ABM INDUSTRIES INC /DE/ Q3 2025 earnings call

Good morning, everyone, and welcome to ABM 's Third Quarter 2025 Earnings Call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM . With me today are Scott Salmirs, our President and Chief Executive Officer, and David Orr, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our third quarter 2025 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website, abm.com. After Scott and David's prepared remarks, we will host a Q&A session. Before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements.

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

Good morning, everyone, and thank you for joining us to review ABM 's Third Quarter Results. I'm especially pleased to be joined today by our new CFO, David Orr. David has been in the room on many previous earnings calls, but this is his first time as CFO, and I couldn't be happier. David brings tremendous experience, strong relationships, and deep industry knowledge, and we are already seeing the benefits of his leadership, highlighted by our cash flow performance in Q3. On behalf of the entire team, I'd like to welcome him publicly and wish him great success. Our quarterly performance demonstrated solid momentum in many areas. We delivered 5% organic revenue growth, generated strong free cash flow, and continued to win new business despite an uncertain macro environment.

Each of our segments once again contributed to organic growth, and we generated over $150 million in free cash flow, driven by disciplined cash collection, resulting in a meaningful reduction in day sales outstanding. Bookings performance was another highlight. Through the first three quarters, we have secured over $1.5 billion in new business, a 15% increase year- over- year, positioning us well for revenue and earnings growth in the year ahead. This success reflects both favorable conditions in most of our markets and our deliberate strategy to strengthen our presence in core markets and build lasting partnerships through thoughtful pricing decisions. We have robust pipelines across Technical Solutions, Manufacturing & Distribution, and Business & Industry, particularly in several attractive geographic markets. At the same time, certain commercial office markets, especially in select West Coast, Midwest, and Mid-Atlantic metro areas, are slower to recover.

In these areas, we're pushing long-term growth by strategically pricing rebates and extensions and by managing the timing of escalations to protect and expand our footprint. A similar approach is being applied to competitive end markets such as semiconductors and e-commerce, where there are terrific opportunities for new business to be won. While these choices did pressure margins and adjusted EPS, we were able to win multi-year contracts and extensions and protect long-term clients, which will support stronger and more sustainable growth over time. It is important to recognize that our strategy is working. While some peers with comparable U.S. cleaning and maintenance exposure have recently reported meaningful organic revenue declines, we delivered mid-single-digit organic growth this quarter. We're also acting decisively to address the near-term margin impact of our choices. Our teams are implementing labor efficiency measures, and we are tightly managing discretionary costs across the company.

In addition, we've launched a company-wide restructuring program, which is already well underway. This program is designed to better align our core structure and operating model with our growth priorities. When fully implemented by year-end, this program is expected to generate at least $35 million in annual run-rate savings. Our actions to boost growth and improve margins, combined with our highly cash-generative business model, reinforce our confidence in ABM 's long-term growth trajectory. Reflecting that confidence, we purchased shares in the third quarter and early into Q4, buying more than 1 million shares during July and August, and nearly 1.5 million shares year to date for $71.3 million. I'm also pleased to report that our board increased our share repurchase authorization by $115 million after the quarter closed, giving us added flexibility in capital allocation going forward.

We also continue to invest for the long term, with artificial intelligence solutions being an important part of that journey. In fact, we've invested in artificial intelligence tools that enhance the way our teams work today, such as automated and more robust RFP responses and improved HR support services. We are exploring using agentic artificial intelligence to supplement client-facing service and operational support. Looking forward, we see opportunities to leverage artificial intelligence to uncover new revenue streams, introduce robotics at client sites where it makes sense, and drive efficiencies within our finance organization. The benefits will be clear and enhance client and team member experience alongside greater efficiency and scale. Importantly, artificial intelligence will not disintermediate ABM .

Our core business, whether cleaning, maintenance, or engineering, is fundamentally people-led, delivered in highly unique and dynamic environments that do not lend themselves to full automation. Artificial intelligence is not a replacement for ABM 's core business, but a tool that strengthens our people, improves outcomes for our clients, and positions ABM to build on our industry-leading position. Let me now give you a brief update across our segments. In B&I, we're seeing the prime office market continue to get healthier overall, as evidenced by our return to organic growth in the last two quarters. CBRE's mid-year outlook shows prime vacancy trending down from about 14.5% today to closer to 13.6% by year-end. What's driving that is a real flight to quality. Tenants want the best buildings, and new supply in that segment is limited. That plays right into our sweet spot in Class A urban properties.

Now, it's not the same story everywhere. Some regions, particularly parts of the West Coast, Midwest, and Mid-Atlantic, are still under pressure with softer leasing and higher vacancy than the national average. The recovery is happening in these markets, but at a slower pace. Stepping back, the overall trend in prime is clearly positive, and with our strong positioning in Class A, we're well aligned to capture the upside of that recovery while being selective and strategic in markets that remain more challenged. With regard to M&D, we see momentum driven by three key forces: technology investments spurred by artificial intelligence solutions, e-commerce growth, and the reshoring of manufacturing. Semiconductors continue to lead the way with more than $450 billion in private investments announced since 2020. E-commerce remains another steady tailwind, with U.S. online retail sales rising 5.3% year- over- year in Q2 of 2025 to over $300 billion.

At the same time, the reshoring of U.S. manufacturing is accelerating, much of it concentrated in pharmaceuticals and automotive production. These are highly attractive markets where we have the clear right to win and where many service providers are eager to participate. ABM 's ability to integrate services, scale quickly, and execute complex solutions positions us to capture these opportunities. Just as importantly, our model enables us to enhance margins over time, turning wins in demanding high-growth sectors into durable and profitable growth. The aviation market continues to experience strength in passenger demand. TSA data shows daily checkpoint screenings routinely averaging above 2.8 million in July and August, up incrementally from 2024, underscoring healthy demand dynamics in domestic air travel. Airports themselves are also in a period of heavy reinvestment.

Projects such as the new Global Concourse at O'Hare , along with the FAA's multi-year program to modernize terminals and airport infrastructure, represent a sustained pipeline of opportunities for us. Against this backdrop, ABM's Technology Solution, ABM Connect for Airports, supported by our project delivery engine that enables us to quickly scale new jobs, is a clear differentiator. This combination of strong consumer travel trends, major infrastructure commitments, and our ability to mobilize rapidly gives us confidence that our aviation business will continue to outperform sector growth as new opportunities come online. In education, our business continues to benefit from the overall resilience of both higher education and K through 12 markets, sectors that are typically moved steadily even when the broader economy is less predictable.

The latest Gordian 2025 State of the Facilities report shows that institutions are focusing more on modernizing and maintaining existing campuses rather than adding new space. In short, the education market remains fundamentally solid, and our team has done a great job executing in this environment. For ABM, our focus on large school districts, colleges, and universities should ensure stable contributions supported by strong client retention and operational efficiency. Finally, in Technical Solutions, our electrification business, particularly microgrids, data centers, and power services, remains strong and now accounts for nearly 60% of segment revenue. Market fundamentals continue to strengthen. Wood Mackenzie projects the U.S. microgrid market will more than double by 2030, reflecting the growing demand for energy resilience and decarbonization. Meanwhile, global data center capacity is expected to expand at double-digit annual pace to support AI-driven computing needs.

You can see why we're so excited about where ABM is headed. The macro trends shaping our markets, whether the recovery in prime office, the surge in electrification investment, and the resilience of aviation and education, are the very areas where we are focused. These trends are evident in our revenue momentum, improving free cash flow, and durable client retention. We believe ABM is uniquely positioned to be a clear winner as these markets continue to evolve, and it becomes even more apparent that we are the best partner to help clients grow and transform their facilities. At the same time, our cash-generative model enables us to consistently return capital to shareholders through dividends and share repurchases, reinforcing our commitment to delivering long-term value alongside sustainable growth. The AI revolution will be a tailwind for ABM rather than a threat to our core business.

Looking ahead, we expect our fourth quarter earnings and margins to improve meaningfully from the third quarter, driven by the benefits of our cost and restructuring actions, as well as from strong performance in our ATS segment. We expect to be towards the low end of our prior adjusted EPS range of $3.65 - $3.80 for the fiscal full year. With that, I'll turn it over to David to walk through the financials.

Good morning, everyone. I'm honored to be here today and look forward to building a relationship with you all in the coming quarters. I'm also excited to work even closer with the ABM operations and functional support teams. With that, let's get into the Q3 results, starting on slide six. Revenue grew 6.2% year- over- year to $2.2 billion, driven by 5% organic revenue growth and a 1.2% contribution from our recent acquisitions. Of note, our organic revenue growth was the highest it's been since the fourth quarter of 2022. Like last quarter, we saw organic revenue growth in all segments led by Aviation, M&D, and Technical Solutions. B&I and Education were both up 3% in the quarter. It's clear that our advantaged offerings and service, in conjunction with our market focus and strategic pricing, are driving outsized growth.

Turning to slide seven, net income from the quarter increased to $41.8 million or $0.67 per diluted share, compared to $4.7 million or $0.07 per diluted share last year. This increase was driven by the absence of a $36 million adjustment to contingent consideration for our RavenVolt microgrid business that was recorded last year, as well as a decrease in corporate costs, reflecting a smaller negative impact from prior year self-insurance adjustments. These items were partially offset by higher interest and taxes. Income was $51.7 million or $0.82 per diluted share, compared to $53.6 million or $0.84 per diluted share last year. The change largely reflects higher interest and tax expense, partially offset by lower corporate costs. Adjusted EBITDA was up 5% to $125.8 million, compared to $119.8 million last year, largely the result of lower corporate costs.

Adjusted EBITDA margin was flat at 5.9%, reflecting the strategic pricing and escalation decisions Scott discussed earlier. As Scott mentioned, we're taking several actions to improve margin, including a restructuring program that was launched in August. The program is designed to more closely align our cost structure and footprint with our growth priorities and is initially focused on organizational structure. The actions we've undertaken are expected to yield annualized savings of $35 million at a cost of approximately $10 million. We continue to review other elements of our cost structure for additional opportunities under this plan. Now, let's turn to segment performance, beginning with slide eight. B&I revenue surpassed $1 billion for the quarter, up 3% from last year. This performance was driven by escalations, expansion with existing clients, and continued strength in our U.K. and sports and entertainment businesses. As Scott mentioned, certain areas in the U.S.

remain slow to recover, and we've made some strategic decisions with regard to pricing and the timing of escalations to ensure we position ourselves for sustainable growth. These decisions helped drive growth, although they impacted margin in the quarter. Operating profit was $73.8 million, and margin was 7.1% as compared to $77.8 million and 7.7% respectively last year. Our teams are working actively on plans to drive margin higher through efficiencies and escalations. Aviation revenue grew 9% to $291.8 million, supported by positive travel trends and several new wins ramping up. Operating profit was $19.7 million, up 11%, with margins up 20 basis points to 6.8%. These results reflect volume growth and the benefits of escalations, partially offset by weather-related headwinds in the quarter. Turning to slide nine, M&D generated $408.9 million in revenue, an 8% increase year- over- year.

This strong organic growth was fueled by new contract wins and client expansions. In the third quarter, we were especially pleased to expand our presence in the Technology sector, securing domestic business with leading U.S. and Asian semiconductor manufacturers, as well as a major capacitor manufacturer. We're making thoughtful pricing decisions to ensure we're well positioned to capture the significant growth in U.S.-based tech manufacturing, much of it driven by enhancements in AI. Operating profit was $36.4 million, with a margin of 8.9% compared to $40.9 million and 10.9% last year. As mentioned, the margin decline was largely due to strategic pricing on select new business opportunities, which offer significant long-term growth opportunities and also reflect investments in technical sales talent and sector-specific capabilities. Education revenue rose 3% to $235.1 million, supported by escalations and stable retention rates.

Our education team did a great job by growing operating profit 17% to $21.1 million and expanding margin 110 basis points to 9%, primarily driven by improved labor efficiencies and escalations. Technical Solutions grew 19% to $249.5 million, with 7% coming from organic growth and 12% from acquisitions. This strong growth was once again driven by robust demand for microgrids and data center and power services, which now make up about 60% of segment revenue. Operating profit rose 9% to $19.4 million on higher volume, and margin was 7.8% compared to 8.5% last year. The margin performance primarily reflects business mix and higher amortization costs. Our microgrid business performed very well in the quarter. We expect margins to improve in the fourth quarter on healthier mix and higher volume.

Now, turning to slide ten, we ended the third quarter with total indebtedness of $1.6 billion, including $29.7 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.8 x. Available liquidity stood at $691 million, including $69.3 million in cash and cash equivalents. Our teams across the business did an incredible job on cash in the quarter. They were laser-focused on collections and significantly reducing our day sales outstanding. I want to thank and acknowledge them for their efforts. Free cash flow was $150 million, an improvement of $135 million over Q2 and up $86 million over the prior year. We continue to make progress with our ERP conversion in the third quarter and anticipate further improvement in the fourth quarter. As such, we expect to be toward the low end of our normalized free cash flow range of $250 million- $290 million.

This range excludes $16 million of the RavenVolt earnout payment that was recorded as a use of operating cash, as well as full-year ELEVATE and integration costs, which have totaled about $40 million through the first three quarters. With regard to capital allocation, we repurchased 555,000 shares in the third quarter at an average price of $48.77 and a total cost of $27.1 million. We continued buying in the fourth quarter and repurchased 491,000 shares at an average price of $46.83 for a total cost of $23 million. Year to date, we've repurchased roughly 1.5 million shares for a total cost of $71.3 million. Additionally, our board recently approved a $150 million increase in our share authorization, bringing our current capacity to $233 million. Interest expense in the quarter was $25.3 million, up $4.1 million from last year, driven by larger average debt balances.

This result was higher than our expectations as cash collections in the quarter were back-end loaded. Turning to our outlook on slide 11, given our higher interest expense and the impact of our strategic pricing and escalation decisions, we now expect full-year adjusted EPS and adjusted EBITDA margin to be toward the lower end of our prior guidance. As a reminder, the range for adjusted EPS was $3.65 - $3.80, and the range for adjusted EBITDA margin was 6.3% - 6.5%. We expect fourth quarter interest expense to be around $25 million, and we continue to expect a normalized tax rate before discrete items of 29% - 30%. As a reminder, our outlook does not include any future positive or negative prior year self-insurance adjustments. Going forward, we'll highlight any material impacts resulting from the inclusion of prior year self-insurance adjustments in our non-GAAP results.

With that, I'll hand it back to Scott for closing remarks.

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

Thanks to all of you, we are confident in our ability to deliver sustainable value for our clients, our teammates, and our shareholders. With that, let's open the line for questions.