ABM Industries Incorporated

Goldberg, Senior Vice President, Investor Relations.

Paul, you may begin. Good morning, everyone, and welcome to ABM's third 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 Salmiers, our President and Chief Executive Officer, and David Orr, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our third 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 David'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. With that, I would now like to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to review ABM's third quarter results. I'm especially pleased to be joined today by our new CFO, David Orr. David has been in the room on many previous earnings calls, but this is his first time as CFO, and I couldn't be happier. David brings tremendous experience, strong relationships, and deep industry knowledge, and we are already seeing the benefits of his leadership, highlighted by our cash flow performance in Q3. On behalf of the entire team, I'd like to welcome him publicly and wish him great success. Our quarterly performance demonstrated solid momentum in many areas. We delivered 5% organic revenue growth, generated strong free cash flow, and continued to win new business despite an uncertain macro environment. Each of our segments once again contributed to organic growth, and we generated over $150 million in free cash flow, driven by disciplined cash collection, resulting in a meaningful reduction in day sales outstanding. Booking's performance was another highlight. Through the first three quarters, we have secured over $1.5 billion in new business, a 15% increase year over year, positioning us well for revenue and earnings growth in the year ahead. This success reflects both favorable conditions in most of our markets and our deliberate strategy to strengthen our presence in core markets and build lasting partnerships through thoughtful pricing decisions. We have robust pipelines across technical solutions, manufacturing and distribution, and business and industry, particularly in several attractive geographic markets. At the same time, certain commercial office markets, especially in select West Coast, Midwest, and Mid-Atlantic metro areas, are slower to recover. In these areas, we're pushing long-term growth by strategically pricing rebids and extensions, and by managing the timing of escalations to protect and expand our footprint. A similar approach is being applied to competitive end markets, such as semiconductors and e-commerce, where there are terrific opportunities for new business to be won. While these choices did pressure margins and adjusted EPS, we were able to win multi-year contracts and extensions and protect long-term clients, which will support stronger and more sustainable growth over time. It is important to recognize that our strategy is working. While some peers with comparable U.S. cleaning and maintenance exposure have recently reported meaningful organic revenue declines, we delivered mid-single-digit organic growth this quarter. We're also acting decisively to address the near-term margin impact of our choices. Our teams are implementing labor efficiency measures, and we are tightly managing discretionary costs across the company. In addition, we've launched a company-wide restructuring program, which is already well underway. This program is designed to better align our cost structure and operating model with our growth priorities. When fully implemented by year-end, this program is expected to generate at least $35 million in annual run rate savings. Our actions to boost growth and improve margins combined with our highly cash-generative business model reinforce our confidence in ABM's long-term growth trajectory. Reflecting that confidence, we purchased shares in the third quarter and early into Q4 buying more than one million shares during July and August, and nearly 1.5 million shares year to date for $71.3 million. I'm also pleased to report that our board increased our share repurchase authorization by $150 million after the quarter closed, giving us added flexibility in capital allocation going forward. We also continue to invest for the long term, with AI being an important part of that journey. In fact, we've invested in AI tools that enhance the way our teams work today, such as automated and more robust RFP responses and improved HR support services. And we are exploring using agentic AI to supplement client-facing service and operational support. Looking forward, we see opportunities to leverage AI to uncover new revenue streams, introduce robotics at client sites where it makes sense, and drive efficiencies within our finance organization. The benefits will be clear and enhance client and team member experience alongside greater efficiency and scale. Importantly, AI will not disintermediate ABM. Our core business, whether cleaning, maintenance, or engineering, is fundamentally people-led, delivered in high, highly unique and dynamic environments that do not lend themselves to full automation. AI is not a replacement for ABM's core business, but a tool that strengthens our people, improves outcomes for our clients, and positions ABM to build on our industry-leading position. Let me now give you a brief update across our segments. In B&I, we're seeing the prime office market continue to get healthier overall. as evidenced by our return to organic growth in the last two quarters. CBRE's mid-year outlook shows prime vacancy trending down from about 4.5% today to closer to 13.6% by year end. What's driving that is a real flight to quality. Tenants want the best buildings, and new supply in that segment is limited. That plays right into our sweet spot in Class A urban properties. Now, it's not the same story everywhere. Some regions, particularly parts of the West Coast, Midwest, and Mid-Atlantic, are still under pressure with softer leasing and higher vacancy than the national average. The recovery is happening in these markets, but at a slower pace. Stepping back, the overall trend in prime is clearly positive, and with our strong positioning in Class A, we're well aligned to capture the upside of that recovery. while being selective and strategic in markets that remain more challenged. With regard to M&D, we see momentum driven by three key forces, technology investments spurred by AI, e-commerce growth, and the reshoring of manufacturing. Semiconductors continue to lead the way with more than $450 billion in private investments announced since 2020. E-commerce remains another steady tailwind with U.S. online retail sales rising 5.3% year over year in Q2 of 2025 to over $300 billion. At the same time, the reshoring of U.S. manufacturing is accelerating, much of it concentrated in pharmaceuticals and automotive production. These are highly attractive markets where we have the clear right to win and where many service providers are eager to participate. ABM's ability to integrate services, scale quickly, and execute complex solutions positions us to capture these opportunities. Just as importantly, our model enables us to enhance margins over time, turning winds and demanding high-growth sectors into durable and profitable growth. The aviation market continues to experience strength in passenger demand. TSA data shows daily checkpoint screenings routinely averaging above 2.8 million in July and August, up incrementally from 2024, underscoring healthy demand dynamics in domestic air travel. Airports themselves are also in a period of heavy reinvestment. Projects such as the new global concourse at O'Hare, along with the FAA's multi-year program to modernize terminals and airport infrastructure, represent a sustained pipeline of opportunities for us. Against this backdrop, ABM's technology solution, ABM Connect for Airports, supported by our project delivery engine that enables us to quickly scale new jobs, is a clear differentiator. This combination of strong consumer travel trends, major infrastructure commitments, and our ability to mobilize rapidly gives us confidence that our aviation business will continue to outperform sector growth as new opportunities come online. In education, our business continues to benefit from the overall resilience of both higher education and K through 12 markets sectors that are typically moved steadily even when the broader economy is less predictable. The latest Gordian 2025 State of the Facilities Report shows that institutions are focusing more on modernizing and maintaining existing campuses rather than adding new space. In short, the education market remains fundamentally solid, and our team has done a great job executing in this environment. For ABM, our focus on large school districts, colleges, and universities should ensure stable contributions supported by strong client retention, and operational efficiency. Finally, in technical solutions, our electrification business, particularly microgrids, data centers, and power services, remain strong and now account for nearly 60 percent of segment revenue. Market fundamentals continue to strengthen. Wood Mackenzie projects the U.S. microgrid market will more than double by 2030, reflecting the growing demand for energy resilience and decarbonization. Meanwhile, global data center capacity is expected to expand at double-digit annual pace to support AI-driven computing needs. You can see why we're so excited about where ABM is headed. The macro trends shaping our markets, whether the recovery of prime office, the surge in electrification investment, and the resilience of aviation and education, are the very areas where we are focused. These trends are evident in our revenue momentum, improving free cash flow, and durable client retention. We believe ABM is uniquely positioned to be a clear winner as these markets continue to evolve and it becomes even more apparent that we are the best partner to help clients grow and transform their facilities. At the same time, our cash-generative model enables us to consistently return capital to shareholders through dividends and share repurchases, reinforcing our commitment to delivering long-term value alongside sustainable growth. And the AI revolution will be a tailwind for ABM rather than a threat to our core business. Looking ahead, we expect our fourth quarter earnings and margin to improve meaningfully from the third quarter. driven by the benefits of our cost and restructuring actions, as well as from strong performance on our ATS segment. We expect to be toward the low end of our prior adjusted EPS range of $3.65 to $3.80 for the fiscal full year. With that, I'll turn it over to David to walk through the financials.

Good morning, everyone. I'm honored to be here today and look forward to building a relationship with you all in the coming quarters. I'm also excited to work even closer with the ABM operations and functional support teams. With that, let's get into the Q3 results, starting on slide six. Revenue grew 6.2% year over year to 2.2 billion, driven by 5% organic revenue growth and a 1.2% contribution from our recent acquisitions. Of note, our organic revenue growth was the highest it's been since the fourth quarter of 2022. Like last quarter, we saw organic revenue growth in all segments, led by aviation, M&D, and technical solutions. B&I and education were both up 3% in the quarter. It's clear that our advantaged offerings and service, in conjunction with our market focus and strategic pricing, is driving outsized growth. Turning to slide seven, net income from the quarter increased to $41.8 million, or $0.67 per diluted share. compared to $4.7 million, or $0.07 per diluted share, last year. This increase was driven by the absence of a $36 million adjustment to contingent consideration for our Ravenvolt microgrid business that was recorded last year, as well as a decrease in corporate costs, reflecting a smaller negative impact from prior year self-insurance adjustments. These items were partially offset by higher interest and taxes. income was $51.7 million, or $0.82 per diluted share, compared to $53.6 million, or $0.84 per diluted share, last year. The change largely reflects higher interest and tax expense partially offset by lower corporate costs. Adjusted EBITDA was up 5% to $125.8 million compared to $119.8 million last year, largely the result of lower corporate costs. Adjusted EBITDA margin was flat at 5.9%, reflecting the strategic pricing and escalation decisions Scott discussed earlier. As Scott mentioned, we're taking several actions to improve margin, including a restructuring program that was launched in August. The program is designed to more closely align our cost structure and footprint with our growth priorities and is initially focused on organizational structure. The actions we've undertaken are expected to yield annualized savings of $35 million at a cost of approximately $10 million. We continue to review other elements of our cost structure for additional opportunities under this plan. Now let's turn to segment performance, beginning with slide eight. B&I revenues surpassed $1 billion for the quarter, up 3% from last year. This performance was driven by escalations, expansion with existing clients, and continued strength in our UK and sports and entertainment businesses. As Scott mentioned, certain areas in the U.S. remain slow to recover, and we've made some strategic decisions with regard to pricing and the timing of escalations to ensure we position ourselves for sustainable growth. These decisions helped drive growth, although they impacted margin in the quarter. Operating profit was $73.8 million, and margin was 7.1%. as compared to $77.8 million and 7.7% respectively last year. Our teams are working actively on plans to drive margin higher through efficiencies and escalations. Aviation revenue grew 9% to $291.8 million, supported by positive travel trends and several new winds ramping up. Operating profit was $19.7 million, up 11%, with margins up 20 basis points to 6.8%. These results reflect volume growth and the benefits of escalations partially offset by weather-related headwinds in the quarter. Turning to slide nine, M&D generated $408.9 million in revenue, an 8% increase year-over-year. This strong organic growth was fueled by new contract wins and client expansions. In the third quarter, We were especially pleased to expand our presence in the technology sector, securing domestic business with leading U.S. and Asian semiconductor manufacturers, as well as a major capacitor manufacturer. We're making thoughtful pricing decisions to ensure we're well positioned to capture the significant growth in U.S.-based tech manufacturing, much of it driven by enhancements in A.I. Operating profit was $36.4 million with a margin of 8.9% compared to $40.9 million and 10.9% last year. As mentioned, the margin decline was largely due to strategic pricing on select new business opportunities, which offer significant long-term growth opportunities and also reflects investments in technical sales talent and sector-specific capabilities. Education revenue rose 3% to $235.1 million, supported by escalations and stable retention rates. Our education team did a great job by growing operating profits 17% to $21.1 million and expanding margin 110 basis points to 9%, primarily driven by improved labor efficiencies and escalations. Technical solutions grew 19% to $249.5 million, with 7% coming from organic growth and 12% from acquisitions. This strong growth was once again driven by robust demand for microgrids and data center and power services, which now make up about 60% of segment revenue. Operating profit rose 9% to $19.4 million on higher volume, and margin was 7.8% compared to 8.5% last year. The margin performance primarily reflects business mix and higher amortization costs. Our microgrid business performed very well in the quarter. We expect margins to improve in the fourth quarter on healthier mix and higher volume. Now turning to slide 10. We ended the third quarter with total indebtedness of $1.6 billion, including $29.7 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.8 times. Available liquidity stood at $691 million, including $69.3 million in cash and cash equivalents. Our teams across the business did an incredible job on cash in the quarter. They were laser-focused on collections and significantly reducing our day's sales outstanding. I want to thank and acknowledge them for their efforts. Free cash flow was $150 million, an improvement of $135 million over Q2, and up $86 million over the prior year. We continue to make progress with our ERP conversion in the third quarter and anticipate further improvement in the fourth quarter. As such, we expect to be toward the low end of our normalized free cash flow range of $250 to $290 million. This range excludes $16 million of the Ravenvolt earn-out payment that was recorded as a use of operating cash, as well as full-year elevate and integration costs, which have totaled about $40 million through the first three quarters. With regard to capital allocation, we repurchased 555,000 shares in the third quarter at an average price of $48.77 and a total cost of $27.1 million. We continued buying in the fourth quarter and repurchased 491,000 shares at an average price of $46.83 for a total cost of $23 million. Year-to-date, we've repurchased roughly 1.5 million shares for a total cost of $71.3 million. our board recently approved a $150 million increase in our share authorization, bringing our current capacity to $233 million. Interest expense in the quarter was $25.3 million, up $4.1 million from last year, driven by larger average debt balances. This result was higher than our expectations as cash collections in the quarter were back-end loaded. Turning to our outlook on slide 11, given our higher interest expense, and the impact of our strategic pricing and escalation decisions, we now expect full-year adjusted EPS and adjusted EBITDA margin to be toward the lower end of our prior guidance. As a reminder, the range for adjusted EPS was $3.65 to $3.80, and the range for adjusted EBITDA margin was 6.3 to 6.5%. We expect fourth quarter interest expense to be around $25 million, and we continue to expect a normalized tax rate before discrete items of 29-30%. As a reminder, our outlook does not include any future positive or negative prior year self-insurance adjustments. Going forward, we'll highlight any material impacts resulting from the inclusion of prior year self-insurance adjustments in our non-GAAP results. With that, I'll hand it back to Scott for closing remarks.

Thanks, David. Before we wrap up, I want to thank the entire ABM team for their continued focus and execution in what remains a dynamic and evolving market. This quarter, our teams did an outstanding job not only winning new business, but also retaining and expanding client relationships, an accomplishment that, together with our strong free cash flow, demonstrates the resilience of our core business and the value we provide. I also want to acknowledge the adaptability of our teams as we modernize how we work. From implementing new systems to embracing AI tools and new ways of doing business, our people are learning and leaning into change with creativity and determination. These efforts are also enhancing how we serve clients, improving efficiency, and positioning ABM for long-term success. Thanks to all of you, we are confident in our ability to deliver sustainable value for our clients, our teammates, and our shareholders. With that, let's open the line for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So we may address questions for as many participants as possible. We ask that you please limit yourself to one question and one follow-up. One moment, please, for our first question. Our first question comes from the line of Tim Mulroney with William Blair. Please receive your questions.

Hi, good morning. This is Luke McFadden on for Tim Mulroney. Thanks for taking our questions today. Maybe want to start here just on the M&D business. Growth in that business was quite a bit stronger than what we were modeling. And I know you've had some headwinds in this segment over the last couple of quarters with respect to that larger customer rebalance. So is this growth acceleration primarily a function of kind of lapping some of those headwinds or really more tied to the underlying momentum you're seeing in the business at this point?

Yeah, I think, look, we're really enthusiastic about our manufacturing and distribution segment, especially the end markets we're focusing on with semiconductor and pharma. So I think it's a combination of lapping generally when you look year over year. But for us, it's just about attacking strong end markets and investments we've made in salespeople in this industry group. It's so focused on having expertise in those areas like semiconductor, what have you. You can't just have a generalist go to those kinds of organizations and sell or be an operational person if you don't have that expertise. So we've made a lot of investments there, and they're really starting to pay off. And that's why you're seeing this accelerated growth. And we're big believers in this growth profile for years to come. So I think this is more about our focus and our expertise.

Understood. Makes sense. And, you know, thinking about free cash flow here in the fourth quarter, we just wanted to make sure we're doing our math right. So inclusive of the full year elevation and integration costs, we're getting to about 170 million implied free cash flow for the fourth quarter. Is that the right ballpark or are we doing something wrong there?

Yeah, thanks. Let me give some color on that. So as you recall, our original normalized cash flow guide for the year was $250 to $290 million. That includes roughly $70 million or excludes roughly $70 million of one-time items related to elevate initiatives and a portion of the Ravenvolt earn-out payment that is treated as operating cash flow. So to kind of back that down, free cash flow of $180 to $220 million. We're at $42 million free cash flow year-to-date. So that would imply we need to do about $140 million in the fourth quarter to achieve the range. And, again, perspective, we did $150 million in Q3. So that's what gives us the confidence on the Q4 number and the range.

Yeah, and what I would add to that, our organization is so acutely focused on cash collections at its core, and I'm just so proud of the team and what we've done, you know, We told you guys that we were going to come back and get to this level, and we're just really happy with what we've done and have every bit of confidence we're going to keep on this momentum.

Understood. Thanks so much for the call today. I'll pass it along.

Thanks.

The next questions are from the line of Jasper Bibb with Truist Securities. Please receive your questions.

Hey, good morning, guys. I wanted to follow up on the margin headwinds. I guess to clarify, would you categorize the margin pressures as incremental growth investments, or is there anything else driving this? Because the BNI and M&D growth has actually been really good, so it doesn't seem really like an operating leverage challenge, I guess.

Yeah, so it's been a combination of both, right? When I think about BNI, I think about it more about protecting our footprint, protecting our client-based Because where we had the pressures were in two or three geographic areas that I mentioned in the prepared remarks. So whereas M&D was more about opportunistically expanding on going after new business and maybe lowering our threshold. And maybe I'll give you guys a couple of examples, see if this makes sense. So in the Northeast, we have a large multi-building commercial office client That was under pressure. And they came to us and they talked to us about the fact that they're looking to trim operating costs across all of their areas and said they may even have to re-bid. And we got in the middle of it because of our relationship and said, look, you don't have to re-bid. Let's figure out how we can accomplish what you want to accomplish. We'll look at scope reduction. We can look at timing of escalations. And it was actually incredible because We came away with this with a margin profile that was still acceptable to us, not as ideal as it was before that negotiation, but still acceptable for us. And we got a long-term extension. And from our view, we really ingrained ourselves with that client because now they think of us as a strategic partner, not just a vendor. And then we had another example in the West Coast where we had a large client in a pressured area of downtown LA. And we had one year to go on the contract. And this is one where we proactively went to them because we didn't want them to bid it out or even start thinking about it. And we worked through, again, the same kind of iterations with them. Can we adjust scope? Can we take a person out of the lobby during the day? Can we think about the window cleaning cycles? Like we really got into it with them And we ended up forging a longer-term contract and the same thing, walking away with a client that now thinks of us as a strategic partner. And in both those cases, we protected our footprint. And these were both marquee clients and long-term clients. So for us, we look at this as a really positive result. And you guys know that have been following us for years. we always rework the margin back up. And I think even if it's a little painful right now, we'll talk about this a year from now, and we're going to be really excited about where we are from a margin perspective. And then the other example I want to give you is manufacturing distribution. We are going after certain submarkets like semiconductor and pharma, and we had a new opportunity with a client that was tangential to semiconductor. It wasn't exactly semiconductor, but it was part of the semiconductor supply chain. And we wanted this client. We wanted to get into this vertical. And you know what? When we bid this contract, we went approximately 100 basis points below what we would normally do as kind of our minimum for bidding new business because we wanted this strategically. We did that. We secured the new business. And we're already seeing some growth from that client, from that bid. So these are decisions that, again, they impact us in the short term. And we also know that you don't solve these problems in a quarter. So we'll have some effect as we go forward. But I guess the thing that I'd want to mention here is we're not sitting on our hands when this stuff happens, right? And you heard in the prepared remarks, right, we're looking at discretionary costs, we're going back and re-looking at labor efficiencies across our entire platform to make up for this. And, you know, to David's credit, initiated a firm-wide restructuring program where we took $35 million of cost out of the company, and that's largely underway, will be finished in the next month or so where we'll have the full run rate by fiscal start of 2026. I'm really proud of the organization for coming together and do that. So, you know, I just hopefully that gives you a little bit more color on kind of how these pricing decisions have impacted us, the examples of it, and kind of what we're doing as an organization in a very agile way to counteract those.

No, that's helpful. And then you mentioned the cash flow outlook. You can maybe give us some more detail on your progress on collections, any concerns about delinquencies, and maybe you could frame for us where you're at on billing cycles for new revenue versus what could be considered normal. Yeah, no problem.

No material concerns on delinquencies. I think as Scott said, there was just a tremendous focus in the quarter on collections overall. In fact, our DSOs were down 7% sequentially, Q2 to Q3. And so we were really proud of that because that was the target we were achieving, we were hoping to achieve. And then, as I said, in Q4, we looked to carry that momentum in. I mean, there's a laser focus throughout the organization, and that goes down from the operators to our back office support functions and everywhere in between. So really proud of where we landed the core-owned cash flow. Feel good about it going into Q4.

Thanks for taking the questions, guys.

The next questions are from the line of Andy Whitman with Baird. Please proceed with your question.

Yeah, great. Thanks for taking my questions. I guess I just wanted to kind of dig into the guidance and the quarter and all the implications here a little bit deeper. And I guess specifically, it's a big quarter over quarter EPS ramp. And there can be historically some positive seasonality that helps 4Q or 3Q, but it looks particularly acute this year to achieve the low end of the guidance. So that's really what I want to get into. You know, when I look at it here, your implied fourth quarter to get to the low end is $1.09 to get there. Consensus is $1.07. So that actually kind of feels like no change, but it feels like there's clearly a change here in terms of the margin rate that your annuity businesses have exited the quarter with on 3Q. versus Scott's comments here so far. So I guess maybe the question is, which of the segments sequentially that are going to drive such a sharp acceleration in your operating income dollars and why?

Thanks, Dan, for the question. So let me dimension it this way. We do, first of all, expect a material sequential improvement in both the EPS line and the margin line. And I'll actually dimension it on the margin side. We're looking at roughly 100 basis points of improvement in margin. And the way I would think about that is we have some moderate improvement in B&I and M&D on the strength of restructuring and the strength of the timing of escalations that are going to come through in the fourth quarter. But the really big difference in the fourth quarter is our expected performance in technical solutions. And if you think about historically what this business has done in Q4's past It's a seasonally very strong quarter. In fact, over the last two years, operating profit margins have been 11% and 13%, respectively, in Q4 for ATS. And we anticipate that to repeat itself in Q4 this year. So that's a massive part of the margin and EPS improvement. And then outside of the restructure impact for B9M&D, as Scott mentioned, the restructure was broader than that. It was across the firm. And so we anticipate a benefit from that as well. So We feel like we're lined up to show a very strong sequential Q4.

Got it. Yeah, and it's just interesting. If you look at the interest expense specifically, I mean, that's a pretty big change in your guidance for interest expense. You know, just that change in interest expense here for the half year explains really the delta between the high end of your EPS and the low end now that you're talking about is actually almost completely explicable by the the change in your interest expense outlook. So just, I guess that's just a comment more than a question, but still, I think notable, you know, Scott, I guess maybe to you here, just the last quarter kind of felt like things were, were kind of firing on, on most, if not all cylinders. And it just, it feels like, you know, I didn't, I didn't hear a lot of commentary about, you know, some pockets of weakness, tough markets in the West coast and the Midwest. um, this, this quarter, kind of a bigger change, I guess, just like, can you just take us through the timeline as to what changed the quarter? And, uh, I would have thought that there'd been some indication about kind of some of these pricing negotiations that you're going into, and maybe just take us through kind of how this all evolved and came to be so that we just understand, um, kind of what happened here.

Yeah. Um, thanks, Andy. You know, it, you know, um, Interestingly, it's really simplistic. It's just, you know, and I'm saying this kind of tongue in cheek, but I thought, you know, it was just bad timing. You know, it's like we had a bunch of clients concurrently come to us and talk about the fact that they're pressured, they're looking at their budgets for 2026, because this is the time, this is the zone when owners are putting together their budgets because most of them largely are on the calendar year. So you're sitting here, you know, for them in June, July, August, confirming up, you know, what their P&Ls are going to look like. And they just came to us and said, look, you know, we'll, again, we're looking across the whole spectrum. No one was like targeting cleaning, but they were targeting every expense, their utilities costs, right? Waste removal, everything. And they just came to us like, what can you do? You know, we don't want to test the market, and we never want them testing the market, right? There's a very different outcome for us on a margin when it's a bid versus a renegotiation. So we were happy, you know, all things considered, to go into a renegotiation. So it was a timing. A lot happened concurrently, and it just happened in the weaker markets, geographic markets that have not recovered as quickly. And, you know, look, I'll tell you some of them and you'll be shaking your head. You know, Portland, Seattle, downtown L.A., parts of Minneapolis, D.C. has been under pressure. So there's been these different than maybe New York or center city Chicago, which are stronger. So it happened in those markets. It happened at the same time. But to give you some comfort, Andy, I could tell you, at least in the short term, you know, we're already a month. into Q4, we are not seeing this happen again. And frankly, I've been around here 20 years. I've not seen, again, having in unison so many clients at such a short period of time. But again, we fought through it. We reacted really quickly. So we feel like we're in good shape, and we feel like we're not going to be having this conversation with you guys again about something that just felt so episodic.

That's really a helpful perspective. Thank you for that, Scott. Have a good day.

Thanks, Andy. Our next question is from the line of Faisal Alway with Deutsche Bank. Please receive your three questions.

Yes, hi. Thank you. Good morning. Scott, I wanted to follow up on the same topic. You talked about you don't want to test the market. And I'm curious if you can talk more about the competitive environment. Are you seeing new entrants out there? Because I would have thought just given where we are in terms of the labor environment, there may be some potentially competitive advantages that you might have. So just talk a little bit more about that thought process.

Sure, sure, Faisal. So look, here's the way I think about it. There is not new entrants from a competitor's standpoint. Look, in any given market that we have, we're always going to have three or four really good competitors. It's just a fact of what we do, right? So when we talk about not wanting something to go to market, for us, it's just a very different conversation when you're sitting down with a client and working with them in a collaborative way to come to a result that they want versus going out to bid and potentially having someone put in an irresponsible bid because they don't know the client as well as we do and know some of the demands the client would have. So you'll always find, and I don't think this is necessarily even ring-fenced to ABM. I think you would look at any kind of commercial services vendor in our universe, and it's kind of ubiquitous that they would say, like, why would you want something to go out to market if you can have a negotiation? So I think this is a result of clients that are under pressure right now because there's been slower-to-recover markets. And, again, I don't – there is – you know, just to be clarified that there is nothing in our mind that's structural that's going on here. You know, this is a normal – event for us throughout the year we see clients come to us all the time on a regular basis and every industry group particular clients become under pressure because it could be their own business model it could be something that's happening particularly to their business so this isn't this isn't the first time that we've had to sit down with a client and try to work through a result to have them save money it literally happens you know every week for us it's just this was a situation where there were a number of big clients that were prestigious that we did not want these kinds of strategic big brand name clients getting into the hands of any of our competitors.

Okay. Understood. Makes sense. And then just to put a finer point on what you're saying with respect to BNI versus MND, because it sounds like those are the two segments where you're undertaking... you know, the strategic pricing, like BNI feels a little bit more defensive versus MND. It sounds like there's a lot of new business opportunities. So, you know, just want to make sure that I'm thinking about it the right way. And if that's right on MND, like should we expect growth to accelerate from here as you get some of this new business, perhaps at a slightly lower margin? I'm just trying to think through like the margin implications for next year.

Yeah, so I think the way to think about it is think about those segments, right? B&I is primarily commercial office, and as you know, for the last few years, it's been under pressure. So it was absolutely more defensive from that way because it was the clients responding, whereas M&D was more opportunistic. We wanted to get into a particular market. But then I think what I would ask you to do is also – put this in context to the fact of what I noted in my prepared remarks, our bookings are up 15%. We brought in $1.5 billion in new business through the first three quarters of the year. So our momentum in terms of winning new business and bringing them on and the tailwinds into 2026 are really healthy.

All right. Thank you so much.

Thanks, Faiza.

Our next question is from the line of Josh Chan with UBS. Let's just see if there are questions.

Hi. Good morning, David and Paul. I appreciate the color about the strategic pricing and escalation actions, I guess, but could you talk to the magnitude of the margin headwinds? Because I guess in any given quarter, only a very small portion of your business I would expect to be rebid or renegotiated at any time, right? So just to see those more episodic events have that big of a margin impact, you know, could you talk to kind of how that, you know, caused the magnitude of the margin headwind?

Yeah, I'll let David take that one.

Yeah. Hey, thanks, Josh. Yeah. So as Scott pointed out a few minutes ago, you know, rebids are a part of our normal course of business, but just the volume and aggregation of this quarter was something we have not historically seen. So you combine that with the decisions we made to protect and preserve the long-term growth footprint. And as we mentioned, there was some timing items on the escalation side that we do believe over the next quarter or two will begin to recover. So I think that in and of itself for B&I especially provides most of the bridge on the margin headwinds.

Okay. That makes a lot of sense. And then in terms of the catch-up into Q4, certainly it does seem like Q4 is becoming a lot healthier. I realize the escalation timing could contribute to that, but I guess what's your confidence level that that alone can drive the projected level of sequential margin improvement?

Yeah, I wouldn't say it's that alone. It's a combination of other things. So, again, if you're talking enterprise-wise, I mentioned just really anticipate a strong quarter from ATS. And I wouldn't discount the benefits of the restructuring activities as well. As Scott said, those activities are underway. They've largely been completed. And we anticipate roughly 20% of those benefits to come through in Q4 of this year with the balance to come through in fiscal 26. Okay.

Great. Thanks for the color and good luck in Q4.

Thank you.

Thanks. The next question is from the line of Mark Riddick with Sedoti. Let's just see their question.

Good morning, everyone. And David, certainly looking forward to working with you going forward. Thank you for all the color that you guys have already provided. I guess I just sort of want to take a different, um, tact on this sort of, I was sort of curious, Scott, maybe you could talk a little bit. You gave some, some examples on sort of how, how these, uh, opportunities present themselves during the, during the quarter. Maybe you could talk a little bit about the visibility and maybe some of the, the contract length, things like that, that maybe sort of, you know, the benefits of, of, of that retention and, and, um, how we should think about that vis-a-vis historical visibility levels.

Sure. I mean, look, I think it's a ramp up, right? You make these decisions. And when we restructure these contracts and we're working with owners on how to get to their – really what their goals are for pricing – We think about it strategically too within where we're providing relief because we'll want to restructure it in a way that we can work the margins back up. And it's too much sausage making for this call, but the truth of the matter is our salespeople and our operators know how to provide savings and restructure the contracts and the contract language. ways that over the next two to five years you see the margins come way back and sometimes even stronger than they were at the start so you know what you're taking a little bit of a hit at the start to preserve the long-term relationship but what's amazing about that is when you have a contract with a significant client with a significant brand and you're looking at an expiration date on that contract this could be a 25 50 75 million dollar contract and you're looking at an expiration date of a year from now and you're like oh my goodness like what an amazing opportunity to give a little bit of give a little bit of margin back and end up with now a four or five year extension you know for us it's it's a home run because we know we're going to get back to that same margin place But now we have a five-year journey ahead of us in locking up a marquee client.

Excellent. And that's kind of where I was going there. So, I mean, did you sense that there are other similar opportunities that you might be able to take in the near term? Or do you get the sense that that might be driven more so around the differentiation of regional performances that you were hinting at earlier? Yeah.

Yeah, no, I, you know, I thought, I think I may have mentioned this before, but like, we do this all the time. So like, you know, I have every, every expectation that in the month of September, there's going to be four or five exact similar, the examples I gave, four or five times that's going to happen in the month of September. Different than 30 of them happening in the month of September, you know, and those, those are, are, anecdotal. Those aren't real, you know, numbers of what happened. And I think, you know what, Mark, that's probably the differential. Like, you'll always see this stuff happening. It's just, again, to have it happen in unison concurrently in one site, that was the one that created the impact. But we're always looking for these kinds of opportunities to continue to secure longer-term contracts with our marquee clients.

Great. And so I appreciate the explanation on going over that. The one thing I also wanted to touch on, you mentioned in your prepared remarks, AI benefits and the like. Can you talk maybe about maybe the timing of when you might see that and sort of how that might take shape and how that sort of plays into the ERP? Thanks.

Sure. Listen, AI is probably the most exciting thing that's happening here. But it's still a nascent technology, right? You know, we're looking at areas across the company where we see savings in terms of our overhead, right? But we're also seeing places where we can accelerate from a revenue standpoint and a profitability standpoint, you know, that our client facing in the field with labor, what have you. But it's the beginning, right? It's the beginning of a journey for not just for ABM. I think we're in good company because You know, I could tell you all the other CEOs that I talk to, everyone's playing around with these initiatives. But my sense of it is in 26 through 28, you're going to start seeing real meaningful, real meaningful impact. And it's not going to be binary where it's just going to be flip a switch. You're just going to see a ramp up. So super excited about that. But I think, you know, what we're really excited about and what we've been reflecting on a great deal is ABM's business model. And we've been talking to investors that have been talking about where they're placing their bets. And it seems like the investor community is starting to get nervous about certain companies that they think could be completely really disaggregated because of AI and their business model and what can happen to their core. You think about ABM's core, right? You know, I don't know how you feel, Mark, but I don't think AI is going to be turning a wrench anytime soon, right? Or doing our core services. So we think there's going to be a lot of focus on companies like ABM in the future when you look at the disruption that's going to happen to companies in a negative way from AI. And we look at this and say, like, we are just super enthusiastic about kind of the core services that we provide as a foundation and the fact that they are insulated for years in terms of AI and then layering on the benefits that we could get in back office and through labor efficiency. And it gets us pretty charged up here that we have an AI resilient business model when it comes to disruption.

Great. Thank you. Thanks, Mark.

Thank you. This will conclude our question and answer session. I'll hand the call back to Scott Salmers for final comments.

Well, thanks, everyone. Appreciate you following. And you can see there's a lot of enthusiasm here for what we're doing and where we're heading. And we're going to continue on. We're looking forward to talking to you in Q4. And at that time, we'll give you our annual guidance for 26. And In the interim, have a good holiday season, and we'll talk to you soon. Thanks, everybody.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.