ABM Industries Incorporated (NYSE:ABM) Q1 2023 Earnings Call Transcript

ABM Industries Incorporated (NYSE:ABM) Q1 2023 Earnings Call Transcript March 8, 2023

Operator: Greetings and welcome to the ABM Industries First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Paul Goldberg, Senior Vice President, Investor Relations for ABM Industries. Thank you. You may begin.

Paul Goldberg: Good morning, everyone, and welcome to ABM’s first 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 Salmirs, our President and Chief Executive Officer; and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our first quarter 2023 financial results. A copy of the release and an accompanying slide presentation can be found on our website abm.com. After Scott and Earl’s prepared remarks, we will host a Q&A session. But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates and other forward-looking statements.

Our use of the words estimate, expect and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies our presentation, as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers, GAAP financial measures is available at the end of our presentation and on the Company’s website under the Investor tab. And with that, I would like to now turn over the call to Scott.

Scott Salmirs: Thanks, Paul. Good morning and thank you all for joining us today to discuss our first quarter results. ABM posted solid results in the first quarter, reflecting strong execution by the ABM team, amid a challenging operating environment. Organic revenue grew 1% even as we experienced a $35 million reduction in disinfection-related work orders versus the prior year period. Adjusted EBITDA was essentially unchanged from last year as we effectively mitigated much of the impact from higher wage costs, labor shortages and lower disinfection-related work orders. In all, ABM generated first quarter revenue of $2 billion with an adjusted EBITDA margin of 6.4%, which remained well above pre-pandemic levels, reflecting improved operational efficiency that we believe can be enhanced over time through our ELEVATE initiatives.

So, I’m certainly pleased with our performance in the first quarter and that we remain on track to achieve our full-year outlook. Despite continued economic uncertainty and persistent inflationary pressures, our business remains resilient given the essential nature of our services. Our clients are increasingly focused on attracting talent and retaining customers by creating and maintaining environments that are inviting healthy and energy-efficient. We remain uniquely positioned to support them, given our financial strength and industry-leading capabilities, and the fact that we continue to innovate, has never been more appreciated or important to our clients. I’ll now discuss the demand environment for each of our industry groups. Beginning with B&I, office occupancy rates in the first quarter remained at relatively stable levels at around 50% on a blended basis, though occupancy varies region by region and by day of the week.

We don’t expect significant changes to these trends in 2023 as employers continue to accommodate remote and hybrid work. So office occupancy will likely marginally tick up. Our expectation is that through 2023 B&I will be the steady performer we are accustomed to. Moving to Aviation, following a rapid recovery in travel last year, consumer and business travel, including parking and transportation has largely returned to pre-pandemic levels. As a result, we anticipate that our Aviation revenue growth rate in 2023 will be reflective of more normalized overall market growth as compared to the accelerated level we experienced in fiscal 2022. We do expect continued growth in our ABM Vantage parking solution, which is proving to generate higher revenue for our clients, while improving the traveler experience.

That all being said, labor cost inflation and worker availability remain ongoing challenges in this segment, in part exacerbated by the lengthy TSA background check process that we’ve spoken about. I’m pleased to announce that after quarter end, we received formal approval on the parking project we discussed last quarter. As you’ll remember we had completed much of the work in 2022, but we were awaiting final client approval in order to recognize the revenue and associated earnings. The project revenue will be recognized in Q2. Moving on demand in Manufacturing and Distribution continues to be strong, and our team is doing an outstanding job of driving organic growth by expanding the served markets and bringing on new clients. As an example, ABM has won nearly $50 million of new business in the U.S. semiconductor manufacturing market over the past 12 months.

This area is experiencing renewed growth, driven by the recent enactment of the CHIPS and Science Act. This legislation provides approximately $280 billion to fund domestic research and manufacturing of semiconductors. We expect revenue growth in our M&D segment to remain solid for the remainder of the year. Turning to Education. The addition of sizable new clients in the fourth quarter of 2022 helped drive solid mid-single-digit organic revenue growth in this segment. We have a strong pipeline of new business opportunities in the fiscal year, and I’m confident ABM will win our fair share given our competitive positioning. While labor cost inflation in non-unionized markets continues to be a challenge for the segment, we incrementally reduced over time this quarter by filling open positions more quickly than in 2022, and our focus on hiring in this area should prove beneficial in the near term.

In Technical Solutions, we continue to see the benefits from the demand for electric vehicles and the consequent need to expand EV charging infrastructure. This shift to EVs will be a multi-year trend, providing ample opportunity for ABM in the future. After several quarters of strong growth, our EV-related revenue declined in the first quarter, primarily reflecting program timing and supply chain delays. Demand remains strong and we expect the pace of EV charger installations to pick up in the second half of the year as we begin to deliver on recently won programs. RavenVolt continues to experience strong customer demand for its microgrid solutions and the sales pipeline continues to grow, though first quarter installations were impacted by some lingering supply chain constraints in what is typically a seasonally slower period.

Total ATS backlog has grown significantly to nearly $450 million supporting our outlook for strong full-year revenue growth, escalating in the back half of the year. From a strategic perspective, we’ve continued to make progress on our ELEVATE initiatives. Most notably, we’re developing a new mobile app for our frontline team members. This app will facilitate a smoother time and attendance experience, offer greater clarity on work schedules on tests and pride quick access to shift change notifications. We should begin piloting this app by the middle of this year with a rollout plan for 2024. We’re also beginning to scale a workforce management tool that enhances visibility into labor productivity levels across our portfolio of accounts. These advanced analytics will enable more efficient labor management over time and also provide actionable insights to enhance the efficiency of lower-performing buildings.

We’re also in the final stages of testing our cloud-based ERP financial system for its initial deployment. This segment-by-segment rollout will begin midyear as part of our ELEVATE technology roadmap. From an IT and innovation standpoint, we are at an exciting time for ABM as a great deal of hard work begins to get embedded across the organization. Lastly, our team has been making some great progress on our ESG journey, which resulted in a couple of nice accolades for ABM. We were recently recognized by Newsweek as one of America’s Most Responsible Companies. And we also won the prestigious SEAL Business Sustainability Service Award. We also formally launched an initiative called ABM Impact Groups, which are voluntary employee-led groups, whose aim is to foster a diverse inclusive workplace aligned with ABM’s mission, values and business strategy.

Before I turn it over to Earl, I want to make a few summary comments. I couldn’t be proud of the entire ABM team, who continue to deliver solid results, despite challenging market conditions. ABM’s resilience and our ability to adapt, innovate, scale and deliver results in dynamic conditions is truly a hallmark of our company. As we move forward, I’m confident that our team will continue to provide our clients with extraordinary service and build value for our shareholders. Our business is supported by a substantial base of recurring revenue in our janitorial, engineering and parking services. Where we serve more than 20,000 clients and we will continue to invest organically and in adjacent businesses with large addressable markets and high growth rates and margins, which were certainly demonstrated with the ramp-up of our EV charging business and the acquisition of RavenVolt.

As we execute this strategy, we see ABM evolving into a higher growth, higher margin facility solutions provider underpinned by the resilient strength of our core businesses. Now, I will turn it over to Earl for the financials.

Earl Ellis: Thank you, Scott, and good morning everyone. For those of you following along with our earnings presentation please turn to Slide 5. First quarter revenue increased 3% to $2 billion, reflecting organic revenue growth of 1% and a 2% contribution from the acquisitions of Momentum and RavenVolt. As a reminder, we will anniversary the acquisition of Momentum in the second quarter. Moving on to Slide 6, net income in the first quarter was $38.5 million or $0.58 per diluted share, down from $76 million and $1.11 per diluted share last year. The decrease in GAAP net income partially reflected higher interest expense and labor costs. The absence of the benefit from a prior year insurance adjustment, lower volume of higher-margin virus protection services and the absence of a gain on sale of assets recorded in the prior year period.

Adjusted net income decreased 18% to $52.7 million an adjusted earnings per share was $0.79, a decrease of 16% from the prior year period. The decreases in adjusted net income and adjusted EPS were primarily due to higher interest expense and wage inflation, partially offset by tight cost controls. Adjusted EBITDA of $122.7 million was essentially flat with the prior year period and adjusted EBITDA margin was 6.4% versus 6.6% last year. This performance largely reflects the decline in higher-margin disinfection services as well as higher labor costs, which were partially offset by price increases and effective cost management. Now turning to our segment results, beginning on Slide 7, B&I revenue increased 1% to over $1 billion, primarily driven by a contribution from acquisitions.

Excluding acquisitions, organic revenue declined 1%, mainly reflecting a lower volume of disinfection-related work orders versus prior year. Operating profit in B&I decreased 9% to $75.9 million and operating margin was 7.3%, down 80 basis points from the prior year. Operating profit and margin declines were largely due to a change in business mix. Aviation revenue increased 6% to $212.3 million, marking the seventh consecutive quarter of robust year-over-year revenue growth. This improvement was driven by increased leisure and business airline traffic as well as related increases in parking activities. As Scott mentioned earlier, we will recognize the revenue for the parking project in Q2 as we now have received official client acceptance.

Aviation’s operating profit was $8.3 million versus $8.9 million in the prior year period and margin was 3.9% compared to 4.4% last year. Operating profit and margin reflect the impact of higher labor costs and labor availability challenges, partially offset by price escalations. Turning to Slide 8, manufacturing and distribution revenue grew 6%, to $380.5 million reflecting solid market demand and the addition of clients in new end markets such as Life Sciences and semiconductor manufacturing. Operating profit increased 1% to $40.9 million on higher volume, while operating margin declined 60 basis points, 10.7%. Margin was impacted by lower levels of disinfection-related work orders. Education revenue increased 4%, $214.9 million, benefiting from the addition of new clients in the fourth quarter of 2022.

The new business pipeline in education remains favorable and we expect education to continue to post positive year-over-year growth in 2023. Education operating profit was $11.8 million, down 6% from the prior year period, while margin decreased 50 basis points to 5.5%. These declines were attributable to lower enhanced clean revenue as well as higher wages including overtime expenses, partially offset by price increases. Technical Solutions grew revenue 4% to $147 million driven by our recent RavenVolt acquisition. Organic revenue declined 9% mainly due to the timing of large EV charger installation program and the push out of some bundled energy solutions projects as well as last year’s sale of customer contracts. Backlog in ATS is nearly $450 million and we are expecting a strong back half of the year, assuming supply chains are supportive.

ATS operating profit was $7.2 million and margin was 4.9%. This compares to operating profit of $9.2 million and margin of 6.5% last year, after adjusting for a $7.7 million gain on the sale of customer contracts. The decreases in margin and profit were largely driven by changes in service mix and the amortization of intangibles related to the RavenVolt acquisition. Moving on to Slide 9, we ended the first quarter with total debt of $1.5 billion including $83.6 million in standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.6 times. At the end of Q1, we had available liquidity of $651.2 million including cash and cash equivalents of $87.9 million. Free cash flow in the first quarter, which is generally softer from a seasonable perspective, due to compensation and tax payments was negative $84.8 million, and included our final $66 million installment of our CARES Act repayment.

Interest expense was $19.8 million in the first quarter, up nearly $14 million over the prior year period and about $4 million sequentially from Q4. The increase was due to significantly higher interest rates as well as a year-over-year increase in total debt. Now let’s move on to our full year fiscal 2023 outlook, as shown on Slide 10. Our expectations for the full year are largely unchanged in the aggregate. We continue to expect GAAP EPS to be in the range of $2.43 to $2.63, with adjusted EPS to be in the range of $3.40 to $3.60. Interest expense is expected to be between $71 million and $74 million in 2023 and is trending towards the higher end of the range. Our tax rate before discrete items is anticipated to be between 29% and 30%. As we discussed last quarter, we expect to grow adjusted EBITDA at a mid-single-digit rate with an adjusted EBITDA margin between 6.4% and 6.8%.

Full year 2023 free cash flow is expected to be between the range of $270 million to $300 million before the final installment of our CARES Act repayment of $66 million, which was made in Q1. And combined integration and ELEVATE costs of about $75 million to $80 million. And as we communicated last quarter with respect to the cadence of earnings, we expect approximately 45% to 50% of full year adjusted earnings per share to be generated in the first half of the year. With that, let me turn it back to Scott for closing comments.

Scott Salmirs: Thanks, Earl. I’m very excited about the future of ABM. Nobody in our industry matches the scope of our services, the scale of our operations or the strength of our balance sheet. I’m confident we’ll deliver a solid 2023 and continue to make progress toward our 2025 goals. With that, let’s take some questions.

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Q&A Session

Operator: Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Samuel Kusswurm: Hi. This is Sam on for Tim. Thanks for taking our questions here. I guess to start, I think we had a lot of discussions around labor availability and the difficulties in finding labor. I was hoping you could also comment on how labor turnover has been trending over the last few quarters and if any of the platform investments that you’re making might meaningfully bring that up?

Scott Salmirs: Sure. Thanks, Tim (sic) . Look, I think we’re starting to see a little bit of a stabilization on turnover. It’s still not great, right? The market is still tough. But for us, we’ve been really doubling down on talent acquisition. We have a new leader that’s been with us for about a year, and we’re building that team, and we’re getting some really good traction. And we’re also supplementing it with tools we have, what we call a team member retention tool that’s doing analytics. We have — we’ve talked before about the fact that ABM now has data scientists onboard, and we’re just looking at all this data and figuring out where the turnover is, where it’s more acute and how to attack it. And it’s worked out. I mean, even in a segment like Education, where we had much higher turnover just because of the nonunion nature of it, we’re starting to see more applicant flow, more people starting jobs because we’ve attacked it with tools.

Samuel Kusswurm: Okay. I appreciate the color there. Maybe pivoting to our eMobility business. Many of the folks that we speak to are initially surprised that you’re one of the largest installers of EV chargers. And my sense is, as you install more microgrid solutions, that same surprise will show up. I guess, can you help explain why you’re able to come in and provide these solutions at such a large scale? Is it that you’re working with the same point of contact as your other services or maybe leveraging the same labor? Just anything to help us understand that better would be helpful.

Scott Salmirs: Sure, Tim (sic) , it’s about focus, right? This is something we’ve been on for two or three years now. We saw the signs on EV and we built a team around it, and we’ve just been able to scale it. No pun intended, there’s a lot of energy around it in our organization, and we feel really, really good about it. And we had a little bit of a slowdown in Q1 because we had a major installation with a large dealership that was rolling off, and we are starting another massive installation of over 1,000 charges with a top three automaker. And that, we thought was going to start a little earlier than it’s kicking off. So that’s why you see in Q1 a little bit of a dip, but the pipeline is super strong and we feel really great about it.

Samuel Kusswurm: Excellent. Appreciate the color.

Scott Salmirs: Great.

Operator: Thank you. Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Sean Eastman: Hi team, nice start to the year. And thanks for taking my questions. I just wanted to start on ATS since that’s kind of where the — some of the noise is in the first quarter. It sounded like from Earl’s comments that we’re assuming some improvement in the supply chain in the second half. I just — in light of that, I wanted to understand the nature of the supply chain-related delays early in the year so we can track them.