Hi, everyone. Welcome to Baird's Global Industrial Conference. I'm Andy Wittmann. I cover Facility Services and Industrial Services, together with Justin Hauke, who's here. This next session is ABM Industries Incorporated. David Orr is the company's CFO. Paul Goldberg is the Vice President of Investor Relations. We're going to do this one as a fireside chat. I've got plenty of questions to go through here today. I'm just going to start out with just kind of turning it to David to tell you who ABM is and what they do, for anybody who might not be familiar and checking this one out for the first time here.
Yeah, great. Thanks, Andy. Thanks for hosting us.
You bet.
Appreciate it. So again, David Orr, CFO. I've been with ABM for about 28 years in a bunch of different roles. So excited to be here to talk to you all today. ABM, a $9 billion facility services company, and we have services across several end markets. We organize ourselves by end markets. So you think about Business & Industry, which is largely commercial real estate, our Aviation, which is a service of airports and airlines, our Manufacturing & Distribution segment, which is kind of more technical distribution, e-commerce sort of end market, our Technical Solutions business, which is in large part a lot of electrical engineering, and it's our most technically advanced business. And then Education, where we service higher ed and K - 12. Our main service lines are janitorial.
We do parking, we do building engineering, and then a variety of technical services through our technical business. The company's been around for 100 years. We've had a really good track record of growth, dividends, capital investment, et cetera. Just excited to be here and talk to you today.
Yeah. And it's over 100 years of business. It's changed a lot.
That's right.
I think recently you guys have really pivoted to trying to go to some of the growthier areas of the economy. So, it's probably worth just talking about some of the recent additions. It's easy to talk about cleaning offices, which you've done for 100 years. The famous story of a guy in San Francisco cleaning windows and knocking on doors, turned into this multi-billion dollar company today. Today, you're cleaning a lot more than windows. Why don't you talk about some of the areas where you've made some investments recently to kind of accelerate your growth rate?
Yeah, to your point, Andy, the company really has evolved. I would say 10, 15 years ago, we were known as just largely the janitorial company. Today, we've been really intentional in investing in areas like semiconductor, data centers, microgrid services, and we've done that both organically and inorganically. If you think about perspective on a few of our recent acquisitions, a few years ago, we bought a company called RavenVolt out of Georgia. RavenVolt specializes in microgrid technologies, so think about battery and power backup systems. So generators, switchgear, battery energy storage systems, anything that can just provide this kind of guarantee of uptime for these large facilities, large big box retailers, et cetera. That's been a fantastic business for us. We've invested in a company recently. We bought a company called WGNSTAR, and the company focuses in the semiconductor area.
Just a remarkable, technically skilled group that has a real moat around being able to provide technical services in a semiconductor fab, for example.
This is clean room stuff.
It really is.
So like when you talk about cleaning, we are talking about much more detailed level.
You are. You are talking about, and Paul and I happened to have taken an opportunity to visit one of our fabs recently, and you are in the clean suit, and you are in the goggles. You are sprayed down very carefully before you enter the facility, and that is what our folks work in all day, that environment. And it is not only cleaning, I would say, Andy. The beauty of that is, in the fabs, we are on the actual construction side as well, in terms of the electrical tie-ins and the hookups and running cables. There is a part of that business
That is through the Technical Solutions business?
It is through Technical Solutions and WGNSTAR.
Got you.
Which rolls up in our M&D business. It is really an incredible mix of in construction on the project side and post-construction on the recurring side, which is what Andy was talking about when you talk about technical cleaning. It is a nice pull-through.
I think there's another aspect. I think you guys are trying to, and you are today, trying to build out your exposure to actually being inside the data centers as well.
That's correct.
I mean, that's a lot of square footage. I don't know how often it needs to be cleaned, what the needs are for that. Why don't you talk about how important that is today and how you're addressing that as a growth area?
Yeah. It's one of our three key areas of growth we're talking about. Our data center business, there's a couple legs to the data center business. It is the technical cleaning, which again, like the semiconductor fabs, requires a lot of specialty skills. You can't just show up and clean inside of a data center. But the other side of data centers that's exciting for us is uninterruptible power systems. You think about, this was an acquisition we did a couple years ago called Quality Uptime Services. You think about installing batteries in a data center, think about batteries as the bridge between the grid and a generator turning on. In this environment, you just can't afford downtime. It's unacceptable for these clients. So our QUS business, Quality Uptime, provides those batteries and services those batteries.
They may only turn on for milliseconds to keep the power running. I think the Uptime Institute did a study last year that said one in five outages are major outages and are at the cost of over $1 million in a data center. It is roughly $500,000 an hour to be down in a data center. That drives up a pretty intense demand for this uninterruptible power solution that our QUS team provides.
Okay. I just wanted to put context around the discussion we just had. Do I understand it correctly that semiconductors, some of the microgrid work, and the data centers, is that about 11% of sales today?
It is.
What is the growth rate that is coming out of these guys?
Yeah, I mean, we've grown very high- double- digits collectively in those areas this year, partly organically and partly inorganically through the acquisition of WGNSTAR. Those three businesses last year represented about 7% of the business, so from 7% to 11% is the cadence. We're going to continue to invest in those businesses and anticipate that mix continuing to grow.
What's the organic CAGR if you were to pro forma in the period that you didn't own? Just trying to understand once it's fully in the base, how much this is going to be contributing.
Yeah, and it varies by group. I mean, organically, microgrid and data, excuse me, semi have been growing well north of 20%. A data center has been more in the 10% range, but we anticipate based on the pipeline we have in data center now that's really expanding, that that could tick up going forward.
Are these Sorry.
Yeah. No, no, I would just build on what David said. I mean, the qualified pipeline, it just, we're really getting going now, especially in data center. The qualified pipeline's like $1.5 billion. So hopefully we'll convert that to contracts, which will convert to revenue.
The qualified pipeline of $1.5 billion or-
Between microgrids and data centers, yeah.
That's right.
Okay.
The beauty of that is, today in microgrid data centers, we have a fair client concentration. I think the majority of our revenues are across five to seven major clients. That pipeline that Paul just talked about is across 25 clients, new clients. It could really broaden the base and ultimately reduce concentration risk in those businesses.
Great. Super interesting. It feels like just to leap on that one, microgrids, this has obviously just talked about the good growth here. We've talked a lot about how you're servicing a large retailer. I think this is what you're talking about. There's been a big customer there. That is basically making sure their stores don't go down. Hate to lose the frozen food aisle or whatever else. I mean, basically is what it is. It's just you don't want to lose spoilage. You also want to keep your customers and your employees safe. But, how much more runway is on that one? How much visibility do you have? I know it's been kind of renewed and reauthorized for a broader bolus of stores over time.
I just want to make sure that I'm keeping track and thinking about it like you guys are over the next couple of years, because it's been a pretty important customer.
It has been, and it continues to be. The way that contract works is each year is part of their capital planning process. They decide how much they are going to dedicate to programs like the ones we service. Usually around the springtime, each year, we will get a notice of award. Nothing is guaranteed, but we have had a good track record for the last several years of some really strong awards with that client. We anticipate, based on those discussions, we would continue to see that runway. I think what is exciting about that business, a little bit beyond the big box, is we just announced a deal with the Army Corps of Engineers.
We are going to go next.
Right, out of Louisville. Sorry to jump your question.
Yeah.
This is a great kind of new venture for us through a JV, where we think we have a right to win. This is a battery energy storage generator work in a base in New Mexico. The way this program works is there is about $2 billion under this task order over the next 10 years that is likely to be awarded through this contract. We are set up with this JV. We think we have a right to win. We think there is roughly three to four bids a year that is going to come out, somewhere between $10 million and $20 million a piece, the one we just won being an example of one. So we see this as a recurring opportunity for us. Obviously, we have got to execute on this first one and prove it out. But that is a nice piece of the pipeline.
Yeah, I think that's, if I'm not mistaken, that's an IDIQ where you guys are you're pre-selected as qualified, and then from there you have to compete for each one of them.
Correct, but you're past that big first hurdle.
Yep, for sure.
Pre-certification. That's right.
Definitely. Just what's the competition inside of that contract? Is it five parties? Is it two parties? Do you have a sense?
It's a handful. It's not 20 or 30.
Got it. Cool. Sorry, you said you just announced one, if I'm not mistaken.
Yeah, we announced the first task order of $20 million roughly in September, and that'll turn to revenue in fiscal 2027 for us.
Yep. Great. Anytime I think about projects, having the benefit of covering construction and engineering. You guys do this mostly on a fixed price basis, if I am not mistaken. Is that correct?
Yeah, we do price, but there are variables too, because anytime you are doing this type of construction, you are going to run into things that were not anticipated or you got to move a generator two feet from the rough-in plans, and those drive change orders. So, we are very protective in that work in that we have a fixed base, but there are always variable options to make sure we protect the margin profile.
Yeah. The company is in blackout period right now.
That is right.
The quarter's done.
Deep in blackout.
We'll be seeing it. It's always around right before Christmas. I was going to ask you about the 4Q ramp, but that's probably an unfair question. I would just say there is a big 4Q ramp in the guide. It's usually attributed to projects like what we're talking about here, where there's a seasonal aspect that seems like summer and early fall are busy times for you guys to be outside building stuff.
Yeah, I think specifically rated Technical Solutions. That's the biggest seasonality we have. Just based on our access to facilities in the back half of the year versus the first half, frankly, the weather has a lot to do with our success and execution in that business. A lot of that work is outside. That just tends to bound itself to the back half of the year, I think that trend should continue.
Yeah, then you get really strong utilization and productivity out of your crews, so you get a margin bump too associated with that.
Correct.
Fourth quarter always kind of looks a little bit like you got to hit a tough comp, but the history has shown that that's where it comes. Okay, let's talk about some of the legacy businesses now a little bit. The B&I segment, Business & Industry, this is a lot of multi-office cleaning. Multi-tenant office cleaning, and some customer-owned properties as well. Here you've been seeing some challenges in terms of competition more than anything. Can you just talk about the locus of those challenges where the price competition's ramping- up and how you guys are responding?
Yep, sure. For our B&I business, which, as Andy said, is largely commercial real estate, and largely janitorial and engineering work, so think about core traditional building maintenance. We've got two key things going on in B&I right now. One is actually overseas in the U.K., we exited a contract, Transport for London, so think about the tube system in London, in the second quarter of last year. We exited that. I mean, it was a great contract for us, but to retain it and maintain it was going to come at a margin hurdle rate that just wasn't in our profile, wasn't acceptable to us. So, a tough loss on the top- line, but I'm fine with it because it does retain margin. So that anniversary is Q2 of 2027. The second piece of focus for B&I is on the West Coast specifically, and I'd say Northern California.
There's just this really intense ramp-up of competitiveness, and I would say on price mainly. So we've had to be very selective on what we're willing to take at a lower price, because we have a margin ramp program. If we take something at a low price, we are committed internally to ramping that back up over a 6-12-month period. So we're selective there, and some of the stuff we're just not willing to take a t little to no margin. That has put pressure on the West Coast specifically. Again, I think most of that anniversary is in the second, third quarter of this coming year, and we see a scenario where B&I is back to positive growth in the back half of 2027.
Are there things that you can do to address that competition? If the customer is saying, "Hey, I need a break here," can you de-scope them? Or clean once a week instead of every other week, something to keep them engaged and meet their needs and still keep you on the contract. How are those discussions going?
That is exactly the approach we take. It is a very collaborative discussion. Some of these clients, we have been clients for 10, 20 years, right? So these are longstanding relationships. And some of them we go proactively to, because we get a sense of what is coming and say, "Hey, listen, here is how we can sharpen our pencil, but here is what it means for the work we are going to do," right? It is not necessarily the same exact footprint of work, it is not perhaps the same frequency of work, but it does help them tolerate and manage their budget. So, we try to approach it very proactively, but it is a competitive environment.
Yeah. Okay. The other kind of larger segment that you have is what you call your M&D, the Manufacturing and Distribution. I have always thought of this as kind of warehouse cleaning, some manufacturing too, where things are getting assembled, if I am not mistaken. These are really large square footage areas.
They are.
These are owned by Multi-tenant office is always a trickier market, in my opinion. You have got usually a financial owner there, instead of somebody that owns the building, where it would be more like an employee benefit. This business, because of that, has typically had a little bit higher margin. I think that's, if I had to simplify it, that's why I feel like it's more of a value-add service here. Tell me what you've seen there. A couple years ago, there was a threat from one of your large customers to go somewhere else, but you guys actually retained more than you thought you would there.
We did.
Are you able to kind of give us a sense of that marketplace today?
Yeah, this is a great business for us. We expect every year really solid growth out of our M&D business. Think about, as Andy said, warehouses, distribution, e-commerce. We're a large client there. Manufacturing spaces. We do automobile plants as part of this. We're in biopharma and life sciences in this segment. The beauty about this segment is, there is an element of technical work here and technical cleaning, if you will. Again, kind of a moat, where it's not just someone off the street can come in and get this business and be awarded this work. What that affords us to do, when we talk about our ABM Performance Solutions group, which is a broad suite of services. Think about everything from even like gas and chemical testing, obviously cleaning, just everything at a facility.
That service is ripe for M&D, and that service carries longer, stickier contracts at more attractive margins. We really try to focus that more turnkey, full-on service, suite of services approach in the M&D area, and it has been working for us.
Now, in the private markets, there are other technical services, people that maintain docks or make sure that the lighting is working, which I think is a business that you are in the facility engineering. There is a lot of other areas around M&D that you could attach. It could be fire life safety inspections. It could be pest control. There is a lot of things that you could see an ABM getting involved with here. I am kind of curious as to, as you think about these, what could be new opportunities to add value at existing clients, how much do those come into play? Can you develop them organically? Just talk a little bit about capturing more wallet through some service expansion.
Yeah, I'll just go back to the answer I just gave on our Performance Solutions group. That's typically a build for us rather than a buy. We are developing that capability internally. One of the things we bring to value for an M&D client where we provide this broad suite of services is we self-perform it. These are not services that we farm out and subcontract out. People see a lot of value in that, because it's the one throat to choke model, and they've got one accountable party, and we control our own resources. Well, I think that's really the sweet spot for us in M&D, is really to be able to get into just a lot more than the cleaning side itself.
Yeah, I would just add, semiconductor falls under M&D, and when we started semiconductor, we were basically doing construction cleanup of some of these fabs going up around the country. We did really well, and then it evolved into electrical work, and now it's evolving into sustaining cleaning. We continue to kind of raise the bar and expand our work within semiconductors, and I think there's opportunity to do even more. If you knew all the activities that go on there, it's insane. It's just a small portion of I think we're participating very well, but there's a lot more we could be doing, for sure. Some of it is gated by the availability of labor. We opened our own training centers. We opened one in Idaho, we have one in Austin, so I think we're actively addressing that. We're incredibly excited about where we sit in semiconductors.
Yeah. Okay, I wanted to talk about your airport and airline business. You call it, I don't know if Aviation.
Aviation.
You guys work for airports, clean the airport, you see their people all the time. You are also sometimes doing cabin cleaning for some of the airlines. A couple years ago, this was like a bad business, it was holding your margins back, but something changed a couple of years ago. The Aviation segment margins are higher than I thought they would have been. We covered the stock a long time. What changed? Are the airlines better customers now?
Yeah, it's-
Just do it less of them.
I'd say it's twofold, right? We have a real focus across the enterprise on underperforming contracts, and that's true for the Aviation space as well. Where we have something that's just not meeting margin hurdle, we really focus on it. We focus on the commercials with the client. We go back to the client, renegotiate, go for escalators, et cetera. That's one piece. I think the other thing in Aviation is we've had a real shift from our mix of business for airlines versus airports. Right now, airports make up about 60% of the portfolio in Aviation, whereas if you went back five years, that ratio was flipped. We had about 60% of the business with the airlines. Airport contracts tend to be, again, longer, stickier, higher margin, accounts where we can sell multiple services, not just not just the cleaning of the terminals, et cetera.
That's a better balance for us. We want to continue to improve that mix. There's no secret that airlines are a challenging client, right? They've had obviously a tough year with fuel costs and everything, so they come back to us for concessions, and we have to manage through that. We're really proud and happy of how we've changed the mix in that business, and I think that's contributed to the-
The airlines are lower now, which is good, but with fuel prices higher, are flights getting Are they canceling flights and reducing volumes, and does that affect your business at all?
We haven't seen a lot of volume drop off yet, Andy. As a matter of fact, I think it's stabilized for us in the last few months. There was some volatility earlier this year, certainly, when the first news of the tariffs and everything else started hitting.
Yeah. Okay. Is there anything else that we should know about your ability to drive margins in Aviation that I haven't asked about or you haven't talked about?
No, listen, it is one of our lower margin segments, but we're really proud of the track record, and we took that business from a 2% operating profit margin to close to 6% over the last six years, and that's taken a lot of discipline, and it's being selective about what work we do want to sign up for in that business.
Yeah, and I think just the other thing that we're excited about there is just the amount of infrastructure going in in airports across the U.S., right? New terminals in Kennedy, obviously Terminal B in LaGuardia, where we have a big space. There's a lot more, I would say, opportunity within that set than there are with airlines, where we're pretty much providing unitary service, cleaning cabins. Yeah, it's an exciting spot to where we've shifted the business.
Yep. Okay, that sounds good. I guess the next thing, I mean, to me, the best reason to own your stock is the steady cash flows that come out of it. It's, over the last few years, you've been investing in your capital base for new IT and handhelds and things like that. You've invested in your OpEx as well to implement some of that. And it feels like, what'd you call it, Vision 2027 or something? What was it called?
Well, ELEVATE.
ELEVATE was the name of it. Can't always keep track. ELEVATE was the name of the program. It was a $200 million + investment, OpEx, CapEx. That is done now, right?
Largely. We have got a couple more groups to get onto the platform, but that is already in the works.
Yeah. Is there any reason to think that 2027 cash flow would not show the full impact of what the business can generate?
Yeah. Obviously, we are in blackout, as you said, so I will not get into specifics. But what I would say is I would be disappointed based on how we plan to grow, both top- line and EBITDA, if we did not have growth in cash flow next year. It is a huge focus of ours. We continue to be disciplined on all the DSO metrics and everything around cash flow and working capital improvement. So, I would look for a growth year next year.
Yeah, big story in 2026 was the fact that you actually had some pent-up ARs. You made some transitions last year. Makes the 2026, 2025 look bad. 2026 looks good. But that's what I'm saying is, like, when I look at 2027, it doesn't look like there's something I can point at to say, "Oh, this is different," or there's a tax item, even, like, it seems like it should be pretty normal. So when I look at I've always thought your company should be generating free cash flow at least, or pretty darn close to net income or better. And so when you do that and the stock that's trading at a 10 x earnings or sometimes less, you should have a free cash flow of around that too.
As you said, that's been a hallmark of ours. We look forward to continue to be successful in that track record.
Just looking at the balance sheet then. I think leverage was, what, 2.9 x at the last quarter? So a little bit high, but you made these investments in WGNSTAR in particular. How should we be thinking about where you guys can be over the course of the next year and what your priorities are for that? Is it debt pay down or are you just going to let EBITDA growth try to-
No, no. I think deleveraging is clearly, and we've talked about it publicly, it's clearly a priority for us. I think we would look to get more towards 2.5x in fiscal 2027. And beyond that, within that framework, something we're really proud of, I would expect us to continue our track record of increasing our dividend. We've done for roughly 60 years now in a row. I expect us to continue to cover any dilution from share-based comp awards. And beyond that, I would say opportunistic between what may come up in M&A pipeline and what incremental opportunities there are for other share buyback.
Was the order of those things that you went through of it, would that be the priority?
That is roughly how we think about priorities.
Buyback, you said buyback before M&A. That is important.
Well, it is. And we toggle between those two. Obviously, if another WGNSTAR were to come up, for example, we would take, that would be heavy consideration for us. But we would toggle between the two.
Yeah. It is interesting because, yeah, I mean, the stock has been, you guys have bought it in the 40s, now we are over 50, and so there is always the daily price that you have to weigh to get that as well too. Just in terms of other things in the business, like fundamental things like ability to find labor. This was obviously a huge problem after COVID. Nobody wanted to work. It feels like a more normal environment. Correct me if I'm wrong, has anything changed in the labor environment?
I would say relative to our core business, we are pretty much back to normal. You recall we had a couple year period there where, number one, you couldn't find labor. Number two, if you found it was very expensive. We were seeing double-digit wage increases on a year-over-year basis, and that's tough for our business. I think the core business labor's largely back to normal from a supply perspective. Where it's not, but where we're really focused, is in the technical side of the business, specifically, as Paul mentioned, the semiconductor space, data centers. That is a really skilled technician that's required to work in those spaces. What we've done a nice job of, as Paul alluded to, is really investing in the training centers. We're heavy in the vocational schools.
We have an employee base of 100,000 employees, many of which we can pull through these programs. They may be cleaning buildings today, but they may have the aptitude to get into more technical skill base.
That's something you do.
We are starting to pull those folks through the programs.
Is that like something that gets identified, like hard worker, trustworthy, shows up on time? Not something you always find if you are totally honest, though.
Intellectually curious.
Yeah.
Right? All of those qualities. They are prime candidates to cover what is really the most gating factor for us in semiconductor and data center, which is being able to provide the technical resources to do the jobs.
Interesting. All right. We will look forward to hearing more about that. We have a couple minutes if there is any questions from the audience, but we also do have a breakout session too. There is one here.
There has been, I think, companies like Tennant here and also SoftBank as a platform, cleaning capabilities that are autonomous. Are you starting to incorporate that kind of technology to supplant labor?
Yeah. We definitely have an innovation group, and robotics is something we study every day of the week. We have some floor scrubbing robots deployed, probably a couple hundred across the country. We are testing that technology. It is a little early right now, but we have an intense focus on it because we do believe it is going to become part of the equation in the future. Yes.
[audio distortion] in terms of its potential, or is it a rounding error in the overall issue of labor?
Yeah. For today, it is a rounding error. But I would say if you look two, three, four years from now, I think it could be a much more meaningful. What form that comes in, whether it is, some people think humanoid robots, others think more machine-based robots, that is to be determined. But clearly the scale of growth there is accelerating.
Yeah. Where it lends itself right now in our business is more around the large facilities with open spaces. Think distribution centers, think airport terminals. But we do a lot of multi-tenant office space where it is cubicle designs and every floor is a little bit different. So it does not lend itself quite there, but the technology is catching up pretty quickly. So, it is definitely going to be a different conversation in a couple of years, I think.
Well, great. We will leave it there. We can take more questions in the breakout. The breakout here is in Levante. It is here on the 12th floor. I believe it is kind of down the way here. So, thank you guys for joining and see you-