Abm Industries Inc (ABM) Q3 2022 Earnings Call Transcript

Greetings, and welcome to the ABM Industries Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. 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.

Good morning, everyone, and welcome to our third quarter 2022 earnings call. My name is Paul Goldberg, and I'm the Senior Vice President, 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 third quarter 2022 financial results. A copy of that 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 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 and could cause our 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. Go ahead, Scott.

Thanks, Paul. Good morning, and thank you for joining us today to discuss our third quarter. ABM generated solid results in the third quarter, continuing our consistent performance throughout 2022. Organic revenue growth of 7.4% was broad-based, driven by healthy demand for janitorial and engineering services in Business & Industry, Aviation and Manufacturing & Distribution as well as in Technical Solutions. And much like the second quarter, the ABM team executed well and mitigated a significant portion of the increase in labor costs while advancing our ELEVATE initiatives. Overall, we generated revenue of $2 billion and an adjusted EBITDA margin of 6.6%, which is well above pre-pandemic levels. I was pleased with our performance when considering the many headwinds we faced this year, including the expected decline of EnhancedClean work orders, significant cost inflation, rising interest rates, and a very, very tough labor market. And in the face of all of that, the team continued to provide outstanding service to our clients while also focusing on profitability. Based on our solid and consistent performance throughout the year, we are adjusting our previous guidance for full year adjusted earnings per share to the upper end of our range and also narrowing the range for adjusted EBITDA margin. We feel confident about our market positioning and our ability to end the year with strong fourth quarter results, given continued favorable demand for our janitorial services and strong demand for our e-mobility and bundled energy solutions. Let's now discuss the demand and operating environment for each of our industry groups. Beginning with B&I, office occupancy rates remain at relatively low levels, but continue to slowly increase. This trend will likely continue into 2023. Modest office occupancy improvement and growth in special events, sporting events and parking is driving growth from existing customers. We've also done a nice job winning new commercial office space business in the New York City market, and we're excited to have been chosen to take on the services at State Farm Stadium in Phoenix. In addition, we recently added a great client in Spirit AeroSystems in Northern Ireland, won by the Momentum team who joined ABM earlier this year. With the most comprehensive service offering in the industry, we expect retention rates to remain high and to continue to win more than our fair share of new business. At the same time, we anticipate that higher margin disinfection work will decline again next year in a post-pandemic environment. Moving to Aviation. The summer travel season has been robust, driving growth in airside and landside operations, which include parking and transportation. We're also seeing strong demand in the UK, driven by their border reopenings. Business travel is also improving, although at a more measured pace. We recently announced an important win at O'Hare, significantly expanding the scope of our service at the airport that will generate an incremental $25 million a year in annual revenue over the next five years. However, labor availability continues to be a challenge in the aviation market, resulting in higher overtime costs. We expect these pressures will continue in the coming quarters. Demand in Manufacturing & Distribution continues to be solid as this segment remains largely unaffected by reduced occupancy levels. As a result, our organic revenue growth reflected the health and relative stability of these end markets. While we don't expect certain of our e-commerce and logistics customers to grow at the same rate as they did during the pandemic, our industry-leading geographic footprint uniquely positions us to win new business, both with manufacturers and life science clients. In Education, K-12 and colleges and universities continued to operate with in-person learning. So we are back to a pre-pandemic demand environment, and we are seeing a much lower level of disinfection-related work orders as we've been signaling in the past. We've on-boarded some large new clients recently, including George Washington University and the School District of Philadelphia, both of which will help drive organic growth in the fourth quarter. We're also seeing a good deal of new contract proposal activity, so we have ample opportunity to renew business as we head into 2023. Labor cost inflation in nonunionized markets, especially in the southern regions of the U.S., and low labor availability, continued to be headwinds that we are managing. These labor dynamics generally put more pressure on Education and Aviation than our other segments. In Technical Solutions, we continued to experience robust demand for our e-mobility charging solutions, where revenue tripled over the prior year period. We expect Technical Solutions to have strong growth again in 2023, aided by the U.S. infrastructure bill and the recent passage of the Inflation Reduction Act, which allocates an incremental $7 billion for electric vehicles, EV infrastructure and other energy efficiency investment activities. We also expect a number of bundled energy solution projects to commence in the fourth quarter. On top of that, Reasonable, our new microgrid business, which I'll discuss shortly, is poised for strong growth. In all, Technical Solutions is very well positioned to benefit from long-term secular trends. Moving to ELEVATE. We continue to make progress in the third quarter. In particular, we implemented a new cloud-based work order system, which when fully rolled out, is intended to meaningfully streamline and improve the current process we have. We continue testing and refining our workforce management tool and made further progress on developing our core cloud-based ERP system. We also launched ABM Vantage, our new data-enabled smart parking platform at a major trade show last month. Early client feedback has been very positive as operators look for ways to generate more revenue with lower operating costs. Lastly, after the quarter ended, we further advanced on our ELEVATE strategy by acquiring RavenVolt, a leading provider of integrated microgrid solutions, including generators and switchgear, that deliver energy resiliency and reliability. This acquisition is a strong fit with Technical Solutions as customers are increasingly turning to microgrids to bolster their on-site energy capacity for EV charging, reducing emissions and meeting sustainability goals. We're really excited to have the RavenVolt team on board. Before I turn it over to Earl to discuss the third quarter financials, let me make a few summary comments. First, on the demand side, the general environment is constructive. We are returning to pre-pandemic levels in terms of travel, in-school learning and industrial activity. Office occupancy is also trending upward, but slowly. We have tremendous growth opportunities in Technical Solutions, driven by energy efficiency, sustainability, cost reduction, and risk mitigation, and further boosted by government stimulus. The RavenVolt acquisition provides us with another high-growth opportunity to win new business. In fact, overall, we expect to finish 2022 with another new sales record. On the cost side, we're continuing to manage several challenges in the current economic environment. The labor pressures we are currently experiencing are largely unprecedented. With unemployment at historically low levels, immigration greatly reduced from prior years, and with high demand from the rapidly recovering travel, restaurant, retail, and service industries, labor shortages are driving labor inflation. We are seeing wage pressure in both blue-collar and white-collar positions, and a real battle for talent. We expect these challenges will persist into 2023. In this environment, we'll remain vigilant on pushing through price escalations, managing costs, and developing systems, programs, and processes to operate more efficiently and to effectively attract, retain, and manage talent. At the same time, we'll continue to invest in ABM to ensure we build off the strong competitive position we've established. So with that, let me now turn it over to Earl for the financials.

Thank you, Scott, and good morning, everyone. For those of you following along with our earnings presentation, please turn to Slide 5. Third quarter revenue increased 27.1% to $2 billion, largely driven by acquisitions, continued recovery from the pandemic, especially in aviation, and solid demand for our janitorial and engineering services as well as strong growth in e-mobility. Organic growth of 7.4% was broad-based across all segments. Moving on to Slide 6. Net income in the third quarter was $56.8 million or $0.85 per diluted share, up significantly over the same period last year. The increase in GAAP income primarily reflects higher segment earnings and the absence of a litigation settlement reserve taken in the prior year period, partially offset by ELEVATE-related investments and lower benefits from prior year insurance adjustments. Adjusted net income for the third quarter increased 3% to $63.2 million or $0.94 per diluted share compared to $61.3 million or $0.90 per diluted share last year. The increase primarily was due to higher segment earnings on higher revenue compared to the prior year period. Adjusted EBITDA increased 11% over the prior year period to $125.5 million. Adjusted EBITDA margin for the quarter was in line with our expectations of 6.6% versus 7.7% last year, largely reflecting the anticipated decline in work orders, which included higher-margin disinfection services as well as higher operating costs, particularly labor. Corporate expenses, excluding items impacting comparability, were essentially flat to the prior year period. Now turning to our segment results, beginning on Slide 7. B&I revenue increased 51.4% to over $1 billion, primarily due to the contribution from the acquisition of Able and Momentum. Excluding acquisitions, organic revenue was 7.1%, reflecting continued growth in special events, including sports, and business expansion with existing customers. Operating profit in B&I increased 15% to $82.4 million, benefiting from significantly higher revenue. Operating margin of 8% was lower than prior year and reflected reduced EnhancedClean and disinfection-related workforce versus the prior year and higher labor costs. Aviation revenue increased 21.3% to $203.5 million, marking the fifth consecutive quarter of robust year-over-year revenue growth. This improvement was largely due to increased leisure and business airline traffic and related parking activity as the economy continues to emerge from the pandemic. Aviation operating profit decreased 5.1% to $9.5 million versus $10 million in the prior year, and margin declined 130 basis points to 4.7%. These declines were the result of the expected decrease in high-margin pandemic-related work orders as well as ongoing labor pressures, including wage increases and overtime costs. Turning to Slide 8. Revenue within our Manufacturing & Distribution industry group grew 5.2% to $358.1 million, reflecting expanded business with existing e-commerce and manufacturing clients. Operating profit and operating margins were both slightly down in the quarter to $38 million and 10.6%, respectively. These results reflect lower levels of EnhancedClean as well as higher costs related to labor shortages, most notably in the Southern states. Education revenue modestly increased to $207.5 million, benefiting from new business wins. We expect to see improved year-over-year revenue growth in our fourth quarter as these new clients ramp up towards a full run rate. Education operating profit was $14.5 million, down from $18 million in last year's third quarter, due to lower EnhancedClean revenue as well as higher wage costs, including overtime expenses, especially in less populated areas, which tend to have shallower pools of available permanent labor. Operating margin of 7% remained elevated from pre-pandemic levels. Technical Solutions grew 9.3% to $158.4 million, largely driven by continued strong growth in our e-mobility service offering in which sales tripled from the third quarter of last year. We expect strong growth in the fourth quarter as certain bundled energy solution projects commence and we benefit from continued growth in e-mobility. Operating profit was $15.4 million compared to $14.4 million last year. Operating margin decreased 21 basis points to 9.7%, primarily reflecting a service mix that was more heavily weighted to our e-mobility service line versus prior year. Moving on to Slide 9. We ended the third quarter with total debt of $1.4 billion, including $159 million in standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.4 times. At the end of Q3, we had available liquidity of $769 million, including cash and cash equivalents of $63.9 million. Please note that after the quarter ended, we funded approximately $170 million for the RavenVolt acquisition, primarily from our revolving credit facility. Interest expense was $11.1 million in the third quarter, up nearly $5 million over the prior year period and $3.3 million sequentially from Q2, reflecting the recent Fed action and higher debt levels year-over-year. Q4 interest expense will be sequentially higher than Q3 and more indicative of the ongoing run rate due to a full quarter of rate increases and the funding of our acquisition of RavenVolt. Turning to capital allocation. We repurchased roughly 744,000 shares in the third quarter at an average price of $41.92 per share for a total cost of $31.2 million. In total, through the first three quarters of fiscal 2022, we repurchased approximately 1.7 million shares for $74.5 million. Now let me briefly touch on guidance, as shown on Slide 10. As Scott mentioned earlier, we are narrowing our guidance for full year 2022 adjusted EPS to the top end of our range. Our revised forecast for adjusted EPS is now $3.60 to $3.70, up from $3.50 to $3.70 previously. We are also guiding for full year adjusted EBITDA margin to be around 6.6%, which is at the midpoint of our prior forecast of 6.4% to 6.8%. Guidance for full year 2022 GAAP EPS is now expected to be in the range of $3.20 to $3.30, reflecting the narrowing of the range and benefit from changes in items impacting comparability. With that, let me turn it back to Scott for some closing comments.

Thanks, Earl. Although we faced some near-term headwinds, 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 close out 2022 in solid fashion and put further distance between us and our competition in the coming years. With that, let's take some questions.

Our first question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead with your question.

Hi, everyone. Thank you for answering my questions and for a good quarter. I would like to start by asking about the buyback. It appears that buyback activity has increased, making this a significant year for share repurchases. What would you like investors to take away from that?

Yes. No, thanks for the question, Sean. So I would say, as we've articulated earlier, we will always look to, at a minimum, repurchase shares to offset the anti-dilutive nature of our share-based compensation. This year, we did that as well as just a little bit more. If you think about, that portion would probably usually be about 600,000 shares. So we did about 1.1 million shares over and above that as we really saw the dislocation in the market and really took the opportunity to take advantage of that. As we've mentioned in the past, we'll use our share buyback opportunistically, really balancing between allocating to M&A activities and barring that, looking at opportunities to redistribute funds back to the shareholders in the way of share buybacks.

Okay. Got it. Got it. And then I realize it's probably early for a formal refresh on the fiscal '25 targets. But I just wanted to check back in there given the inflationary pressure that's developed since those targets were set, sort of the acuteness of the labor availability challenges that's developed since those targets were set. But then maybe on the flip side, some higher-margin high-growth opportunities have seemingly firmed. So even just qualitatively, kind of if you could sort of refresh us on how you're thinking about that organic growth and margin trajectory that you laid out back in December.

Sure, Sean. I would say that our long-term outlook for the completion of our ELEVATE program remains unchanged. It's certainly not a straight path, and the macroeconomic environment has shifted since December. While we believe the end result will still be the same, it may be a bit uneven due to the current labor market conditions and challenges with interest expenses. Nevertheless, we are optimistic about our progress and continue to invest in ELEVATE, along with making strategic acquisitions. So, while the journey may not be smooth, we feel positive about the ultimate outcome.

Okay, thanks. I'll turn it over there.

Our next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.

Good morning. Thanks for taking my question, guys. I guess I wanted to just drill in a little bit more on the labor market. And given that the labor market is tight in availability, it's difficult. It sounds like overtime and usage of agency continue to be at least part of the solution that you're having to employ today. I was just wondering, Scott or Earl, if you could just help us understand how that is trending. If you could talk about maybe like a quarter-over-quarter change in like the amount of overtime or agency that you're using, just so we can get a sense of how that's affecting your P&L given that, that's kind of the Street bucket.

Sure, Andy. I’ll provide a general update. The labor pressures have not eased at all, and when we compare the first half of this year to the second half, we're experiencing even more pressure now. Recent statistics show there are 11.3 million open jobs in the economy. This impacts us in two ways. Firstly, we are experiencing labor inflation, particularly in our Education segment where base wages are increasing by 10% per year, which is challenging. Secondly, while the situation is improving somewhat, it remains extremely difficult to find and attract talent for these positions. The service industry is facing these challenges, which often leads to increased overtime when we can’t staff fully. I can tell you that our overtime costs are up significantly from last year. Overall, I don’t believe the situation has improved, and while I don’t expect it to worsen, I think the challenges we're facing today will continue for several quarters.

I appreciate the context on that. For my follow-up, I wanted to ask about work order demand. You discussed this in detail. At the Analyst Day, you provided expectations. How are things trending on the work order side of the business? You mentioned it was close to 10% of the company's revenue at the peak during COVID, while it had been around 4% or 5%. Please correct me if I'm wrong about that. Where did you stand in the quarter? How much did that change from the previous quarter? I'm trying to understand the decline. You noted in your prepared remarks that you expect it to continue declining in fiscal '23. Another way to ask this is how much revenue headwind do you anticipate from this kind of work into 2023?

Yes. Let me just start off with that, Andy. Thanks for the question. I would say as we expected, we knew that from the heights of last year that we would actually see a reduction in work orders. So if you look at last year Q3, we're probably closer to 9%. That's actually dropped off to about 6%. So we continue to see that tailoring down. Last quarter, I think it was probably closer to 7%. But when you look at what we suggested, we would be recouping or capturing. I think we're currently on trend with what we actually thought we would be at this point in time.

Yes. From an EnhancedClean perspective, we anticipated a gradual decline. As RFPs are released, we notice them being integrated into the specifications. It’s challenging to quantify this exactly, but we do observe the expected decline. Additionally, we have been fortunate because the return to work in Building and Industrial sectors has not been as strong as we anticipated, providing us with some additional support.

Yes. And then just your last question as far as the impact that it actually has on revenues, again, much like we modeled, we knew that we were going to have a reduction in this mix of our revenue, but it really is being offset by new business wins as well as just what we're seeing as far as the modest recovery in the office buildings and the economy in general.

Yes. And the other thing I would say, Andy, because I want to make sure I get this in, like our team has done an incredible job on the labor side with grouping escalations, which helps, generally speaking, the entire firm. But even when you see work orders trail off and you're out there getting strong escalations, the team has done a great job. Clearly, we don't recover 100% of the wage inflation. Nobody can. But the guys have done a really, really good on that.

Thanks.

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

Good morning, Scott, good morning, Earl. Scott, I want to expand on your previous comment regarding the excellent performance of your team. When I review your B&I segment or consider your consolidated EBITDA margins, you've achieved a 6.6% EBITDA margin this quarter, compared to pre-pandemic levels which were around 5%. Even though the labor market is challenging, you are clearly performing better than before. How much of this growth, considering the delay in returning to work, do you attribute to labor efficiencies compared to other factors, such as the higher-margin EnhancedClean work that Andy mentioned?

I think it's difficult to compare 10.1 to the others. This quarter, it was 6.6%, not 6.8%. There are many factors involved. It's about our teams effectively capturing estimates, managing expenses, and making the right sales moves. Additionally, we are on track to set another record for bringing in new business. So, it's a combination of all these elements. Labor efficiency certainly contributes, as our facilities are not operating at previous levels. We've also been exiting unprofitable business lines, maintaining discipline if we can't achieve necessary escalations. We've been on this course for at least the last two or three years, and I believe we are trending positively.

Combination of several things, not the labor efficiency?

Yes. Yes.

Okay. My second question, Scott, is about RavenVolt. Can you elaborate on the strategic reasons for this acquisition? You outlined it well in your prepared remarks, but I want to know why RavenVolt complements ABM. What capabilities do you bring that can support growth at a company like RavenVolt?

Yes. Let me start by explaining the concept of microgrids. Imagine a 500,000-square-foot office building receiving its power from the grid. Inside, you have all the power feeding in. Now, picture a set of generators positioned alongside that building, which can be activated, either using gas or oil. You can alternate between the power grid and these generators, which run on oil or gas. It's important to note that energy rates from the grid fluctuate throughout the day; there are peak hours and off-peak hours. During peak electrical cost periods, you might choose to switch to the microgrid to save money. This approach offers cost efficiency and is a significant development in sustainability and energy efficiency. We're experiencing an increase in requests for proposals for fundamental electrical services such as retrofit projects, where potential clients are inquiring about our microgrid capabilities. Previously, we were looking for contractors or simply stated that we lacked the internal resources for subcontracting. Now, we can confidently present that ABM has successfully managed these energy solution projects, which allows us to cross-sell within our $7.5 billion revenue scope. We're extremely excited about the opportunities these capabilities create. This area is currently the most dynamic within the Technical Solutions sector.

And I would just add, Tim, just in addition to that, if you think about our emerging e-mobility business, and a lot of the fact that you're going to be looking at a significant electrification of vehicles over the next several years, the infrastructure needed to do that and the power augmentation that's going to make, that's really the sweet spot of RavenVolt, really helping clients understand how they can actually augment their power to facilitate the infrastructure for EV mobility.

Alright. Thank you.

Our next question comes from the line of Marc Riddick with Sidoti & Company. Please proceed with your question.

Good morning, everyone. I want to discuss a few points, starting with some insights from RavenVolt's commentary and then looking at the bigger picture. Could you share what you are observing in the acquisition pipeline? Also, if we recall from the Investor Day, the aim was to add approximately $2 billion in acquisition revenue by the end of fiscal 2025. Could you provide an update on your progress toward that target and share your current outlook on the pipeline and appetite?

Well, look, I think it's clear, we're off to a super-fast start, right, between Able acquisition, which was $1 billion of revenue and then Momentum and now RavenVolt, we're out of the gates really strong. And it's always great when you front-load those acquisitions over a 3- or 4- or 5-year time horizon. So we're really excited about that. And we definitely see that in the marketplace. There's just a little bit more caution right now. People are kind of pausing a little bit. But our pipeline actually is pretty strong. And RavenVolt, you would look at as a tuck-in at $100 million in revenue. But I think there's ample opportunity for us to do tuck-ins like that right now. So, I don't see it necessarily slowing down.

Okay. And then, Scott, briefly, you mentioned in your prepared remarks around some of the longer-term drivers including, the opportunities that are in front of you, that are based on the Federal act. And I was wondering if you could talk a little bit about maybe what you're thinking bigger picture as to when other timing and visibility as to maybe what your initial thoughts on and sort of how that might flow through to ABM. Obviously, we're not talking about any actual guide numbers kind of thing, but sort of maybe if we should think about sort of bigger pictures, how that might come across.

Yes, I think it's a bit early to tell because we're just starting to see the impacts. However, our technical solutions group is well-positioned, especially with our retrofit work and what RavenVolt is currently doing. We're leading in the EV charging market and have recently launched our E-mobility solution, which enables us to design and install chargers while also procuring energy. This rounds out our offerings nicely. While we've only recently seen the relevant legislation, we haven't yet grasped the full impact or the speed at which the funds will be distributed. Nevertheless, we believe we are in a strong position right now.

Can you provide us with an update on the current situation with travel, along with some insights into the business gradually improving? I recall you mentioned the evolution of the mix between airport and airline activity and orders, and I would appreciate it if you could elaborate on what you're observing in that area, especially considering the challenges faced at airports.

Yes. The current volumes are around 90% or possibly even higher compared to pre-pandemic levels. Travelers have noticed that airports are quite crowded. There has been significant frustration regarding travel due to flight cancellations, partly because of our labor challenges. When you visit an airport, you might find that your flight is canceled due to a lack of available pilots or personnel at the gates and for baggage handling. Labor-related issues have led to this frustration. However, this has not discouraged people from traveling, and we are seeing strong volume. We have adjusted our portfolio to a 60%-40% split, with 60% focused on airports and 40% on airlines. Our profitability has improved, exceeding pre-pandemic levels by over 100 basis points. We have been disciplined in our approach, exiting unprofitable contracts, and our team has excelled in the aviation sector.

Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.

Thank you, and good morning. I would like to inquire about the B&I segment. You mentioned some of the factors contributing to it, but could you provide more details on what's driving the increased growth rate and margins? It seems there have been some new successes, so I would appreciate your insights on client feedback. Additionally, was there any increase in pricing, and how significant was the revenue synergy related to Able in this segment?

Yes. So there's a lot there. And what I would say is, when I look at the B&I segment, first of all, we have the benefit of Able. And that acquisition, which has been tremendous. And we have seen a return to office, again, not as much as probably anyone would have expected a year ago, but we've seen a return to office. So that's helped. And we've won just a good deal of new business and expanding with clients. So the kind of environment for growth has been good for us. And again, I would say, I would attribute it mostly to the fact that we brought in Able and that there's some return to office. So that will flatten out over time. So we're feeling really good about that. And it's the core of ABM. It always has been. It's our largest segment. And it will remain robust, we think, through '23.

Okay, great. In your Investor Day presentation, you mentioned the investment allocation related to ELEVATE and discussed various digital transformation, growth, and workforce initiatives. Could you clarify how much of the investment has been allocated across these three areas so far and where you stand in this process?

Yes, sure. We don’t have the exact breakdown between ERP and other systems, but I can say we’re making great progress. This year, we initiated three new tech systems: an applicant tracking system that’s been fantastic for bringing in field workers as it allows us to track them throughout the entire process; a new work order system; and a new risk management system. We also launched our ABM Vantage smart parking solution. Overall, we have a lot of positive developments happening, and everything is on track. Our projected spending this year may be a bit lighter but will likely catch up next year. It’s not an exact science regarding our spending, but everything is on target right now. The significant milestone for us will be next year when we launch our ERP system and begin to roll it out across the industry.

Our next question comes from the line of David Silver with CL King & Associates. Please proceed with your question.

Hi, good morning. Thank you. So I guess I would like to ask you maybe about the Able Services acquisition a little bit more. So it's been almost exactly a year since you closed on that. And as I recall, there were both significant cost synergies envisioned. But also, I was kind of even a little bit more interested in the revenue synergy potential. In other words, the ability to migrate that bundled service or operating engineer-based model to maybe customers in other metropolitan areas or geographies. So if you could, maybe just some comments about the synergies, cost and revenue that you're seeing at this point one year on from Able? Thank you.

Sure. Yes, sure. So look, everything has gone basically as expected. We're on target. Synergies are on target from where we want them to be. On the revenue side, it's performing as expected. I think the big thing for us, David, this year, it was all about having the entire firm integrated into ABM. This is a $1 billion acquisition. So we spent a ton of time on integration to make sure. And I think kind of year or two is going to be about the revenue synergies and how we can cross-sell. So for us, we just didn't want to attack too many things at once because it was really important to get the integration right. So I think more to come, and you're going to hear more about this from us over the next few quarters because we're really excited about the potential.

Okay. Thank you for that. And then maybe just the last question is kind of maybe about the future of office occupancy, office space. So just from a bigger picture point of view, Scott, a lot of headlines these days about major big-name employers trying even harder to get their remote workers back into the offices. And you had opined a few times over the past few quarters about concepts like how much space per worker might be rising in the post-pandemic environment maybe offsetting some other trends. But as you sit here, and maybe if you wouldn't mind sharing qualitatively a few of the comments or a few of the priorities from your major customers, I mean, how do you see just the overall demand and the layout and the demand for particular ABM services evolving as big, big companies try ever harder to get people back in the office? Thank you.

Yes. No, that's a good question. Look, I will say this, it is just actually too early to tell. Because just when you thought that people were never coming back to the office, and employers didn't have control because of what's going on, the macroeconomic environment is changing. It's getting tougher. We'll see if people come back to the office more. I think it's way, way too early to tell. I mean for ABM, we feel really, really insulated from that, only because the majority of the space that we clean on the B&I side is Class A space, modern buildings with modern filtration systems for air, better cleaning specs. Our thesis is that tenants in C buildings are going to gravitate to B buildings and B buildings to A buildings. And so we don't think this is going to have a major effect on Class A buildings in terms of occupancy levels. And the way I think about it and the way I would give you context on it, picture a 20,000-foot tenant that's spending $1 million on rent and they're on a B building, maybe they only need 10,000 feet now, but they're still happy to spend $1 million on rent. They move up to an A-class building with 10,000 feet. And we're starting to see some of those trends. We're starting to talk to clients who have said, 'We may downsize, but we're going to try to upgrade our space.' So we feel like as a firm, we're starting to get insulated. And let's not forget, people are incrementally coming back to office. So it's not like we've reached space. It feels like every quarter, it's incrementally more, but probably smaller increments than we thought.

Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Hi, thank you. A couple of follow-ups on Aviation. And then Scott, you provided some good details. But I mean, historically, I think you exceeded annual revenue in Aviation of a little more than $1 billion. Is there something different going forward in the Aviation business that you would not get back to that number? I know you're not in the fuel business anymore, but I mean just setting expectations, could you approach that number again?

No question. No question. It's just going to come organically now. Part of the reason that we're at a lower number because we exited contracts, specifically because they weren't making money, and we're not in the revenue game when it's a loss. So I think for us, I would look at where we are from a run rate standpoint and look at that as our baseline, and we'll just be growing organically now. And the best example of that is the O'Hare win that we got last month of $25 million a year for five years. I mean it's incredible. So I look at this as the baseline. We'll grow from then, and we should be $1 billion plus.

One more, if I may, on energy and efficiency and technical solutions work. Besides improving the older infrastructure inside buildings. Can you comment on how many projects currently incorporates solar at our batteries? Or is that more of an opportunity going forward, particularly after the Inflation Reduction Act passing?

Yes, we see this as a significant opportunity moving forward and we're well positioned for it, although we haven't experienced much activity yet because the infrastructure is still in the early stages of development. However, I can share that our Technical Solutions group currently has the highest backlog we've ever recorded, which consists of signed contracts awaiting commencement. So, in terms of sustainability and energy efficiency, particularly regarding the whole ESG platform, we are in a strong position with the largest backlog we've ever had.

Our final question this morning comes from the line of Andy Wittmann with Baird. Please proceed with your question.

Okay. Thanks for let me back in. I just thought it would be helpful for to have a little bit more detail on the EPS accretion that you might be getting from RavenVolt. Obviously, you guys gave the revenue give EBITDA in the press release. And that was super helpful, and we all did the math on that. But there's is going to be intangible amortization attached to that because of the backlog business, which is going to burn off, but also probably because of some goodwill that won't burn off. But I guess we were thinking that you could probably get $0.03, $0.04, $0.05 of annual EPS accretion after you take the intangible amortization hit. I guess, Earl, could you just comment if that's kind of the right way of thinking about it? And then just given the moving pieces that you noted on interest rates as well as the incremental debt you'll be taking on for RavenVolt, could you just talk about what you think the interest expense run rate will be? Just heading into initial guidance for next year, I think these are two areas that there could be some variability, and you can all get us tightened up on those items.

No, absolutely. So we believe that the RavenVolt acquisition is definitely going to be cash accretive. I would say from an adjusted EPS. I think you're actually in the range. I'd say probably $0.03 to $0.04 based on the fact that we will actually have some amortization of the intangibles. So I think you're spot on. With regards to interest rates, obviously, we have been impacted by the 225 basis point increase that the Fed is actually put into place over the course of the last year. So when we look at our current run rate based on our fixed floating mix, we're looking at about a little over $15 million of interest per quarter. So hopefully, that helps you in the modeling.

Thank you very much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Salmirs for any final comments.

Sure. Look, I just want to thank everybody for participating today and the interest you have. And I just want to close with just saying just briefly, on just behalf of our entire team, I want to extend our thoughts and condolences to our team members, to our clients, and partners across the United Kingdom and the Commonwealth following the sad news of the passing of Queen Elizabeth II. I mean, her devotion to service will undoubtedly remain an inspiration for generations to come. And again, we just wanted to extend our condolences. So thank you, everybody, for participating, and look forward to Q4, coming back to you and chatting some more. But thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.