ABM Industries Incorporated

Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Paul Goldberg, Senior Vice President, Investor Relations. Thank you. You may begin.

Good morning, everyone, and welcome to ABM's third quarter 2023 earnings call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmiers, our President and Chief Executive Officer, and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our third quarter 2023 financial results. A copy of that release An accompanying slide presentation can be found on our website, abn.com. After Scott and Earl's prepared remarks, we will host a Q&A session. But before we begin, I want to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the word estimate, expect, and 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 risk and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies our presentation, as well as in 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. And with that, I would like to now turn the call over to Scott.

Thanks, Paul. Good morning. And thank you all for joining us today to discuss our third quarter results. Third quarter revenue grew 3.4% to $2 billion, including 2.5% organic growth. Our aviation, education, and manufacturing and distribution segments perform well, driven by robust air travel, new education clients, and our strong market positioning in M&D. These solid results were partially offset by lower activity in bundled energy solutions and delayed project starts in our technical solutions group, and by the softening market conditions for janitorial services in business and industry. Our teams are acting to resolve project delays and technical solutions, which we believe to be transient, and we've also proactively adjusted our cost structure to better match the current demand environment in B&I. In addition to our cost management efforts, we have aggressively pursued price increases to cover the inflationary labor environment and reflect the value of the essential services we provide. I'll now discuss the demand environment for each of our industry groups. Let's begin with B&I. Office density rates remain relatively static in the third quarter at around 50% on a blended basis. Although the hybrid work model remains prevalent, we expect to see a gradual increase in the number of days per week employees spend at their office. In fact, many of our clients plan to mandate employees work an additional day per week in the office starting sometime after Labor Day. Accordingly, office density is likely to gradually improve, which should help stabilize our volume of work orders over time. However, we are beginning to see what has been so prevalent in the media, that as office leases expire, many clients are downsizing their office footprints given hybrid work models and the macroeconomic environment. This puts pressure on the demand side for us until vacant floors are released and reoccupied. This trend will likely continue into 2024. We remain well positioned to navigate the challenges of commercial real estate given our flexible labor model. Also importantly, our multi-tenant commercial real estate profile largely consists of Class A and newer buildings. These properties have been less impacted than class B and class C properties and should be leased up fairly quickly. In addition, engineering services constitute a sizable portion of our revenue in BNI. This revenue stream is less impacted than janitorial services as HVAC and electrical systems must be maintained regardless of occupancy density. Finally, I would note that our B&I segment includes a large portion of non-multi-tenant locations, such as corporate office towers and corporate campuses. This portion of B&I has seen more stability from a vacancy perspective. So summing it all up, we see the pressures on commercial real estate modestly impacting our revenue line, but allowing us to protect margin through our labor model and ability to manage our cost structure. Moving to aviation. The leisure and business travel markets, including international travel, continue to be quite strong given pent-up demand. Our aviation team has executed well in this environment, managing through a historically tight labor market while ramping up service volumes to above pre-pandemic levels. They've also done a great job winning new business, such as a significant recent expansion at one of the country's busiest airports that included multiple service lines through our ABM Performance Solutions integrated offering, which is known as APS, in the marketplace. Demand within our manufacturing and distribution segment has remained solid, benefiting from our core e-commerce and logistics clients and from our diversification efforts, including expanded business with clients in the manufacturing, semiconductor, and biopharma markets. These newer end markets continue to offer strong growth opportunities as clients increasingly outsource support services so they can focus on their core business operations, and the momentum for onshoring manufacturing is continuing. Of note, we booked a significant contract with the leading energy company in the third quarter, further diversifying our client base. We will continue to focus on new growth opportunities as we prepare for a large client of ours to re-bid and rebalance their work needs over the next year. This is part of their normal business process and even after the bid. While we expect some revenue pressure, we also expect to maintain a disproportionate share of their business, having provided stellar service to them through a strong growth period. Moving to education. We continue to post mid-single-digit organic revenue growth, driven by 100% in-class learning and by the addition of new clients. We executed well on our sales pipeline and won several new contracts during the third quarter, including a sizable win with the Providence Rhode Island Public School District. We are pleased that Providence has opted to utilize our APS offering, which, as I noted earlier, combines multiple service offerings into one comprehensive solution. Other notable education wins in the third quarter included the Prosper Texas Independent School District and Palm Beach State College in Florida. Our pipeline of new business opportunities remains strong, and we expect to continue to win our fair share going forward. Moving to technical solutions. The global demand environment for EV charging infrastructure and microgrids, particularly battery storage systems, remain strong. Our ATS backlog now exceeds $450 million, with EV and microgrid services representing over 60% of the total. At the same time, we are experiencing soft market conditions in bundled energy solutions, which includes HVAC, lighting, and electrical system retrofits. This is driven by reduced investment spending, especially in K-12 schools, primarily due to higher interest rates and the pressure that puts on project ROIs. ATF did not perform as we anticipated in the third quarter for two key reasons. First, we expected to complete a greater number of booked microgrid projects at multiple locations, specifically large battery systems for a large industrial client. This project was initially impacted by supply chain constraints in the first half of the year. With the supply chain having largely stabilized, we face new delays relating to local permitting and utility issues. Because the deployment of large-scale battery storage systems is relatively new, many local governments are not accustomed to dealing with the unique and complex requirements of these projects, and permitting gets protracted. We continue to work closely with our client, and we are executing a plan to address near-term hurdles, including targeting alternative sites where appropriate. Turning to e-mobility, as we discussed on our last call, we expected the pace of EV charger installations to materially accelerate in the second half of the year as we began to deliver on several new programs, including one for a large automotive dealer network. Because this particular auto OEM recently announced a change in its EV production goals, the dealerships have slowed their rollout in EV infrastructure to match the production schedule. We view the battery storage system delays as well as the project pushouts on EV as transitory and reflective of rapidly evolving markets experiencing disruptive change. While we address the near-term challenges in this market, ABM remains well positioned in the EV charging space, given our track record of over 22,000 EV installations, as well as our innovative technical capabilities that include end-to-end solutions. Also, the level of interest and bidding activity for EV infrastructure and microgrids has never been higher, so we remain really encouraged. Turning now to our Elevate initiatives. We have continued to make important progress in reaching our long-term technology objectives. During the third quarter, we utilized our new cloud-based ERP system to complete our quarterly close for the education segment. This platform, which provides significant efficiency and operational improvements, will be rolled out to the remainder of ABM over the next two years as planned. We also continue to leverage our workforce productivity and optimization tool, which provides our operations teams with advanced analytics into productivity levels across their portfolios. In fact, we've seen about a 10% improvement in gross margins on the jobs where the tool has been piloted. This capability will become even more critical going forward to effectively manage our labor utilization as we navigate the commercial office landscape. Additionally, we now have over 200 digital client dashboards deployed at sites across the country, and feedback has been exceptionally positive. As we manage through some specific challenges, ABM remains resilient, supported by our leading market position, diversified industry groups, and financial strengths. We continue to be the clear leader in facility services and we have expanded our long-term growth opportunity through strategic investments in fast-growing markets and will continue to do so. We've done a terrific job winning large new contracts in aviation and education, as well as in manufacturing and distribution, where we continue to expand. And although we've experienced some delays in ATS, we are confident our performance will improve as the market matures. In BNI, we're fortunate that our portfolio is remains heavily weighted towards better performing Class A commercial real estate and more stable engineering services combined with our flexible labor model. Given the recent challenges in ATS and B&I, we expect full year 2023 adjusted EPS to come in at the bottom half of our prior outlook range. Looking further ahead to next year, Although our forecasting and budget process is in its early stages, it wouldn't surprise me if fiscal 2024 adjusted EPS was slightly down from 2023, given the softness in the commercial office sector. We will share our more formal 2024 outlook on our Q4 earnings call in December. We are laser-focused on overcoming these near-term challenges, including tightly managing costs, and making tough decisions to adjust our cost structure across the organization. Beyond that, we are building for the future by winning new business and attractive markets, leveraging our Elevate technology, and by using our strong free cash flow to enhance shareholder returns. We will also continue to invest for the long term to position ABM for sustainable success. Now I'll turn it over to Earl for the financials.