ABM Industries Incorporated Q4 FY2025 earnings call

• Finished the year with record quarterly revenue, 4.8% organic growth; adjusted EPS, adjusted EBITDA, and adjusted EBITDA margin ahead of expectations excluding prior year self-insurance adjustment. - Technical Solutions had standout quarter with complex projects in microgrids; strong revenue growth in Aviation and Manufacturing & Distribution. - B&I and Education segments saw margin improvements. - 2025 had record annual revenue of $8.7 billion (5% increase), record new sales bookings of $1.9 billion (12% increase). - 2026 off to good start with major new contract in Aviation; pipeline strong, targeting another bookings record. - Invested in AI capabilities and made progress in ERP implementation. - Announced acquisition of WGNSTAR, strategic for expanding technical capability in semiconductor sector, expected to close Q1 2026. - Restructuring program initial components largely complete, annualized savings $35 million, over 3/4 to be realized in 2026.

B&I revenue was up 2% to over $1 billion, driven by higher work orders and U.K. strength. Operating profit was $80.6 million with a margin of 7.7%. Aviation revenue grew 7% to $296.7 million. Operating profit was $16.8 million with a margin of 5.7%. M&D generated $417.4 million in revenue, up 8% year-over-year. Operating profit was $35.8 million with a margin of 8.6%. Education revenue rose 2% to $233.7 million. Operating profit increased 44% to $18.8 million, with margins expanding to 8%. Technical Solutions revenue increased 16% to $298.7 million, with 11% organic growth driven by microgrids. Operating profit rose 32% to $37.1 million, and margin was 12.4%.

• Expect full year organic revenue growth of 3% to 4% in fiscal 2026. - WGNSTAR acquisition to contribute roughly 1 additional point of revenue growth. - Segment operating margin expected to be between 7.8% and 8% for fiscal 2026. - Interest expense forecast $95 million to $105 million. - Expect free cash flow of about $250 million in 2026 (before certain transformation/integration costs). - Full year adjusted EPS in range of $3.85 to $4.15.

• Forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially, as described in SEC filings and accompanying slides.

Q: I'm going to ask about the margin trajectory. You introduced a segment operating margin metric. What are the drivers between what seems like a relatively flat margin outlook for '26 despite restructuring savings?

A: Yes, we introduced that metric to reflect the operating health and remove the noise from prior year self-insurance adjustments. We have some benefit from the restructuring built into those margins, but we also have some mix rolling into those numbers that we're working through, some from the pricing decisions we discussed on the Q3 call. It mirrors how we manage the business internally.

Q: Could you talk about the strategic attraction of the WGNSTAR deal? And from a financial perspective, why the switch from dilutive in '26 to accretive in '27?

A: The strategic imperative is compelling. We already have over $300 million in the semiconductor space. Think of a bull's eye: ABM core has operated in the outer ring of the facility (cleaning, technical service), but we've never been able to get inside the fabrication facility (the inner ring). That's what WGNSTAR brings. They have over 30 clients in the semiconductor space. Regarding dilution, we expect some in the first year largely due to factoring in amortization and interest. But based on the growth trajectory, we expect a real path to accretion in year 2. On a forward-looking basis, we see a multiple between 12 and 13x.

Q: Last quarter you talked about pricing concessions in challenged U.S. office markets. Have you seen more of that in B&I or has it slowed?

A: It has stabilized. We had some pricing discussions in Q4, but they weren't as dramatic as Q3. We see total normalization now. Regarding M&D, those pricing discussions were about capturing market in semiconductor. We knew WGNSTAR was coming, so some of those discussions were in anticipation of this deal.

Q: Could you provide detail on the remaining ERP road map for '26 and how that factors into free cash flow?

A: Nearly 90% of transactions are now on the new system. The remaining groups are much less complex. Cash flow-wise, we ended the year strong. Our DSOs were down 11% from their peak in Q2. For 2026, our $250 million normalized cash flow target includes $30 million for buses for an airport contract we won. We feel strong about that number.

Q: David, on the free cash flow bridge, can you call out the unusual one-time items?

A: Starting at $250 million, we'll have about $20 million in transformation, $10 million in integration/acquisition, and $5 million in restructuring costs. The last piece is an anticipated $30 million payout for the RavenVolt contingent consideration. That gets you to a free cash flow number of around $185 million.

Q: What was the segment operating profit in fiscal 2025?

A: It was 7.9%, which is roughly in the middle of our 7.8% to 8% range for fiscal '26.

Q: What is the assumption for B&I in your 3% to 4% organic growth guide? You didn't call it out as a driver.

A: We feel like the commercial real estate crisis is behind us. Work-from-home versus work-in-office has stabilized. We think B&I is back to steady state, growing at a GDP rate. That is what is baked into our guidance.

Q: Timothy Mulrooney: Can you unpack that $0.26 impact from prior year self-insurance adjustments? Is there a longer tail here?

A: This is a $500 million pool (workers' comp, general liability, auto). A 4% adjustment on a pool for 100,000 employees is within industry standards. We had a similar adjustment last year. The key is that after discussions with the SEC, we are now reporting this differently (above the line). It's a reporting change, nothing more.

Q: Scott Salmirs: We have a very strong safety culture. Keeping the adjustment within 4% given rising healthcare costs is something we are proud of.

Q: Faiza Alwy: Why is such a small portion of the semiconductor sector outsourced right now? And how should we think about future M&A?

A: It's because the work is highly technical. Bridging that gap requires a high bar of trust. WGNSTAR has 20-plus year relationships because they are so good at it. We see tremendous potential to introduce this capability to our existing semiconductor and pharma clients. Regarding M&A, there aren't many big competitors; it's mostly small ones. We could have roll-up potential or expand organically.

Q: Faiza Alwy: Can you give more detail on the WGNSTAR margins and '26 assumptions?

A: EBITDA margins are in the mid-teens. For '26, we assumed roughly $13 million of amortization and $12 million of interest (prorated for about 3/4 of the year). We anticipate double-digit growth rates continuing into '27.

Q: What does the leverage look like post-transaction and what is your comfort range?

A: This gets us to about 3x leverage, which is the range we want to be in. We'll be very balanced about acquisitions for the rest of the year. It has to be a compelling strategic imperative.

Q: Any seasonality for the WGNSTAR acquisition?

A: No, they operate indoors in the fabs. Geography is good—they operate in 9 basic regions where semiconductor facilities are located.