Greetings, and welcome to the ABM Industries Incorporated Fourth Quarter 2024 Earnings Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Paul Goldberg, Senior Vice President, Investor Relations. Mr. Goldberg, you may now begin.

Good morning, everyone, and welcome to ABM's fourth quarter 2024 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 2024 financial results as well as our 2025 outlook. 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 a Q&A session. But before we begin, I would like to remind you that our call and presentation today contain certain 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 slide 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. And with that, I would like to now turn over the call to Scott.

Thanks, Paul. Good morning, and thank you all for joining us today to discuss our fourth quarter results and fiscal 2025 outlook. ABM finished the year on a high note, driven by double-digit revenue growth in Technical Solutions and Aviation in the fourth quarter, and our performance also reflects the continued resilience of our Business & Industry segment. We posted 3% organic revenue growth and delivered adjusted EPS of $0.90, both of which were moderately above our expectations. These results capped a great year for ABM, highlighted by strong execution on our ELEVATE initiatives, balanced capital deployment, and more importantly, positive results in a volatile macro environment. I'm thrilled with ABM's positioning as we begin fiscal 2025. We have emerged a stronger company after navigating through some macro turbulence over the last couple of years. And although it's still early, it appears as though our key commercial real estate markets are near an inflection point and returning to growth. Market improvement, coupled with the strategic investments we've been making across our business, gives me confidence in our future growth trajectory and our enhanced ability to service clients in dynamic markets. Before we discuss 2025, let me quickly run through a few of our important accomplishments in fiscal 2024. First, we achieved remarkable results in our Technical Solutions and Aviation segments in 2024. The big story in Technical Solutions, which grew 16% organically, was a rapid expansion of our microgrid service line, complemented by growth in our data center related business. Our RavenVolt team did a fantastic job executing on a very complex microgrid project schedule, which shows no signs of abating. This strong growth helped drive an increase in full year segment earnings. Our Aviation business grew 12% in 2024 as we benefited from healthy travel markets and also from…

Good morning, everyone. As Scott mentioned, we are pleased with our fourth quarter and full year results, and we believe we are well positioned for growth in 2025 and beyond. But before we get into our 2025 outlook, let me quickly review our fourth quarter results. For those of you following along with our earnings presentation, please turn to Slide 5. Fourth quarter revenue of $2.2 billion increased 4%, comprised of 3% organic growth, with the remaining 1% driven by our third quarter acquisition of Quality Uptime Services. Organic revenue growth was once again led by Technical Solutions and Aviation, which grew 25% and 11%, respectively. Education was essentially flat. Our B&I segment remained resilient, declining less than 1%, benefiting from our diverse client and service base. Lastly, Manufacturing & Distribution revenue came in above our expectations, declining by only 1%. Moving on to Slide 6, we recorded a fourth quarter net loss of $11.7 million or $0.19 per share as compared to net income of $62.8 million or $0.96 per share last year. This result was primarily attributable to a $59.7 million adjustment to our contingent consideration related to the RavenVolt earnout, the negative impact of prior year self-insurance adjustments, legal settlements, higher corporate investments and lower segment operating earnings, partially offset by lower income tax. The earnout adjustment was driven by RavenVolt's very strong 2024 performance and reflects our current estimate of the payout under the acquisition earnout plan. I will discuss RavenVolt's performance in greater detail in a few minutes. Adjusted net income of $57.5 million and adjusted earnings per share of $0.90 decreased 13% and 11%, respectively, from the prior year. In addition, adjusted EBITDA decreased 11% to $128 million and adjusted EBITDA margin was 6.1%, down 110 basis points. These decreases were largely driven by…

Thanks, Earl. I want to take a moment to congratulate our team on a great 2024. Their tireless efforts enable us to consistently exceed our internal plans throughout the year, which is even more exceptional, given the fact that we've been working tirelessly on upgrading and transforming our technology and data platform as well as our end-to-end processes. Through it all, we remain committed to our clients and to our longer-term financial goals, and most importantly, to our strategy of investing in our business. We're excited about our positioning as we begin 2025 and by the progress we've already made on several initiatives. Thanks again for joining our call today. And with that, let me take some questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Scott, Earl, good morning.

Good morning.

The M&D segment performed quite a bit better than we were expecting, I guess, because the customer rebalancing wasn't as large as initially expected. Can you help frame this for us? What was the headwind you were originally expecting from the rebalancing? And what your base-case scenario is at this point?

Yeah. So, we did better than expected through the rebalancing, but it's not over yet. There's still another phase that's going to happen in fiscal year '25 for us, actually, two more phases that we have to get through, but we've done really well. And in addition to that, we've actually picked up new sites as the client has grown. So, yeah, it just turned out better than we expected, but we're not calling it quite yet, Tim, just because we have to get through the next two phases this year, but we're optimistic, because I think we've been really consistent with saying that this was more of a philosophical change, not a reflection on our performance, and as such, we've just been continuing to grow with the client as that client opens up new sites. So, it's been a great story.

Understood. That's good to hear. So, not through it yet, but things are looking up. That's a good color. Thanks, Scott. And then, just one more from me on the -- excuse me, the Technical Solutions business. Could you just expand a little bit more on that $4 million remediation charge on the energy performance contract? I mean, does this happen from time to time, or is it a rare occurrence? Is there a reasonable expectation for more of these types of charges in the future, just the nature of the business, or is this more truly like kind of a one-off situation?

This rarely happens, Tim, rarely happens. This is an anomaly. I'll let Earl take you through it, but this is something that we rarely ever see.

Yeah. This was a technical issue with one of -- a portion of an installation. So, this was actually part of a broader installation that actually started in 2018. So, it was a $50 million project. Again, we actually had a fail on a portion of it. And as a result of that, we needed to remediate the customer. But as Scott mentioned, this is a very rare event.

Understood. Thank you so much.

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

Oh, great. Thanks. Excuse me. So, I wanted to just ask another couple of things just to help clarify the quarter a little bit. I think, Earl, in the B&I segment, I think you said there was $4 million to $5 million of discrete costs in addition to some of the other things you talked about in the quarter, but I was kind of curious about the discrete costs. Are you meaning to say that those are one-time costs or somehow otherwise discrete? Maybe some color on what that was and would you help give some context around that? Thanks.

Yeah, thanks for the question, Andy. Yeah, those are kind of like what I would say were one-time discrete expenses, most notably just a handful of legal settlements that we trued-up in the quarter as well as a bad debt reserve, just a series of small things that actually came up to about $4 million to $5 million.

Okay. And -- but those were added back in the adjusted results. Is that correct?

They were -- no, those were actually in the above-the-line, yeah. So, those were not below-the-line numbers. Those were actually numbers that actually hit our SG&A above-the-line.

Okay. Yeah, because sometimes you add back legal settlements and so...

Yeah. And again, typically those would be very large legal settlements that we've actually put below the line. These were a series of smaller ones that would actually accrue for above the line.

Okay. All right. And then, I guess there was a comment here that the free cash flow in '25 is going to be impacted by $30 million to $40 million of, I don't know, should call it, I guess maybe transformation costs. So, I was hoping maybe you could expand on that a little bit, because I think previously, the ELEVATE program was looking for maybe a $25 million impact to fiscal '25. So, it looks like it's a little bit bigger. So, I was wondering if this is just like -- this is the cost -- the new cost estimate for the same, or if you're doing more, and if you're doing more, what you're doing?

Yeah. No, this will be the new cost estimate for the same. If you recall, originally, we had said that ELEVATE would be about $150 million to $180 million. We've actually since taken that up to about $205 million to $215 million. So, what you're seeing actually reflects the higher costs. And again, we've probably spent near 80% of that total. So, what you're actually seeing is literally the residual wind-down over the next 18 months to 24 months.

Okay. That's helpful. And then maybe, Scott, just for you, in the 20 basis points of margin expansion that you're anticipating for '25, are there other investments that are going in that -- holding that one back, or do you feel like with the top-line growth that you're getting and the leverage that you get out of your platform, really of your SG&A costs primarily, is that the right way to be thinking about annual expansion, or do you feel as you finish up the remainder of ELEVATE that maybe annual margin expansion can expand beyond the 20 basis points that's implied for '25?

Yeah, we do. We think it can expand. And if you remember, we put out a aspirational target of 7% on EBITDA margins. And we do believe we're on a path to that. The ELEVATE spend is largely behind us, but the benefit is just beginning, right, because part one is getting your data platforms all updated and upgraded, but part two is then building the tools on top of that. So, the people out in the field can get insights and solutioning. So, that's just beginning, and we've gotten a fair number of benefits already, but there's more to come.

Okay. Great. Those are all my questions for today. Have happy holidays, guys.

You too, Andy.

Our next questions are from the line of Jas Bibb with Truist Securities. Please proceed with your questions.

Hey, good morning, guys. It's actually Jasper Bibb on. In the prepared remarks, you mentioned expecting total revenue to grow in fiscal '25. Just kind of hoping you could put a finer point on what that might look like from a growth rate perspective and a cadence through the year with some of the factors you cited, it sounds like overall it's going to be a stronger back-half than the first-half, but just a little bit more detail there would be great.

Yeah. I mean, look, we're optimistic that it is going to be a growth year. When you look at our end markets, we're just seeing great white space. I think the one that is still in question is B&I, right, in terms of when we'll see that inflection back to growth, but all signs are pointing positive and you probably heard in my prepared remarks, I talk about hoping that the back half of the year is when we start turning to growth, which will be a big deal for us, right, because that's always a segment that grows at GDP. And the fact that we were down 1%, that's a meaningful impact versus GDP, which could be 2% to 3% in that range. So, we're hoping that's an upward trajectory. And then, M&D is going to be a flattish story this year and -- but the hope is to return back to year-over-year growth in Q4, but really meaningfully in '26. So, Aviation is going to be strong. We had double-digit growth in 2024. I think we're going to have very solid growth in '25. Education will keep being that steady grower. And ATS, very confident ATS is going to have double-digit growth again in '25. So, really optimistic about the growth platform. And I would cap it off by saying, we achieved $1.7 billion in new sales in 2024. I think it's our sixth or seventh year of consecutive record-breaking sales. So, really excited about the platform from a growth trajectory.

Got it. And then, I was just hoping you could update us on what the ERP roadmap looks like for fiscal '25. When will the remaining segments be moving on to the new platform? And any expectations for associated cost savings therein as part of your ELEVATE targets?

Yeah. No, thanks for the question. So, we actually just deployed the new system for our largest industry group, B&I as well as M&D. So, we now actually have three of the IGs wrapped up. And so, we anticipate the next ones will roll out over the course of the next 12 months to 18 months. And as a result of that, we should have everything kind of like in place, I would say, by the beginning to middle part of FY '26.

Got you. Last one for me, just hoping you could outline what you're seeing on labor cost inflation and recovery rate at this point relative to, I guess, what's considered historical norms.

Yeah. I think labor costs have moderated. I think we've been consistent in talking about that through '24. It's definitely 100 basis points or so stepdown from where we were in '23. And the positive thing for us is, if you remember, half of our revenues come from collective bargaining agreements on union arrangements, and virtually all of those agreements were settled in the last 12 months to 18 months. So, we have really high predictability on labor costs in '25 and beyond, actually '25 through '27. And it's all at rates that we believe are recoverable from clients without a lot of irritation, not necessarily where we were in '21 and '22 when we had high labor inflation. So, we feel like we're in a really good place from a labor inflation standpoint.

Okay. Great. Thank you for taking the questions.

Thanks.

Our next question is from the line of Josh Chan with UBS. Please proceed with your questions.

Hi, good morning, Scott and Earl. Maybe picking off that -- on that labor inflation theme, does productivity continue to be positive in 2025? And how much does that contribute to your 20 basis points of margin improvement? Is that one of the more meaningful drivers you expect?

Yeah. I mean, look, I think one of the tailwinds we have is our ELEVATE investments on our workforce productivity optimization tool, which is just starting to roll out, and we're starting to see good benefit on that. Because for us, right, the vast majority of our expenses are labor, right? So, the more proficient we get at that, the more we get to accelerate. So, when you see us moving up the chain on EBITDA margin, it's largely going to come from being efficient on labor. And we just -- it's going to take another 12 months to 24 months to completely roll out those tools, but really optimistic about what we're seeing.

Great. Thank you. And on ATS, the margins have been very different quarter-to-quarter this whole year. And so, I know that you're ramping up a big [indiscernible] acquisition in there. So, could you just talk to maybe what the normalized or expected margin trajectory within ATS is going into 2025? Thank you.

Yeah. ATS margins are actually -- the volatility that you actually mentioned are usually driven by mix of business, obviously, with the microgrids probably have more of a higher margin, and as you've actually seen that business really pick up. But I would say that if you were to look at normalized margins going out, you'd be looking at high-single-digit margins.

Great. Thank you, both, for the color, and good luck on next year.

Thank you.

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

Good morning. This is Avi Sharma on behalf of Faiza Alwy. Congrats on the quarter and thanks so much for taking our questions. I wanted to start on Aviation. So, Aviation has seen obviously an outsized growth over the last several quarters. Could you talk about what is your market share, the market opportunity, and any thoughts around what is the sustainable growth rate for that business? Thanks.

Yeah, we feel really good about that business. And first of all, what we key on is the fact of how much infrastructure is going into airports around the country. And we were operating in the vast majority of the top 100 airports in the world, and so many of them are going through retrofits right now. And for us with our APS offering, which as you remember, is our integrated offering like we have at LaGuardia airport, which is such an amazing contract. We feel really good about our trajectory. We grew double-digit in '24, had a really strong sales year. And if I were predicting, I'd say we'd be in high-single-digit growth in '25. Markets are going to moderate a little bit based on some of the predictions, but we have so much white space ahead of us in our offering. And the last thing I'd mention, we have this one tool called ABM Clean, which is our app-based tool that dispatches our employees around the airport based on predictability of where the traffic is going to be. And we've rolled that out to over 10 different airports at this point right now. So, it's just beginning. But I will mention, it definitely is a longer sales cycle in Aviation just because we're going for larger contracts, bigger bundled and -- bigger bundled solutions. So, it takes a little bit longer, but again, really excited about the growth prospects long-term for our Aviation segment.

Thanks. And then just on capital allocations, any updated thoughts around capital allocation priorities for 2025? And how should we think about split between organic investments, buybacks and M&A?

Yeah. So, no change in our approach and strategy around capital allocation. What we feel really pleased about is our continued relatively low leverage. We're right in our target range of 2.5 times to 3 times -- 2.6 times, which offers us the flexibility to continue to first and foremost, fund our dividend plan. You've actually saw a significant increase recently in the dividend plan. And when it comes to M&A, M&A will continue to be part of our strategic growth plan as well as opportunistic share buybacks.

Great. Thank you.

Thank you.

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

Yeah, hi. Thank you. I guess, I would just like to go back to the guidance -- adjusted EPS guidance range for fiscal '25, and in particular, I'm thinking about the low end of the range, in particular. But you did record 2%, I guess, adjusted EPS growth this year in what was, to me, a very much less -- very cloudy or much more uncertain environment. You've talked about some of the positive trends in virtually every one of your product lines, but other than maybe a bigger step down from your large distribution customer, I mean, what goes into your thinking about the potential for that low end of the range, maybe a 1% or 2% growth? I mean, what would have to happen to limit your earnings improvement to that low end of the range? Thanks.

Yeah, thanks for the question, David. I mean, I think so much of this rests on the commercial real estate trajectory, right? We are predicting some back end of the year growth, not heavy growth, but a little bit of growth, and that can or cannot happen that could put pressure on the range. And there's no question that the macro environment still isn't settled yet because we have a new administration coming in. And this happens frankly every four years for us. When a new administration comes in, they have potential policy changes. So, we have to watch that carefully right now. So, I think that's the stuff that could put pressure on us, but generally speaking, we're optimistic.

Okay. And then -- thank you for that. And then, the next question is more kind of your philosophy or your growth philosophy with regards to labor. Heading into the pandemic, Scott, I believe your employee count was about 140,000 or more. I don't know what it is right this moment, but it was recently down around 125,000. And, I guess, I'm just thinking, you talked about white space and a lot of opportunities for growth, et cetera. Is this the case where you're going to be maybe targeting or upgrading your business mix primarily like seeking growth opportunities and maybe moving some employees around? You talked a quarter ago about walking away or not renewing some contracts where the returns weren't acceptable. Is this the case where maybe you're going to focus your existing workforce more or less on and upgrading your portfolio of business? Or is this more -- the white space you see is more capturing share broadly in the areas in which you operate? So, where might your employee count go excluding -- I guess, excluding M&A, but where do you see your employee count going? And what would be the philosophy for growing your employee roles meaningfully?

Yeah. So look, I don't think we look at it in terms of employee count, absolute employee count, because obviously, it's always relative to our revenue and our growth. But I would tell you, I'll give you two commentaries, David. One, the more and more we do on the technical hard services side, like, Technical Solutions and Engineering, you have less people per revenue dollar. So, you'll see the kind of mix of employees come down per revenue dollar for the entire organization as we move more towards hard services, if in fact that's what ends up happening with the portfolio. And then, secondly, with our workforce optimization, the more and more efficient we get at managing labor, the less bodies per revenue dollar is the reality. So, I would say, I'm not sure it's going to be overly meaningful until we get more proof points or at least I don't want to commit to it being overly meaningful until we get more proof points, but net-net, five years from now, the ratio of employees to revenue dollars should moderate based on the fact that we're going to get more efficient and we're going to move more towards hard services.

Thank you. Our final question comes from Marc Riddick with Sidoti & Company. Please proceed with your question.

Hey, good morning.

Good morning.

So, I was wondering if you could talk a little bit about on the -- in your prepared remarks, you talked about AI benefits. Maybe you could expand on that a little bit maybe where you're seeing those initially, whether it's in particular segment wise, and then sort of how you see those benefits being more broad-based maybe throughout other segments, or how you see that helping to drive toward the margin goals?

Yeah. It's -- look, I think it's early days, right? And I think for every company that we've spoken to in just about every industry segment, everyone would say it's early days and it's less about true savings versus efficiency in the back office and maybe solutioning out in the field. So, one good example is our ABM Clean AI-based app tool, which again will deploy people more efficiently around an airport and that lets us reduce labor and actually get to problems quicker. We didn't have that solution two years ago. We weren't able to predict the way we can today. So, that's like one application. And we're going to be using AI more and more in the field. And one of the things we've talked about in the past, Marc, is that we may have an office building, a 500,000-square-foot office building in Chicago that has a certain labor ratio and we'll look at one in Los Angeles that's the same size and the same makeup and has a different labor ratio, and we'll get people on the phone and start talking about what are the differences and predictability. So, we wouldn't be able to do those kinds of predictions without it. And then, on the back office, we generate a significant portion of RFP responses and we believe there is an opportunity through AI to be more efficient with RFP responses, to be better at it. And then, the last thing I'll just say, in our HR platform, think about the tens and tens of thousands of people that we hire on an annual basis over the next coming years. It's not a one-year journey, but over the next coming -- have greater predictability about candidates that come through the door and whether or not they're the type of candidate that will stay in the job. The predictability of that and helping with turnover is going to be phenomenal, and we're not quite there yet, but we're already exploring AI opportunities on the -- in the HR space that I think are going to give us great trajectory.

Okay, great. And then, the last thing from me, I wanted to circle back on this part. I think you touched briefly on thoughts on cash usage. I wanted to just sort of follow-up and maybe get your thoughts on what you're seeing currently as far as the potential for acquisition pipeline, if you're seeing much in the way of changes in the number of opportunities that are out there, willingness of sellers to act, whether you've seen much as far as attractive targets now maybe versus six months ago or so?

Yeah, I think we're seeing a little bit more flow, to be honest, just a little bit, but if you remember high level, Marc, we kind of said we were going to be taking a pause on large acquisitions in '23 and '24 because of the fact that our ELEVATE program was in the middle of being formulated and we were igniting our ERP system. So, we like to believe that there's more opportunity in 2025. The bankers that we talk to are all talking about the potential for increased activity. So, we'll see. But nicely for us, we're passing the hurdle point where we could start talking about the hurdle point where we could start talking about acquisitions again at scale. We just need to spend a little bit more time getting through our ERP transformation before we get super excited about a big acquisition.

Thank you. At this time, we've reached the end of our question-and-answer session. Now I'll hand the floor back to Scott Salmirs for closing remarks.

Hi. I just want to quickly thank everybody for the interest for being on the call and taking our questions and answers. And just want to wish everybody a happy holiday season. Hope you have time with your family, and just be safe out there and enjoy. And we'll be back to you in Q1 with our results, but we're really excited about 2025 here at ABM. So, take care everybody.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.