ABM Industries Incorporated

Greetings and welcome to the ABM Industries Inc. Q2 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Goldberg, Investor and Media Relations. Please go ahead.

Good afternoon, everyone, and welcome to our second quarter 2022 earnings call. 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, and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this afternoon, we issued our press release announcing our second quarter fiscal 2022 financial results. A copy of this release and an accompanying slide presentation can be found on our website, abn.com. After Scott and Earl's prepared remarks, we will host the Q&A session. But before I begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the words estimate, expect, or similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently 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 and on the company's website under the investor tab. With that, I'd like to now turn this call over to Scott.

Thanks, Paul. Good afternoon, and thank you all for joining us today to discuss our second quarter results. ABM posted strong results in our second quarter, following the excellent results we recorded in our first quarter. Organic revenue growth of 7.5% was driven by solid demand in business and industry, aviation, manufacturing and distribution, and technical solutions, which benefited from robust growth in our e-mobility business. Our teams executed well in a challenging environment, driving high single-digit organic revenue growth while largely mitigating the impacts of labor availability and wage inflation. We generated an adjusted EBITDA margin of 6.5%, which represents a significant improvement over pre-pandemic levels and reflects our ability to protect profitability in the current inflationary environment. Our solid results underscore the strength of our client relationships and our broad capabilities to meet their evolving needs. Overall, our second quarter performance largely reflected healthy demand for our core janitorial services, contributions from acquisitions, and the ongoing recovery in the aviation market. These positive factors were partially offset by the expected decline in disinfection-related work orders and enhanced clean services from the heightened levels in last year's second quarter. As Earl will discuss later, we are reaffirming our previous guidance ranges for full year adjusted earnings per share and adjusted EBITDA margin, reflecting continued favorable market demand trends for our core janitorial services, as well as our solutions that enable our clients to achieve their sustainability and energy efficiency objectives. Our strong market positioning is evidenced in our new sales bookings, which increased 11% year over year, to $795 million through the first six months of the year. Let me now discuss the demand environment for each of our industry groups. Beginning with B&I, office occupancy rates remain at relatively low levels, but continue to gradually increase, especially on the east and west coasts, where occupancy rates have risen to approximately 35 to 40%. while occupancy in the central part of the US is at approximately 60%. We continue to anticipate a measured pace of rising office occupancy for the balance of 2022. This slower pace of reopening is generally beneficial for our business, enabling us to effectively manage labor costs in today's tight labor market. At the same time, demand continues to rebound to special events such as concerts and sporting events, as essentially all venues have reopened to the public. One notable development in the office market is that occupancy levels are generally higher midweek with lower occupancies on Mondays and Fridays. This trend suggests that even though occupancy levels may not soon return to pre-pandemic levels, clients still must plan for high occupancy days when they think about their future space requirements. Moving to aviation, Travel rebounded significantly from the prior year with U.S. passenger volumes now at approximately 90% of pre-pandemic levels, mostly driven by leisure travel. Business travel is also improving, although at a more measured pace. We expect travel demand to continue to trend higher and to approximate pre-pandemic levels in the U.S. in the third quarter. Given the recovery in the travel market, margins in our aviation business have rebounded strongly. aided by our efforts to optimize our service mix and by our effective management of labor costs in tight markets. Demand in manufacturing and distribution continues to be solid, as this segment has been largely unaffected by reduced occupancy levels. As a result, our organic revenue growth reflects the health of these end markets. Supported by our strong relationships with many of our country's leading e-commerce, logistics, and manufacturing companies, we have expanded our book of business with these clients, benefiting from their continued growth. To further accelerate our growth in M&E, we are working to broaden our exposure in attractive markets such as life sciences. With our industry-leading geographic footprint, ABM remains uniquely positioned to serve our clients' M&E needs who value our ability to provide consistent service across their numerous site locations. In education, demand remains stable as K-12 and college and universities continue to operate with 100% in-person learning. Although the roll-off of two education accounts in the back half of fiscal 2021 and a reduction in the disinfection-related work orders continue to impact revenue in Q2, we expect that the addition of new clients starting in Q3 of this year will drive year-over-year revenue growth in the fourth quarter. In Q2, Segment margins were impacted by the labor ramp-up required to service nearly full in-person learning versus the hybrid model from a year ago. Additionally, we did experience labor inflation costs in certain non-unionized markets, especially in the southern regions of the U.S., but we effectively mitigated a large portion of them through price escalations. In technical solutions, we continue to see robust demand for our e-mobility charging solutions where revenue quadrupled compared to the prior year, despite some of the supply chain constraints on growth. We expect our e-mobility business to continue to accelerate, driven by the US infrastructure bill and strong demand for electric and hybrid vehicles. On top of that, we recently booked a large bundled energy solutions project that will commence in the coming quarters. Interest in our bundled energy solutions continues to build, and we are optimistic that we will book additional new BES business in the back half of the year. Going forward, Technical Solutions is poised to benefit from long-term secular trends like EVs, sustainability, and energy efficiency. In addition to the constructive demand environment, we continue to make important progress with respect to the Elevate program in Q2. The focus of our second quarter efforts was on designing and testing our core cloud-based ERP system and further refining our cloud-based recruiting and tracking system. While there is still plenty of work ahead of us, our teams are well aligned on advancing our Elevate strategy. Driving growth through strategic acquisitions is a fundamental component of Elevate, and I'm pleased with our progress. During the second quarter, we completed the purchase of Ireland-based Momentum support. The acquisition expands ABM's footprint to the attractive Irish market and provides us with cross-selling opportunities to existing ABM clients with operations in Ireland. We further advanced our Elevate strategy through the establishment of ABM Ventures, our business ventures program. As our first transaction under the program, we acquired a minority investment in Recycle Track Systems, a leader in cutting-edge traceability and sustainability solutions utilized in the materials waste and recycling industry. Through this partnership, ABM clients will have access to RTS's full suite of on-demand waste removal and materials management solutions. Before I turn it over to Earl to discuss the financials, let me provide a quick update on the labor environment. As I mentioned last quarter, ABM's wage inflation risk is largely mitigated by the composition of our direct labor workforce. As a percentage of our contract revenue, roughly two-thirds of our direct labor is subject to collective bargaining agreements or part of a cost-plus arrangement or part of some other arrangement where wage rates can be predicted more easily and passed through. The transparency of these contractual arrangements makes capturing labor cost increases less difficult as clients know that our increases are a direct result of stated or contractual wage increases. That being said, we have definitely been experiencing meaningful wage inflation in the portion of our labor spend that is not subject to the contracts I just mentioned. This wage inflation is most evident in the southern region of the U.S., where unions are less prevalent and hourly wages are generally lower than in the rest of the country. In these instances, we have proactively sought escalations to cover wage cost increases when appropriate. Our success in obtaining price escalation speaks to the high value our clients place on our services, especially during the most challenging of times, and to the fact that wage inflation is widespread and affecting our competitors similarly. We also continue to experience these effects of labor shortages when businesses are quickly ramping, such as in education, when we went to full in-person learning virtually overnight, and what we are now seeing in aviation. Though not expected in the next few quarters, we believe labor shortages will somewhat subside over time, especially as inflation continues driving more people to reenter the workforce. In the meantime, we continue to aggressively and proactively recruit using all the tools and technology at our disposal. With that, let me turn it over to Earl for the financials.