ABM Industries reported its third-quarter 2024 earnings, surpassing expectations with an earnings per share (EPS) of $0.90 against a forecast of $0.87. The company's revenue reached $2.2 billion, exceeding the anticipated $2.07 billion. Despite the absence of stock data, ABM's strategic initiatives and raised guidance highlight its robust market position.
Key Takeaways
- ABM Industries reported a 3.45% EPS beat.
- Revenue increased by 3.3% year-over-year, with organic growth at 2.8%.
- The company raised its full-year EPS guidance, reflecting confidence in future performance.
- New acquisitions and product launches are enhancing ABM's market capabilities.
- Challenges remain in the commercial real estate sector, but market stabilization is anticipated.
Company Performance
ABM Industries demonstrated strong performance in the third quarter of 2024, with a revenue increase of 3.3% compared to the previous year. This growth was driven by strategic expansions and product innovations, positioning the company well within its industry. The acquisition of Quality Uptime Services and the launch of new tools like the Workforce Productivity Optimization (WPO) tool have further solidified ABM's market presence.
Financial Highlights
- Revenue: $2.2 billion, up 3.3% year-over-year
- Earnings per share: $0.90, surpassing the forecast of $0.87
- Adjusted EPS: $0.94, a 19% increase year-over-year
- Adjusted net income: $59.5 million
- Adjusted EBITDA: $128.1 million, with a 6.4% margin
Earnings vs. Forecast
ABM Industries exceeded expectations with an EPS of $0.90, compared to the forecasted $0.87, marking a 3.45% surprise. This performance continues a trend of consistent earnings growth, reinforcing investor confidence in the company's financial health.
Market Reaction
While specific stock data is unavailable, ABM's earnings beat and strategic initiatives likely contribute to a cautiously optimistic market sentiment. The raised full-year EPS guidance suggests potential for continued stock appreciation.
Company Outlook
ABM Industries has raised its full-year adjusted EPS guidance to $3.48-$3.55, indicating strong future prospects. The company expects normalized free cash flow to approach $270 million by year-end, with growth anticipated in Technical Solutions and Aviation segments. Market recovery in commercial real estate is projected by mid-2025.
Executive Commentary
CEO Scott Salmeers emphasized the company's strategic growth, stating, "Our business model... is a consistent cash generating flywheel." He also highlighted the expansion through cross-selling and analytics: "We're expanding our core through cross-selling, advanced analytics and innovative go-to-market strategies."
Q&A
During the earnings call, analysts inquired about labor market improvements and the contingent consideration adjustment related to the RavenWolf acquisition. The company also addressed growth in its microgrid business and new client acquisitions, underscoring its strategic focus on emerging markets.
Risks and Challenges
- The commercial real estate sector faces uncertainties, which could impact ABM's growth.
- Macroeconomic pressures and market volatility may pose risks to future performance.
- Managing underperforming contracts remains a challenge, requiring strategic oversight.
- The competitive landscape in emerging markets like microgrids and data centers could intensify.
- Supply chain disruptions may affect operational efficiency and cost management.
Full transcript - ABM Industries Inc (NYSE:ABM) Q3 2024:
Conference Operator: Greetings and welcome to the ABM Industries Third Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Paul Polberg, Senior Vice President, Investor Relations. Thank you. You may begin.
Paul Goldberg, Senior Vice President, Investor Relations, ABM Industries: Good morning, everyone, and welcome to ABM's Q3 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 Salmeers, our President and Chief Executive Officer and Earl Elis, our Executive Vice President and Chief Financial Officer. Please note that earlier this morning, we issued our press release announcing our Q3 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 and A session. But before we get started, 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. And with that, I would like
Scott Salmeers, President and Chief Executive Officer, ABM Industries: to now turn the call over to Scott. Thanks, Paul. Good morning, and thank you all for joining us today to discuss our Q3 results. ABM posted another strong quarter, driven by double digit growth in Technical Solutions and Aviation and supported by the continued resilience of our business and industry segment. Once again, our team did a great job focusing on our clients and executing in still choppy commercial real estate markets, enabling us to generate solid organic revenue growth on the enterprise level and post resilient margins.
We delivered adjusted EPS of $0.94 which is slightly ahead of our expectations. ABM's business model, which last quarter I described as a consistent cash generating flywheel, was in full force in Q3 as we leveraged our capital light model, scale and leading market positions to strengthen our enterprise through our internal Elevate initiatives, especially our technology roadmap. During the quarter, we continued to make progress delivering our core janitorial and engineering services through advanced use of data and analytics such as our workforce productivity optimization tool or WPO as we call it. Simply said, WPO, which is being piloted at multiple sites, is an analytics toolset that allows operators to easily identify opportunities for productivity improvements. It benchmarks productivity based on facility profiles to ensure we're operating as efficiently as we should based on the facility archetype.
We've already begun to see benefits of this technology in terms of improved efficiency and client outcomes and look forward to more broadly implementing these new tools over the next couple of years. We also acquired Quality Uptime Services, which expands our position in the fast growing data center vertical by adding new capabilities in uninterrupted power supply systems and battery maintenance. We were able to complement these growth and self help initiatives with additional capital returns to our shareholders via our long standing dividend. Continual investments to build and strengthen our core, strategic investments in complementary services and markets that offer secularly high growth rates and steady returns of capital to our shareholders via our long standing dividend are the key initiatives in our go forward plan. Our diversification, scalability and the essential nature of the services we provide all underpin the consistency and resiliency of our results, which Innosense fuels our strong cash flow.
Now let me quickly run through what we're seeing in our markets before I turn it over to Earl for the financials. Our B and I segment has remained quite resilient, benefiting from our diverse client and service mix, our leading market position and our penetration in the higher performing Class A segment of the market. We've also done a nice job diversifying geographically and we continue to renew business throughout the U. S. Such as the janitorial business of the MetLife (NYSE:MET) building, a large marquee property here in New York.
Although we're not ready to say commercial real estate market is rebounding, things seem to be firming up and pressure to return to offices is definitely on the rise. This was highlighted by a recent survey conducted by CBRE (NYSE:CBRE), whereby 38% of the 225 corporate real estate executives polled said they plan to expand their office space in the next 3 years. This is up from 20% in last year's poll. Also, 37% of those surveys anticipate downsizing versus 53% in the prior year. We were also closely monitoring this dynamic situation and talking with our clients about their plans.
We believe we need another quarter or 2 to get a clearer picture of the timing and slope of the potential recovery, but we're optimistic. Our manufacturing and distribution markets continue to be healthy, driven by a generally strong industrial economy, secular growth in the U. S. Semiconductor and data center markets and the general trends towards onshore manufacturing in the U. S.
We've continued to win new business in these markets and have invested in important resources to further leverage these trends. These robust markets and our growth initiatives addressing them have helped to partially mitigate the previously discussed rebalancing of work from a large client. I'm also proud of the team as we have proactively let some other business go where we were not receiving appropriate value for the services we were providing. I have confidence that our M and D segment will quickly return to mid single digit organic growth once the rebalancing annualizes, if not before. Aviation is having an amazing year and there are markets remain very healthy.
We've emerged as a clear leader in the aviation facilities management space, driven by the industry's best team and by our technology leadership, including our award winning ABM Clean product line. I'm thrilled our aviation segment has grown to be a $1,000,000,000 business, but I'm even more encouraged by the marginal improvements we've made over the last few years. It's a clear indication of the value we provide and our strategy around client segmentation. Although we aren't expecting to continue to deliver double digit growth quarter after quarter as the sector normalizes, I have no doubt aviation will remain strong going forward. Education remains solid.
Although it's not our fastest growing segment, it is typically very stable and provides a foundation of earnings and cash flow that can be utilized across ABM. We also believe there's an opportunity to grow in education, especially with larger school districts, colleges and universities, which can greatly benefit from our ABM Performance Solutions offering known as APS. As a reminder, APS is our single source operating model, which delivers integrated end to end facility services, generating cost and operating efficiencies through one contract, one invoice and one source of accountability. Like we've done with Providence School District, Utica University and others, we remain focused on bringing new APS clients aboard. Lastly, regarding technical solutions, our microgrid business is thriving, driven by a large contract won last year.
And while our Ravenvolt team progresses on that contract, we continue pursuing numerous other opportunities with several other prospects seeking traditional microgrids as well as for battery energy storage systems. We expect the need for energy resiliency and redundancy will only grow over time. Similarly, we know the proliferation of AI will drive significant growth in data center and mission critical infrastructure, and we have a growing position in this market. While our bundled Energy Solution business is still soft, we believe the anticipated reduction in interest rates later this year and beyond that will improve projected ROIs and hopefully restart the market. In all, we feel good about our markets, though there are still challenges to overcome both macro and specific to our industry.
We had a great Q3 and have confidence we will finish the year well. As such, we are raising our full year guidance for adjusted EPS and now expected to be in the range of $3.48 to 3.5 $5 versus our prior range of $3.40 to $3.50 With that, let me turn it over to Earl to walk you through the details and I'll be back shortly with some final comments.
Earl Elis, Executive Vice President and Chief Financial Officer, ABM Industries: Good morning, everyone. As Scott mentioned, we are quite pleased with our 3rd quarter results, which are a representation of the trends we've experienced over the last three quarters, namely steady organic growth on an enterprise level, strong execution and solid cash generation. I'd like to take the moment to recognize our team for the great work they've done this year. For those of you following along with our earnings presentation, please turn to Slide 5. 3rd quarter revenue of $2,100,000,000 increased 3.3 percent comprised of 2.8% organic growth and the balance driven by our recent acquisition.
Organic revenue growth was led by Technical Solutions and Aviation, which both grew double digits, while Education posted mid single digit growth. Our B and I segment remained resilient, declining by only 1%, benefiting from our diverse client and service base. Lastly, as expected, manufacturing and distributions revenue declined 1% as the rebalancing impact we have previously discussed began to materialize. Moving on to Slide 6. 3rd quarter net income of $4,700,000 or $0.07 per diluted share was down year over year.
This decrease was primarily attributable to a $73,200,000 year over year impact from prior year and current year adjustments to contingent consideration related to the Ravenbolt acquisition, as well as the absence this year of a $22,400,000 employee retention credit that was recognized in last year's Q3. We also recorded unfavorable prior year insurance adjustments and higher corporate investments as planned. These items were partially offset by improved segment operating results and lower Elevate costs. Earnings per share further benefited from a lower share count. Of note, the contingent consideration adjustment relates to RavenWolf significantly improved 2024 performance, as Scott mentioned, and the increased likelihood of a payout under their acquisition earn out plan.
Adjusted net income of $59,500,000 and adjusted earnings per diluted share of $0.94 increased 13% 19% respectively over the prior year period. These increases were largely driven by improved segment operating results, especially in Aviation and Technical Solutions, partially offset by higher year over year corporate costs. Adjusted EPS also benefited from a lower share count, driven by share repurchases last year. Adjusted EBITDA increased 2% to $128,100,000 and adjusted EBITDA margin of 6.4% was consistent with last year. Now turning to our segment results beginning on Slide 7.
B and I revenue of $1,000,000,000 declined 1%. We continue to benefit from our end market diversification, including our geographic footprint, our exposure to the sport and entertainment and healthcare markets and from our mix of higher performing Class A properties. This purposeful positioning has aided us in avoiding a more significant impact resulting from the soft commercial real estate market. Operating profit in B and I declined 1% to $77,800,000 while operating margin remained flat at 7.7%. Margin benefited from our continued focus on price realization and cost management.
Aviation revenue grew 13% to $268,400,000 driven by healthy travel markets and new business wins from both the airport and airline sides of the business. As Scott mentioned, Aviation is well on track to be a $1,000,000,000 segment for ABM this year, in large measure due to our advantaged ABM clean service line. Aviation's operating profit was $17,800,000 up 52% and margin was 6.6%, an increase of 170 basis points. Operating leverage on higher volume and favorable service mix were significant contributors to the increase in margin. Turning to Slide 8, manufacturing and distributions revenue declined 1% to $377,100,000 primarily due to the expected rebalancing of work by a large e commerce customer, which we discussed on prior calls, partially offset by growth with other clients.
We continue to work hard to offset the rebalancing through the addition of new business and we believe we have a clear path to positive growth in the second half of twenty twenty five. However, the impact of this rebalancing will continue for the next few quarters. Operating profit increased 8% to $40,900,000 and operating margin increased 90 basis points to 10.9%. Profit and margin improvement was largely due to a favorable customer mix, including some client rationalization for underperforming contracts. Education revenue increased 4% to $228,300,000 benefiting from the increased activity on a number of Cost Plus accounts.
We also continue to win new business in the quarter with the addition of Auburn University, which will be onboarded early next fiscal year. Education operating profit was seasonally strong at $18,000,000 up 13% and margin was 7.9%, an increase of 60 basis points. This was largely attributable to improved labor efficiency. Technical Solutions revenue grew 25% in total to $209,700,000 including 20% organic growth and 5% from the acquisition of Quality Uptime Services. Organic growth was driven by strong microgrid project activity.
Bundled Energy Solutions and EV project activity remained soft. However, we expect a strong finish to the year in Technical Solutions, driven by constructive macro trends in energy resiliency and data centers and further progress on the microgrid projects we have already booked. Technical Solutions operating profit grew 56 percent to $17,900,000 and margin expanded 170 basis points to 8.5%. These improvements were a result of significantly higher volume and lower acquisition related amortization. Moving on to Slide 9, we ended the 3rd quarter with total indebtedness of $1,400,000,000 including $57,900,000 of standby letters of credit, resulting in a total debt to pro form a adjusted EBITDA ratio of 2.5 times.
At the end of Q3, we had available liquidity of $513,900,000 including cash and cash equivalents of $86,300,000 Free cash flow in the 3rd quarter was $64,000,000 with Q3 comparables being impacted by the timing of accounts payable and the non repeat of a $22,000,000 employee retention credit received last year. Throughout the 9 months of 2024, we have generated $152,000,000 in free cash flow this year or $187,000,000 after normalizing for in year Elevate and integration costs. This is up $16,000,000 or 9% over the last year's normalized free cash flow of $170,000,000 which is adjusted for the receipt of the employee retention credit, repayment of the CARES Act and in year Elevate and integration costs. Cash flow generation continues to be a hallmark of ABM and it's a product of our asset light and flexible business model, complemented by our consistent focus on working capital management. Interest expense was $21,200,000 slightly higher than prior year.
Regarding Q3 capital allocation, we made one acquisition for $118,000,000 We also paid dividends of $14,100,000 We did not repurchase any stock in the quarter and the remaining authorization under our share repurchase program is $186,000,000 Now let's move on to our revised full year fiscal 2024 outlook as shown on Slide 10. As Scott mentioned, we are raising our full year guidance for adjusted EPS based on our strong Q3 results and our confidence in a solid finish to the year. As such, we now expect full year 2024 adjusted EPS to be in the range of $3.48 to $3.55 up from $3.40 to $3.50 previously, representing a $0.07 increase at the midpoint. Adjusted EBITDA margin is expected to be around 6.3% for the full year. Our interest expense forecast is unchanged at $82,000,000 to $86,000,000 and the normalized tax rate before discrete items is expected to be between 29% to 30%.
Lastly, full year normalized free cash flow is likely to be near the top end of our $240,000,000 to $270,000,000 range, if not a little higher. This forecast excludes the estimated $45,000,000 of Elevate and integration costs. With that, let me turn it back to Scott for closing comments.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Thanks, Earl. While we're very pleased with our performance in fiscal 2024, we know ABM can be even more. Supported by a resilient, flexible and cash generative business model, our investment in technology, new capabilities and most importantly, our people, we are positioned for sustained success. We're expanding our core through cross selling, advanced analytics and innovative go to market strategies with additional opportunity on the horizon. These initiatives are being complemented with investments in new capabilities like microgrids and mission critical services, which we believe will drive higher growth rates, expand margin over time and further set us apart from the competition.
Thanks again for joining our call today. And with that, let's take some questions.
Conference Operator: Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Tim Mulrooney, Analyst, William Blair: Scott, Earl, good morning. Good morning. Good morning. So on the guide, just real quick, it looks like your previous expectation, I think, was more for EPS to be kind of balanced between the Q3 and the Q4. But now based on your guide, it looks like you expect the Q3 to be maybe $0.10 or so higher than the Q4 in EPS.
Is this just a simple case of more revenue being pulled into the Q3 than you were initially expecting? Or are there other factors that warrant consideration here?
Earl Elis, Executive Vice President and Chief Financial Officer, ABM Industries: Yes. No, thanks for the question, Tim. When we look at the Q3 quarter, we were really pleased with the performance across the portfolio. But in particular, our Technical Solutions business, especially Ravenbolt really outperformed. Why you're not necessarily seeing that flow through to the Q4 to the same extent is really what you're going to see in M and D.
And as we talked about, we're actually experiencing that rebalancing of one of our major customers in M and D. That started in Q3, but will fully ramp up in Q4. And we'll actually see that impact over the next several quarters.
Tim Mulrooney, Analyst, William Blair: Okay. That's very helpful. Thank you, Earl. My second question a lot of these segments. I mean, aviation was 6.6, I think in the quarter.
I think our model was about 5.5 and M and D came in at 10.9. I think we were at 10.0. So I know the EPS beat here was driven by ATS to a large degree, but also want to know the profitability across a lot of these segment margins here. So my question is, are these improvements that I'm seeing here, are these sustainable do you think as we move into 2025? Or was there something about the Q3 that helped lift profitability here like maybe a working days dynamic or something like that that isn't necessarily expected to carry forward?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: No, I mean, I don't think there was anything unusual. I think we're just performing at a high level. Our resilience and what we've been talking about quarter after quarter is really coming true. We're excited about the results as you are and it's really nice, Tim, as you point out when you could see it across the board like this. So there's no watch outs ahead for us.
Earl just talked about M and D going to kind of trend down a little bit the year over year, but you pull that out of M and D and you're going to be back to mid to high single digit growth. So we're feeling good across the board.
Tim Mulrooney, Analyst, William Blair: Okay. Thank you, Scott. I'll update my expectations on profitability here in the model and congrats on a nice quarter. Thank you.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Thanks, Tim.
Conference Operator: Thank you. Our next question comes from the line of Faiza Alwy with Deutsche Bank (ETR:DBKGn). Please proceed with your question.
Faiza Alwy, Analyst, Deutsche Bank: Yes. Hi, good morning. Thank you. So I wanted to follow-up on the margin question. I made the same observation as I was looking at numbers this morning.
And maybe I know you mentioned sort of labor efficiencies a few times. Maybe talk a bit more about like what's driving that? Are you seeing sort of wage rates come down? Or talk about some of the other dynamics that are helping margins across the board at this point.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure. That's great. So yes, there's a couple of dynamics here. First on the labor front, we're feeling really good because wages haven't been rising to the same extent as they were in the last couple of years, right? And that's been widely publicized.
You can read about that. So that's playing through for us. And also availability of labor is getting much better for us as well in terms of getting people on board quicker. And so that's been another great tailwind. And lastly, our workforce productivity optimization tool has been really great.
And what that really does is it lets one of our project managers who's and I'll give you like kind of anecdotal, a project manager is managing a 500,000 square foot building and he's looking at his labor and the productivity of the labor. And now that project manager can compare it to another 500 1,000 square foot building either in their market or in a different market. And it helps give them kind of a true north about how efficient they are. And it could be as simple as making a course correction or actually just getting on the phone with the other project manager and ask them what they're doing. So, it's just starting up now.
I'd say, I think the good news from my standpoint is we're at early, early stages in the rollout. So there's a lot more white space to go. So I think it's those dynamics, Faiza.
Faiza Alwy, Analyst, Deutsche Bank: Great. That's very helpful. And then on the ATS business, I think you're if I'm not wrong, I think you're alluding to maybe revenues being a bit lumpy from here. So talk a bit more about how you're thinking about business. I know previously you've mentioned sort of what the backlog might be.
Was there something in the quarter that was that kind of came in earlier? And just a bit more color on how we should expect the top line trends from here?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure. I think we're all kind of getting used to ATS being so much project driven now with our microgrid business. And there's so much that we can predict, but also things that we can predict, right? Because think of it as construction projects and a lot of it outdoors. So depending on the weather, we may get a delay.
Depending on a community issuing a permit at a given meeting that we're projecting them to issue the permit on and that meeting gets delayed by a month. So there are things that are out of our control. But when we talk about our backlog being strong, that's booked business and it's really just a question of timing. So for us, we get really comforted by a backlog that's strong and RavenWolf's backlog has never been stronger and because it's money in the bank, it's just a question of when we're cashing the check to use the analogy. So it's something we're getting used to, but we have good line of sight kind of month to month, but sometimes it just drops into a different quarter.
But we feel really good about Q4 now at least the line of sight that we have.
Faiza Alwy, Analyst, Deutsche Bank: Excellent. Thank you so much.
Conference Operator: Thank you. Our next question comes from the line of Jasper Bibb with Chuye Securities. Please proceed with your question.
Jasper Bibb, Analyst, Chuye Securities: Hey, good morning guys. I wanted to ask about the BMI segment. Just any detail on segment revenue expectations for the Q4? I think the prior view you had was a low single digit decline for the year, 3 quarters in seem to be running at the high end of that range. So any change there on where do you think that business is going to end up in fiscal 2024?
Tim Mulrooney, Analyst, William Blair: Yes. Look, I think we're
Scott Salmeers, President and Chief Executive Officer, ABM Industries: I love the way we're performing in B and I, right? It just shows resilience. Being down 1% year over year in this segment when every headline is talking about commercial real estate, we're really proud of. And it looks like the trends are starting to turn up as I talked about in my opening remarks. So, we're not ready to call it as being over and that we're going to start rebounding to positive growth yet.
I think we'll have a better line of sight to that probably in the middle of next year to be safe. I think as more and more tenants have their leases start coming due and decide how much space they're taking or how much they're ramping down. But we feel really good about the segment. And we're as proud of this as anything we've done in the last few years because if someone would have told us in 2 or 3 years from now, there's going to be a massive reset in commercial real estate, but your revenues are only going to be of reset in commercial real estate, but your revenues are only going to be down 1%, it would be hard to believe, right? So again, I think this is all normalized right now and we're just going to ride through the next few months and hopefully we stay exactly in the zone, but we're optimistic.
Jasper Bibb, Analyst, Chuye Securities: Thanks. That makes sense. And then you mentioned some of the moving pieces in ATS in response to earlier question. Just kind of hoping to get an update on and maybe isolate $180,000,000 contract there. I guess how has that ramped up so far?
And when do you expect that contract will hit the full, I guess, dollars 90,000,000 a year run rate?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure. So it's a contract that will run through 'twenty six through at least the beginning of 2026 and it's on a cadence. I think we said it's over 180 sites. So just think about kind of an even ramp from now until maybe Q1 of 2026 and that can move a little bit. But it's baked into our numbers and how we're thinking about certainly the finish of this year and as we start our or actually conclude our budgeting process for next year.
I do, Chad. Thanks.
Conference Operator: Thank you. Our next question comes from the line of Josh Chan with UBS. Please proceed with your question.
Josh Chan, Analyst, UBS: Hi, good morning, Scott and Earl. Congrats on a good quarter.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Thank you.
Josh Chan, Analyst, UBS: Hi, yes. So you mentioned data center several times in your prepared remarks. Is there a way that you can triangulate for us what's your data center exposure? I know it might go in a couple of different segments, but some way to triangulate that would be helpful. Thank you.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure. It really runs across 2 of our segments. It runs across ATS and M and D. And M and D is more handling clients that have big data centers within their facilities, whereas ATS is more project driven where we're supporting mission critical sites either through our electrical work or mechanical work or actually through microgrids. So it runs through both.
But I mean to put it in context, right, commission critical business right now is nascent for us. We're call it sub $250,000,000 in revenue on our $8 plus 1,000,000,000 But I mean, we're so excited. You saw us leaning in with the acquisition of Quality of Time Services that does UPS power, which is uninterrupted power, which every data center needs in terms of backup power. And the team there designs and installs UPS. It's exactly where you want to be in the new AI data center generation.
So really excited about how that's going to grow as well. But it is good to kind of put the revenue number in context to the enterprise.
Josh Chan, Analyst, UBS: Great. Thank you for that color. And then maybe specifically on M and D, I guess I was under the impression that margins might be pressured by the rebalancing, but you turned out to have a very strong margin quarter. So I guess what's the source of that strength? And as the rebalancing potentially ramps in the coming quarters, could margins sustain at current levels?
Or will there be some pressure?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: There'll be a little bit of compression. Next (LON:NXT) quarter is the quarter that will have the full effect of the rebalancing. But interestingly, we're not looking at it as that dramatic internally because first of all, that client is still one of our biggest clients and we're already starting to grow with them again believe it or not after the rebalancing because we'd like to believe we're best in class. So that's a good tailwind for us. And then the rest of the business is doing so well.
You guys know about the trends with manufacturing and on shoring and we're squarely in the middle of that. We are really deep into the semiconductor market. I mean literally we're in Korea meeting with companies that are moving over here. So the M and D segment is going to be so powerful for us over the next few years. And this rebalancing is such for us, we're thinking this is such a small bump in the road.
And again, we love the fact that we're picking up some sites. So it's good stuff.
Josh Chan, Analyst, UBS: Great. Thank you for your time and congrats on a good quarter.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Thank you.
Conference Operator: Thank you. Our next question comes from the line of David Silver with C. L. King and Associates. Please proceed with your question.
David Silver, Analyst, C.L. King and Associates: Yes. Hi. Thank you. First question would be about the contingent consideration adjustment for RavenWolf. So I was wondering if you could put the $37,000,000 adjustment this quarter into context.
In other words, is that kind of a mark to market to get you caught up to where RavenWolf's year to date performance is? Is that an estimate for the full I believe it's a calendar year calculation? Or is this something that extends beyond this year? In other words, is it a judgment about not just next few months or the current year for the incentive calculations and whatnot, but something beyond that? So just what is captured in the $37,000,000 adjustment this quarter?
Thank you.
Earl Elis, Executive Vice President and Chief Financial Officer, ABM Industries: Yes. No, thanks for the question, David. So we look at this every quarter to assess kind of where RavenWolf's forecast is over the 3 year period. And so if you think about it, this was an earn out of our 3 year period. So we actually have 2 years.
It's on a calendar year basis, so we have 2024 and 2025. And so when we look at their projections over that period, we exactly to your point, we actually do a mark to market. And so this is looking at the full extent over that next 2 year period as opposed to just this year. So good news is that versus where they're trending last year where they actually had a slow start, The business is definitely picked up with incremental business and new clients. So we feel very good where Ravenmold is positioned and really happy to actually have this earn up.
David Silver, Analyst, C.L. King and Associates: Okay, great. Thank you for that. This next question, I guess, would be a little bit new business and then old business kind of question. But firstly, I was just wondering if you could update us on your year to date new business success. I think you said for the 1st 6 months of this fiscal year, you were at $1,000,000,000 Just wondering where do you think you might end up the year at or where were you at the end of the Q3?
And then more to the point, Scott, I heard you say something, I believe, for the first time this year this time versus the few years that I've been covering you. But you talked about what would the word be, firing some customers or walking away from some business. So when I first started listening to your conference calls, you used to tout your very high retention rates pretty regularly. And your comments this period about opting to walk away from some business due to returns and whatnot. I mean, I think that's a change in your philosophy at some to some extent.
So I was just wondering if you could kind of talk about maybe the evolution or the shift in how you're thinking about retaining new business versus identifying and targeting sorry, targeting new business versus opting to not service some of your current portfolio?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure, sure. So we're not going to update at this moment our sales, but we did hit a record as you noted last quarter. We do the midpoint in year end, but we are tracking to have another record year. I'll just leave it at that. We're doing really well on the new business front.
And the firing customers, it's not really quite that dramatic as firing a customer, but what will happen is we have thresholds of profitability that we have to meet and we've been really resolved about that. And sometimes that happens on a larger scale than on a micro scale because it does happen all the time. We take a lot of pride, David, in what we're doing here. And
Tim Mulrooney, Analyst, William Blair: if we're
Scott Salmeers, President and Chief Executive Officer, ABM Industries: not getting the value that we thought, we just we will walk away. And I think that says a lot about what we're doing and the value that we're adding. So every now and then, we'd just like to point that out to make sure you guys all know that we do not see ourselves as a commodity business.
Conference Operator: Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Tim Mulrooney, Analyst, William Blair: Hi, thank you. Scott, it's great to hear the progress and optimism about your microgrid business. Can you roughly quantify, is it mostly projects with existing clients or not? Or is it largely cross selling efforts, please?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: It's mostly new clients, which is super exciting. But it's a strong mix. It's great because we bought this business and with that came a portfolio of clients and we got established and now we're starting to cross sell. We're starting to have conversations. And interestingly, it's popping up in more and more bids for other things where we're seeing EV and microgrids combined together.
So there's a lot of good stuff happening around the microgrid business. But to your point, it's a mix. And when we look at the future and the ability to sell into our $8,000,000,000 customer base, it gets us really, really excited. But again, it's a new business for us. And we're really putting points on the board now and we have a really strong backlog.
So
Tim Mulrooney, Analyst, William Blair: understand opportunity, but can it lead to some electrical subcontracting work for you for the rest of the building or has it in some cases?
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Well, we do that already. We have an electrical division in our ATS group. That's a separate segment for us and we're doing some contracted work all the time and now that we added quality uptime services, it's just another tool in the toolbox to say not only can we test your infrastructure and do mission critical work there, but we could actually design and install UPS systems, we could do retrofits, we could do underfloor cleaning in a data center. Really becoming a turnkey data center operator, which has been phenomenal.
Tim Mulrooney, Analyst, William Blair: Thank you.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Sure.
Conference Operator: Thank you. Our final question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with
Earl Elis, Executive Vice President and Chief Financial Officer, ABM Industries: your question.
Faiza Alwy, Analyst, Deutsche Bank: Hi, thank you. I just had a follow-up. Wanted to talk about capital allocation and I know you acquired a company back in June. So curious around how you're thinking about M and A versus cash return to shareholders? What did you like about that business?
And should we expect more M and A from here?
Earl Elis, Executive Vice President and Chief Financial Officer, ABM Industries: Yes. I mean, I can start off Faiza. M and A continues to be part of our growth strategy and that was signified with the latest acquisition that you just mentioned of quality uptime. So we will continue to be balanced with our capital allocation between accretive M and A opportunities as well as share buyback. Obviously, we did a significant amount of share buyback last year where we probably reduced our share count by 5% as we actually saw some price dislocations.
So we took advantage of that. But based on where we are right now, we are really happy not only with our current leverage, but also our capital allocation.
Faiza Alwy, Analyst, Deutsche Bank: All right, great. Thank you.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: Thanks Faiza.
Conference Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Selmers for any final comments.
Scott Salmeers, President and Chief Executive Officer, ABM Industries: I just wanted to thank everybody for listening and participating in the call today. We're excited about our results and optimistic about the future and hope everybody had a really good summer and is excited about the fall and we'll be back to you with Q4 soon. Thanks everybody.
Conference Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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