Greetings, and welcome to the ABM Industries Inc Q2 2022 earnings call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Goldberg, Investor and Media Relations. Please go ahead.
Good afternoon, everyone, and welcome to our second quarter 2022 earnings call. My name is Paul Goldberg, and I'm the Senior Vice President of Investor Relations at ABM. With me today are Scott Salmirs, our President and Chief Executive Officer, and Earl Ellis, our Executive Vice President and Chief Financial Officer. Please note that earlier this afternoon, we issued our press release announcing our second quarter fiscal 2022 financial results. A copy of this release and an accompanying slide presentation can be found on our website, abm.com. After Scott and Earl's prepared remarks, we will host a Q&A session. Before I 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, or 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'd like to now turn this call over to Scott.
Thanks, Paul. Good afternoon, and thank you all for joining us today to discuss our second quarter results. ABM posted strong results in our second quarter following the excellent results we recorded in our first quarter. Organic revenue growth of 7.5% was driven by solid demand in Business & Industry, Aviation, Manufacturing & Distribution, and Technical Solutions, which benefited from robust growth in our eMobility business. Our teams executed well in a challenging environment, driving high single-digit organic revenue growth while largely mitigating the impacts of labor availability and wage inflation. We generated an adjusted EBITDA margin of 6.5%, which represents a significant improvement over pre-pandemic levels and reflects our ability to protect profitability in the current inflationary environment. Our solid results underscore the strength of our client relationships and our broad capabilities to meet their evolving needs.
Overall, our second quarter performance largely reflected healthy demand for our core janitorial services, contributions from acquisitions, and the ongoing recovery in the Aviation market. These positive factors were partially offset by the expected decline in disinfection-related work orders and EnhancedClean services from the heightened levels in last year's second quarter. As Earl will discuss later, we are reaffirming our previous guidance ranges for full-year adjusted earnings per share and adjusted EBITDA margin, reflecting continued favorable market demand trends for our core janitorial services, as well as our solutions that enable our clients to achieve their sustainability and energy efficiency objectives. Our strong market positioning is evidenced in our new sales bookings, which increased 11% year-over-year to $795 million through the first six months of the year. Let me now discuss the demand environment for each of our industry groups.
Beginning with B&I, office occupancy rates remain at relatively low levels, but continue to gradually increase, especially on the East and West Coasts, where occupancy rates have risen to approximately 35%-40%, while occupancy in the central part of the U.S. is at approximately 60%. We continue to anticipate a measured pace of rising office occupancy for the balance of 2022. This slower pace of reopening is generally beneficial for our business, enabling us to effectively manage labor costs in today's tight labor market. At the same time, demand continues to rebound for special events such as concerts and sporting events, as essentially all venues have reopened to the public. One notable development in the office market is that occupancy levels are generally higher midweek, with lower occupancies on Mondays and Fridays.
This trend suggests that even though occupancy levels may not soon return to pre-pandemic levels, clients still must plan for high occupancy days when they think about their future space requirements. Moving to Aviation, travel rebounded significantly from the prior year, with U.S. passenger volumes now at approximately 90% of pre-pandemic levels, mostly driven by leisure travel. Business travel is also improving, although at a more measured pace. We expect travel demand to continue to trend higher and to approximate pre-pandemic levels in the U.S. in the third quarter. Given the recovery in the travel market, margins in our Aviation business have rebounded strongly, aided by our efforts to optimize our service mix and by our effective management of labor costs in tight markets. Demand in Manufacturing & Distribution continues to be solid as this segment has been largely unaffected by reduced occupancy levels.
As a result, our organic revenue growth reflects the health of these end markets. Supported by our strong relationships with many of our country's leading e-commerce, logistics, and manufacturing companies, we have expanded our book of business with these clients benefiting from their continued growth. To further accelerate our growth in M&D, we are working to broaden our exposure in attractive markets such as life sciences. With our industry-leading geographic footprint, ABM remains uniquely positioned to serve our clients' M&E needs, who value our ability to provide consistent service across their numerous site locations. In Education, demand remains stable as K-12 and colleges and universities continue to operate with 100% in-person learning.
Although the roll-off of two Education accounts in the back half of fiscal 2021, and a reduction in the disinfection-related work orders continued to impact revenue in Q2, we expect that the addition of new clients starting in Q3 of this year will drive year-over-year revenue growth in the fourth quarter. In Q2, segment margins were impacted by the labor ramp-up required to service nearly full in-person learning versus the hybrid model from a year ago. Additionally, we did experience labor inflation costs in certain non-unionized markets, especially in the southern regions of the U.S. We effectively mitigated a large portion of them through price escalations. In Technical Solutions, we continue to see robust demand for our eMobility charging solutions, where revenue quadrupled compared to the prior year, despite some of the supply chain constraints on growth.
We expect our eMobility business to continue to accelerate, driven by the U.S. infrastructure bill and strong demand for electric and hybrid vehicles. On top of that, we recently booked a large Bundled Energy Solutions project that will commence in the coming quarters. Interest in our Bundled Energy Solutions continues to build, and we are optimistic that we'll book additional new BES business in the back half of the year. Going forward, Technical Solutions is poised to benefit from long-term secular trends like EVs, sustainability, and energy efficiency. In addition to the constructive demand environment, we continued to make important progress with respect to the ELEVATE program in Q2. The focus of our second quarter efforts was on designing and testing our core cloud-based ERP system and further refining our cloud-based recruiting and tracking system.
While there is still plenty of work ahead of us, our teams are well-aligned on advancing our ELEVATE strategy. Driving growth through strategic acquisitions is a fundamental component of ELEVATE, and I'm pleased with our progress. During the second quarter, we completed the purchase of Ireland-based Momentum Support. The acquisition expands ABM's footprint to the attractive Irish market and provides us with cross-selling opportunities to existing ABM clients with operations in Ireland. We further advanced our ELEVATE strategy through the establishment of ABM Ventures, our business ventures program. As our first transaction under the program, we acquired a minority investment in Recycle Track Systems, a leader in cutting-edge traceability and sustainability solutions utilized in the materials waste and recycling industry. Through this partnership, ABM clients will have access to RTS's full suite of on-demand waste removal and materials management solutions.
Before I turn it over to Earl to discuss the financials, let me provide a quick update on the labor environment. As I mentioned last quarter, ABM's wage inflation risk is largely mitigated by the composition of our direct labor workforce. As a percentage of our contract revenue, roughly two-thirds of our direct labor is subject to collective bargaining agreements or part of a cost-plus arrangement or part of some other arrangement where wage rates can be predicted more easily and passed through. The transparency of these contractual arrangements makes capturing labor cost increases less difficult, as clients know that our increases are a direct result of stated or contractual wage increases. That being said, we have definitely been experiencing meaningful wage inflation in the portion of our labor spend that is not subject to the contracts I just mentioned.
This wage inflation is most evident in the southern region of the U.S., where unions are less prevalent and hourly wages are generally lower than in the rest of the country. In these instances, we have proactively sought escalations to cover wage cost increases when appropriate. Our success in obtaining price escalation speaks to the high value our clients place on our services, especially during the most challenging of times, and to the fact that wage inflation is widespread and affecting our competitors similarly. We also continue to experience these effects of labor shortages when businesses are quickly ramping, such as in Education. When we went to full in-person learning virtually overnight, and what we are now seeing in Aviation. Though not expected in the next few quarters, we believe labor shortages will somewhat subside over time, especially as inflation continues, driving more people to re-enter the workforce.
In the meantime, we continue to aggressively and proactively recruit using all the tools and technology at our disposal. With that, let me turn it over to Earl for the financials.
Thank you, Scott, and good afternoon, everyone. For those of you following along with our earnings presentation, please turn to slide five. Second quarter revenue increased 26.7% to $1.9 billion, largely driven by acquisitions, continued recovery from the pandemic, especially in Aviation, and solid demand for our janitorial services. Organic growth of 7.5% was broad-based across all segments, with the exception of Education. Moving on to slide six. Net income in the second quarter was $48.8 million or $0.72 per diluted share, both up 57% over the same period last year when we posted net income of $31.1 million or $0.46 per diluted share. The increase in GAAP income primarily reflects higher segment earnings and the absence of a litigation reserve taken in the prior year period, partially offset by ELEVATE-related investments.
Adjusted net income for the second quarter increased 8% to $60.2 million or $0.89 per diluted share, compared to $55.5 million or $0.82 per diluted share in the second quarter of last year. The increase primarily was due to higher segment earnings and one less workday compared to the prior year period. Adjusted EBITDA increased 12% to $118.9 million, compared to $106.6 million in the prior year period. Adjusted EBITDA margin for the quarter was solid at 6.5% versus 7.4% last year, largely reflecting the anticipated decline in work orders, which include higher margin disinfection services. Corporate expenses, excluding items impacting comparability, were essentially flat to the prior year period. Now turning to our segment results beginning on slide seven.
B&I revenue increased 48.9% to over $1 billion, driven primarily by contributions from acquisitions. The period included a full quarter of Able and three weeks of contribution from the Momentum deal. Excluding acquisitions, organic revenue growth was a robust 6.2%, reflecting increased office occupancy, growth in special events, and business expansion with existing customers. Operating profit in B&I increased 6.5% to $76.7 million, driven by significantly higher revenue, especially related to core services such as janitorial. Operating margin of 7.6% was lower than the prior year and reflected lower EnhancedClean and disinfection-related work orders, which we anticipated. Aviation revenue increased 27.4% to $185.9 million, marking the fourth consecutive quarter of robust year-over-year revenue growth.
The improvement was largely driven by increased leisure and business airline traffic. Aviation operating profit increased 69% to $9.6 million versus $5.7 million in last year's second quarter, driven by the significant increase in revenue as well as growth in our higher-margin airport facility services business. The year-over-year operating margin improvement of 130 basis points reflects greater economies of scale on higher volume with existing clients, partially offset by the impact of wage inflation. Turning to slide eight. Revenue within our Manufacturing & Distribution industry group grew 4.9% to $356.9 million. Solid organic growth in this segment was driven by expanded business with existing clients and several new customer wins. Operating profit increased 4.6% to $41.9 million on higher sales volume.
Operating margin was essentially flat as service mix was unfavorably impacted by lower levels of EnhancedClean and disinfection-related work orders compared to the prior year. Education revenue declined 3.9% to $204.4 million, largely due to lower work orders versus prior year and the roll-off of two accounts. As Scott mentioned earlier, we believe that the new clients we have coming on board in Q3 will drive year-over-year revenue growth in Education starting in Q4. Operating profit was $11.7 million, down from $13.8 million in last year's second quarter due to lower revenue as well as higher wage costs, especially in the southern regions of the U.S. Operating margin remained elevated from pre-pandemic levels and finished at 5.7%.
Technical Solutions revenue grew 18.1% to $147 million, largely driven by extremely strong growth in our eMobility service offering. Operating profit was $10.6 million compared to $10.2 million last year. Operating margin decreased 100 basis points to 7.2%, primarily reflecting a service mix that was more heavily weighted to our eMobility service line versus prior year. Moving on to slide nine. We ended the second quarter with total debt of $1.3 billion, including $162 million in standby letters of credit, resulting in total debt to pro forma adjusted EBITDA ratio of 2.4 x. Debt was up $159 million versus the first quarter, and largely reflects the litigation settlement payment of $144 million completed in the second quarter.
At the end of Q2, we had available liquidity of $781 million, including cash and cash equivalents of $48.9 million. Turning to capital allocation, we repurchased roughly 700,000 shares in the second quarter at an average price of $43.50 per share for a total cost of $30 million. In total, for the first six months of fiscal 2022, we repurchased approximately 1 million shares for $43.3 million. Lastly, we are proud to have paid our 224th consecutive dividend in the second quarter. Now let me briefly touch on guidance, as shown on slide 10.
As Scott mentioned earlier, we are reaffirming our prior guidance for full year 2022 adjusted EPS to be in the range of $3.50-$3.70, and for adjusted EBITDA margin to be in the range of 6.4%-6.8%. Guidance for the full year 2022 GAAP EPS is now expected to be in the range of $2.91-$3.11, up $0.26 from our prior guidance, reflecting benefits from changes in items impacting comparability. With that, let me now turn it back to Scott for some closing comments.
Thanks, Earl. In an evolving and dynamic market environment, ABM continues to operate from a position of strength, supported by the industry's best team, the breadth and scale of our operations, and the strength of our balance sheet. We are well-positioned strategically with exposure to secular trends like healthy buildings, sustainability, and energy efficiency. We also serve high growth markets, including eMobility and e-commerce. These growth opportunities, coupled with the resilience of our janitorial and engineering business, underscore our confidence in our outlook. At the same time, we continue to make important progress with respect to our ELEVATE initiative, enhancing our efficiency to create long-term sustainable value for all of our stockholders and stakeholders. With that, let's take some questions.
At this time, we'll be conducting a question- and- answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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 star keys. One moment please while we poll for questions. Your first question comes from Faiza Alwy with Deutsche Bank. Please proceed with your question.
Yes. Hi, how are you? I have lots of questions. Scott, could you maybe talk about just big picture, sort of what are some of the things this quarter that were sort of in line with your expectations from a few months ago versus what maybe has surprised you or was different in terms of how you were thinking about your business?
No. First of all, thanks for the question. You know, interestingly, we think everything is kind of right in line with what we were saying if you go back a couple of quarters. We're performing as expected, really pleased with everything we've done. You know, I think the thing I would point out is that what was probably unexpected, even from the start of planning for the year is inflation and, you know, the recessionary effects that we're seeing out there, because that certainly has a knock-on effect on wage rates and ability to get labor, and we fought through it. You see that in our margins and in our bottom line.
Super proud of the team for how they've come through in a quarter where if there was anything that was unexpected, it would be how significant the wage pressures are.
Okay, understood. Maybe if we could focus on just the Aviation segment. You know, you've seen quite a bit of margin improvement there on a year-over-year basis and also sequentially, but I think sequentially was expected. Maybe talk a little bit about how we should think about like the long-term margins in Aviation and how do you expect you know, maybe back half margins to trend in that business.
Sure. You know, look, we're enthusiastic about this segment, for sure. One of the things we've done, you know, through the good work of our Chief Operating Officer, Rene Jacobsen, is reposition how we go to market, and we've shifted our mix from predominantly airlines to airports, and that's helped increase our margins. The trajectory is incredible. We were in a very low operating margin at, you know, pre-pandemic, and now, you know, we're at 5%, as you saw, and no reason it shouldn't continue in the back half of the year at the same rate. I'd like to believe that as we talk to you in 2023 and 2024, you're gonna continue to see improvement and ultimately get this in line with our other segments.
We're on a journey, no pun intended.
Okay. Understood. I'll leave it there. I have a lot more questions, but I'll give others the opportunity. Thank you.
Thanks, Faiza.
Your next question comes from Sean Eastman with KeyBanc. Please proceed with your question.
Hi, everyone. Thanks for taking my questions.
Hey, Sean.
It would be great to get some context for the decline in disinfection-related work orders and EnhancedClean, maybe year-over-year or sequentially versus the first quarter. Just trying to flesh out how much of that sort of margin tailwind is still in the system.
Sure. So, we still have margin accretion for disinfection, but, you know, it is starting to normalize as we projected. Now, high level, we still have a couple of points of revenue tailwind, which is great. You know, we think some of it will remain, but it's certainly tailing off as we get more normalized with the pandemic. A little bit less, but not significant. Essentially in line with what we've been saying for the past few quarters.
Okay. By a couple of points, what exactly do you mean there, Scott? I mean, just versus normalized level.
Sure. When we talk about work orders, right? If you think about the elevated level of our work orders through the pandemic, you know, I think round numbers, we're at, like, 5% pre-pandemic, and we rose all the way up. Now we're in that 7% range, right? We don't think we're going back down to 5%, but may not stay at 7%. It'll, you know, there's some room in there to normalize, but it'll still end up being elevated. As you know, in our business, a point on work orders which are higher margin, a higher margin segment, it works really well for us.
Okay. Helpful. Were you gonna say something, Earl?
Yeah, I was just gonna add to that, Sean. You know, when you actually look at the margin this past quarter, I would say that, you know, if you look at the 90 basis points that we actually shed year-over-year, it's probably 200 basis points was really the disinfection related. Just to give some perspective on disinfection in and of itself.
Okay. Very helpful CFO perspective there. Okay. You called out the wage inflation. Obviously a big topic there. Could you give us any color on where that's running, whether it's ramping or plateauing? You know, I kind of wondered if the CBAs, it maybe means that wage escalations are gonna hit ABM with a lag. You know, I'm not sure if that matters, but any color there would be helpful.
No, no, that's the right question. You know, from a risk protection standpoint, we're in such good shape, I have to tell you, Sean, because as you know, 3/4 of our revenue is from collective bargaining agreements, and virtually all of them got done in the last year or so. We have line of sight to the next 2 or 3 years of escalations. On average, it's gonna be about 4.5% for wage and benefits, which is really, you know, sustainable for us and something that is less difficult to pass on to clients. On the non-union side, which is, you know, call it 1/3 of our business, you're definitely seeing elevated levels running anywhere from, you know, 5%-10% increases depending on different geographies.
That's where, you know, we look at a segment like Education, where 75% of the labor is non-union, and that's why you see a little bit more pressure in the Education segment. It affects every segment differently, but it's based on geography. You know, the silver lining for us is how much can you recapture in escalations. Last year, we had a record year of price escalation recapture, and we're probably running close to 2x that right now. The team's doing an unbelievable job of recapturing that wage inflation.
Super helpful responses. I'll turn it over. Thanks a lot.
Thanks.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment please while we poll for more questions. Your next question comes from David Silver with C.L. King. Please proceed with your question.
Yeah. Hi, good afternoon. Thank you. Scott or Earl, I think, maybe I was just gonna ask if you could give us an update on the Able Services acquisition. Couple of things. I mean, maybe if you could talk about the integration overall, and then secondly, if you could talk about the financial impacts, the accretive nature of Able in your current quarter results. Thanks.
Sure. That's great. So look, we're really proud of how Able is going from an integration standpoint. On the operational side, you know, we're in my mind, fully integrated operationally. We're on track with our synergy targets, which is great. You know, as we modeled out how we wanted this to perform internally, we're just right on track. Really pleased with how it's going. You know, I'll let Earl talk about the accretive nature, but I will tell you, David, what is really powerful about this as well is the fact from a brand standpoint in the industry and, you know, the fact that we've combined with Able and what it means for, again, the ABM brand because they're such a valuable asset and had such a great reputation.
It's been wonderful beyond the pure financials of the transaction. Couldn't be more pleased. You know, Earl, if you wanna give some commentary on the accretive nature of it.
Yeah, just to reiterate, you know, when we announced, you know, this acquisition last year in September, you know, we talked about.
You know, the presumption that we actually had with regards to revenues, as well as the EBITDA that it would accrete. Like, you know, Scott just mentioned, everything is on track, including, you know, both, you know, customer revenue retention as well as the synergies. We also talked about, you know, generating about, you know, $0.25 in EPS, and we are well on track to deliver that in the first year.
Okay. That's great. My next question, I'd like to hone in on the new sales bookings growth, low double digits year to date. I was wondering if you could characterize what you think. What is it in the value proposition that ABM brings to the table now in the post-pandemic period that, you know, has led to this, strong bookings? In other words, I believe, you know, your company brought a lot, a very differentiated service offering during the height of the pandemic relative to a lot of your smaller regional competitors. But we're now in the post-pandemic period, where perhaps, you know, the differentiation you can offer might not be as clear to the customer.
You know, if René was here, or maybe you could just highlight, you know, what aspect of your value proposition do you believe is driving the double-digit growth in sales bookings? Thanks.
I think a lot of it is the momentum that we've achieved by just the resources we bring to bear, the scale that we have and expertise. Look, it was highlighted with COVID, right? You know, I don't think anyone in the industry would dispute that we were first out of the box with solutions. We had our EnhancedClean. The brand has just been elevated, right? You know, when you're pitching for new business and you're talking about how you performed over the last couple of years, you talk about combining with Able. I feel, we just all feel like there's a certain level of momentum that's going on with ABM that's causing us to have another first half of record sales growth. It's you know.
It's hard to put your finger, David, on one particular thing other than I could just tell you there was so much energy around wanting to get into the room and pitch our brand and our capabilities to clients because of what's happened over the last couple of years.
Okay. That's great. Thank you very much.
David.
Your next question comes from Marc Riddick with Sidoti. Please proceed with your question.
Good evening, everyone.
Hey, Marc.
I wonder if you could touch a little bit about it, and forgive me if I missed this in prepared remarks, but I know in the past you made mention, definitely, I think on the last call, as far as the pace of folks returning to the office and maybe, you know, seeing different levels in different regions of the country. I was wondering if you could talk a little bit about maybe how that's updated as well as, with that pace, how that's sort of playing with the visibility of staffing and the ramping that up alongside of it and the like. Maybe you could talk about kind of how that's played out so far.
Yeah, sure. Look, we've, it's office occupancy has gone up incrementally. You know, if you think about maybe six months ago, we were talking about 10%-20% on the coast and 40% in the middle of the country. I'd say now it's like 35%-40% on the coast and maybe 60% in the middle of the country. It's not, you know, all days of the week are not created equal, right? Monday and Friday, you're probably talking about 5%-10% occupancy. Tuesday, Wednesday and Thursday, you know, elevated from there, you know, to get to your averages. It's a ramp back, where we think it'll still continue to ramp back.
I don't think anybody thinks the landing spot is five days a week back to the office, right? It's gonna be a more modest return, which plays to ABM's strength with labor efficiency and being able to be, again, efficient with how we deploy our staff. You know, we've seen that in the margin.
It seems as though then that the pace of how this has played out so far has been relatively, at least slightly positive, if not more so as, you know, compared to maybe if it was rushed or the like. Is that a fair way to look at that?
Yeah, you know it is, Mark, because look, put it in context of the labor environment, right? Not necessarily just wage, because the B&I office segment is largely unionized, where it's very controllable cost, but just the availability of labor and the availability.
Right.
Of the fine staffing and not have to use overtime, right? We are, you know, I mean, it's worked out very well for us that the pace of change back to the office has been controlled and modest for now. You know, obviously, we'd love to eventually see more robust numbers 'cause it's good for the health of the economy, but right now plays to ABM strength.
Okay. That's very helpful. Thank you.
Sure.
Ladies and gentlemen, we have reached the end of the question- and- answer session, and I would like to turn the call back to Mr. Scott Salmirs for closing remarks.
I just wanted to thank everyone for participating this afternoon. We're excited about everything we're doing here at ABM, and just really pleased with our performance and look forward to speaking to you in the fall. Have a good, safe, healthy summer. Take care, everybody.
This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.