ABM Industries Incorporated (NYSE:ABM) Q1 2024 Earnings Call Transcript

ABM Industries Incorporated (NYSE:ABM) Q1 2024 Earnings Call Transcript March 7, 2024

ABM Industries Incorporated misses on earnings expectations. Reported EPS is $0.7 EPS, expectations were $0.72. ABM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the ABM Industries Inc. First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Goldberg, Senior with Investor Relations. Thank you, Mr. Goldberg. You may begin.

Paul Goldberg: Good morning, everyone, and welcome to ABM’s First Quarter 2024 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 2024 financial results. A copy of that release and accompanying slide presentation can be found on our website abm.com. After Scott and Earl’s prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today contain certain predictions, estimates, and other forward-looking statements.

Our use of the words, estimates, expects, 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 in our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers to GAAP financial measures is available at the end of the presentation and on the company’s website under the Investor tab. And with that, I would like to now turn the call over to Scott.

Scott Salmirs: Thanks Paul. Good morning. And thank you all for joining us today to discuss our first quarter results. We’re off to an excellent start in 2024. First quarter revenue increased 3.9% to $2.1 billion, all of which was organic growth. Our Aviation team is doing a great job of leveraging ABM’s leading position in a robust travel market, winning significant new business with both airports and major airlines, which I’ll speak more about later. Manufacturing and Distribution and Education also both generated solid revenue growth in the quarter with M&D capitalizing on positive demand trends and an effective sales strategy. Despite some project delays and winter weather interruptions, Technical Solutions grew revenue double digits, driven by the closeout of several battery energy storage system projects in Q1.

We were pleased to sign a large contract with a leading national retailer at more than 150 sites over a multiyear period. This is a large and exciting program for us, showcasing the breadth of capabilities that ABM can now offer. It’s also a testament to our reasonable team, as this contract represents a significant expansion of our relationship with this particular client, both in the scope of services and the number of sites. Our B&I business remained resilient, benefiting from end market diversification and from strong cost management. B&I’s revenue was essentially flat year-over-year, reflecting softer demand within the commercial real estate market. We also continue to effectively push pricing across our business, resulting in adjusted EBITDA and margin that were consistent with our expectations.

As a result of the recognition of certain discrete tax benefits and our solid Q1 operating results, we are raising our full year outlook for adjusted EPS which Earl will discuss in more detail. I’ll now discuss the demand environment within each of our industry groups. Let’s start with B&I. Office density and vacancy rates remain largely unchanged from three months ago with density at 50% plus and vacancy at approximately 20%. While we’re not expecting material changes in office utilization trends over the next few quarters, we believe there will be a gradual increase in the time employees spend at the office over the next couple of years. In this operating environment, we remain confident in B&I’s resilience. We continue to focus on better performing Class A office space while providing a broad mix of services including engineering and parking.

Our strategy continues to largely mitigate ongoing pressure within commercial real estate market and enhance our long-term growth opportunities. For example, we saw double digit revenue growth in our sports and entertainment business, driven by strong consumer demand for live sports and concerts. I’m so proud that the ABM team was responsible for facility services at the Super Bowl at Allegiant Field in Las Vegas last month and did an amazing job. Additionally, we recently won a multiyear contract for facility services at Chase Field in Arizona, the major league home of the Diamondbacks. And we’re pursuing opportunities at several other sports and concert venues. Looking forward, we believe we will outperform the underlying commercial real estate markets given our flexible labor model, cost management efforts, and the diversity of our service lines and clients.

Moving to Aviation, the leisure business travel markets, including international travel, have remained strong, and we’ve continued to renew business, including a large janitorial contract at Tulsa Airport and an airline cabin cleaning contract in Boston, with more on the way. One reason for our success is our branded ABM Clean service offering, which is gaining significant traction in the market. ABM Clean is a technology-driven, demand-based cleaning service that integrates data from beacons, guests and user feedback, as well as from real-time flight schedules, which allows our on-the-ground teams to deliver enhanced outcomes for our clients and a better travel experience for the public. Because it’s demand-based as opposed to schedule-based, ABM Clean adapts to the dynamic conditions in the airports.

We believe ABM is the only company in the industry that can self-perform operations and provide design for purpose technology, which can be fully integrated into our client systems. We currently have ABM Clean up and running at 10 locations with several other airports and airlines interested in our innovative solution. To demonstrate our capabilities in the aviation market and the advantage of our solutions, we will host a small analyst tour at LaGuardia Airport Terminal B in late April. Terminal B was named the world’s best new airport terminal at the 2023 World Airport Awards. Please let Paul Goldberg know if you’re interested in attending. Moving on to Manufacturing and Distribution, demand has remained solid reflecting a favorable industrial economy as well as our focus on expanding our service offerings and presence in fast growing markets like biopharma, semiconductor and industrial manufacturing.

As I’ve mentioned on prior calls, we knew a large and valued M&D client would rebalance a large portion of their work needs in 2024 as part of their normal procurement process and changes in their overall strategy. This process is largely done and our initial estimates of the rebalancing were reasonable and our full year forecast accurately incorporates the anticipated impact. We continue to be focused on gaining new clients, expanding our relationship with existing clients through new locations and services and pursuing opportunities and other end models. We expect a segment to generate mid to high single digit annual revenue growth over the midterm. However, 2024 will reflect the impact of the rebalancing. Moving to Education, markets remain solid and we’re effectively managing labor costs.

While we face tough comparables in the back half of 2024 as some big wins in 2023 and we continue to work diligently to a new business and lead with our ATS self-performed platform. Moving to Technical Solutions, segment backlog is now approximately $590 million with the addition of $180 million of new microgrid business from the contract I mentioned earlier. This well-known retailer selected ABM to enhance their energy resilience at more than 150 of their locations over the next few years. We will accomplish this through the installation of individually customized microgrids at each site. This project also provides us the opportunity to cross-sell additional services like maintenance and EV infrastructure over the coming years as the systems at each location become operational.

In total, EV and microgrid services now represent nearly two -thirds of ATS’ backlog. Additionally, backlog for our bundled energy solutions offering improved on a sequential basis. While modest, this improvement may indicate a positive shift in market sentiment, although we expect the overall market to remain challenging in 2024 due to the interest rate environment. Our acquisition of Able has significantly expanded our growth opportunity at ATS, and we believe can build our positive momentum going forward. While the exact timing of project closed outs can vary quarter by quarter based on externalities such as weather and permitting, we are confident in our leading-edge technology and our outstanding team will continue to renew business and deliver improved results.

As we grow in scale over the next few years, we expect a quarter-to-quarter variability to dissipate. Turning now to our ELEVATE initiative. Following the successful financial close on our new cloud-based ERP system for the Education segment last year, we plan to implement this system for B&I and M&D later this year. Much of our ELEVATE efforts are centered around this implementation, which includes enhanced capabilities for our operations and back office teams, including connection to several key systems such as procurement and payroll. We’ve continued to roll out ABM Connect, our team member mobile app that delivers on-demand training, safety moments, time clock integrations, and task management thesis. Early feedback on this tool from our frontline team members and managers is super positive.

When distributed at scale, we believe that we’ll drive higher levels of engagement for our team members and better outcomes for our clients, ultimately resulting in even higher customer retention rates. In summary, we’re pleased with the start of the year and our positioning as we begin the second quarter. Our markets have generally been constructed despite an unsettled macroenvironment and the pressures on commercial real estate. And our teams have done a great job winning new business and satisfying our clients. While there’s so much to be accomplished this year, we are focused on achieving our goals supported by our cash generating business, balance sheet optionality and the best team in the industry. With that, I’ll 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 of $2.1 billion increased 3.9%, all of which was organic. Revenue growth was led by Aviation, which is up 18%, and Technical Solutions which grew to 13%. Also of note, B&I, our largest segment, declined less than 0.5% despite market headwind. Moving on to slide 6, net income in the first quarter was $44.7 million or $0.70 per diluted share, up 16% and 21% respectively versus last year. These increases were largely driven by lower year-over-year Elevate costs, The recognition of certain discrete tax benefits of $4.4 million or $0.7 per share and higher segment earnings on higher revenues.

These gains were partially offset by higher corporate investments, which were primarily technology related, and the impact of prior year self-insurance adjustments. Adjusted net income of $54.8 million increased 4%, and adjusted earnings per diluted share of $0.86 was up 9% over the prior year period. The year-over-year increase in adjusted net income primarily reflected certain discrete tax benefits and higher segment earnings, including the benefits from price increases, partially offset by higher corporate investments and increased interest expense. The growth in the adjusted EPS is due to higher adjusted earnings on a lower share count driven by our share repurchase activities last year. Adjusted EBITDA declined 5% to $116.7 million and adjusted EBITDA margin decreased 50 basis points to 5.9%.

These year-over-year changes were generally in line with our expectations, reflecting higher investments as well as adverse project mix in Technical Solutions. Now turning to our segment results beginning on slide 7, B&I revenue decreased less than 0.5% to $1 billion, has strong demand in sports and entertainment, and solid results in parking offset most of the impact of softer demand and commercial real estate market. Of note, we expect B&I revenue to be down low single digits in Q2 on a year-over-year basis as certain clients transition to new suppliers as a result of our disciplined price and margin strategy. Operating profit in B&I increased nearly 5% to $79.6 million and operating margin improved to 7.7% as positive business mix, price increases, and cost actions more than offset sluggish demand dynamics in commercial real estate.

Aviation revenue grew 18% at $249.5 million, 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. Aviation’s operating profit was $9.7 million versus $8.3 million in the prior year and operating margin was unchanged at 3.9%. This performance included improved labor utilization, which was largely offset by approximately $2 million of costs related to reconciliation under customer contracts completed in prior years. Absent these costs, operating margin would have exceeded 4.5%. Turning to slide 8, Manufacturing and Distribution revenue grew 5% to $400.9 million, reflecting broad-based demand. Operating profit increased to $41.3 million while operating margins declined 40 basis points to 10.3%.

Profit and margin performance was largely due to changes in customer mix. Education revenue increased 2% to $220.1 million, benefiting from the addition of new clients earlier in the year. Education operating profit was $12.7 million, up 8% over the prior year period, while margin increased 30 basis points to 5.8%. These increases were largely attributable to a modestly improved labor market that resulted in reduced overtime expense. Technical Solutions revenue grew 13% to $165.9 million, largely due to closeouts of a number of battery storage projects executed by RavenVolt and growth in our mission critical and power business. As Scott noted, Technical Solutions’ backlog exceeded $590 million at the end of the first quarter, with about two-thirds of it actionable within the year.

Technical Solutions’ operating profit was $6.6 million and margin was 4%, compared to operating profits of $7.2 million, and margins of 4.9% last year. These declines were largely due to project mix. We expect ATS margin to climb higher as the year progresses. Moving on to slide 9, we ended the first quarter with total indebtedness of $1.4 billion, including $58.2 million of standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.4x. At the end of Q1, we had available liquidity of $507.8 million, including cash and cash equivalents of $58 million. Free cash flow in the first quarter, which is our seasonally fastest quarter was in line with our expectations at negative $14 million. Interest expense was $21.3 million, up $1.5 million from the prior year period, driven by higher year-over-year interest rates.

Our Q1 tax rate of 17.2% included certain discrete tax benefits of roughly $4.4 million. Finally, our current total authorization under our share repurchase program stands at $210 million. Now, let’s move on to our full year fiscal 2024 outlook, as shown on slide 10. As Scott mentioned, we are raising our full year guidance for adjusted EPS based on the flowthrough of the discrete tax benefits recognized in the first quarter and our solid Q1 operating results. We now expect full year 2024 adjusted EPS to be in a range of $3.30 to $3.45 up from $3.20 to $3.40 previously. All other elements of our outlook remain unchanged from our last quarterly call. Adjusted EBITDA margin is expected to be between 6.2% and 6.5%. Interest expense is estimated to in the range of $82 million to $86 million, and a normalized tax rate before discrete items is expected between 29% to 30%.

Lastly, full year normalized free cash flow is expected to be in the range of $240 million to $270 million, excluding the estimated $45 million of Elevate and integration costs, with the majority being Elevate investments. With that, let me turn it back to Scott for closing comments.

Scott Salmirs: Thanks, Earl. I want to thank our teams for a great start of the year. Our success reflects our resilient business model that benefits from our Elevate investments, and consistent execution by the ABM team. As we move forward, I’m confident in our ability to build value for our stakeholders as we work tirelessly towards achieving our goals and evolving ABN into the technology-driven leader of facility services. With that, let’s take some questions.

Operator: [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

Tim Mulrooney: Scott, Earl, good morning. I wanted to ask about the guide really quick. You listed a couple reasons for raising that guide in the press release. Among them was resilience in B&I segment. Does that mean that your outlook for this segment has changed for the full year? You still kind of expecting that organic decline in the 2% to 3% range?

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Q&A Session

Scott Salmirs: Yes, no, yes, we are still expecting that. I think, look, we have — we feel even more confident in how we’re going to perform and how we guide it, because as you saw for this quarter, we were flat year-over-year, but there’s no question that it’s realistic to expect low single-digit declines as we see some compression with our clients, but we feel really good about where we are, and we continue to see people come back to the office. So our outlook is positive, Tim, but in line with the way we guide it.

Tim Mulrooney: Okay. That’s helpful, Scott. I’m going to switch gears really quick, because I wanted to ask about this microgrid project you announced. Obviously, a really big win, $180 million. My question is, how did that come about? Like, was this a retailer that was an existing client of yours that you introduced the RavenVolt team? Oh, and can you also remind me, like, what the margins are on a microgrid project like this, relative to maybe a more traditional leveled solutions project?

Scott Salmirs: Sure. Yes, so it’s an existing client, and it’s actually a client that we have across other industry groups as well, so it was just a really great win for us, and especially when you talk about installing these microgrids, which really consist of switchgear and generators across 150 different sites over multiple years, right? So we’re excited about that, and it’s going to have double-digit margins, right? This is — the switchgear and generators are a higher margin profile than the projects that we did last year that were — that actually ended up in this quarter, which were battery related projects. Like, if you looked at ATS this quarter, you saw a really great growth, but on the bottom line, it wasn’t really up to what you would normally expect in ATS, and that’s because the mix this quarter was around the large battery projects, which again doesn’t have the margin profile that the national retailer project is going to have and that’s going to come back in — that’s going to really manifest itself in the second half of the year with the bulk of it being in ‘25, but it’s super exciting for us and our pipeline is huge right and I think we mentioned it but if you look at the ATS segment, Tim, two-thirds of our backlog now is around microgrids and EV.

So we feel really a big sense of satisfaction that our thesis is proving out that these are the right areas to be in.

Operator: Our next question comes from the line of Andrew Wittmann with Baird.

Andrew Wittmann: Yes, great. Good morning, and thanks for taking my question, guys. I guess I’ll keep going on ATS a little bit more here. And I guess, Scott, I wanted to just understand, there was a comment on some timing as it related to the margin performance and Technical Solutions. I don’t think this is new. There’s been like permit delays for some of these projects. Is that what you’re referring to in this case here today and this quarter? And can you talk about how the projects that were previously delayed are proceeding? Do you have certain start dates for those contracts now, or were those the ones that were maybe completed in the quarter? And in the case that you don’t have great visibility on start dates for some of these projects, can you talk about what your options are to manage your profit margins while you wait for them to begin?

Scott Salmirs: Yes, sure. I mean, look, no question that it feels like, I guess, even to the outside world that it could be a little frustrating, right? Because what we’re gravitating to on ATS is so much project-based. And when you’re doing projects, and they’re weighted this way, you have weather issues to start. You have permitting issues to start. You have supply chains, all these things. And even at ABM, we’re getting used to this, right? With the RavenVolt acquisition and leaning into EV. So I think this choppiness is something that until we get really big scale in this area, it’s just not going to smooth out. So we’re going to have some lumpiness. For this quarter, it was really about the fact that the projects that happened in this quarter were the, it was really the projects that we talked about last year, which were the battery storage projects.

And that’s kind of the lower margin end of the microgrid work, whereas generators and switch gear is the higher margin end. And that we’ll see towards the back half. So it is tough. We’re not going to scale up and down SG&A quarter by quarter. It’s not a quarter by quarter again. Andrew, where I feel good is that the look back when you look at FY24 is going to feel really good on ATS, but quarter by quarter it’s just going to be choppy.