ABM Industries Incorporated

Greetings. Welcome to the ABM Industries second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Paul Goldberg, Senior Vice President, Investor Relations.

Paul, you may begin. Good morning, everyone, and welcome to ABM's second quarter 2025 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 morning, we issued our press release announcing our second quarter 2025 financial results and outlook. 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 a Q&A session. But before we 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, 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 risks 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 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 now to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to review our second quarter results. We achieved several important milestones this quarter. Notably, we returned to organic growth in both B&I and M&D, significantly improved our cash flow compared to the first quarter and generated $1.1 billion in new bookings during the first half, marking a new record for ABM. Overall, we posted 3.8% organic revenue growth, highlighted by continued recovery in our current commercial office markets, new contract wins, and a diminished impact from prior year client exits in M&D. We also saw solid performances in our aviation and education segments. While growth in ATS remained strong, it could have been even higher had we not experienced some temporary project delays and service mix headwinds that impacted profitability. As we've discussed before, this business can be a little lumpy quarter to quarter based on construction timing, but the market is extremely healthy overall, and we expect ATS to deliver a very strong year. In total, ABM delivered $2.1 billion in revenue and adjusted EPS of 86 cents. Looking ahead, despite ongoing macroeconomic uncertainty, we remain confident in our core markets, particularly high-quality office properties, manufacturing and distribution facilities, commercial aviation, as well as energy resiliency and microgrids. We expect delayed projects from Q2 to resume in the third quarter and are reaffirming our full-year adjusted EPS guidance. As I noted earlier, we're pleased to see BNI return to organic growth in the second quarter. Market indicators for prime commercial office space have been improving steadily. CBRE reports that prime vacancy rate declined 50 basis points year-over-year in Q1 to 14.8%. low below the broader office market vacancy rate of 19 percent demand continues to favor high quality amenity rich buildings and well-connected locations we've been intentional in focusing our strategy on this premium segment geographically the lowest prime vacancy rates are in the northeast and midwest two of our largest markets given these trends We expect to see market improvement translate into growth and account expansion, and that's exactly what's happening. In addition to the rebound in U.S. prime office, our U.K. operations and sports and entertainment and parking businesses continue to perform well. Turning to M&D, I'm pleased to report that the segment returned to organic growth a quarter earlier than anticipated. Our teams have done an excellent job expanding with existing e-commerce clients and winning new business with semiconductor and tech manufacturers. In total, M&D posted nearly $400 million in revenue in Q2, or 20% of total company revenue. More broadly in this segment, we're evolving our service offering from traditional cleaning and maintenance to include ancillary support services like material handling and test and balancing services. These offerings help clients focus on their core operations and deepen our strategic relationships with them. We believe the long-term fundamentals of the M&D market remain strong as companies continue to invest in U.S.-based manufacturing, and we're investing accordingly in technical sales and industry-specific capabilities. As mentioned earlier, we booked $1.1 billion in new sales in the first half, up 11% year-over-year and a new record. A key highlight was securing approximately $190 million in new business from a major big box retailer for the next phase of their microgrid build-out. This reflects their confidence in our electrical engineering expertise, technology, and client-first approach. Beyond that, ATS secured a large battery energy storage system project supporting renewable thermal hybrid energy centers helping communities achieve ambitious sustainability goals. In aviation, we won a $25 million contract at Miami International Airport and also had a large cabin cleaning win at the Dallas-Fort Worth Airport, two of the nation's busiest by passenger volume. Our team continues to do a great job on building on the successes at O'Hare, LaGuardia, and JFK to showcase our differentiated tech-enabled solutions that drive favorable client outcomes, and it's truly resonating in the market. We also secured other high-profile wins, including new contracts with two major investment banks in New York City and several top technology firms, including a global autonomous driving company and a memory and storage leader, as well as with well-known semiconductor and aerospace manufacturers. These wins reflect our strong reputation among sophisticated clients with complex needs and rigorous standards. Increasingly, they're turning to ABM to leverage our scale, integrated capabilities, and tech investments. and we're raising our game accordingly in talent and execution. We've made important progress on our ERP implementation this quarter, reducing operational friction and setting the stage for continued improvements in the second half, particularly in cash flow. Our teams are fully aligned and focused on driving this initiative to completion with strong coordination and a shared commitment to delivering lasting operational benefits. Let me now give you a brief update across our segments. In B&I, according to JLL, U.S. office leasing activity in Q1 2025 grew 15.3% year over year to 50.4 million square feet, 89% of pre-pandemic levels. Prime office space continues to outperform with over 2 million square feet of positive net absorption and a 14.8% vacancy rate compared to the market average of 19%. This plays directly to our strength in Class A urban properties. With regard to M&D, we're benefiting from strong industrial activity. The Semiconductor Industry Association reports over $200 billion in U.S. semiconductor investments since 2020, driven by AI, automotive, and cloud sectors. E-commerce also continues to grow, with Q1 online sales up 6.1% year-over-year, reaching $300.2 billion and 16.2% of total retail. This macro data shows coupled with our new business pipeline and expansion efforts, positions us well for the future. Turning to aviation, domestic air travel remains strong. TSA data shows daily screenings frequently exceeding 2.5 million in May. Our technology-led offerings, especially ABM Connect, and wins like the $25 million Miami International Airport contract, give us confidence in outpacing sector growth. Our education segment remains a stable contributor of earnings and cash flow. According to Wardium, 27% of higher ed institutions are modestly expanding some portion of their facilities. We continue to focus on large school districts and universities, maintaining high retention and cost efficiency while pursuing new opportunities. Finally, in technical solutions, Our microgrid business is strong, and total segment backlog now sits at $700 million. We're also positioned to benefit from accelerating demand in data centers. JLL projects global data center capacity will grow 15% annually, with construction expected to hit record levels in 2025 and significantly more in the future. These positive market dynamics strongly reinforce the strategic course we've set over the past several years. Our focused investments in talent, technology, and go-to-market execution combined with targeted M&A have positioned ABM to capture outsized opportunities across our portfolio. Whether it's capitalizing on the resurgence of prime office space, supporting the expansion of high-growth sectors like semiconductors and e-commerce, or leading the energy transition through our technical solutions platform, we believe our capabilities and our strategies to enhance them are fully aligned with where demand is going. As a result, we remain highly confident in our ability to sustain healthy top-line growth and expand margins over time.