ABM Industries Incorporated

Greetings and welcome to the ABM Industries fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. The 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. Please note this conference is being recorded. I will now turn the conference over to your host, Paul Goldberg, head of investor relations for ABM. Thank you. You may begin.

Good morning, everyone, and welcome to ABM's fourth 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 Thalmers, 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 fourth quarter and full year 2023 financial results. A copy of that release And an accompanying slide presentation can be found on our website, abm.com. After Scott and Earl's prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today contains predictions, estimates, and other forward-looking statements. Our use of the words 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 uncertainty that could cause our actual results to differ materially. These factors are described in the 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. And with that, I'd like to turn the call over to Scott.

Thanks, Paul. Good morning, and thank you all for joining us today to discuss our fourth quarter results. Fourth quarter revenue grew 4.1% to $2.1 billion, including 3.8% organic growth. All segments grew organically in the quarter, led by double-digit growth in our aviation segment, driven by healthy airport activity and the addition of new clients. Our technical solutions, education, and manufacturing and distribution segments also posted solid growth, reflecting several project closeouts in technical solutions, new education clients, and a strong positioning in M&D. We also recorded modest organic growth in B&I, where robust sports and entertainment and special event activity helped to offset continued softness in the commercial real estate market. Additionally, our team set another sales record in 2023 with new sales bookings of $1.6 billion, which is a great accomplishment. I'm pleased with our progress in resolving certain microgrid project delays and technical solutions as well as our ability to win new clients, push price increases, and effectively manage our cost structure. As a result, ABM generated double-digit increases in net income, adjusted net income, and adjusted EBITDA, and achieved an adjusted EBITDA margin of 7.2%. I'll now discuss the demand environment for each of our industry groups. Let's begin with BNI. Office density rates remain relatively static in the fourth quarter at around 50-plus percent on a blended basis, with the commercial office vacancy rate near 20 percent. These factors directly impact the demand for our janitorial services in B&I. Although the hybrid work model remains prevalent, we expect to see a continued gradual increase in the time employees spend at the office in the next couple of years. We expect, as office leases expire in 2024, many clients will move forward with their plans to downsize their office footprints to match their density, which will put pressure on demand for janitorial services until vacant floors are re-leased and reoccupied. If companies become more proactive in requiring their employees to return to the office, the impact may be more muted than our current expectations. Given our flexible labor model, ABM remains well-positioned to navigate the challenges of commercial real estate. As a reminder, our multi-tenant commercial real estate profile largely consists of Class A and newer buildings, which we believe are far more resilient than lower-quality buildings. In addition to janitorial services, our B&I segment provides engineering services and has clients in submarkets like sports and entertainment and healthcare. all of which are influenced by demand drivers that are far less correlated to office density. That's an important reason why B&I's full-year revenue declined less than 1% despite softness in the commercial real estate market. In summary, while the pressure in commercial real estate is tangible and will impact B&I's performance next year, we plan to mitigate a portion of the impact through our flexible labor model cost management, and the diversity of our end markets and mix of service lines. Moving to aviation, the leisure and business travel markets, including international travel, remain quite strong and should be solid in 2024, although we face tougher year-over-year comparisons due to the large 2022 parking project that carried over into Q1 of 2023. Our aviation team has executed extremely well managing through a historically tight labor market while ramping up service volumes to above pre-pandemic levels. They also continue to win new business, including two large airport janitorial contracts pending final approval, along with two core airline projects, all of which kick in in the first half of the year. Demand within our manufacturing and distribution segment has remained strong, 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. The newer end markets continue to offer exciting growth opportunities as clients increasingly outsource support services in order to focus on their core business operations. In addition, we see growing momentum from the onshoring of manufacturing. As we mentioned last quarter, we expect a large and valued M&D client to rebid and rebalance their work needs in 2024 as part of their normal procurement process. Our team has been working to offset the anticipated revenue reduction through expansion with other clients and pursuing new opportunities in other end markets. Over the midterm, we expect M&D to grow revenue in the high single digits However, the 2024 growth rate will be impacted by the rebalancing. Moving to education, we generated 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 year. We expect 2024 to be another year of solid growth and stability. Moving to technical solutions, segment backlog now exceeds $410 million, even after several completions of projects in the fourth quarter, with EV and microgrid services representing nearly 60% of the segment total. Conversely, we continue to experience soft market conditions in bundled energy solutions. which includes HVAC lighting and electrical system retrofits, primarily due to the impact of higher interest rates on project ROIs and the availability of government funding through legacy COVID legislations. We believe projects will pick up once return expectations get reset and the government funding projects sunset. The timing of this is hard to predict. which is why we are tempering 2024 expectations for bundled energy solutions. Technical solutions as a whole performed better in the fourth quarter as we were able to close out several legacy projects and make progress on certain microgrid projects following supply chain and permitting delays earlier in the year. Looking forward, we expect to advance microgrid projects during the year. Also, The level of interest in bidding activity for microgrid systems and large EV infrastructure projects, including the opportunity for recurring revenue, remains high. We expect 2024 to be a year of solid growth in technical solutions. Now turning to our elevator initiatives. Following the successful financial close on our new cloud-based ERP system for the education segment, we achieved two more milestones in the fourth quarter. First, we launched a new workforce management solution for pilot sites in the education segment. This tool allows for a more modern approach to time and attendance and scheduling, providing managers with improved visibility. By pairing this tool with the workforce productivity and optimization tool we released last year, we are now entering a new phase of efficiency that provides operators with enhanced insights We expect to complete the rollout of this tool to our education segment in 2024 and further expand deployment thereafter. The second milestone is the initial release of our new team member mobile app called Team Connect. The app is currently in the hands of more than 500 frontline team members. Over the next year, this app will deliver on-demand training, safety moments, clock-in and clock-out integrations, and task management features, among other capabilities. These tools will create a digital connection to the front line, driving a higher level of engagement and delivering real-time updates to our clients that provide more transparency on services performed. Over the next couple of years, we plan to scale this ecosystem to deliver the outcomes we initially shared during investor day in late 2021. We've also had a lot of learnings from the successful initial deployment of our cloud-based ERP system in our education industry group earlier this year. We are applying those learnings to future segment ERP rollouts to ensure we minimize any potential disruptions to our clients and our internal operations. As a result, We expect the full deployment may take about a year longer than first anticipated, and the total program costs will likely be about $200 to $215 million, which is modestly higher than we said in 2021. We cannot be more excited about the positive impact that our transformation initiatives are having on our clients and team members. Our expectation is that these capabilities will be game-changing in our industry. Looking back at our performance in 2023, we did a terrific job winning large new contracts in aviation, in education, as well as in M&D, where we continue to expand. Although we experienced some project delays in technical solutions, our performance improved in the fourth quarter, and we expect further progress as the nascent markets mature. In B&I, we are effectively navigating this challenging market benefiting from the flexibility in our labor model and our real estate portfolio that remains heavily weighted towards better performing Class A properties. In 2024, we expect generally healthy market activity for technical solutions, aviation, education, and M&D. At the same time, we anticipate that the conditions will remain challenging in the commercial real estate office market and that we will be impacted by some business rebalancing in M&D. We expect these factors along with projected labor inflation will likely mute our revenue growth and cause our margins to incrementally tick lower when compared to the strong levels we achieved in 2023. Our overall outlook for 2024, therefore, is essentially unchanged from the comments we shared last quarter. Earl will walk you through the specifics of our 2024 outlook in his comments. As we look forward, we expect our teams to set another new sales record in 2024 after record sales in 2023. Through our Elevate initiative, we are leveraging our scale, depth of service offerings, and technology. In addition, we will continue to carefully manage costs, and proactively make changes to our cost base, if necessary, just as we did in 2023. And of course, our anticipated strong free cash flow will enable us to continue to invest for the long term while regularly returning cash to our shareholders. Now, I'll turn it over to Earl.