ABM Industries Incorporated

Good morning, everyone, and welcome to our fourth quarter 2021 earnings call and Investor Day. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmers, our President and Chief Executive Officer, Earl Ellis, our Executive Vice President and Chief Financial Officer, as well as other members of our Executive Leadership Team, whom you will meet later during the Investor Day portion of today's program. We are all very pleased you have joined us this morning. Please note that earlier this morning we issued our press release announcing our fourth quarter and full year fiscal 2021 financial results, as well as details about the Elevate initiative we are undertaking. A copy of this release and an accompanying slide presentation can be found on our website, abn.com. Regarding today's program, we will first review our fourth quarter and full fiscal year 2021 financial and operating results. After that, we will take a short break. We will then begin the Investor Day portion of the program where we will provide an update on our strategic positioning, discuss our newly announced Elevate initiative, and provide a multi-year outlook. After that, we will host the Q&A session. Instructions on how to submit a question will be provided at the end of our prepared remarks. Before we begin, I would like to remind you that our webcast and presentation today contain 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 of 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. These factors are described in a slide that accompanies our presentation as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers to GAAP financial measures is available at the end of the presentation on the company's website under the investor tab. And with that, I would like to now turn the webcast over to Scott. Thanks, Paul.

Good morning, and thank you all for joining us today to discuss our fourth quarter and fiscal 2021 results. Following our comments, we're hosting a virtual investor day where we will provide a long-range strategic update and financial outlook, including a comprehensive discussion of our Elevate Investment Initiative. I hope everyone can join us for that part of the webcast, and we look forward to speaking with you and answering your questions. Fiscal 2021 was an exceptional year for ABM, highlighted by continued strong financial performance and the acquisition of ABLE services, a key transaction that substantially expanded our geographic footprint and broadened our capabilities. Throughout the year, our global team continued to execute at the highest level, successfully navigating a dynamic environment with agility, resiliency, and dedication to serve our clients. Fourth quarter revenue grew over 14% to $1.7 billion and adjusted EPS increased 23%. representing a great finish to our fiscal 2021 year, where revenue of $6.2 billion was accompanied by an adjusted earnings per share increase of 47% to $3.58. Our strong revenue growth in the fourth quarter was driven by one month of contribution from ABLE, as well as organic growth in our B&I, aviation, and technical solutions verticals, which more than all set a modest decline in our education segment. I'm pleased with the progress we've made in enhancing our overall profitability as full year adjusted EBITDA margins reached a record 7.3% and fourth quarter adjusted EBITDA margins increased 40 basis points from prior year. Throughout the year, we continue to experience demands for our disinfection and virus protection services as clients prioritize our enhanced clean protocols to maintain hygiene in high traffic spaces. In addition, we continued to manage our labor costs proficiently as office occupancy trends increased gradually through the year. As anticipated, overall demand for our higher margin work orders and enhanced clean services eased as the year progressed, yet we maintained elevated in the fourth quarter compared to pre-pandemic levels. Going forward, we expect that ongoing concerns around COVID-19 variants will lead to incremental opportunities for our disinfection services, providing support for our adjusted EBITDA margins exceeding 6% in fiscal 2022 per our guidance. Turning to our segment performance, fourth quarter revenue growth was led by a continued rebound in aviation. This industry group, which was most impacted by the pandemic, generated 43% year-over-year revenue growth in the fourth quarter as air travel trends improved markedly over the prior year, and we capitalized on new business opportunities, including the expansion of our parking operations at airports. Our fourth quarter has also benefited from 21% growth in technical solutions revenue, reflecting growth in our emerging e-mobility business and improved access to client site. Technical solutions backlog increased by 20% sequentially compared to the third quarter and reached a record level in the fourth quarter. Driven by the transition to electric vehicles and the associated need for charging stations, our e-mobility business has significant long-term growth potential. Key growth drivers for this business include federal stimulus funds designated for energy-efficient projects, as well as the recent passage of the Federal Infrastructure Bill that included $7.5 billion towards deploying EV charging stations nationwide. Our B&I segment continued to perform well as revenue grew at a double-digit rate in the fourth quarter, benefiting from the addition of ABLE, new contract wins, and continued client demand for work orders. While office occupancy trended higher over the past year, office occupancy levels remained low by historical standards, which should lend to a continued tailwind from labor efficiencies perspective in this segment during the first half of fiscal 2022 and possibly longer. Turning to education, fourth quarter revenue and margins declined compared to the prior year. Earlier this year, we communicated that the return of students to school on a full-time basis would diminish education segment labor efficiency as increased staffing would be required to accommodate educational institutions' reopenings in the fall. This did occur as we expected, though the unusual rapid staffing ramp combined with the state of the labor markets resulted in higher labor costs. dampening segment margins in the quarter. With this staffing increase now behind us, we believe education segment profitability will return to more normalized levels starting in the first quarter. I'd now like to provide some color on Elevate, our transformational investment initiative that we will discuss in detail during our Virtual Investor Day event following this call. Five years ago, we announced 2020 Vision, a long-range strategic plan to drive profitable growth and shareholder value. Today, we are building on the success of that initiative with Elevate, a multi-year comprehensive investment initiative that will enhance our strategic and competitive positioning, leverage the advantages of leading-edge technologies, inclusive of data and analytics, and enable us to capture incremental growth and profit opportunities arising from macro shifts in demographics, rapidly changing workplace dynamics, and the heightened need for increased corporate sustainability. Elevate will include strategic investments in revenue growth initiatives, team member development, workforce management, and digital transformation. These investments will accelerate our organic growth, strengthen profitability, and create a more rewarding experience for both clients and team members. The total Elevate investment is estimated to be $150 million to $175 million, and the initiative is expected to be largely completed by the end of fiscal 2025. In fiscal 2022, we expect to invest approximately $80 million in Elevate, enabling us to significantly advance the implementation of our digital transformation. With these foundational elements in place by the end of fiscal 2022, we anticipate lower levels of Elevate investments in subsequent years. We're excited about the opportunities that Elevate will provide, and we'll share more detail with you on this whole initiative in a few minutes on the investor day portion of the program. We are entering fiscal 2022 from a position of strength, supported by a healthy balance sheet, solid cash flow, and favorable growth trends across our businesses. We continue to support our clients by providing high-value services and solutions that have enabled them to navigate unprecedented challenges over the past couple of years. And with the recent acquisition of ABLE, we significantly expanded our capabilities to comprehensively address our clients' evolving needs across the spectrum of facilities management and engineering solutions. Now I'd like to comment briefly on our guidance. For fiscal 2022, we forecast gap earnings per diluted share of $2.05 to $2.30 and adjusted EPS of $3.30 to $3.55. Within this guidance, we assume an easing of COVID-related disinfection services and work orders, leading us to project fiscal 2022 adjusted EBITDA margins of 6.2% to 6.6%, inclusive of synergies from ABLE services acquisition. While EPS and margins are projected to decline from fiscal 2021, they are significantly above pre-pandemic levels and above our targeted long-term metrics we outlined in 2019 when we signaled an aspirational margin range of 5.5% to 6%. We'll provide more detail on our outlook and fiscal 2022 guidance later during our virtual investor day portion of the program. I'll now turn over the call to Earl for a discussion of our financials.

Thank you, Scott, and good morning, everyone. Fourth quarter revenue increased 14.2% to $1.7 billion, primarily driven by one month of contribution from the acquisition of Able Services, continued client demand for disinfection services, and a generally improving economic environment. Gap income from continuing operations in the fourth quarter was $34.3 million, which or 50 cents per diluted share, compared to $53.1 million, or 78 cents per diluted share, in the same period last year. The decrease in GAAP income reflects higher operating and corporate expenses, which included acquisition-related costs of $19.7 million, initial investments in our Elevate initiative, and a lower benefit from self-insurance adjustments related to prior years. On an adjusted basis, Fourth quarter income from continuing operations grew 25% to $58.2 million, or $0.85 per diluted share, compared to $46.7 million, or $0.69 per diluted share, in the fourth quarter of last year. The increase in adjusted EPS reflects revenue growth and a benefit from the absence of a reserve for notes receivable related to a single project within the company's technical solution segment recorded last year, partially offset by reduced labor efficiencies and disinfection work. Corporate expenses were $40.9 million higher compared to the fourth quarter of fiscal 2020 due to acquisition-related expenses, a lower benefit from prior year self-insurance adjustments, and costs related to hiring initiatives. Corporate expenses in the fourth quarter of fiscal 2021 were also impacted by $10.3 million of initial investments in the Elevate Transformation Initiative that Scott mentioned and that we will discuss more fully later on. Now, turning to our segment results in the fourth quarter. B&I revenue increased 17.5% year-over-year to $933 million, driven primarily by a one-month contribution from ABLE Services, increased office occupancy, and the expansion of key accounts. Excluding the contribution from ABLE, B&I revenue increased 4.7% from the prior period. Operating profit in B&I declined 3% to $82.1 million from the same period last year, reflecting an easing in higher margin work orders. Aviation revenue increased 43% to $201.7 million, marking the second consecutive quarter of robust year-over-year revenue growth. This improvement was driven largely by increased airline passenger volume and the expansion of our airport parking operations. Aviation operating profit increased to $13.2 million compared to $3.5 million in last year's fourth quarter, driven by the significant rebound in revenue as well as our efforts to emphasize higher-margin airport facility services. Revenue within our technology and manufacturing segment was essentially flat year-over-year at $245.5 million as new business starts were offset by reduced client demand for COVID-related work orders and enhanced claims. However, operating margins for T&M improved to 10% in the fourth quarter, up 40 basis points from last year's fourth quarter, benefiting from efficient labor management and contract expansions. Education revenue declined 3.7% to $204.4 million, largely reflecting the timing of contract rebids. While client retention rates remained consistent on a year-over-year basis, certain contract rebids were not completed in the fourth quarter, impacting segment revenue. Operating profit totaled $7.7 million, down from $15.1 million in last year's fourth quarter. The decline in segment operating profit was in part due to normal seasonality. However, the magnitude of the decline this year was amplified by the widespread reopening of educational institutions that necessitated a near instantaneous ramp-up of staff, as Scott has discussed. Moving forward, we anticipate education segment profit margins will be approximately 6% in fiscal 2022, representing an increase of more than 100 basis points compared to pre-COVID levels, resulting from a sustained uplift in labor efficiency and higher disinfection revenue. Revenue within our technical solutions segment grew 21% to $199 million, aided by continued strong growth in our emerging electric vehicle charging infrastructure business, improved access to client sites, and strengthened client demand for energy efficient solutions. Segment operating income returned to profitability and generated an operating profit margin of 12.8%. We ended the fourth quarter with $62.8 million in cash and cash equivalents, compared to $394.2 million in With total debt of $1.06 billion as of October 31st, 2021, our total debt to pro forma adjusted EBITDA, including standby letters of credit, was 1.9 times at the end of the fourth quarter of fiscal 2021. As for our dividends, I am pleased to report the board approved a 2.6% increase in our quarterly dividend to 19.5 cents to be paid out in February. Now I'll briefly discuss our outlook. As Scott mentioned, Our guidance for full-year fiscal 2022 adjusted income from continuing operations is a range of $3.30 to $3.55 per diluted share. Our adjusted earnings forecast reflects a favorable growth outlook across our business segments in fiscal 2022, as well as an expected easing in COVID-19-related disinfection work and a reduction in labor efficiencies from anticipated rising office occupancy rates. Please note that our adjusted earnings guidance excludes approximately $72 million in Elevate-related expenses that are planned in fiscal 2022. These are general and administrative expenses for delivering and implementing technology and process solutions related to our digital transformation. We plan to exclude these expenses from adjusted earnings to provide for more accurate comparisons regarding operating performance. We expect the fiscal 2022 tax rate to be approximately 30%, excluding any discrete items. Fiscal 2022 will have one additional workday compared to fiscal 2021. As a reminder, each workday represents approximately $7 million of labor expense. In terms of the timing of quarterly workdays throughout the year, we will have one additional workday in both the first and fourth quarters versus the comparable periods in fiscal 2021 and one less workday in the second quarter. Capital expenditures for fiscal 2022 are expected to be approximately $54 million, including $8 million related to elevate investments. We forecast depreciation to be approximately $50 million for the year. We hope you will remain with us for our Virtual Investor Day presentation, which will start shortly after a brief break. Following the presentation, we will be available to answer your questions. Thank you.