ABM Industries Earnings Call INSIGHTS: Property Vacancy Levels, Government Business

On Thursday, ABM Industries, Inc. (NYSE:ABM) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Property Vacancy Levels

Joe Box – KeyBanc: A question for you on some leading indicators. Can you maybe just talk to where property vacancy levels have been trending within some of your core markets and verticals?

Henrik C. Slipsager – President and CEO: Yeah, I would say the vacancy rate in general, even though it’s a regional phenomenon being pretty flat regionally but the vacancy rates have a slight impact on our business, not the greatest impact, on the verticals – what was the question about the verticals?

Joe Box – KeyBanc: I was just asking for vacancy rates within some of your more pressing verticals like offices.

Henrik C. Slipsager – President and CEO: The biggest verticals we have is commercial properties and commercial business and as I said that vacancy has been pretty flat and I wouldn’t say the vacancy in the south has any major impact on our numbers for the quarter or for the year.

Joe Box – KeyBanc: What I was trying to get at was, if it’s flattish or even potentially improving in some markets that I’m looking at, can you maybe just put some color around why we’re seeing either job reductions or the aggressive pricing environment that you guys called out?

Henrik C. Slipsager – President and CEO: Well, I think the recession has been prolonged a little bit or it’s a fact of life – out of what we call the tough times have people focusing on commodities like our Janitorial services in particular and unfortunately it continues to see price pressure, and particularly in that segment, I think that’s going to continue for a while until the time where we’re truly out of this sluggish economy so we can focus on growth and a lot of positives. The other thing I want to mention is, I really don’t think the vacancy rate has any major impact on neither our – the price pressure we feel and/or revenue growth, I think we’ve seen – no, it’s pretty flat but certain margin (indiscernible) and other margins are just getting along. I don’t think that’s going to change in the near future maybe even in – rather in the long future.

Joe Box – KeyBanc: Question for you on your implied 4Q guidance. Can you maybe just talk to what included in your new guidance for the Facility Solutions or the government business are you looking at a 3Q type run rate or are you baking in some potential new government projects for your implied 4Q guidance?

Henrik C. Slipsager – President and CEO: In our guidance we are not including anything – no home runs included a lot of (indiscernible) home run, I am very open for home runs but nothing is included. We are basically expecting the run rate to be pretty much the same as it was in the third quarter on the – pretty much on most of our businesses. As Tracy mentioned, we expected a lot particularly on our Energy – the onsite business due to the fact that we started a new contract – the sizeable contract in July it is going to have some impact but nothing major. What’s also included is an expected onetime benefit of 11% for the quarter on tax related items.

Joe Box – KeyBanc: One more question then I will turn it over. Question on your go-to-market strategy in Facility Solutions, it is certainly understandable that you guys have more market touch points and you’ve got a broader product platform. I guess, what I am trying to understand is does that mean that we are looking at maybe lower incremental margins until you bring enough volume to cover the costs or is the cost structure variable enough to where we would see typical incremental margins as you bring in some incremental volume?

Henrik C. Slipsager – President and CEO: I would tell you that the cost structure is variable and that it increases at a decreasing rate relative to revenue, so it actually puts us in a better position the more of that mid-market business we go after, it’s generally speaking much higher gross margin business than the traditional onsite business, it also requires a much higher SG&A to capture it, but for us it’s a blend and extend play where the more of the mobile business and more of the on-demand business that we have, the better the margins are going to be overall for Facility Solutions.

Government Business

David Gold – Sidoti & Company: I wanted to follow-up with you a little bit more the commentary on the runoff in the terminations in government business. So a couple of things could you give some color on, one is, can you give us a sense for how much more of that maybe out there, sort of in front of you, in other words I think this quarter you said we were $25 million short of you expected to be, but as we look forward, yeah, how much more serious risk do we have in front of us, I guess, is the first question?

Henrik C. Slipsager – President and CEO: Before I give the call over to Tracy, I think, I have some good news. We can’t get out of Iraq more than one time. So, we can’t get hurt more in that particular area. But Tracy, please give a little color.

Tracy K. Price – EVP, President of ABM Facility Solutions Group: Yeah, and to that point we can only depart a country once, which (inverse to our) benefit.

David Gold – Sidoti & Company: When did that officially happened?

Tracy K. Price – EVP, President of ABM Facility Solutions Group: January.

David Gold – Sidoti & Company: Okay, got it. So it wasn’t all that surprising to you in the quarter?

Tracy K. Price – EVP, President of ABM Facility Solutions Group: No, and hasn’t been for the last two quarters. So, it’s frustrating, but not surprising. What has been of benefit to us is within the last quarter and specifically in the last 35 to 40 days we have seen an uptick in contract wins and primarily adds to existing contracts and just so that you understand the government business, there’s really two components, there’s the kind of core competency in operations and maintenance contracts and things that we do day in and day out and then there’s the expeditionary business that we tend to do in war theaters, that’s where the variability comes in and it can be a great win for all it can be disappointing but it’s geopolitical, so we really have zero control over what happens there. We can deliver the services definitely as we possibly can and if the politicians make a decision to go elsewhere our contracts end but in the recent times, we’ve had expansions on our supply support activity contract of 21 additional FTEs. We’ve had improvements in our Coalition Joint Task Force contract of another 24 FTE. We had a recent win at the BOS contract at Camp Leatherneck for another 22 FTEs. We got word that we will be re-engaging on a contract in Egypt, that we’ve had in the past and we also recently got a domestic award with the Navy that bodes well for us. So it’s not all doom and gloom and we do think that 2013 will be better than 2012 because we don’t have that large hole to dig out of.

David Gold – Sidoti & Company: Just following up on that, there’s a comment in the release I think contributed to Henrik about the large issue being a short fall of 25 million expected sales in the quarter for the government business. So, presumably if that’s not Iraq, because we knew – we were already out of Iraq starting January. Where did that come from?

Henrik C. Slipsager – President and CEO: It is Iraq. It is from our regional expectations also. Areas like the DLITE Contract. As you know we were one of six companies selected for this $9.7 billion contract and we made our plans a year ago. We thought it was pretty reasonable to include $25 million or $50 million in DLITE revenue net income and as you might also know a lot of the government business that we received is there was some of the business Tracy just mentioned that is you get a phone call on Monday, you start on Friday and the revenue comes in. So, it is very difficult to project, but we talked about our shortfall it is based upon – shortfall versus original expectation, not what we expected 60 days ago.

David Gold – Sidoti & Company: Sort of more broadly Henrik and maybe Jim can help on this. How do you think about go-to-market pricing in this environment – couple of perspectives; one is, presumably if we found out it takes a little while to find out what the actual insurance cost is, if you will, given the adjustments that have to be made each year but also sort of the tough market broadly how do you think about it and basically ensure the contracts you are putting out right now will definitely will be profitable to us?

Henrik C. Slipsager – President and CEO: First of all, I would say there’s one thing we are pretty good at and that is not losing money on particular contracts. We have very, very good management out there in all segments that knows how to bid a job. What I can’t change is the competitive environment. It is always a particular time that I discussed a lot with McClure, we are the leader in this business and when do we say, hey, let’s get these increases or sort of disappear from the market or obtain some contracts, but as long as they are profitable and as long as most of our businesses viewed by the third-party as a commodity, you have to be very, very careful in these particular times of having an aggressive pricing strategy and an aggressive cancellation strategy. So we have chosen to be very aggressive in our renewals of contracts, long-term renewals and I think the one number that I’m particularly proud of for the Janitorial division that is their renewal rate, close to 96% is unique, that was in an average life time of 25 years per contract, which is absolutely unheard off in the business. At the same time, we might have a tough time, but medium-sized contractors are having a very, very, very difficult time. So at one point of time there’s going to be some very attractive businesses for sale that are not making the same amount of money they are doing today and at one point of time a lot of these contractors won’t have a change of surviving this particular economic climate. So I think we have very – in a very good position long-term. Unfortunately you have to go through some of these difficult quarters where there are some pressures on margin, but at the same time by renewing a huge amount of clients we look forward to a steady revenue stream for the coming years.