Greetings. Welcome to ABM Industries Incorporated's third quarter 2025 earnings conference call. At this time, I'll just be in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. At this time, I'll hand the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Paul, you may begin.

Good morning, everyone, and welcome to ABM Industries Incorporated's third quarter 2025 earnings call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM Industries Incorporated. With me today are Scott Salmirs, our President and Chief Executive Officer, and David Orr, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our third quarter 2025 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website, abm.com. After Scott and David's prepared remarks, we will host a Q&A session. 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 Investor tab. With that, I would now like to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to review ABM Industries Incorporated's third quarter results. I'm especially pleased to be joined today by our new CFO, David Orr. David has been in the room on many previous earnings calls, but this is his first time as CFO, and I couldn't be happier. David brings tremendous experience, strong relationships, and deep industry knowledge, and we are already seeing the benefits of his leadership, highlighted by our cash flow performance in Q3. On behalf of the entire team, I'd like to welcome him publicly and wish him great success. Our quarterly performance demonstrated solid momentum in many areas. We delivered 5% organic revenue growth, generated strong free cash flow, and continued to win new business despite an uncertain macro environment. Each of our segments once again contributed to organic growth, and we generated over $150 million in free cash flow, driven by disciplined cash collection, resulting in a meaningful reduction in day sales outstanding. Bookings performance was another highlight. Through the first three quarters, we have secured over $1.5 billion in new business, a 15% increase year over year, positioning us well for revenue and earnings growth in the year ahead. This success reflects both favorable conditions in most of our markets and our deliberate strategy to strengthen our presence in core markets and build lasting partnerships through thoughtful pricing decisions. We have robust pipelines across Technical Solutions, Manufacturing & Distribution, and Business & Industry, particularly in several attractive geographic markets. At the same time, certain commercial office markets, especially in select West Coast, Midwest, and Mid-Atlantic metro areas, are slower to recover. In these areas, we're pushing long-term growth by strategically pricing rebates and extensions and by managing the timing of escalations to protect and expand our footprint. A…

Good morning, everyone. I'm honored to be here today and look forward to building a relationship with you all in the coming quarters. I'm also excited to work even closer with the ABM operations and functional support teams. With that, let's get into the Q3 results, starting on slide six. Revenue grew 6.2% year over year to $2.2 billion, driven by 5% organic revenue growth and a 1.2% contribution from our recent acquisitions. Of note, our organic revenue growth was the highest it's been since the fourth quarter of 2022. Like last quarter, we saw organic revenue growth in all segments led by Aviation, M&D, and Technical Solutions. BNI and Education were both up 3% in the quarter. It's clear that our advantaged offerings and service, in conjunction with our market focus and strategic pricing, are driving outsized growth. Turning to slide seven, net income from the quarter increased to $41.8 million or $0.67 per diluted share, compared to $4.7 million or $0.07 per diluted share last year. This increase was driven by the absence of a $36 million adjustment to contingent consideration for our RavenVault microgrid business that was recorded last year, as well as a decrease in corporate costs, reflecting a smaller negative impact from prior year self-insurance adjustments. These items were partially offset by higher interest and taxes. Income was $51.7 million or $0.82 per diluted share, compared to $53.6 million or $0.84 per diluted share last year. The change largely reflects higher interest and tax expense, partially offset by lower corporate costs. Adjusted EBITDA was up 5% to $125.8 million, compared to $119.8 million last year, largely the result of lower corporate costs. Adjusted EBITDA margin was flat at 5.9%, reflecting the strategic pricing and escalation decisions Scott discussed earlier. As Scott mentioned, we're taking several…

Thanks, David. Before we wrap up, I want to thank the entire ABM team for their continued focus and execution in what remains a dynamic and evolving market. This quarter, our teams did an outstanding job not only winning new business but also retaining and expanding client relationships, an accomplishment that, together with our strong free cash flow, demonstrates the resilience of our core business and the value we provide. I also want to acknowledge the adaptability of our teams as we modernize how we work. From implementing new systems to embracing artificial intelligence solutions and new ways of doing business, our people are learning and leaning into change with creativity and determination. These efforts are also enhancing how we serve clients, improving efficiency, and positioning ABM for long-term success. Thanks to all of you, we are confident in our ability to deliver sustainable value for our clients, our teammates, and our shareholders. With that, let's open the line for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask that you please limit yourself to one question and one follow-up. One moment, please, for our first question. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your questions.

Hi, good morning. This is Luke McFadden for Tim Mulrooney. Thanks for taking our questions today. 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?

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.

Understood. Makes sense. You know, thinking about free cash flow here in the fourth quarter, we just wanted to make sure we're doing our math right. Inclusive of the full-year Elevate and integration costs, we're getting to about $170 million in implied free cash flow for the fourth quarter. Is that the right ballpark, or are we doing something wrong there?

I think let me give some color on that. As you recall, our original normalized cash flow guide for the year was $250 to $290 million. That includes roughly $70 million of one-time items related to Elevate initiatives and the portion of the RavenVault earnout payment that is treated as operating cash flow. If you kind of back that down, free cash flow of $180 to $220 million, we're at $42 million free cash flow year to date. That would imply we need to do about $140 million in the fourth quarter to achieve the range. For perspective, we did $150 million in Q3. That's what gives us the confidence on the Q4 number and range.

Yeah, what I would add to that is our organization is so acutely focused on cash collections at its core. I'm just so proud of the team and what we've done. You know, we told you guys that we were going to come back and get to this level, and we're just really happy with what we've done and have every bit of confidence we're going to keep on this momentum.

Understood. Thanks so much for the color today. Pass it along.

Thanks.

Today's questions are from the line of Jas Bibb with Truist Securities. Please proceed with your questions.

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.

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…

No, that's helpful. You mentioned the cash flow outlook. You can maybe give us some more detail on your progress on collections. Any concerns about delinquencies and maybe a good frame for us where you're at on billing cycles for new revenue versus what could be considered normal?

No problem. No material concerns on delinquencies. I think, as Scott said, there was just a tremendous focus in the quarter on collections overall. In fact, our DSOs were down 7% sequentially Q2 to Q3. We were really proud of that because that was the target we were hoping to achieve. As I said, in Q4, we look to carry that momentum in. There is a laser focus throughout the organization, and that goes down from the operators to our back office support functions and everywhere in between. Really proud of where we landed the quarter on cash flow. Feel good about it going into Q4.

Thanks for taking the questions, guys.

Today's questions are from the line of Andy Wittmann with Baird. Please proceed with your question.

Yeah, great. Thanks for taking my questions. I just wanted to kind of dig into the guidance in the quarter and all the implications here a little bit deeper. I guess specifically, it's a big quarter-over-quarter EPS ramp. There can be historically some positive seasonality that helps 4Q or 3Q, but it looks particularly acute this year to achieve the low end of the guidance. That's really what I want to get into here. When I look at it here, your implied fourth quarter to get to the low end is $1.09 to get there. Consensus is $1.07. That actually kind of feels like no change, but it feels like there's clearly a change here in terms of the margin rate that your annuity businesses have exited the quarter with on 3Q versus Scott's comments here so far. Maybe the question is, which are the segments sequentially that are going to drive such a sharp acceleration in your operating income dollars and why?

Thanks, Andy, for the question. Let me dimension it this way. We do, first of all, expect a material sequential improvement in both the EPS line and the margin line. I'll actually dimension it on the margin side. We're looking at roughly 100 basis points of improvement in margin. The way I would think about that is we have some moderate improvement in Business & Industry and Manufacturing & Distribution on the strength of restructuring and the strength of the timing of escalations that are going to come through in the fourth quarter. The really big difference in the fourth quarter is our expected performance in Technical Solutions. If you think about historically what this business has done in Q4s past, it's a seasonally very strong quarter. In fact, over the last two years, operating profit margins have been 11% and 13% respectively in Q4 for the ATS segment. We anticipate that to repeat itself in Q4 of this year. That's a massive part of the margin and EPS improvement. Outside of the restructure impact for Business & Industry and Manufacturing & Distribution, as Scott mentioned, the restructure was broader than that. It was across the firm. We anticipate a benefit from that as well. We feel like we're lined up to show a very strong sequential Q4.

Got it. It's just interesting if you look at the interest expense specifically. I mean, that's a pretty big change in your guidance for interest expense. You know, just that change in interest expense here, the half year, explains that really the delta between the high end of your EPS and the low end now that you're talking about is actually almost completely explicable by the change in your interest expense outlook. I guess that's just a comment more than a question, but still, I think notable. Scott, I guess maybe to you here, last quarter kind of felt like things were kind of firing on most, if not all, cylinders. It feels like I didn't hear a lot of commentary about some pockets of weakness, tough markets in the West Coast and the Midwest. This quarter, kind of a bigger change. I guess just like, can you just take us through the timeline as to what changed through the quarter? I would have thought that there had been some indication about some of these pricing negotiations that you're going into. Maybe just take us through how this all evolved and came to be so that we just understand what happened here.

Yeah, thanks, Andy. Interestingly, it's really simplistic. It's just, and I'm saying this kind of tongue in cheek, but I don't, it was just bad timing. It's like we had a bunch of clients concurrently come to us and talk about the fact that they're pressured. They're looking at their budgets for 2026 because this is the time, this is the zone when owners are putting together their budgets because most of them largely are on the calendar year. You're sitting here, for them in June, July, August, and firming up what their P&Ls are going to look like. They just came to us and said, look, again, we're looking across the whole spectrum. No one was targeting cleaning, but they were targeting every expense, their utilities costs, right? Waste removal, everything. They just came to us like, what can you do? We don't want to test the market, and we never want them testing the market, right? There's a very different outcome for us on a margin when it's a bid versus a renegotiation. We were happy, all things considered, to go into a renegotiation. It was a timing. A lot happened concurrently, and it just happened in the weaker markets, geographic markets that have not recovered as quickly. I'll tell you some of them, and you'll be shaking your head. Portland, Seattle, downtown LA, parts of Minneapolis, DC has been under pressure. There have been these, it's different than maybe New York or Center City, Chicago, which are stronger. It happened in those markets. It happened at the same time. To give you some comfort, Andy, I could tell you, at least in the short term, we're already a month into Q4. We are not seeing this happen again. Frankly, I've been around here 20 years. I've not seen, again, having in unison so many clients at such a short period of time. We fought through it. We reacted really quickly. We feel like we're in good shape, and we feel like we're not going to be having this conversation with you guys again about something that just felt so episodic.

That's really helpful perspective. Thank you for that, Scott. Have a good day.

Thanks, Andy.

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

Yes, hi. Thank you. Good morning. Scott, I wanted to follow up on the same topic. You talked about you don't want to test the market. I'm curious if you can talk more about the competitive environment. Are you seeing new entrants out there? I would have thought, just given where we are in terms of the labor environment, there may be some potentially competitive advantages that you might have. Just talk a little bit more about that thought process.

Sure, Faiza. Here's the way I think about it. If there's not new entrants from a competitor's standpoint, look, in any given market that we have, we're always going to have three or four really good competitors. It's just the fact of what we do, right? When we talk about not wanting something to go to market, for us, it's just a very different conversation when you're sitting down with a client and working with them in a collaborative way to come to a result that they want versus going out to bid and potentially having someone put in an irresponsible bid because they don't know the client as well as we do and know some of the demands the client would have. You'll always find, and I don't think this is necessarily even ring-fenced to ABM Industries Incorporated. I think you would look at any kind of commercial services vendor in our universe, and it's kind of ubiquitous that they would say, like, why would you want something to go out to market if you can have a negotiation? I think this is a result of clients that are under pressure right now because there's been slower to recover markets. Again, just to be clear, Faiza, there is nothing in our mind that's structural that's going on here. This is a normal event for us throughout the year. We see clients come to us all the time on a regular basis, and every industry group, particular clients become under pressure because it could be their own business model. It could be something that's happening particularly to their business. This isn't the first time that we've had to sit down with a client and try to work through a result to have them save money. It literally happens every week for us. This was a situation where there were a number of big clients that were prestigious that we did not want these kinds of strategic, big brand name clients getting into the hands of any of our competitors.

Okay, understood. Makes sense. Just to put a finer point on what you're saying with respect to BNI versus M&D, because it sounds like those are the two segments where you're undertaking the strategic pricing. BNI feels a little bit more defensive versus M&D. It sounds like there's a lot of new business opportunities. I just want to make sure that I'm thinking about it the right way. If that's right on M&D, should we expect growth to accelerate from here as you get some of this new business, perhaps at a slightly lower margin? I'm just trying to think through the margin implications for next year.

Yeah, so I think the way to think about it is think about those segments, right? BNI is primarily commercial office. As you know, for the last few years, it's been under pressure. It was absolutely, you know, more defensive from that way because it was the clients responding, whereas M&D was more opportunistic. We wanted to get into a particular market. I think what I would ask you to do is also put this in context to the fact of, you know, what I noted in my prepared remarks. Our bookings are up 15%. We brought in $1.5 billion in new business through the first three quarters of the year. Our momentum in terms of winning new business and bringing them on and the tailwinds into 2026 are really healthy.

All right, thank you so much.

Thanks, Faiza.

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

Hi, good morning, Scott, David, and Paul. I appreciate the color about the strategic pricing and escalation actions, I guess, could you talk to the magnitude of the margin headwinds? In any given quarter, only a very small portion of your business, I would expect to be rebid or renegotiated at any time, right? Just to see those more episodic events have that big of a margin impact, could you talk to kind of how that, you know, caused the magnitude of the margin headwinds?

Yeah, I'll let David take that one.

Yeah, thanks, Josh. As Scott pointed out a few minutes ago, rebids are a part of our normal course of business, but just the volume and aggregation of this quarter was something we have not historically seen. You combine that with the decisions we made to protect and preserve the long-term growth footprint. As we mentioned, there were some timing items on the escalation side that we do believe over the next quarter or two will begin to recover. I think that in and of itself for BNI, especially, provides most of the bridge on the margin headwinds.

Okay, that makes a lot of sense. In terms of the catch-up into Q4, certainly it does seem like Q4 is becoming a lot healthier. I realize the escalation timing could contribute to that, but I guess what's your confidence level that that alone can drive the projected level of sequential margin improvement?

Yeah, I wouldn't say it's that alone. It's a combination of other things. If you're talking enterprise-wise, I mentioned just really anticipate a strong quarter from ATS. I wouldn't discount the benefits of the restructuring activities as well, because as Scott said, those activities are underway. They've largely been completed, and we anticipate roughly 20% of those benefits to come through in Q4 this year, with the balance to come through in fiscal 2026.

Okay, great. Thanks for the color and good luck in Q4.

Thank you.

Thanks.

The next question is from the line of Marc Riddick with Sidoti. Please proceed with your question.

Good morning, everyone. David, certainly looking forward to working with you going forward. Thank you for all the color that you guys have already provided. I just want to take a different tact on this. I was curious, Scott, maybe you could talk a little bit. You gave some examples on how these opportunities present themselves during the quarter. Maybe you could talk a little bit about the visibility and some of the contract lengths, things like that, the benefits of that retention and how we should think about that vis-a-vis historical visibility levels.

Sure. I mean, look, I think it's a ramp-up, right? You make these decisions. When we restructure these contracts and we're working with owners on how to get to their, really, what their goals are for pricing, we think about it strategically too within where we're providing relief because we'll want to restructure it in a way that we can work the margins back up. It's too much sausage-making for this call, but the truth of the matter is our salespeople and our operators know how to provide savings and restructure the contracts and the contract language in ways that over the next two to five years, you see the margins come way back and sometimes even stronger than they were at the start. You know what? You're taking a little bit of a hit at the start to preserve the long-term relationship. What's amazing about that is when you have a contract with a significant client, with a significant brand, and you're looking at an expiration date on that contract, and this could be a $25 million, $50 million, $75 million contract, and you're looking at an expiration date of a year from now, and you're like, oh my goodness, what an amazing opportunity to give a little bit of margin back and end up with now a four or five-year extension. For us, it's a home run because we know we're going to get back to that same margin place, but now we have a five-year journey ahead of us and locking up a marquee client.

Excellent. That's kind of where I was going there. Do you sense that there are other similar opportunities that you might be able to take in the near term, or do you get the sense that that might be driven more so around the differentiation of regional performances that you were hinting at earlier?

Yeah, no, I think I may have mentioned this before, but we do this all the time. I have every expectation that in the month of September, there's going to be four or five exact similar, the examples I gave, four or five times that's going to happen in the month of September, different than 30 of them happening in the month of September. Those are anecdotal. Those aren't real numbers of what happened. I think, you know what, Mark, that's probably the differential. You'll always see this stuff happening. It's just, again, to have it happen in unison, concurrently in one shot, that was the one that created the impact. We're always looking for these kinds of opportunities to continue to secure longer-term contracts with our marquee clients.

Great. I appreciate the explanation on going over that. The one thing I also wanted to touch on, you mentioned in your prepared remarks, AI benefits and the like. Can you talk about the timing of when you might see that and sort of how that might take shape and how that sort of plays into the ERP? Thanks.

Sure. Listen, AI is probably the most exciting thing that's happening here, but it's still a nascent technology, right? We're looking at areas across the company where we see savings in terms of our overhead, right? We're also seeing places where we can accelerate from a revenue standpoint and a profitability standpoint that are client-facing in the field with labor, what have you. It's the beginning, right? It's the beginning of a journey, not just for ABM Industries Incorporated. I think we're in good company because I could tell you all the other CEOs that I talk to, everyone's playing around with these initiatives. My sense of it is in 2026 through 2028, you're going to start seeing real meaningful impact. It's not going to be binary where it's just going to be flip a switch. You're just going to see a ramp-up. Super excited about that. I think what we're really excited about and what we've been reflecting on a great deal is ABM Industries Incorporated's business model. We've been talking to investors that have been talking about where they're placing their bets. It seems like the investor community is starting to get nervous about certain companies that they think could be completely, really disaggregated because of AI and their business model and what can happen to their core. You think about ABM Industries Incorporated's core, right? I don't know how you feel, Mark, but I don't think AI is going to be turning a wrench anytime soon, right? We're doing our core services. We think there's going to be a lot of focus on companies like ABM Industries Incorporated in the future when you look at the disruption that's going to happen to companies in a negative way from AI. We look at this and say we are just super enthusiastic about kind of the core services that we provide as a foundation and the fact that they are insulated for years in terms of AI and then layering on the benefits that we could get in back office and through labor efficiency. It gets us pretty charged up here that we have an AI-resilient business model when it comes to disruption.

Great. Thank you.

Thanks, Mark.

Thank you. This will conclude our question and answer session. I'll hand the call back to Scott Salmirs for final comments.

Thank you, everyone. Appreciate you following. You can see there's a lot of enthusiasm here for what we're doing and where we're heading. We're going to continue on. We're looking forward to talking to you in Q4. At that time, we'll give you our annual guidance for 2026. In the interim, have a good holiday season, and we'll talk to you soon. Thanks, everybody.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.