Abm Industries Inc (ABM) Q4 2023 Earnings Call Transcript

Greetings and welcome to the ABM Industries Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Paul Goldberg, Head of Investor Relations for ABM. Thank you. You may begin.

Good morning everyone and welcome to ABM's fourth 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 fourth quarter and full year 2023 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 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 estimate, expect, and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the slide that accompanies our presentation, as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the Investors tab. And with that, I'd like to turn the call over to Scott.

Thanks, Paul. Good morning and thank you all for joining us today to discuss our fourth quarter results. Fourth quarter revenue grew 4.1% to $2.1 billion, including 3.8% organic growth. All segments grew organically in the quarter, led by double-digit growth in our Aviation segment, driven by healthy airport activity and the addition of new clients. Our Technical Solutions, Education, and Manufacturing and Distribution segments also posted solid growth, reflecting several project closeouts in Technical Solutions, new Education clients, and our strong positioning in M&D. We also recorded modest organic growth in B&I, where robust sports and entertainment, and special event activity helped to offset continued softness in the commercial real estate market. Additionally, our team set another sales record in 2023 with new sales bookings of $1.6 billion, which is a great accomplishment. I'm pleased with our progress in resolving certain microgrid project delays in technical solutions as well as our ability to win new clients, implement price increases, and effectively manage our cost structure. As a result, ABM generated double-digit increases in net income, adjusted net income and adjusted EBITDA, and achieved an adjusted EBITDA margin of 7.2%. I'll now discuss the demand environment for each of our industry groups. Let's begin with B&I: office density rates remained relatively static in the fourth quarter at around 50% plus on a blended basis with the commercial office vacancy rate near 20%. These factors directly impacted demand for our janitorial services and B&I. Although the hybrid work model remains prevalent, we expect to see a continued gradual increase in the time employees spend at the office in the next couple of years. We expect as office leases expire in 2024, many clients will move forward with their plans to downsize their office footprints to match their density, which will put pressure on demand for janitorial services until vacant floors are re-leased and reoccupied. This company has become more proactive in requiring their employees to return to the office. The impact may be more muted than our current expectations. Given our flexible labor model, ABM remains well-positioned to navigate the challenges in commercial real estate. As a reminder, our multi-tenant commercial real estate profile largely consists of Class A and newer buildings, which we believe are far more resilient than lower-quality buildings. In addition to janitorial services, our B&I segment provides engineering services and has clients in submarkets like sports and entertainment and healthcare, all of which are influenced by demand drivers that are significantly less correlated to office density; that’s an important reason why B&I's full-year revenue declined less than 1% despite softness in the commercial real estate market. In summary, while the pressure in commercial real estate is tangible and will impact B&I's performance next year, we plan to mitigate a portion of the impact through our flexible labor model, cost management, and the diversity of our end markets and the mix of service lines. Moving to Aviation, the leisure and business travel markets, including international travel, remain quite strong and should be solid in 2024, although we face tougher year-over-year comparisons due to the large 2022 parking project that carried over into Q1 of 2023. Our Aviation team has executed extremely well, managing through a historically tight labor market while ramping up service volumes to above pre-pandemic levels. They also continue to win new business, including two large airport janitorial contracts, pending final approval, along with two core airline projects, all of which kicked in in the first half of the year. Demand within our Manufacturing and Distribution segment has remained strong, benefiting from our core e-commerce and logistics clients and from our diversification efforts, including expanded business with clients in the manufacturing, semiconductor, and biopharma markets. The newer end markets continue to offer exciting growth opportunities as clients increasingly outsource support services in order to focus on their core business operations. In addition, we see growing momentum from the onshoring of manufacturing. As we mentioned last quarter, we expect a large and valued M&D client to rebid and rebalance their work needs in 2024 as part of their normal procurement process. Our team has been working to offset the anticipated revenue reduction through expansion with other clients while pursuing new opportunities in other end markets. Over the mid-term, we expect M&D to grow revenue in the high single-digits. However, the 2024 growth rate will be impacted by the rebalancing. Moving to Education, we generated mid-single-digit organic revenue growth driven by 100% in-class learning and by the addition of new clients. We executed well on our sales pipeline and won several new contracts during the year. We expect 2024 to be another year of solid growth and stability. Moving to Technical Solutions, segment backlog now exceeds $410 million even after several completions of projects in the fourth quarter, with EV and microgrid services representing nearly 60% of the segment total. Conversely, we continue to experience soft market conditions in bundled energy solutions, which includes HVAC lighting and electrical system retrofits, primarily due to the impact of higher interest rates on project ROIs and the availability of government funding through legacy COVID legislations. We believe projects will pick up once return expectations get reset and the government funding projects sunset. The timing of this is hard to predict, which is why we are tempering 2024 expectations for bundled energy solutions. Technical Solutions as a whole performed better in the fourth quarter as we were able to close out several legacy projects and make progress on certain microgrid projects following supply chain and permitting delays earlier in the year. Looking forward, we expect to advance microgrid projects during the year. Also, the level of interest in bidding activity for microgrid systems and large EV infrastructure projects, including the opportunity for recurring revenue, remains high. We expect 2024 to be a year of solid growth in Technical Solutions. Now turning to our ELEVATE initiative. Following the successful financial close on our new cloud-based ERP system for the Education segment, we achieved two more milestones in the fourth quarter. First, we launched a new workforce management solution for pilot sites in the Education segment. This tool allows for a more modern approach to time and attendance and scheduling, providing managers with improved visibility. By pairing this tool with the workforce productivity and optimization tool we released last year, we are now entering a new phase of efficiency that provides operators with enhanced insights. We expect to complete the rollout of this tool to our Education segment in 2024 and further expand deployment thereafter. The second milestone is the initial release of our new team member mobile app called Team Connect. The app is currently in the hands of more than 500 frontline team members. Over the next year, this app will deliver on-demand training, safety moments, clock-in and clock-out integrations, and task management features, among other capabilities. These tools will create a digital connection to the frontline, driving a higher level of engagement and delivering real-time updates to our clients that provide more transparency on services performed. Over the next couple of years, we plan to scale this ecosystem to deliver the outcomes we initially shared during Investor Day in late 2021. We've also had a lot of learnings from the successful initial deployment of our cloud-based ERP system in our Education Industry Group earlier this year. We are applying those learnings to future segment ERP rollouts to ensure we minimize any potential disruptions to our clients and our internal operations. As a result, we expect the full deployment may take about a year longer than first anticipated and the total program cost will likely be about $200 million to $250 million, which is modestly higher than we said in 2021. We could not be more excited about the positive impact that our transformation initiatives are having on our clients and team members. Our expectation is that these capabilities will be game-changing in our industry. Looking back at our performance in 2023, we did a terrific job winning large new contracts in Aviation, in Education, as well as in M&D, where we continue to expand. Although we experienced some project delays in Technical Solutions, our performance improved in the fourth quarter and we expect further progress as the nascent markets mature. In B&I, we are effectively navigating this challenging market, benefiting from the flexibility in our labor model and our real estate portfolio that remains heavily weighted towards better-performing Class A properties. In 2024, we expect generally healthy market activities in Technical Solutions, Aviation, Education, and M&D. At the same time, we anticipate that the conditions will remain challenging in the commercial real estate office market, and that we will be impacted by some business rebalancing in M&D. We expect these factors, along with projected labor inflation, will likely mute our revenue growth and cause our margins to incrementally tick lower when compared to the strong levels we achieved in 2023. Our overall outlook for 2024 therefore, is essentially unchanged from the comments we shared last quarter. Earl will walk you through the specifics of our 2024 outlook in his comments. As we look forward, we expect our teams to set another new sales record in 2024 after record sales in 2023. Through our ELEVATE initiatives, we are leveraging our scale, depth of service offerings and technology. In addition, we will continue to carefully manage costs and proactively make changes to our cost base if necessary, just as we did in 2023. And, of course, our anticipated strong free cash flow will enable us to continue to invest for the long term while regularly returning cash to our shareholders. Now, I'll turn it over to Earl.

Thank you, Scott, and good morning everyone. For those of you following along with our earnings presentation, please turn to Slide 5. Fourth quarter revenue of $2.1 billion increased 4.1%, comprised of organic revenue growth of 3.8% and a one-month contribution from RavenVolt. Moving on to Slide 6, net income in the fourth quarter was $62.8 million or $0.96 per diluted share, up 29% and 32% respectively versus last year. These increases were largely driven by higher segment earnings on higher revenue, the benefits of the prior year self-insurance adjustments, and lower ELEVATE costs, partially offset by higher interest expense and labor costs. Adjusted net income of $66.2 million increased 11% and adjusted earnings per diluted share of $1.01 was up 13% over the prior year period. These year-over-year increases primarily reflect higher segment earnings, including the benefits from price increases and our cost management efforts, partially offset by higher interest expense and labor costs. Adjusted EBITDA grew 10% over the prior year to $144.2 million and adjusted EBITDA margin increased 40 basis points to 7.2%. These year-over-year improvements were driven by higher segment earnings including several project closeouts in Technical Solutions and normalized performance in Aviation compared to the prior year, which was impacted by adverse project timing. Now turning to our segment results, beginning on Slide 7. B&I revenue increased modestly to $1 billion, partly due to strong sport and special event demand, which helped to offset reduced demand in the commercial real estate market. Operating profit in B&I decreased to $84.6 million and operating margin declined to 8.2%, as adverse service mix was partially offset by price increases and cost actions. Aviation grew 16% to $248.2 million, once again driven by strong demand for leisure and business travel, and new business wins. We expect demand within our Aviation segment to remain robust going forward. Aviation's operating profit was $16.4 million versus $1.3 million in the prior year period, and operating margin expanded significantly to 6.6%. These increases reflected the absence of the adverse project timing, which negatively impacted the prior year period, as well as benefits of higher volume and price increases. Turning to Slide 8, Manufacturing and Distribution revenue grew 5% to $391.2 million, reflecting broad-based demand. Operating profit increased to $42 million, while operating margin declined 40 basis points to 10.7%. Profit and margin performance was largely due to customer mix. Education revenue increased 6% to $229.8 million, benefiting from the addition of new clients earlier in the year. Education operating profit was $10.2 million, up 23% over the prior year period, while margin increased 60 basis points to 4.4%. These increases were largely attributable to increased organic revenue growth and a modestly improved labor market. Technical Solutions grew 6% over the prior year period to $190.8 million, comprised of an even split between organic growth and acquisition contribution. This performance largely reflecting the close-out of several legacy projects and progress on battery storage system projects. Of note, RavenVolt contributed to organic growth beginning in September. After these project closeouts as Scott noted, Technical Solutions backlog now exceeds $410 million, a large portion of which is scheduled to convert to revenue in 2024. Technical Solutions' operating profit was $24.4 million and margin was 12.8%, compared to operating profit of $20.9 million and margin of 11.7% last year. These increases were largely due to higher volume and approximately $2 million of one-time gains related to certain contracts. Moving on to Slide 9, we ended the fourth quarter with total indebtedness of $1.4 billion, including $58.2 million of standby letters of credit, resulting in a total debt to pro forma adjusted EBITDA ratio of 2.3 times. At the end of Q4, we had available liquidity of $552.5 million, including cash and cash equivalents of $69.5 million. Free cash flow was strong in the fourth quarter at $121 million and was $191 million for the year. Excluding full-year ELEVATE and integration costs of $71 million, our CARES Act repayment of $66 million and employee retention credits received of $24 million, normalized free cash flow was $303 million in 2023. We repurchased 2.7 million shares of common stock in the fourth quarter at an average price of $40.82 per share for a total cost of $110 million. For the full year, we repurchased 3.3 million shares for $137.1 million, excluding excise taxes, and reduced our share count by 5%. Also, subsequent to the year end, our Board approved a $150 million expansion of our share repurchase authorization. The total current authorization is now $210 million. Interest expense was $20.5 million, up $4.5 million from the prior year period. Now let's move on to the full-year fiscal 2024 outlook as shown on Slide 10. As Scott mentioned, our view for 2024 is consistent with the comments we made on the third-quarter earnings call. We expect full 2024 adjusted EPS to be in the range of $3.20 and $3.40. Adjusted EBITDA margin is expected to be 6.2% to 6.5%, largely driven by a shift in business mix. This includes expected lower B&I janitorial activity, a change in revenue mix in M&D, and continued labor cost pressure, partially offset by ELEVATE and cost initiatives, as well as price increases. Interest expense is estimated to be in the range of $82 million to $86 million. The tax rate before discrete items is expected to be between 29% to 30%. Lastly, full-year normalized free cash flow is expected to be in the range of $240 million to $270 million, excluding the estimated $45 million of ELEVATE and integration costs, the majority being ELEVATE investments. With that let me turn it back to Scott for closing comments.

Thanks, Earl. I want to thank our teams for their incredible efforts and dedication throughout the year. Despite challenging commercial real estate and labor markets, and through the introduction of new technology and processes, our teams never took their eyes off our clients and delivered solid performance. I wish you and your loved ones a very happy and healthy holiday season and a Happy New Year. With that, let's take some questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Jasper Bibb with Truist. Please proceed with your questions.

Hey, good morning guys. I wanted to ask what you're seeing from a labor inflation and pricing perspective, and if you could provide underlying assumptions for '24 guidance with respect to labor cost inflation and the recovery rate there, that would be definitely helpful. Thanks.

Sure. So for us, we're thinking it's going to be in the 4% to 5% range. A lot of the collective bargaining agreements for the janitorial workers across the country are in process right now, and we feel encouraged that they're going to end in that range. So our guess is on the collective bargaining agreements, which are the union-based agreements, they're going to be in that 4% range, and it'll be a little higher for the non-union, as we look to those markets with the lower labor rates. So again, that 4% to 5% range. And just as a reminder, we've been successful over the last few years of recovering 75% to 80% of that. So that's what we're thinking.

Okay, makes sense. And then I was hoping to get an update on the ELEVATE progress. I think on the last call you mentioned you've already captured about 50% of the cost benefit there. Any color on where you expect to be from a cost capture perspective by the end of fiscal '24? And are there any kind of key deliverables like ERP deployments we should be aware of over the next 12 months?

We are currently around 30% of the benefits we've achieved so far. This is expected to increase over time as we implement various tools across different industry segments. We're anticipating a gradual ramp-up to our target range of $110 million to $130 million. Everything is proceeding according to plan.

Got it. Last question from me. The company really stepped up the repurchase this quarter. How should we think about the pace of capital deployment into 2024?

Yeah, no, thanks for the question, Jasper. I would say that we're really pleased that we were able to return capital back to our shareholders over Q4, especially in light of the compression in our share price that we saw after our Q3. And as we look to the future, within FY '24 at a minimum, we'll buy back shares against the dilutive share-based compensation. We have a Board authorization now for about $210 million worth of shares, so we'll be opportunistic where it makes sense.

Makes sense. Thanks for taking the questions guys.

Thanks.

Thank you. Our next questions come from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions.

Yes, hi, good morning. So I wanted to ask about Technical Solutions. I know you don't guide to revenues, but it sounds like the range of alternatives or the range of scenarios on Technical Solutions is quite wide, just given timing. So give us a bit more color on how do you expect the pacing of these new projects, project revenues to be realized and how do you expect sort of the underlying business to perform within Technical Solutions?

That's great. Thanks for the question. So, look, we feel as strongly about Technical Solutions as we ever have. We love kind of the end markets that we're serving here and we think it's going to be a strong year for Technical Solutions in '24. They continually post high single-digit margins. We're expecting that again. And remember, Faiza, the cadence of Technical Solutions starts off a little soft and then progresses through the year from a margin standpoint, because it is quite seasonal. In the summer, you do a lot of the work, right? So we're excited about that. We don't guide to revenue, but we're excited about the potential for growth this year. We have the strongest backlog that we've ever had. And just as a reminder, backlogs are the contracts that are signed and locked, and it's just a question of starting the work. So we're feeling really good about Technical Solutions this year.

Maybe just to follow up on that, now that you've ended fiscal '23, could you give us a bit of a breakdown? Because I know there's a bunch of different items underneath Technical Solutions. There's the bundled energy, there's other things, there's the EV charging segment. Can you give us just a breakdown of the revenues in fiscal '23?

Sure. There are three main areas: bundled energy solutions, electric vehicles (EV), and RavenVolt. We have a strong sentiment about the EV sector, as all indicators suggest robust growth. Recent news might imply that EV is slowing down or losing excitement, but that's relative to their previously extraordinary growth rates. Many car dealers have identified "range anxiety" as a hurdle; consumers worry about running out of power due to insufficient infrastructure. Therefore, we believe that the lack of infrastructure will be a catalyst for our growth. Our backlog makes us optimistic about the EV segment. Regarding RavenVolt, we are very enthusiastic. A significant portion of our backlog in Technical Solutions pertains to RavenVolt and its large projects. However, timing these projects quarter-to-quarter can be challenging since they are essentially battery backup systems and involve extensive installations, similar to construction projects. While we are confident that RavenVolt will perform well over the year, it's difficult to predict specific quarterly performance, though we anticipate the second half of the year to be stronger than the first. RavenVolt is expected to be a major contributor to our success. Lastly, we have Bundled Energy Solutions, which is the most pressured area. These projects often involve significant capital expenditures, such as retrofitting schools for around $15 million by updating lighting and HVAC systems. With higher interest rates, schools are hesitant and are considering whether rates will drop, which leads to delays in Bundled Energy Solutions. Additionally, there has been substantial government funding through programs like the CARES Act, which has provided a lot of financial support to schools, but we expect that to wind down by the end of this year. Consequently, Bundled Energy Solutions may experience a decline in performance in 2024, although we remain optimistic for 2025. This year, we anticipate revenues to be about half of the previous more than $200 million run rate, which is still strong but below our usual expectations.

Thank you, Scott, for that. I have a quick question regarding your interest expense guidance. Are you considering any debt repayment, and could you elaborate on your capital allocation? I know you've mentioned the share buyback, but are you also thinking about debt repayment?

Yeah, it anticipates marginal pay down in debt. And if you think about it, we have a term loan that amortizes probably about $30 million a year, and then we'll use some of the excess cash to pay down a bit of the revolver, but nothing material in that. When you look at our leverage of 2.3 times, we feel very comfortable there, and we're looking to maintain that level of leverage into next year. When it comes to capital allocation, our plan is still consistent. We'll continue to invest in our organic growth through the ELEVATE program, investing in talent, etc. And again, based on our strong projected cash flows, relatively low leverage, it continues to provide us with the flexibility to allocate capital, whether it's to M&A opportunities or returning back to shareholders.

Great. Thank you so much.

Thanks, Faiza.

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

Great. Thanks for taking my questions, guys, and good morning. I guess I just want to understand the quarter a little bit better, particularly in the Technical Solutions segment. Earl, you talked about how there were several close-outs in the quarter. Oftentimes, but not always, close-outs are basically accounting adjustments when projects that you've been working on come in better than expected after you finish them, and then you recognize a whole bunch of revenue and basically almost 100% profit against that revenue in the quarter. Is that what you mean by attributing the revenue growth year-over-year significantly to that kind of performance or were you saying something different? I just want to make sure we're clear about what you're saying on the project close-outs and how that contributed to revenue and profits.

Yeah, no, I think you got it spot on, Andy. There were a number of projects that closed out, and as a result of that, you're actually able to do your final billings. Any holdouts that you actually had, you're now able to capture that. And in the quarter, that amounted to about $2 million. When we talk about the profitability in Q4, remember, Q4 is a seasonal business, and typically back half with Q4 being our largest quarter. So keep that in mind that by no means would that be a run rate into Q1, which we know typically would be a lower quarter than others.

Okay. But your revenue growth was like $11 million, $12 million in the quarter for Technical Solutions, the gain was only $2 million. I guess it sounded like the other, whatever, $9-ish million of revenue might also be attributable to the close-outs. Is that true or not? Sorry, trying to understand that.

No, that would be the regular situation if you consider RavenVolt. Throughout the first half of the year, we faced delays on certain battery storage projects as we were waiting for inventory supplies and finalizing many authorizations. We were able to close out several of those deals in Q4, which is why you're seeing the revenue and associated profit.

Okay, that's helpful. And then, Scott, just on the B&I segment, I guess you mentioned in your press release or your report here, your slide deck, you talked about kind of diversification. I just want to make sure I'm understanding what you're saying there as well. Is that meaning you had the good entertainment and sports and diversified in that way from, I don't know, I just call it the traditional janitorial services or is there some other dynamic there that we should be aware of, that you're referring to in diversification?

Yeah, no, that's a great question. Yeah, it's partly that. It's partly we have a little healthcare in there, but more importantly, it's an engineering segment. So if you think about, especially with the Able acquisition, where between Able and the legacy ABM, we had a lot of stationary engineers, and that's about 25% of our business; it doesn't change with office occupancy or density. If you have eight engineers in an engine room, whether you're 80% occupied or 95%, that's really not going to change. We also have parking in that segment, and that's been relatively stable since we've come out of the pandemic. So that moderates the janitorial, which is the piece of it that becomes more variable. So when, I guess Andy, I'm so glad you brought up this question, because when we look at B&I, we want you to look at that as just purely janitorial and having all that kind of variability, so to speak, based on density. The truth of it is it’s so mitigated by, again, the engineering specifically.

I just wanted to clarify my understanding, and now I do. Regarding the ELEVATE program, you mentioned it's taking about a year longer and the updated estimate is around $215 million. I believe I heard it as $200 million to $215 million, whereas the previous high end for total ELEVATE spending was $175 million. So, that indicates a difference. It seems like you were initially planning for around $15 million of spending in '24. Am I correct in thinking that the additional $30 million and the extra year account for the increase from $175 million to the low $200 million range? Earl, is that what you meant to convey?

Yes, that's correct. It will carry over. We have an additional year for FY '24; we anticipated that it would be slightly higher as it gradually decreases. You could consider approximate figures of about $35 million in '24, followed by $25 million for the subsequent two years.

Okay. And then, Scott, can you just talk a little bit about kind of what you've learned along the way that's causing the extra year and the extra cost here? What are some of the technical challenges or maybe operational challenges that go along with the extension of the program?

Sure, Andy. These processes are quite intricate. The most straightforward aspect of implementing an ERP is integrating the financial system. The challenges arise with the other systems connected to it, such as payroll, travel and expenses, and procurement. The data needs to flow smoothly through these connections. I compare it to a Lego structure, where the ERP serves as the core and various systems link to it, forming a network. From our experiences in education, we've realized that achieving an effective and clean data flow takes longer than anticipated, as does establishing the necessary processes for data transfer in and out of the ERP. After launching the system, we undergo a period we refer to internally as hypercare, which involves training and addressing field inquiries as users adapt to the new system. This phase is taking more time than we initially expected because we lacked prior benchmarks. The important takeaway, Andy, is that our system is not failing. We're not shifting between different vendors like Oracle and SAP, nor are we abandoning a consulting group mid-process. There haven't been any major errors; our focus is primarily on mitigating risks for our internal team and shareholders. We need to ensure our invoices, payables, and payroll are accurate, and while this may extend the timeline by another year, it’s all for a good reason.

Okay. Great. Thank you for that context. Have a good day, guys.

Thanks, Andy.

Thank you. Our next questions come from the line of Josh Chan with UBS. Please proceed with your questions.

Hi, good morning, Scott, Earl, and Paul.

Good morning.

Good morning. So, you mentioned the margin guidance for '24. I appreciate the drivers behind that. So I guess as you think about going beyond 2024, how should we think about the trajectory of margins and what are some of the factors that will drive it up or down beyond this year?

Sure, we anticipate a gradual increase towards our 7.2% margin target. However, I believe that 2025 will present significant forecasting challenges due to the impact of commercial real estate. This situation may persist for two years, specifically in 2024 and 2025. Once we navigate through this period, we expect to see a return to a normal growth pattern. In the meantime, we are proactive in addressing the issue. We have adjusted our cost structure, and we expect the benefits from our ELEVATE initiative to begin to materialize as we activate these industry segments and implement our new financial system. Additionally, the tools I mentioned earlier, like workforce management and a new app designed to enhance communication with our frontline employees, will substantially improve their ability to manage labor effectively. While we don't expect a perfectly linear trajectory, it is essential for us to determine when we will emerge from the commercial real estate slump, which we believe may take another year or two.

Okay. Thank you for the color there, Scott. And then I want to follow up on the repurchase. I guess, could you just talk to the amount of repurchase? It's obviously a lot higher than what you normally do. And so I just wonder if there's any change in philosophy in terms of how you think about the stock versus other means of deployment, mainly M&A, I suppose?

Yeah. No change in philosophy as we mentioned. When we look at capital allocation, first and foremost we want to ensure that we're investing in our organic growth. We feel that we actually have sufficient investments there with ELEVATE and other key investments. When you look at the fact that, after looking at organic growth and M&A opportunities, we actually have excess cash, we look at how's the best way to deploy that back to shareholders. After Q3, with the compression that we saw in the share price, we thought that it was prudent to take actions. But going forward, we'll take a balanced approach. We manage our leverage. Currently, right now it's 2.3 times, and we anticipate that's going to be consistent going into the next year. So we'll continue to look at opportunities and allocate accordingly.

Great. Thank you, Earl, and thank you both for your time.

Thank you.

Thank you. Our next questions come from the line of Sam Kusswurm with William Blair. Please proceed with your questions.

Thanks, Scott and Earl. I hope you both are doing well. I guess to start here, you mentioned last quarter that B&I could be down 2% to 3% in 2024. And today's outlook commentary calls for a challenging B&I market. I guess I want to see, first is down 2% to 3% is the right way to think about this business for next year still? And then I would also like to get your thoughts on how long this type of challenging environment could last? I think you just mentioned that maybe into 2025 where it goes to, but is there a chance that it goes beyond that? Just trying to get your broad commentary there.

Sure. So I think you're kind of spot on on how you're thinking about '24 from that revenue perspective on the growth side. So I think you hit that. And yeah, we do think it's going to go into '25, and the reason we're more optimistic about '26 and beyond. Just from pure statistics standpoint, I think they're saying that 50% of all leases are coming due in '24 and '25. So you're going to see that volatility with some of the compression bringing up, because opportunistically, when your lease comes up, you have a chance to narrow your density a bit. So that's why we think it's going to be more of a two-year problem than extended. But more importantly than that, I have to tell you, and I think you're probably seeing it, and everybody on the call is seeing it too, like the sentiment out there is really becoming stronger and stronger on return to work. I could tell you in my CEO peer networks, all we're talking about is getting people back to the office for collaboration. There are all these studies now that are being released on the effectiveness of organizations by having people on site and collaborating. The macroeconomic environment, frankly, is giving employers more power over saying you have to come into the office versus where we were a year or two ago when the labor situation was different. There's a bit of a power shift going on right now in favor of employers who want to bring people back. So I think it's episodic. I think it's '24 and '25. I suspect '25 won't even be as difficult as '24, and that's our feeling; it seems to be the general sentiment.

Awesome. Very helpful color. Maybe sticking with B&I then, could you break out the growth rates between commercial cleaning and engineering services? I guess I'd just be curious how each of those are doing within the broader portfolio.

Yeah, we don't really guide to revenue or anything like that. But I will tell you, I could give you some high-level color, right. Engineering is just a lot more stable, right. You do not see variability on the downside. Because, again, if you have an office building and it requires 12 engineers to take care of the equipment between the day shift, the night shift, and the weekend shift, that equipment has to be taken care of and it doesn't matter what the occupancy is, right? You have to run that equipment. You're still delivering air conditioning to the building, you're still doing electrical and mechanical work. Pumps are still breaking that have to be fixed. This stuff all happens. And that's why when you look at it being like 25% of B&I, you have that stability. It's the janitorial side that ends up being more, I guess, flexible, if you will, having more variability.

Got you. Makes sense. Maybe the final one related more to M&D. Could you characterize the growth across the end markets, parsing out the e-commerce logistics, biopharma, and semiconductor? I'm not asking for any actual numbers here, just more curious how you'd rank these in terms of performance or maybe growth opportunities as you head into 2024?

Yeah. So look, we've done a really good job on the e-commerce side, and we'll see some good growth there, but probably more normalized. It's really, you know, where we're focusing now, like semiconductors, biopharma, or some of the manufacturing stuff that we're doing, we think those will be higher growth areas. Listen, I have to tell you, we'll have this little impediment in '24 because of the rebalancing of one big client. But we have every confidence in the outer years after that; this is going to be a high-single-digit grower, one of our fastest growing in all of ABM. So really enthusiastic about the Manufacturing and Distribution industry segment.

Awesome. Thanks, guys. Appreciate it.

Thank you.

Thank you. Our next questions come from the line of David Silver with CL King. Please proceed with your questions.

Yeah, hi. Thank you. I'd like to ask a question firstly on your aviation segment. So clearly not your biggest segment in terms of revenues or absolute profit, but it was the best performer by a wide margin this year, both in revenue growth and operating income growth, and especially margin improvement. I know there's a number of initiatives that you've undertaken over the last couple of years, which I would say are starting to bear fruit. But on a scale of 1 to 10 or 0 to 100 or whatever, where do you think ABM is in terms of fully exploiting the opportunities from your evolving strategies there? In other words, should we expect another meaningful improvement next year, assuming that air flight or air travel trends continue as positively as they've been? Thank you.

Sure. That's a good question. There’s so much going on in aviation that we're excited about. Firstly, we've had a new management team in place for the last couple of years that have been phenomenal, both on the ability to operate the business and then on business development. We've been really excited about. You may remember, David, that we started a few years back, shifting our focus to airports and less on airlines, because we saw all the modernizations that were happening across the country. The perfect example of that is LaGuardia, just got named the best new airport in the world. Terminal B is like, I don't know, 80% of that airport. We do everything there. We just got a very large, we call it APS, which is ABM Performance Solutions, which is integrated facility services. Basically, where the client says, look, you self-perform a bunch of these services, in addition to that, why don't you take care of all our subcontracted services as well? So basically bundling everything together and letting us run it. We just got a massive contract at LaGuardia to handle all of Terminal B, also Providence School Systems, we got. So we're excited about the ability to take this ABM Performance Solutions to airports around the country, and our pipeline is growing there. Air travel is up; it continues to be up. Aviation had a really great year. It was also helped, if you remember in Q1, by the parking project that happened in 2022. A lot of the expenses happened in 2022, but we got paid in '23, so the profit flow-through was about $11 million or $12 million. That helped as well. But we're very, very enthusiastic about Aviation and its growth ability for next year. And again, loving the team.

Okay. Thank you for that. And I just would like to ask for a clarification on the share repurchase activity this quarter. There were a couple of comments, certainly already, but I'm just trying to sharpen my understanding. Should I assume that the bulk of the fourth quarter activity was kind of concentrated early in the quarter? In other words, after your stock was quite volatile, 90 days ago? Is that when the activity was concentrated in, in other words, more opportunistic, or would you say it was spread a little more evenly and hence maybe more, I don't know, programmatic or more balanced through the quarter? Thank you.

Yeah, no, it was definitely more front end loaded. Hence, when we look at the average price, which was $40.82, that is emblematic of where it was trading shortly after the Q3 earnings call.

Okay, great. Thank you for that. And then last question would be for Scott, I guess. And, Scott, I'd like you to maybe look back a few years and then compare it to today. But in the immediate aftermath of the pandemic, your company was kind of in a very strong position in some ways to capture new business because of your scale, because of your ability to source scarce equipment, better purchasing power, etc., as well as staffing, a number of advantages. And we're kind of in the post-pandemic environment, and at least in some parts of your business, commercial real estate, things are structurally a little softer. But my sense is that your go-to-market strategy or your value proposition to your core, like bread and butter commercial customers is probably a little bit stronger even than it was a few years ago, just in terms of maybe the enhancements from your internal ELEVATE program and whatnot. But how would you think about, just for the core, kind of bread and butter clientele across education, manufacturing, etc., how has your value proposition kind of shifted over the last couple of years and in particular, as you look at the post-pandemic environment?

Sure. Our brand has definitely evolved, especially after the pandemic, which has set us apart from our competitors. They would likely agree that our enhanced clean product has given us greater visibility on social media. We even ran a commercial that has made us more noticeable. This has changed our approach to business development and client interactions. Additionally, we are investing heavily in technology. When we present to clients, we can show them a digital dashboard to manage their facilities through our ABM team connect. Soon, all our field team members will have an app that connects them directly to clients and us, which will be a significant advantage. The momentum we’re experiencing is very real. We've just had another record year in new sales. A few years ago, we aimed to achieve $1 billion in new sales, and this year we exceeded $1.6 billion. Our new sales are probably three times larger than our closest competitor’s in terms of total revenue. We truly believe we have a strong value proposition.

Thank you. Our final question comes from the line of Marc Riddick with Sidoti. Please proceed with your questions.

Hey, good morning, everyone. I'll be brief on this. Why don't you talk a little bit about what you're seeing with Education? The commentary was around the strength that you saw there and some of the prior new business wins. Maybe you could bring us a little bit of an update as to maybe what you're seeing there on revenue visibility, the margin profile there, and the opportunity to continue to gain share in the space?

Sure. We're so happy about our Education positioning. We're the clear number one in Education, and we're split between K through 12 and Higher Ed. We had great growth this year, brought in over $100 million in new business; we've never done that before. Our margins are up since the pandemic. We've maintained that. And then what I said earlier, Marc, about our APS or our integrated solution that we not only got at LaGuardia, but Providence School District, that's something that we're pitching to our educational clients that, like, listen, we can do so many things and self-perform, putting everything under us and managing it strategically. Our pipeline is really growing there. We picked up George Washington University last year. We're just really excited about that industry group. We typically project kind of GDP-ish growth, and hopefully we'll get to GDP plus. Usually it's longer decision time frames in that segment, but again, the proof is in the pudding as we just had a tremendous year this year. So I appreciate you asking that question.

Absolutely. Thank you.

Thank you.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the call back over to Scott Salmirs for any closing remarks.

I want to thank everybody for their interest, and we were excited to close out the year the way we did. '24 will be a challenging year for everybody in the business environment, we know that. But I could just tell you that this team at ABM is going to attack it with enthusiasm, and we're really excited about it. So have an amazing holiday, everybody. Hopefully get some time with your loved ones, and we look forward to giving you an update in Q1. Take care, everybody.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.