Q2 2023 ABM Industries Incorporated Earnings Call
Greetings and welcome to the ABM industry second quarter, 2023 earnings call. At this time, all participants are in the 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, Senior Vice President of Invest Relations for ABM Industries. Thank you. You may begin.
Good morning everyone and welcome to ABM 2nd quarter, 2,023 earnings call. My name is Paul Goldberg and I'm the Senior Vice President of Investor Relations at ABM. I'm the Senior Vice President of Investor Relations at ABM.
With me today are Scott Falmier, our president and chief executive officer, and Earl Ellis, our executive vice president and chief financial officer. Whoever is Secretary of State and office not with sir.
Please note that earlier this morning, we issued our press release announcing our second quarter 2023 financial results. A copy of the release and in a accompanying slide presentation, can be found on our website, abm.com. After Scott and Earl's prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today, for a quick presentation, please note that earlier this morning, we will host the Q&A session.
and came predictions estimates and other fold-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 risked 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-gap numbers. The GAAP financial measures is available at the end of the presentation. A reconciliation of historical non- GAAP financial information will be presented.
and on the company's website under the investor tab.
And with that, I would like to now turn the call over to Scott.
Thanks Paul, good morning and thank you all for joining us today to discuss our second quarter results.
ABM generated solid results in the second quarter, delivering 2.3% organic revenue growth and strong adjusted EBITDA growth.
We achieve these results through our consistent focus on cost controls, implementing price escalations, and driving organic growth in our manufacturing and distribution, aviation and education segments.
These factors more than offset the impacts from the still challenging labor market, continued supply chain constraints, lower work orders, and a slow recovery of Autism Activity for commercial real estate.
Our financial and operational performance speaks to the resilience of our business model, our end market diversification, and most importantly, the talent and dedication of our team.
In all, ABM generated second quarter revenue of $2 billion with an adjusted EBITDA margin of 7.2%, which included the benefit of earnings from the prior period parking project as discussed last quarter.
Despite a more challenging macro economic environment than we have anticipated, we remain on target to achieve our 2023 financial goals. We continue to be focused on driving roads across the company and capturing our share of the many opportunities before us. And fast.
For the first six months of 2023, we generated $918 million in new sales up from $791 million last year. We also continued to invest in our future, including our elevator issues, which will enhance our operational efficiency and deliver an improved experience.
for both clients and our team members.
I'll now discuss the demand environment for each of our industry groups.
Let's begin with B and I.
All distance of the rates in the second quarter renamed at relatively stable levels at approximately 50% on a blended basis.
Although commercial office space remains fairly well occupied Tuesday through Thursday, many employees continue to work remotely on Monday and Friday.
This trend is likely to continue as employers accommodate remote and hybrid work.
This pattern of office usage limits demands for certain high-immargin work orders by carpet cleaning, freight elevator service, and large gathering cleanups, which are largely driven by office density.
As a result of the reduction in authenticity, we are beginning to see a consolidation of office space in metro markets as clients reduce their footprint when their lease is expired. Although we have not yet experienced a resulting contraction in scope of work, we anticipate that further increases in vacancy rates
could create additional pressures on our business.
However, we feel that we're in very well positioned given our commercial real estate profile, which is heavily concentrated within class A newer properties.
Although class-aid buildings are still impacted, it's to a much lesser degree than class B and class C properties.
We also believe that as tenants migrate towards higher quality buildings, it will stabilize our multi-tenant portfolio.
Additionally, a sizable portion of our commercial real estate exposure is an engineering, which tends to be more stable as HVAC and electrical systems need to be maintained regardless of occupancy density.
Moving to aviation, activity in the leisure and business travel markets, including related parking and transportation, has essentially returned to pre-pendemic levels.
Accordingly, as we go forward, we anticipate our aviation revenue growth will be reflective of the overall travel market growth rate complemented by new business opportunities.
Accordingly, as we go forward, we anticipate our aviation revenue growth will be reflective of the overall travel market growth rate complemented by new business opportunities. In fact,
We recently won a multimillion dollar expansion of passenger transportation services at two major UK airports.
We also expect continued growth in our ABM Vantage Parking solution, which is a hands-ins revenue for clients and improves the traveler experience.
Demand in manufacturing and distribution continues to be solid, benefiting not only from expansion with an existing logistics and e-commerce clients, but also from new business and new end markets. For example, we added over $30 million in new contracts in the semiconductor market in the second quarter of a row.
In education, the addition of size of the new clients in the fourth quarter of 2022 and new business swings in this fiscal year has helped drive mid-single digit organic revenue growth in this segment.
We have a strong pipeline of new business opportunities and I'm confident ABM will continue our positive growth trajectory given our competitive position.
From the margin perspective, segment margin remains above pre-prandemic levels, and we anticipate that further labor market normalization will support the margin progress we've achieved.
Moving to technical solutions, the demand environment for EV charging infrastructure and micro-fords remains positive as our ATS backlog exceeds $440 million.
Furthermore, after a slow start to the year hampered by macroeconomic concerns, market conditions are slowly improving for our infrastructure solutions business as evidenced by a significant contract win with a school district in western Pennsylvania which includes upgrades for lighting and HVAC as well as multiple building and...
Ravenvul generated approximately $30 million in second quarter revenue, completing multiple projects, including the installation of power resiliency systems for two major retailers, and a multinational consumer goods company.
Similar to EV, we expect growth to accelerate in the back half of this year as long-awaited materials begin to arrive.
Overall, we continue to be excited about the long-term outlook for ATS and believe we're at the beginning of what will be a multi-year runway of strong growth.
In fact, to support the growth opportunity, we recently announced our plan to construct an electrification center that will establish ABM as the clear leader in electrification infrastructure turnkey solutions. The plan's facility in the Atlanta area will house multiple solutions
serving the e-mobility, power resiliency, and electrification sectors, creating a first-of-its-kind, easy ecosystem hub.
Turning to Elevate, we made significant headway on our planned initiatives during the second quarter, including the initial successful deployment of our cloud-based ERP system and 15 integrated boundary systems.
Our initial implementation focused on our education segment and the results have been more than encouraging.
As we progress forward, future implementations will move through each industry segment on a program and manage pace as we leverage our collective learning and experience.
In addition, we extended the reach of our workforce productivity and optimization tool, which provides our teams with advanced analytics for productivity levels across their portfolios.
This capability has been critical for optimizing labor usage in our commercial real estate markets.
We're also approaching the pilot launch of a new mobile application for our front line team members that key digital enable for the Elevated Program.
Lastly, we continue to make progress on our ESG journey. For the first time, ABM has been named to the Diversity Inc. list of noteworthy companies. This, among many other distinctions and awards, reflects our culture and our drive to lead the way in DEMI.
I couldn't be proud of where our company is heading despite the macroeconomic headwinds and the challenges in commercial real estate.
The mixture of our end markets, the resiliency of our culture, and the extraordinary talent of our teammates will allow us to continue on our accelerated path.
Now we'll 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 the slide slide.
Second quarter revenue increased 4.5% to $2 billion, comprised of organic revenue growth of 2.3% and growth from acquisitions of 2.2%. Moving on to slide six, net income in the second quarter was $51.9 million, or 78 cents for diluted share, up 6% and 8% respectively.
as compared to last year.
The increase in gap net income was driven by higher income from operation, especially in our aviation segment and tight expense controls, partially offset by higher interest expense, labor costs, and lower volume of higher margin work orders.
Adjusting that income was flat at $60.2 million. And adjusted earnings for diluted share was 90 cents up 1% from prior year period.
Adjusting that income and adjusted EPS primarily reflects higher income from operation and effective cost controls.
Offset by higher interest expense.
Adjusted EBITDA increased 15% over the prior year to $137 million, and adjusted EBITDA margins was 7.2% versus 6.5% last year.
This performance was boosted by the recognition of revenue connected with the previously mentioned aviation parking project as associated expenses were recorded in prior periods.
excluding the impact from the parking project.
Adjusted EBITDA was $124.4 million, plus 5% over last year. And adjusted EBITDA margin was 6.6%.
Now turning to our segment's results, beginning on slide 7.
B&I revenues decline half a percent year over year to $1 billion. Organic revenue decline 2%, mainly reflecting a lower volume of work orders, including disinfections versus the prior year, and expected attrition of certain client contracts from the able acquisition.
Operating profit in B&I decreased slightly to $76.2 million and operating margin was 7.6%. Essentially flat with the prior year.
Aviation revenues increased 22% to $227.2 million, marking the eighth consecutive quarter of year-over-year revenue growth. This improvement was driven by the recognition of the previously mentioned Puckin Project revenues, as well as increased leisure and business airline traffic, along with related growth and parking activities. Aviation's operating profit was $23.6 million, including $12.6 million of parking project earnings versus $9.6 million in the prior period.
Margin was 10.4% compared to 5.2% last year. Adjusting for the parking project, operating profit was $11 million, and Margin was 5.1%.
Turning to slide A, manufacturing distribution revenue grew 5% to $373.2 million.
reflecting favorable market demand and expansion with clients in the life sciences and semiconductor markets.
Operating profit decreased 3% to $40.8 million, and operating margin declined 80 basis points to 10.9%.
The decreases in operating profit and margin primarily reflect labor cost inflation and changes in net.
Education revenues increase 6% to $216.7 million.
benefiting from the addition of new clients in the fourth quarter of fiscal 2022.
Education operating profit was $11.8 million, essentially flat versus the prior year period. Well, a margin was down slightly to 5.4%.
Technical Solutions revenue grew 15% to $168.4 million.
Driven by the contribution from Ravenville.
Organic revenues declined 6%. Largely due to the timing of large, easy, charger installation programs, which are weighted to the second half of the year, and the delay of some infrastructure solution projects.
Backlog in ATS is over $440 million. Support our expectations for a strong back half of the year. Of note, Ravenville generated nearly $30 million in revenue in the second quarter aided by the receipt of delayed material. ATS is over $30 million in revenue in the second quarter aided by the receipt of delayed material.
ATS operating profit was $10.2 million and margin was 6% compared to operating profit of $10.6 million and margin of 7.2% last year.
The decreases in margin and profit were largely driven by changes in service next, and the amortization of intangible related to the Ravenbolt acquisition. Moving on to slide nine.
We ended the second quarter with total debt of $1.5 billion.
including $58.6 million in standby letters of credit, resulting in a total debt to perform a adjusted EBIT ratio of 2.6 times.
At the end of Q2, we had available liquidity of $503.2 million, including cash in cash equivalent of $71.2 million.
Free cash flow in the second quarter was $16 million, and we expect a solid back half of the year in terms of free cash generation.
Interest expense was $21.1 million in the second quarter, up $13 million from the prior year period, and up over $1 million sequentially from Q1.
The increase was due to significantly higher interest rates as well as year-over-year increase in total death.
Now, let's move on to our full year fiscal 2023 outlook as shown on slide 10.
We now expect GAAP EPS to be in the range of $2.52 to $2.72, up $0.09 from our prior outlook, driven by a benefit from changes in items impacting comparability, primarily related to the spare value of contingent consideration.
Our outlook for the adjusted EPS remains unchanged at $3.40 to $3.60.
In short, expense is now expected to be around $80 million for the full year, reflecting recent Fed action and the forward yield curve.
This forecast is about $6 million above the high end of the previously estimated range.
Our tax rate before the screen item is anticipated to be between 29 and 30%.
And as mentioned last quarter, we expect to grow full-year adjusted EBITDA at a mid-single-digit rate.
Additionally, we are increasing the low ends of the range for adjusted evid a margin by 10 basis points.
And now expect it to be between 6.5 and 6.8% for the full year.
We now expect full year 2023 free cash flow to be in the range of $240 million to $270 million.
before the final installment of our CARES Act payment of $66 million, which was made in Q1 and combined integration and elevate costs of approximately $75 to $80 million. product thickness.
This represents a $30 million decrease from our Trier forecast largely driven by expected working capital needs to support growth in our ATS segment in the second half and higher interest expense.
With respect to the cadence of quarterly adjusted EPS, we expect approximately 45 to 50% of full year adjusted earnings for shares to be generated in the first half of the fiscal year.
Consistent with our prior guidance.
We anticipate Q3-adjusted EPS will not be material different from Q2 2023.
With that, let me turn it back to Scott's closing comment.
Thanks Earl. In late 2021, around the time we announced our initial elevate targets, the average U.S. inflation rate for the full year of 2021 was 4.7%. The 10-year T-Vail was approximately 1.5% and the unemployment rate had trended down to 4%.
from the pandemic high of 15%.
Today, the 10-year T-thole rate is over 200 basis for entire.
Inflation peaked at 9% in 2022 and is currently close to 5%.
And the job market for Blue Color Labor is as challenging as it has ever been.
Despite these headwinds, we've delivered on our financial goals, expanded our business and service offerings, and achieved important progress towards our 2025 targets.
Today, ABM is stronger and better position than ever before. Our success reflects our resilient business model, the benefits from our elevate investments and consistent execution by the ABM team.
As we move forward, I'm confident in our ability to do value for our stakeholders as we work tirelessly towards achieving our goals.
Underpinned by the strength of our core business, ABM continues to evolve into a higher-growth, higher-margin facility solution provider.
So with that, let's take some questions. Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands.
going now, it sounds like the EV charging side on pace for a second half ramp. I just wanted to round that out with a discussion on the bundle of energy solutions piece and just how customer decision making is trending in light of the weak macro conditions. Yeah, that's a great question. It's so slow.
probably slower than we'd like, but it's not a reflection of our market share or our sales pipeline or even the viability of the offering. It's more about the fact that what we've seen just across the board, some clients are in pause mode right now, right? The economics get a little bit more challenging in that segment because of interest rates.
But we just won, you know, I mentioned in my opening remarks, we won a really nice job in western Pennsylvania, and the pipeline is strong. So I think for us, it's waiting for clients to pull the trigger because it's upgrades that they know they need. Because if you look at the core of it, right, you're retrofitting a facility that needs retrofitting, right?
In addition to the bundle of energy solutions, as you point out, we have the microgrid solution now with RavenVolt, our EV is starting to ramp up. We do have a core electrical and mechanical business on top of that that we don't talk about a lot, but that's also part of the underpinning. So it's nice to have a diversification in that segment.
I'm just trying to...
get an expectation for where we should be run rating when everything's up on plane for ATS. Yeah, historically when it's humming, it's high single digit, right? And there's no reason that it won't get back to that. I think it's like, you know, that higher march and stuff, which is the bundled energy solutions and the microgrids.
are the ones that just haven't kicked in yet, right? And even Sean Evie, which we said is lower margin, that's really because we've been playing in the dealership market, which is like one Z2 Zs, like if you have a large scale contract with an auto maker like BMW.
You're putting two or three in per dealership. It's not the scale you want. We're moving more to a fleet orientation where we can go to a facility and put in 100 charges and get the scale. So that's part of our ramp up strategy as well. So I'm confident over time we will squarely get back into that high single digit margin range.
Okay, got you. And then one more, just relative to the work order dynamic, I feel like over the past two years, we've been anchored from, in terms of work orders going from pandemic highs down to normalized. But now we're talking about lighter vacancy rates and maybe that normalize.
What have we seen historically there?
Yeah, so look, I think we're getting back down to pre-pandemic levels and that's really a reflection right now of hybrid work. So here's the way to think about it, maybe this will give you some clarity. When you think about work orders, it ranges from people calling for the freight elevator because they're getting further...
those calls on the Mondays and Fridays and we were still stabilized during hybrid at a higher rate than we were pre-pandemic and we're really encouraged by that. I think the overlay now that's brought it down incrementally more is just the state of the economy. You know people are watching what they're spending.
temporary double overhang now, but just around that the question, I do not think on a percentage basis we are going to see much more deterioration. Now volumetrically maybe because revenues can be compressed a little bit, but that will be on dollars, not margin percentage. I feel like we are kind of where we are now is kind of pretty stable.
Okay, thanks. I'll turn it over. Appreciate it. Thanks, Sean. Thank you. Our next question comes from line of Justin Hawk with Eric. Please continue to question.
I wanted to ask just to kind of you know big picture clarify some of the guidance moving pieces because you know with the margin moving up a little bit despite the and the EPS held despite the incremental interest expense.
Just the moving pieces on that, what was a little bit better and a little bit weaker, and maybe specifically the corporate cost control, which seems like that's continued to kind of come in a little bit better than expected. So maybe just the outlook for what you're looking at for corporate for the back after the year. Sure, absolutely. I'll take that on.
So when we look at kind of what happened throughout the quarter two, we continue to see some headwinds in the shape of lower work orders, which actually has had a dip in the margin, as well as continued pressure in the labor market. So we've continued to see labor inflation, which good news is we've been able to offset a large
deferred parking.
So what we feel really good about is that in spite of the continued challenges that we're seeing in margins, we're still able, so if you actually even back out the flow through of the parking approach from last year, our margins for the quarter were 6.6%. And so in spite of the continued challenges that we're actually seeing, we feel really, really pleased.
that we're still being able to deliver within the midpoint of our range. Okay, and just the corporate expense, maybe like a dollar run rate, what you're kind of thinking back after the year? Yeah, so I would say that when we look at corporate expenses, I would say that the, you know, over the expected average of about $60 million.
in corporate expenses excluding kind of like the items impacting terribly.
Great. And then I guess the second question, I just saw in the parking segment. I mean, even backing up the one time here, your organic growth rates there have been really strong and kind of sounded like you prepared remarks that maybe you're expecting that to kind of decelerate when you talked about more market trends. I just wanna understand what you mean by that and what you're thinking about for kind of the growth rate of that segment. What is a market trend for the back half of the year?
Sure, I mean it look I think it you know generally speaking like from an industry standpoint I think parking revenues are kind of stable now right like you know hybrid work is in place so it is what it is the you know because like for us we have our parking business in two kind of key segments the real estate side, commercial real estate and then on aviation.
And I think in both of those segments, we're pretty stable, right? So I think it's more normalized now, but what we're excited about is we have our advantage parking offering, which is something that's really, you know, it's a new technology, it's insightful, it works.
to help give insights to clients on revenue management. So for us, it's about this new productized offering that's gonna help us accelerate it. So we're hoping that in the parking segment, not only will we continue to grow, but hopefully a little bit ahead of the market because of some of the innovative stuff.
I, you know, your growth rate there has been, you know, in the high single digits. I guess what I was more asking about is, you know, what is your expectation for the deceleration from that or why was it so strong in the first half? Was that just kind of the recovery in aviation volumes and now you're...
You're saying those are recovered and they should kind of moderate and one of those single digits or That's right. That's that's exactly right. You know travel has been what you know, right and anything around travel And leisure's been so up so I think you know at this point and I think we did say a little bit in the prepared remarks We we feel like you know we are back to pre-pandemic levels and maybe even then so we do think there's a bunch of people that are catching up
right in terms of travel. So I think you'll see more of a stabilization, but still, you know, nice steady growth.
Great. Okay, thank you very much. You got it.
Yes, hi, good morning. I just want to follow up again on the technical solution side of the business. So walk us through, you mentioned that you have project backlog of 440 million. Are you expecting that all of that will be recognized as revenue this year? Or just, you know, walk us through.
So, you know, for us, you know, backlog means, again, signed contracts that get initiated. So a lot of that's going to happen in Q3 and Q4, really more Q4 than Q3, and that will be the initiation. So I can't give you a precise, you know, exactly how much of the 440 will be in year, but it's a really strong sign that we have, you know, backlog at that level, but, you know, think of it as initiating the projects in Q4 and they ramp into through Q1 and even a little bit into Q2.
Okay, and then just so I'm clear because you know the delete is a related, is it more supply oriented or is it more you know demand oriented because it's I was under the impression that it was more supply related but some of your comments today are leading me to believe that maybe it's more on the demands.
Thunder ready to No, it's no I actually saw you know, sorry Yeah, no, you know five it's a combination of both right It's a little bit on the man side on the bundled energy solutions on the micro grids It's all about the supply chain, you know and you know specifically batteries and some of the switch gear now
You know, we are encouraged because what was happening, and I think you would see this from some of the competitors in our industry, at the beginning of the year, what would happen is something would take...
10 weeks and then you know 10 weeks to get the item and then maybe a month later You'd get another order for something and you'd go to the manufacturers like oh no no now it's taking 12 weeks And then you'd call again like yeah, well now it's taking 14 weeks It's all starting to stabilize now and that's the key for us
So if something pre-pandemic took six weeks and now it's taking 10, as long as it stays taking 10, you could be plantful, you could manage around it and we're seeing that stabilization. So the majority of the problem, especially on the Ravenwolf side, has been supply chain oriented.
Definitely not demand oriented. The pipeline is really, really robust. Okay. Sorry, I'm just a little unclear. That's why I just want to follow up because if it is on the RavenGull side, that wouldn't impact your organic revenue. Explain to me a little bit more in terms of what's driving the demand.
the decline in organic revenue. Yeah, so let's just pull out RavenVault for a second. So there's two core segments there. There's EV and there's bundled energy solutions. And both of those are more demand side and for different reasons. EV, because we were just winding down a big project with a dealership and we're now ramping up a big project with an automotive company. So you're seeing that delayed to the back half.
So that was just timing, but demand timing, not supply chain timing. And the other one is bundled energy solutions, which is what I talked about a few seconds ago, which is really the fact that we have the backlog, we have the orders, but clients aren't pulling the trigger because they're just doing a general pause.
But again, we're starting to see that loosen up a bit. Now that I think the market is thinking that interest rates are starting to stabilize and if it is what it is, then you start making those decisions. Godness, thank you. Thank you for indulging me in all that detail. And then just maybe if I can follow up on the elevate to initiative, like you mentioned, the few things.
Give us a sense of how you're thinking about timing there. I know you've talked about the end stage being maybe a couple of years ago, talk about how you're thinking about getting to that end stage. What are some of the next initiatives that we should expect to going forward?
Sure, I mean, look worse, we are on track with Elevate. And the big core, in terms of infrastructure, is our ERP transformation. And that's a two-year process because we're doing it by industry group, which just had the successful launch of our education group literally like a month ago. And it's gone.
way better than we've been expected, right? Because, you know, ERP implementations are always bumpy and it went really well. And now we're planning our next industry group which will happen early next year. So, the infrastructure side is on track and going better than we hope. And then, you know, other things are all in progress, right? We've launched hyper targeting for sales growth.
You saw in or heard in the prepared remarks, we had another unbelievable first six months of the year of new sales. So that's a reflection, you know, not only of our sales team, you know, in terms of just the culture of our people, but the hyper targeting tool.
And we're now piloting our workforce management, which is going to create efficiency in the field. And this month we're releasing our ABM Connect, which is our digital application to start connecting us in real time to the people out in the field, which is going to be a real game changer for us. And even that is probably a 12 to 18 month journey, if not longer, to actually get it deployed across a whole.
Hi, good morning. Thank you. I would like to maybe just drill down a little bit on the Ravenville performance to date. I'm wondering if you, you know, maybe if you wouldn't mind.
discussing how the performance of the business aligns or how it compares to your initial expectations. And then in particular, I noticed you booked a change to the fair value of contingent consideration. Could you just maybe talk about what drove you to?
right now and the backlog is phenomenal and the team is phenomenal. So I think if there was any level, I don't even want to use the word disappointment, it's just a supply chain and you can't control that, right? And it's the same thing that everyone in our industry is facing but again we see light at the end of the tunnel and we're hoping for a strong back half of the year. So I'll let Earl talk to the accounting treatment.
There's some timing challenges as we take in regards to supply chain timing, which has actually deferred some of the revenue and earnings that would have actually happened in year one into future years. And then just based on the GAAP accounting of that, you actually then discount that back with a high discount rate, which then resulted in this reduction in the liabilities.
My other question would be kind of more about the office market, the commercial market, which seems to be in the news quite a bit. You certainly addressed it right up front, but I'm just wondering if maybe...
Scott, if maybe you would share kind of a multi-year outlook, a two or three-year outlook. In other words, I think what you're saying is the office market and the motivations and whatnot for the tenants has changed. For yourself to keep growing in that area, I'm guessing you're going to have to have
necessary for you to kind of deal with the current trends towards lower occupancy rates and remote work or hybrid work arrangements in order to kind of continue to kind of maintain your position and ideally grow your share, grow your profitability in there. Thank you.
Sure, well listen, this is certainly going to be pressure in commercial real estate, right? That's pretty obvious, right? For us, so far, as we've mentioned, it's really only been around the work order side because of hybrid and the economy. So when you drill down into ABN,
It doesn't matter how dense a floor is, you still need the quote unquote engineers in the basement working on the mechanical and electrical equipment. So that doesn't change. And parking, as we said, is stabilized. So you're really talking about the janitorial piece that has some of the exposure. But then you look at ABM's portfolio and we are...
Weigh predominantly class A buildings newer buildings bigger buildings Which are the ones that are going to survive the best and if anything we've seen those um have positive absorption as compared to the rest of the market because we're seeing B and C
tenants from B and C buildings, rather, migrating into Class A buildings. So I think, you know, for us, we are, we're pretty protected. It'll be choppy for the next several quarters. There's no question about it. You know, leases expire even in A buildings and as they take a little less space, you know, the next tenant has to come in. They're going to have.
a year or so to build their space. So there'll be some choppiness, but I think, again, we're so mitigated because of the portfolio that we have. And don't forget, again, as a whole, we're diversified. We've been investing in end markets like ATS, manufacturing and distribution, which is another hedge for us. And then lastly, David, what I would say is you think about the elevated investments and just hyper-targeting just in general for on the growth side.
doing great and ATS is doing great.
Thank you for that. I just have a quick one here. But you know, you touched on ERP and what the history of many other companies has been with their different implementations issues. And I've, you know, I've certainly been an observer of a number of them. Just so I know, but you know, in the event that maybe call
talking about cost overruns at this point. We feel really good and have really good line of sight into what the expense profile looks like in the next couple of years. So that's not in our narrative cost overruns. Thank you. Thank you.
Ladies and gentlemen, our final question this morning comes from the line of Tim Moroney with William Blair. Please proceed with your question. Scott, Earl, good morning. Good morning. Most of my questions have been answered, so I'll keep this quick. But last quarter, you all gave the headwinds.
from work orders, I think it was $35 million. And you said you'd expect that, I think, to more normalize. So you didn't mention it this quarter. Is that because there really wasn't a headwind year over here? Or if there was, can you quantify it for us? Yes. Talking about maybe $15 million.
It hasn't been much and again I do think we're heading into this more stabilized rate right now. So yeah, I think this is, we're actually given everything that's happening in the environment and where hybrid is and as I said where the overall economy is. We're actually, you know, pleased that it wasn't more acute.
Yeah, because I mean, I think what we talked about last quarter was the anticipated reduction in disinfection related work orders, which, you know, that will become a non-story, you know, starting in Q3, Q4 as that kind of like dissipates. You know, I think what the, you know, the potential, you know, headwinds that we'll be seeing potentially in the future are really around just based on...
What Scott earlier alluded to with regards to the hybrid environment and the potential for reduction in work orders, where again right now we're now at free COVID levels, which are typically about 5% of revenue. Yeah, that's kind of how I'm thinking about it, or how I'm...
That's the right way to think about it. Yeah, exactly right. And again, what I would reiterate is that even during, you know, before the economy started turning, you know, in the last few months, even before that with hybrid, we were still above pre-pandemic level. So it's almost like kind of this new kind of cost control that we're seeing is what pushed us back to.
pre-pandemic level. So we're optimistic, Tim, that we're going to get back above that when the economy turns.
Understood. Last one from me guys. Thank you. You know, does it make sense to prioritize?
your capital allocation on debt reduction near term versus M&A and buybacks and other things to help reduce that incremental interest burden or are you comfortable at 2.6 times? Thank you. Yeah, no, good question. When we looked at our cash flow, which generally is
weighted more in the back half, we do feel like it's going to provide us with ample flexibility to do both of those things, which would include paying down debt in addition to potentially doing some very small share buybacks. And when I talk about share buybacks, it really would be probably most likely.
Thank you.
Thank you. Thank you. Thank you, ladies and gentlemen. That concludes our question and the intercession. I'll turn the floor back to Mr. Salmer's for any final comments.
I just want to thank everybody for participating and the interest level again. We very, very much appreciate it. We hope everyone is having a good start to the summer and we're looking forward to coming back to you in Q3 with an update on all things ABM. So have a great summer everybody. Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.