ABM INDUSTRIES INC /DE/ Q4 2025 earnings call

Good morning, everyone, and welcome to ABM's fourth 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 fourth quarter 2025 financial results and outlook, as well as a press release announcing our planned acquisition of WGNSTAR. A copy of those releases 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 today, I would like to remind you that our call and presentation contain predictions, estimates, and other forward-looking statements.

Our use of the words estimate, expect, and similar expressions is 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. And with that, I would now like to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to discuss ABM's fourth quarter and full-year fiscal 2025 results, as well as our 2026 outlook. I appreciate you taking the time, and I'll get right into our performance and the progress we're making as a company. We finished the year on a strong note, posting record quarterly revenue supported by 4.8% organic growth. Encouragingly, if you exclude the impact of the prior-year self-insurance adjustment, our adjusted EPS, adjusted EBITDA, and adjusted EBITDA margin were all ahead of our expectations heading into the quarter. This performance reflects strong volume, favorable mix, disciplined cost management, and the benefits from our restructuring actions. Across the portfolio, our teams executed exceptionally well. Technical Solutions delivered another standout quarter, completing a significant number of complex projects, particularly in microgrids and mission-critical infrastructure.

We also saw strong revenue growth in Aviation and Manufacturing and Distribution, fueled by recent client wins and customer expansions. Meanwhile, in Business and Industry and Education, margins improved year over year, demonstrating the resiliency of these segments and our continued focus on operational efficiency. Our fourth quarter results capped an outstanding year for ABM, highlighted by record annual revenue of $8.7 billion, an increase of 5% over last year. We also generated record new sales bookings of $1.9 billion, a 12% increase over 2024. Those bookings are diversified across the business and provide confidence in our growth trajectory entering fiscal 2026. On top of the strong 2025 bookings, I'm pleased to announce 2026 is off to a great start for us with a major new contract in Aviation.

Specifically, we won a significant passenger services contract at a leading global gateway airport, set to ramp up in the first quarter of calendar 2026. This win highlights our continued focus on the Aviation sector, the strength of our team, and the value of technology-driven solutions. I'm confident in our team's ability to deliver an outstanding experience for our clients and their passengers. This is one of the largest single Aviation awards in ABM's history, and it reflects the reputation our teams have built in delivering industry-leading service and operational excellence. I'll also note that our pipeline across the enterprise remains strong, and we are targeting another bookings record in 2026. 2025 was a year defined by progress in several strategic areas.

We invested in AI capabilities that are already improving our internal processes, including enhanced RFP automation, more intelligent HR support tools, and early exploration of agentic AI to enhance client-facing operations. These investments are expected to provide greater efficiency, scalability, and differentiation, and position ABM to unlock new revenue streams in the years ahead. We also made substantial progress in our ERP implementation. As you know, the transition created working capital friction earlier in the year, but the team worked relentlessly to stabilize and scale the system, and we saw meaningful improvement in cash performance in the back half of the year. This sets us up well for continued progress in 2026 and normalization. I'd like to thank David Orr for taking a leadership position in this area and helping deliver a significantly better outcome than we had at the beginning of the year.

Also exciting is today's announcement of our agreement to acquire WGNSTAR, a leading provider of managed technical workforce solutions and equipment support services for the semiconductor and high-technology manufacturing sectors. This is a highly strategic transaction for ABM that is expected to close in the first calendar quarter of 2026. It significantly expands our technical capability set in fabrication environments, adds a skilled workforce of more than 1,300 employees, and strengthens our position in a sector that is experiencing multi-year growth from U.S. semiconductor onshoring. With only about 15% of the market currently outsourced, WGNSTAR gives us a meaningful foothold in a space with substantial runway. Combined with our existing energy resiliency, mission-critical, and engineering strength, this acquisition positions ABM to be one of the largest integrated service providers to semiconductor facilities in North America.

I also want to take a moment to highlight the continued efforts across ABM to improve margin and strengthen earnings power. The initial components of our restructuring program, launched in Q4, are now largely complete. The program was designed to better align our core structure and operating model with our growth priorities. As mentioned last quarter, the annualized savings related to the initiatives already undertaken is $35 million, with over three quarters of the savings to be realized in fiscal 2026. These benefits, combined with disciplined cost management and improved labor efficiency, played an important role in our performance in the fourth quarter and will continue to do so in 2026. As we look across the business, I'm proud of how our teams navigated a complex and dynamic operating environment.

Not only did we win important new business and strengthen key client relationships, we did so while modernizing our systems, advancing our use of AI, and integrating new tools and processes into the way we work. It speaks to the commitment and adaptability of our people, and these efforts position ABM for long-term success. Turning now to the year ahead, we are confident in ABM's momentum heading into fiscal 2026. Demand across our key end markets remains healthy, especially within Technical Solutions, Aviation, and Manufacturing and Distribution. Combined with a record year of new sales bookings, the major Aviation contract win, and a strong backlog, we expect another year of solid organic revenue growth. Our recent agreement to acquire WGNSTAR will strengthen our position in the fast-growing semiconductor market and will complement our growth in the strategic space.

In addition, our restructuring actions, disciplined cost management, and our 2025 share repurchases enhance the earning power of the enterprise. With these tailwinds, we expect fiscal 2026 organic revenue growth of 3%-4%, an adjusted EPS to be in the range of $3.85-$4.15, before any potential positive or negative impact from prior-year self-insurance adjustments. With that, I'll turn it over to David to walk through the financial results in more detail.

Before we get into the results, I want to take a moment to clarify how to think about prior-year self-insurance adjustments, because they're an important factor in our fourth quarter and full-year performance. As a reminder, starting in our second quarter earnings release and following discussions with the SEC, we updated the definition of all our non-GAAP financial measures, including adjusted net income, adjusted EPS, adjusted EBITDA, and adjusted EBITDA margin. Under the revised definition, we no longer exclude the positive or negative impact of prior-year self-insurance adjustments from our non-GAAP results. Prior-year self-insurance adjustments represent the net changes to our reserves for general liability, workers' compensation, automobile, and health insurance claims that relate to incidents that occurred in prior years.

These programs involve numerous claims across many years, and some have very long tails, which makes them inherently difficult and, in many cases, impossible to predict or forecast with any precision. For this reason, our forward-looking outlook does not include any potential positive or negative impact from these prior-year adjustments. With that context, it's important to note that prior-year self-insurance adjustments had no impact on our Q2 results and an immaterial impact on Q3. They did, however, have a significant impact on our Q4 results and, therefore, on the full year as well. To help you interpret the numbers, we've included a table on page four of our earnings presentation that breaks out the specific impact. For example, in the fourth quarter, the adjustment created a $0.26 headwind to adjusted EPS.

While our reported adjusted EPS was $0.88, to reflect and truly understand the underlying performance of the business, you would need to add back the $0.26 insurance-related headwind, and as Scott noted, that core performance was above our expectations heading into the quarter. As I walk through the P&L this morning, I'll call out the impact of prior-year self-insurance adjustments where relevant, so you have a clear picture of our core operating performance. Let's start on slide seven. Revenue grew 5.4% year-over-year to $2.3 billion, a new quarterly record, driven by 4.8% organic growth and a modest contribution from our recent acquisition in Ireland. Similar to last quarter, we saw organic revenue growth across all segments, with the strongest contributions coming from Technical Solutions, Manufacturing and Distribution, and Aviation. Both B&I and Education delivered 2% growth in the quarter, reflecting stable demand and solid execution.

Overall, we're very pleased with the growth trajectory of the business, and our end markets remain constructive as we head into fiscal 2026. Turning to slide eight, net income from the quarter increased to $34.8 million, or $0.56 per diluted share, compared to a loss of $11.7 million, or $0.19 per share, last year. The year-over-year improvement primarily reflects a $61.3 million benefit from the absence of the large contingent consideration adjustment related to the RavenVolt acquisition that was recorded in the prior year, as well as higher segment operating earnings, largely driven by strong ATS performance. These benefits were partially offset by a $15.8 million negative impact from prior-year self-insurance adjustments recognized in the current period and $9.5 million in previously communicated restructuring costs.

Adjusted net income was $54.7 million, or $0.88 per diluted share, compared to $55.8 million, or $0.88 per diluted share, last year. The year-over-year change largely reflects the $15.8 million, or $0.26 per share, negative impact from prior-year self-insurance adjustments and higher interest expense, largely offset by higher segment earnings, including the benefits of restructuring actions. Importantly, when adding back the prior-year self-insurance adjustment, our adjusted EPS would have been significantly higher than last year and reflects the strong underlying operating performance of the business. Adjusted EBITDA was $124.2 million, and adjusted EBITDA margin was 5.6%, compared to $125.6 million and 6% in the prior year. Taking into account that prior-year self-insurance adjustments had a $22.2 million pre-tax negative impact on EBITDA, and a 100 basis points impact on adjusted margin provides a much clearer view of our core operational performance in the quarter.

Now, let's turn to segment performance, beginning with slide nine. B&I revenue surpassed $1 billion for the quarter, up 2% from last year. This performance was driven by higher work orders, expansions with existing clients, and continued strength in the U.K., partially offset by certain client exits. Markets remain largely unchanged from last quarter, and we expect modest, steady growth in 2026. Operating profit was $80.6 million, and margin was 7.7%, as compared to $72 million and 7%, respectively, last year. The improvements were mainly due to restructuring benefits and the absence of $4-$5 million of discrete costs incurred in the prior year. Aviation revenue grew 7% to $296.7 million, supported by positive travel trends and several new wins ramping up, which carried some frictional upfront costs as these programs came online. Operating profit was $16.8 million, with a margin of 5.7%.

These results primarily reflect the timing of escalations and mix, including some frictional costs in the quarter. As Scott mentioned, we're very excited about the large new passenger services contract we won after the quarter closed, which is expected to begin ramping in our fiscal second quarter. This win, combined with a robust pipeline of new opportunities, positions our Aviation business well for healthy organic growth in 2026. Turning to slide 10, M&D generated $417.4 million in revenue, an 8% increase year over year. This strong organic growth was driven by recent contract wins, particularly in the technology sector, and continued client expansions across the segment. Based on the momentum we've seen in the back half of fiscal 2025, we believe these growth rates are sustainable as we move into 2026. Operating profit was $35.8 million, with a margin of 8.6%, compared to $40.4 million and 10.4% last year.

As we discussed last quarter, the year-over-year margin change is largely the result of strategic pricing on select new contracts that offer meaningful long-term growth opportunities, as well as ongoing investments in technical sales talent and sector-specific capabilities. Education revenue rose 2% to $233.7 million, supported by escalations and stable retention rates. Our Education team delivered an excellent quarter, increasing operating profit 44% to $18.8 million and expanding margins by 230 basis points to 8%. This performance was driven by improved labor efficiencies and escalations, as well as the benefits of our strategic mix shift towards colleges and universities, where the scope of opportunities and economics continue to be particularly attractive. Technical Solutions had a phenomenal quarter, with revenue increasing 16% to $298.7 million, including 11% organic growth and 5% from acquisitions.

Growth was once again driven by robust demands for microgrids, where we completed a large number of projects in what is typically a seasonally strong fourth quarter. Our data center and power services businesses also performed well. Operating profit rose 32% to $37.1 million, and margin was 12.4%, up 150 basis points from last year. This strong performance reflects excellent execution, higher volume, and a favorable mix, all consistent with what we anticipated heading into the quarter. Now, turning to slide 11, we ended the year with total indebtedness of $1.6 billion, including $23.5 million in standby letters of credit. Our total debt-to-pro forma Adjusted EBITDA ratio was 2.7 times. Available liquidity stood at $681.6 million, including $104.1 million in cash and cash equivalents.

Fourth quarter cash from operations was $133.4 million, and free cash flow was $112.7 million, a significant improvement compared to $30.3 million and $15.5 million, respectively, in the prior year. This strong performance was driven by continued progress with our ERP conversion and tight working capital management during the quarter. Now, turning to capital allocation. During the fourth quarter, we repurchased 1.6 million shares at an average price of $45.84, for a total cost of $73 million. For the full fiscal year, we repurchased 2.6 million shares at an average price of $47.35, totaling $121.3 million, and reduced our outstanding share count by 4%. At year-end, we had $183 million of remaining availability under our share repurchase authorization.

Looking ahead to next year, we remain committed to covering annual dilution at a minimum and will weigh additional repurchase activity against the opportunities in our M&A pipeline to drive long-term value creation. Interest expense in the quarter was $24.3 million, up $2.4 million from last year, driven by larger average debt balances. Turning to our fiscal 2026 outlook on slide 12, we're excited about our 2026 plan and expect meaningful revenue growth, Adjusted EBITDA, and Adjusted EPS, all before any positive or negative impacts from prior-year self-insurance adjustment. Specifically, we expect full-year organic revenue growth of 3%-4%. Aviation, M&D, and Technical Solutions are all expected to grow above that range, while B&I and Education are expected to deliver low single-digit growth. The WGNSTAR acquisition will contribute roughly one additional point of revenue growth, bringing total growth to 4%-5% for the year.

We're also introducing a new metric this year, segment operating margin, which we believe better reflects the core operational health of the business as it removes the noise created by prior-year self-insurance adjustments. Segment operating margin is defined as segment operating profit divided by total revenue, and we expect it to be between 7.8% and 8% for fiscal 2026. Interest expense is forecast to be $95-$105 million, and our normalized tax rate before any discrete items is expected to be 29%-30%. With regard to cash, we expect free cash flow before the impact of transformation and integration costs, the RavenVolt earn-out, and any incremental restructuring to be about $250 million in 2026. Putting this all together, we expect full-year adjusted EPS in the range of $3.85-$4.15. As a reminder, our outlook does not include any future positive or negative prior-year self-insurance adjustments.

Thanks, David. Before we open the line for questions, I want to take a moment to reflect on the year and acknowledge the tremendous work of our team. Fiscal 2025 was a year of real accomplishment for ABM. We delivered record revenue and record new sales bookings, even as we navigated an uncertain macro environment and worked through a significant ERP system upgrade that touched every part of our business. These achievements speak to the resilience, adaptability, and professionalism of our people.

I'm incredibly proud of how our team showed up this year, meeting challenges head-on, staying focused on our clients, and executing with discipline. Whether it was delivering complex Technical Solutions projects, ramping major new contracts, or advancing and adapting to our AI and technology capabilities across our operations, our team rose to the occasion. Their efforts position ABM very well for the future. Looking ahead, I'm excited about what 2026 holds for ABM. We have large new clients ramping early in the year. The WGNSTAR acquisition will be contributing to our growth, and our pipeline across the portfolio remains strong. These elements give us confidence in our ability to drive another year of solid organic revenue growth and continued earnings expansion. And as we think about the longer term, we will continue to evolve ABM into a higher-growth organization.

That means enhancing our portfolio, pushing further up the value stream with our clients, expanding our technical and data-enabled capabilities, and being disciplined allocators of capital. We will do this with the same focus on clients, people, and operational excellence that has guided us this year. To everyone at ABM, thank you for your hard work and commitment. It's made all the difference. Happy holidays to everyone, and with that, we'll open up the line for questions.