by total operations during the quarter was positively impacted by the increase in net income, the timing of accounts receivable, collections, and payments of accounts payable and accrued liabilities. We ended the quarter with $279.5 million in working capital, compared to $274 million at the end of fiscal 2008. We had $227 million outstanding under our credit line at the end of the first quarter down $3 million from the end of the year. At the end of the first quarter, we had a $105 million of availability under our line of credit.

Days' sales outstanding at quarter end were 56 days up from 53 at the end of fiscal 2008, which compares to 55 days in the year ago quarter. The increase in days' sales outstanding from the end of fiscal 2008 was expected due to the concerted efforts to collect outstanding receivables at year-end. Our accounts receivable that were over 90 days remained consistent with the end of fiscal 2008. Insurance claim liabilities at January 31 were $347.5 million, compared to $346.2 million at the end of fiscal 2008. There were no changes to our self-insurance reserves for ultimate losses related to prior years during the quarter. Self-insurance claims paying during the quarter totaled $19 million, compared to $17.5 million in the first quarter of 2008.

There has been a fair amount of focus regarding the impact the economy has on our tag business, in prior years revenue from tag business has had a mid single-digits contributor as a percentage of overall janitorial revenue. The majority of this tag business was related to storm cleanup and other recurring events and not the economy. Going forward, we do not anticipate significant decreases in janitorial revenues from the tag business. With that let me turn it back to Henrik, who will give us perspective on the first quarter operational performance by segment and update guidance for the first half of 2009 as well as the guidance for the full year.

Henrik C. Slipsager

Thank you, Jim. I will now briefly review the operational results for the first quarter as well as update our outlook for the first half of fiscal '09. While the economic climate is causing downward pressure on revenues, we are pleased with our ability to improve our operating efficiencies, and drive operating profits across all divisions.

Turning now to slide 10. For the first quarter, janitorial revenue increased by $2.4 million or 0.4% to $608.4 million, which does include 12 more days of revenue contribution from OneSource. Janitorial operating profit for the quarter increased a $11.4 million or 54.3% to $32.3 million as our team continue to execute on operational synergies from the OneSource acquisition and improve operational efficiencies across all regions. In addition, we had one less workday in the fiscal quarter of '09 that accounted for approximately one-third of the improvement year-over-year. We continue to have a solid pipeline of new business and as I mentioned, we remain focused on eliminating less profitable contracts and higher credit risk customers.

Turning to slide 11. Parking revenue decreased in the first quarter by $2.3 million or 2%, $215.7 million due to management reimbursement revenue and reduced expenses at management contract locations, hotels, and airports. These costs are primarily passthroughs, so there is no negative margin impact. Excluding management reimbursement revenues, parking revenues increased by $2 million or 3.7% primarily due to new customers and an increased level of service to existing customers, especially in the Midwest, Southwest, and at HPSA.

Operating profit for the first quarter increased 6.5% to $4.1 million. Profit from the parking segment remained strong, careful expense management plan, put in place in advance of the economic downturn. Continued organic growth at HPSA and a larger concentration of managed lots all contributed to the result. We are actively pursuing opportunities for college and universities, business parks, hospitals, and municipalities to offset our client need to reduce expenses.

Turning to slide 12. Security revenue for the first quarter increased $4.6 million or 5.7% to $85.6 million, primarily as a result of new customers and a continuation of service expansion to current customers in the Northwest and Midwest regions. Operating profit for the first quarter increased 28.9%, $1.8 million due to additional revenues and a reduction in insurance expense it really continues on a very solid pipeline of sales.

Turning to slide 13. Engineering revenue for the quarter decreased $4.6 million or 5.6% from the prior year period, primarily due to lost business in early to mid-'08 in the East and Mid-Atlantic regions, which was partially offset by the expansion of services to existing customers in the Northwest region. Operating profit increased $1.1 million or 32.3% to $4.7 million as much of the new business' higher margin compared to business replaced.

Turning to slide 14, a summary despite the challenging economy we had an exceptional first quarter and are very pleased with the relative strength of our performance with every segment posting increases in operating profit. ABM's fundamental business is solid, we are taking and continue to take steps to mitigate the impact of the macroeconomic environment by focusing on the aspect of the business that are within our control. Our team is leveraging our unmatched size, scale, and diversity, the strong sales effort between new accounts and better penetration of large strategic customers across operating segments. We are proactively negotiating concessions on pricing and scope of services for the existing customers and we are implementing cost reductions that we are sure we maintain and improve profitability. I am confident that this operating discipline will carry through fiscal '09.

Turning to slide 15, in light of the first quarter results the company is improving its guidance for the first half of fiscal '09. The company now expects income from continuing operations per diluted share in the range of $0.48 to $0.52 and for the same period adjusted income from continuing operations per diluted share in the range of $0.52 to $0.56. Full year estimate remains difficult given the challenging and uncertain market environment. The company's estimate for the full year '09 is that it expects income from continuing operations per diluted share in the range of a $1.10 to $1.20 and adjusted income from continuing operation per diluted share for the same period in the range of $1.25 to a $1.35. Guidance is exclusive of any acquisitions. At this time I would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from David Gold, Sidoti.

David Gold – Sidoti & Co.

Hi, good morning. Couple of follow-up questions, Henrik can you speak a little bit more to the climate or essentially what's happening in janitorial along the lines of and obviously revenue there is stable, but profitability up a bit some of it obviously attributed to OneSource, but, what's happening when you're presumably going or renegotiating on these contacts?

Henrik C. Slipsager

Well, I think a lot of things, it's not one or two things isolated, but the fact of life is that we are working very proactively with clients that wants cutback in their overall expense for their services and in that process we of course want to make sure that we can maintain profitability as much as possible and at the same time we are also trying to reduce some of our overhead associated with the accounts. So, overall if you look at it we will maintain in certain cases improve overall profitability, but not all directly associated with the account.

David Gold – Sidoti & Co.

How do you reduce overhead on the accounts?

Henrik C. Slipsager

Well, some of it is associated with indirect costs associated with the account, the direct expenses associated with an account could be increased productivity, it could be change of specifications for the client in a changing environment, there might be clients that we work with that who will increase new sites. So, we have a bigger base to do the business on. There could be times where you work with a client if they're closing their offices down a week or month and I can't go [inner] on, there is no golden rule. The only golden rule is that we are proactive dealing with those clients in order to first to maintain the client, and second of all maintain profitability, and thirdly, but probably most important make sure the client is happy.

David Gold – Sidoti & Co.

Okay. And then on your slides for janitorial, there is a note about a solid pipeline of new business and, curious if you can add some color there, I would guess in this environment, that would be winning business away market share gains rather than sort of new business to the environment or?

Henrik C. Slipsager

No, but that's accurate. I think the positive in this business if non-existing clients are faced for the challenging environment and using a number of different contractors we are very attractive because we are the only one with a national footprint and naturally they will come to us to see if they with one relationship with one client and achieve some savings, they may not be able to do with the 42 different subcontractors they are using today. So, I think size and footprint in this particular case are driving opportunities.

David Gold – Sidoti & Co.

Okay. Can you also, I’m not sure if you gave a number, but can you give a sense for integration synergies where we are with that from the OneSource?

Henrik C. Slipsager

We are running on a annualized basis around 45 million, which I think is up from $44 million last quarter last year and if you remember the committed goal we had was around $47.5 million by the end of '09 and we are still targeting that, but of course the as you can see we are very close to our aim goals. So, the level of increases quarter-over-quarter will be very minimum.

David Gold – Sidoti & Co.

Okay. And then one just last one, maybe this is more appropriate for Jim basically to your comment on tag work, presumably, if we go back a couple of quarters we had a little bit of an issue there with the financials, New York, San Francisco say it seems like from what I can tell over the last couple of quarters it's stabilized or maybe that work is bottomed out, but can you give some color I mean is there still work coming baked in there from the financials or has that really bottomed and what sort of a status for that piece of business?

James Lusk

Yeah. Thanks David. The reason I made the comment on tag work because I think its not always clear that it's not of risk, I mean most of the tag work as I said is related to things like storms and floods and cleaning out universities and things like that that's where the bulk of the work is. The work that we talked about last quarter, which is a small percentage of the overall tag work that is down, that is primarily in places like the financial industry, et cetera and we don’t see much more of that going down at this point in time. So, that's pretty much baked into our forecast and baked into where we are at this point.

David Gold – Sidoti & Co.

Gotcha. And, I mean would it be fair to say as I said your expectation from those clients is presumably a lot lower maybe closer to almost or is very minimal at this point?

James Lusk

Yeah. I think the time of having IPO parties and holiday celebrations and that kind of stuff is clearly off the map, especially for some of the big companies that we read in the papers on the front page every single day. So, those things are fairly minimal right now. But the bulk of our tag work, which is the work I talked about earlier, that is continuing and that's not the kind of stuff that tends to be a jeopardy in this situation unless less act of god go away, so that's what would have to happen really.

David Gold – Sidoti & Co.

Gotcha. That's it. Very good. Thank you both.

Henrik C. Slipsager

Thank you.

Operator

(Operator Instructions). And we have no further questions at this time. I’d like to turn the conference back over to Mr. Slipsager for any additional or closing remarks.

Henrik C. Slipsager

Well we are very proud of our first quarter and I want to thank all of the employees for a great job for the first quarter and we look very much forward to talk to all of you at the end of the second quarter. Have a nice day.

Operator

Ladies and gentlemen that concludes today's conference. We appreciate your participation. You may disconnect at this time.

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