Greetings, and welcome to the ABM Industries Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Goldberg, Senior Vice President of Investor Relations for ABM Industries. Thank you. You may begin.

Good morning, everyone, and welcome to ABM's Second Quarter 2023 Earnings Call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmirs, our President and Chief Executive Officer; and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our second quarter 2023 financial results. A copy of the release and an accompanying slide presentation can be found on our website. After Scott and Earl's prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Our use of the words, estimates, expects, and similar expressions are intended to identify these statements and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies our presentation as well as 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, and the 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.

Thanks, Paul. Good morning, and thank you all for joining us today to discuss our second quarter results. ABM generated solid results in the second quarter, delivering 2.3% organic revenue growth and strong adjusted EBITDA growth. We achieved these results through our consistent focus on cost controls, implementing price escalations, and driving organic growth in our manufacturing and distribution, aviation, and education segments. These factors more than offset the impacts from a still challenging labor market, continued supply chain constraints, lower work orders, and the slow recovery of office occupancy for commercial real estate. Our financial and operational performance speaks to the resilience of our business model, our end market diversification, and most importantly, the talent and dedication of our team. In all, ABM generated second quarter revenue of $2 billion, with an adjusted EBITDA margin of 7.2%, which included the benefit of earnings from the prior period parking project as discussed last quarter. Despite a more challenging macroeconomic environment than we anticipated, we remain on target to achieve our 2023 financial goals. We continue to be focused on driving growth across the company and capturing our share of the many opportunities before us. In fact, for the first six months of 2023, we generated $918 million in new sales, up from $791 million last year. We also continue to invest in our future including our ELEVATE initiatives, which will enhance our operational efficiency and deliver an improved experience for both clients and our team members. I'll now discuss the demand environment for each of our industry groups. Let's begin with B&I. Office density rates in the second quarter remained at relatively stable levels at approximately 50% on a blended basis. Although commercial office space remains fairly well occupied Tuesday through Thursday, many employees continue to work remotely on Monday and Friday. This trend is likely to continue as employers accommodate remote and hybrid work. This pattern of office usage limits demand for certain higher-margin work orders like carpet cleaning, freight elevator service, and large gathering cleanups, which are largely driven by office density. As a result of the reduction in office density, we are beginning to see a consolidation of office space in metro markets as clients reduce their footprint when their leases expire. Although we have not yet experienced a resulting contraction and scope of work, we anticipate that further increases in vacancy rates could create additional pressures on our business. However, we feel that we're very well positioned given our commercial real estate profile, which is heavily concentrated within Class A newer properties. Although Class A buildings are still impacted, it's to a much lesser degree than Class B and Class C properties. We also believe that as tenants migrate towards higher-quality buildings, it will stabilize our multi-tenant portfolio. Additionally, a sizable portion of our commercial real estate exposure is in engineering, which tends to be more stable as HVAC and electrical systems need to be maintained regardless of occupancy density. Moving to Aviation. Activity in the leisure and business travel markets, including related parking and transportation, has essentially returned to pre-pandemic levels. Accordingly, as we go forward, we anticipate our aviation revenue growth will be reflective of the overall travel market growth rate complemented by new business opportunities. In fact, we recently won a multimillion-dollar expansion of passenger transportation services at two major U.K. airports. We also expect continued growth in our ABM Vantage parking solution, which enhances revenue for clients and improves the travel experience. Demand in manufacturing and distribution continues to be solid, benefiting not only from expansion within existing logistics and e-commerce clients but also from new business and new end markets. For example, we added over $30 million in new contracts in the semiconductor market in the second quarter alone. We also saw growth with a leading aerospace company, further highlighting our successful efforts to broaden our client base in attractive end markets. We expect revenue growth in our M&D segment to remain on pace for the remainder of the year. In Education, the addition of sizable new clients in the fourth quarter of 2022 and new business wins in this fiscal year has helped drive mid-single-digit organic revenue growth in this segment. We have a strong pipeline of new business opportunities, and I'm confident ABM will continue our positive growth trajectory given our competitive positioning. From a margin perspective, segment margin remains above pre-pandemic levels, and we anticipate that further labor market normalization will support the margin progress we've achieved. Moving to Technical Solutions. The demand environment for EV charging infrastructure and microgrids remains positive as our ATS backlog exceeds $440 million. Furthermore, after a slow start to the year, hampered by macroeconomic concerns, market conditions are slowly improving for our Infrastructure Solutions business, as evidenced by a significant contract win with a school district in Western Pennsylvania, which includes upgrades for lighting and HVAC, as well as multiple building enhancements. Turning to eMobility. As we discussed on our last call, we expect the pace of EV charger installations to accelerate in the second half of the year as we begin to deliver on several new programs, including one for a large automotive dealer network. RavenVolt generated approximately $30 million in second quarter revenue, completing multiple projects, including the installation of power resiliency systems to two major retailers and a multinational consumer goods company. Similar to EV, we expect growth to accelerate in the back half of this year as long-awaited materials begin to arrive. Overall, we continue to be excited about the long-term outlook for ATS and believe we're at the beginning of what will be a multiyear runway of strong growth. In fact, to support this growth opportunity, we recently announced our plan to construct an electrification center that will establish ABM as the clear leader in electrification infrastructure turnkey solutions. The planned facility in the Atlanta area will house multiple solutions serving the eMobility, power resiliency, and electrification sectors, creating a first-of-its-kind EV ecosystem hub. Turning to ELEVATE. We made significant headway on our planned initiatives during the second quarter, including the initial successful deployment of our cloud-based ERP system and 15 integrated boundary systems. Our initial implementation focused on our Education segment, and the results have been more than encouraging. As we progress forward, future implementations will move through each industry segment on a programmed and managed pace as we leverage our collective learning and experience. In addition, we extended the reach of our workforce productivity and optimization tool, which provides our teams with advanced analytics for productivity levels across their portfolios. This capability has been critical for optimizing labor usage in our commercial real estate markets. We are also approaching the pilot launch of a new mobile application for our frontline team members, a key digital enabler for the ELEVATE program. Lastly, we continue to make progress on our ESG journey. For the first time, ABM has been named to the Diversity Inc. list of noteworthy companies. This, among many other distinctions and awards, reflects our culture and our drive to lead away in DEI. I couldn't be prouder of where our company is heading despite the macroeconomic headwinds and the challenges in commercial real estate. The mixture of our end markets, the resiliency of our culture, and the extraordinary talent of our teammates will allow us to continue on our accelerated path. Now I'll 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. Second quarter revenue increased 4.5% to $2 billion, comprised of organic revenue growth of 2.3% and growth from acquisitions of 2.2%. Moving on to Slide 6. Net income in the second quarter was $51.9 million or $0.78 per diluted share, up 6% and 8%, respectively, as compared to last year. The increase in GAAP net income was driven by higher income from operations, especially in our Aviation segment, and tight expense controls partially offset by higher interest expense, labor costs, and lower volume of higher-margin work orders. Adjusted net income was flat at $60.2 million, adjusted earnings per diluted share was $0.90, up 1% from the prior year period. Adjusted net income and adjusted EPS primarily reflects higher income from operations and effective cost controls offset by higher interest expense. Adjusted EBITDA increased 15% over the prior year to $137 million, and adjusted EBITDA margin was 7.2% versus 6.5% last year. This performance was boosted by the recognition of revenue connected with the previously mentioned Aviation parking project as associated expenses were recorded in prior periods. Excluding the impact from the parking project, adjusted EBITDA was $124.4 million, up 5% over last year, and adjusted EBITDA margin was 6.6%. Now turning to our segment results beginning on Slide 7. B&I revenues declined 0.5% year-over-year to $1 billion. Organic revenue declined 2%, mainly reflecting a lower volume of work orders, including disinfection versus the prior year and expected attrition of certain client contracts from the Able acquisition. Operating profit in B&I decreased slightly to $76.2 million, and operating margin was 7.6%, essentially flat with the prior year. Aviation revenue increased 22% to $227.2 million, marking the eighth consecutive quarter of year-over-year revenue growth. This improvement was driven by the recognition of the previously mentioned parking project revenue, as well as increased leisure and business airline traffic, along with related growth in parking activity. Aviation's operating profit was $23.6 million, including $12.6 million of parking project earnings versus $9.6 million in the prior period. Margin was 10.4% compared to 5.2% last year. Adjusting for the parking project, operating profit was $11 million and margin was 5.1%. Turning to Slide 8. Manufacturing and distribution revenue grew 5% to $373.2 million, reflecting favorable market demand and expansion with clients in the life sciences and semiconductor market. Operating profit decreased 3% to $40.8 million, and operating margin declined 80 basis points to 10.9%. The decreases in operating profit and margin primarily reflect labor cost inflation and changes in mix. Education revenue increased 6% to $216.7 million, benefiting from the addition of new clients in the fourth quarter of fiscal 2022. Education operating profit was $11.8 million, essentially flat versus the prior year period while our margin was down slightly to 5.4%. Technical Solutions revenue grew 15% to $168.4 million, driven by the contribution from RavenVolt. Organic revenue declined 6%, largely due to the timing of large EV charger installation programs, which are weighted to the second half of the year, and the delay of some infrastructure solution projects. Backlog in ATS is over $440 million, supporting our expectations for a strong back half of the year. Of note, RavenVolt generated nearly $30 million in revenue in the second quarter, aided by the receipt of delayed materials. ATS’s operating profit was $10.2 million, and margin was 6% compared to operating profit of $10.6 million and margin of 7.2% last year. The decreases in margin and profit were largely driven by changes in service mix and the amortization of intangibles related to the RavenVolt acquisition. Moving on to Slide 9. We ended the second quarter with total debt of $1.5 billion, including $58.6 million in standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.6 times. At the end of Q2, we had available liquidity of $503.2 million, including cash and cash equivalents of $71.2 million. Free cash flow in the second quarter was $16 million, and we expect a solid back half of the year in terms of free cash generation. Interest expense was $21.1 million in the second quarter, up $13 million from the prior year period and up over $1 million sequentially from Q1. The increase was due to significantly higher interest rates as well as a year-over-year increase in total debt. Now let's move on to our full-year fiscal 2023 outlook, as shown on Slide 10. We now expect GAAP EPS to be in the range of $2.52 to $2.72, up $0.09 from our prior outlook, driven by a benefit from changes in items impacting comparability, primarily related to the fair value of contingent consideration. Our outlook for adjusted EPS remains unchanged at $3.40 to $3.60. Interest expense is now expected to be around $80 million for the full year, reflecting recent Fed actions and the forward yield curve. This forecast is about $6 million above the high end of the previously estimated range. Our tax rate before discrete items is anticipated to be between 29% and 30%. And as mentioned last quarter, we expect to grow full-year adjusted EBITDA at a mid-single-digit rate. Additionally, we are increasing the low end of the range for adjusted EBITDA margin by 10 basis points and now expect it to be between 6.5% and 6.8% for the full year. We now expect full-year 2023 free cash flow to be in the range of $240 million to $270 million before the final installment of our CARES Act payment of $66 million, which was made in Q1, and combined integration and ELEVATE cost of approximately $75 million to $80 million. This represents a $30 million decrease from our prior forecast, largely driven by expected working capital needs to support growth in our ATS segment in the second half and higher interest expense. With respect to the cadence of quarterly adjusted EPS, we expect approximately 45% to 50% of full-year adjusted earnings per share to be generated in the first half of the fiscal year, consistent with our prior guidance. We anticipate Q3 adjusted EPS will not be materially different from Q2 2023. With that, let me turn it back to Scott for closing comments.

Thanks, Earl. In late 2021, around the time we announced our initial ELEVATE targets, the average U.S. inflation rate for the full year 2021 was 4.7%. The 10-year T-bill was approximately 1.5%, and the unemployment rate has trended down to 4% from the pandemic high of 15%. Today, the 10-year T-bill rate is over 200 basis points higher. Inflation peaked at 9% in 2022 and is currently close to 5%. And the job market for blue-collar labor is as challenging as it has ever been. Despite these headwinds, we've delivered on our financial goals, expanded our business and service offerings, and achieved important progress towards our 2025 target. Today, ABM is stronger and better positioned than ever before. Our success reflects our resilient business model, the benefits from our ELEVATE investments, and consistent execution by the ABM team. As we move forward, I'm confident in our ability to build value for our stakeholders as we work tirelessly towards achieving our goals, underpinned by the strength of our core business. ABM continues to evolve into a higher-growth, higher-margin facility solution provider. So, with that, let's take some questions.

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

Thanks for taking my question. So, I just wanted to start on ATS. It sounds like RavenVolt is performing very well now. It sounds like the EV charging side is on pace for a second half ramp. I just wanted to round that out with a discussion on the bundled energy solutions piece and just how customer decision-making is trending in light of the weak macro conditions.

Yes, that's a good question, Sean. It's still slow, likely slower than we would prefer, but this does not reflect our market share, sales pipeline, or the viability of our offering. The situation is more about the fact that many clients are currently in pause mode. The economic conditions have become a bit more difficult in that segment due to interest rates. However, we recently secured a significant project in Western Pennsylvania, and our pipeline remains strong. We are essentially waiting for clients to make their decisions on upgrades that they recognize they need because they are retrofitting facilities that require it. It's a matter of the school board coming together to approve the decision. We feel confident, but there is a slight delay. We hope to see a stronger performance in the second half. The positive aspect of ATS is our diversification. Along with our bundled energy solutions, our RavenVolt microgrid solution is gaining traction, and we have a core electrical and mechanical business that we don't often highlight, which also supports our efforts. Diversification in that segment is advantageous for us.

Okay. Thanks for that, Scott. And then I guess maybe just to finish it off on ATS. I mean where should the margins be? Obviously, in the first half, we've had supply chain issues and kind of a project timing air pocket. I mean, I'm just trying to get an expectation for where we should be run rating when everything is back on planned for ATS.

Yes. Historically, when it's humming, it's high single-digit, right? And there's no reason that it won't get back to that. I think it's like that higher-margin stuff, which is the bundled energy solutions and the microgrids that just haven't kicked in yet. And even Sean, EV, which we said is lower margin. That's really because we've been playing in the dealership market, which is like onesie, twosies. Like if you have a large-scale contract with an automaker like BMW, you're putting two or three in per dealership. It's not the scale you want; we're moving more to a fleet orientation where we can go to a facility and put in 100 chargers and get the scale. So that's part of our ramp-up strategy as well. So, I'm confident over time we'll squarely get back into that high single-digit margin range.

Okay. Got you. And then one more, just relative to the work order dynamic, I feel like over the past two years, we've been anchored from pandemic highs down to normalized. But now we're talking about lighter vacancy rates and maybe that normalized work order level having some downside. How should we think about that, Scott, and whether there's risk to margins around a step down to below normal work orders. What have we seen historically there?

Yes. I think we're getting back to pre-pandemic levels, which reflects the reality of hybrid work. To break it down: work orders come from various situations, like calls for the freight elevator due to furniture deliveries or celebrations, such as a birthday party that requires extra assistance. There are also tasks like carpet cleaning. With people in the office three days a week instead of five, we’re receiving fewer calls on Mondays and Fridays. Despite this, we have stabilized during hybrid work at a higher rate than before the pandemic, and we are encouraged by that. The additional decline we are seeing is primarily due to the current state of the economy, as people are being cautious with their spending, creating a bit of pressure. Looking ahead, I believe that once we see a recovery, work orders will increase again, likely surpassing pre-pandemic levels. I see this as a temporary setback. Furthermore, I do not expect significant deterioration on a percentage basis. While there may be some volume decreases due to revenue compression, this will affect dollars, not margin percentage. Overall, I feel that our current position is quite stable.

Okay, thanks. I’ll turn it over. Appreciate it.

Our next question comes from the line of Justin Hauke with Baird. Please proceed with your question.

Hi, good morning. I wanted to clarify some aspects of the guidance because the margin has increased slightly despite the circumstances, and the EPS has remained stable even with the added interest expense. Can you share what contributed positively and negatively? Also, I'm interested in the corporate cost control, which appears to be performing better than anticipated. Could you provide your outlook for corporate for the latter half of the year?

Sure. I'll address that. Throughout Quarter 2, we experienced some challenges, including a decrease in work orders that affected our margins and ongoing pressure in the labor market. We have faced labor inflation, but the good news is that we have managed to offset most of it through price increases. Additionally, the impact of last year's parking project helped balance things out. When we examine the quarterly performance, part of the improvement in margins was due to the benefits from the deferred parking project. Despite the ongoing obstacles with margins, we are pleased to report that, even when excluding the impact of the parking project, our margins for the quarter stood at 6.6%. Given the challenges, we are satisfied to be operating within the midpoint of our expected range.

Okay. And just the corporate expense, maybe like a dollar run rate, what you're kind of thinking in the back half of the year?

Yes. So, I would say that when we look at corporate expenses, I would say that over the next few quarters, expect an average of about $60 million in corporate expenses, excluding the items impacting comparability.

Great. And then I guess the second question, just on the parking segment. I mean even backing out the one-time here. Your organic growth rates there have been really strong. And it kind of sounded like in your prepared remarks that maybe you're expecting that to kind of decelerate when you talked about more market trends. I just want to understand what you mean by that and what you're thinking about for the growth rate of that segment? What is the market trend for the back half of the year?

Sure. Generally speaking, from an industry perspective, parking revenues are stable now due to the implementation of hybrid work. Our parking business is focused on two key segments: commercial real estate and aviation, both of which are performing steadily. It feels more normalized at this point. We're particularly excited about our Vantage parking offering, which is an innovative technology that provides valuable insights for clients regarding revenue management. This new product is expected to help us accelerate growth. We're optimistic that we can grow in the parking segment, potentially even outpacing the market due to our innovative efforts. However, on a broader scale, the parking business as an industry has reached a level of stabilization.

And I apologize. I meant the aviation segment and the adjusted for the parking item, your growth rate there has been in the high single digits. I guess what I was more asking about is, what is your expectation for the deceleration from that? Or why was it so strong in the first half? Is that just kind of the recovery in aviation volumes and now you're saying those are recovered and they should kind of moderate to more low single digit?

That's right. That's exactly right. Travel has been well, you know, right. Anything around travel and leisure has been so up. So, I think at this point, and I think we did say a little bit in the prepared remarks, we feel like we are back to pre-pandemic levels and maybe even beyond. We do think there's a bunch of people that are catching up, in terms of travel. So, I think you'll see more of a stabilization but still nice steady growth.

Great. Okay, thank you very much.

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

Yes. Hi, good morning. I just wanted to follow up again on the technical solution side of the business. So, walk us through, you mentioned that you have a project backlog of $440 million, are you expecting that all of that will be recognized as revenue this year? Just walk us through the timing of what's going on with the project delays? And when do you expect to fulfill those projects?

Sure, Faiza. That will all be recognized this year. Typically, ATS tends to have more activity in the second half of the year. We do a lot of work in school systems, and during July and August, schools, especially K-12, are not in session, which allows us to conduct much of the infrastructure work at that time. This is why much of our activity is loaded into the second half of the year. Our backlog consists of signed contracts that will be initiated, primarily in Q3 and Q4, with more emphasis on Q4. While I can’t specify exactly how much of the $440 million will be recognized this year, having this level of backlog is a strong indicator. We expect to initiate these projects in Q4, with ramp-up continuing into Q1 and a bit into Q2.

Okay. And then just so I'm clear because the delays are related. Is it more supply oriented? Or is it more demand-oriented? Because I was under the impression that it was more supply related. But some of your comments today are leading me to believe that maybe it's more on the demand side.

No, actually sorry. Faiza, it's a combination of both. It's a little bit on the demand side on the bundled energy solutions on the microgrids, but it's all about the supply chain. And specifically, batteries and some of the switch gear. Now, we are encouraged because what was happening, and I think you would see this from some of the competitors in our industry. At the beginning of the year, what would happen is something would take 10 weeks to get the item, and then maybe a month later, you'd get another order for something and you go to the manufacturer, like, 'Oh, no, no, now it's taking 12 weeks. And then you'd call again, it's like now it's taking 14 weeks.' It's all starting to stabilize now. And that's the key for us. So, if something pre-pandemic took six weeks and now it's taking ten, as long as it stays at ten, you can be planful, you can manage around it, and we're seeing that stabilization. So, the majority of the problem, especially on the RavenVolt side, has been supply chain-oriented, definitely not demand-oriented. The pipeline is really, really robust.

I'm a bit unclear, so I want to follow up. If the issue is on the RavenVolt side, it wouldn't affect your organic revenue. Can you explain further what is causing the decline in organic revenue?

Yes. If we look at RavenVolt for a moment, there are two main segments: EV and bundled energy solutions. Both are primarily focused on demand. In the case of EV, we are finishing a large project with a dealership while beginning another significant project with an automotive company, which has delayed progress to the latter half of the year. This delay is due to timing related to demand rather than supply chain issues. For bundled energy solutions, we have a strong backlog and numerous orders, but clients are hesitating to proceed as they are currently in a general pause. However, we are beginning to see some movement as the market anticipates that interest rates may be stabilizing. If that holds true, it will prompt clients to start making those decisions.

Got it. Thank you, thank you for indulging me on all the detail. And then just maybe if I can follow up on the ELEVATE initiatives. You mentioned a few things. Give us a sense of how you're thinking about timing there? I know you've talked about the end state being maybe a couple of years out. Talk about how you're thinking about getting to that end state, and what are some of the next initiatives that we should expect going forward?

Sure. I mean, look, we are on track with ELEVATE. And the big core in terms of infrastructure is our ERP transformation, and that's a two-year process, because we're doing it by industry group, which just had the successful launch of our education group literally like a month ago, and it's gone better than we even expected. Because the ERP implementations are always bumpy and it went really well. And now we're landing our next industry group, which will happen early next year. So, the infrastructure side is on track and going better than we hope. And then other things are all in progress. We launched hyper-targeting for sales growth. You saw in or heard in the prepared remarks, we had another unbelievable first six months of the year of new sales. So that's a reflection not only of our sales team in terms of just the culture of our people, but the hyper-targeting tool. And we're now piloting our workforce management which is going to create efficiency in the field. And this month, we're releasing our ABM Connect, which is our digital application to start connecting us in real time to the people out in the field, which is going to be a real game changer for us. And even that is probably a 12- to 18-month journey, if not longer, to actually get it deployed across 100,000 people, as you can imagine. But, things are going as planned. So, hopefully, you can sense the enthusiasm.

Great. Thank you so much.

Our next question comes from David Silver with CL King & Associates. Please go ahead with your question.

Yes, good morning. Thank you. I would like to delve a bit deeper into the RavenVolt performance so far. Could you discuss how the business's performance aligns with or compares to your initial expectations? Additionally, I noticed a change in the fair value of contingent consideration. Could you explain what led to that adjustment this quarter? Thank you.

Sure. I'll take the first part. We're more encouraged than ever about RavenVolt, even more than when we executed the transaction, because microgrids are extremely appealing right now. The backlog is impressive, and the team is excellent. While there is some challenge due to supply chain issues, which are affecting everyone in our industry, we still see positive signs ahead. We are hopeful for a strong second half of the year. I'll let Earl address the accounting treatment since that is his area of expertise.

Sure, Scott. So, on a quarterly basis, we do a mark-to-market valuation on the contingent consideration. And when we look at the outlook, as Scott just mentioned, we're still very positive on the deal model. However, there's some timing challenges as we articulated in regards to supply chain timing, which has actually deferred some of the revenue and earnings that would have actually happened in year one into future years. And then just based on the GAAP accounting of that, you actually then discount that back with a high discount rate, which then resulted in this reduction in the liability. So again, I would really chalk it up to timing, as opposed to anything different from a value case basis.

Thank you for addressing my previous point. I have another question regarding the office and commercial market, which has been a hot topic lately. You've touched on it already, but I'm curious if you could provide a multi-year outlook, perhaps a two- or three-year perspective. It seems that the dynamics of the office market and tenant motivations have shifted. To continue growing in this sector, I imagine you'll need to increase your market share or enhance your offerings with higher-value services. From your viewpoint, how do you see the evolution of your value proposition or services in the commercial market to adapt to current trends like decreased occupancy rates and the rise of remote or hybrid work? What strategies will you implement to maintain and ideally increase your market share and profitability? Thank you.

Sure. Well, listen, there's certainly going to be pressure in commercial real estate. That's pretty obvious. For us, so far, as we've mentioned, it's really only been around the work order side because of hybrid and the economy. So, when you drill down into ABMs portfolio in B&I, don't forget, or you may not have the insight to this, but a third of our revenues in B&I is around engineering and parking. And those are really stabilized depending on office density, because it doesn't matter how dense the floor is, you still need engineers in the basement, working on the mechanical and electrical business, that doesn't change. And parking, as we said, is stabilized. So, you're really talking about the janitorial piece that has some of the exposure. But then you look at ABM's portfolio, and we are predominantly Class A buildings, newer buildings, bigger buildings, which are the ones that are going to survive the best, and if anything, we've seen those have positive absorption compared to the rest of the market because we're seeing B and C tenants migrate from B and C buildings to Class A buildings. So, I think for us, we're pretty protected. It will be choppy for the next several quarters, there's no question about it. Leases expire even in A buildings, and as they take a little less space, the next tenant has to come in, they're going to have a year or so to build their space. So, there'll be some choppiness. But I think, again, we're so mitigated because of the portfolio that we have. And don't forget, again, as a whole, we're diversified. We've been investing in end markets like ATS, manufacturing and distribution, which is another hedge for us. And then lastly, David, what I would say is you think about the ELEVATE investments and just hyper targeting in general for the growth side to help us mitigate some of the compression in the real estate market. So, I think we're doing all the things we can, and we actively manage these challenges. We've seen some of these downturns before in the segments; look at even the pandemic when schools were closed and airports were closed, and B&I accelerated. So now we may be in a period where there is less acceleration in B&I, but as we talked about, aviation is doing great and ATS is doing great.

Thank you for that. I just have a quick one here, but you touched on ERP and what the history of many other companies has been with their different implementation issues. And I've certainly been an observer of a number of them. Just so I know, but in the event that maybe costs rise a little bit above expectations, with the implementation of your ERP system. Would that extra outlay be treated? Would it be capitalized? Or would it be expense? Do you have a sense of that at this point?

Yes. We're right on our target. So, we're not talking about cost overruns at this point. We feel really good and have really good line of sight into what the expense profile looks like in the next couple of years. So, that's not in our narrative as cost overruns.

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Timothy Mulrooney with William Blair. Please proceed with your question.

Scott, Earl, good morning. Most of my questions have been answered, so I'll keep this quick. But last quarter, you all gave the headwinds from work orders. I think it was $35 million. And you said you'd expect that, I think, to normalize more. So, you didn't admit this quarter, is that because there really wasn't a headwind year-over-year or if there wasn't, if you can quantify it for us?

Yes. We're talking about maybe $15 million. It hasn't been much. And again, I do think we're heading into this more stabilized rate right now. So yes. I think this is a good performance given everything that's happening in the environment and where hybrid is and as I said, where the overall economy is; we were actually pleased that it wasn't more acute.

Yes. Because I mean, I think what we talked about last quarter was the anticipated reduction in disinfection-related work orders, which that will become a non-story starting in Q3 and Q4 as that kind of precipitates. I think what the potential headwinds that we'll be seeing potentially in the future are really around just based on what Scott earlier alluded to with regards to the hybrid environment and the potential for reduction in work orders where, again, right now, we're now at kind of pre-COVID levels, which are typically about 5% of revenue.

Yes, that's kind of how I'm thinking about it, or how I interpreted Scott's comments earlier, is like, look, pre-pandemic work order of 4% to 5%. All else equal, you'd expect that to be higher on a go-forward basis. But there's some macro headwind stuff that's kind of pulling it back to that 4%, 5%. Is that the right way to think about it?

That's exactly right.

Exactly right. I want to emphasize that even before the economy began to shift in recent months, we were maintaining levels similar to those before the pandemic. It seems that this new approach to cost control has helped us return to those pre-pandemic levels. We are optimistic, Tim, that we will surpass those levels once the economy improves.

Understood. Last one from me, guys. Thank you. Does it make sense to prioritize your capital allocation on debt reduction near term versus M&A and buybacks and other things to help reduce that incremental interest burden? Or are you comfortable at 2.6 times?

Yes. Good question. When we looked at our cash flow, which generally is weighted more in the back half, we do feel like it's going to provide us with ample flexibility to do both of those things, which would include paying down debt in addition to potentially doing some very small share buybacks. And when I talk about share buybacks, it really would be most likely limited to the anti-dilutive nature of our share-based compensation. But the good news is we feel that with our strong cash flows, we'll be able to limit our net leverage exposure.

All right. Thank you.

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.

I just want to thank everybody for participating and the interest level, again, very much appreciate it. We hope everyone is having a good start to the summer, and we're looking forward to coming back to you in Q3 with an update on all things ABM. So, have a great summer, everybody.

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