ABM Industries Incorporated Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Delivered 5% organic revenue growth, strong free cash flow, and secured over $1.5 billion in new business through the first three quarters, a 15% y/y increase.
• Certain commercial office markets, especially select West Coast, Midwest, and Mid-Atlantic metro areas, are slower to recover; strategic pricing and escalation decisions made to position for sustainable growth.
• Launched a restructuring program in August to align cost structure and footprint with growth priorities, expected to generate $35 million in annual run-rate savings.
• Purchased over 1 million shares in July and August, and board increased share repurchase authorization by $115 million. Invested in AI tools for enhanced team work, RFP responses, and HR support.
• Segment updates: BNI seeing prime office market recovery in Class A urban properties; M&D driven by technology investments, e-commerce growth, reshoring of manufacturing; Aviation benefiting from passenger demand and airport reinvestment; Education resilient with focus on modernizing and maintaining campuses; Technical Solutions strong in electrification, with U.S. microgrid market projected to double by 2030.

Segment Performance

• BNI: Revenue surpassed $1 billion for the quarter, up 3% from last year. Driven by escalations, expansion with existing clients, and strength in UK and sports/entertainment businesses. Operating profit was $73.8 million, and margin was 7.1% compared to $77.8 million and 7.7% respectively last year.
• Aviation: Revenue grew 9% to $291.8 million, supported by positive travel trends and new wins. Operating profit was $19.7 million, up 11%, with margins up 20 basis points to 6.8%.
• M&D: Generated $408.9 million in revenue, an 8% increase year over year, fueled by new contract wins and client expansions. Operating profit was $36.4 million, with a margin of 8.9% compared to $40.9 million and 10.9% last year.
• Education: Revenue rose 3% to $235.1 million, supported by escalations and stable retention rates. Operating profit grew 17% to $21.1 million, and margin expanded 110 basis points to 9%.
• Technical Solutions: Grew 19% to $249.5 million, with 7% from organic growth and 12% from acquisitions. Electrification business, especially microgrids, data centers, and power services, accounts for nearly 60% of segment revenue. Operating profit rose 9% to $19.4 million, and margin was 7.8% compared to 8.5% last year.

Guidance

• Full-year adjusted EPS and adjusted EBITDA margin expected to be toward the lower end of prior guidance.
• Fourth quarter earnings and margins expected to improve meaningfully from the third quarter, driven by cost and restructuring actions and strong performance in ATS segment.
• Free cash flow expected to be toward the low end of normalized range of $250 to $290 million, excluding certain one-time items.
• Interest expense outlook changed, contributing to the lower end of EPS guidance.

Risks

• Macro uncertainties and market recovery slowdown in certain areas (West Coast, Midwest, Mid-Atlantic metro areas) posing challenges.
• Margin impact from strategic pricing and escalation decisions made to protect footprint and client base in slower-recovering markets.
• Inherent risks in forward-looking statements due to uncertainties that could cause actual results to differ materially.

Question and Answer

• Q: Hi, good morning. This is Luke McFadden for Tim Mulrooney. Maybe one to start here just on the M&D business. Growth in that business was quite a bit stronger than what we were modeling. I know you've had some headwinds in this segment over the last couple of quarters with respect to that larger customer rebalance. Is this growth acceleration primarily a function of kind of lapping some of those headwinds, or really more tied to the underlying momentum you're seeing in the business at this point? A: Yeah, I think, look, we're really enthusiastic about our Manufacturing & Distribution segment, especially the end markets we're focusing on with semiconductor and pharma. I think it's a combination of lapping generally when you look year over year. For us, it's just about attacking strong end markets and investments we've made in salespeople. In this industry group, it's so focused on having expertise in those areas like semiconductor, what have you. You can't just have a generalist go to those kinds of organizations and sell or be an operational person if you don't have that expertise. We've made a lot of investments there, and they're really starting to pay off. That's why you're seeing this accelerated growth. We're big believers in this growth profile for years to come. I think this is more about our focus and our expertise.
• Q: Hey, good morning, guys. I wanted to follow up on the margin headwinds. I guess to clarify, would you categorize the margin pressures as incremental growth investments, or is there anything else driving this? Because the Business & Industry and Manufacturing & Distribution growth has actually been really good, so it doesn't seem really like an operating leverage challenge, I guess. A: Yeah, so it's been a combination of both, right? When I think about BNI, I think about it more about protecting our footprint, protecting our client base, because where we had the pressures were in two or three geographic areas that I mentioned in the prepared remarks. Whereas M&D was more about opportunistically expanding on going after new business and maybe lowering our threshold. Maybe I'll give you guys a couple of examples to see if this makes sense. In the Northeast, we have a large multi-building commercial office client that was under pressure. They came to us, and they talked to us about the fact that they're looking to trim operating costs across all of their areas and said they may even have to rebid. We got in the middle of it because of our relationship and said, look, you don't have to rebid. Let's figure out how we can accomplish what you want to accomplish. We'll look at scope reduction. We could look at timing of escalations. It was actually incredible because we came away with this with a margin profile that was still acceptable to us, not as ideal as it was before that negotiation, but still acceptable for us. We got a long-term extension. From our view, we really ingrained ourselves with that client because now they think of us as a strategic partner, not just a vendor. We had another example on the West Coast where we had a large client in a pressured area of downtown LA, and we had one year to go on the contract. This is one where we proactively went to them because we didn't want them to bid it out or even start thinking about it. We worked through, again, the same kind of iterations with them. Can we adjust scope? Can we take a person out of the lobby during the day? Can we think about the window cleaning cycles? We really got into it with them, and we ended up forging a longer-term contract and the same thing, walking away with a client that now thinks of us as a strategic partner. In both those cases, we protected our footprint. These were both marquee clients and long-term clients. For us, we look at this as a really positive result. You guys know that have been following us for years, we always rework the margin back up. I think even if it's a little painful right now, we'll talk about this a year from now, and we're going to be really excited about where we are from a margin perspective. The other example I want to give you is Manufacturing & Distribution. We are going after certain submarkets like semiconductor and pharma. We had a new opportunity with a client that was tangential to semiconductor. It wasn't exactly semiconductor, but it was part of the semiconductor supply chain. We wanted this client. We wanted to get into this vertical. When we bid this contract, we went approximately 100 basis points below what we would normally do as kind of our minimum for bidding new business because we wanted this strategically. We did that. We secured the new business, and we're already seeing some growth from that client, from that bid. These are decisions that, again, impact us in the short term. We also know that you don't solve these problems in a quarter. We'll have some effect as we go forward. The thing that I'd want to mention here is we're not sitting on our hands when this stuff happens, right? You heard in the prepared remarks, we're looking at discretionary costs. We're going back and relooking at labor efficiencies across our entire platform to make up for this. To David's credit, we initiated a firm-wide restructuring program where we took $35 million of cost out of the company. That's largely underway. We'll be finished in the next month or so, where we'll have the full run rate by fiscal start of 2026. I'm really proud of the organization for coming together and doing that. Hopefully that gives you a little bit more color on how these pricing decisions have impacted us, the examples of it, and what we're doing as an organization in a very agile way to counteract those.