ABM Executive Insights: Delays, Government Services

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

Delays in Work and DLITE Reevaluation:

David Gold – Sidoti & Company: A quick question. I wanted to hear a little bit more on I guess one of the notes in the presentation that you spoke to was, on the government side your early terminations. Can you give us a sense – I guess if we go back a quarter ago where we were talking more about some delays in work. So a sense for order of magnitude of the early terminations, how those come about and basically how concerned we should be about that?

Tracy K. Price – Executive Vice President: This is Tracy Price, I’ll respond to that. I think we were all caught a little flat-footed with the inability of the government to put together a Status of Forces Agreement with the Iraq and that really resulted in the rather unceremonious departure on several contracts and we had two in particular, (indiscernible) which were slated to generate $40 million plus in revenues this year and without the ability to fulfill those contracts or the anticipated growth in those most contract we won’t be able to replace that income.

David Gold – Sidoti & Company: I guess presumably that was something that became more obvious in the second quarter?

Tracy K. Price – Executive Vice President: In January we were getting inklings that that was the case, but yes it manifest itself closer to the second quarter.

David Gold – Sidoti & Company: The other question on, can you give us a sense on the revaluation of DLITE, what brought that on and was it still simple as the six finalists or whatever – six folks selected including ABM who are being reevaluated or is it being open to the world?

Tracy K. Price – Executive Vice President: I wouldn’t say it’s simple as that, but no it’s not being reopened to the world. What transpired was a number of companies who thought that process was flawed and submitted protest, what the government elected to do instead of acting on the protest was take corrective action, which is a good sign meaning that they believe that they potentially had a flawed process as well. As a result of that there are the existing bidders whose bids will be reevaluated for price and technical competency and since we were already judged to be technically competent, it should evolve to a pricing exercise and we believe we are competitive.

David Gold – Sidoti & Company: One last one, Henrik, in a pool of new business, we have been relatively successful this year, can you give some sense of how much of that is success by way of the energy initiatives versus other areas, basically what’s the secret to success in winning new business in the tough environment?

Henrik C. Slipsager – President and CEO: It’s fair to say, David, the growth is everywhere. The most exciting part of the growth even though I’m pretty excited about all kinds of growth is the sizeable contract we are we are talking about that unfortunately was delayed is a Facility Solutions job where all our operating units participate other than that it’s basically growth everywhere and then I’m very pleased to see the activity level and that includes energy by the way.

David Gold – Sidoti & Company: across the board and as far as margins – pricing have – you had to give up very much to sign these contracts or is it more about the services that ABM brings to the table?

Henrik C. Slipsager – President and CEO: It is a combination of all things David , there is no doubt that the market, especially if you have the single service contracts the market is very tough out there comparatively on the price side, but you are right, when we do present solutions to the client that is primarily in-house the fact that we can deliver all services and self perform is very, very attractive. So, hopefully, the profit percentage on those jobs would be slightly higher.

Linc Revenue and Government Services:

Adam Thalhimer – BB&T Capital: Are you able to breakout what Linc revenue was in the quarter?

Henrik C. Slipsager – President and CEO: No, Linc revenue is merged into the ABM Facility Solutions where the old ABM engineering business is part of that. So, it’s nearly impossible to break that because I can’t tell you the business was added from the time we bought Linc to now, if that should be part of the old ABM or it should be part of the new ABM. So, what I am trying to measure is the size of the company, when we bought it, including our engineering group versus how big they are today and the growth we’ve had in that company pretty much offsets the loss of business in government. So, you have seen sizable growth in the rest of the engineering group.

Adam Thalhimer – BB&T Capital: Tracy, how should we think about the outlook for government? I know it’s weak, it’s muddled, but how long could it be before that becomes a real business again, the government services?

James S. Lusk – EVP and CFO: Yeah. Well, I think our government services business is a real business. The stuff that’s been rather opaque has been to the dealings in the war theater and those are primarily related to the contracts that existed in Iraq and Afghanistan and the delays in deferrals on opening up some of other delayed markets that are – there’s eight to 10 of those contracts in the queue. So I think our frustration is the pace of letting of the contracts and that I think has to do with more political overtones than economic realities, but it’s not like the work is going to go away, so it’s just a matter of us being patient in persevering. We will get our share of that business and we do have the right infrastructure to deliver on it. So I think it’s just a matter of time, but I guess we’ve all learned that we can’t predict what the government is going to do next.

Adam Thalhimer – BB&T Capital: Would you say Afghanistan represents an opportunity or it’s just too uncertain?

James S. Lusk – EVP and CFO: It’s an opportunity for us, because of its expanded services.

Adam Thalhimer – BB&T Capital: Then, last question, which maybe Tracy can answer as well on the facility services side. Potentially to me, we’ve seen a lot of companies get or at least a few companies get bigger in that space. You’ve got the commercial leasing guys trying to move more in the services, you got the construction guys trying to offer more services than just construction, and then you are coming out of from, I guess, more of a HVAC/Janitorial and now getting into electrical. How does that play out over the next several years? I mean, what is the competitive environment like in that market and how well received is that kind of approach of the full suite of solutions?

Tracy K. Price – Executive Vice President: I’ll tell you how it’s played out over the last 25 years and that is that every time the economy contracts, the construction companies get in the service business, the manufacturers get in the service business and the real estate companies get in the service business. As soon as the market starts to expand and the economy does better, they will go back to doing what is their core competency and get out of the service business. So, it does create some confusion with the customers and compression on margins during these unique periods in the annals of economic history, but we come at it from a pure service play. So, we are manufacture agnostic, we’re a hoop jumping obsequious service company, we are not manufacturing a product, we are not a construction company and we’re not generating revenue based on real estate transactions. So, the customers understand that and our orientation has always been comprehensive integrated facility services with the ability to leverage off of our mechanical footprint and having to subcontract the types of services that ABM traditionally has self performed and then adding in the other leg of the stool with electrical was very important to us. They helped facilitate and grow our energy services business. So, when you look at our model, we really are I think one of one in terms of end-to-end capability to do that urban, suburban and rural play that I think is very important to facilitating our growth, but if you look at the expense of services we provide, the biggest things that’s happened as a result of us being acquired by ABM is we’ve gone from a hard services self performed and sub contracted soft services company to a self performed turnkey company which customer appreciate. I can tell you one of our most recent wins, when we were up against the traditional companies that you just outlined in terms of their normal orientation of focus, the customers response was the reason why you guys won is because you self performed. So, I think what customers understand is that if you’re in the ‘FM’ business and you broker services, you’re not adding much value. If you’re actually providing integrated Facility Solutions and you turnkey the work, you’re providing tremendous value and more work for the same money.