Q2 2022 ABM Industries Inc Earnings Call
Greetings and welcome to the ABM Industries, Inc, Q2, 2022 earnings call at.
At this time all participants are in a listen only mode. A 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. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Paul Goldberg Investor and media relations.
Please go ahead.
Good afternoon, everyone and welcome to our second quarter 2022 earnings call.
My name is Paul Goldberg and I'm, the senior Vice President of Investor Relations at a B M.
With me today are Scott Palmar, <unk>, our president and Chief Executive Officer, and Earle Ellis.
Our executive Vice President and Chief Financial Officer.
Please note that earlier this afternoon, we issued a press release announcing our second quarter fiscal 2022 financial results.
A copy of this release and an accompanying slide presentation can be found on our website a b M Dot com.
After Scott <unk> prepared remarks, we will host a Q&A session.
But before I begin I would like to remind you that our call and presentation today contain predictions estimates and other forward looking statements how.
Our use of the words estimate expect or similar expressions are intended to identify these statements and they represent our current judgment of what the future holds.
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 a 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'd like to now turn the call over to Scott.
Thanks, Paul Good afternoon, and thank you all for joining us today to discuss our second quarter results.
<unk> posted strong results in our second quarter. Following the excellent results, we recorded in our first quarter.
Organic revenue growth of seven 5% was driven by solid demand and business and industry aviation manufacturing and distribution and technical solutions, which benefited from robust growth in our E mobility business.
Our teams executed well in a challenging environment driving high single digit organic revenue growth, while largely mitigating the impacts of labor availability and wage inflation.
We generated an adjusted EBITDA margin of six 5%.
Which represents a significant improvement over pre pandemic levels and reflects our ability to protect profitability in the current inflationary environment.
Our solid results underscore the strength of our client relationships and our broad capabilities to meet their evolving needs.
Overall, our second quarter performance largely reflected healthy demand for our core janitorial services contributions from acquisitions and the ongoing recovery in the aviation market.
These positive factors were partially offset by the expected decline and disinfection related work orders and enhanced cleaning services from the heightened levels in last year's second quarter.
As Earl will discuss later, we are reaffirming our previous guidance ranges for full year adjusted earnings per share and adjusted EBITDA margin, reflecting continued favorable market demand trends for our core janitorial services as well as our solutions that enable our clients to achieve their sustainability and energy efficiency.
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Our strong market positioning as evidenced in our new sales bookings, which increased 11% year over year to $795 million through the first six months of the year.
Let me now discuss the demand environment for each of our industry groups.
Beginning with BMI office occupancy rates remain at relatively low levels, but continue to gradually increase, especially on the east and west coast, where occupancy rates have risen to approximately 35% to 40% while occupancy in the central part of the U S is at approximately 60%.
We continue to anticipate a measured pace of rising office occupancy for the balance of 2022.
This slower pace of reopening is generally beneficial for our business, enabling us to effectively manage labor costs in today's tight labor market.
At the same time demand continues to rebound for special events, such as concerts and sporting events as essentially all venues have reopened to the public.
One notable development in the office market is that occupancy levels are generally higher midweek with lower occupancies on Mondays and Fridays.
This trend suggests that even though occupancy levels may not soon return to pre pandemic levels clients still almost plan for high occupancy days, when they think about their future space requirements.
Moving to aviation.
Travel rebounded significantly from the prior year with U S passenger volumes now at approximately 90% of pre pandemic levels, mostly driven by leisure travel.
Travel is also improving although at a more measured pace, we expect travel demand to continue to trend higher and to approximate pre pandemic levels in the U S. In the third quarter.
Given the recovery in the travel market margins in our aviation business have rebounded strongly aided by our efforts to optimize our service mix and by our effective management of labor costs in tight markets.
Demand in manufacturing and distribution continues to be solid as this segment has been largely unaffected by reduced occupancy levels.
As a result, our organic revenue growth reflects the health of these end markets supported by our strong relationships with many of our country's leading e-commerce logistics and manufacturing companies. We have expanded our book of business with these clients benefiting from their continued growth.
To further accelerate our growth in M. D. We are working to broaden our exposure in attractive markets such as life Sciences.
With our industry, leading geographic footprint, a b M remains uniquely positioned to serve our clients M N needs, who value our ability to provide consistent service across their numerous site locations.
In education.
Demand remained stable S. K through 12 and college and universities continue to operate with 100 per cent in person learning.
Although the roll off of two education accounts in the back half of fiscal 2021 and a reduction in the disinfection related work orders continue to impact revenue in Q2.
We expect that the addition of new clients starting in Q3 of this year will drive year over year revenue growth in the fourth quarter.
In Q2 segment margins were impacted by the labor ramp up required to service nearly full in person learning versus the hybrid model from a year ago. Additionally, we did experienced labor inflation cost and certain non unionized markets, especially in the southern regions of the U S, but we effectively.
A large portion of them through price Escalations.
In technical solutions, we continue to see robust demand for our E mobility charging solutions, where revenue quadrupled compared to the prior year. Despite some of the supply chain constraints on growth.
We expect our E mobility business to continue to accelerate driven by the U S infrastructure, Bill and strong demand for electric and hybrid vehicles.
On top of that we recently booked a large bundled energy solutions project that will commence in the coming quarters.
Interest in our bundled energy solutions continues to build and we're optimistic that we will book additional new B S business in the back half of the year.
Going forward technical solutions is poised to benefit from long term secular trends like E. These sustainability and energy efficiency.
In addition to the constructive demand environment, we continued to make important progress with respect to the elevate program in Q2.
The focus of our second quarter emphasis was on designing and testing our core cloud based ERP system and further refining our cloud based recruiting and tracking system.
While there is still plenty of work ahead of US our teams are well aligned on advancing our elevate strategy.
Driving growth through strategic acquisitions is a fundamental component of elevate and I'm pleased with our progress.
During the second quarter, we completed the purchase of Ireland based momentum support.
The acquisition expands aam's footprint to the attractive Irish market and provides us with cross selling opportunities to existing E. B M clients with operations in Ireland.
We further advanced our elevate strategy through the establishment of a B M Adventures our business ventures program.
As our first transaction under the program, we acquired a minority investment and recycle track systems, a leader in cutting edge traceability and sustainability solutions utilizing the materials waste and recycling industry.
Through this partnership E. B M clients will have access to our T. S has full suite of on demand waste removal and materials management solutions.
Before I turn it over to Earl to discuss the financials, let me provide a quick update on the labor environment.
As I mentioned last quarter Abiam's wage inflation risk is largely mitigated by the composition of our direct labor workforce.
As a percentage of our contract revenue roughly two thirds of our direct labor is subject to collective bargaining agreements were part of a cost plus arrangement or part of some other arrangement where wage rates can be predicted more easily and pass through.
The transparency of these contractual arrangements makes capturing labor cost increases less difficult as clients know that our increases are a direct result of stated or contractual wage increases.
That being said, we have definitely been experiencing meaningful wage inflation and the portion of our labor spend that is not subject to the contracts I just mentioned.
This wage inflation is most evident in the southern region of the U S where unions are less prevalent and hourly wages are generally lower than in the rest of the country.
In these instances, we have proactively sought escalations to cover wage cost increases when appropriate.
Our success in obtaining price escalation.
Speaks to the high value our clients place on our services, especially during the most challenging of times and so the fact that wage inflation is widespread and affecting our competitor a similarly.
We also continue to experience these effects of labor shortages when businesses are quickly ramping such as in education. When we went to full in person learning virtually overnight.
What we are now seeing in aviation.
So not expected in the next few quarters, we believe labor shortages will somewhat subsides over time, especially as inflation continues driving more people to re enter the workforce.
In the meantime, we continue to aggressively and proactively recruit using all the tools and technology at our disposal.
With that let me turn it over to Earl for the financials.
Thank you Scott and good afternoon, everyone for those of you following along with our earnings presentation. Please turn to slide five.
Second quarter revenue increased 26, 7% to $1 $9 billion largely driven by acquisition.
Recovery from the pandemic, especially in aviation and solid demand for our janitorial services.
Organic growth of seven 5% with broad based across all segments with the exception of education.
Moving on to slide six net.
Net income in the second quarter with $48 $8 million or <unk> 72 cents per diluted share both up 57% over the same period last year. When we posted net income of $31 1 million or 46 cents per diluted share.
The increase in GAAP income, primarily reflect higher segment earnings and the absence of a litigation reserve taken in the prior year period, partially offset by elevated related investment.
Adjusted net income for the second quarter increased 8% to $62 million or <unk> 89 cents per diluted share compared to $55 5 million or <unk> 82 cents per diluted share in the second quarter of last year.
The increase primarily was due to higher segment earnings and one less workday compared to the prior year period.
Adjusted EBITDA increased 12% to $118 $9 million compared to $106 $6 million in the prior year period.
Adjusted EBITDA margin for the quarter was solid at six 5%.
Seven 4% last year, largely reflecting the anticipated decline in work orders, which include higher margin disinfection services.
Corporate expenses, excluding items impacting comparability were essentially flat to the prior year period.
Now turning to our segment results beginning on slide seven.
DNI revenue increased 48, 9% to over $1 billion, driven primarily by contributions from acquisitions.
The period included a full quarter of Abel and three weeks of contribution from the momentum deal.
Excluding acquisitions organic revenue growth was a robust six 2%.
<unk> increased office occupancy growth and special event and business expansion with existing customers.
Operating profit in DNI increased six 5% to $76 $7 million driven by significantly higher revenue, especially related to core services such as janitorial.
Operating margin of seven 6% was lower than the prior year and reflected lower enhanced cleaning and disinfection related work orders, which we anticipated.
Aviation revenue increased 27.4% $285 $9 million, marking the fourth consecutive quarter of robust year over year revenue growth.
Improvement was largely driven by increased leisure and business airline traffic.
Aviation operating profit increased 69% to $9 $6 million versus $5 7 million in last year's second quarter, driven by the significant increase in revenue as well as growth in our higher margin Airport facility services business.
The year over year operating margin improvement of 130 basis points reflects greater economies of scale on higher volume with existing clients.
Partially offset by the impact of wage inflation.
Turning to slide eight revenue within our manufacturing and distribution industry group grew four 9% to $356 $9 million.
Solid organic growth in this segment was driven by expanded business with existing clients and several new customer wins.
Operating profit increased four 6% to $41 9 million on higher sales volume.
Operating margin was essentially flat as service make was unfavorably impacted by lower level of enhanced cleaning and disinfection related work orders compared to the prior year.
Education revenue declined three 9% to $204 $4 million largely due to lower work orders versus prior year and the roll off of two accounts.
As Scott mentioned earlier, we believe that the new clients, we have coming on board in Q3 will drive year over year revenue growth in education, starting in Q4.
Operating profit was $11 7 million down from $13 8 million in last year's second quarter due to lower revenue as well as higher wage costs, especially in the southern regions of the U S.
Operating margin remained elevated from pre pandemic levels and finished at five 7%.
Technical solutions revenue grew 18, 1% to $147 million.
Largely driven by extremely strong growth in our E mobility service offering.
Operating profit was $10 6 million compared to $10 $2 million last year.
Operating margin decreased 100 basis points to seven 2%, primarily reflecting a service mix that was more heavily weighted to our E mobility service line versus prior year.
Moving on to slide nine we ended the second quarter with total debt of $1 3 billion, including $162 million in standby letters of credit, resulting in total debt to pro forma adjusted EBITDA ratio of 2.4 time.
That was up $159 million versus the first quarter and largely reflects the litigation settlement payment of $144 million completed in the second quarter.
The end of Q2, we had available liquidity of $781 million, including cash and cash equivalents of $48 9 million.
Turning to capital allocation, we repurchased roughly 700000 shares in the second quarter at an average price of $43 50 per share for a total cost of $30 million.
In total for the first six months of fiscal 2022, we repurchased approximately 1 million shares for $43 $3 million.
Lastly, we are proud to have paid our 224th consecutive dividend in the second quarter.
Now, let me briefly touch on guidance as shown on slide 10.
Scott mentioned earlier, we are reaffirming our prior guidance for full year 2022, adjusted EPS to be in the range of $3 50 to $3 70 and for adjusted EBITDA margin to be in the range of six 4% to six 8%.
Guidance for the full year 2022, GAAP EPS is now expected to be in the range of $2 91 to.
The $3 11 up 26 cents from our prior guidance.
Afflicting benefits from changes in items impacting comparability.
With that let me now turn it back to Scott for some closing comments.
Thanks, Earl and in an evolving and dynamic market environment, a b M continues to operate from a position of strength supported by the industry's best team the breadth and scale of our operations and the strength of our balance sheet, we are well positioned strategically with exposure to secular trends like healthy buildings.
Sustainability and energy efficiency.
We also serve high growth markets, including E mobility and E. Commerce these growth opportunities coupled with the resilience of our janitorial and engineering business underscore our confidence in our outlook at the same time, we continued to make important progress with respect to our elevated initiative enhancing our efficiency.
Cincy to create long term sustainable value for all of our stockholders and stakeholders.
With that let's take some questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up here.
Handset before pressing the star keys, one moment, please while we poll for questions.
Your first question comes from Asia, AOI with Deutsche Bank. Please proceed with your question.
Yes, Hi, how are you.
I guess, so I have lots of questions first maybe just.
Scott could you maybe talk about just the big picture and sort of what are some of the things are this quarter that they were sort of in line with your expectations from a few months ago, but he says what maybe has surprised you or with a friend in terms of how you were thinking about them about your bad enough.
No.
Well thanks for the question.
Interestingly, we think everything is kind of right in line with what we're saying if you go back a couple of quarters.
Performing as expected really pleased with everything that we've done and you know I think the thing I would point out is that what was probably unexpected even from from the start of planning for the year is inflation and you know the recessionary effects that we're seeing out there.
Because that's certainly has a knock on effect on wage rates and ability to get labor and we fought through it and you see that in our margins and our bottom line. So super proud of the team for how they've come through in a quarter, where if there was anything that was unexpected it would be how how significant wage pressures are.
Okay I understood maybe if we could focus on just the aviation segment.
You know you've seen quite a bit of a margin improvement there on a year over year basis, and also sequentially I think sequentially was expected them, maybe talk a little bit about how we should think about like the long term margins in aviation and how do you expect you know maybe back.
Caf margins to trend in that business.
Sure. So you know look we're enthusiastic about this segment.
For sure.
One of the things we've done through the good work of art, our Chief operating Officer, Rene Jacobson has repositioned, how we go to market and we've shifted our mix from from predominantly airlines to airports and that's helped increase our margins and the trajectory is incredible we were now.
Very very low operating margin.
Pre pandemic and now we're at 5% as you saw and no reason it shouldn't continue in the back half of the year at the same rate and I'd like to believe that as we talk to you in in 'twenty, three and 'twenty four you're going to continue to see improvement and ultimately get this in line with our other.
Segment. So we're on a journey no pun intended.
Okay understood I'll leave it there I have a lot more questions, but I'll I'll give others the opportunity. Thank you. Thanks Faiza.
Your next question comes from Sean Eastman with Keybanc. Please proceed with your question.
Hi, everyone. Thanks for taking my questions.
It'd be great to get some context for the.
The decline in disinfection related work orders and an enhanced clean maybe year on year or sequentially versus the first quarter.
I'm, just trying to flesh out how much of that sort of margin tailwind as it's still in the system.
Sure so.
We still have we still have margin disinfection margin accretion for four for disinfection, but you know it is starting to normalize as we projected.
High level, we still have a couple of points of revenue tailwind, which is great and we think some of it will remain but it certainly tailing off as we get more normalized with the pandemic, so I'm a little bit less but not significant so essentially in line with what we've been saying for the past few quarters.
Okay.
And a couple of points with what exactly do you mean, there Scott I mean, just.
Yeah mine level.
Sure when we talk about work orders right. If you think about the elevated level of our work orders.
Through the pandemic.
Round numbers, we were at like 5% pre pandemic and we rolls all the way up so now we're in that 7% range right and we don't think we're going back down to five but may not stay at seven. So there is some room in there to normalize but it will still end up being elevated and as you know in our business a point on work orders, which are higher margin.
Margin segment, it works really well for us.
Okay helpful.
Sure.
Where are you going to say something Earl and I was just going to add to that Sean you.
When you actually look at the margin this past quarter I would say that if you look at the 90 basis point that we actually shed year over year. It was probably 200 basis point was really the disinfection related.
Just to give a perspective on disinfection in of itself.
Okay very helpful. CFO perspective, there, Okay, and then and then you called out the wage inflation, obviously, a big topic, there, but could you give us any color on where that's running whether it's ramping or plateauing and I kind of wondered if if the.
C B as.
Maybe means that wage escalations are gonna hit a b M with with a lag and.
I'm not sure if that matters, but any color there would be helpful. No no. That's the right question and from a risk protection standpoint, we're in such good shape I have to tell you Sean because as you know three quarters of our revenue is.
From collective bargaining agreements and virtually all of them got done in the last year or so so we have line of sight to the next two or three years of Escalations and on average it's going to be about four 5% for wage and benefits, which is really you know sustained.
Sustainable for us and something that is.
Less difficult to pass on to clients on the non union side, which as you know call. It a third of our business Youre definitely seeing elevated levels running anywhere from 5% to 10% increases depending on different geographies.
And that's where we look at a segment like education, where 75% of the labor is non union and that's why you see a little bit more pressure in the education segment. So it affects every segments differently, but it's based on geography. So you know, but I will say the silver lining for US is how much can you recapture in <unk>.
<unk> last year, we had a record year of price escalation recapture and we're probably running closer to two X that right now so the team is doing an unbelievable job of recapturing that wage inflation.
Super helpful responses, all I'll turn it over thanks a lot.
Yeah.
Yeah.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment. Please while we poll for more questions.
Your next question comes from David Silver with C. L. King. Please proceed with your question.
Yeah, Hi, good afternoon. Thank you.
So Scott or Earl I think maybe I was just going to ask if you could give us an update on the Abel services acquisition.
A couple of things I mean, maybe if you could talk about the integration overall and then secondly, if you could talk about.
The financial impacts the accretive nature of able in your current quarter results. Thanks.
Sure. That's great. So look we're really proud of how April is going from an integration standpoint on the operational side.
Sure.
In my mind fully integrated operationally, we're on track with our synergy targets, which is great and you know as we modeled out how we wanted this to perform internally. We're just right on track so really pleased with how it's going and are you now.
I'll, let al talk about the accretive nature, but I will tell you David.
Is really powerful about this as well as the fact from a brand standpoint in the industry and you know the fact that we've combined with able and what it means for again, the a b M brand because there's such a valuable asset and has such a great reputation. It's been it's been wonderful beyond the pure financials.
The transaction, so couldnt be more pleased and Earl if you want to give some commentary on the accretive nature of yeah. Just to reiterate you know when we announced this acquisition last year in September we talked about.
The presumption that we actually had with regards to revenues as well as the EBITDA that it would accrete and like Scott just mentioned everything is on track including.
Both customer revenue retention as well as the synergies. We also talked about you know generating about 25 in.
In EPS and we are well on track to deliver that in the in the first year.
Okay. That's great. My next question I'd like to hone in on the new sales bookings growth double low double digits year to date.
And I was wondering if you could characterize what you think.
What is it in the value proposition.
<unk> brings to the table now in the post pandemic period.
That has led to the strong bookings in other words I believe your company brought a lot.
It's very differentiated service offering during the height of the pandemic relative to a lot of your smaller regional competitors, but we're now in the post pandemic.
Period, where perhaps the differentiation you can offer.
Might not be as clear to the customer so.
He was here or maybe you could just highlight what aspect of your value proposition do you believe is driving the.
The double digit growth in sales bookings.
I think a lot of it is the momentum that we were achieved by just the resources, we bring and that's where the scale that we have an expertise look it was highlighted with COVID-19 right.
I don't think anyone in the industry would dispute that we were first out of the box solutions, we had our enhanced clean. So the brands has just been elevated rate and you know when you're pitching for new business and you're talking about how you performed over the last couple of years can you talk about combining with April I feel we all feel like there's a certain.
Level of momentum that's going on with a b M. That's causing us to have another first half of record sales growth.
So it's hard to put your finger David on one particular thing other than I can just tell you. There's so much energy around wanting to get into the room and pitch our brand and our capabilities to clients because of what's happened over the last couple of years.
Okay. That's great. Thank you very much.
David.
Your next question comes from Marc Riddick with Sidoti. Please proceed with your question.
Good evening everyone.
Hey, Mark.
So I wonder if you could touch a little bit about it and forgive me if I missed this in prepared remarks, but I know independents. You made mentioned I think on the last call as far as the pace of folks returning to the office maybe different.
Different levels in different regions of the country and I was wonder if you could talk a little bit about maybe how that's updated as well as with that with that pays how that's sort of playing with the visibility of.
Of.
Staffing and and the ramping down up alongside of it and the like and so maybe you can talk about kind of how that's playing out so far.
Yeah sure. So look we it's office occupancy has gone up incrementally.
If you think about maybe six months ago, we were talking about 10% to 20% on the coasts and 40% in the middle of the country I'd say now it's like 35 to 40 on the coast. So maybe 60 in the middle of the country and it's not all days of the week are not created equal right, So Monday, and Friday, you're probably talking about 5% to 10% occupancy.
And Tuesday, Wednesday, and Thursday elevated from there to get to your averages. So it's a it's a ramp back where.
Where we think it will still continue to ramp back, but I don't I don't think anybody.
Anybody thinks the landing spot is five days a week.
Back to the office right, it's going to be more modest return, which plays to a strength with labor efficiency and being able to be again efficient with how we deploy our staff and we've seen that in the margin.
It seems as though than the pace of how this has played out so far has been relatively.
At least slightly positive if not more so.
Compare to maybe if it was rushed or the like is that a fair way to look at that yet.
Yeah. It is mark because look put it in context to the labor environment, right and not necessarily just wage because the P&I office segment is largely unionized, where where it's very controllable cost, but just the availability of labor and the availability of the fine staffing and not have to use overtime right.
We are you know.
Where where it's worked out very well for us the pace of change back to the office has been controlled and modest for now you know obviously, we'd love to eventually see more robust numbers because it's good for the health of the economy, but right now place to ABM strength.
Okay. That's very helpful. Thank you.
Sure.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Scott Sommeliers for closing remarks.
I just wanted to thank everyone for participating this afternoon. We're excited about everything we're doing here at ABM and just really pleased with our performance and.
Look forward to speaking to you in the fall have a good safe healthy summer take care everybody.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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