Greeting, and welcome to the ABM Industries Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Goldberg, Senior Vice President, Investor Relations for ABM Industries. Thank you, sir. You may begin.

Good morning, everyone, and welcome to ABM's Second 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 second quarter 2024 financial results. 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 contains 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. And with that, I would like to now turn the call over to Scott.

Thanks, Paul. Good morning, and thank you all for joining us today to discuss our second quarter results. We are pleased with our quarterly results, which were driven by our team's execution and highlighted by a strong cash flow, adjusted EBITDA margin of 6.5% as well as by mid-single-digit organic revenue growth in our Aviation, Technical Solutions, Manufacturing & Distribution and Education segments, all of which resulted in adjusted EPS of $0.87. We were also encouraged with B&I as the business continues to prove resilient in a still settling commercial real estate environment, benefiting from our diverse client and service mix, our leading market position and our penetration in higher-performing Class A segment of the market. In fact, the results were generated in B&I are a strong validation of our strategy and of the effectiveness of our business model, all of which provide a clear path to generate shareholder value. Our service breadth, our teammates and our focus on our customers as well as our ELEVATE investments and technology have enabled us to perform extremely well in choppy markets. Going forward, we expect to further leverage our ELEVATE investments as we scale the technology across the organization. Earl will take you through the financial details of Q2 in a few minutes. We have had so many touch points with new investors in the past few months that we thought it might be a good moment to reground our business model and value creation pathway while we have a focused audience. In the broader sense, we think of ABM as the consistent cash-generating flywheel, leveraging our capital-light model, scale and leading market positions to self-fund growth and margin expansion initiatives, while at the same time, consistently returning capital to shareholders. All of which drive attractive long-term shareholder returns. Going deeper on…

Thank you, Scott, and good morning, everyone. Overall, our Q2 results were slightly better than our expectations heading into the quarter, and we want to thank our team for their strong performance in a choppy macro environment. For those of you following along with our earnings presentation, please turn to Slide 5. Second quarter revenue of $2 billion increased 1.7%, all of which was organic. Revenue growth was broad-based as M&D, Aviation, Education and Technical Solutions, all grew mid-single digits. Once again, B&I, our largest segment, declined less than 1% benefiting from a diverse client and service base. We expect B&I will remain resilient despite persistent market headwinds. Moving on to Slide 6. Before we go through the numbers, I'd like to remind you that in the second quarter of 2023, we recognized $12.6 million in revenue for a large parking project in our Aviation segment. Since the costs associated with this project were incurred and recorded in prior periods, all the revenue essentially flowed through to earnings and margins in Q2 2023. The absence of that project in the current period impacts are comparable. Net income in the second quarter was $43.8 million or $0.69 per diluted share, down 16% and 12%, respectively versus last year. These decreases were largely driven by the absence of the aviation project I just mentioned. We also recorded higher corporate investments, which were planned. These items were partially offset by lower ELEVATE and integration costs and improved operating results in our B&I, M&D and ATS segments. Earnings per share further benefited from a lower share count. Adjusted net income of $55.5 million decreased 8% while adjusted earnings per diluted share of $0.87 declined 3% from the prior year period. The decrease in our adjusted net income primarily reflected the absence of the Aviation…

Thanks, Earl. We are very pleased with our first half performance and even more excited about our future. Our success reflects ABM's resilient business model, the benefits from our ELEVATE investments and perhaps most importantly, the incredible dedication and strong execution by the ABM team. We are excited for the road ahead for ABM as we continue to build and shape our business to become the technology-driven leader of the facility services industry and look forward to continuing the journey. We're now available to answer your questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

I'm curious about that M&D segment. How are you thinking about organic growth in the back half of the year? I mean, I know performance has been solid here but I think this is when that supplier rebalancing issue begins to have a more acute impact, if I'm not mistaken.

Yes, that's right, Tim. You're right on. That's when we start lapping the rebalancing that we talked about. So you'll see it down. We don't give revenue guidance. But you'll see it down in the back half. But I think what we'd want you to focus on is we do believe in the future, M&D is going to be a double-digit top and bottom line industry group, right? So we're just going through this period now that will take us through essentially the next 2 quarters and a little bit into next year. But we couldn't be more excited about the industry group, but you're spot on that we'll start lapping that in Q3 and Q4.

Scott, let's dig into that a little bit deeper than the data centers. I mean can you remind me? Like what percent of your business is that data centers today? And also like what kind of work do you do in your -- beyond your core janitorial offering? And how would you frame that opportunity around the massive expected build-out over the next several years?

Sure. And data centers for us really bridge M&D and our ATS industry groups, right? Yes, and that ranges from a number of things, Tim. It's anything from floor cleaning because in data centers has raised floors, right? So it's anything from underfloor cleaning, which is more of the M&D thing to doing real power testing, right, taking care of generator sets, switchgear. Anything with power resilience. Even mechanical side, that resides mostly in our ATS group. And in context to our $8-plus billion in revenue, it's still quite small, but it's significant enough that we feel -- we really feel the acceleration in margins because it's higher-margin business. It's where we're going to be leaning into with our efforts internally from an organic standpoint and also inorganically. So small right now, but really the center of our focus because you see the trends. This is where everything is heading. And we're just so well positioned based on our client base to cross-sell into that. I mean, we couldn't be more excited about data centers as a whole.

Our next question comes from the line of Jasper Bibb with Truist Securities.

Wanted to ask about B&I. You got it to low single-digit declines for the year, but I guess, we're pretty close to flat in the first half. So is a low single-digit decline still the right way to think about that segment for the year? And I know you exited some contracts in the last quarter or 2. Is there anything else that we should keep in mind that's going to impact the back half of the year?

No. Jasper, I think it's the right way to think about the low single-digit declines, right? We're still in the middle of this thing. And I could answer you best as ABM and a service provider. And I could tell you like where we sit today versus let's call it, 9 months ago, when we were putting together and framing our guidance. Where we sit today is a lot more positive, right? Our resiliency is coming through because we always talk about the fact that we have this flexible labor model. So while we are seeing tenants compress on their space, we flex our labor, right? And I will tell you, again, as we sit here today, what we were envisioning in terms of where we thought tenants were going to be from a compression standpoint versus where it's playing out. It's not been as dramatic. I think there is a very, very palpable movement back to the office, which is encouraging. And lastly, and don't forget, we play in Class A space. And even in addition to what I'm saying, everything you read is the resiliency of Class A space. And so we're very, very fortunate that we've been riding through it yet. But I still think for the next couple of quarters and into next year, it's not unrealistic to look at low single-digit declines and then -- for the back half of this year. And then starting to ramp up possibly to neutral next year, and then getting back to where we historically been to GDP and possibly even GDP-plus.

That makes sense. And then you mentioned the record $1 billion in new business for the first half. Is there any way to maybe contextualize that for us versus what might be a normal range? Maybe growth versus the first half of last year? Or I guess, what new business typically looks like as part of your revenue base?

Yes. This was another record for us. And more than incrementally better than the first half. We've gotten some large projects at the start of this year, that's been really helpful. And as I mentioned in my prepared remarks, the multiyear projects, which is terrific for us because we stay close to our clients. So we hit a record last year at $1.6 billion for the entire year. And we think we're going to -- all indications are that we're going to lap that record this year. So just -- we're off to a great start. And I think the bigger sentiment more than anything else is that clients continue to want to expand with us. New clients, when we sit in the presentation room, are voting for ABM. I mean, it's pretty significant when you do the math that you have this $8 billion company in revenue and bringing in $1 billion of new business in the first 6 months of the year. We're really enthusiastic about how we're putting our platform forward and the relationships we're building with clients that cause them to stay sticky and expand with us.

Our next question comes from the line of Faiza Alwy with Deutsche Bank.

So I wanted to follow up on B&I. It sounds like what you're saying is that commercial real estate part of the business is maybe a little bit better than you had feared. And then you're seeing sort of this offset from like the sports entertainment part of the business. So I just want to dig into that a little bit more, like how much of B&I now is sports entertainment and give us sort of the relative performance of sort of those 2 segments within B&I.

Look, in B&I, when you think about sports and entertainment, it's growing. But in terms of its percentage, Pfizer of B&I, it's small. We're talking $100 million, $150 million business. And it's just it's been vibrant. And it's been vibrant for a while now because people are certainly back to events. But don't forget in B&I, we have engineering segment, stationary engineering, which are the engineers in the building. And that -- the variability of that staffing level doesn't change with occupancy. If you need 12 engineers in the proverbial basement of the building to operate the equipment, whether you're 95% occupied or 75% occupied, that doesn't change. So there's inherent stability in B&I just for that. And again, the compression. The compression that we're seeing from tenants, you have to remember that plays out over time. It's not like there is mass lease expirations all happening at the same time. Those happen over a 2- or 3-year period. So we're just seeing it play out slowly and again, you're probably seeing this with other clients and other companies you cover. There is this demand to get people back to the office. And I'll just give you one anecdotal example. We just had our Board meeting, and we had a very senior executive join the team, and the Board was asking the senior executive, "What were some of the reasons you wanted to come to ABM?" After she talked about the culture and the collaboration. She said, I have to tell you, I was working remote in my last job, I wanted to get back to the office and be with people. And we're just seeing that sentiment. So it gives us some us enthusiasm for the future. But again, we're still going through this period, and it's still going to take -- I mean, in my opinion, I've been somewhere between another 6 to 12 months before we really get level set.

Okay. That's really helpful. And then just taking a step back, right? It sounds like you're doing really well with new business. But I'm curious, like was there something specific that was better than expected in the quarter that led you to raise the guide? Like is it more on the Technical Solutions side? Or is it just a little bit of everything across the board that helped you gain confidence and be more optimistic for this year and beyond?

Yes. I think for us, when we look at the year, right, we take everything into account. We don't look at things quarter-by-quarter. We look at all the different metrics, everything from new sales to how we're performing to a strong lens on the industry group. And as we frame out the year, we just have an increased level of confidence on how we're performing, and we felt this was just the right move at this time.

Our next question comes from the line of David Silver with CL King & Associates.

Yes. Scott, I was hoping to maybe just have you drill down a little bit into that $1 billion of new business. And when I hear $1 billion in the first half, I mean, it's a pretty dramatic pickup over, let's say, a few years ago when, I believe, $100 million per quarter of new business was kind of the bogey. I mean that was considered pretty good. Now I understand it's not apples-to-apples, but if you were to take out, I don't know, the microgrid business which wasn't owned by you a few years ago, and I don't know, maybe the charging business. But apples-to-apples compared to, I don't know, prepandemic, what would that $1 billion shake out compared to, let's say, several years ago? In other words, just the core activities across your non-ATS segments maybe.

Yes, that's a good question. Let me give you some context that we're pretty proud of. In 2016, which wasn't that long ago, our full year new business was $750 million, right? So now we're on track to do $1 billion more than that on average in a particular year. And look, we talked about $180 million microgrid project that we got in the first half of the year, even if you take that out as an anomaly. And by the way, we don't think that's an anomaly. We think we're going to have these big chunky microgrid projects. But even if you wanted to kind of carve that out, we still grew as compared to where we were last year at this time in terms of new sales. So really optimistic. And David, it doesn't happen by chance, right? Not only is it based on our ability to execute in the field and win the confidence and gaining reputation from clients. But it's also by putting a really structured framework on our new sales, leveraging CRM systems, leveraging training for salespeople, bringing on more salespeople. This is like -- it's not random. We invested in hyper targeting, which is really a way to triangulate different real estate databases to figure out what different regions of the country we should be going after new business. How we should be targeting that business? Who are the people we should be going after? So part of the ELEVATE investments, it's not just our ERP. Sometimes we get caught and talking about ELEVATE as our ERP systems, but we are investing dollars in organic growth and it's absolutely paying off. But it comes from having a very structured approach to it.

Our next question comes from the line of Josh Chan with UBS.

Maybe focusing on the new business gains as well. I guess, given the momentum that you have in gaining new business and it sounds like that's sustainable. Is there a chance that ABM could kind of exceed the historical 2% to 4% organic growth that you gave earlier over time? How are you thinking about sort of that contribution to the overall growth going forward?

Yes, I think so. It's over the long term, right? We talked about the fact that we -- typically as a GDP kind of grower, we talked about with ELEVATE GDP-plus, right? And we said low to mid-single-digit growth, right, which would be historically high for us. And it's because of the investments we're making and the platform. So absolutely, we think this will inure to a higher growth rate for ABM over the long term. It's just -- it's not going to be a quarter-by-quarter thing, right? And that's why we don't give revenue guidance, especially now with the project-related business having more and more of our share. We just don't want to be in that quarter-by-quarter game.

Okay. That's perfect color. And then for my follow-up for Earl, I think you mentioned right at the end, Earl, that Q3 and Q4 EPS should be fairly balanced. I know that it moves around historically. But I think usually, Q4 is a little stronger than Q3 based on normal seasonality. So could you just talk about how you expect seasonality to play out this year and why it may [indiscernible] be different than normal?

Yes. No, great question. Typically, we would actually have a little bit more revenue and profit in the back half, especially driven by ATS. That really is a back half business. But remember, within M&D, we're going to have that reset associated with the rebalancing of one of our major clients, which really kind of like offset some of that favorable seasonality that we would typically see in the second half.

Our next question comes from the line of Marc Riddick with Sidoti & Company.

I wanted to sort of touch on a couple of -- it was mentioned in the press release on a couple of times in your prepared remarks around the performance of Class A. And I was wondering maybe you could sort of put a little context around maybe the difference in performance of what you're seeing of Class A properties as opposed to the rest of the portfolio? And then maybe you can sort of I know we don't do necessarily a revenue portioning, but maybe you can sort of talk about what the potential is to increase Class A as a percentage of revenue? Or how we should be thinking about sort of where you're striving to get to?

Sure. I mean look, our strategy has been baked and we've been baked and baking for a long time to focus on Class A. And it's not because we're so smart and we knew hybrid work was coming and that's where people are going to gravitate to. It was because we like Class A clients because Class A clients are not the clients that when you send them an RFP response that they ask for and it's 300 pages, they don't go Page 280 to look at the price, rip that page out and just go for a little bid. There are the kinds of clients that actually value the offering that ABM has. So it's a significant portion of our percentage and we'll always still be diversified. We have some B&C, very, very little compared to the whole. So I don't think there's going to be this major shift to increase that percentage even more because it's such a high percentage now. But it's absolutely -- for a company like ABM that's investing in technology, investing in sales, investing in their people, you just want to be in that Class A space. And again, fortunately, it turns out that's where tenants want to be as well. And just as a last reminder for that thesis, if tenants are taking less space and they can afford to take -- to pay the same amount of rent, you can move up to Class A and that's why Class A has been so resilient because Class B tenants can move up to Class A now.

That's very helpful. And then I was wondering maybe you could touch a little bit on -- I think in some past calls, you've talked about differentiation in regional mix of what you're seeing? Are you seeing much in the way of different activity as far as of tenant activity across the country? Or is it sort of uniform at this point?

It's pretty uniform at this point. Some of the markets that we're having a tougher time like San Francisco, if you will, are starting to see increased activity because of AI. There's always other events that kind of mitigate some of the things that are happening in a particular city, the whole Sunbelt area is growing with manufacturing now, also with AI and data centers. So we're starting to see increased activity across the board. And some of the things we differentiated when we talked regionally in the past was about back to office. And we were seeing a stronger push in the South than we were on the coast. I have to tell you, even on the coast now, we're seeing people get back to the office. So that's even becoming more uniform as well.

Our final question is a follow-up from the line of David Silver with CL King & Associates.

I would like to ask maybe a cash flow-oriented question or 2. So firstly, you did indicate that you repurchased whatever, 555,000 shares. And firstly, I'd just like to know if you'd characterize that as offsetting dilution type of repurchases? Or would you say it's pure opportunistic kind of cash flow deployment or free cash flow deployment? And then secondly, on your free cash flow for the year. I mean for the first half, you're running well ahead of a year ago. And historically, your company has been kind of back half weighted on your free cash flow generation. So just wondering if we should expect -- since your EPS guidance is getting pretty close to the last years, just wondering if we should expect similar free cash flow in the back half of the year? Or is there an element or 2 that maybe, to a certain extent, front-loaded when that free cash flow is generated?

Yes. No, thanks for the question, David. So to answer the first part of your question with regards to the share buybacks that we did in this past quarter. You're right. We did about 555,000 shares and that really is associated with offsetting the dilutive share-based compensation. And based on our -- as you mentioned, strong free cash flow as well as relative low leverage. It really affords us the opportunity to potentially do opportunistic share buybacks in the future. You're right. We are really pleased with the cash flow that this company continues to drive. And if you recall at the beginning of the year, we gave guidance of normalized free cash flow, excluding kind of like the onetime cash outlays of $240 million to $270 million. Based on what we've actually seen in this past quarter, we are well on track to deliver that for the full year. And if any, we actually think we may be trending more right towards the high end of that range. When you look at the back half of the year in our EPS call like I just mentioned, although we have a really good backlog on ATS, which is normal to actually have a strong second half quarter, that will be offset with some declines that we mentioned within M&D. And that does actually have an impact on the cash flow. But suffice it to say, on a full year basis, we feel really good about the strength of our cash flow.

Thank you. This concludes our question-and-answer session. I'll turn the floor back to Mr. Salmirs for any final comments.

Okay, thanks. I just want to thank everybody for participating today. And I just want you to make sure you understand, it's not lost on us that we could not post these kinds of results, if it wasn't for our teammates who are just out there. Just working hard and doing what they're doing for our customers and for each other. So I'm really appreciated the team. So with that, have a good summer, and we'll be back to you next quarter with our Q3 results. Thank you, everybody. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.