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spk05: recent Fed actions, and the forward yield curve. This forecast is about $6 million above the high end of the previously estimated range. Our tax rate before discrete items is anticipated to be between 29% and 30%. And as mentioned last quarter, we expect to grow full-year adjusted EBITDA at a mid-single-digit rate. Additionally, we are increasing the low end of the range for adjusted EBITDA margin by 10 basis points, and now expect it to be between 6.5 and 6.8% for the full year. We now expect full year 2023 free cash flow to be in the range of $240 million to $270 million. Before the final installment of our CARES Act payment of $66 million, which was made in Q1, and combined integration and elevate costs of approximately $75 to $80 million. This represents a $30 million decrease from our prior forecast, largely driven by expected working capital needs to support growth in our ATS segment in the second half and higher interest expense. With respect to the cadence of quarterly adjusted EPS, we expect approximately 45 to 50% of full-year adjusted earnings per share to be generated in the first half of the fiscal year, consistent with our prior guidance. We anticipate Q3 adjusted EPS will not be a material difference from Q2 2023. With that, let me turn it back to Scott for closing comments.
spk03: Thanks, Earl. In late 2021, around the time we announced our initial elevate targets, the average U.S. inflation rate for the full year of 2021 was 4.7%. The 10-year T-bill was approximately 1.5%, and the unemployment rate had trended down to 4% from the pandemic high of 15%. Today, the 10-year T-bill rate is over 200 basis points higher. Inflation peaked at 9% in 2022 and is currently close to 5%. And the job market for blue-collar labor is as challenging as it has ever been. Despite these headwinds, we've delivered on our financial goals, expanded our business and service offerings, and achieved important progress towards our 2025 targets. Today, ABM is stronger and better positioned than ever before. Our success reflects our resilient business model, the benefits from our elevated investments, and consistent execution by the ABM team. As we move forward, I'm confident in our ability to build value for our stakeholders as we work tirelessly towards achieving our goals. Underpinned by the strength of our core business, ABM continues to evolve into a higher growth, higher margin facility solution provider. So with that, let's take some questions.
spk10: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Sean Eastman with KeyBank Capital Markets. Please proceed with your question.
spk01: Hi, team. Thanks for taking my questions. So I just wanted to start on ATS. It sounds like, you know, Ravenvolt is blown and going now. It sounds like the EV charging side is on pace for a second half ramp. I just wanted to round that out with a discussion on the bundled energy solutions piece and just how, you know, customer decision-making is trending in light of the, you know, the weak macro conditions.
spk04: Yeah, that's a great question, Swan. Look, it's still slow. probably slower than we'd like, but it's not a reflection of our market share or our sales pipeline or even the viability of the offering. It's more about the fact that, you know, what we've seen just across the board, some clients are in pause mode right now, right? You know, the economics get a little bit more challenging in that segment because of interest rates. But we just won, you know, I mentioned in my opening remarks, we won a really nice job in western Pennsylvania. And the pipeline is strong. So I think for us, it's waiting for clients to pull the trigger because it's upgrades that they know they need. Because if you look at the core of it, right, you're retrofitting a facility that needs retrofitting, right? So it's a question of, you know, getting the school board together and giving the high sign to pull the trigger. So we're as confident as ever. It's just a little bit more on the delay side. But We're hoping the back half will be stronger. And that's the nice thing about ATS because we're so diversified. And in addition to the bundled energy solutions, as you point out, we have the microgrid solution now with Ravenvolt. Our EV is starting to ramp up. And we do have a core electrical and mechanical business on top of that that we don't talk about a lot, but that's also part of the underpinning. So it's nice to have diversification in that segment.
spk01: Okay, thanks for that, Scott. And then I guess maybe just to finish it off on ATS, I mean, where should the margins be? Obviously, the first half, we've had supply chain, we've had kind of a project timing, air pocket. I mean, I'm just trying to get an expectation for where we should be run rating when everything's up on plane for ATS.
spk04: Yeah, historically, when it's humming, it's high single digit, right? And there's no reason that it won't get back to that. I think it's like, you know, that higher margin stuff, which is the bundled energy solutions and the microgrids are the ones that just haven't kicked in yet, right? And even Sean EV, which we said is lower margin, that's really because we've been playing in the dealership market, you know, which is like onesies, twosies. Like if you... have a large-scale contract with an automaker like BMW, you're putting two or three in per dealership. It's not the scale you want. We're moving more to a fleet orientation where we can go to a facility and put in 100 chargers and get the scale. So that's part of our ramp-up strategy as well. So I'm confident over time we'll squarely get back into that high single-digit margin range.
spk01: Okay, got you. And then one more, just relative to the work order dynamic, I feel like over the past two years, we've been, you know, anchored from, you know, in terms of like work orders going from pandemic highs down to normalized. But now we're talking about lighter vacancy rates and, you know, maybe that normalized work order level having some downsides. How should we think about that, Scott, and whether there's, you know, risk to margins around, you know, a step down to below normal work orders? What have we seen historically there?
spk04: Yeah, so look, I think we're getting back down to pre-pandemic levels, and that's really a reflection right now of hybrid work, right? So here's the way to think about it. Maybe this will give you some clarity, right? You know, when you think about work orders, right, it ranges from people calling for the freight elevator because they're getting furniture deliveries. They're having a birthday celebration, so they want two porters to come up because they're having a pizza party, right? It's spotting on stained carpets, right? So all those one-time things. And now when people are in the office three days a week instead of five days a week, you get less of those calls on the Mondays and Fridays, and we were still stabilized during hybrid at a higher rate than we were pre-pandemic. And we're really encouraged by that. I think the overlay now that's brought it down incrementally more is just the state of the economy. You know, people are watching what they're spending. So I think that's a little bit of an overhang. So, you know, if I were to look into the future, when we have a recovery, I'm willing to bet that work orders will pop back up again and pop back up again at higher than pre-pandemic levels. So I think we have this temporary double overhang now. But, you know, just to round out the question, I do not think on a percentage basis we're going to see much more deterioration. Now, you know, volumetrically, maybe because revenues can be compressed a little bit, but that will be on dollars, not margin percentage. I feel like we're kind of Where we are now is kind of pretty stabilized.
spk08: Okay, thanks. I'll turn it over. Appreciate it. Thanks, Sean.
spk10: Thank you. Our next question comes from the line of Justin Hawk with Barrett. Please proceed with your question.
spk08: Hi, good morning.
spk07: Good morning. Good morning. I wanted to ask just to kind of, you know, big picture clarify some of the guidance pieces. you know, with the margin moving up a little bit despite the – and the EPS held despite the incremental interest expense, just the moving pieces on that, what was a little bit better and a little bit weaker, and maybe specifically the corporate cost control, which it seems like that's continued to kind of come in a little bit better than expected. So maybe just the outlook for what you're looking at for corporate for the back half of the year.
spk06: Sure, absolutely. I'll take that on. So when we look at kind of what happened throughout quarter two, you know, we continue to see some headwinds in the shape of, you know, lower work orders, you know, which actually has had a dip in the margin, as well as continued pressure in the labor market. So we continue to see labor inflation, which, you know, good news is we've been able to offset a large majority of that through price escalations. When we looked at the quarter, we also had the flow-through from last year's parking project that was able to offset that. And so when you look at the call-up in margins, part of that was actually the flow-through that we actually got from the previously deferred parking. So what we feel really good about is that in spite of the continued challenges that we're seeing in margins, we're still able – so if you actually even back out the flow-through of the parking project from last year – Our margins for the quarter were 6.6%. And so, you know, in spite of the continued challenges that we're actually seeing, we feel really, really pleased that we're still being able to deliver within, you know, the midpoint of our range.
spk07: Okay. And just the corporate expense, maybe like a dollar run rate, what you're kind of thinking back after the year?
spk06: Yeah, so I would say that, you know, when we look at corporate expenses, I would say that the, you know, over the, you expect an average of about $60 million in corporate expenses, excluding kind of like the items impacting comparability. Yeah, right. Great.
spk07: And then I guess the second question, just on the parking segment, I mean, even backing out the one time here, your organic growth rates there have been really strong and it kind of sounded like in the prepared remarks that maybe you're expecting that to kind of decelerate when you talked about, you know, more market trends. I just want to understand what you mean by that and what you're thinking about for kind of the growth rate of that segment. What is a market trend for the back half of the year?
spk04: Sure. I mean, look, I think, you know, Generally speaking, from an industry standpoint, I think parking revenues are stable now. Hybrid work is in place, so it is what it is. For us, we have our parking business in two key segments, the real estate side, commercial real estate, and then on aviation. I think in both of those segments, we're pretty stable. So I think it's more normalized now, but what we're excited about is we have our Vantage parking offering, which is something that's really, it's a new technology, it's insightful, it works to help give insights to clients on revenue management. So for us, it's about this new productized offering that's going to help us accelerate it. So we're hoping that in the parking segment, Not only will we continue to grow, but hopefully a little bit ahead of the market because of some of the innovative stuff we're doing. But I would say walking that back in large measure, we're kind of at stabilization in the parking business as an industry.
spk07: And I apologize. I meant the aviation segment and the adjusted for the parking item. Your growth rate there has been in the high single digits. I guess what I was more asking about is, you know, what is your expectation for the deceleration from that? Or why was it so strong in the first half? Is that just kind of the recovery in aviation volumes? And now you're saying those are recovered and they should kind of moderate to more low single digit?
spk04: That's right. That's exactly right. You know, travel has been, well, you know, right? And anything around travel and leisure has been so up. So I think You know, at this point, and I think we did say a little bit in the prepared remarks, we feel like, you know, we are back to pre-pandemic levels. And maybe even then, we do think there's a bunch of people that are catching up, right, in terms of travel. So I think you'll see more of a stabilization, but still, you know, nice, steady growth.
spk08: Great. Okay. Thank you very much. You got it.
spk10: Thank you. Our next question comes from the line of Faiza Alway with Deutsche Bank. Please proceed with your question.
spk02: Yes, hi, good morning. I just wanted to follow up again on the technical solution side of the business. So walk us through, you mentioned that you have project backlog of 440 million. Are you expecting that all of that will be recognized as revenue this year? Just walk us through the timing of what's going on with the project delays and when do you expect to fulfill those projects?
spk04: Sure, Faiza. No, no, that won't all be recognized this year. So typically speaking, ATS and journal has always been a back half of the year story. And just to put some color around it, we do a lot of work in school systems. So think about the fact that in July and August, The schools aren't occupied, especially the K-12. So that's the time that you go in and you do a lot of the infrastructure work. So that's why a lot of this is back half loaded, right? So for us, backlog means, again, signed contracts that get initiated. So a lot of that's going to happen in Q3 and Q4, really more Q4 than Q3. And that'll be the initiation. So I can't give you a precise you know, exactly how much of the 440 will be in-year. But it's a really strong sign that we have, you know, backlog at that level. But, you know, think of it as initiating the projects in Q4, and they ramp through Q1 and even a little bit into Q2.
spk02: Okay, and then just so I'm clear, because, you know, the delays are related, is it more supply-oriented, or is it more, you know, demand-oriented? Because I was under the impression that it was more supply-related, but some of your comments today are leading me to believe that maybe it's more on the demand side, so I'm ready to... No, I actually, you know, sorry for presenting that.
spk04: It's Yeah, no, it's a combination of both, right? It's a little bit on the man side, on the bundled energy solutions, on the micro grids, it's all about the supply chain, you know, and, you know, specifically batteries and some of the switch gear. Now, you know, we are encouraged because what was happening, and I think you would see this from some of the competitors in our industry, at the beginning of the year, what would happen is something would take 10 weeks and then you, you know, 10 weeks to get the item. And then maybe a month later, you'd get another order for something and you'd go to the manufacturer. It's like, Oh no, no. Now it's taking 12 weeks. And then you'd call again. It's like, Oh, well now it's taken 14 weeks. It's all starting to stabilize now. And that's the key for us. So if something pre pandemic took six weeks and now it's taking 10, As long as it stays taking 10, you could be planful, you can manage around it, and we're seeing that stabilization. So the majority of the problem, especially on the Ravenvolt side, has been supply chain oriented, definitely not demand oriented. The pipeline is really, really robust.
spk02: Okay. Sorry, I'm just a little unclear. That's why I just want to follow up. So if it is on the RavenWolf side, that wouldn't impact your organic revenue. So explain to me a little bit more in terms of what's driving the decline in organic revenue.
spk04: Yeah. So let's just pull out RavenWolf for a second. So there's two core segments there. There's EV and there's bundled energy solutions. And Both of those are more demand side, and for different reasons. EV, because we were just winding down a big project with a dealership, and we're now ramping up a big project with an automotive company. So you're seeing that delayed to the back half. So that was just timing, but demand timing, not supply chain timing. And the other one is bundled energy solutions, which is what I talked about a few seconds ago, which is really the fact that we have the backlog, we have the orders, but clients aren't pulling the trigger because they're just doing a general pause. But again, we're starting to see that loosen up a bit now that I think the market is thinking that interest rates are starting to stabilize. And if it is what it is, then you start making those decisions.
spk02: Got it. Thank you. Thank you for indulging me on all that detail. And then just maybe if I can follow up on the Elevate initiative. You mentioned a few things. Give us a sense of how you're thinking about timing there. I know you've talked about the end state being maybe a couple years ago. Talk about how you're thinking about getting to that end state. What are some of the next initiatives that we should expect going forward?
spk04: Sure. I mean, look, we're, we're on track with elevate and, you know, the, the big core, you know, in terms of infrastructure is our ERP transformation. And that's a two year process because we're doing it by industry group. Um, we just had the successful launch of our, our education group, um, literally like a month ago and it's gone way better than we even expected. Right. Cause the, you know, ERP implementations are always bumpy and, um, And it went really well. And now we're planning our next industry group, which will happen early next year. So the infrastructure side is on track and going better than we'd hoped. And then, you know, other things are all in progress, right? We launched hyper-targeting for sales growth. You saw or heard in the prepared remarks, we had another unbelievable first six months of the year in new sales. So that's a reflection not only of our sales team in terms of just the culture of our people, but the hyper-targeting tool. And we're now piloting our workforce management, which is going to create efficiency in the field. And this month we're releasing our ABM Connect, which is our digital application to start connecting us in real time to the people out in the field, which is going to be a real game changer for us. And even that is probably a 12- to 18-month journey, if not longer, to actually get it deployed across 100,000 people, as you can imagine. But things are going as planned, so hopefully you can sense the enthusiasm.
spk10: Great. Thank you so much.
spk08: Thanks, Faisal.
spk10: Thank you. We'd like to request that you please keep to one question and one follow-up each. Our next question comes from the line of David Silver with CL King & Associates. Please proceed with your question.
spk00: Yeah. Hi. Good morning. Thank you. I would like to maybe just drill down a little bit on the Ravenvolt performance to date. And I'm wondering if you, you know, maybe if you wouldn't mind discussing how the performance of the business aligns or how it compares to kind of your initial expectations. And then in particular, you know, I noticed you booked a change to the fair value of contingent consideration. Could you just maybe talk about what drove you to make that adjustment this quarter? Thank you.
spk04: Sure. I'll take the first part of it. We're as encouraged as ever about Ravenvolt. I think probably even more so than we did the transaction because microgrids are so, so compelling right now. And the backlog. is phenomenal, and the team is phenomenal. So I think, you know, if there was any level, I don't even want to use the word disappointment. It's just a supply chain, and you can't control that, right? And it's the same thing that everyone in our industry is facing. But, again, we see light at the end of the tunnel, and we're hoping for a strong back half of the year. But I'll let Earl talk to the accounting treatment because that's in his wheelhouse. So, Earl, you can take it away.
spk06: Sure, Scott. So on a quarterly basis, we do a mark-to-market valuation on the contingent consideration. And when we look at the outlook, you know, as, you know, Scott just mentioned, we're still very positive on the deal model. However, there's some timing challenges as regards to supply chain timing, which has actually deferred some of the revenue and earnings that would have actually happened in year one into future years. And then just based on the GAAP accounting of that, you actually then discount that back with a high discount rate, which then resulted in this reduction in the liability. So again, I would really chalk it up to timing as opposed to anything different from a value case basis.
spk00: Yeah, thank you. That's kind of what I was wondering about. I appreciate you targeting that. My other question would be kind of more about the office market, the commercial market, which seems to be in the news quite a bit. You certainly addressed it right up front. But I'm just wondering if maybe you could, Scott, if maybe you would share kind of a multi-year outlook, a two- or three-year outlook. In other words, I think what you're saying is the office market and the motivations and whatnot for the tenants has changed. And for yourself to keep growing in that area, I'm guessing you're going to have to take share or offer a bundle of higher value services. So from your perspective, I mean... What continued, I guess, evolution in your value proposition or in your offering into the commercial market will be necessary for you to kind of deal with the current trends towards lower occupancy rates and remote work or hybrid work arrangements in order to kind of continue to kind of maintain your position and ideally grow your business? you know, grow your share, grow your profitability in there. Thank you.
spk04: Sure. Well, listen, there's certainly going to be pressure in commercial real estate, right? That's pretty obvious, right? For us, so far, you know, as we've mentioned, it's really only been around the work order side because of hybrid and the economy. So when you drill down into ABM's portfolio and B&I, You know, David, don't forget that, you know, or you may not have the insight to this, but a third of our revenues in B&I is around engineering and parking, right? And those are really stabilized depending on office density, because it doesn't matter how dense a floor is, you still need, you know, the quote-unquote engineers in the basement working on the mechanical and electrical equipment, so that doesn't change. And you know, parking, as we said, is stabilized. So you're really talking about the janitorial piece that has some of the exposure. But then you look at ABM's portfolio, and we are way predominantly Class A buildings, newer buildings, bigger buildings, which are the ones that are going to survive the best. And if anything, we've seen those have positive absorption as compared to the rest of the market, because we're seeing B and C tenants from B and C buildings rather migrating into class A buildings. So I think, you know, for us, we are, we're pretty protected. It'll be choppy for the next several quarters. There's no question about it. You know, leases expire even in A buildings. And as they take a little less space, you know, the next tenant has to come in, they're going to have a year or so to build their space. So there'll be some choppiness, but I think, again, we're so mitigated because of the portfolio that we have. And don't forget, again, as a whole, we're diversified. We've been investing in end markets like ATS, manufacturing and distribution, which is another hedge for us. And then lastly, David, what I would say is you think about the elevated investments and just hyper-targeting just in general on the growth side. to help us mitigate some of the compression in the real estate market. So I think we're doing all the things we can, and we actively manage these challenges. We've seen some of these downturns before in segments. Look at even the pandemic when schools were closed and airports were closed and B&I accelerated. So now we may be in a period where there's less acceleration in B&I, but as we talked about, aviation is doing great and ATS is doing great.
spk00: Thank you for that. I just have a quick one here. But you touched on ERP and what the history of many other companies has been with their different implementations issues. And I've certainly been an observer of a number of them. Just so I know, but in the event that maybe costs rise a little bit above expectations with the implementation of your ERP system, Would that extra outlay be treated, would it be capitalized or would it be expense? Do you have a sense of that at this point?
spk04: Yeah, we're right on our target. So we're not talking about cost overruns at this point. We feel really good and have really good line of sight into what the expense profile looks like in the next couple of years. So that's not in our narrative, cost overruns.
spk10: Thank you. Ladies and gentlemen, our final question this morning comes from the line of Tim Marooney with William Blair. Please proceed with your question.
spk09: Scott, Earl, good morning. Good morning. Most of my questions have been answered, so I'll keep this quick. But last quarter, y'all gave the headwinds from work orders. I think it was $35 million. And you said you'd expect that, I think, to more normalize. So you didn't mention it this quarter. Is that because there really wasn't a headwind year over here, or if there was, can you quantify it for us?
spk04: Yeah. Talking about maybe $15 million, you know, it hasn't been much. And, again, I do think we're heading into this more stabilized rate right now. So, yeah, I think this is – We're actually, given everything that's happening in the environment and where hybrid is, and as I said, where the overall economy is, we're actually, you know, pleased that it wasn't more acute.
spk06: Yeah, because, I mean, I think what we talked about last quarter was the anticipated reduction in disinfection-related work orders, which, you know, that will become a non-story, you know, starting in Q3, Q4, as that kind of like dissipates. I think the potential headwinds that we'll be seeing potentially in the future are really around just based on what Scott earlier alluded to with regards to the hybrid environment and the potential for reduction in work orders where, again, right now we're now at kind of call it pre-COVID levels, which are typically about 5% of revenue.
spk09: Yeah, that's kind of how I'm thinking about it or how I interpreted Scott's comments earlier. It's like, look, pre-pandemic work order was 4% to 5%. All else equal, you'd expect that to be higher on a go-forward basis, but there's some macro headwind stuff that's kind of pulling it back to that 4% to 5%. That's the right way to think about it.
spk04: Yeah, exactly right. And again, what I would reiterate is that Even during, you know, before the economy started turning, you know, in the last few months, even before that with hybrid, we were still above pre-pandemic level. So it's almost like kind of this new kind of cost control that we're seeing is what pushed us back to pre-pandemic level. So we're optimistic, Tim, that we're going to get back above that when the economy turns. Understood.
spk09: Last one from me, guys. Thank you. You know, does it make sense to prioritize your capital allocation on debt reduction near term versus M&A and buybacks and other things to help reduce that incremental interest burden? Or are you comfortable at 2.6 times? Thank you.
spk06: Yeah, no, good question. You know, when we looked at our cash flow, which generally is weighted more in the back half, we do feel like it's going to provide us with ample flexibility to do both of those things, which would include paying down debt in addition to potentially doing some very small share buybacks. And when I talk about share buybacks, it really would be most likely limited to the anti-dilutive nature of our share-based compensation. But, you know, the good news is we feel that, you know, with our strong cash flows, we'll be able to limit, you know, our net leverage exposure.
spk08: All right. Thank you. Thank you.
spk10: Thank you, ladies and gentlemen. That concludes our question and answer session. I'll turn the floor back to Mr. Selmers for any final comments.
spk04: I just want to thank everybody for participating and the interest level. Again, very, very much appreciate it. We hope everyone is having a good start to the summer, and we're looking forward to coming back to you in Q3 with an update on all things ABM. So have a great summer, everybody.
spk10: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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