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ABM Industries Inc. (NYSE:ABM)

F3Q09 Earnings Call

September 3, 2009; 9:00 am ET

Executives

Henrik Slipsager - President & Chief Executive Officer

Jim Lusk - Executive Vice President & Chief Financial Officer

Sarah McConnell - Senior Vice President & General Counsel

Analysts

David Gold - Sidoti & Co.

Michael Gallo - C.L. King

Justin Hawkey - Robert W. Baird

Operator

Good day everyone and welcome to today’s ABM Industries third 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.

Henrik Slipsager

Thank you. I’m Henrik Slipsager, President and CEO of ABM. Joining me today are Jim Lusk, Executive VP and CFO; and Sarah McConnell, Senior VP and General Counsel.

On the call today, I’ll provide an overview of the 2009 third quarter which ended July 31. Jim will discuss the details of our financial results and I’ll conclude our prepared remarks with a summary of the company’s operational achievements for the quarter, as well as discuss our outlook for fiscal ‘09.

In addition, we’re providing a slide presentation to accompany today’s prepared remarks. You may 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 McConnell

Thank you, Henrik. I will pause for a moment to allow everyone time to access our presentation on ABM website. Will you turn 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 2008 Annual Report on Form 10-K/A and in our Quarterly Report on Form 10-Q and Current Reports on Form 8-K that we filed with the SEC.

During the course of this presentation, certain financial measures that were not prepared in accordance with U.S. GAAP will be presented. A reconciliation of those numbers to GAAP financial measures is available on the company’s website under Investor Relations.

Henrik Slipsager

Thank you, Sarah. Now please turn to slide five and six for a review of our fiscal third quarter highlights. Consistent with the trends we saw in the second quarter of this year, the recession continues to have an impact on our business. However, the actions that we have taken to adjust our infrastructure and expense base, and manage our pricing strategy have turned out to be appropriate and effective, allowing us to achieve the result that we have this quarter.

We delivered year-over-year growth of over 18% in adjusted income from continuing operation and 8% in adjusted EBITDA. Our third quarter revenue was down 5.7% from the prior year period, primarily due to the economic environment and the proactive steps we took earlier in the year, to help our customers manage their expenses, and to reduce or eliminate less profitable businesses.

On a sequential basis revenues were up slightly and in viewing recent trends, we believe our revenue base has stabilized. Our sales pipeline and sale activity continue to look healthy. While we expect fourth quarter revenue to be essentially flat on a sequential basis, given recent sales we anticipate revenue growth returning as early as the first quarter of fiscal 2010.

Despite the top line challenge and overall business climate in the third quarter, our combined division operating profit increased year-over-year, led by growth in operating profit within our Janitorial and Security Divisions, up 10.6% and 30% respectively. We continue to benefit from our proactive management of gross profit margins and aggressive control of cost.

Our third quarter performance reflects the action we’ve taken to manage our pricing strategy, expenses, working capital and cash conservation. Our strong strategic framework and our business buys have helped us weather the negative economic cycle. Prior to the downturn until today, we are the leading provider of facility services, which is to the Fortunate 1000 companies.

In summary, our business is sound and our financials are solid. Yesterday we announced a quarterly cash dividend of $0.13 per common share, marking our 174th consecutive dividends. We continue to work to best position the company’s towards the drastic current economic environment, while laying the foundation for increased profitability as the economy improves.

Now, I’d like to turn the call over to Jim for the financial revenue of our third quarter and nine month results. Jim.

Jim Lusk

Thank you, Henrik. Good morning everyone. Turning to our third quarter fiscal 2009 results on slide seven, revenues for the third quarter decreased 5.7% to $870.6 million, from $923.7 million in the prior year period.

As Henrik mentioned, revenues continue to be adversely affected by the weak economic climate. It is important to note however, that 10.4% or $5.5 million of decrease in revenues is due to reduction of expenses incurred on behalf of managed parking facility, which are reimbursed to the company, and have no impact on operating profit. Sequentially, revenues increased 1.7% compared to the second quarter of 2009.

In addition to the impact to the economy, our third quarter net income reflects the effects of a $2.2 million after-tax increase in self-insurance reserves, related to prior years, compared to a $4.6 million after-tax reduction in self-insurance reserves related to prior years recorded in the third quarter of 2008. As we have said before, we recorded adjustments to our self-insurance reserves based on the point estimate determined by an independent actuarial announces. Overall our insurance trends are positive.

As Henrik noted however, we continue to take proactive steps to mitigate the broader economic pressures. This discipline extends to working capital management and we are pleased with our ability to generate solid cash flow from operations, particularly in light of the recessionary environment. Our strong liquidity position speaks to the strength of our business model and we believe that we are well positioned to emerge a stronger player in the economic recovery cycle.

Continuing to focus on slide seven, gross margins for the 2009 third quarter declined to 10.1% from 11.3% in the prior year period. In the fiscal 2009 third quarter we recorded a $3.5 million pre-tax increase in self-insurance reserves, compared to the fiscal 2008 third quarter in which we recorded a $7.6 million pre-tax reduction in self-insurance reserves related to prior years.

Excluding the insurance adjustments recorded in the current and year ago quarter, gross margins remained constant on a year-over-year basis. Reflecting our diligent cost containment and operational efficiency efforts, our SG&A expense for the third quarter decreased $7.6 million to $64.7 million, which was $72.3 million earlier.

The year-over-year decrease is primarily due to aggressive cost controls in the divisions, a decrease in cost associated to move our corporate headquarters in fiscal 2008, a decrease in professional fees and a reduction in expenses associated with the integration of OneSource. This was partially offset by an increase in information technology costs, including higher appreciation costs related to the upgrade of our payroll, given the resources and accounting systems.

Interest expense decreased $1.9 million to $1.5 million in the third quarter of 2009, from $3.3 million in the prior year period, reflecting a lower average outstanding balance and average interest rate under our credit facility. As compared to the third quarter of 2008, we reduced our line of credit by $89 million to $196 million at July 31, 2009. We ended the quarter with over $135 million of availability in our credit facility.

Our effective tax rate and income from continuing operations for the third quarter of 2009 was 29%, compared to 38.6% in the prior year period. Our tax rate in the 2009 third quarter includes certain tax benefits amounting to $1.7 million. We continue to expect our annual effective tax rate to approximate 37% in fiscal 2009, as compared to 37.5% in fiscal 2008.

Adjusted income from continuing operations before items impacting comparability increased 18.4% to $18.7 million or $0.36 per diluted share in the third quarter of fiscal 2009, from $15.8 million or $0.31 per diluted share in the same period last year.

Items impacting comparability for the quarter represented a net loss of $6.3 million after-tax or $0.12 per diluted share, related to corporate initiatives, the increase in insurance reserves for prior periods, and a credit loss on an auction rate security. This is compared to a net gain of $0.5 million after-tax or $0.01 per diluted share of the prior year period.

Adjusted EBITDA defined as Earnings before Interest, Taxes, Depreciation and Amortization, and excludes both discontinued operations and items that impacting comparability. For the 2009 third quarter adjusted EBITDA increased 8% to $37.8 million from $35 million in the prior year period. Net income for the third quarter of 2009 was $12.3 million or $0.24 per diluted share, compared to net income of $16.4 million or $0.32 per diluted share in the prior year period.

Turning briefly now, our results for the nine months ended July 31, 2009, which are not part of our slides. Revenues for the first nine months of 2009 decreased 3.8% to $2.6 billion from $2.7 billion in the first nine months of 2008. Income from continuing operations increased 6% to $40.2 million or $0.78 per diluted share from $37.9 million or $0.74 per diluted share in the prior year period.

Adjusted income from continuing operations before items impacting comparability increased 27.3% to $48 million, from $37.7 million in the first nine month of 2008. Items impacting comparability for the nine month period ended July 31, 2009 showed a total net loss of $7.8 million after-tax compared to a net gain of $0.2 million after-tax in the nine month ended July 31, 2008. For the nine months ended July 31, 2009, adjusted EBITDA increased 13.9% to $104.2 million, from $91.5 million in the first nine months of 2008.

Turning now to the balance sheet and cash flow on slides eight and nine, we continue to build our strong financial position and generate solid cash flow from operation. Cash from total operations which includes both continuing and discontinued operations for the nine months ended July 31 was a positive $76.5 million, compared to a positive $36.8 million in the comparable prior year period.

Cash provided by total operations was positively impacted by collections of accounts receivable, an increase in deferred income taxes, primarily due to the utilization of the acquired OneSource deferred tax assets during the nine months ended July 31, 2009 and the income from total operations generated in the first nine month of 2009.

We ended the quarter with $265.7 million in working capital, compared to $274 million at the end of fiscal 2008. Excluding discontinued operations, working capital increased to $261.3 million from $249.6 million at the end of fiscal 2008. Working capital depends on both, the timing accounts receivable collection, as well as the quality of our related receivables.

Trade accounts receivable at July 31, 2009 was $470.5 million versus $473.3 million at October 31, 2008. Day sales outstanding at quarter end were 50 days, reflecting our continued working capital management efforts. It’s worthy to note that we achieved these results while upgrading our IT systems.

Total insurance claims at July 31, 2009 were $343.5 million, compared to $346.2 million in the third quarter of 2008. Self-insurance claims paid during the quarter totaled $20.8 million, compared to $19.3 million in the third quarter of 2008.

I would like now to turn the call back over to Henrik who will provide a perspective on the third quarter operational performance, as well as discuss our guidance for fiscal 2009.

Henrik Slipsager

Thank you, Jim. I will now briefly review the operational results for the third quarter, as well as discuss our fiscal 2009 guidance. Turning to slide ten which shows the third quarter revenues of our operating divisions, while revenues were down approximately 6% on a year-over-year, as noted early on a sequential basis the revenue slightly increased from Q2. This is not the only positive sign we see.

Our sales pipeline and sales activity remained solid, and as I said at the beginning of the call, we’ve seen stabilization in both our revenue base and tag work. Recent sales trend, coupled with a stabilized book of business, positions the company for a return to revenue growth as early as the first fiscal quarter of 2010. While it’s premature to speculate on how the U.S. economy will perform going forward, we certainly are encouraged by recent developments.

Turning to slide eleven, although revenues were impacted by the economy and the proactive steps we started taking in the fourth quarter of 2008, operating profits for the four divisions benefited from aggressive cost controls and focus on job margins. In particular, our janitorial division achieved a 10.6% increase of $3.4 million. The result in janitorial, reflects on the quality of management we have in place, and in our ability to successfully execute in what is arguably one of the toughest operating environment since the great depression.

Moving to slide twelve, in summary we believe that we’re responding to the business environment appropriately. Our third quarter and year-to-date results service as a testament of our efforts to effectively manage the organization through a recessionary period. Despite the pressure on the top line, we were able to deliver growth and adjusted income from continuing operation and adjusted EBITDA; the key measurement of our business through expense management and performance improvement.

Our divisional operating profit also increased year-over-year, led by a growth in operating profit with our Janitorial and Security Divisions. Our strong financial position improving the working capital management puts ABM in a solid position to build upon our position as a leading facility service provider in the U.S.

Turning to our slide 13, in light of our 2009 year-to-date result, we take into consideration the unanticipated impact of insurance expense related to prior years and a non-cash charge associated with an option rate security. We’re adjusting our guidance for fiscal ‘09 of income from continuing operations per diluted share in the range of $1.05 to $1.15, and reaffirming adjusted income from continued operations per diluted share for the same period in the range of $125 to $135, exclusive of any additional acquisitions.

We will remain acutely tuned to the changes in their market environment and will leverage recent sales wins and improvements in the economy to build upon our financial results.

At this time, I would like to open the call for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Gold - Sidoti & Co.

David Gold - Sidoti & Co.

A couple of questions for you, just following up a little bit on Janitorial. We are impressed with the early progress that we’re seeing there and just wanted to go over a couple of things.

One, the incremental of the growth that we’re seeing there, would you attribute that to market share; is it an easing at existing clients? Basically where have you been finding the success there? Part two of that, I think Henrik you commented a little bit on tag work. If you can give a little bit more color there on what’s sort of happening there too?

Henrik Slipsager

I would say that the activity in the Janitorial Division as well as the other divisions, I think more reflects returning to a normal world. There are increasing activity at existing clients as well as taking market share or being successful on bid situations.

The other thing you talked about yourself, tag work. Tag work, I think I said during the second quarter I think we reached the bottom, and this quarter pretty much confirms what we expected when we had the second quarter, that tag work has stabilized at a lower level than it was in the prior period, but at least it’s stabilized and I think we’re well positioned from a tag work point of view, if in fact the economy comes back.

David Gold - Sidoti & Co.

Is that what it takes to get tag work to come back? Is it right now just a function of the economy or is there anything more that we can do to sort of push that along?

Henrik Slipsager

I think the primary push is the economy and people starting to feel comfortable about the future. There were a lot of pretty sizable cutbacks and I hope and believe there will be some openings going forwards, but tag work is primarily a result, especially we’re talking about New York in express, that’s a result of that. Tag work outside the New York, which could be associated with national disasters is pretty flat, nothing has happened.

David Gold - Sidoti & Co.

Then my other favorite question and I’m sure you see this coming is sustainability. Basically sustainability of the progress that you’ve made by way of margins as the economy comes back. What sort of color can you have there? How much of it do you think is sustainable, and how much of it is maybe just a function of we have an easier time, say freezing let’s say salaries right now given the environment?

Henrik Slipsager

I think none of the expenses reductions we’ve made are temporary adjustments. I think we’ve been able and successful in making the cost reductions, not based upon a short term situation, but adjusting downwards to prepare ourselves for what I define as a different world today than was it today.

So I don’t expect expenses to come back up, because none of the cuts we made is like delaying some expenses. If you notice we continued our IT investment, we haven’t stopped that and in general, none of the expenses are expected to reoccur.

David Gold - Sidoti & Co.

Just one minor if I might; on the technology upgrades that I think we’re close to finishing, what type of savings or benefit do you think we might see next year from that?

Henrik Slipsager

I think it’s going to take some time before we see savings and benefits from that. I think next year you’ll see some negative effects on the increased level of depreciation on all the equipment we have bought, but long term, I think if you look into the two or three year period, we should be able to manage our business better and more efficiently and we do have some cost savings associated with it, but it’s not a short term impact, it’s a long term impact.

Operator

Your next question comes from Michael Gallo - C.L. King.

Michael Gallo - C.L. King

The question I have is on the OneSource integration. I was wondering if you can give us an update on where you stand on the $45 million to $50 million in synergies, whether you’re pretty much gotten to the end of that or whether you think there’s still more to go?

Jim Lusk

Basically, we fully achieved all those savings and there maybe minor dollars to go, but pretty much we’ve achieved everything at this point time. So we achieved the goal and it could potentially squeeze out more, but it’s minor.

Michael Gallo - C.L. King

This sounds like it’s going forward on a run rate basis. You pretty much have gotten to that $45 million to $50 million target?

Jim Lusk

That’s correct.

Michael Gallo - C.L. King

Then second question I have is just on the pricing environment. Obviously it was certainly very competitive over the last six months or so. Have you started to see any stabilization in the pricing environment or is it still everyone just trying to win the jobs that are out there? Thank you.

Jim Lusk

It’s a tough environment, but it’s not only tough for us, it’s tough for everybody, which means we might be on depression in certain of our accounts, but also opens up some opportunities for adding on business from the competition.

So I don’t look at the environment as any kind of excuse of not achieving what should be achieved. It’s tough, but it’s tough for everybody. A tough environment also opens up opportunities for hopefully future acquisitions, etc., so tough environments might not necessarily always be bad.

Operator

Your final question comes from [Justin Hawkey] - Robert W. Baird.

Justin Hawkey - Robert W. Baird

I was wondering if you could just speak a little bit more about the guidance range. It just looks like its a little wider than maybe historically what you had going into the fourth quarter, and was hoping maybe you could give us a little more color on what you’re thinking is for the top end versus the low end and what we need to see in 4Q?

Jim Lusk

We have been pretty consistent throughout the year in our guidance and haven’t changed it. I think it’s fair to say that this environment that we’ve been through and should have seen some other companies recover as well.

It’s an environment where, I think management is maybe a little more conservative with respect to changing anything in their forecast. So I will just tell you we’re comfortable in maintaining our existing guidance as we said, and still as a matter of fact pretty good if our year can reflect an increase of close to 15% year-over-year, compared to what we’ve been through this year.

Justin Hawkey - Robert W. Baird

I was looking at the security margins, they came in a little bit better than what we were looking for. I guess I was curious if there was anything in particular in the quarter that was driving that or it was just solid execution?

Henrik Slipsager

Security, I’m very comfortable with the way they have performed this year. It has been probably the best 18 months and it’s my hope that they will continue this very strong operational performance. There’s no onetime, so anything that drives it, that’s the question. It’s just I think a very solid quarter for security and hopefully it’s going to be a long term improvement of that division.

Justin Hawkey - Robert W. Baird

Just one last kind of housekeeping question; with your acquisition of Control Building Services, are you expecting that could be accretive at all in ‘09 or is that not impacting your guidance at all?

Henrik Slipsager

The acquisition we made, it’s accretive, but it’s accretive at a very low level, because it’s a relatively small acquisition.

Operator

(Operator Instructions) At this time I would like to turn the conference back over to Mr. Henrik Slipsager for any additional remarks.

Henrik Slipsager

It’s Slipsager, but nonetheless I don’t have any additional remarks. I want to thank everybody for listening to our third quarter call and look forward to talk to all of you around Christmas time. Thank you very much.

Operator

This will conclude today’s conference. Thank you for your participation.

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Source: ABM Industries Inc. F3Q09 (Qtr End 07/31/09) Earnings Call Transcript
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