ABM Industries Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 13, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the ABM Industries 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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.

Operator

Thank you. You may begin.

Speaker 1

Good morning, everyone, and welcome to ABM's 4th 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 Erl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our Q4 and full year 2023 financial results. A copy of that release and an accompanying slide presentation can be found on our website, abm.com.

Speaker 1

After Scott and Earl's prepared remarks, we will host the Q and 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 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.

Speaker 1

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 Investors tab. And with that, I'd like to turn the call over to Scott.

Speaker 2

Thanks, Paul. Good morning, and thank you all for joining us today to discuss our 4th quarter results. 4th quarter revenue grew 4.1 percent to $2,100,000,000 including 3.8 percent 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 our strong positioning in M and D. We also recorded modest organic growth in B and I, where robust sports and entertainment and special event activity Hope to offset continued softness in the commercial real estate market.

Speaker 2

Additionally, our team set another sales record in 2023 With new sales bookings of $1,600,000,000 which is a great accomplishment. I'm pleased with our progress in resolving certain microgrid project delays in 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 B and I.

Speaker 2

Office density rates remain relatively static in the 4th quarter at around 50 plus percent on a blended basis, With the commercial office vacancy rate near 20%. These factors directly impact the demand for our janitorial services in B and I. Although the hybrid work model remains prevalent, we expect to see a continued gradual increase in the time employees 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 in commercial real estate.

Speaker 2

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 and 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 and 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 and 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.

Speaker 2

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 2 large airport janitorial contracts Pending final approval along with 2 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 on shoring of manufacturing.

Speaker 2

As we mentioned last quarter, we expect a large and valued M and 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 and D to grow revenue in the High single digits. However, the 2024 growth rate will be impacted by the rebalancing. Moving to education.

Speaker 2

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 $410,000,000 even after several completions of projects in the 4th quarter. With easy and microgrid services representing nearly 60% of the segment total.

Speaker 2

Conversely, we continue to experience soft market conditions in Bumbold 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 Q4 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.

Speaker 2

Also, the level of interest and bidding activity For microgrid systems and large EV infrastructure projects, including the opportunity for current revenue remains high. We expect 2024 to be a year of solid growth in technical solutions. Now turning to our Elevator initiative. Following the successful financial close on our new cloud based ERP system for the Education segment, we achieved 2 more milestones in the 4th quarter. First, we launched a new workforce management solution for pilot sites in the education segment.

Speaker 2

This tool Allows for a more modern approach to time and attendance from 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 Call Team Connect. The app is currently in the hands of more than 500 frontline team members.

Speaker 2

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 frontline, 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 cost We'll likely be about $200,000,000 to $215,000,000 which is modestly higher than we said in 2021.

Speaker 2

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 and D, where we continue to expand. Although we experienced some project delays in Technical Solutions, our performance improved in the Q4 and we expect further progress As the nascent markets mature, in B and 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 and D.

Speaker 2

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 and D. We expect these factors along with projected labor inflation We'll likely mute our revenue growth and course 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. Karl 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.

Speaker 2

Through our Elevate initiatives, 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.

Speaker 3

Thank you, Scott, and good morning, everyone. For those of you following along with our earnings presentation, please turn to Slide 5. 4th quarter revenue of $2,100,000,000 increased 4.1% comprised of organic revenue growth of 3.8% and a 1 month contribution from RavenWolf. Moving on to Slide 6. Net income in the 4th quarter was $62,800,000 or $0.96 per diluted share, Up 29% and 32% respectively versus last year.

Speaker 3

These increases were largely driven by Higher segment earnings on higher revenue, the benefits of the prior year self insurance adjustments and lower Elevate partially offset by higher interest expenses and labor costs. Adjusted net income of $66,200,000 increased 11% and adjusted earnings per diluted share of $1.01 was up 13% over the prior year period. These year over year increases primarily reflect Higher segment earnings, including the benefits from price increases and our cost management efforts, partially offset $144,200,000 and adjusted EBITDA margin increased 40 basis points to 7.2%. These year over year improvements were driven by higher segment earnings, including several project closeouts in Technical Solutions And normalized performance in aviation as compared to the prior year, which was impacted by adverse project timing. Now turning to our segment results beginning on Slide 7.

Speaker 3

B and I revenue increased modestly to $1,000,000,000 Partly due to strong sport and special event demand, which helped to offset reduced demand in the commercial real estate market. Operating profit in B and I decreased to $84,600,000 and operating margin declined to 8.2% As adverse service mix was partially offset by price increases and cost actions. Aviation grew 16% to $248,200,000 once again driven by strong demand for leisure and business travel And new business wins. We expect demand within our Aviation segment to remain robust going forward. Aviation's operating profit was $16,400,000 versus $1,300,000 in the prior year period And operating margin expanded significantly to 6.6%.

Speaker 3

These increases reflected the absence Of the adverse project timing, which negatively impacted the prior year period, as well as benefits of higher volume and price increases. Turning to Slide 8, manufacturing and distribution revenue grew 5% to $391,200,000 Reflecting broad based demand, operating profit increased to $42,000,000 while operating margin declined 40 basis points to 10.7%. Profit and margin performance was largely due to customer mix. Education revenue increased 6% to $229,800,000 benefiting from the addition of new clients earlier in the year. Education operating profit was $10,200,000 up 23% over the prior year period, While margin increased 60 basis points to 4.4%.

Speaker 3

These increases were largely attributable to increased organic revenue growth And a modestly improved labor market. Technical Solutions grew 6% over the prior period to $190,800,000 comprised of an even split between organic growth and acquisition contribution. This performance largely reflecting the closeout of several legacy projects and progress on battery storage system projects. Of note, RavenWolf contributed to organic growth beginning in September. After these project closeouts, As Scott noted, Technical Solutions backlog now exceeds $410,000,000 a large portion of which is scheduled to convert to revenue in 2024.

Speaker 3

Technical Solutions operating profit was $24,400,000 and margin was 12.8%, compared to operating profit of $20,900,000 and margin of 11.7% last year. These increases were largely due The higher volume and approximately $2,000,000 of one time gains related to certain contracts. Moving on to Slide 9. We ended the Q4 with total indebtedness of $1,400,000,000 including $58,200,000 of standby letters of credit, Resulting in a total debt to pro form a adjusted EBITDA ratio of 2.3 times. At the end of Q4, we had available liquidity $552,500,000 including cash and cash equivalents of $69,500,000 Free cash flow was strong in the 4th quarter at $121,000,000 and was $191,000,000 for the year.

Speaker 3

Excluding full year Elevate and integration costs of $71,000,000 our CARES Act repayment of $66,000,000 and employee retention credits Received a $24,000,000 normalized free cash flow was $303,000,000 in 2023. We repurchased 2,700,000 shares of common stock in the 4th quarter at an average price of $40.82 per share For a total cost of $110,000,000 for the full year, we repurchased 3,300,000 shares for $137,100,000 excluding excise taxes, and reduced our share count by 5%. Also, subsequent to the year end, our Board approved $150,000,000 expansion of our share repurchase authorization. The total current authorization is now $210,000,000 Interest expense was $20,500,000 up $4,500,000 from the prior year period. Now let's move on to the full year fiscal As shown on Slide 10, as Scott mentioned, our view for 2024 is consistent with the comments we made on the Q3 earnings call.

Speaker 3

We expect full 2024 adjusted EPS to be in the range of $3.20 3.40 Adjusted EBITDA margin is expected to be 6.2% to 6.5%, largely driven by a shift in business mix. This includes expected lower B and I janitorial activity, a change in revenue mix in M and D and continued labor cost pressure, partially offset by $82,000,000 to $86,000,000 The tax rate before discrete items is expected to be between 29% to 30%. Lastly, full year normalized free cash flow is expected to be in the range of $240,000,000 to $270,000,000 Excluding the estimated $45,000,000 of Elevate and integration costs, the majority being Elevate Investments. With that, let me turn it back to Scott for closing comments.

Speaker 2

Thanks, Earl. I want to thank our teams for their incredible efforts dedication throughout the year. Despite challenging commercial real estate and labor markets and through the introduction of new technology and processes, our teams Never took their eyes off our clients and delivered solid performance. I wish you and your loved ones a very happy and healthy holiday season and a happy New Year. With that, let's take some questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line

Speaker 3

Wanted to ask what you're seeing from a labor inflation and pricing perspective. And if you could kind of provide the underlying assumptions for 2024 guidance With respect to labor cost inflation and recovery rate there, that would definitely be helpful. Thanks.

Speaker 2

Sure. So for us, We're thinking it's going to be in the 4% to 5% range. A lot of the collective bargaining agreements for the janitorial workers across the country are in The bargaining agreements, which are the union based agreements, they're going to be in that 4% range and it will be a little higher for the non union as we look to those markets with the lower labor rates. So, again, that 4% to 5% range. And just as a reminder, We've been successful over the last few years of recovering 75% to 80% of that.

Speaker 2

So, kind of that's what we're thinking.

Speaker 4

Okay. Makes sense.

Speaker 3

And then I was hoping to get an update on the Elevate progress. I By the end of fiscal 2024 and are there any kind of key deliverables like ERP deployments we should be aware of over the next 12 months?

Speaker 2

Yes. So we're probably I think we're in the kind of that 30% range, a third of the benefits that we've captured to date. And it's something that escalates over time as we actually execute on the different industry group segments, Then we can put in some of the tools. So I think it's just going to be a normal ramping up to that range that we laid out of $10,000,000 to $130,000,000 over time. So we're right on track with our cadence on that.

Speaker 2

So everything is going as planned right now.

Speaker 4

Got it. Last question for me.

Speaker 3

The company really stepped up the repurchase this quarter. I would say that we're really pleased that we're able to return capital back to our shareholders over Q4, especially In light of the compression in our share price that we saw after our Q3. And as we look to the future within FY 2024 at a minimum, We'll buy back shares against the dilutive share based compensation. We have board authorization now for about $210,000,000 worth of shares. And so we'll be opportunistic where it makes sense.

Operator

Thank you. Our next questions come from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions.

Speaker 5

Yes. Hi, good morning. So I wanted to ask about Technical Solutions. I know you don't guide to revenues, But it sounds like the range of alternatives or the range of scenarios on technical solutions is quite wide, just given timing. So give us a bit more color on how do you expect the pacing of these new projects, Project revenues to be realized and how do you expect sort of the underlying business to perform within Technical Solutions?

Speaker 2

That's great. Thanks for the question. So look, we feel strongly about technical solutions as we ever have. We love kind of the end markets that we're serving here. And we think it's going to be a strong year for Technical Solutions in 2024.

Speaker 2

They continually post High single digit margins. We're expecting that again. And remember, Fiza, the cadence of Technical Solutions, It starts off a little soft and then progresses through the year from a margin standpoint because it is quite seasonal. In the summer, you do a lot of the work, right? So We're excited about that.

Speaker 2

We don't guide to revenue, but we're excited about the potential for growth this year. And we have the strongest backlog that we've ever had. And just as a reminder, backlog are the contracts that are Signed and locked, and it's just a question of starting the work. So we're feeling really good about technical solutions this year.

Speaker 5

And maybe just a follow-up on that. Now that you've ended fiscal 2023, could you give us A bit of a breakdown because I know there's a bunch of different items underneath Technical Solutions. There's the bundled energy, there's other things, there's the EV charging segment. Can you give us just a breakdown of

Speaker 2

EV and RavenWolf. And I guess the best way to describe it is our sentiment on those different industries, And we know both sub industries. And we just feel really strong about EZ. All the signs are pointing to strong growth there. Because if you remember, like there has been some news coverage lately that EV is maybe taking a step back or is not as exciting as it was, but that's all in context to the Crazy growth rates that they've had in the past.

Speaker 2

And the truth is what a lot of the car dealers are realizing is the impediment To this excitement is they call it range fear that people feel like they're going to run out of power and that's because there's not a lot of So for us, the catalyst, the way we see EV, the catalyst for our growth is going to be the fact that Infrastructure is so light. So we're really happy about our backlog. So EV is going to be a really strong segment for us. And RavenVault, we're really excited about. We have a very strong backlog, probably close to half of our backlog In Technical Solutions is around RavenVault and these big projects.

Speaker 2

And the frustrating part, frankly, It's the fact that it's really hard to time these quarter by quarter because the way you got to think about it, Faiza, it's not they're basically battery backup projects, Right. And it's not like you're going in and installing 1 battery. These are battery fields. Some of them are the size of a football field, Right. So it's almost like a construction project and timing a construction project, getting the permits, getting the equipment.

Speaker 2

So, when you look across a year, we feel really confident that RavenWolf is going to perform. But Can I tell you whether or not Q2 is going to be stronger than Q1? It's hard to get that insight, But we're getting better at it frankly. We think the back half of the year is going to be stronger than the first half of the year right now, but RavenWolf is going to be another Big strong performer for ATS. And then the last piece is bundled energy solutions and that's the one that's going to be most pressured.

Speaker 2

And the way I want you to think about it, think about these big projects where you go in and retrofit A school and it's a $15,000,000 project changing out the lighting, the air conditioning equipment, the heating equipment. And what ends up happening there It's high capital for these schools. And the IRRs were typically really strong when interest rates are low. But now that interest rates are higher, it's causing them to push and to see what will interest rates come down, what's going to happen. And so there's been a lot of free money out there for school.

Speaker 2

So we think that's going to be sunsetting towards the end of this year. So I would suggest that bundled energy solutions will be soft in 2024, more excited about 2025. But that being said, They'll still perform, just not at their kind of run rate that they used to be at where it was over $200,000,000 in projects. It will probably be around half that this year, which is still fairly strong, but not what we're used to. So hopefully that gives you more color.

Speaker 5

Yes. Thanks. Thanks a lot for that. And then just a quick one for Earl. On your interest expense guide, Are you assuming any debt pay down?

Speaker 5

And just talk a little bit more about Your capital allocation, I know you've talked about the share buyback, but is any sort of debt pay down? Are you thinking about that at all?

Speaker 3

Yes. It anticipates marginal pay down in debt. So if you think about we have a term loan that amortizes probably about $30,000,000 a year and then we'll use some of the Excess cash to pay down a bit of the revolver, but nothing material in that. When you look at our leverage of 2.3 times, we feel very Comfortable there and we're looking to maintain that level of leverage into next year. When it comes to capital allocation, our plan is We'll continue to invest in our organic growth through the Elevate program, investing in talent, And again, based on our strong projected cash flows, relatively low leverage, it continues to provide us with the flexibility To allocate capital, whether it's to M and A opportunities or returning back to shareholders.

Speaker 5

Great. Thank you so much.

Speaker 2

Thanks Faiza.

Operator

Thank you. Our next question comes from the line of Andy Wittmann with Baird. Please proceed with your questions.

Speaker 4

Great. Thanks for taking my question guys and good morning. I guess, I just want to understand the quarter a little bit better, particularly in the Technical Solutions segment. And so for Earl, so you talked about how there were several closeouts in the quarter. Oftentimes, but not always, closeouts are basically accounting adjustments when projects that you've been working on come in Better than expected after you finish them and then you recognize a whole bunch of revenue and basically almost 100% profit against that revenue in the quarter.

Speaker 4

Is that what you mean by saying by attributing the revenue growth year over year significantly to that kind of performance? Or were you something different. I just want to

Speaker 3

make sure we're clear about what you're saying

Speaker 4

on the project closeouts and how that contributed to revenue and profits.

Speaker 3

Yes. No, I think you got it spot on, Andy. There A number of projects that closed out and as a result of that you're actually able to do your final billings. Any holdouts that you actually had you're now able to capture that. And in the quarter that amounted to about $2,000,000 When we talk about The profitability in Q4, remember Q4 is a seasonal business and typically back half with Q4 being our largest quarter.

Speaker 3

So keep that in mind. That by no means would be a run rate into Q1, which we know typically would be a lower quarter than others.

Speaker 4

Okay. But your revenue growth was, like $11,000,000 $12,000,000 in the quarter for technical solutions. The gain was only 2. I guess, It sounds like the other, whatever, dollars 9 ish million of revenue might also be attributable to closeouts. Is that true or not?

Speaker 4

Sorry, I'm trying to understand that.

Speaker 3

No, that would be the regular if you think about on RavenVault where throughout the First half of the year, we actually had delays on certain battery storage projects as we're waiting for not only inventory But getting a lot of the authorizations finalized. So we actually were able to close on a number of those deals in Q4 and as a result you're seeing the revenue and the associated profit.

Speaker 4

Okay. That's helpful. And then, Scott, just on the B and I segments, I guess you mentioned in your press release or your report here, your slide deck, You talked about kind of diversification. I just want to make sure I'm understanding what you're saying there as well. Is that meaning you had the good entertainment and sports And diversified in that way, from, I don't know, let's call it the traditional janitorial services or is there some other dynamic there that we should be aware of That you're referring to in diversification?

Speaker 2

Yes. No, no, that's a great question. Yes. It's partly that. It's partly we have Healthcare in there, but more importantly, the engineering segment.

Speaker 2

So if you think about especially with the Able acquisition where Between Abel and the legacy ABM, we had a lot of stationary engineers and that's about 25% of our business is just Engineering and that doesn't change with office occupancy or density. If you have 8 engineers in an engine room, Whether you're 80% occupied or 95%, that's really not going to change. And we have parking in that segment as well. And that's been relatively stable since we've come out of the pandemic. So that moderates the janitorial, Which is the piece of it that becomes more variable.

Speaker 2

So when I guess, Andy, I'm so glad you brought up Question because like when we look at B and I, we wouldn't want you to look at that as just purely janitorial And having all that kind of variability, so to speak, based on density, because the truth of it is, it's so mitigated by, Again, the engineering specifically.

Speaker 4

Yes. Okay. Just wanted to make sure I understood that and now we do. And then Just on the, I guess, the Elevate program here. So you said it's taking about a year longer.

Speaker 4

The new number is what 215, I think I heard, 200 to 215. I think previously the high end of the total Elevate spend was 175. So that's the delta. Looks like, I guess, you were always planning for like around, I think, dollars 15,000,000 of spend in 2024. So, am I doing the math here like the extra $30,000,000 with the extra year is the delta that takes you That one hundred and seventy five number into the low twos.

Speaker 4

Earl, is that am I thinking about that correctly? Is that what you're saying here today?

Speaker 3

Yes, you are. So it's a spillover. We'll have an extra year. You remember for FY 2024, we are actually planning on that being a bit higher as it Tails down throughout the so you could almost think of rough numbers, probably about $35,000,000 in 20 24 Followed by 25 for the next 2 years.

Speaker 4

Okay. And then Scott, can you just Talk a little bit about kind of what you've learned along the way, that's causing the extra year and the extra cost here. What are some of the technical challenges Or maybe operational challenges that go along with the extension of the program.

Speaker 2

Sure, Andy. And these things are so complex, right? And The way I would think about it is, when you think about deploying an ERP, like the easiest part of it is putting And the data has to flow in and out through a pipe. It's almost like I look at it like a LEGO where you got the middle of the LEGO Is the ERP and then you have all these systems coming around and creating a wheel. And as part of that, what we learned with education is it's just going to take longer to get that data flow right and clean and to All the training, all the answering of questions of the field as they start using the new system, and It's just it's taking longer than we originally expected, because we had no frame of reference, right?

Speaker 2

So I think the Strong point here, Andy, more than anything is this isn't it's not a system that's off the rails. It's not like, hey, we were going with Oracle And we ditched that and now we're going to SAP. It's not like we had a specific consulting group that was helping us through some process work and we had to So none of this is about really missteps. It's really about the fact that Risk mitigation is the most important thing to us internally and to our shareholders, right? So we just have to make sure we do everything we And so that our invoices are right, our payables are right, and our payroll is right, and it's Just going to take a year longer, but it's all for like good reason.

Speaker 4

Okay, great. Thank you for that context. Have a good day, guys.

Speaker 2

Thank you. Thank you.

Operator

Our next questions come from the line of Josh

Speaker 6

Good morning. So you mentioned the margin guidance for 2024. I appreciate the drives behind that. So I guess as you think about Going beyond 2024, how should we think about the trajectory of margins and what are some of the factors that will drive it up or down Beyond this year.

Speaker 2

Sure. Thanks. Look, we think there's going to be a Cadence up to or 7.2%. I think 2025 will be one of the more challenging years for us Predict, right? Because so much of kind of the I don't want to say setback, but the stall And our trajectory is because of commercial real estate and we kind of think that's a 2 year overhang, 2024 2025.

Speaker 2

So I think Once we get out of that trough, it'll be a normal cadence up. But at the same time, we're not sitting around And just admiring the problem, right? We've made some changes to our cost structure and then the Elevate benefits It started kicking in as we start lighting up these industry segments and put our new financial system in and overlay the tools I talked about in my prepared remarks like workforce management and this app that's going to be a game changer because we're going to be able to communicate With all of our frontline employees and ultimately help them manage labor during the day and night, it's just going to be phenomenal. So I think, again, it won't be a straight line up, but the key thing will be when do we think we're going to get past the commercial real

Speaker 6

Okay. Thank you for the color there, Scott. And then I want to follow-up on the repurchase. I guess, Could you just talk to the amount of repurchase and it's obviously a lot higher than what you normally do. And so I just wonder if there is any Change in philosophy in terms of how you think about the stock versus other means of deployment mainly M and A I suppose?

Speaker 3

Yes. No change in philosophy. As we mentioned, we look at capital allocation. 1st and foremost, we want to ensure that we're actually in our organic growth. And we feel that we actually have sufficient investments there with Elevate and other key investments.

Speaker 3

When you look at the fact that after looking at organic growth, M and A opportunities, when we actually have excess We look at how is the best way to deploy that back to shareholders. And after Q3 with the compression that we saw in the share price, we thought It was prudent to actually take actions. But going forward, we'll actually take a balanced approach. We manage our leverage. Currently right now, 2.3 times and we anticipate that that's going to be consistent going to the next year.

Speaker 3

So we'll continue to look at opportunities and allocate accordingly.

Speaker 6

Great. Thank you, Earl, and thank you both for your time.

Speaker 7

Thank you. Thanks.

Operator

Thank you. Our next questions come from the line of Sam Kussler with

Speaker 8

I guess to start here, you mentioned last quarter that B and I could be down 2% to 3% in 2024. And today's outlook commentary challenging B and I market. I guess I want to see first, if down 2% to 3% is the right way to think about this business for next year still? And then I'd also like to get your thoughts on how long this type of challenging environment could last. I think you just mentioned that maybe into 2025 is where it goes to, but Is there a chance that it goes beyond that?

Speaker 8

Just trying to get your broad kind of commentary there.

Speaker 2

Sure. So I think you're kind of spot on, on how you're thinking about 24 from that revenue perspective on the growth side. So I think you hit that. And yes, we do think it's going to go into 2025. And The reason we're more optimistic about 2026 and beyond, so just from a pure statistics standpoint, think they're saying that 50% of all leases are coming due in 2024 and 2025.

Speaker 2

So you're going to see that volatility with some of the compression Because opportunistically, when your lease comes up, you have a chance to kind of narrow your density a bit. So that's why we think it's going to be more of a 2 year problem than extended. But more importantly than that, I have to tell you, And I think you're probably seeing it and everybody on the call is seeing it too. Like the sentiment out there It's really becoming stronger and stronger on return to work. I could tell you in my CEO peer networks, All we're talking about is getting people back to the office for collaboration.

Speaker 2

There's all these studies now that are being released on Effectiveness of organizations by having people on-site and collaborating And the macroeconomic environment, frankly, are giving employers more power over saying You have to come into the office versus where we were a year or 2 ago when the labor situation was different, right? So there's a bit of a power shift going on right now in favor Of employers who want to bring people back. So I think it's episodic. I think it's 2425. I suspect 25 won't even be as difficult as 24.

Speaker 2

And that's our feeling and it seems to be the general sentiment.

Speaker 8

Awesome. Very, very helpful color. Maybe sticking with B and I then, maybe you could break out the growth rates between commercial cleaning and Engineering Services, I guess I'd just be curious how each of those are doing within the broader portfolio?

Speaker 2

Yes. We don't really guide to revenue or anything But I will tell you, I could give you some high level color, right? Engineering is just a lot more Stable, right? You do not see variability in on the downside because Again, if you have an office building and it requires 12 engineers To take care of the equipment between the day shift, the night shift and the weekend shift, that equipment has to be taken care of And it doesn't matter what the occupancy is, right? Because you have to run that equipment.

Speaker 2

You're Still delivering air conditioning to the building. You're still doing electrical and mechanical work. Pumps are still breaking that have to be fixed. So this stuff all happens. And that's why when you look at it being like 25% of B and I, you have that stability.

Speaker 2

It's the janitorial side that Ends up being more, I guess, flexible, if you will, having more variability.

Speaker 8

Got you. Makes sense. Maybe final one related more to M and D. Maybe you could characterize the growth across the end markets, Parsing out the e commerce logistics, I think, in biopharma and semiconductor, I'm not asking for any actual numbers here, just More curious how you'd rank these in terms of performance or maybe growth opportunities, as you head into 2024?

Speaker 2

Yes. So look, we've done a really good job on the e commerce side and we'll see some good growth there, but Probably more normalized, but it's really where we're focusing now like semiconductors, biopharma, some of the manufacturing We think those will be higher growth areas. Listen, I have to tell you like we'll have This little impediment in 2024 because of the rebalancing of 1 big client, but we have every confidence Thank you.

Operator

Thank you. Our next questions come from the line of David Silber with C. L. King. Please proceed with your questions.

Speaker 7

Yes. Hi. Thank you. I'd like to ask a question firstly on your Aviation segment. So clearly not your biggest segment in terms of revenues or absolute profit, But it was the best performer by a wide margin this year, both in revenue growth and in Well, operating income growth and especially margin improvement.

Speaker 7

So I know there's a number of initiatives that you've undertaken over the last couple of years, I would say are starting to bear fruit. But on a scale of 1 to 10 or 0 to 100 or whatever, where do you think ABM is in terms of fully exploiting the opportunities from your evolving Strategy is there. In other words, should we expect another meaningful improvement next year, assuming that, I don't know, air flight or air travel trends continue as positively as they've been? Thank you.

Speaker 2

Sure. That's a good question. So there's so much going on in aviation that we're excited about. Firstly, This had a new management team in place for the last couple of years that have been phenomenal both on the ability to operate the business And then on business development, we've been really excited about. And you may remember, David, that we started a few years back Shifting our focus to airports and less on airlines because we saw all the modernizations That were happening across the country and the perfect example of that is LaGuardia, just got named the best new airport in the world.

Speaker 2

Terminal B is like, I don't know, 80% of that airport. We do everything there. We just got a very large we call it APS, Which is ABM Performance Solutions, which is integrated facility services, basically where the client says, look, you self perform a bunch of these services. In addition to that, why don't you take care of all our subcontracted services as well. So basically bundling everything together and letting us run it.

Speaker 2

So we just got a massive contract at LaGuardia to handle all of Terminal B, also Providence School Systems we got. So We're excited about the ability to take this ABM Performance Solutions to airports around the country and our pipeline is growing there. So air travel is up. It continues to be up. Aviation had a really, really great year.

Speaker 2

It was also helped, if you remember, in Q1 by the parking project that happened in 2022. A lot of the expenses happened in 2022, but we got paid in 2023. So the profit flow through is about $11,000,000 or $12,000,000 So that helps as well. But we're very, very enthusiastic about aviation and its growth ability for next year and again, loving the team.

Speaker 7

Okay. Thank you for that. And I just would like to Yes, for a clarification on the share repurchase activity this quarter. So there were a couple of comments certainly already, but I'm just trying to Sharpened my understanding. Should I assume that the bulk of the 4th quarter activity was Kind of concentrated early in the quarter, in other words, after your stock was quite volatile 90 days ago.

Speaker 7

Is that When the activity was concentrated in, in other words, more opportunistic or would you say it was spread a little more evenly and hence maybe more, I don't know, programmatic or more balanced through the quarter. Thank you.

Speaker 3

Yes. No, it was definitely more front end loaded. And hence, when we look at the average price, which was $40.82 that is emblematic of kind of like where it was trading shortly After the Q3 earnings call.

Speaker 7

Okay, great. Thank you for that. And then last question would be For Scott, I guess. And Scott, I'd like you to maybe look back a few years and then compare it to today. But In the immediate aftermath of the pandemic, and I'm sorry, I should say this is kind of related to your Advantage competitive advantages and your ability to gain new business.

Speaker 7

But in the immediate aftermath of when the pandemic Your company was kind of in a very strong position in some ways to Capture new business because of your scale, because of your ability to source scarce equipment, better purchasing power, etcetera, as well as staffing, a number of advantages. And we're kind of in the post And at least in some parts of your business, commercial real estate, things are structurally a little softer. But my sense is that your go to market strategy or your value proposition to your core like bread and butter, Industrial or commercial customer is probably a little bit stronger even than it was A few years ago, just in terms of, maybe the enhancements from your internal Elevate program and whatnot. But how would you think about just for the core kind of bread and butter clientele across Education, manufacturing, etcetera. How has your value proposition Kind of shifted, let's say over the last couple of years and in particular as you kind of look at the post pandemic environment.

Speaker 7

Maybe if you could comment on that, that would be

Speaker 2

Yes, sure. Yes, look, I think for us as a brand, it's certainly I guess our positioning has changed a great deal. I mean, as we came through this pandemic different than our competitors, and I think our competitors would admit that too. We're developing our Enhanced Clean product. We got so much more exposure on social media, if you remember, we did a commercial.

Speaker 2

So, we've become more prevalent. And, it's just a different Swagger, I guess, if you will, when we're pursuing business development and talking to clients. And then you layer on top of that, David, all The investments that we're making in technology and to sit across from a client in the presentation And show them a digital dashboard and how we're monitoring their facilities and with this ABM Team Connect And how very shortly all of our team members in the field are going to have an app that is Connect them to the client to us. It's just going to be game changer. So, I just feel like this momentum That we're having is very palpable.

Speaker 2

And I would close off the comment by saying, we just had another Record year of new sales. We were to give you context a few years back, we put a true north Is it possible to possibly bring in $1,000,000,000 in new sales? And we were like that was our like aspiration that was really far out there. And this year, we did over $1,600,000,000 in new sales. I mean, what we brought in in new sales It's probably 3 times bigger than our nearest competitor in terms of total revenue, not what they brought in.

Speaker 2

I'm talking about their book of business. So We feel like we have a really compelling value proposition.

Operator

Thank you. Our

Speaker 1

I'll be brief on this.

Speaker 9

I know we've deepened a lot of things.

Speaker 1

So if you could talk a

Speaker 9

little bit about what you're seeing with education and the commentary Around the strength that you saw there and some of the prior new business wins, the benefits of that. Maybe you could bring us a little bit of an update as to maybe what Seeing there on revenue visibility, the margin profile there and the opportunity to continue to gain share in the space.

Speaker 2

Sure. We're like so happy about our education positioning. We're the clear number 1 in Education, we're split between K-twelve and Higher Ed. We have great growth this year, brought in over 100,000,000 Dollar is a new business, never done that before. And our margins are up since the pandemic.

Speaker 2

We've held on to that. And then What I said earlier, Mark, about our APS or our integrated solution that we Not only Gallaudet LaGuardia, but Providence School District. That's something that we're pitching now to our education clients that like, Listen, we can do so many things and self perform, put everything under us and we'll strategically manage it. Our pipeline It's really growing there. We picked up George Washington University last year.

Speaker 2

So we're just really excited about That industry group and we typically project like kind of GDP ish growth and hopefully we'll get to GDP plus Usually, there it's longer decision timeframes in that segment. But again, the proof is in the pudding and we just had Tremendous year this year. So I appreciate you asking that question.

Speaker 9

Absolutely. Thank you.

Speaker 2

Thank you.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Scott Salmers for any closing remarks.

Speaker 2

Hey, just I wanted to thank everybody for their interest and we were excited to close out the year the way we did. And 2024 will be a challenging year for everybody in the business environment. We know that. But I could just tell you that this Team at ABM is going to be attacking it with enthusiasm and we're really excited about it. So Have an amazing holiday, everybody.

Speaker 2

Hopefully, you get some time with your loved ones, and we look forward to giving you an update in Q1. So take care, everybody.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.

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Earnings Conference Call
ABM Industries Q4 2023
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