Abm Industries Inc (ABM) Q3 2026 Earnings Call Transcript

respect, 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 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. With that, I would like to now turn the call over to Scott.

Good morning, everyone, and thank you for joining us. We had a strong third quarter, particularly when you consider some of the puts and takes across the business. We delivered record quarterly revenue, 27% adjusted EPS growth, and exceptional year-to-date cash flow, despite project timing and technical solutions and the anticipated impact of client exits in B&I. I think the quarter demonstrates both the resilience of our portfolio and our ability to execute operationally, even when individual parts of the business don't move in a straight line. On the revenue side, most of the business performed largely as we expected. Aviation and manufacturing and distribution continue to deliver strong growth. Education performed as expected, while B&I reflected the client exits we have discussed over the last several quarters. Technical solution was the one area where revenue came in below our expectations, driven by certain project deferrals from an important client. Based on our discussions with that client, we believe this is principally a timing issue rather than a change in the underlying demand environment. And we expect a meaningful portion of that activity to move into the fourth quarter. What I'm particularly pleased with this quarter is our execution on profitability and cash flow. The cost actions we've been driving throughout the year, combined with disciplined working capital management, resulted in 27% adjusted EPS growth, 40 basis points of sequential segment margin improvement, and an increase of over $150 million in year-to-date free cash flow. Cash generation has historically been an important strength of ABM. Following the disruption associated with our ERP implementation, we've been very focused on restoring that performance, and the progress is increasingly visible in our results. Given our performance through the first nine months, we are raising our full-year free cash flow outlook. I want to spend a few minutes on the part of the AABM story that I think is becoming increasingly important, our position in semiconductor, microgrids, and data centers. Because some of these businesses are project-oriented and can be lumpy quarter-to-quarter, I think the year-to-date numbers provide the best perspective. Through the first nine months, these businesses generated nearly $775 million of revenue, growing 26% organically and approximately 40% when including WGM-STAR. Together, they now represent more than 11% of ABM's revenue and carry a double-digit blended operating margin. So these businesses have become meaningful with an ABM, and we believe they have significant runway ahead. In Semiconductor, we made a strategic decision several years ago to invest ahead of what we believe would be a significant expansion of advanced manufacturing capacity. We invested in industry expertise, developed relationships with many of the leading manufacturers, and established a strong position supporting semiconductor facilities. WGM-STAR significantly expands that opportunity. One way to think about it is to picture the fab as the bullseye in a semiconductor facility. Historically, AVM has operated around the bullseye, providing a broad range of services. With WGNSTAR, we now have the highly specialized technical capabilities to operate inside the bullseye as well. That significantly expands our addressable opportunity and allows us to provide a much broader range of services to semiconductor clients. The results so far have been really encouraging. Semiconductor revenue grew 65% organically during the first nine months and more than doubled when including almost two quarters of WGM star. And we are still early in realizing the opportunities across the combined client portfolio. In microgrids, including battery energy storage systems, we have approximately quadrupled the size of the business since entering the market in 2022. Through the first nine months, revenue grew 17% organically. The underlying demand drivers remain compelling as clients increasingly invest in power, resiliency, and redundancy. We're also focused on broadening the client base and increasing the recurring component of the business over time. To highlight our progress on diversification, in the coming days, we expect to finalize a contract to build a microgrid for primary backup power for the Army Corps of Engineers as part of a joint venture with a strategic partner. The total value to ABM is approximately $20 million, and we expect the project will be executed in calendar 2027. And finally, data centers. Year-to-date, revenue grew 8% organically, but we believe the opportunity ahead is considerably larger than what is reflected in that current growth rate. Our pipeline and backlog continue to build, including work with many co-location customers, and we expect a meaningful portion of that activity to convert into revenue fiscal 2027 and into 2028. Taken together, these businesses represent an important evolution in ABM's portfolio. We have a large, resilient core business that generates significant cash flow, while at the same time building meaningful positions in markets benefiting from powerful long-term investment trends. We believe that combination can contribute meaningfully to ABM's growth and margin profile over time. Let me step back and briefly talk about what we are seeing across our markets as we move into the fourth quarter within business and industry the trends we discussed last quarter remain largely intact the northeast continues to be our strongest commercial real estate market while the west coast particularly northern california remains challenging we continue to be disciplined and how we pursue and retain business our objective isn't simply to maximize revenue we want client relationships where we see a credible path to attractive returns over time looking ahead we expect bni to return to organic growth around the middle of fiscal 2027 as we lap the large uk client exit we've previously discussed in manufacturing and distribution the environment remains very constructive technology continues to lead the way particularly semiconductor, and we're also seeing healthy activity in e-commerce, farmer, and broader industrial manufacturing. Based on what we see today, we believe M&D is positioned to sustain strong organic growth into fiscal 2027 and beyond. In aviation, passenger demand remains healthy. The near-term issue is pressure on airline economics from higher jet fuel costs, which is creating some pressure on our margins. We have incorporated that into our outlook and are actively working to mitigate the impact. And at the same time, our deliberate shift towards airports continues to improve the long-term profile of the business. Airports now represent approximately 60% of the aviation revenue and provide greater consistency, broader cross-selling opportunities and more stable economics education continues to be a consistent cash-generated business the team is executing extremely well and we expect low single-digit organic growth as we move into fiscal 2027 and finally in technical solutions the underlying market fundamentals across energy resiliency data centers and hvac remain strong as i mentioned earlier q3 was affected by certain project deferrals at an important client these delays were not driven by interest rates supply chain constraints or permitting challenges the client made a decision to prioritize other capital projects during the quarter we are now executing on many of those preferred projects which should translate into significant sequential improvement in ATS revenue, operating profit, and margin in Q4. More broadly, given the demand we continue to see across ATS, we expect another year of strong growth in fiscal 2027. Since we enter the fourth quarter, I would leave you with three things. First, the majority of our end markets remain healthy, and where we do have pressure, we understand the issues and are actively managing them second our operational execution continues to improve margins increase sequentially cash flow has strengthened considerably and the cost actions we've been taken are showing up in our results and third semiconductor microgrids and data centers are becoming increasingly meaningful contributors to abm and we believe they have substantial runway ahead we are raising the midpoint of our adjusted EPS outlook and raising our full-year free cash flow outlook based on our strong third quarter results and our confidence in delivering the fourth quarter. There's still work to do, but we feel good about the position we're in and the foundation we are building as we head into fiscal 2027. And with that, I'll turn it over to David.

Thanks, Scott, and good morning, everyone. Let's start on slide seven. Revenue grew 4.2%. year-over-year to an all-time quarterly record of slightly above $2.3 billion, driven by 2.1% organic growth and a 2.1% contribution from acquisitions, primarily WGNSTAR. Organic growth was especially strong in aviation and M&D, which grew 12% and 8% respectively. Education was up slightly, while technical solutions posed to organic growth of 2%, reflecting project timing, which I'll discuss shortly. B&I declined 3% as expected. We'll get into the segment details in a few minutes. Turning to slide 8, as Scott mentioned, we deliver a strong earnings quarter. Net income increased 19% to $49.7 million, or $0.84 per diluted share, compared to $41.8 million, or $0.67 per diluted share in the prior year. Adjusted net income was $61.5 million, or $1.04 cents per diluted share versus 51.7 million or 82 cents per diluted share last year reflecting increases of 19 percent and 27 percent respectively these significant year-over-year increases primarily reflect higher segment operating profit lower tax expense and reduced ongoing corporate cost partially offset by higher interest expense per share measures were further benefited from share repurchase activities completed earlier in the year. Suggested EBITDA increased 13.8 million, or 11%, over the prior year to 139.6 million, driven by higher segment operating profit and lower corporate costs. Segment operating margin increased 40 basis points sequentially to 7.7%. On a year-over-year basis, segment margin was essentially flat, as operational efficiencies in B&I, M&D, and education were offset by anticipated pressures in aviation and higher amortization expense related to the WGN STAR acquisition. Excluding acquisition-related amortization, margin would have been 7.8%. Now let's turn to segment performance, beginning with slide nine. B&I revenue declined 2.6% in the third quarter, as expected, driven by the Q2 exit of a large UK-based client and the impact of certain other client exits, particularly on the West Coast. We expect revenue trends to be similar in Q4, though we anticipate continued incremental margin improvement as our operational actions take further hold. Operating profit increased to $75 million, and margin expanded 30 basis points year-over-year to 7.4%, compared to 73.8 million and 7.1 percent in the prior year period. These improvements primarily reflect cost actions and operational improvements, along with the benefit of lapping certain lower margin contracts entered into in the third quarter of last year. Aviation grew 12 percent to 328.1 million, supported by healthy travel demand and the continued ramp of our Heathrow contract. Operating profit was $18.4 million with a margin of 5.6 percent compared to $19.7 million and 6.8 percent last year. Profit and margin were pressured by airline clients who are reacting to elevated fuel costs by seeking cost relief from their service providers. We factored this into our outlook and are actively managing the pressure through operational efficiencies. Turning to slide 10, M&D generated $481 million in revenue, an 18% increase year over year, including organic growth of 8% and 10% growth from the WGN STAR acquisition. A strong organic growth was driven by continued client expansions across the segment. Operating profit was $40.5 million with a margin of 8.4% compared to $36.4 million and 8.9% last year. On a year-over-year basis, the margin change primarily reflects ongoing investments in sales and industry expertise, talent, to support our long-term growth strategy, as well as nearly $4 million in incremental amortization expense connected with the WGM-STAR acquisition. Excluding incremental amortization, margin was 9.2%, which we view as a solid base from which to expand as we outgrow the amortization and continue to cross-sell higher-value solutions to our semiconductor and technology clients. Education revenue rose slightly to $235.8 million and delivered excellent operating performance in the quarter, which is the seasonally strongest for profit and margin. Operating profit increased 9% to $23 million, and margin expanded 70 basis points to 9.7%. This improvement was driven by enhanced labor efficiency and effective escalation management. Technical Solutions third quarter revenue was $259.9 million, up 4% year-over-year, including 2% organic growth and 2% from acquisitions. Organic growth reflected strong HVAC and battery energy storage system activity, partially offset by certain project delays in our microgrid business, driven by an important client. These delays were compounded by a difficult comparison against a very strong third quarter last year. operating profit was 21.5 million with margin at 8.3 percent compared to 19.4 million and 7.8 percent last year the increase in operating profit and margin was mainly driven by positive service mix partially offset by impacts in our microgrid business due to project delays looking to the fourth quarter we expect significant sequential increases in revenue operating profit and margin on higher microgrid activity as projects that shifted out of the third quarter move forward. As we discussed earlier in the year, the back half of the fiscal year, and specifically the fourth quarter, has historically been the strongest operating quarter of the year for technical solutions. This year will be no different. Now, turning to slide 11. We ended the quarter with total indebtedness of $1.8 billion, including $22 million in standby letters of credit. Our total debt to pro forma adjusted eva-da ratio was 2.9 times. We achieved our goal of leverage being below three times a quarter earlier than originally planned, reflecting strong sequential progress driven by our robust cash flow. We expect to drive leverage even lower by year end. Available liquidity stood at $606 million, including $110 million in cash and cash equivalents. During the quarter, we closed on a $300 million accounts receivable facility. This diversifies our funding sources and reduces our marginal costs of borrowing relative to our existing revolving credit facility and also represents a meaningful enhancement to our overall capital structure. As Scott mentioned, we had a very strong cash generation quarter, which has long been a hallmark of ABM. Third quarter cash from operations was $146.8 million and free cash flow was $128.4 million. For the first nine months, cash from operations was $275 million and free cash flow was $199.6 million versus cash from operations of $101 million and free cash flow of $42.4 million in the prior year period. This represents an improvement of over $150 million in free cash flow during the first nine months, driven by strong working capital management and ERP stabilization. As a result of our progress on cash generation year-to-date, we're raising our full-year free cash flow expectations, which I'll discuss in a moment. Entrance expense in the quarter was $29.5 million, up $4.2 million from last year, reflecting larger average debt balances driven by our WGN-STAR acquisition. This was partially offset, at the net income level, a lower tax expense, which was $4.1 million below last year, reflecting certain discrete tax benefits recognized in the quarter. Turning to our fiscal 2026 outlook on slide 12, as Scott noted, we're encouraged by the relative health of our in-markets while remaining mindful of the broader economic uncertainty. As such, we're raising the midpoint of our fiscal 2026 adjusted EPS range, which is now expected to be $3.95 to $4.10. This raise reflects our strong third quarter performance and our confidence delivering on our fourth quarter expectations as a reminder our full year organic revenue growth outlook is three percent to four percent we continue to expect to be toward the higher end of that range aviation mnd and technical solutions are expected to grow above that range while bni and education are projected to be below that range the wgn star acquisition is expected to deliver approximately one point of additional revenue growth bringing total growth to the high end of our four to five percent range for modestly updating our segment operating margin outlook to 7.7 to 7.8 percent for fiscal 2026 selecting year-to-date performance and slightly higher intangible amortization for wgnstar which in aggregate accounts for 10 basis points of operating profit margin impact for the full year that said fourth quarter margin is projected to be meaningfully above the high end of that range reflecting the anticipated seasonal improvements and ATS mix, and the continued benefit of our operational actions across the portfolio. The forecast for interest expense remains at approximately $110 million, and our normalized tax rates before any discrete items, including the possible extension of the Work Opportunity Tax Credit Program, is still expected to be 29% to 30%. As I mentioned earlier, we're encouraged by our progress generating cash and are raising our four-year expectations. We now expect normalized free cash flow of approximately $285 million in fiscal 2026 before the impact of transformation and integration costs, final Ravenvold earn-out, and any incremental restructuring. On a reported basis, free cash flow is expected to be approximately $210 million versus our prior forecast of $185 million, a $25 million improvement that reflects the strong work and capital performance we've delivered through the first nine months of the year. I also want to take a moment to recognize the efforts of our operators and our finance and treasury teams who drove outstanding third-quarter cash flow. These results are a product of discipline and focus on the fundamentals of working capital management. With that, Scott, I'll turn it back to you for closing remarks.

Thanks, David. Let me close with a couple of thoughts. We feel good about where ABM stands today. Our core business remains resilient. Cash flow has improved significantly, and we're making progress on margins and operating efficiency. At the same time, the investments we've made in semiconductor, microgrids, and data centers have created meaningful growth platforms and markets where we believe demand will remain strong for years. As we move towards fiscal 2027, our priorities are straightforward. finish this year strong execute on the opportunities already in front of us continue improving margins and cash flow and allocate capital with discipline and finally I want to thank our team more than a hundred thousand people show up every day and deliver for our clients ultimately the results we are discussing today come from their execution expertise and the trust they build with our clients. We look forward to sharing our fiscal 2027 outlook and when we report fourth quarter results. With that, we'll open up the line for questions.

Thank you. We'll now be conducting a question and answer session. In the interest of time, please limit yourself to one question and one follow-up. If you'd like to ask a good question, please press star 1 from your telephone keypad and a confirmation tone to indicate your lines in the question queue. Let me press star 2 would we like to remove your question from the queue? For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question is from the line of Tim Mulroney with William Blair. Please proceed with your questions.

Yeah, thank you and good morning. Scott, I'm going to start off here with your high-tech business, your semiconductors, data centers, microgrids. they're 11% of your business today. But, you know, I'm curious, what do you think that'll represent in terms of your sales mix a couple of years from now? You know, I know these high tech sectors are growing faster than the rest of your business, but I also know the microgrids can be lumpy. So I'm really curious to get your, you know, broad thoughts on that.

Yeah. So look, We're still super optimistic about that area of work, and it's going to continue becoming a more and more meaningful part of our business just by the fact of the mix, right, because it's growing double digits where some of our other segments are more GDP or GDP plus. So we will continue to be meaningful. And we also continue to invest in because it's not only executing on the work, which you have to do, obviously, in the highest of fashion, but we're hiring experts that understand this business. We're hiring sales associates. So this is an area that we think has a lot of trajectory for years and years to come. and what okay thank you for that and and what did you say the how the profitability of these three businesses combined compares to your corporate average yeah so this is we're talking about double digit versus our average which is typically you know in the uh you know low single digits.

Yeah. Yeah.

Okay. Very interesting. You know, in terms of, you know, and that was more on the growth side, I should say, but, you know, you, you know, where our, our EBITDA margins are in comparison to this, it could, you know, in a lot of cases, it could be double in these markets.

Yeah. Okay. Thank you. Appreciate that. David, I had one for you on the cashflow guide, and then I'll hop. I think last time you communicated about this, you said you were targeting $250 million of free cash flow less, I guess, $65 million of non-recurring cash expenses. So really, it was like $185 million, and now you're saying $210 million, which is $25 million higher. Is that right? Is all of that right? Is all of that apples to apples? uh yeah tim you've got it right so a 210 on an as reported basis is the number we're targeting um as you said we're really pleased with the where we landed cash flow for the quarter and our in our raise of guidance there yeah no it looks looks great i just want to you kind of felt like you're changing the way we're talking about a little bit here before it was like pre all of that stuff and now it's just on a reported basis 210 why did you raise the free cash flow guidance. Was it due to higher operating cash flow than you were expecting before, or is it due to fewer of that $65 million bucket of non-recurring charges than you previously thought?

I think the way to reflect on it is we had a really strong working capital quarter. Specifically, I think from my perspective, the good news is we're starting to really leverage some of the capabilities of the new system. And in doing so, in the quarter, we're able to accelerate some of the collections for the quarter. So it's just, you know, another step to stability on our transformation. And ultimately, that was the driver for the cash flow performance.

Yeah, good execution. Well, congrats on the next quarter. Thanks, guys.

The next question is from the line of Justin Hockey with Robert W. Baird. Please receive your questions.

Oh, great. Thanks for taking my question. I guess I wanted to go back to the ramp in the fourth quarter, and, Scott, I appreciate you kind of walked through some of the moving pieces, but I guess I'm just curious on the deferred projects, just how much is already, given that we're halfway through the quarter, I mean, how much has already started? Is there anything that needs to still start? I'm just trying to understand the line of sight and the visibility on those deferrals.

Sure, and, you know, and again, you know, before I even ask that, You know, we don't really look at this quarter by quarter, you know, year to date, you know, in terms of just ATS in general, we have, you know, 10 percent year to date growth and the micro grids and those projects are in that segment. But, you know, this quarter was about 15 million dollars in deferrals and largely almost all of those projects are going to land in Q4, a little bit in Q1 of next year. But we're already turning wrenches on those projects, so we're still not waiting to see if the deferrals are going to be put into action. So we're actively working on them now. And I think what you're going to see in Q4 is double-digit organic growth in ATS. That's helpful.

And then just on the aviation, the margin concessions that you talked about with the fuel pressure that the airlines are seeing, and I appreciate that color that the 60% of what you do there now is with the airports and not the airlines, but can you quantify just what impact that had on the margin in the quarter?

Well, you know, without going into too much detail, I will tell you, like, you know, just first to level set, the segment is still really strong. Demand is strong. And I guess the best way to look at this is that we feel like that pressure is stabilizing, you know, sequentially, the margins, you know, a little actually this quarter modest improvement. So we feel like a lot of that impact is behind us. And you'll start seeing us accelerating over time. now once we get a little bit of relief on fuel costs.

And then I guess my last one, I just, I mean, because, you know, you're growing the, you know, all the high-tech businesses so fast, the 26% organic growth year to date that you called out in the release. Obviously, the intangible amortization has been weighing on the manufacturing and distribution segment, but I guess maybe it's a question for David. But can you remind us, what's the bridge, the intangible for this year, and then how much of that falls off next year, given that that's such a high-margin segment?

Yeah, we had about $12 million allocated to this year for the intangibles for next year. We'll have some modest fall-off of that next year. But I think what I'm most excited about, ultimately, about WGNSTAR is, you may recall, we guided to roughly $120 million to $130 million of annualized revenue for WGNSTAR. They're tracking well above that now, and we see that kind of growth rate continuing into next year. So the good news is an enhanced growth rate will help us continue to outgrow the amortization expense.

Yeah, and I would also point out that we've already had two or three cross-sells in such a short period of time. which is, you know, really part of the thesis of this. And, you know, you heard in my prepared remarks of how, you know, inside that bullseye of the fab and outside, and now, you know, when you think about that and you say that, well, ABM has about 50 semiconductor clients that we were dealing with prior to WGN Star. WGN Star has 30 plus clients. So to be able to start cross-selling this, we're just seeing the start of it, but it's really positive.

Yeah. Thank you very much, guys.

Thank you. The next questions are from the line of FISA Alway with Deutsche Bank. This is you with your questions.

Thank you. Scott, I want to follow up on the high growth end market. I know you've mentioned that there's a blend of project and recurring revenue. I'm curious if you could expand on that, Like, how much of your revenues are recurring, and is there a way to shift more of it to recurring? I guess I'm curious under what circumstances is it project-based versus recurring.

Yeah, so, I mean, so the goal is to make it more recurring, and kind of what that means on the most basic level is you do a project, and instead of walking away, you get a maintenance contract where you stay a client for the long term and then hopefully not only are you getting that revenue, but as other projects come up, you're right in the sweet spot for that. So that's a big focus of ours in the whole ATS area is how do we, over time, blend the mix to be more recurring revenue.

Yeah, and Fiza, this is David. But I would say right now, roughly 15% to 20% of that revenue is on a project basis, which is still great for us because it means we're staying really connected with the client at good margins. And as Scott mentioned, over time, we'd like to return that to the recurring business, longer-term contracts. But make no mistake, having a line of sight into this project work and this space is really important for us.

All right, great. That's very helpful. And then just on the – you have strong cash flow improvement this year. I'm curious if you have, I know it's early and you're not giving a 27 guide or anything like that, but David, as you look at kind of where we are, how should we think about, you know, cash flow in 2027? Are there any sort of big, you know, expense items or anything else that we should keep in mind?

No big expense items out of the ordinary, I would say. Obviously, as I mentioned earlier, we're very, very pleased with our performance year-to-date on cash flow. When I step back and think about it, we've funded a roughly $250 million acquisition and within the last nine months used $100 million of our capital to buy back shares and had $51 million of dividends, all the meanwhile driving below 3 times levered at the end of the day. So we're excited about that, and, you know, I don't think there'll be any surprises next year relative to cash flow, but we'll look forward to coming back and talk to you about that in December.

All right. Sounds good. Thank you.

Thank you. The next question is from the line of David Silver with Freedom Capital Markets. Please receive your questions.

Yeah. Hi. Good morning. Thank you. I guess the first question, I would like to go back to, you know, slide six and your discussion of your opportunities in technology. And in particular, I wanted to focus on the data center panel. So, you know, in my view, I mean, that's an area where there's a tremendous amount of, you know, growth or build out that's going to occur over the next, you know, handful of years. You know, from your perspective, Scott, maybe two questions. You know, one is, have you been bidding for business for data centers that are kind of under construction? Or, you know, what is the cadence on, you know, contract, your pursuit of contracts and when they get awarded? And then secondly, taking up your analogy of the bullseye and the target and everything. Is quality uptime kind of in some sense, you know, your path to getting inside the bullseye of, you know, the more significant data center projects? And if that's the case, can you, you know, expand that geographically, organically, or is this the case where, you know, you're going to be looking for maybe similar, you know, service companies, you know, targeted – in targeted geographies? Thank you. Sure, sure.

So, you know, as it relates to the data center question first, you know, we have been doing a lot of mining in that area, and we're bringing on sales assets for that, too. So, you know, and I think I even said in my prepared remarks that the 8% organic, you know, I don't believe it's reflective of what we see over the next two or three years. In fact, our pipeline right now is a multiple of where it was at this time last year. So we're really optimistic that that will be, over time, very, very healthy double-digit growth in data centers. And then with quality uptime, you know, that's largely UPS power, which, you know, I think I've said this before on the call, but, you know, think of that as the transition between the power going out and the generator starting or the microgrid starting up, right? You would need these UPS batteries to transition through. So the way to think about quality uptime, it's just a big piece of the puzzle. It's a really important part. As we go selling to data centers, as we go selling to big retailers, anyone who's looking for power generation is also going to be looking for UPS power for the transition. So quality uptime is very, very important to the piece of the puzzle. You know, from our perspective, it was a very strategic acquisition for us.

And, David, I would add, you know, from a pipeline perspective, really the co-locators are our main target in the data center space. That's where we see the fastest and most robust part of our pipeline growing here in the near term.

Okay, great. Thank you very much. You know, I'd like to, if you don't mind, I'd like to swing over to some of your comments about, you know, I guess over the last couple of quarters, but about just development in the California market in particular or maybe, you know, the West Coast. But really, California, I mean, it is kind of a foundational business for your company. And then not too long ago, you did do the big, you know, Able Services acquisition. And, you know, certainly there's a lot of headlines about, you know, business trends in that area, in that geography. So just, you know, from a big picture perspective, Scott, I mean, you know, what are the keys to kind of, you know, optimizing what you're doing in that geography here? I mean, are the pressures more on the integrated services side, or is it more just standard B&I? And, you know, where do you think the opportunities are, you know, when the dust settles a little bit, you know, from the current trends you're seeing?

Yeah, that's a good question. I'm glad you brought that up because I want to make sure it's clear that this isn't what we view as a systemic problem. You know, it's really now migrated to Northern California. We had pressures early in the year in Southern California. That's stabilized. That's behind us now. And Northern California, you know, it's just part of a trend right now. Even though there's strong growth in that market from AI, you know, it's not a people-heavy business. And as we go through those spaces, you know, there's still a lot of work from home. And what's ended up happening, which is a unique thing right now, and it started in Southern California and now NorCal, which is the competitors are just pricing at places that we're just not willing to work at. And, you know, this has been a theme, David, as you know, over the last decade about ABM not wanting to work for free, right? And so we think this is not systemic. we think you'll see this reverse. If the trend of what happened in Southern California holds in NorCal by mid-next year, we think a lot of this will be behind us. And, you know, the proof in the pudding on this is you look at B&I and, you know, our margins are up 30 basis points. So sequentially from quarter over quarter. So we're heading in the right direction. We're making the right decisions. And, you know, we talk internally about no-regret decisions, and this falls into it. So, again, not systemic.

Thank you. The next question is from the line of Brianna Camden with UBS. Please just use your questions.

Hey, good morning, Scott and David. This is Brianna on for Josh Chan. Thanks for taking my questions. I guess on the outlook, can you maybe talk through why EPS midpoint is higher if margins are lower and most of the other items stay the same?

Yeah, sure. So I think it just reflects where we are nine months through the year. We have good line of sight on what we think the revenue is going to be for the full year. And we have a very prescriptive approach to margins in our forecast. I think you could expect margins north of 8% in the fourth quarter, and that tracks to basically what we did last year at 8.2%. And as you know, Q4 has just been historically a very seasonally strong quarter four. So it gives us that confidence.

Thank you. Can you touch a bit more on confidence around the margin ramp in FQ4? And then maybe, you know, I know there's no guide for 20 for next school year, but how should that accelerate in FQ4 and going forward? Thank you.

Yeah, I think the biggest margin accelerator in Q4, which has been very, again, historically consistent, is the ATS business has done anywhere between 11% and 13% operating profit margin for the last two quarter fours in 2024 and 2025. We don't see this year being any different. In fact, we're really encouraged by the health of the backlog and what we're seeing as an early start from the quarter. So that's the single biggest driver.

Thank you.

The next question is in the line of Mark Riddick with the Snowdean Company. Please proceed with your question.

Say good morning. Morning, Mark.

Wanted to touch on some thoughts as to the pricing dynamic that you're seeing and some of the key service areas and visibility there, because it seems as though there's some crystallization that's beginning to form. but maybe you could talk a little bit about your comfort level as far as pricing and as well as the revenue mix benefit on that, and then I have a quick follow-up.

Yeah, we're real positive on our pricing approach. We have for medium-sized to large contracts, we have a pricing council that goes through, and we have hurdle rates that you have to hit. So that's been super helpful in terms of discipline. Escalations, really important part of our mix on pricing. You know, we have to go out there every year and get wage escalations. And, you know, that's always been a historic strong point for ABM, even in times when there was significant labor pressure. So it's a muscle strength we've built. So we don't think there's anything dynamic happening in the market that's going to hurt us from a pricing standpoint. If anything, I think we've just gotten stronger in discipline year over year after year. So I feel really good about that.

Great. And then shifting gears over to aviation, I really appreciated the commentary as far as the airport airline and what's going on with the airlines. Maybe talk a little bit about that mixed shift that you've accomplished over the years and sort of maybe where you see that maybe settling out. What's sort of a reasonable – I mean, we're at 60-40, I guess, now with airports and airlines. Maybe we could talk a little bit about what might be a reasonable target or a view and maybe the kind of timeframe that you might have in mind there.

Yeah, you know, it's kind of hard to predict, to be honest with you. I know, you know, our focus is on that. And, you know, if it landed three to five years from now at 7030, I think we'd all be happy with that. And I think that's not it's not necessarily even a reflection that we think the airlines are going to be weaker. I think there's going to be so much infrastructure going on in airports. I think there's going to be an opportunity as airports upgrade around the country that they're going to want more enhanced services, and they're going to want the kind of service that we perform at LaGuardia, which we've talked about, where we're kind of, it's an integrated approach. So, you know, so 70-30 is not necessarily scientific. It's just kind of a sentiment that we're thinking over time, but there's a lot that can happen in that industry. But we love the way we've been heading.

Thank you very much.

The next questions are from the line of Tate Sullivan with Maxim Group. Please proceed with your questions.

Thank you very much. A couple of follow-ups. Scott, in the prepared remarks, you mentioned an award for the microgrid work for the Army Corps of Engineers. Is that a longtime customer of ABMs? Is it related to an acquisition? I think you had a previous announcement with them, but just check in, please.

Yeah, no, this is part of a – they're not a long-term client for us, which is even more exciting, actually. So it's part of a joint venture that we went in to pitch this with with another company. So we're a component part of this. But it's really thrilling because the provider picked us to partner with because of the work that we do in microgrids. And as you can imagine with the Army Corps of Engineers, we think there is a big addressable market within the government on these types of projects. So hopefully this is the beginning of a really healthy future. over time.

Great. Thank you. And a follow-up on aviation. You mentioned cost relief from the customers or receiving cost relief, but the revenue growth has been double digits the last three quarters. Are you continuing to see good traffic in the airports you work in?

Yeah. I mean, the pipeline's strong. Whether or not it'll be double-digit, we'll do more when we talk to you in Q4 as we shape up and look at the pipeline. But we feel really good about that segment. It's been a good performer. And, you know, we're in this mode now with fuel costs and some of the pressures on airline profitability that, you know, hopefully what's going to inure to our benefit is that we've been really good strategic partners and we've made the concessions that we needed to make to kind of stabilize and hopefully grow those longer term relationships. So it's things that you do in the airline industry when they go through these cycles. And, you know, We've all seen them before, so, yeah, it's nothing, again, that is troubling to us over the long term.

Yeah, Tate, I would add, too, obviously, a good chunk of the revenue growth in aviation is a startup of the Heathrow contract in the U.K., which has been very successful for us. So, as Scott said, we're just really, really happy with the growth profile there, and we'll continue to manage the operational challenges.

Thank you. And just on that, you mentioned Heathrow. Can you comment on your international mix with the U.K. after the U.K. client exit that you mentioned, return to organic growth in B&I with Heathrow? Or can you quantify the international contribution?

Yeah, I mean, I would say it hasn't actually changed a whole lot. The loss of the TFL contract is a pretty good balance with the win of the Heathrow contract. So all in all, not a big mixed change. But, you know, if you do look at the U.K. markets specific to itself, we are seeing some healthy growth rates over there, and we're continuing to invest in that team. The team's doing a great job of driving growth and profitability, so a great market for us.

Thank you. Thank you. At this time, I'll turn the floor back to Scott for final comments.

Well, thanks, everybody, for joining in. Hope you have a happy fall, and everyone's back to work now. Summer's over, and we will see you in Q4 with our results. and our full year guide for 27, but thanks everybody.

Thank you.

This will conclude today's conversation.