ABM Industries, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and welcome to ABM's third quarter 2026 earnings call. My name is Paul Goldberg, and I'm the senior vice president of investor relations at ABM. With me today are Scott Salmirs, our president and chief executive officer, and David Orr, our executive vice president and chief financial officer. Please note that earlier this morning, we issued our press release announcing our third quarter 2026 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website, abm.com. After Scott and David's prepared remarks, we will host a Q&A session. Before we begin, I would like to remind you that our call and presentation today contains predictions, estimates, and other forward-looking statements. Our use of the words "estimate," "expect," and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds.

While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in 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 would like to now turn the call over to Scott.

Good morning, everyone, and thank you for joining us. We had a strong third quarter, particularly when you consider some of the puts and takes across the business. We delivered record quarterly revenue, 27% adjusted EPS growth, and exceptional year-to-date cash flow despite project timing and Technical Solutions and the anticipated impact of client exits in B&I. I think the quarter demonstrates both the resilience of our portfolio and our ability to execute operationally, even when individual parts of the business don't move in a straight line. On the revenue side, most of the business performed largely as we expected. Aviation and Manufacturing & Distribution continued to deliver strong growth. Education performed as expected, while B&I reflected the client exits we have discussed over the last several quarters. Technical Solutions was the one area where revenue came in below our expectations, driven by certain project deferrals from an important client.

Based on our discussions with that client, we believe this is principally a timing issue rather than a change in the underlying demand environment, and we expect a meaningful portion of that activity to move into the fourth quarter. What I am particularly pleased with this quarter is our execution on profitability and cash flow. The cost actions we have been driving throughout the year, combined with disciplined working capital management, resulted in 27% adjusted EPS growth, 40 basis points of sequential segment margin improvement, and an increase of over $150 million in year-to-date free cash flow. Cash generation has historically been an important strength of ABM. Following the disruption associated with our ERP implementation, we have been very focused on restoring that performance, and the progress is increasingly visible in our results. Given our performance through the first nine months, we are raising our full-year free cash flow outlook.

I want to spend a few minutes on the part of the ABM story that I think is becoming increasingly important: our position in semiconductor, microgrids, and data centers. Because some of these businesses are project-oriented and can be lumpy quarter to quarter, I think the year-to-date numbers provide the best perspective. Through the first nine months, these businesses generated nearly $775 million of revenue, growing 26% organically and approximately 40% when including WGNSTAR. Together, they now represent more than 11% of ABM's revenue and carry a double-digit blended operating margin. These businesses have become meaningful within ABM, and we believe they have significant runway ahead. In semiconductor, we made a strategic decision several years ago to invest ahead of what we believed would be a significant expansion of advanced manufacturing capacity.

We invested in industry expertise, developed relationships with many of the leading manufacturers, and established a strong position supporting semiconductor facilities. WGNSTAR significantly expands that opportunity. One way to think about it is to picture the fab as the bullseye in a semiconductor facility. Historically, ABM has operated around the bullseye, providing a broad range of services. With WGNSTAR, we now have the highly specialized technical capabilities to operate inside the bullseye as well. That significantly expands our addressable opportunity and allows us to provide a much broader range of services to semiconductor clients. The results so far have been really encouraging. Semiconductor revenue grew 65% organically during the first nine months, and more than doubled when including almost two quarters of WGNSTAR. And we are still early in realizing the opportunities across the combined client portfolio.

In microgrids, including battery energy storage systems, we have approximately quadrupled the size of the business since entering the market in 2022. Through the first nine months, revenue grew 17% organically. The underlying demand drivers remain compelling as clients increasingly invest in power resiliency and redundancy. We are also focused on broadening the client base and increasing the recurring component of the business over time. To highlight our progress on diversification, in the coming days, we expect to finalize a contract to build a microgrid for primary backup power for the U.S. Army Corps of Engineers as part of a joint venture with a strategic partner. The total value to ABM is approximately $20 million, and we expect the project will be executed in calendar 2027. And finally, data centers. Year to date, revenue grew 8% organically, but we believe the opportunity ahead is considerably larger than what is reflected in that current growth rate.

Our pipeline and backlog continue to build, including work with many co-location customers, and we expect a meaningful portion of that activity to convert into revenue in fiscal 2027 and into 2028. Taken together, these businesses represent an important evolution in ABM's portfolio. We have a large, resilient core business that generates significant cash flow, while at the same time building meaningful positions in markets benefiting from powerful long-term investment trends. We believe that combination can contribute meaningfully to ABM's growth and margin profile over time. Let me step back and briefly talk about what we are seeing across our markets as we move into the fourth quarter. Within Business & Industry, the trends we discussed last quarter remain largely intact.

The Northeast continues to be our strongest commercial real estate market, while the West Coast, particularly Northern California, remains challenging. We continue to be disciplined in how we pursue and retain business. Our objective isn't simply to maximize revenue. We want client relationships where we see a credible path to attractive returns over time. Looking ahead, we expect B&I to return to organic growth around the middle of fiscal 2027 as we lap the large U.K. client exit we've previously discussed. In Manufacturing & Distribution, the environment remains very constructive. Technology continues to lead the way, particularly semiconductor, and we're also seeing healthy activity in e-commerce, pharma, and broader industrial manufacturing. Based on what we see today, we believe M&D is positioned to sustain strong organic growth into fiscal 2027 and beyond. In Aviation, passenger demand remains healthy.

The near-term issue is pressure on airline economics from higher jet fuel costs, which is creating some pressure on our margins. We have incorporated that into our outlook and are actively working to mitigate the impact. At the same time, our deliberate shift towards airports continues to improve the long-term profile of the business. Airports now represent approximately 60% of Aviation revenue and provide greater consistency, broader cross-selling opportunities, and more stable economics. Education continues to be a consistent cash-generative business. The team is executing extremely well, and we expect low single-digit organic growth as we move into fiscal 2027. Finally, in Technical Solutions, the underlying market fundamentals across energy resiliency, data centers, and HVAC remain strong. As I mentioned earlier, Q3 was affected by certain project deferrals at an important client. These delays were not driven by interest rates, supply chain constraints, or permitting challenges.

The client made a decision to prioritize other capital projects during the quarter. We are now executing on many of those deferred projects, which should translate into significant sequential improvement in ATS revenue, operating profit, and margin in Q4. More broadly, given the demand we continue to see across ATS, we expect another year of strong growth in fiscal 2027. As we enter the fourth quarter, I would leave you with three things. First, the majority of our end markets remain healthy. Where we do have pressure, we understand the issues and are actively managing them. Second, our operational execution continues to improve. Margins increase sequentially, cash flow has strengthened considerably, and the cost actions we've been taking are showing up in our results. Third, semiconductor, microgrids, and data centers are becoming increasingly meaningful contributors to ABM, and we believe they have substantial runway ahead.

We are raising the midpoint of our adjusted EPS outlook and raising our full-year free cash flow outlook based on our strong third-quarter results and our confidence in delivering the fourth quarter. There's still work to do, but we feel good about the position we're in and the foundation we are building as we head into fiscal 2027. With that, I'll turn it over to David.

Thanks, Scott, and good morning, everyone. Let's start on slide seven. Revenue grew 4.2% year-over-year to an all-time quarterly record of slightly above $2.3 billion, driven by 2.1% organic growth and a 2.1% contribution from acquisitions, primarily WGNSTAR. Organic growth was especially strong in Aviation and M&D, which grew 12% and 8% respectively. Education was up slightly, while Technical Solutions posted organic growth of 2%, reflecting project timing, which I'll discuss shortly. B&I declined 3% as expected. We'll get into the segment details in a few minutes. Turning to slide eight. As Scott mentioned, we delivered a strong earnings quarter. Net income increased 19% to $49.7 million, or $0.84 per diluted share, compared to $41.8 million or $0.67 per diluted share in the prior year.