ABM Industries Incorporated (NYSE:ABM) Q4 2022 Earnings Call Transcript

ABM Industries Incorporated (NYSE:ABM) Q4 2022 Earnings Call Transcript December 13, 2022

Operator: Greetings and welcome to the ABM Industries Inc. Fourth Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Goldberg, Senior Vice President, Investor Relations. Thank you, Paul. You may begin.

Paul Goldberg: Good afternoon everyone, and welcome to ABM’s fourth quarter 2022 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 afternoon, we issued our press release announcing our fourth quarter 2022 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 today, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements.

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

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Scott Salmirs: Thanks, Paul. Good afternoon, and thank you all for joining us today to discuss our fourth quarter results and 2023 guidance. ABM posted solid results in the fourth quarter, capping off a strong year. Organic revenue growth of 5.8% was broad-based, driven by robust growth in our e-mobility, aviation, manufacturing and distribution, and education businesses, complemented by consistent organic growth in B&I. The ABM team continued to execute well mitigating much of the impact from higher wage costs and labor shortages, while advancing our ELEVATE initiatives and moving toward our 2025 goals. ABM generated fourth quarter revenues of over $2 billion with an adjusted EBITDA margin of 6.8%. Our adjusted EBITDA margin remained well above pre-pandemic levels reflecting improved operational efficiency that we believe is sustainable and can be enhanced over time through our ELEVATE initiative.

Our solid financial and operational performance in fiscal 2022 demonstrated ABM’s underlying brand strength and enhance competitive positioning in a challenging market environment. Despite the expected decline in high margin disinfection related work orders, significant wage inflation, rising interest rates, and a historically tough labor market, the ABM team delivered strong full-year EBITDA growth of 9.5% with an adjusted EBITDA margin of 6.6%. Additionally, with our expanded breadth of service offerings, we generated new sales totaling more than $1.3 billion, another record year. I’ll now discuss the demand environment for each of our industry groups. Beginning with B&I, office occupancy rates in the fourth quarter remained at relatively low levels, but continue to modestly increase, a trend we expect to continue into 2023.

Similar to 2022, we anticipate our operating margin to remain steady in 2023 as we maintain our base of existing customers, while leveraging our scale and unrivaled breadth of services to expand our growth opportunities. Recently, we won a sizable contract expansion with Google to serve their newly built Bay View Campus and we see additional opportunities to expand our partnerships with other significant customers. Moving to aviation, travel, including parking and transportation has nearly returned to pre-pandemic levels. So, we expect our growth rate in aviation to moderate in 2023 from the elevated level we experienced in fiscal 2022. We expect continued growth in our ABM Vantage parking solution as our airport clients continue to migrate to integrated touchless parking solutions that generate higher revenue and improve the traveler experience.

On the cost side, labor availability remains a challenge in the aviation market as time to hire is the biggest impediment due to the TSA’s lengthy background check process. As we’ve discussed previously, in this labor market, speed to hire is important and a protracted background check process causes headwinds. Demand in manufacturing and distribution continued to be solid, in-part reflecting our successful efforts to expand our business with existing customers in the e-commerce and automotive markets. ABM is also winning new business in faster growing and under penetrated markets like Life Sciences. In fact, we just won a sizable new contract with a large pharmaceutical manufacturer in the fourth quarter. And given the significant growth opportunity in this sector, we view Life Sciences as a strategic priority for 2023.

In education, the addition of important new clients in the fourth quarter helped drive organic growth of 7%. We’re also seeing a good deal of new contract proposal activity, providing ample opportunity to win new business in 2023 from a variety of potential clients, both from those who currently outsource, as well as those who are contemplating outsourcing. However, labor cost inflation in non-unionized markets, especially in the southern eastern regions of the U.S. continues to be challenging for this segment. That being said, we’ve made steady progress in filling open positions. So, we’re optimistic moving forward. In Technical Solutions, we continue to experience robust demand for our e-mobility charging solutions, where revenue more than doubled over the prior year period.

For the fiscal full-year, e-mobility revenue grew to nearly $130 million from a base of just 36 million in 2021. We also saw strong growth in our mission critical end-markets where we provide comprehensive services for data centers, 911 call centers, and national defense related facilities. We expect Technical Solutions to show strong growth in 2023, aided by the U.S. Infrastructure Bill and recent passage of the Inflation Reduction Act. In addition, our results should benefit from the contribution from RavenVolt, which recently signed a sizable contract with a national logistics solution provider to design and install a backup battery storage system at numerous locations over the next few years. So, Technical Solutions is well-positioned to benefit from long-term secular trends and remains an area of strategic focus as we seek to identify future acquisitions that broaden our capabilities.

Over the past year, we made significant progress with respect to our ELEVATE initiative. Most recently, we developed a team member retention predictive model that forecasts where and why we may see attrition rise. With this predictive information, we can proactively implement an effective team member retention strategies, including bolstering HR recruiting support and ultimately reduce labor acquisition cost. We also developed and started piloting a workforce management tool that provides enhanced visibility into productivity levels across our portfolio of accounts. When fully shaped after a pilot period this year, we should start seeing scaled improvements in overall labor spend, and meaningful insight into low performing buildings and how to solve the challenges we may have.

Lastly, among all the other initiatives that are , we continue to move forward with our cloud based ERP system, which we expect will begin deployment mid-year 2023 as part of our ELEVATE Tech roadmap that runs through 2025. Before I turn the call over to Earl to discuss the Q4 financials and guidance, I want to make a few summary comments. First and most importantly, I’m extremely proud of our talented and dedicated team who delivered extraordinary financial and operational results this past year, despite the toughest labor market on record. By putting our customers first, our team has done a tremendous job in strengthening our client relationships and opening up new growth opportunities to provide additional value-added services. At the same time, we made significant progress on our ELEVATE initiatives laying the groundwork that will help accelerate our organic growth and enhance our profitability over the long-term.

As we enter 2023, now is a good time to provide a status update on how we are progressing toward our 2025 goals of in sales, adjusted EBITDA margin of 7.2%, and $400 million of free cash flow. We were already well on our way towards achieving $9 billion in revenue, driven by solid organic growth complemented by acquisitions, including Able, Momentum and RavenVolt with more to come. We also remain confident in our adjusted EBITDA margin and free cash flow targets. The 6.6% margin we posted this year is consistent with our expectations and represents a solidified base from which we aim to add 60 basis points of incremental margin over the next three years. Given current challenges in the labor market, this projected margin step-up is not likely to be a linear progression, but the end target remains fully achievable as we expect labor costs and inflation to ease in the coming couple of years.

This will coincide with our evolving service mix. Additionally, margin should benefit over the next few years from increased operational efficiency and cost savings associated with our ELEVATE investments I outlined earlier. Our vision for ABM remains clear. We strive to be the leading facility solutions provider in terms of size, scale, and client and team member satisfaction. ABM remains strongly positioned supported by a substantial base of recurring maintenance related revenue, including janitorial and engineering services where we serve more than 20,000 clients. We will continue to invest in and grow our base businesses both organically and through acquisitions where it makes sense, and we will enhance our performance through a greater use of advanced technology.

The free cash that our core business generates will be in adjacent businesses with large addressable markets and high growth rates and margins as we have done with acquisitions like RavenVolt, and organic investments in e-mobility. Through this strategy, we see ABM evolving into a higher growth, higher margin to solution provider, underpinned by resilient strength of our core business. We also intend to use our strong cash flow to return cash to shareholders through dividends and share repurchases. Now, I’ll turn the call over to Earl for the financials.

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Earl Ellis: Thank you, Scott, and good afternoon, everyone. For those of you following along with our earnings presentation, please turn to Slide 5. Fourth quarter revenue increased 18.6% to $2 billion, reflecting the contribution by acquisitions, as well as broad-based organic revenue growth of 5.8%. Moving on to Slide 6, net income in the fourth quarter was $48.9 million or $0.73 per diluted share, up 43% and 46% respectively, over the same period last year. The increase in GAAP net income, primarily reflects higher segment earnings on significantly higher volume, and lower acquisition, and integration costs, partially offset by higher interest expense and higher ELEVATE related investments. Adjusted net income for the fourth quarter increased 2% to $59.4 million and adjusted earnings per share was $0.89, an increase of 5% over the prior year period.

The increases in adjusted net income and adjusted EPS were due primarily to higher segment earnings, partially offset by higher interest expense. Adjusted EBITDA grew 18% over the prior year period to $130.7 million. Adjusted EBITDA margin for the quarter was 6.8%, flat with last year, largely reflecting tight cost controls and price escalation, which largely offset the anticipated decline in higher margin disinfection services, as well as higher operating costs, particularly for labor. I believe our margin performance was quite impressive given the labor environment we faced during the year and our team did a phenomenal job successfully negotiating price through escalations. Now turning to our segment results beginning on Slide 7. B&I revenue increased 27.5% to over $1 billion, primarily driven by the contribution from the acquisitions of Able and Momentum.

Excluding acquisitions, organic revenue growth was 2.6%, reflecting modestly improved office occupancy rates, as well as solid demand for parking services, concerts, and sporting events. Operating profit in B&I increased 32.9% to $92.4 million, benefiting from significantly higher revenue. Our operating margin of 9% was slightly higher than that of the prior year period and largely reflected leverage on volume and strong execution with regard to price escalations and cost controls. Aviation revenue increased 9.1% to $214.4 million, marking the sixth consecutive quarter of robust year-over-year revenue growth. This improvement was largely due to increased leisure and business airline traffic and related increase in parking activities in a post-COVID environment.

Looking ahead, we believe year-over-year growth rate in aviation will moderate as travel has essentially transitioned back to pre-COVID levels. Aviation operating profit was $1.3 million versus $13.2 million in the prior year period and margin was 0.6%. Operating earnings and margin were negatively impacted by work order approval timing related to a large parking construction project where ABM had completed significant work and await final customer approval. We expect to receive approvals in the first half of the calendar 2023. Turning to Slide 8, manufacturing and distribution revenue grew 8.7% to $371.2 million, reflecting solid market demand and expanded business with existing e-commerce and manufacturing clients. Operating profit increased 11.3% to $41.2 million, and operating margin improved 30 basis points to 11.1%.

These results were driven by favorable customer mix and operating leverage on higher volume, partially offset by lower levels of disinfection related work orders. Education revenue increased 6.9% to $217.1 million, benefiting from new clients onboarded in the fourth quarter. With bidding activity in education fairly strong, we expect education to continue to post positive year-over-year growth in 2023. Education operating profit was $8.3 million, up 3% over the prior year period on higher volume. Margin decreased 20 basis points to 3.8%, due to lower enhanced clean revenue, as well as higher wage costs, including . Technical Solutions grew revenue 21.5% to $179.6 million, largely driven by continued strong growth in our e-mobility service offering, strong growth in mission critical markets, and from the recent RavenVolt acquisition.

Operating profit was $20.9 million, compared to $18.8 million last year. Operating margin decreased to 11.7%, primarily reflecting service mix that was most heavily weighted to our e-mobility service line versus the prior year. Moving on to Slide 9. We ended the fourth quarter with total debt of $1.4 billion, including $158 million in standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.6x. At the end of Q4, we had available liquidity of $686 million, including cash and cash equivalents of $73 million. Free cash flow in the fourth quarter was $104 million. For the full-year, free cash flow was negative $30 million, reflecting $143 million legal settlement and another combined $146 million impact from our CARES Act repayment, integration costs, and elevated expenses.

free cash flow was over $250 million, excluding these items. Interest expense was $16 million in the fourth quarter, up nearly $10 million over the prior year period and about $5 million sequentially from Q3, reflecting significantly higher interest rates, as well as the year-over-year increase to total debt by . Turning to capital allocation. We repurchased roughly 580,000 shares in the fourth quarter at an average price of $39.69 per share, for a total cost of $23 million. For the fiscal 2022 year, we repurchased approximately 2.3 million for $97.5 million. We also recently received Board approval for $150 million expansion of ABM share repurchase authorization. The total authorization now stands at $197 million. Now let’s move on to guidance for fiscal 2023 as shown on Slide 10.

For 2023, we 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 to $74 million in 2023, compared to $41 million in 2022. Our tax rate is expected to be between 29% and 30%. We expect to grow adjusted EBITDA at a mid-single-digit rate with an adjusted EBITDA margin between 6.4% and 6.8%. We expect full-year 2023 cash flow to be in the range of $270 million to $300 million before the second and final installment of our CARES Act repayment of $66 million and combined integration and elevated costs of about $75 million to $80 million. Turning to Slide 11, we expect to post solid mid-single-digit growth in operating earnings at the mid-point of our guidance, reflecting revenue growth supported by price escalations and other cost control measures that help mitigate higher labor costs and labor shortages.

At the same time, we anticipate interest expense will be a $0.32 to $0.35 headwind to earnings per share in 2023, representing the primary cause of the year-over-year decline in our forecasted adjusted EPS. Overall, our anticipated growth in operating earnings in a tough macro environment speaks to the underlying strength of our business model and our team. Additionally, we expect the quarterly cadence of our adjusted EPS to return to a more typical pattern now that most of the impacts of COVID have subsided. Prior to the pandemic, for example, our Q1 earnings have represented on average approximately 21% to 22% of our full-year’s adjusted EPS with about 45% of adjusted earnings per share generated in the first half of the year. We expect a similar performance in fiscal 2023.

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 will deliver a solid 2023 and continue to make progress towards our 2025 goals. With that, let’s take some question.

Q&A Session

Operator: Thank you. Thank you. Our first question is from Tim Mulrooney with William Blair. Please proceed with your question.

Unidentified Analyst: Hey, this is I’m filling in for Tim. Thanks for taking our question here guys. Maybe to start, we’ve seen recently some companies pull back hiring or even announced targeted layoffs. And the recent it seems to show some coolant in the labor market. It sounds like it’s still a very difficult labor market for you guys, but you guys seen any signs of increased labor availability or even able to find talent easier than maybe say a few months ago?

Scott Salmirs: Yes, sure. That’s a good question. Look, I think if you think of 2022, right, and for us we’re in 2023 now with our fiscal year, but when you think of 2022, I mean that was as bad as we’ve ever seen. So, we’re expecting a little bit of moderation this year. We’re starting to see the participation rate, which is people that will come into the market. We’re starting to see applications go up a little bit. So, we’re still cautious, Tim, for sure, and we still think it’s going to be a very challenging year. We’re hoping that it’s going to be incrementally better than last year.

Unidentified Analyst: That’s helpful. Appreciate the color. For, maybe pivoting to ERP actually, you mentioned you expect to begin the rollout in 2023. I was wondering if you could provide us a bit more detail on that project. grow up in targeting any segment or client type first? And I know you broadly talked about the margin benefit from the ELEVATE program, but can you share how you think about the ERP project as it relates to any margin benefit?

Scott Salmirs: Sure. I mean, look, we’re going to be very prescriptive and careful on how we roll it out. We’re going to start with our education group mid-year, next year. And it’s probably a two-year process of rollout industry group by industry group. And I mean, we’re just super excited about it because we’re just going to have modern best-in-class systems for our financial data. And I think what people forget is that the ERP is, kind of in the center of the hub, the financial system, but every system that we have talks to the ERP, right. So, the data analytics we’re going to have with our timekeeping system, our work order system like everything, think of the ERP as the heartbeat of every system that we have in the firm and workforce management tools that we’re going to be rolling out through ELEVATE, everything ties into it.

So, we just couldn’t be more excited about it, but expect it to start cascading through mid-year, next year with education. And we’re going to €“ we’ll keep you guys close to it as we roll it out, because again there’s so much in anticipation in the firm for it.

Unidentified Analyst: Excellent. That’s good to hear. And maybe if I could just squeeze one more real quick, just a housekeeping question. Your guidance, how much are you assuming a management reimbursement revenue? I know your EBITDA margin guidance excludes this. So, just want to level set for everybody.

Scott Salmirs : On our management, reimbursement, is that more for €“ on the parking side, which something we talked about. It’s about 30 basis points you could think about.

Unidentified Analyst: Okay. Thanks. Appreciate the color guys.

Scott Salmirs : Thanks Tim.

Operator: Thank you. Our next question is from Andy Wittmann with Baird. Please proceed with your question.