Q3 2022 ABM Industries Inc Earnings Call
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Paul Goldberg Senior Vice President Investor Relations for Abiomed industry.
You may begin.
Good morning, everyone and welcome to our third quarter 2022 earnings call. My name is Paul Goldberg and I'm, The senior Vice President Investor Relations at a B M. With me today are Scott Sal mirrors, our president and Chief Executive Officer, and Earle Ellis, Our executive Vice President and Chief Financial Officer.
Please note that earlier this morning, we issued our press release announcing our third quarter 2022 financial results.
Copy of that release and an accompanying slide presentation can be found on our website a b M Dot com.
After Scott and <unk> prepared remarks, we will host a Q&A session.
But before we begin I would like to remind you that our call and presentation today contain 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 and could cause our 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.
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.
Go ahead Scott.
Thanks, Paul Good morning.
Thank you for joining us today to discuss our third quarter.
A b M generated solid results in the third quarter, continuing our consistent performance throughout 2022 oral.
Organic revenue growth of seven 4% was broad based driven by healthy demand for janitorial, and engineering services and business and industry aviation and manufacturing and distribution as well as in technical solutions.
And much like the second quarter, the a b M team executed well and mitigated a significant portion of the increase of labor costs, while advancing our elevate initiatives overall, we generated revenue of $2 billion and an adjusted EBITDA margin of six 6%, which is well above pre P.
<unk> levels.
I was pleased with our performance when considering the many headwinds we faced this year, including the expected decline of enhanced clean work orders significant cost inflation rising interest rates and a very very tough labor market.
And in the face of all of that the team continued to provide outstanding service to our clients while also focusing on profitability.
Based on our solid and consistent performance throughout the year, we are adjusting our previous guidance for full year adjusted earnings per share to the upper end of our range and also narrowing the range for adjusted EBITDA margin we.
We feel confident about our market positioning and our ability to end the year with strong fourth quarter results given continued favorable demand for our janitorial services and strong demand for E mobility and bundled energy solutions.
Let's now discuss the demand and operating environment for each of our industry groups.
He was being an office occupancy rates remain at relatively low levels, but continue to slowly increase.
This trend will likely continue into 'twenty twenty-three.
Modest office occupancy improvement and growth in special events sporting events and parking is driving growth from existing customers. We've also done a nice job winning new commercial office space business and the New York City market and we're excited to have been chosen to take on the services at State Farm Stadium in Phoenix.
In addition, we recently added a great client and spirit Aero systems in Northern Ireland, one by the momentum team who joined the a b M earlier this year.
With the most comprehensive service offering in the industry, we expect retention rates to remain high and to continue to win more than our fair share of new business.
At the same time, we anticipate that higher margin disinfection work will decline again next year in a post pandemic environment.
Moving to aviation.
Summer travel season has been robust driving growth in air side and land side operations, which include parking and transportation.
We're also seeing strong demand in the U K driven by their board of reopening.
Business travel is also improving although at a more measured pace.
We recently announced an important win at O'hare significantly expanding the scope of our service at the airport that will generate an incremental $25 million a year in annual revenue over the next five years.
However, labor availability continues to be a challenge in the aviation market, resulting in higher overtime costs. We expect these pressures will continue in the coming quarters.
Demand in manufacturing and distribution continues to be solid as this segment remains largely unaffected by reduced occupancy levels. As a result, our organic revenue growth reflected the health and relative stability of these end markets.
While we don't expect certain of our e-commerce and logistics customers to grow at the same rate as they did during the pandemic our industry, leading geographic footprint uniquely positions us to win new business, both with manufacturers and life science clients.
In education, K through 12, and colleges and universities continue to operate with in person learning. So we're back to a pre pandemic demand environment and we are seeing a much lower level of disinfection related work orders as we've been signaling in the past.
We've on boarded some large new clients recently, including George Washington University, and the school district of Philadelphia.
Both of which will help drive organic growth in the fourth quarter.
We're also seeing a good deal with new contract proposal activity. So we have ample opportunity to win new business as we head into 'twenty twenty-three Les.
Labor cost inflation, and Nonunionized markets, especially in the southern regions of the U S and low labor availability continued to be headwinds that we are managing.
These labor dynamics generally put more pressure on education and aviation than our other segments.
In technical solutions, we continued to experience robust demand for our E mobility charging solutions, where revenue tripled over the prior year period.
We expect technical solutions to have strong growth again in 'twenty two 'twenty three aided by the U S infrastructure Bill and the recent passage of the inflation reduction Act, which allocates an incremental $7 billion for electric vehicles, EV infrastructure and other energy efficiency investment activities.
We also expect a number of bundled energy solutions projects to commence in the fourth quarter.
Top of that reasonable, our new micro grid business, which I'll discuss shortly is poised for strong growth in all technical solutions is very well positioned to benefit from long term secular trends.
Moving to elevate.
We continue to make progress in the third quarter.
In particular, we implemented a new cloud based work order system, which when fully rolled out is intended to meaningfully streamline and improve the current process we have.
We continue testing and refining our workforce management tool and made further progress on developing our core cloud based ERP system.
We also launched a b M vantage, our new data enabled smart parking platform at a major trade show last month.
Early client feedback has been very positive as operators look for ways to generate more revenue with lower operating costs.
Lastly, after the quarter ended we further advanced on our elevate strategy by acquiring reasonable a leading provider of integrated microgrid solutions, including generators and switchgear that deliver energy resiliency and reliability. This acquisition is a strong fit with technical solutions as customers.
<unk> are increasingly turning to micro grids to bolster their onsite energy capacity for EV charging reducing emissions and meeting sustainability goals. We're really excited to have the Raven volt team on board.
Before I turn it over to al to discuss the third quarter financials, Let me make a few summary comments.
First on the demand side. The general environment is constructive we are returning to pre pandemic levels in terms of travel in school learning and industrial activity.
Office occupancy is also trending upward but slowly.
We have tremendous growth opportunities in technical solutions, driven by energy efficiency sustainability cost reduction and risk mitigation and further boosted by government stimulus the reasonable acquisition provides us with another high growth opportunity to win new business in fact overall we.
Expect to finish 2022 with another new sales record.
On the cost side, we're continuing to manage several challenges in the current economic environment.
Labor pressures, we are currently experiencing are largely unprecedented.
With unemployment at historically low levels immigration greatly reduced from prior years and with high demand from the rapidly recovering travel restaurant retail and service industries.
Labor shortages are driving labor inflation, we are seeing wage pressure in both blue collar and white collar positions and a real battle for talent.
We expect these challenges will persist into 2023.
In this environment will remain vigilant on pushing through price escalations, managing costs and developing systems programs and processes to operate more efficiently and to effectively attract retain and manage talent.
At the same time, we'll continue to invest in a b M to ensure we build off the strong competitive position we've established.
So with that let me now turn it over to Earl for the financials.
Thank you Scott and good morning, everyone for those of you following along with our earnings presentation. Please turn to slide five.
Third quarter revenue increased 27, 1% to $2 billion, largely driven by acquisitions continued recovery from the pandemic, especially in aviation and solid demand for our janitorial and engineering services as well as strong growth in E mobility.
Organic growth of seven point work with that was broad based across all segments.
Moving on to slide six net income in the third quarter was $56 $8 million or 85 cents per diluted share up significantly over the same period last year.
The increase in GAAP income, primarily reflects higher segment earnings and the absence of a litigation settlement reserve taken in the prior year period, partially offset by elevate related investments and lower benefits from prior year insurance adjustment.
Adjusted net income for the third quarter increased 3%.
$3 $2 million or 94 cents per diluted share compared to $61 $3 million or 90 cents per diluted share last year.
The increase primarily was due to higher segment earnings on higher revenue compared to the prior year period.
Adjusted EBITDA increased 11% over the prior year period to $125 $5 million.
The EBITDA margin for the quarter was in line with our expectations at six 6% versus seven 7% last year, largely reflecting the anticipated decline in work orders, which included higher margin disinfection services as well as higher operating costs.
Particularly labor.
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 51, 4% to over $1 billion, primarily due to the contribution from the acquisition of Abel and momentum.
Excluding acquisitions organic revenue was seven 1%.
Reflecting continued growth in special events, including sports and business expansion with existing customers.
Operating profit in Eni increased 15% $82 $4 million benefiting from significantly higher revenue.
Operating margin of 8% was lower than prior year and reflected reduced enhanced cleaning and disinfection related workforce versus the prior year and higher labor costs.
Aviation revenue increased 21, 3% to $203 $5 million, marking the fifth consecutive quarter of robust year over year revenue growth.
This improvement was largely due to increased leisure and business airline traffic and related parking activity as the economy continues to emerge from the pandemic.
Aviation operating profit decreased by 1% to $9 $5 million versus $10 million in the prior year and margin declined 130 basis points to four 7%.
These declines were the result of the expected decrease in high margin pandemic related work orders as well as ongoing labor pressures, including wage increases and overtime costs.
Turning to slide eight revenue within our manufacturing and distribution industry group grew five 2% to $358 $1 million.
Selecting expanded business with existing e-commerce and manufacturing clients.
Operating profit and operating margin were both slightly down in the quarter to $38 million and 10, 6% respectively.
These results reflect lower levels of enhanced clean as well as higher costs related to labor shortages, most notably in the southern states.
Education revenue modestly increased to $207 $5 million benefiting from new business wins.
We expect to see improved year over year revenue growth in our fourth quarter as these new clients ramp up towards a full run rate.
Education operating profit was $14 $5 million down from $80 million in last year's third quarter due to lower enhance clean revenue as well as the higher wage costs, including overtime expenses, especially in less populated areas, which tend to have shallower pool available permanent labor.
Yeah.
Operating margin of 7% remain elevated from pre pandemic levels.
Technical solutions grew nine 3% to $158 $4 million largely driven by continued strong growth in our E mobility service offering.
Which sales tripled from the third quarter of last year.
We expect strong growth in the fourth quarter at certain bundle energy solution projects to men and we benefit from continued growth in E mobility.
Operating profit was $15 $4 million compared to $14 $4 million last year.
Operating margin decreased 21 basis point to nine 7%.
Merrily, reflecting a service mix that was more heavily weighted to our E mobility service life versus prior year.
Moving on to slide nine we ended the third quarter with total debt of $1 $4 billion, including a $159 million in standby letters of credit.
Resulting in a total debt to pro forma adjusted EBITDA ratio of two four times.
At the end of Q3, we had available liquidity of $769 million, including cash and cash equivalent of $63 $9 million.
Please note that after the quarter end, we funded approximately $170 million for the Rainbow acquisition, primarily from our revolving credit facility.
Interest expense was $11 $1 million into third quarter up nearly $5 million over the prior year period, and $3 $3 million sequentially from Q2, reflecting the recent fed action and higher debt levels year over year.
Q4 interest expense will be sequentially higher than Q3, and more indicative of the ongoing run rate due to a full quarter of rate increases and the funding of our acquisition of Raven bolt.
Turning to capital allocation, we repurchased roughly 744000 shares in the third quarter at an average price of $41 92 per share for a total cost of $31 $2 million.
In total through the first three quarters of fiscal 2022, we repurchased approximately one 7 million shares for $74 $5 million.
Now, let me briefly touch on guidance as shown on slide 10.
Todd mentioned earlier, we are narrowing our guidance for full year 2020 to adjusted EPS.
Top end of our range, our revised forecast for adjusted EPS is now $3 60 to $3.70 up from $3 50 to $3 that'd be banks previously.
We are also guiding for full year adjusted EBITDA margin to be around six 6%, which is that the midpoint of our prior forecast of six 4% to six 8%.
Guidance for full year 2022 GAAP EPS is now expected to be in the range of $3.20 to.
$3 30, reflecting the narrowing of the range and benefit from changes in items impacting comparability.
With that let me turn it back to Scott for some closing comments.
Thanks, Earl, although we faced some near term headwinds I'm very excited about the future of ABM nobody in our industry matches, the scope of our services the scale of our operations, where the strength of our balance sheet I'm confident will close out 2022, and solid fashion and put further distance between us.
And our competition in the coming years.
With that let's take some questions.
Thank you 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 can.
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 your handset before pressing the starkey and the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, guys. Thanks for taking my questions and good quarter I just wanted to firstly ask on the buyback so it looks like capital it looks like the buyback activity stepped up cycle.
22, making this a pretty outsized year for share buybacks, but what would you like investors to read into that.
Yeah no. Thanks for your question, John So I would say as we've articulated earlier you know we will always look to at a minimum you know repurchase shares to offset the anti dilutive nature of our share based compensation. This year, we did that as well, it's just a little bit more of a if you think about that portion of it.
Usually be about 600000 shares. So we did about $1 1 million shares over and above that as we really saw the dislocation in the market and really took the opportunity to take advantage of that as we've mentioned in the past we will use our share buy back Opportunistically, you know really balancing between you know allocating.
To M&A.
M&A activities and barring that you know looking at opportunities to redistribute funds back to the shareholders in the way of share buybacks.
Okay got it got it and then and then I realize it's a you know it's probably early for formal refresh on the fiscal 'twenty five targets, but I just wanted to check back in there given you know the inflationary pressure that has developed since those targets were set sort of the acuteness of the labor availability.
Challenges, but that's developed into those targets were set but then maybe on the flip side. Some some higher margin high growth opportunities of seemingly firmed. So.
Yeah, even just qualitatively.
If you could sort of refresh us on how you're thinking about that organic growth and margin trajectory that you laid out back in December .
Sure Shaun look what I would say is nothing has really changed at all our long term outlook for where we're finishing up our elevate program. It's it's certainly not linear and Theres no question that the macro economic environment has changed and we all know that since December . So again, we feel like you know.
And path is still the same it's just it may be a little lumpy given what we're seeing in the in the labor markets right now and the interest expense headwinds, but we feel really good about where we're heading and we're continuing to invest and elevate we continue to do some really good strategic acquisitions. So.
Again, not linear, but we're feeling really good about the end game.
Okay. Thanks, I'll turn it over there.
Thanks.
Thank you. Our next question comes from line of Andy Wittmann with Baird. Please proceed with your question.
Hey, good morning, Thanks for taking my question guys I guess I wanted to just drill in a little bit more on the labor market.
And <unk>.
Given that the labor market has tightened availabilities.
It's difficult it sounds like over time and usage of agency I continue to be at least part of the solution that you're having to employ today I was just wondering scatter Earl if you could just help us understand how that is trending if you could talk about maybe like the quarter over quarter change in like the amount of <unk>.
Overtime or agency that Youre using.
Just so we can get a sense of how that's affecting European now given that that's kind of the street bucket.
Sure.
I'll do it probably more directionally I will tell you that.
The labor pressures have not subsided at all and you know if we were looking at kind of even in the first half of this year versus second half. We're seeing more pressure is now I think the statistics that came out a couple of days ago, There's 11 million open jobs $11 3 million open jobs and the economy, it's like.
So it gets us in two ways, Andy one we're seeing labor inflation right, we're seeing I'm.
Just in our education segment alone, we're seeing base wage labor inflation of 10% per year right.
<unk>, which is tough and then availability there is it although it's getting a little better it's still super Super hard to find people attract the talent to come and do these jobs the service industry as a whole has been feeling these pressures and.
What's that manifest to is using overtime. When you talk when you don't have when you don't have the full complement of staff and we're seeing that and you know I would just say to you like we're probably just from an overtime standpoint up double digit from from where we were last year. So directionally I don't think things.
We've gotten better and.
Well I don't think they're going to get worse I feel like where we are today.
It is going to trend for the next few quarters, just being really super hard.
I appreciate the context on that.
I guess for my follow up I wanted to ask about.
Work order demand I mean, obviously you guys talked about this at length instead at the Analyst day, you gave expectations and it seems like.
You tell me how are things trending on the work order side of the business.
Can you maybe talk about I mean, you guys have articulated that it was you know pushing 10% of the company's revenue.
At the kind of the Covid peak normally had been I guess would you say four or 5% you can correct me if I'm wrong in that kind of where where are you in the quarter. How much did that change over the prior quarter, just trying to get a sense of how that is falling off you mentioned in your prepared remarks that you expect it to can you.
Continued to decline in fiscal 'twenty three maybe another way of asking that is how much revenue headwind do you see from this kind of work into 'twenty two 'twenty three.
Yeah, Let me let me just start off without Andy. Thanks for the question I would say you know.
As we expected we knew that you know from the heights of last year that we would actually see a reduction in work orders up you know if you look at last year Q3, we're probably closer to 9% that's actually dropped off to about 6%. So we continue to see that tailoring down last quarter I think it was probably closer to 7%.
But when you look at what we suggested we would be you know recouping are capturing I think we're currently on on trend with what we actually thought we would be at this point in time.
Yeah, I mean, it's.
From an enhanced claims standpoint, just as we said we thought it would be trailing off.
As we see Rfps come out we see it getting baked into the specification a bit it's hard to kind of give you percentages on that but if there's no question. We've seen the drop off that we predicted but we've been fortunate to because that the back to work and be an eye hasn't been as robust as we thought so where we are.
Picking up some tailwind there yeah and then just.
Last question as far as the impact that it actually has on revenues again much like we modeled we knew that we were going to have a reduction in this mix of our revenue, but it really is being offset by new business wins as well as just what we're seeing as far as the modest recovery in.
In the office buildings and in the economy in general Yeah, and the other thing I would say anything so I want to make sure I get this thing like our team has done an incredible job on the labor side with our recruiting escalations, which helped which helps.
Generally speaking the entire firm, but even when you see work orders trail off and you're out there getting strong escalations. The team's done a great great job clearly, we don't recover 100% of the wage inflation and nobody can but the guys have done a really really good job on that.
Cool thanks.
Thanks, Andy.
Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Good morning, Scott Good morning, Earle Scott building on your last comment there about your team doing a great job if I look at your.
B and I.
Segment or if I just look at your EBITDA margins I guess on a consolidated basis, you did six 8% EBITDA margin in this quarter versus pre pandemic levels that were closer to 5%.
So I know the labor market is tough, but clearly you're still well above where you were before.
How much of that expansion with this delay and back to work how much of that expansion do you think is related to labor efficiencies versus other things that Andy asked about like higher margin enhanced clean work.
I you know I think it's hard to like literally pinpoint one versus the other it was six six this quarter about $6 eight Oh, I'm, sorry, six months okay.
So look I think it's a it's a plethora of things right.
It's the team is going out and capturing.
It's about managing expenses.
Right selling you know the other thing that we haven't talked about is where we are on track to have another sales record of bringing in new business.
I think it's a combination of all these things the labor efficiency definitely helps because the buildings aren't where they were but you know.
Anyway I just I just think you know every there's so many things I would tell you Tim we've been exiting business that has not been profitable. So if we can't get the escalation we've been disciplined and we've been on that path for the last two or three years at least so you know I think where we're trending really well.
A combination of several things.
Yeah Labor efficiency. Okay. My second question, Scott I wanted to ask you about Raven volt, So I mean.
Can you just talk a little bit more about the strategic rationale behind that acquisition, yet you did a good job in the prepared remarks of laying it out but.
My question is why does Raven volt fit well within a b M. What.
<unk> do you guys bring to the table that can help fuel growth at <unk>.
Company like Great uncle, Yeah, and let me, let me just start right.
The word micro grid and its use.
I wonder if.
I'm going to do it really simple right. So picture a picture of you know a 500000 square foot office building, that's getting its power from from the grid right.
Have downstairs, you have or the power coming in now picture, having kind of a bank of generators sitting side by side from that building that can fire up that see the gas fired or oil fired and now you're able to switch back and forth for the power grid to a bank or a jet.
<unk> again, that's that's fired by oil or gas and you could say wait you know because I don't know if you guys know this but the energy rates off the grid change during the day. There's peak hours. There is you know theres down hours and now you can imagine and say you know what go into peak period.
Oh, Oh electrical cost, we're going to switch to the micro grid to save money now and so its cost efficiency and it's a really big deal its probably the hottest area in terms of sustainability and energy efficiency and what we're seeing now Tim is more and more rfps come through four.
Basic electrical services like a retrofit project, where they're asking about our micro grid capabilities and heretofore. We were looking for subcontractors or we were just basically saying we don't have the internal capability. We can subcontract. So now between being able to say that this is a muscle that ABM has self perform for the.
Bundled energy solution projects to just being able to cross sell into the rest of the seven and a half a billion dollars worth of revenue, we just super Super excited about the capability that this springs, it's literally the hottest area.
In kind of the whole technical solutions space right now and I would just add Tim just in addition to that if you think about our emerging E mobility business and a lot of the.
The fact that you know that youre going to be looking at any significant electrification of vehicles over the next several years the infrastructure needed to do that and the power augmentation thats going to be that's really the sweet spot of Rainbow really helping clients understand how they can actually augment their power to facilitate the infrastructure for E mobility.
Yeah.
Alright, thank you.
Thanks, Tim.
Thank you. Our next question comes from the line of Marc Riddick with Sidoti and company. Please proceed with your question.
Hey, good morning, everyone.
Good morning, Mark.
So I wanted to touch on a couple of things, but really want to start with I guess, maybe piggybacking on Raven bolt commentary and then more bigger picture, maybe you could talk a little bit about what you're seeing with the acquisition pipeline and then sort of where you are from you know when we go back to the Investor day.
<unk> was adding about 2 billion of acquisition revenue.
But I believe by the end of fiscal 2025, if I remember correctly. So if you can maybe a sort of bring us up to date and sort of where you are on that target and maybe talk about maybe where you are what your current view on the current pipeline and appetite.
Well look I think it's clear we're off to a super fast start rate between Abel acquisition, which was $1 billion in revenue and then momentum and now raising the volt, you know where where we're out of the gates really strong and it's always great. When you frontload those acquisitions over over a three year.
Four or five years' time horizon. So so we're really excited about that and we definitely see that in the marketplace. There's just a little bit more caution right. Now people are kind of pausing a little bit, but our pipeline actually is pretty strong and you know raise involved you would look at as a tuck in.
You know $100 million in revenue, but.
But I think there is ample opportunity for us to do tuck ins like that right now so I don't I don't see it necessarily slowing down.
Okay, and then Scott briefly you mentioned in your prepared remarks around some of the longer term drivers, including you know the the opportunities that are in front of you that were that are based on the on the the federal.
And I was wonder if you could talk a little bit about maybe what you're thinking bigger picture as to when either.
Are there timing visit and visibility as to maybe what your initial thoughts on sort of how that might flow through to you, which way B M. Obviously, we're not talking about any any actual guide numbers kind of thing, but maybe if we should think about sort of bigger picture.
You know how that that might come across yeah. I think it's I think it's a little early right because it's just coming in now and.
But I think if you look at our technical solutions group with the retrofit work, we do with what Raven vault is doing now I think we're really in the fact that we're nimble on easy charger in store in the country and we just launched a product position of that which we call. Our E. Mobility solution, you know, saying that we can kind of do every.
For you we can design your charges, we can install your charges ultimately will be procuring energy right. So we're really rounding out that offering. So I think we are really well positioned to take advantage of it but you know a lot of that legislation has just recently been released so we haven't seen the full magnitude of it and the velocity of house.
Those funds are going to be deployed but again, we think we're sitting pretty right now.
And then can you give us a little bit of an update on our end.
The commentary around.
What's what's taking place with travel with a little bit more commentary around the business kind of creeping in I guess, a little bit more and I think the addition of some of the parking commentary that you had if I remember correctly also you. There was a you had brought up sort of how that mix has.
You know evolved.
I mean airport and airline activity and in orders and I was wondering if you could talk a little bit about maybe sort of what you're seeing there you know given what's taking place with.
The challenges of being in an airport, all but sort of what kind of what you're seeing there. Yeah. So so the volumes are about 90% now it's not even higher to where it was pre pandemic anyone who's traveled to seen the airports that really fall if anything theres been a lot of frustration around travel because of cancel flights because we talk about our labor.
<unk> go to an airport and see that your flight is canceled because they can't find pilots because they can't find people at the gates to let people and baggage handling so you.
Anything around labor has caused frustration and so but that hasnt deterred people from traveling so we're seeing we're seeing the volume up we've made a move to switch our portfolio to 60 40, 60% airports, 40% Airlines.
And our profitability as you know we're over 100 basis points up from where we were pre pandemic because we've been disciplined we've got out of unprofitable contracts.
Team has done a great job on the aviation side.
Thank you. Our next question comes from the line of Faiza <unk> with Deutsche Bank. Please proceed with your question.
Yes, hi, Thank you good morning morning isolates.
I just wanted to ask about the DNI segment, you touched on some of the drivers there, but curious if we could get a little bit more color on what's driving the acceleration.
And the growth rates, there and the margins it sounds like there's some new ones, but maybe give us some perspective on what you're hearing from clients and you know.
Was there incremental pricing and you know how much but there is revenue synergy component as it relates to able within that segment yes.
Yeah. So there's a lot there and what what I would say is you know when I look at the P&I segment first of all we are we have the benefit available right and that acquisition, which has been tremendous and we have seen a return to office again not.
As much as probably anyone would've expected a year ago, but we've seen a return to office. So that's helped and we've won you know just a good deal of new business and expanding with clients. So the the kind of environment for growth has been good for us and and again I would say I would attribute it mostly to the fact that we brought in.
Abel and that Theres. Some return to office, so that will flatten out over time that will flatten out over time.
So we're feeling really good about that.
And it's the core of ABB I'm. It always has been it's our largest segment and.
It will remain robust we think through through 'twenty three.
Okay, Great and then just secondly on you at Investor Day, you talked about the investment allocation as it relates to elevate and you know you talked about some digital transformation initiatives growth initiatives and workforce people initiatives. So I'm curious.
So if you could help us think through like how much of this investment has been allocated across the three areas at this point and you know.
How much.
Where you are in this process I guess.
Yeah, Yeah sure Yeah yeah.
Yes, so like we don't we don't have it like actually bucket it for ERP versus that that that that that I think would be interesting to you I think what I would say is we're on track we've had a lot of great progress you know so so so far this year, we we initiated three new systems Tech.
Systems that have been great and applicant tracking system, which has been wonderful for.
And we will continue to be wonderful for us being able to bring in field field workers right. Because you can track them all the way through the process. That's a new cloud based system. We put in we put in a new work order system, we put in a new risk management system, we launched our AVM advantage new parking smart parking so.
We're across the platform, we have a lot of really good stuff going on it's on track and Orange bars are projected spend will probably be a little lighter this year than maybe catch up more next year, but it was never meant to be an exact science in terms of how much we'd spend but.
I would say, it's everything right now is on track and and you know the Big next hurdle for US is next year when we launch.
Our ERP system and start cascading it through the industry groups.
Great. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of David Silver with CL King <unk> Associates. Please proceed with your question.
Yeah, Hi, good morning, Thank you.
So I guess I would like to ask you maybe a bed.
The [noise] able services acquisition, a little bit more so it's been almost exactly a year since you closed on that and.
You know as I recall, there were both significant cost synergies envisioned.
But also I was kind of even a little bit more interested in the revenue synergy potential in other words, the ability to migrate that bundled service or operating engineer based model to maybe customers in other metropolitan areas or geographies. So you know if he.
You could maybe just some comments about the synergies cost stand revenue that you're seeing at this 0.1 year run from April . Thank you sure. Yes sure. So you know everything that's going basically as expected right, where we're on target synergies.
Alright.
Synergies are on target from where we wanted them to be on the revenue side, it's performing as expected I think the big thing for US David This year. It was all about.
Having the the entire firm integrated into a B M. Right. This is a billion dollar acquisition. So we spent a ton of time on integration to make sure that's right and I think kind of year two is going to be about the revenue synergies and how we can cross sell so.
For us we just didn't want it to two attack too many things at once because it was really important to get the integration right. So I think more to come and you're going to hear more about this from us over the next few quarters, because we're really excited about the potential.
Okay. Thank you for that and then maybe just a last last question is kind of.
Maybe about the future of our office occupancy office space. So just from a bigger picture point of view Scott.
Scott.
Lot of headlines these days about major you know big name employers.
Trying even harder to get there.
Remote workers back into the offices and you had opined a few times over the past few quarters about you know.
Concepts like how much space per worker might be rising in the post pandemic environment may maybe offsetting some other trends.
But how did you sit here and maybe if you wouldn't mind sharing qualitatively a few of the comments or a few of the priorities from your your major customers I mean, how do you see the just the overall demand and the lay out there and and the demand for particular, a b M services even.
Holding as you know.
Big companies try ever harder to get people back in the office. Thank you.
It's a good question look I.
I will say this it is just actually too early to tell right because just when you thought that people would never coming back to the office and employers didn't have control because of what's going on.
The macroeconomic environment is changing it's getting tougher we'll see if people come back to the office more I think it's way way too early to tell I mean for a b M. We feel we feel really really insulated from that only because the majority of the space that we plan on it being <unk>.
<unk> class a space modern buildings with modern filtration systems for air better planning specs.
Our thesis is that that tenants and see buildings are going to gravitate to be buildings and b buildings to a buildings and so we don't think this is going to have a major effect on class a buildings in terms of occupancy levels. So.
The way I think about it and the way I would give you context on it you know picture a 20000 foot tenant that's spending a million dollars on rent and they're gonna be building, maybe they only need 10000 feet now, but theres still happy to spend the millions of dollars on rent they move up to an a class building with 10000 feet and.
And we're starting to see some of those trends were starting to talk to clients, who have said, we may downsize, but we're going to try to upgrade our space. So so we feel like as a firm.
We're starting to get insulated and let's not forget people are incrementally coming back to office. So it's not like we've reached stasis. It feels like every quarter, it's incrementally more but probably smaller increments than we thought.
Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Hi, Thank you a couple of follow ups on aviation Scott you get provided some good details, but I mean, historically I think you exceeded annual revenue in aviation or a little more than $1 billion is there something different going forward in the aviation business.
That you would not get back to that number I know you're not in the fuel business anymore, but I mean, just setting expectations could you approach that number again.
No question No question, it's just gonna come organically now right because part of the reason that we're at a lower numbers, because we exited contracts specifically because they werent, making money and you know we're not in the revenue game when it's when it's a loss right. So I think for us.
I wouldn't look at where we are from a run rate standpoint, and look at that as our baseline.
And we will just be growing organically now and.
The Best example of that is the O'hare win that we got last month $25 million a year for five years I mean, it's incredible right. So I look at this as the baseline will grow from there and we should be 1 billion plus.
Thank you one more for me on energy efficiency and technical solutions work, besides improving the older infrastructure inside buildings can.
Can you comment on how many projects currently incorporate solar at or batteries or is that more of an opportunity going forward, particularly after the inflation reduction act passing yep, that's more of an opportunity going forward.
And you know we're positioned for that but we haven't seen a lot of activity just yet right because it's so new that the infrastructure Bill, but I will tell you on our technical solutions group or our backlog, which again remember backlog is signed contracts waiting to start our backlog is the highest its ever been right.
Now so in terms of I guess, the bigger question would be you know or the bigger answer would be in terms of sustainability in terms of energy efficiency the whole ESG platform.
You know, it's we're just well positioned and again, our biggest backlog we've ever had.
Great. Thank.
Thank you Scott.
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Thank you. Our final question. This morning comes from the line of Andy Wittmann with Baird. Please proceed with your question.
Oh, great guys. Thanks for letting me back in I, just thought it'd be helpful for them to have a little bit more detail on the EPS accretion that you might be getting from Raven volt. Obviously, you guys gave the revenue.
EBITDA in the press release that was Super helpful and we all do the math on that but there's there's gonna be intangible amortization attached to that.
Because it's a backlog business, which is going to burn off but also probably because there's some goodwill it won't burn off.
But I guess.
We were thinking that you could probably get 345 cents of annual EPS accretion after you take the intangible amortization hit.
I guess Earl could you could you just comment if that's kind of the right way of thinking about it and then just given the moving pieces that you noted on interest rates as well as the incrementals that you'll be taking on for Raven volt could you just talk about what you think the interest expense run rate will be it's just you know heading into initial guidance for next year. I think these are two areas there.
It could be some variability and you could you can all get us tightened up on those items.
Absolutely so we.
We believe that you know they resemble acquisition definitely going to be cash accretive you know I would say from an adjusted EPS I think youre actually in the range you know I would say probably three to four cents.
Based on the fact that we will actually have some amortization of the intangibles. So I think youre spot on with regards to interest rates. Obviously, we have been impacted by the 225 basis point increase that the fed is actually put into place over the course of the last year or so when we look at our current run rate based on our <unk>.
Floating mix, we're looking at about a little over $15 million of interest.
Per quarter, so hopefully that helps you in the modeling.
Thank you very much.
Yeah.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Sal Mears for any final comments.
Sure.
I just want to thank everybody for participating today and the interest you have and I just want to close with just saying you know just briefly on behalf of our entire team I want to extend our thoughts and condolences to our team members to our clients and partners across the United Kingdom and the Commonwealth Following the sad news of the passing of.
Queen Elizabeth the second I mean, her devotion to service will undoubtedly remain an inspiration for generations to come and again, we just wanted to extend our condolences.
So thank you everybody for participating and look forward to our Q4 coming back to you and chatting some warrant but thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.