ABM Industries Incorporated Stock

Greetings. Welcome to ABM Industries Third Quarter 2026 Earnings Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll turn the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Thank you. You may now begin.

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.

But 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 in 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'm particularly pleased with this quarter is our execution on profitability and cash flow. The cost actions we've 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've been very focused on restoring our performance, and the progress is increasingly visible in our results. Given our performance through the first 9 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 9 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. So 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 believe 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 bull's eye in the semiconductor facility. Historically, ABM has operated around the bull's eye, providing a broad range of services. With WGNSTAR, we now have the highly specialized technical capabilities to operate inside the bull's eye 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 9 months and more than doubled when including almost 2 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 sides of the business since entering the market in 2022. Through the first 9 months, revenue grew 17% organically. The underlying demand drivers remain compelling as clients increasingly invest in power resiliency and redundancy. We're 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 or primary backup power for the 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 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. With the Business & Industry, the trends we discussed last quarter remain largely intact. And 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. And 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 the 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.

And finally, in Technical Solutions, the underlying market fundamentals across energy resiliency, data centers and HVAC remains strong. As I mentioned earlier, Q3 was affected by certain project deferrals of 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.

So as we enter the fourth quarter, I will leave you with 3 things. First, the majority of our end markets remain healthy. And where we do have pressure, we understand the issues and are actively managing them. Second, our operational execution continues to improve. Margins increased sequentially, cash flow has strengthened considerably, and the cost actions we've been taking are showing up in our results. And 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 in 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.

And with that, I'll turn it over to David.

Thanks, Scott, and good morning, everyone. Let's start on Slide 7. 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. I'll get into the segment details in a few minutes.

Turning to Slide 8. 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. Adjusted net income was $61.5 million or $1.04 per diluted share versus $51.7 million or $0.82 per diluted share last year, reflecting increases of 19% and 27%, respectively. These significant year-over-year increases primarily reflect higher segment operating profit, lower tax expense and reduced ongoing corporate costs, partially offset by higher interest expense. Per share measures were further benefited from share repurchase activities completed earlier in the year.

Adjusted EBITDA increased $13.8 million or 11% over the prior year to $139.6 million, driven by higher segment operating profit and lower corporate costs. Segment operating margin increased 40 basis points sequentially to 7.7%. On a year-over-year basis, the segment margin was essentially flat as operational efficiencies in B&I, M&D and Education were offset by anticipated pressures in Aviation and higher amortization expense related to the WGNSTAR acquisition. Excluding acquisition-related amortization, margin would have been 7.8%.

Now let's turn to segment performance, beginning with Slide 9. B&I revenue declined 2.6% in the third quarter, as expected, driven by the Q2 exit of a large U.K.-based client and the impact of certain other client exits, particularly on the West Coast. We expect revenue trends to be similar in Q4, so we anticipate continued incremental margin improvement as our operational actions take further hold. Operating profit increased to $75 million and margin expanded 30 basis points year-over-year to 7.4% compared to $73.8 million and 7.1% in the prior year period. These improvements primarily reflect cost actions and operational improvements, along with the benefit of lapping certain lower-margin contracts entered into in the third quarter of last year.

Aviation grew 12% to $328.1 million, supported by healthy travel demand and the continued ramp of our Heathrow contract. Operating profit was $18.4 million with a margin of 5.6% compared to $19.7 million and 6.8% last year. Profit and margins were pressured by airline clients who are reacting to elevated fuel costs by seeking cost relief from their service providers. We factor this into our outlook and are actively managing the pressure through operational efficiencies.

Turning to Slide 10. M&D generated $481 million in revenue, an 18% increase year-over-year, including organic growth of 8% and 10% growth from the WGNSTAR acquisition. The strong organic growth was driven by continued client expansions across the segment. Operating profit was $40.5 million with a margin of 8.4% compared to $36.4 million and 8.9% last year.

On a year-over-year basis, the margin change primarily reflects ongoing investments in sales and industry expertise talent to support our long-term growth strategy as well as nearly $4 million in incremental amortization expense connected with the WGNSTAR acquisition. Excluding incremental amortization, margin was 9.2%, which we view as a solid base from which to expand as we outgrow the amortization and continue to cross-sell higher value solutions to our semiconductor and technology clients.

Education revenue rose slightly to $235.8 million and delivered excellent operating performance in the quarter, which is the seasonally strongest for profit and margin. Operating profit increased 9% to $23 million, and margin expanded 70 basis points to 9.7%. This improvement was driven by enhanced labor efficiency and effective escalation management.

Technical Solutions third quarter revenue was $259.9 million, up 4% year-over-year, including 2% organic growth and 2% from acquisitions. Organic growth reflected strong HVAC and battery energy storage system activity, partially offset by certain project delays in our microgrid business, driven by an important client. These delays were compounded by a difficult comparison against a very strong third quarter last year. Operating profit was $21.5 million with margin at 8.3% compared to $19.4 million and 7.8% last year. The increase in operating profit and margin was mainly driven by positive service mix, partially offset by impacts in our microgrid business due to project delays.

Looking to the fourth quarter, we expect significant sequential increases in revenue, operating profit and margin on higher microgrid activity as projects that shifted out of the third quarter move forward. As we discussed earlier in the year, the back half of the fiscal year and specifically the fourth quarter has historically been the strongest operating quarter of the year for Technical Solutions. This year will be no different.

Now turning to Slide 11. We ended the quarter with total indebtedness of $1.8 billion, including $22 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.9x. We achieved our goal of leverage being below 3x a quarter earlier than originally planned, reflecting strong sequential progress, driven by our robust cash flow.

We expect to drive leverage even lower by year-end. Available liquidity stood at $606 million, including $110 million in cash and cash equivalents. During the quarter, we closed on a $300 million accounts receivable facility. This diversifies our funding sources and reduces our marginal cost of borrowing relative to our existing revolving credit facility and also represents a meaningful enhancement to our overall capital structure.

As Scott mentioned, we had a very strong cash generation quarter, which has long been a hallmark of ABM. Third quarter cash from operations was $146.8 million, and free cash flow was $128.4 million. For the first 9 months, cash from operations was $275 million, and free cash flow was $199.6 million versus cash from operations of $101 million and free cash flow of $42.4 million in the prior year period. This represents an improvement of over $150 million in free cash flow during the first 9 months, driven by strong working capital management and ERP stabilization. As a result of our progress on cash generation year-to-date, we're raising our full year free cash flow expectations, which I'll discuss in a moment.

Interest expense in the quarter was $29.5 million, up $4.2 million from last year, reflecting larger average debt balances driven by our WGNSTAR acquisition. This was partially offset at the net income level and lower tax expense, which was $4.1 million below last year, reflecting certain discrete tax benefits recognized in the quarter.

Turning to our fiscal 2026 outlook on Slide 12. As Scott noted, we're encouraged by the relative health of our end markets while remaining mindful of the broader economic uncertainty. As such, we're raising the midpoint of our fiscal 2026 adjusted EPS range, which is now expected to be $3.95 to $4.10. This raise reflects our strong third quarter performance and our confidence delivering on our fourth quarter expectations.

As a reminder, our full year organic revenue growth outlook is 3% to 4%, and we continue to expect to be toward the higher end of that range. Aviation, M&D and Technical Solutions are expected to grow above that range, while B&I and Education are projected to be below that range. The WGNSTAR acquisition is expected to deliver approximately 1 point of additional revenue growth, bringing total growth to the high end of our 4% to 5% range.

We're modestly updating our segment operating margin outlook to 7.7% to 7.8% for fiscal 2026, reflecting year-to-date performance and slightly higher intangible amortization for WGNSTAR, which, in aggregate, accounts for 10 basis points of operating profit margin impact for the full year. That said, fourth quarter margin is projected to be meaningfully above the high end of that range, reflecting the anticipated seasonal improvements in ATS mix and the continued benefit of our operational actions across the portfolio.

Our forecast for interest expense remains at approximately $110 million and our normalized tax rate before any discrete items, including the possible extension of the work opportunity tax credit program, is still expected to be 29% to 30%.

As I mentioned earlier, we're encouraged by our progress generating cash and are raising our full year expectations. We now expect normalized free cash flow of approximately $285 million in fiscal 2026 before the impact of transformation and integration costs, final RavenVolt earn-out and any incremental restructuring.

On a reported basis, free cash flow is expected to be approximately $210 million versus our prior forecast of $185 million, a $25 million improvement that reflects the strong working capital performance we've delivered through the first 9 months of the year. I also want to take a moment to recognize the efforts of our operators and our finance and treasury teams who drove outstanding third quarter cash flow. These results are a product of discipline and focus on the fundamentals of working capital management.

With that, Scott, I'll turn it back to you for closing remarks.

Thanks, David. Let me close with a couple of thoughts. We feel good about where ABM stands today. Our core business remains resilient. Cash flow has improved significantly, and we are making progress on margins and operating efficiency. At the same time, the investments we've made in semiconductor, microgrids and data centers have created meaningful growth platforms in markets where we believe demand will remain strong for years.

As we move towards fiscal 2027, our priorities are straightforward. Finish this year strong, execute on the opportunities already in front of us, continue improving margins and cash flow and allocate capital with discipline.

And finally, I want to thank our team. More than 100,000 people show up every day and deliver for our clients. Ultimately, the results we are discussing today come from their execution, expertise and the trust they build with our clients.

We look forward to sharing our fiscal 2027 outlook when we report fourth quarter results.

With that, we'll open up the line for questions.

[Operator Instructions] And our first question is from the line of Tim Mulrooney with William Blair.

Yes. Scott, I'm going to start off here with your high-tech business, your semiconductors, data centers, microgrids, they're 11% of your business today. But I'm curious, what do you think that will represent in terms of your sales mix a couple of years from now? I know these high-tech sectors are growing faster than the rest of your business, but I also know the microgrids can be lumpy. So I'm really curious to get your broad thoughts on that.

Yes. So look, we're still super optimistic about that area of work. And it's going to continue becoming a more and more meaningful part of our business, just by the fact of the mix, right? Because it's growing double digits, where some of our other segments are more of GDP or GDP plus. So we will continue to be meaningful. And we also continue to invest in because it's not only executing on the work, which you have to do, obviously, in the highest of fashion. But we're hiring experts that understand this business. We're hiring sales associates. So this is an area that we think has a lot of trajectory for years and years to come.

And what -- okay. And what did you say -- how the profitability of these 3 businesses combined compares to your corporate average?

Yes. So this is -- we're talking about double-digit versus our average, which is typically in the low single digits. In terms of -- and that was more on the growth side, I should say. But you know where our EBITDA margins are in comparison to us. In a lot of cases, it could be double in these markets.

Yes. Okay. Appreciate that. David, I had one for you on the cash flow guide and then I'll hop. I think last time you communicated about this, you said you were targeting $250 million of free cash flow less, I guess, $55 million of nonrecurring cash expenses. So really, it was like $185 million, and now you're saying $210 million, which is $25 million higher. Is that right? Is all of that right? Is all that apples-to-apples?

Yes, Tim, you got it right. So $210 million on an as-reported basis is the number we're targeting. As you said, we're really pleased with where we landed cash flow for the quarter and our raise of guidance there.

Yes. No, it looks great. I just want to -- you kind of -- felt like you're changing the way we're talking about a little bit here. Before, it was like pre all of that stuff, and now it's, just on a reported basis, $210 million. Why did you raise the free cash flow guidance? Was it due to higher operating cash flow than you were expecting before? Or is it due to fewer of that $65 million bucket of nonrecurring charges than you previously thought?

I think the way to reflect on it is we had a really strong working capital quarter. Specifically, I think from my perspective, the good news is we're starting to really leverage some of the capabilities of the new system. And in doing so in the quarter, we're able to accelerate some of the collections for the quarter. So it's just another step to stability on our transformation. And ultimately, that was the driver for the cash flow performance.

Yes. Good execution. Congrats on a nice quarter.

The next question is from the line of Justin Hauke with Robert W. Baird.

Great. I guess I wanted to go back to the ramp in the fourth quarter. And Scott, I appreciate, you kind of walked through some of the moving pieces. But I guess I'm just curious on the deferred projects, just how much is already -- given that we're halfway through the quarter, I mean, how much has already started? Is there anything that needs to still start? I'm just trying to understand the line of sight and the visibility on those deferrals.

Sure. And again, before I even answer that, you know we don't really look at this quarter-by-quarter. Year-to-date, in terms of just ATS in general, we have 10% year-to-date growth in the microgrids and those projects are in that segment. But this quarter, it was about $15 million in deferrals. And largely, almost all of those projects are going to land in Q4, a little bit in Q1 of next year. But we're already turning wrenches on those projects. So we're still not waiting to see if the deferrals are going to be put into action. So we're actively working on them now. And you think what you're going to see in Q4 is double-digit organic growth in ATS.

Okay. That's helpful. And then just on the Aviation, the margin concessions that you talked about with the fuel pressure that the airlines are seeing. And I appreciate that color that the -- 60% of what you do there now is with the airports and not the airlines. But can you quantify just what impact that had on the margin in the quarter?

Well, without going into too much detail, I will tell you, like just first to level set, the segment is still really strong. Demand is strong. And I guess the best way to look at this is that we feel like that pressure is stabilizing. Sequentially, the margins -- a little -- actually this quarter, a modest improvement. So we feel like a lot of that impact is behind us, and you'll start seeing us accelerating over time. Now once we get a little bit of relief on fuel costs.

Okay. And then I guess my last one, just an -- I mean, because you're growing the -- all the high-tech businesses so fast, the 26% organic growth year-to-date that you called out in the release. Obviously, the intangible amortization that's been weighing on the manufacturing and distribution segment. But I guess, maybe it's a question for David. But can you remind us what's the bridge, the intangible for this year? And then how much of that falls off next year, given that, that's such a high-margin segment?

Yes. We had about $12 million allocated to this year for the intangibles for next year. We'll have some modest falloff of that next year. But I think what I'm most excited about ultimately about WGNSTAR is, you may recall, we guided to roughly $120 million to $130 million of annualized revenue for WGNSTAR. They're tracking well above that now, and we see that kind of growth rate continuing into next year. So the good news is an enhanced growth rate will help us continue to outgrow the amortization expense.

Yes. And I would also point out that we've already had 2 or 3 cross-sells over such a short period of time, which is really part of the thesis of this, and you heard in my prepared remarks how inside that bull's eye of the fab and outside, and now when you think about that and you say that, well, ABM has about 50 semiconductor clients that we were dealing with prior to WGNSTAR, WGNSTAR has 30-plus clients. So to be able to start cross-selling this, we're just seeing the start of it, but it's really positive.

The next questions are from the line of Faiza Alwy with Deutsche Bank.

Scott, I want to follow up on the high-growth end markets. I know you've mentioned that there's a blend of project and recurring revenue. I'm curious if you could expand on that, like how much of your revenues are recurring? And is there a way to shift more of it to recurring? I guess I'm curious under what circumstances is the project-based versus recurring?

Yes. So I mean -- so the goal is to make it more recurring. And kind of what that means on the most basic level is you do a project, and instead of walking away, you get a maintenance contract where you stay a client for the long term. And then hopefully, not only are you getting that revenue, but as other projects come up, you're right in the sweet spot for that. So that's a big focus of ours in the whole ATS areas, how do we, over time, blend the mix to be more recurring revenue.

Yes. And Faiza, this is David. I would say, right now, roughly 15% to 20% of that revenue is on a project basis, which is still great for us because it means we're staying really connected with the client at good margins. And as Scott mentioned, over time, we'd like to return that to the recurring business longer-term contracts. But make no mistake, having a line of sight into this project work in this space is really important for us.

All right. Great. That's very helpful. And then just on the -- you have strong cash flow improvement this year. I'm curious if you have -- I know it's early and you're not giving a '27 guide or anything like that. But David, as you look at kind of where we are, how should we think about cash flow in 2027? Are there any sort of big expense items or anything else that we should keep in mind?

No big expense items out of the ordinary, I would say. Obviously, as I mentioned earlier, we're very, very pleased with our performance year-to-date on cash flow. When I step back and think about it, we've funded a roughly $250 million acquisition. And within the last 9 months, used $100 million of our capital to buy back shares and have $51 million of dividends, all the meanwhile driving below 2.9 -- driving below 3x levered at the end of the day. So we're excited about that. And I think -- I don't think there'll be any surprises next year relative to cash flow, but we look forward to come back and talk to you about that in December.

The next question is from the line of David Silver with Freedom Capital Markets.

Yes. I guess first question, I would like to go back to Slide 6 and your discussion of your opportunities in technology. And in particular, I wanted to focus on the data center panel. So in my view, I mean, that's an area where there's a tremendous amount of growth or build-out that's going to occur over the next handful of years. From your perspective, Scott, maybe 2 questions. One is, have you been bidding for business for data centers that are kind of under construction? Or what is the cadence on contract, your pursuit of contracts and when they get awarded?

And then secondly, taking up your analogy of the bull's eye and the target and everything, is quality uptime kind of, in some sense, your path to getting inside the bull's eye of the more significant data center projects? And if that's the case, can you expand that geographically organically? Or is this the case where you're going to be looking for maybe similar service companies targeted -- in targeted geographies?

Sure. Sure. So as it relates to the data center question first, we have been doing a lot of mining in that area and we're bringing on sales assets for that, too. So -- and I think I've said in my prepared remarks that the 8% organic, I don't believe it's reflective of what we see over the next 2 or 3 years. In fact, our pipeline right now is a multiple of where it was at this time last year. So we're really optimistic that, that will be, over time, very, very healthy double-digit growth in data centers.

And then with quality uptime, that's largely UPS power, which -- I think I've said this before on the call, but think of that as the transition between the power going out and the generator starting or the microgrid starting up, right? You would need these UPS batteries to transition through. So the way to think about quality uptime, it's just a big piece of the puzzle. It's a really important part. As we go selling to data centers, as we go selling to big retailers, anyone who's looking for power generation is also going to be looking for UPS power for the transition. So quality uptime is very, very important to the piece to the puzzle. From our perspective, it was a very strategic acquisition for us.

And David, I would add, from a pipeline perspective, really the co-locators are our main target in the data center space. That's where we see the fastest and most robust part of our pipeline growing here in the near term.

Okay. Great. I'd like to -- if you don't mind, I'd like to swing over to some of your comments about, I guess, over the last couple of quarters, but about just developments in the California market, in particular, or maybe the West Coast. But really, California, I mean, it is kind of a foundational business for your company. And then not too long ago, you did do the big Able Services acquisition. And certainly, there's a lot of headlines about business trends in that area in that geography. So just from a big picture perspective, Scott, I mean, what are the keys to kind of -- optimizing what you're doing in that geography here? I mean are the pressures more on the Able -- the integrated services side? Or is it more just standard B&I? And where do you think the opportunities are when the dust settles a little bit from the trends you're seeing?

Yes, that's a good question. I'm glad you brought that up because I want to make sure it's clear that this isn't what we view as a systemic problem. It's really now migrated to Northern California. We had pressures early in the year in Southern California. That's stabilized. That's behind us now.

In Northern California, it's just -- it's part of a trend right now, even though there's strong growth in that market from AI. It's not a people-heavy business. And as we go through those spaces, there's still a lot of work from home. And what's end up happening, which is a unique thing right now, and it started in Southern California, now NorCal, which is the competitors are just pricing at places that we're just not willing to work out.

And this has been a theme, David, as you know over the last decade, about ABM not wanting to work for free, right? And so we think this is not systemic. We think you'll see this reverse. If the trend of what happened in Southern California holds in NorCal by mid next year, we think this -- all of this will be behind us. And the proof in the pudding on this is you look at B&I and our margins were up 30 basis points, so sequentially from quarter-over-quarter. So we're heading in the right direction. We're making the right decisions. And we talk internally about no regret decisions and this falls into it. So again, not systemic.

The next question is from the line of [ Brianna Camden ] with UBS.

This is Brianna for Josh Chan. I guess on the outlook, can you maybe talk through why EPS midpoint is higher if margins are lower and most of the other items stay the same?

Yes, sure. So I think it just reflects where we are 9 months through the year. We have a good line of sight on what we think the revenue is going to be for the full year. And we have a very prescriptive approach to margins in our forecast. I think you could expect margins north of 8% in the fourth quarter, and that tracks to basically what we did last year at 8.2%. And as you know, Q4 has just been historically a very seasonally strong quarter for us. So it gives us that confidence.

Can you touch a bit more on confidence around the margin ramping at Q4? And then maybe -- I know there's no guide for next fiscal year, but how should that accelerate in the Q4 going forward?

Yes. I think the biggest margin accelerator in Q4, which has been very, again, historically consistent, is the ATS business has done anywhere between 11% and 13% operating profit margin for the last 2 quarter [ 4s ], in 2024 and 2025. We don't see this year being any different. In fact, we're really encouraged by the health of the backlog and what we're seeing early -- as an early start in the quarter. So that's the single biggest driver.

The next question is from the line of Marc Riddick with Sidoti & Company.

I wanted to touch on some thoughts as to the pricing dynamic that you're seeing in some of the key service areas and visibility there because it seems as though there's some crystallization that's beginning to form. But maybe you could talk a little bit about your comfort level as far as pricing and as well as the revenue mix benefit on that? And then I have a quick follow-up.

Yes, we're really positive on our pricing approach. We have -- for medium-sized large contracts, we have a pricing council that goes through and we have hurdle rates that you have to hit. So that's been super helpful in terms of discipline escalations, really important part of our mix on pricing. We have to go out there every year and get wage escalations, and you know that's always been a historic strong point for ABM even in times when there was significant labor pressure. So it's a muscle strength we've built. So we don't think there's anything dynamic happening in the market that's going to hurt us from a pricing standpoint. If anything, I think we've just gotten stronger and disciplined year-over-year after year. So we feel really good about that.

Great. And then shifting gears over to Aviation. I really appreciated the commentary as far as the airport airline and what's going on with the airlines. Maybe talk a little bit about that mix shift that you've accomplished over the years and sort of maybe where you see that maybe settling out? What sort of a reasonable -- I mean we're at 60-40, I guess, now with airports and airlines. Maybe you could talk a little bit about what might be a reasonable target or a view and maybe the kind of time frame that you might have in mind there?

Yes. It's kind of hard to predict, to be honest with you. I know our focus is on that. And if it landed 3 to 5 years from now, it's 70-30, I think we'd all be happy with that. And I think that's -- it's not necessarily even a reflection that we think the airlines are going to be weaker. I think there's going to be so much infrastructure going on in airports.

I think there's going to be an opportunity as airports upgrade around the country that they're going to want more enhanced services, and they're going to want the kind of service that we perform at LaGuardia, which we've talked about, where we're kind -- an integrated approach. So 70-30 is not necessarily scientific. It's just kind of a sentiment that we're thinking over time, but there's a lot that can happen in that industry. But we love the way we've been heading.

The next question is from the line of Tate Sullivan with Maxim Group.

A couple of follow-ups, Scott. In the prepared remarks, you mentioned an award for the microgrid work for the Army Corps of Engineers. Is that a long-time customer of ABM? Is it related to an acquisition? I think you had a previous announcement with them, but just check in, please.

Yes. No, this is part of a -- they're not a long-term client for us, which is even more exciting. Actually, it's part of a joint venture that we went in to pitch this with another company. So we're a component part of this. But it's really thrilling because the provider picked us to partner with because of the work that we do in microgrids. And as you can imagine, with the Army Corps of Engineers, we think there is a big addressable market within the government on these types of projects. So hopefully, this is the beginning of a really healthy future over time.

And a follow-up on Aviation. You mentioned cost relief from the customers are seeing costs, but the revenue growth has been double digits the last 3 quarters. Are you continuing to see good traffic in the airports you're working?

Yes. I mean the pipeline is strong. Whether or not it will be double digit, we'll do more when we talk to you in Q4 as we shape up and look at the pipeline. But we feel really good about that segment. It's been a good performer. And we're in this mode now with fuel costs and some of the pressures on airline profitability that -- hopefully, what's going to inure to our benefit is that we've been really good strategic partners, and we've made the concessions that we needed to make to kind of stabilize and hopefully grow those longer-term relationships. So it's things that you do in the airline industry when they go through these cycles. And we've all seen them before. So, yes. Well, it's nothing, again, that is troubling to us over the long term.

Yes. Tate, I would add too, obviously, a good chunk of the revenue growth in Aviation and the start-up of the Heathrow contract in the U.K., which has been very successful for us. So as Scott said, we're just really, really happy with the growth profile there, and we'll continue to manage the operational challenges.

And just on that -- you mentioned, Heathrow. Can you comment on your international mix with the U.K. -- after the U.K. client exit that you mentioned return to organic growth in B&I with Heathrow or can you quantify the international contribution?

Yes. I mean, I would say it hasn't actually changed a whole lot. The loss of the TfL contract is a pretty good balance with the win of the Heathrow contract. So all in all, not a big mix change. But if you do look at the U.K. market specific to itself, we are seeing some healthy growth rates over there and we're continuing to invest in that team. The team has done a great job of driving growth and profitability. So a great market for us.

At this time, I'll turn the floor back to Scott for final comments.

Well, thanks, everybody, for joining in. I hope you have a happy fall. And everyone's back to work now, summer's over, and we will see you in Q4 with our results and our full year guide for '27. But thanks, everybody.

Thank you. This will conclude today's [Audio Gap].

Greetings, and welcome to the ABM Industries Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host Paul Goldberg, Senior Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to ABM's Second 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 second 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.

But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates and other forward-looking statements. Our words of these 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.

And with that, I would like to now turn the call over to Scott.

Good morning, everyone, and thank you for joining us to discuss ABM's second quarter fiscal 2026 results. We had a strong quarter. Organic revenue growth came in at 6.1% and I'm especially pleased to report that our first half new sales bookings reached $1.2 billion, a new record for ABM. Organic growth was especially strong in Technical Solutions and Aviation, while in M&D, we saw healthy underlying organic demand complemented by the WGNSTAR acquisition, which is performing well and adding meaningfully to the segment's results right out of the gate. Education continued to post steady growth, and B&I was flat organically. B&I was impacted by the exit of a large U.K. client during the second quarter and by our decisions to exit several other clients, especially on the West Coast, where commercial real estate markets have yet to fully recover creating pressure in the market.

Stepping back from the top line for a moment, we also executed well operationally. Margins improved sequentially and free cash flow was up significantly in the first half compared to last year, which I'm very pleased with. As we look ahead to the second half, the setup is compelling. We expect volume to ramp meaningfully in both ATS and M&D and service mix within ATS in particular, should improve as the project pipeline matures and our backlog execution ramp sequentially. Layered on top of that, our cost discipline and price escalation actions are gaining traction. Taken together, we expect these drivers to produce a significant step-up in both earnings and margin as we move through the back half of the year.

While the near-term macroeconomic environment remains dynamic, ABM operates in markets that offer a compelling combination of secular growth opportunities in areas like energy infrastructure, semiconductors and airport modernization alongside the steady, predictable revenue streams that have always been ABM's foundation. When taken together with the strong operating culture we have in place, ABM is well positioned to capture the long-term growth opportunities ahead.

So let me share more. Within Business & Industry, the prime office recovery continues to gain traction, although as mentioned, the market is still experiencing some softness on the West Coast. U.S. office leasing is approaching 2019 levels. Net absorption turned significantly positive in the first quarter, the strongest since 2020 and prime vacancy rates continue to tighten. New supply remains extremely limited with the construction pipeline nearly 90% below its 2020 peak. The flight to quality dynamic continues to favor exactly the types of prime assets where ABM is concentrated, and we expect to see positive spillover into the next tier of high-quality buildings.

This dynamic is translating into real wins. Last year, we were selected to service the new headquarters of the nation's largest bank here in New York City, and we recently followed that with a significant new facilities contract with another of the nation's leading commercial banks. These wins reflect both the strength of the office recovery and the confidence that world-class clients are placing in ABM.

Turning to M&D. The semiconductor build-out may turn out to be one of the most compelling growth stories in American manufacturing in 21st century, over $645 billion in private investment has been announced across 140-plus projects since 2020 with major commitments from companies such as TSMC, Micron, Intel, Samsung and Texas Instruments. The WGNSTAR acquisition has significantly strengthened our presence in semiconductor fabrication environment and the benefits are already becoming evident. During the second quarter, we secured tens of millions of dollars in new business and delivered high double-digit organic revenue growth across our semiconductor market. And beyond semiconductors, e-commerce growth and U.S. manufacturing reshoring continue to support healthy demand across the segment, which will continue to benefit us.

In Aviation, the fundamentals remain strong. TSA throughput is running close to 3 million passengers per day and leisure demand remains robust. Airport infrastructure investment is at elevated levels as aging terminals drive a sustained modernization pipeline and our recent wins at Orlando International, Miami International and LaGuardia Terminal B reflect the strength of that pipeline. While rising fuel costs will likely create some near-term challenges for our airline clients, the long-term trajectory of this business is positive and our pipeline of new opportunities continues to evolve.

In Education, the numbers tell a compelling story. K-12 schools in this country averaged 49 years in age. There is an $85 billion annual funding gap for repair and modernization, and higher education construction spending in that area continues at near record levels. These dynamics should create durable long-term demand for ABM services. Our strong retention rates and ABM Performance Solutions offering position us to capture an increasing share of this opportunity, and our recently awarded $25 million Detroit Public Schools contract is a tangible demonstration of that.

And in Technical Solutions, the tailwinds are as strong as we have seen, nationwide battery storage installations were up 52% in 2025. AI is accelerating data center construction at double-digit pace globally and microgrids are becoming essential infrastructure for the modern electric grid. This is precisely where ATS is most differentiated, sitting at the intersection of energy resiliency, electrification and AI infrastructure. Another recent microgrid win with a major big-box retailer, along with a variety of other energy storage and infrastructure projects booked this quarter are proof points of what we believe will be a multiyear growth cycle for this segment.

Now looking specifically at the remainder of the year, we expect strong results in Technical Solutions driven by higher volume and improved mix. M&D is also expected to deliver robust results as new business continues to come online and WGNSTAR ramps up. Education will continue to be solid. B&I revenue will likely moderate in the back half of the year due to client exits, including the large U.K. client I previously discussed. And in Aviation, while air travel demand remains robust, we are watching the potential impact of rising fuel costs on our airline clients.

Overall, though, our end markets remain largely constructive and we continue to closely monitor the evolving macroeconomic environment. We remain focused on reducing leverage to below 3x, maintaining a disciplined approach to capital allocation and executing against our full year outlook as we operate with focus and financial discipline.

With that, I'll turn it over to David.

Thanks, Scott, and good morning, everyone. Let's start on Slide 6. Revenue grew 8.4% year-over-year to a second quarter record of $2.3 billion, driven by 6.1% organic growth and a 2.3% contribution from acquisitions, primarily WGNSTAR. Consolidated organic growth was the strongest we've delivered since Q3 of 2022, with Technical Solutions and Aviation leading the way.

By segment, Technical Solutions grew revenue 27%, Aviation was up 20%, and Manufacturing & Distribution grew 17%. Education grew 2%, while B&I was essentially flat. Overall, we remain pleased with the growth trajectory of the business, reflecting the resiliency and diversity of our end markets as well as our investments in sales talent and industry expertise, which helped deliver record first half new sales bookings of $1.2 billion.

Turning to Slide 7. Net income for the quarter was $43.1 million or $0.73 per diluted share compared to $42.2 million or $0.67 per diluted share in the prior year period. Adjusted net income was $52.9 million or $0.90 per diluted share versus $54.1 million or $0.86 per diluted share last year. These year-over-year changes primarily reflect higher interest and amortization expense, offset by lower tax expense and corporate costs, per share measured were boosted by our recent share repurchase activities.

Adjusted EBITDA increased $5.8 million over the prior year to $131.7 million. Segment operating margin increased 20 basis points sequentially to 7.3%. On a year-over-year basis, segment margin decreased 60 basis points primarily reflecting the impact of contracts that came online last year in M&D and B&I as well as higher amortization expense related to the WGNSTAR acquisition. We expect healthy sequential margin improvement in the third and fourth quarters, driven by improved mix in ATS and our ongoing price escalation and cost actions.

Now let's turn to segment performance, beginning with Slide 8. B&I revenue was essentially flat with last year at $1 billion. This performance was driven by overall strength in our U.K. markets, partially offset by the mid-quarter exit of a large U.K.-based client and the impact of certain other client exits, particularly on the West Coast. Looking forward, we expect growth to moderate in the back half of the year, primarily due to the full run rate impact of the previously mentioned client exits. Operating profit was $76.7 million and margin was 7.6% compared to $83 million and 8.2%, respectively, last year. This margin change primarily reflects shifts in contract mix, along with increased investments in sales resources to support long-term growth. Margin improved 10 basis points sequentially as we continue to make progress on our cost and price escalation actions.

Aviation revenue grew 20% to $310.8 million, supported by a healthy travel demand and the ramp of new contract wins, particularly our new Heathrow contract. Looking to the back half of the year, organic growth will remain strong, but moderate from Q2 as we anniversary several large contracts that were brought on in Q3 of last year. Operating profit was $16.3 million, with a margin of 5.3% compared to $16.5 million and 6.3% last year. Profit and margin were pressured by incremental weather-related costs, certain contract scope changes and TSA-driven operational disruptions during the quarter as well as by ramp-up costs for the new Heathrow contract.

Turning to Slide 9. M&D generated $463.8 million in revenue at a 17% increase year-over-year, including organic growth of 7% and 9% growth from the WGNSTAR acquisition. The strong organic growth was driven by recent contract wins, particularly in the technology sector, along with continued client expansions across the segment. Operating profit was $40.6 million with a margin of 8.8% compared to $39.9 million and 10% last year. As anticipated, margin increased 20 basis points sequentially. On a year-over-year basis, the margin change reflects the mix of new contracts secured last year that are helping to drive organic growth. Margin was also impacted by $4 million in incremental amortization expense connected with the WGNSTAR acquisition. Excluding incremental amortization, margin was 9.6%, which we believe better reflects the underlying long-term earnings power and margin profile of the segment.

Education revenue rose 2% to $232.2 million, primarily driven by escalations. The segment delivered strong operating performance with operating profit increasing 19% to $16.4 million and margin expanding 100 basis points to 7%. This improvement was driven by enhanced labor efficiency and effective escalation management. Our Education team continues to execute at a high level and win meaningful new business, such as a large ABM Performance Solutions contract from the Detroit Public School System, which will come fully online in the fourth quarter. We also expanded our scope with the University of Miami, a long-standing and important client. Looking ahead, we expect margin to improve in the third quarter, which is always a seasonally strong period for Education.

Technical Solutions second quarter revenue was $267.3 million, up 27% year-over-year. including 22% organic growth and 6% from acquisitions. Organic growth reflected robust activity in our data center markets as well as strong growth in battery energy storage system and HVAC project activity. Additionally, we booked significant new microgrid business in the second quarter with a major big-box retailer, which supports our expectations for a strong second half in terms of revenue and mix. Operating profit was $16.8 million with a margin at 6.3% compared to $13.4 million and 6.4% last year. The increase in profit was driven by significant volume growth, margin primarily reflected service mix that was less weighted to design and engineering and more weighted to equipment-intensive infrastructure project services as well as ongoing investments in growth. We expect the service mix to improve in the back half of the year as has been our historical performance cadence within Technical Solutions.

Now turning to Slide 10. We ended the quarter with total indebtedness of $1.9 billion, including $23 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 3.2x. Available liquidity stood at $614 million, including $95 million in cash and cash equivalents. As expected, the WGNSTAR acquisition pushed leverage above 3x in the second quarter, and we expect to work it back down under 3x by the end of our fiscal year.

Second quarter cash from operations was $66.2 million, and free cash flow was $22.4 million. For the first 6 months, Cash flow from operations was $128.2 million, and free cash flow was $71.2 million versus a use of cash of $73.9 million and negative free cash flow of $107.8 million in the prior year period. This year-over-year improvement of approximately $180 million during the first 6 months was driven by strong working capital management efforts and continued progress on our ERP stabilization.

Now turning to capital allocation. As mentioned, we're focused on reducing our leverage below 3x. And as such, our near-term priority is debt repayment, but we'll remain flexible as potential value creation opportunities present themselves. At quarter end, $89 million remained under our existing authorization. Interest expense in the quarter was $28.1 million up $4.2 million from last year, reflecting larger average debt balances driven by our WGNSTAR acquisition.

Turning to our fiscal 2026 outlook on Slide 11. As Scott noted, while we remain encouraged by the relative health of our end markets, we're mindful of broader economic uncertainty. Accordingly, we're maintaining our previously communicated fiscal 2026 adjusted EPS outlook. As a reminder, our full year organic revenue growth outlook is 3% to 4%, and we now expect to be toward the higher end of that range. Aviation, M&D and Technical Solutions are expected to grow above that range, while B&I and Education are projected to be below that range. The WGNSTAR acquisition is expected to deliver approximately 1 additional point of revenue growth, bringing total growth to the high end of our 4% to 5% range.

Segment operating margin is expected to be toward the low end of our range of 7.8% to 8% for fiscal 2026 with margin expansion weighted toward the back half of the year, primarily driven by improved mix and volume in ATS. Interest expense is now forecast to be approximately $110 million, driven by higher-than-forecasted interest rates. We plan to offset this headwind with additional cost actions. Our normalized tax rate before any discrete items, including the possible extension of the Work Opportunity Tax Credit program is still expected to be 29% to 30%.

We feel good about our progress generating cash and are confident in our expectations. And as a reminder, we expect free cash flow of approximately $250 million in 2026 before the impact of transformation and integration costs the final RavenVolt earn-out and any incremental restructuring. Putting it all together, we continue to expect full year adjusted EPS to be in the range of $3.85 to $4.15.

In addition, we've been actively implementing operational and process improvements to our insurance program over the last 6 months. We believe these changes will ultimately enable us to better predict the in-year impact of prior year self-insurance adjustments. As such, our full year fiscal 2026 outlook no longer excludes the expected impacts of such adjustments, which we believe provides greater predictability and transparency in our outlook going forward.

And with that, I'll hand it back over to Scott for closing remarks.

Thanks, David. In closing, I'm pleased with where ABM stands. We are growing. We are generating cash, and our end markets are largely constructive. We have more work to do particularly in driving consistent margin improvement, but the trajectory is positive, and the back half of the year gives us real opportunity to demonstrate that. We remain disciplined stewards of capital. Near term, that means staying focused on deleveraging. Longer term, it means continuing to shape our portfolio and invest in areas where ABM can become a more integrated and an important supplier to our clients and generate the most shareholder value. Lastly, I want to take a moment to thank our team. More than 100,000 people show up every day and deliver for our clients, and their commitment is what makes ABM's long-term story possible.

With that, we'll open up the line for questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

So I wanted to ask about your power solutions business here, which seems to be running pretty hot right now with more microgrid activity, I guess, expected in the back half here. But on the second quarter specifically, were there any really large projects in there, like the battery storage system or anything else that had a significant contribution to that 22% organic growth number we saw in the quarter?

Yes. Tim, it's David. Thanks for the question. We did have a really good quarter on the battery energy storage side. There was a couple of large projects, as you mentioned. And those projects carry a little bit different profile, right? They're heavy on equipment, heavy on infrastructure and the margins are a little less just because you've got so much equipment going into the jobs. But we see that momentum continuing on not only those jobs in the second half, but really ramping up our more traditional microgrid work for switchgear and generators in the second half as well.

Yes. And Tim, just to give you a little more build out on that. And I'll go super high level on this, but when you look at our ATS project work, you can almost think of it in two phases. It's like the design and the engineering and then it's turning the wrenches part. And then turning the wrenches part is lower margin than designing and engineering. So when you look at the mix for this quarter when you look at margin, we were heavily weighted towards the turning of the wrenches part. And we think in the back half, what we know in the back half, we're going to have a lot more of the designing and engineering, you'll see the margins ramp in the back half, if that helps a little bit.

Yes. That's really helpful. That was actually my other question I was going to ask about the margin trajectory and the mix. But I appreciate the color there, Scott.

David, maybe I'll follow up with something else in Technical Solutions. I noticed in your slides, you highlighted higher HVAC project activity in the quarter. Now HVAC technicians, we all know right now are in such a high demand nationwide for data center construction projects. I'm curious if you're seeing more work kind of prop up in the building environment on the retrofit side because perhaps some other companies that you'd normally compete with on these jobs are now just solely focused on new data center construction. Are you seeing more opportunities open up?

I would say we're strong across the board. I don't think we're seeing one particular segment versus the other. Obviously, data centers are really strong, but I think we're seeing it kind of broad-based right now, Tim.

Our next question comes from the line of Jasper Bibb with Truist Securities.

I know you raised the organic growth in a bit, but it still implies like a little bit of deceleration in the back half of the year. It sounds like at the segment level, things are mostly running ahead of that range with the exception of B&I due to some client exits, I guess. I'm wondering if the flat growth in the second quarter reflects the full impact of those client exits in B&I or maybe the segment would decelerate a bit more in the next 2 quarters slightly?

Jasper, you're calling from a bad line, maybe you could just repeat that question. Hopefully, it will come across clear. We hardly heard it.

I'm sorry. Hopefully, this is better.

So much better. Yes, so much better.

Yes. Okay. Great. Okay. Yes. So my question was on B&I. You mentioned some client exits in the quarter. I was wondering if the flat growth in the second quarter reflected the full impact of the client exits or maybe the segment would decelerate a bit more in the next 2 quarters as you, I guess, see the full impact of the exits you talked about?

Yes. Maybe I'll just break down B&I for you. Like I think the majority of the pressure that we're seeing was that the TfL exit that we talked about that was pretty significant. And then the other part of it that we talked about a little bit was the West Coast. And maybe I'll just give you a little bit more background on the way we see that market and what's going on. And if you were to look at like vacancy rates in cities like L.A., San Francisco, Seattle, they're -- to give you a context, they're probably 2 or 3x worse than New York City. And if you were to think about those markets, I think West Coast is kind of tech heavy, whereas East Coast is banking, legal and from a return to work standpoint also as you guys know, like West Coast when it comes to the tech sector, they're not returning to work the same way financial services and legal is.

So we're seeing pressure in those markets. And what ends up happening with that pressure is competitors will start -- especially when it's prolonged, the way it's been prolonged for the last couple of years, competitors start making pricing decisions and margin decisions that just don't meet our economic thresholds. And I'll just tell you, I've seen this before in my long career at ABM and this stuff, it tends to be episodic, and it's not sustainable. So we see it waning over time. But right now, we're seeing some of that pressure.

And if I were to distinguish this quarter versus last year when we made some strategic decisions. For us, we have to see a path to profitability. It has to be a highly strategic account those were the dynamics in Q3 of last year versus what we're seeing now. So we made these decisions, we're actually happy about the decisions we made on the exits because what you will see in B&I in the second half is our operating margins flex up, and we feel that's really important.

And Jasper, I'll just one more bit of color on that looking forward for B&I. The TfL exits accounts for about 300 basis points of growth impact for B&I in the back half. So when we talk about the proportion of the impact, it's clearly the majority of that's going to be because of that contract exit.

And then could you maybe provide a bit more detail on where you're at with the ERP at this point, what kind of margin opportunity you think you have there with ERP in place and running in, I think three of your five segments at this point?

Yes, you're right, three of five on the platform. We're in the planning phases for the last couple of segments. And based on all the things we learned from the first go-lives, we'll be taking that into consideration.

I think the opportunities lie ultimately in scalability. What we anticipate from an AI perspective and how we load contracts in, how we process the invoicing, our efficiencies in collecting cash. So we're mindful of that, but the first things first is just getting the planning done for the next groups and we'll provide clarity to that in the future call.

Yes. And kind of I would just say what I'm excited about in terms of getting done with the ERP is we're just going to have a clean data set. And when you think about AI and all the leverage, it's so important to have clean data to leverage your tool set on, and we're heading in that direction. And I think you're going to see some meaningful opportunities in 2027, 2028, as our data set matures as our AI matures, we see there's just a lot of runway in what we're going to be able to do with scheduling and workforce management. I mean there's a lot of exciting initiatives coming and we always feel like it can't come soon enough, but we're mindful of the pace and the balance. We're in a long-term situation here.

Our next question comes from the line of Andy Wittmann with Baird.

I wanted to first ask about the, I guess, the standby generator microgrid work that you're doing at the retailers. You've had a large retailer that has been working with you guys to install these for several years now. I think you're on at least -- I know you're on your at least your second, maybe your third kind of tranche of stores that, that legacy retailer that you've been working with has given you. It sounded like, I guess, I heard here that there's a new large retailer that signed you up. And so I'm just trying to understand now that we've got two of these kind of where they are in terms of installing these types of things on their stores, both for the legacy and how much you have with this new customer and how you're thinking, Scott, about the long term with this customer? Obviously, you need to deliver quality work and all of that. But is this the beginning? Or is this new one, are you expecting that it is likely to have phases as well?

Thanks. Look, I would just say kind of high level, Andy, like we think there's just a lot more runway in the microgrid business. And for us, it's not necessarily customer by customer. And the big trip is having customer concentration, which you don't want to have. So we're very focused from a business development standpoint of spanning out and strategically going after a broader range of clients.

So it's not about like one or two clients for us for the long term. Although right now, we are heavily weighted to one and two, but we're growing out of that, and we're optimistic about what the next year or 2 is going to bring in terms of, again, broadening that perspective. So -- but with these other clients, we see really good runway in their portfolio and their programs.

Okay. Got it. I guess my follow-up question has been for David. So I wanted to just talk about the prior year self-insurance accounting here that's in your adjusted results. I'm sorry, I don't know if I quite followed this. As I understood it like going back here, as we came into the year, you were no longer adjusting for this, and it was going to be -- it's been an add back for years. It was not going to be this year. Did I hear you say that you made a change this quarter to putting it back in? I'm sorry, can you just clarify that? And did the change that you made this quarter have any -- I mean, the nominal number that you're saying in terms of EPS range for the year is the same, but was there an impact from the change that you made this quarter? I'm sorry, could you just please explain that maybe more slowly this time so we can all understand.

Yes, sure, Andy. No problem. So just to take a step back for context, right? Last year, Q2, we had communications with the SEC, and they were strongly advising us to record any prior year self-insurance adjustments above the line as part of our operating earnings. So we did that.

And fast forward to the guidance for this year, for fiscal '26, what we said was we would continue recording those adjustments as part of operating earnings. However, we weren't factoring that into our guidance, right? And at the time, it was really a visibility issue. We had a $23 million adjustment -- unfavorable adjustment last year. We were obviously not very pleased with that. And then -- so what I would say is, as a result of that, we've made some real investments in this program and specifically investments to find ways to dampen the volatility and some real operational improvements that we think is going to result in meaningfully better predictability going forward.

And specifically, we're focused on real insurance-related programs, return to work, timely claims closing, aggressive claims settlement, driver behavior programs. And we think the combination of our focus on that, Andy, is going to really allow us to be more confident about predicting this type of adjustment in the future. And as such, we're now confident that the results of the study that we'll do this Q4 for the full year of '26 can be captured and contemplated within the guidance of $3.85 to $4.15.

So at the end of the day, we felt like this is about transparency. We're going to include it in the guide going forward. We're going to own it operationally and treat it like any other operational program at this company.

Yes. And what I would say, Andy, and why I think this is pretty significant move is I'd like to think for investors, we just de-risked Q4 because we -- prior to this, we didn't have it in the guidance. And again, what happened last year is we had this $0.20-plus hit to EPS in Q4, and it wasn't a great effect on the stock price, to be frank. And for us to come out now and say, you do not have to worry about the Q4 effect we are absorbing it into our guidance, we think is a big statement for investors.

Yes. Okay. That makes more sense. I guess maybe another way, I just want to check my understanding for -- I think everybody can benefit from this. It sounds like you've sufficiently narrowed the way you're accounting for this and the programs and all these actions so that even if there are changes in how this comes through, like you think they're narrow enough that it's more predictable now than it used to be. And so now you can bake it in there fully baked, which is a good outcome. Is that kind of another simple way of looking at it, David?

That you nailed it, Andy. It's all about predictability and we really firmly believe that the actions we've taken and the focus on the program gives us that narrowing ability.

Our next question comes from the line of Faiza Alwy with Deutsche Bank.

I wanted to ask about WGNSTAR. Now that you've owned it for a few months, just wanted to get an update. I know you sound pretty good about the opportunity there, but just give us some additional color in terms of are you seeing any changes around the competitive environment there? And kind of how do you think about -- are you growing with new business? Or are you seeing just your existing customers grow a lot faster? I just would love to hear more about that.

Sure, Faiza. So we're thrilled with this acquisition and the integration has gone really, really well. They're already starting to contribute meaningfully to our semiconductor space.

And as I think we've mentioned in the past, but let me just reiterate, if you think about the semiconductor space and you think of like a bull's eye, right, this is the way I like to think about it. The center of the bull's eye is the fabrication part, which is highly protected, think about people in hazmat suits and the outside of that bull's eye is the facility itself. We were big with semiconductor companies on the outside of that fab, whereas WGNSTAR was inside that fab. And the combination of the two is making us a kind of seamless provider. And over -- if you look year-over-year in semiconductor, we've doubled our growth there.

Let me just give you some statistics about how we're doing in the semiconductor market. We have over 60 clients. We're at over 300 sites right now. If you were to look at like kind of fab capacity between U.S. and European fab makers, we're in 75% of those clients right now. And when you look at the OEMs, there's kind of like 10 big OEMs. We're doing work with 7 of them right now. So we feel like to be positioned in that space, to be positioned in that space and have that opportunity with the client to grow with them and to grow inside the fab and outside the fab. It's just going to be tremendous for us. So I can tell you, we see in semiconductor space, double-digit growth continuing for a while.

Great. That's very helpful. And then I just wanted to follow up on B&I margins because you talked about an improving trajectory. It sounds like from mix. And then you're also investing in sales resources, it sounds like. So just give us a bit more perspective around like where do we think sort of steady-state B&I margins should be sort of how much opportunity is there just from mix alone, and maybe once you ramp down the sales investments?

Sure. So you saw some sequential movement in our margins. We were up 30 basis points between Q1 and Q2. So we're seeing movement. And I think with the decisions that we've made specifically on the West Coast, you'll see some ramp down in revenue in B&I between that and the TfL, we're not expecting positive organic growth necessarily. However, you're going to see margin acceleration in the back half. Like you'll see the proof points play out. the decisions we're making and how we're managing the business are going to have accretive margins. So we're really optimistic about B&I.

Our next question comes from the line of Josh Chan with UBS.

So obviously, really strong organic growth in the first half, 5% to 6%. Your guide, obviously, you're pushing it up to the high end of 3% to 4%. But I guess does that decel imply the B&I slowdown in the second half? It seems like there may be opportunity even with B&I to still get perhaps above the 4% growth rate for the year. Am I on the right track in thinking that way?

Yes. Josh, it's David. Thanks for the question. So as we said, clearly, the decel in B&I in the back half is largely driven by the TfL exit as we talked about, and some of the pressure on the West Coast that Scott talked about. So I think from a full fiscal year perspective, we're looking at more a flat to maybe slightly positive growth for B&I on a full year perspective. We see that deceleration. And just obviously it takes a little bit of time to lap that, lap those kind of exits, especially with TfL for the year.

Okay. Okay. And you mentioned price escalations, so I guess in terms of the magnitude of those price escalations, do you feel like your pricing is sufficient to offset whatever you're seeing in terms of wage inflation?

Yes. One of the things I think we're excited about and actually a benefit of some of the new systems we have installed, we've got really good visibility on our cost basis, especially for a lot of the bigger groups that have the high volume of contracts. So B&I being the main one there. So we've -- as part of our just core operating day-to-day, we've got a tremendous focus on escalations. We feel really good about the path to capturing any cost burdens that we've experienced. And that's part of the momentum, as Scott mentioned, that's going to continue in the back half of the year for B&I to really help ramp that sequential margin performance up.

Yes. And what I would say is that, again, I get enthusiastic about is kind of AI-based initiatives. And on escalations, this is one of the places where we had an AI-based initiative where we went through, scanned the contracts, generated escalation letters and done this with an AI initiatives. So I think the AI initiatives are all -- they're starting to mature, they take time, but this is one area. I'm glad you brought up escalations because this is one area where we're so proud of what we're doing on the AI front.

Our next question comes from the line of David Silver with Freedom Capital Markets.

I'd like to maybe just ask for a little bit of color behind the $1.2 billion of new contract wins. So a couple of things, but just I mean, certainly, it's a big number, and I think you're on track clearly for another record in terms of new business wins overall. But I'd also say beyond that, I mean just seeing it highlighted in a quarterly earnings release that struck me as a little unusual.

And then I even wrap it around with the idea that you highlighted maybe some decisions to walk away from some business that wasn't generating sufficient profit or path to sufficient profitability. And I guess I just would like to know, I mean, if we could just focus on the non-ATS portion of that, how much of the new business wins that you're getting? Or what would you attribute maybe the incremental, the faster pace at which you're winning new business?

And I guess I would just break it down as offense versus defense. I mean are you out there specifically targeting business that -- new business that you want to be in strategically? Or is it more defense where just due to regional or company-specific characteristics they're looking for concessions or terms of business that you're -- as a company, you're just not acceptable. So just some thoughts on the incremental pace of new business wins and from your perspective, what's behind that?

Yes. And let me start with that. You had mentioned that it was unusual that we mentioned it. But just so you know, we do have a history in Q2 of updating the first half. So we've done it before. So probably not that unusual. And we're excited about where we are at $1.2 billion because I think what you have to do is you have to step back and you have to look at sentiment, right? And the sentiment from our standpoint is like clients continue to want to work for us. We're winning this business going through presentations with broad groups of clients who are all saying yes to ABM. So we like the fact that we're seeing this positive trend year after year of growing our sales.

And I would say it's more -- it's less defensive and more strategic. We've talked in the past about how we are hiring business development assets, and we're targeting certain areas, certainly, like the Sunbelt regions, we've targeted also by industry group and data centers and semiconductor.

So it's -- for us, like I'll just give you a proof point between semiconductors and data centers. If you combine those two little micro groups, that's 7% of ABM's revenue, right now. That's pretty significant. It's a strategic initiative that we set out a couple of years ago to accomplish. And that's also a segment that's going to grow double digit. So I think for us, this has all been strategic. And clearly, there's always defensive measures in sales pursuit. So I'm not going to sit here and say the $1.2 billion was all purely strategic. There was a nice balance, but the majority of it was strategic.

Okay. Great. And then this is a question that maybe you've touched on anecdotally or partially already. But Scott, your company has been in business for a very long time, and you've been very careful to segment your business by end market. And even within that, you've segmented Aviation in different ways, for example, and other segments.

I'm just wondering, but as a company, does it make sense to maybe think about things more geographically now? In other words, technology business in one part of the country might not be -- might require a different strategy than maybe another part. I'm just thinking California versus Texas or West Coast versus non-West Coast just based on your comments. But you used the term episodic, but my sense is over the past few years, some of these trends have not really changed much. So just as a company and with a very clear national view, I mean, what role does maybe a more discrete -- more explicit geographic strategy makes sense.

Sure. No, that's a good question. We do have a geographic strategy. I would say, look, we segment by industry group by end market, and we still feel like it's absolutely the right way to do it. We pressure test all these assumptions every year strategically. It's a management team with our Board of Directors. So it's -- we still firmly believe by aligning with the customer segment, that's the best way to go.

Within those customer segments, though, we do have a geographic focus. And maybe earlier, I mentioned about the Sunbelt, like we look at the certain growth zones in the places that we operate, and we apportion business development assets based on those growth zones, operational assets. So I'd like you to think about it as the industry groups are kind of -- in the segments that are the overlay. And within that overlay, you have an approach that absolutely incorporates a geographic attitude.

Our next question comes from the line of Marc Riddick with Sidoti & Company.

I wanted to just -- we covered quite a bit already this morning. I did want to touch a little bit on -- with the expectation of reducing leverage by the end of the year back to 3x or so. Maybe talk a little bit about what you're seeing in the acquisition pipeline currently and sort of comfort levels, valuation levels, if they changed much over the last few months and sort of how your appetite looks there?

Thanks, Marc, it's David. Definitely an appropriate question. As we said in Q1, we did anticipate our leverage to tick up over 3x with the acquisition of WGNSTAR. Clearly, our near-term priority remains delevering. And we anticipate, based on our cash flow strength in the back half to be able to get back down below 3x by the end of the year. And obviously, that doesn't mean we're walking away from other value creation opportunities and capital return. We're just sequencing it appropriately basically. So I think from a leverage perspective. And then again, based on the strength of our sequential cash flows, we feel really solid.

Scott, I'll let you comment on the M&A pipeline.

Yes. So the M&A pipeline, we continue to monitor it. We think there are going to be some interesting opportunities in the back half of this year and in the first half of next year. And frankly, that could coincide with our leveraging -- our leverage going down below 3. And the fact that we very much care about getting integrations right. So we're still integrating WGNSTAR. So I think the confluence of this could be positive from an M&A standpoint, again, more towards the back half and maybe Q4 or dripping into fiscal Q1 for us. But we're monitoring it and again, being very strategic about where we play.

That's helpful. And then just a quick follow-up. There was -- I guess there wasn't much mentioned as far as any effects that you've seen either from the war or sort of the geopolitical disruptions. I was wondering if there was any areas that you've seen any influence from that or how that sort of -- how the pacing through the quarter and into 3Q might be impacted there? Or if you've seen anything that's come from that?

Yes. Yes. So what I would say is where we see a little hint of it right now is in the aviation sector, specifically on our international business because flights, there's been pressure on the international side in terms of volume hasn't been incredibly material yet. But as we said in the prepared comments, we're just watching it and staying on top of it. But the one great thing about ABM is even in these cycles, we get through them pretty well because of our flexible labor model and the fact that the services we perform largely are not discretionary. So we'll definitely -- in extreme times, we'll get some pressure, but we ride through it.

Our final question this morning comes from the line of Tate Sullivan with Maxim Group.

Thanks for the earlier comments on organic growth, and that's one thing we're looking for accelerating the earnings growth from last fiscal year when it was 3.8%. So I think you cleared that up with B&I. And just one quick, David, on the cash -- free cash flow guidance of $250 million. Can you go -- what does that exclude specifically? And can you just close some of the figures, excluded amounts.

Certainly, Tate. So the items that would exclude a total of roughly $65 million on an annual basis. So some remaining transformation costs about $20 million, the anticipated earn-out payment for the RavenVolt acquisition, the final one, which is roughly $30 million, and then some acquisition costs associated with the WGNSTAR acquisition, about $9 million, $8 million to $9 million, and just any other restructuring charges fill out the gap there.

So what I would say is as I mentioned earlier, we still feel really good about where we are on cash flows. We're at about 40% of our pacing on a normalized basis, so about $100 million out of the $250 million guide. And you've been following the stock for a while. You guys know that our -- the majority of the cash flow for ABM is tilted towards the second half of the year. So it just puts us in a good position on cash flow for the year.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Salmirs for any final comments.

Sure. Thank you. Thanks, everybody, for participating. Hopefully, you can see how optimistic David and I are about where we're heading and what the back half is going to be. So we'll look forward to seeing you in Q3 and have an amazing summer, everybody.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to ABM Industries, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Thank you. You may begin.

Good morning, everyone, and welcome to ABM's First 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 first quarter 2026 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website adm.com. After Scott and David's prepared remarks, we will host a Q&A session.

But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the 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 our presentation and on the company's website under the Investor tab.

And with that, I would like to now turn the call over to Scott.

Good morning, everyone, and thank you for joining us to discuss ABM's First Quarter Fiscal 2026 Results.

We're off to a solid start of the year. We delivered 5.5% organic revenue growth, generated nearly $50 million in free cash flow and repurchased over $90 million of shares in the quarter. While margin performance in Technical Solutions was below our expectations, primarily due to project timing and mix, underlying demand and backlog trends are healthy and the fundamentals across the portfolio remain constructive. As such, our full year outlook is unchanged.

Let me step back and provide some broader context. Across our end markets, demand remains generally healthy in prime office. Recent data from CBRE indicates improving transaction volumes and stabilization and Class A vacancy trends in major gateway markets. While certain regional markets remain slower to recover, the flight to quality dynamic continues to favor the types of assets where ABM is concentrated. Our B&I segment grew 4% in the quarter, the highest it's been since the third quarter of 2022, reflecting strong international growth, stable client retention and underlying steady demand.

In Aviation, TSA Checkpoint volumes remain resilient, and airport infrastructure investment continues at elevated levels. The FAA's terminal modernization programs and large-scale capital projects across major U.S. airports support a multiyear pipeline of outsourced service opportunities for us. Our Aviation segment grew double digits year-over-year, and our bid pipeline remains healthy. M&D continues to benefit from secular growth tied to major U.S. infrastructure and technology build-outs. Public and private investment in semiconductor manufacturing is accelerating with the recent PwC forecast indicating that more than $1.5 trillion in fabrication facility investment through 2030 as AI, cloud and edge computing drive demand for advanced chips. This underscores the scale of the opportunity and the multiyear runway it creates for service providers like ABM.

With the completion of our acquisition of WGNSTAR at the beginning of Q2, we've meaningfully strengthened our presence in semiconductor fabrication environment and enhanced our ability to support the strategic U.S. growth area. In Technical Solutions, the secular tailwinds remain intact, Mackenzie projects the U.S. microgrid market will more than double by 2030, driven by electrification, grid resiliency needs and decarbonization priorities. At the same time, investments in data center construction and hyperscale capacity expansion remain robust as enterprises build out next-generation infrastructure to support AI and digital transformation.

These trends align directly with ABM's strength and energy resiliency, engineering services and mission-critical operations, and we expect ATS to deliver sustainable long-term growth as these markets continue to expand.

In education, demand remains steady and resilient given the essential nature of services provided to K through 12 districts and higher education institutions. We continue to see opportunities as schools evaluate outsourcing to improve efficiency and service quality. Our focus on higher education, particularly large universities and multicampus systems positions ABM well in a segment where scale, complexity and compliance requirements favor sophisticated multiservice providers.

Now turning back to the quarter. The investments we've made over the last few years in sales resources, technical talent and strategic contract positioning are clearly contributing to our growth trajectory. Not only do we grow organically in each segment, but our enterprise organic growth rate of 5.5% was the strongest we've delivered since the fourth quarter of 2022 when the business was truly emerging from the pandemic.

From a margin perspective, our first quarter shortfall was predominantly concentrated in Technical Solutions. As we've discussed, ATS is inherently project driven and can vary from quarter-to-quarter. Q1 was impacted by project timing and service mix along with some weather-related delays. These factors created approximately $0.05 of EPS pressure relative to our internal expectations with the majority attributable to delayed revenue recognition rather than reduced demand.

Importantly, B&I and M&D performed largely in line with what we outlined in our third quarter call last year, reflecting the economics of newer contracts that ramped last year and provided immediate growth opportunities, as we work more upward over time. Our ability to improve our margin profile can be seen clearly in education where we once again delivered strong execution and meaningful expansion in margins.

Switching gears briefly to AI, which continues to be a highly topical and source of so much volatility in the market. We believe AI will enhance ABM's capabilities rather than disintermediate our core services. The majority of our janitorial and engineering work takes place in dynamic nonstandard environments such as offices, airports, schools, stadiums and industrial facilities where layouts, traffic patterns, compliance requirements and client expectations continuously evolve. These conditions require human judgment, dexterity and real-time adaptability.

That said, we're actively researching and testing a wide range of AI-enabled robotics, including emerging humanoid platforms. While robotics can add value in structured applications such as open area floor care and certain repetitive tasks, today's technology is not positioned to operate at scale across the full breadth of our service environments. As innovation continues, we expect robotics to become an increasingly useful complement to our workforce.

At the same time, we've been investing in AI-driven predictive maintenance, intelligent scheduling, optimized routing and back-office automation. These initiatives are already driving incremental improvements in labor efficiency, win rates and SG&A productivity, and we expect benefits to expand as adoption increases and deepens across the organization. In short, we believe AI strengthens our business not disintermediates it.

In closing, we're encouraged by constructive demand across our markets. At the same time, macro sentiment remains unsettled given evolving policy direction and geopolitical dynamics. Despite that, we are maintaining our full year outlook, and we'll continue to operate with discipline and focus.

With that, let me turn it over to David.

Good morning, everyone. Let's start on Slide 6. Revenue grew 6.1% year-over-year to $2.2 billion, driven by 5.5% organic growth and a modest contribution from our acquisition in Ireland completed last year. The WGNSTAR acquisition closed after quarter end and will be included in our Q2 results. As Scott mentioned, consolidated organic growth was the strongest we've delivered since Q4 2022 and broad-based across the portfolio. Aviation led the way with organic growth of 10%, while Technical Solutions and manufacturing and distribution, both grew 7%. B&I and Education delivered 4% and 2% growth, respectively. Overall, we're pleased with the growth trajectory of the business, and our end markets remain constructive as we move into the second quarter.

Turning to Slide 7. Net income from the quarter was $38.8 million or $0.64 per diluted share compared to $43.6 million or $0.69 per share in the prior year period. Adjusted net income was $50.4 million or $0.83 per diluted share versus $55.3 million or $0.87 per diluted share a year ago. These year-over-year changes primarily reflect lower segment income, most notably in Technical Solutions and higher tax expense and interest expense, partially offset by lower corporate costs.

Segment operating margin was 7.1% compared to 7.6% last year. The year-over-year change primarily reflects unfavorable project timing, including some weather-related delays and service mix within Technical Solutions as well as by the margin impact of contracts that came online last year in M&D and B&I that we discussed in the third quarter. These factors were partially offset by strong execution and margin expansion in Education. Adjusted EBITDA was $117.8 million compared to $120.6 million in the prior year.

Now let's turn to segment performance, beginning with Slide 8. B&I revenue was $1.1 billion for the quarter, up 4% year-over-year. Growth was driven by higher work orders, strong performance in the U.K. and the benefit of price escalations. Market conditions remain largely consistent with last quarter, and we expect modest, steady growth in 2026. However, growth is expected to moderate in the back half of the year due to the anticipated exit of a large U.K. client, as the contract economics were no longer aligned with the long-term opportunity.

Operating profit was $79.7 million, and margin was 7.5% as compared to $79.4 million and 7.8%, respectively, last year. Margin change primarily reflects shifts in contract mix, along with increased investments in sales resources to support long-term growth. Aviation revenue grew 10% to $297.7 million supported by healthy global travel demand and the continued ramp of several new contract wins. Operating profit was $12.6 million with a margin of 4.2% compared to $12.2 million and 4.5% last year. Profit and margin were modestly pressured by incremental weather-related costs during the quarter which drove higher labor and supply expenses.

As we noted last quarter, the large passenger services contract we secured at Heathrow Airport, we expect it to begin ramping in the second quarter, reinforcing our confidence in strong organic growth for Aviation in 2026.

Turning to Slide 9. M&D generated $422.3 million in revenue, a 7% increase year-over-year. This strong organic growth was driven by recent contract wins, particularly in the technology sector, along with continued client expansions across the segment. Based on the momentum we saw over the last few quarters, we believe these growth rates are sustainable, as we move throughout 2026. Operating profit was $36.3 million with a margin of 8.6% compared to $39.4 million and 10% last year.

As discussed previously, the margin change primarily reflects the mix of newer contracts secured last year that provide meaningful long-term growth opportunities. Margin was also impacted by continued investments in technical sales talent and sector-specific capabilities. Education rose 2% to $228.7 million supported by escalations and stable retention rates. The segment delivered strong operating performance with operating profit increasing 54% to $21.6 million and margin expanding 320 basis points to 9.4%. This improvement was driven by enhanced labor efficiency, effective escalation management and some temporary operating benefits related to severe winter weather in certain regions during the quarter.

Looking ahead, we remain encouraged by the education pipeline and are actively pursuing several attractive opportunities, including a potential large award from a major school district in the Midwest. Technical Solutions, which, as we've discussed in the past, can vary quarter-to-quarter given its project-based nature, experienced a challenging quarter driven primarily by temporary project timing and service mix dynamics. First quarter revenue was $229.7 million, up 14% year-over-year, including 7% organic growth and 7% from acquisitions.

Organic growth reflected strong activity in our mission-critical and data center markets, while microgrid growth was lower than anticipated, primarily due to the impact of temporary project delays totaling approximately $20 million in revenue. A significant portion of these delays were weather-related, as severe conditions across much of the U.S. slowed construction activity. In fact, one of our larger customers temporarily suspended construction operations during the quarter. We're also monitoring potential impacts from the February storm in the Eastern U.S., though it's too early to quantify any effect.

Importantly, these delays reflect timing rather than demand. We expect the majority of these projects to resume as weather conditions normalize and move further into our seasonally strong second half. Operating profit was $8.4 million, with a margin at 3.7% compared to $16.6 million and 8.2% last year. The margin decline primarily reflects adverse service mix within our microgrid business as well as the impact of delayed project completions. In the prior year quarter, we completed a higher volume of engineering heavy work, which carries structurally higher margins and did not repeat in Q1 of this year. Additionally, while revenue recognition was delayed on certain projects, our labor and material cost structure remained largely intact during the period.

Looking ahead, we remain confident in the underlying demand environment. As projects progress through the pipeline and timing normalizes, we expect service/mix to improve. Historically, ATS performance strengthens meaningfully in the second half of the year, and we expect fiscal 2026 to follow a similar seasonal pattern.

Now turning to Slide 10. We ended the quarter with total indebtedness of $1.7 billion, including $23 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.9x. Available liquidity stood at $608 million, including $100 million in cash and cash equivalents. Of note, our leverage ratio will be above 3x in Q2 driven by the WGNSTAR acquisition. We expect to work it back down to under 3x by the end of our fiscal year.

First quarter cash from operations was $62 million and free cash flow was $48.9 million, representing a significant improvement over the prior year. This performance was driven by strong working capital management efforts and continued progress in our ERP stabilization in the quarter, positioning us for a more normalized cash flow in 2026.

Now turning to capital allocation. During the first quarter, we repurchased 2.1 million shares at an average price of $44.13 for a total cost of $91.1 million. At quarter end, $92 million remained under our existing authorization. As always, we balance deleveraging with incremental repurchase activity and opportunities within our M&A pipeline to drive long-term value creation.

Interest expense in the quarter was $24 million, up $1.1 million from last year, reflecting larger average debt balances, driven by our first quarter share repurchases.

Turning to our fiscal 2026 outlook on Slide 11. As Scott noted, while we feel good about the relative health of our end markets, we remain mindful of broader economic uncertainty. Accordingly, we're maintaining our previously communicated fiscal 2026 outlook. As a reminder, we expect full year organic growth of 3% to 4%. Aviation, M&D and Technical Solutions are expected to grow above that range, while B&I and Education are projected to deliver low single-digit growth.

The WGNSTAR acquisition is expected to deliver approximately an additional 1 point of revenue growth, bringing total growth to 4% to 5% for the year. Segment operating margin is expected to be between 7.8% and 8% for fiscal 2026. With margin expansion weighted towards the back half of the year as project timing normalizes in Technical Solutions and seasonal patterns reassert themselves, interest expense is forecast to be $95 million to $105 million and our normalized tax rate before any discrete items, including the possible extension of the work opportunity tax credit program, is expected to be 29% to 30%.

Our cash flow expectations are also unchanged. We continue to expect free cash flow of approximately $250 million in 2026 before the impact of transformation and integration costs, the RavenVolt earnout and any incremental restructuring. Putting it all together, we continue to expect full year adjusted EPS to be in the range of $3.85 to $4.15. And as a reminder, our outlook does not include any future positive or negative prior year self-insurance adjustments. Going forward, we'll continue to highlight any material impacts resulting from the inclusion of prior year self-insurance adjustments in our non-GAAP results.

With that, I'll hand it back to Scott for closing remarks.

Thanks, David. In closing, we remain confident in ABM's trajectory. We are growing organically, we are generating cash, we are allocating capital decisively, we've strengthened our semiconductor capabilities through WGNSTAR and the long-term trends across energy resiliency, airport modernization and prime office stabilization remain supportive. At the same time, we're focused on improving consistency within Technical Solutions and executing with discipline across the enterprise.

I want to thank our more than 100,000 team members around the world. Your dedication and professionalism continue to differentiate ABM and position us for long-term success.

With that, let's open it up for questions.

[Operator Instructions]. Our first question is from Tim Mulrooney with William Blair.

It looks like margins were impacted by several things here, including project timing and service/mix. So just -- I have a few questions on each of these, and I know you touched on that in the prepared remarks, but just want to double-click on, first of all, the project timing. Was this primarily just a weather disruption issue or were there other factors such as project rework being done?

Because weather issues, those are more isolated, but projects taking longer to complete or if there's rework being done, that kind of stuff can bleed into future quarters. So I just want to double check on what drove that underperformance in the quarter?

Yes. Thanks, Tim. Look, you were around, you saw the weather, right? And it was a tough quarter from a weather standpoint. So as it relates to ATS, you think about our Q4, which was really strong, the fundamentals continue to be good in ATS. And this is just really about a delay and really pushing to the right rather than we canceling projects. So this is all stuff that will be worked back into our numbers a little bit in Q2 and the predominance in the back half of the year.

But we feel really good about ATS. But listen, I have to say, Tim, like we're dealing in the realities of the economic uncertainty that we have between some of the macroeconomic issues and the geopolitical issues. So it's Q1 now. We still remain confident. But we're cautiously optimistic, but there is some caution there, just like pretty much every company that's reported has been hearing the constant theme about some certainty. So we're not immune to that. But as we sit here today and we think about ATS, we feel really good about it.

Yes. You're certainly not the only company, Scott, to be talking about weather-related issues in the fourth quarter or macro uncertainty. So I think everyone definitely understands that. I just -- I wanted to make sure there wasn't anything else beyond weather. It sounds like there wasn't. So that's good.

And I guess, if I'm going to ask 1 more question. Margins were a little lower than expected in the first quarter, but you maintained guide for the full year -- so can you just help because it makes it feel like it's a little more back half weighted now. Can you just help me understand that trajectory or cadence as we move through the fiscal year here just for -- so we can update our models accordingly?

Tim, this is David. I'll jump in and grab that one. I appreciate the question. So I think the predominance of that shift, you can tag to ATS specifically. So and for perspective in our U.S. ATS business. Over the last 3 years, about 2/3 of the operating profit has been delivered in the second half of the year, and there's been a 350 basis points margin improvement from first half to second half of that group. And that's just purely a seasonal item with that business, and it's been very consistent, I would say, we don't expect that to change to be any different this year.

And I think the other element to that is in the B&I and M&D world, we spoke about some of the contracts that we renewed and brought on last year in the third quarter. And one of the things we talked about was the margin trajectory over time in those groups. That doesn't happen overnight, obviously. But as we go throughout the year and specifically the back half of the year for those groups, we anticipate some of the labor optimization projects kicking in for those contracts and other cross-sell opportunities. So it gives us a little bit of a glide path on margin improvement for those groups as well as the back half of the year.

Our next question is from Jasper Bibb with Truist Securities.

I was hoping you might give a little bit more detail around B&I customer behavior? I guess I'm wondering, are you seeing any change in office occupancy indicators like special events volume? And have you also seen any more customers coming to you and for pricing concessions or anything like that after the experience a couple of quarters ago?

Yes. So we haven't seen anything yet on scale with customers because of the economy. But look, again, as I stated before, it's Q1, and we're remaining conservative. But for now, it's been stable. It's really been stable. And some of these things have a delayed effect, right? But for now, we feel good about it. As it relates to B&I, we'll have a little bit of organic revenue pressure in the back half. We had a large contract in London with the Transport for London, that's rolling off, that's going to have an impact of about $70 million of revenue in the year.

But the reason I want to bring that up is I'm kind of proud of the discipline of the team because like we made some hard decisions in Q3 last year where we took on contracts at lower margin, but we did that because we knew that we can work those up over the contract period, and we saw a path to really good profitability over time with this contract, the way it was structured and the way it was laid out we just didn't see a path to increasing margins.

So we probably could have held on to that contract and made next to nothing and didn't have a good trajectory, and we weren't willing to do that. So it's one of those stories, it's a suite, we hate losing a contract of that size. But again, really proud of the team for making a good decision on a contract that couldn't be worked up from a profitability standpoint.

And then pretty healthy repurchase number this quarter. I just wanted to ask how you're thinking about balancing maybe the capital deployment piece and deleveraging for the rest of '26 now the WGNSTAR deal is closed?

Yes, Jasper, thanks for the question. I'll grab that one. So I mean, obviously, we believe in the long-term prospects of the business and the share will rise over time and that is part and parcel of our decision to continue buybacks through first quarter. And for context, last year, we repurchased over $100 million in shares. So we took the opportunity this quarter to go ahead and cover dilution, plus roughly an incremental $60 million of share buyback on top of that. So all that being said, I think, as you mentioned, the WGNSTAR acquisition, as we spoke about, will temporarily take our leverage over time. And given that our target range is below 3x, I think what you should expect in the near-term future is for us to use our free cash flow to delever back towards that range.

Our next question is from Marc Riddick with Sidoti & Company.

Wanted to touch a little bit on what you're seeing as far of some of the market share gains that you've mentioned and some of the new business wins? Maybe talk a little bit about the competitive dynamic of what you're seeing in the segments? And if you've seen much in the way of a shift in the competitive dynamic over the last few quarters, whether it's driven by macroeconomic situations or if you're seeing any greater opportunities than maybe you were more recently?

So I think it's been pretty stable, and we haven't seen any overreactions whatsoever with competitors or frankly, even clients right now. I think everyone's kind of impossible, everyone's watching and waiting. And again, the reason why we remain cautious but still optimistic.

Okay. Great. And then recently, you made the announcement of the new business win of -- in Philadelphia with the Citizens Bank. I was wondering if you talk a little bit about what you're seeing on the leisure side of things and how you're looking at that for this year? I know sometimes there can be a little bit of ebb and flow in leisure activity or concert activity? Maybe you could talk a little bit about what you sort of have embedded in your expectations for this year relative to what we've seen over the last couple of years on the leisure side?

Yes. I mean we're loving this segment. It's had really high growth. It's still a smaller percentage of our business, but it's growing. And it's -- I'll tell you, it's interesting. And I think we've seen this before, no matter how bad the economy gets or how uncertain, people are still coming out to see Taylor Swift, right? So we haven't seen the reduction in demand is MariTech. We're even internally putting more focus on that group and actually giving it more of a national platform now in terms of how we're managing it. So we've become incrementally excited about the group and the trajectories. And I think it was one of our bragging rights because I think we took care of the services in the last 5 Super Bowls, and we have the next one as well. So it's just a great segment for us.

Yes. It's interesting you bring that up because you've made mention on the Super Bowl situation before and kind of -- and the pressure on the Citizens Bank, if I remember correctly, they've got a high level event of their own, which was sort of highlighted. So sort of curious as to maybe that maybe was one of the beneficiaries that you're seeing in new business wins in that area is being able to do a high-level events like that?

Yes. You know what it is? It's just -- it builds upon itself, right? Because so much of what we do is continual resume building. So you get a landmark account, and that helps other accounts. And outside of even sports and entertainment, we talk about the fact that we're taking care of the majority of services, we're well over the Fortune 1000. I mean -- when you look at our portfolio, we've continually often out and have been proud about the Class A nature of the work we do in B&I, in M&D, even in Education. We like to brag, but we have a resume to die for.

Great. And then the last one for me. I think when WGNSTAR was announced, there was a revenue contribution estimate based on 2025, but obviously, the year hasn't finished yet. Is there an update on sort of where they finished 2025 revenue, and how we should think about any seasonality, if anything, if any, in that contribution?

Yes. No, thanks. No changes to the expectations for how they finish 2025 was right in line with what we thought. And in 2026, we're expecting roughly somewhere between $120 million and $130 million of revenue. And over time, we certainly believe this is a business that can have a double-digit growth profile and a 15% EBITDA margins like we mentioned on the previous call, it's a really attractive end market for us that we really think we can grow.

Yes. I think RavenVolt started out at about the same revenue and we did over $400 million in business last year. So when we make these strategic acquisitions in end markets that we believe are accelerating, the 1 thing I would say about ABM, and we know how to load into those end markets and build the business. So we feel like WGNSTAR is going to follow the same trajectory.

Our next question is from David Silver with Freedom Capital Markets.

Yes. I wanted to maybe just ask you a couple of questions regarding maybe full year outlook. But last year was a record for your company for new business wins at, I think, $1.9 billion. And your organic growth was kind of above your full year guide in the first quarter. So should we anticipate a new business win total greater than last year's record? And if you wouldn't mind, I mean, where do you think you have the greatest confidence in year-over-year growth?

And overall, I mean, I guess, included in that, I know there's some strategic contract bidding in the M&D sector, I believe. And just just maybe some comments on the overall margin profile of your new contract wins that you expect or that's built into your guide for 2026?

Yes. So again, David, it's early on for us, right? It's still Q1, and we remain confident. And we look at our guide. And I'd say that we're -- internally, we're forecasting to be on the higher end of that range. And -- but it's early on yet. We do have a bunch of uncertainty, but we still feel really good about Aviation. It's going to be strong. M&D is going to be strong.

As I mentioned earlier in the call, I think B&I will temper a bit because of that larger contracts in the U.K. And ATS is going to be strong. It's a back-half story. But all in all, we feel constructive across the board. And again, sitting here today as we model, we think we're going to head towards the higher end.

Okay. And my next question is kind of a big picture question about labor costs and availability in the current, I guess, political, social environment. But compared to 2 or 3 years ago, I think the pool of workers that might be available for some of your cleaning and moderate skilled work may be shrinking. And I believe most of the effects for ABM would probably be indirect as opposed to direct, but has your overall business strategy changed at all, let's say, over the last 2 or 3 years as a result of maybe that structural change in immigration versus

Yes, it's a good question. We made a decision 2 or 3 years ago, our talent acquisition area, made a lot of investments in technology in terms of how we onboard people, how we how we do security background checks. And we've talked about that over the years, and it's really been helpful with talent in our talent acquisition area. It has just been really upgraded and we feel great about that.

But I will tell you, just dealing a little bit more with the near term. Sitting here a year ago, I had a very different feeling about how this is all going to play out versus where we are today. And frankly, David, I'm surprised because we've not seen a deterioration in applicant flow, we have not seen a deterioration in the staffing levels on site. So we are optimistic that there's -- we don't see a catalyst right now that's going to change that, and it really hasn't affected any major wage pressure right now.

So knock wood, things are going well on the labor front. And again, I'll say what I said a few seconds ago, very surprised by that, especially from where we were sitting last year at this time and some of the narrative on immigration. So we're pleased.

Okay. Great. If I could just sneak a quick one in -- an additional 1 in. I did notice in your prepared remarks and in your slide, there was a comment about ERP stabilization. And I remember or recall kind of your approach to implementing or starting up that new ERP system. So just a couple of questions. But has that -- first one is has it fully normalized? And then secondly, like when you do bring on new business, is there kind of a smaller, but analogous, I don't know, delay or extra care in ensuring that the billing is handled appropriately with new customers that might cause after shock smaller ripples of the same effect, let's say, during this year.

Thanks, David, it's David. I'll take that one. So I think the good news is we continue every quarter to make progress on the stabilization from the transformation. And we have a very significant majority of the transactions from the entire enterprise on the new system. So the B&I, M&D groups and the Education groups are all on. And I think -- I'd couch it as we're in the seventh or eighth inning of this, and I think you see the results, particularly in the cash flow, right?

Q1 cash flow was good, had some catch-up from last year from a stabilization perspective. And so we anticipate continuing that momentum. As far as new contracts that we bring on board, the way I would talk about the system is almost like learning a little bit of a new language, right? So we kind of take care and time to make sure that any new business for the 3 groups that are on is loaded in properly, the data is bedded, it's analyzed. We do proof of billing before we send the first building out. So it's a pretty rigorous process because it is you make a first impression as you get to first fill out the door and you want that to be right and accurate and that flows right now to our cash flow success. So at the end of the day, we're pleased with the progress. Like anything, you can always improve, you can always be better. But we feel like we're in a good position now on the ERP.

Our next question is from Josh Chan with UBS.

This is [indiscernible] on for Josh. So I wanted to ask about the Education margins because it seems like margins in Education has been like really strong lately. So just wondering how sustainable that is and whether -- well, [indiscernible] the similar levels of margins going forward as well?

It's David. So what I would say is we're obviously really pleased with where the education margin profile is. I think this quarter, specifically, we had a roughly 50 basis points benefit from weather where we didn't have kids in school for a couple of days at the end of the month. And some of that will give back next quarter just as makeup days come into play. But what I would tell you is that team has done a really good job and from just managing all the direct cost element. And we see a bit of a good trend there on the Education margin side.

Yes. And I'm so pleased with the leadership there. We had a reboot a couple of years ago with our senior leadership and our sales leadership. And we see some really good trajectory. We'll have a little bit of pressure in Q2 because the weather delays caused and we have a little bit of benefit on the labor, but they have to make up those days, so we'll see a little bit of that in Q2 on the margin side as they make up the days when we have to put in some labor that was previously unforecasted, but this has been a real good story for us on the Education side.

Got it. Very helpful. And just maybe as a follow-up, I wanted to ask in like M&D and Aviation. So it sounds like you're expecting still like strong growth going forward. But I'm just wondering if there are like any concerns as it relates to the geopolitical growth, maybe the oil price going up, that could impact M&D customers [indiscernible] funding cost for if that could be an issue for the Aviation segment

Yes. So Aviation still remains really strong. We had a good quarter. We had a lot of project work in the Northeast that will start trailing off a little bit, but the pipeline is really strong. We're leaning into integrated services across our aviation sector. And we're seeing no downside right now to travel. And even with the oil prices, it seems to be coming down recently, we don't see that as an impediment in that group, as we sit here today.

Our next question is from [ Rohan Vasudeva ], with Baird.

It's [ Rohan ] on for Andy Whitman. I think most of my questions have been answered, but I wanted to ask on M&D or Aviation margins. You guys called out in the quarter that there were some new contracts ramping that you won last year. How long do you expect these new contract new contract ramp headwinds to persist?

So with new contracts, so I think I touched on this a little bit earlier, but like the way to think about it is when you take on a contract and you may be -- I guess the way to say it, when you compromise a little bit on pricing because it's a good strategic contract, the only reason you do it is because you see a glide path back to really good profitability and that just doesn't happen overnight. That's something that happens over time as you get to learn the property and you get to figure out how you can adjust labor.

So it's not kind of a mine everything where you get a contract maybe at a discounted rate from where you'd like and then 3 months later, it's back. It's just something that happens over time. So it's from our perspective, it's not something that in Q2 or Q3, we're going to be able to call out. Now we will lap these in the back half of the year, so we don't feel as bad. But just generally speaking, when you get a contract and you try to work the margin up, it's a glide path that happens over the life of the contract rather than something that you fix in 30 or 60 days.

Got it. And then my last question would be, is there any update on the restructuring process? What is the capture rate of the original $35 million you had expected at the start of the year?

Yes. So the $35 million project was completed, initiated last year completed last year. So we see the benefits of that kind of rolling through the first couple of quarters into Q3 of this year. And I would say, and Scott mentioned it, just given all the macro sensitivity, geopolitical risk, everything that's broad based, the good news about ABM is we can control several things. We can control our labor on a direct basis and we have a completely flexible labor model.

And we also have strategy playbooks for SG&A cost mitigation and cost management so that we're ready to deploy if we need to. So it's just a diverse way to look at the business, and we have a real good sense of the levers we have, if there's any disruption.

Yes. And just to add to what David is saying here, we talked at the start of the call, about the fact that there is some uncertainty out there. And I want to make sure everybody on the call understands that we're just not admiring it. We have plans, we have mitigation strategies and we have responsibility. So that's something that's top of mind. And again, we're not looking at this from a passive standpoint.

There are no further questions at this time. I would like to turn the conference back over to Scott for closing remarks.

Thank you, and thanks, everybody, for taking the time to listen. I think you can hear that we had some thematic pressure with weather-related delays, but we feel really good about where we sit right now. We're optimistic, and we're excited to come back and talk to you in Q2. So thanks, everybody, and we'll talk soon.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Greetings. Welcome to ABM Industries Incorporated Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

At this time, I'll now turn the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Thank you, Paul. You may now begin.

Good morning, everyone, and welcome to ABM's Fourth Quarter 2025 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 fourth quarter 2025 financial results and outlook, as well as the press release announcing our planned acquisition of WGNSTAR. A copy of those releases 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 today, I would like to remind you that our call and presentation contain predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the 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.

And with that, I would now like to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to discuss ABM's Fourth quarter and full year fiscal 2025 results, as well as our 2026 outlook. I appreciate you taking the time, and I'll get right into our performance and the progress we're making as a company.

We finished the year on a strong note posting record quarterly revenue supported by 4.8% organic growth. Encouragingly, if you exclude the impact of the priority of self-insurance adjustment, our adjusted EPS, and adjusted EBITDA and adjusted EBITDA margin were all ahead of our expectations heading into the quarter. This performance reflects strong volume, favorable mix disciplined cost management and the benefits from our restructuring actions.

Across the portfolio, our teams executed exceptionally well. Technical Solutions delivered another standout quarter, completing a significant number of complex projects, particularly in [ microgrids ] and mission-critical infrastructure. We also saw strong revenue growth in aviation and manufacturing and distribution, fueled by recent client wins and customer expansions. Meanwhile, in Business & Industry and Education, margins improved year-over-year, demonstrating the resiliency of these segments and our continued focus on operational efficiency.

Our fourth quarter results capped an outstanding year for ABM highlighted by record annual revenue of $8.7 billion, an increase of 5% over last year. We also generated record new sales bookings of $1.9 billion, a 12% increase over 2024. Those bookings are diversified across the business and provide confidence in our growth trajectory entering fiscal 2026.

On top of the strong 2025 bookings, I'm pleased to announce 2026 is off to a great start for us with a major new contract in aviation. Specifically, we won a significant passenger services contract at a leading global gateway airport, set to ramp up in the first quarter of calendar 2026. This win highlights our continued focus on the aviation sector, the strength of our team, and the value of technology-driven solutions. I'm confident in our team's ability to deliver an outstanding experience for our clients and their passengers. This is one of the largest single aviation awards in ABM's history, and it reflects the reputation our teams have built in delivering industry-leading service and operational excellence. I'll also note that our pipeline across the enterprise remains strong, and we are targeting another bookings record in 2026.

2025 was a year defined by progress in several strategic areas. We invested in the AI capabilities that are already improving our internal processes, including enhanced [ RFP ] automation, more intelligent HR support tools and early exploration of agentic AI to enhance client-facing operations. These investments are expected to provide greater efficiency, scalability and differentiation, and position ABM to unlock new revenue streams in the years ahead.

We also made substantial progress in our ERP implementation. As you know, the transition created working capital friction earlier in the year, but the team worked relentlessly to stabilize and scale the system, and we saw a meaningful improvement in cash performance in the back half of the year. This sets us up well for continued progress in 2026 and normalization. I'd like to thank David Orr for taking a leadership position in this area and helping to deliver a significantly better outcome than we had at the beginning of the year.

Also exciting is today's announcement of our agreement to acquire WGNSTAR, a leading provider of managed technical workforce solutions and equipment support services for the semiconductor and high-technology manufacturing sectors. This is a highly strategic transaction for ABM that is expected to close in the first calendar quarter of 2026. It significantly expands our technical capability set and fabrication environments, adds a skilled workforce of more than 1,300 employees, and strengthens our position in a sector that is experiencing multiyear growth from U.S. semiconductor onshore. With only about 15% of the market currently outsourced WGNSTAR gives us a meaningful foothold in a space with substantial runway. Combined with our existing energy resiliency mission-critical and engineering strength, this acquisition positions ABM to be one of the largest integrated service providers to semiconductor facilities in North America.

I also want to take a moment to highlight the continued efforts across ABM to improve margin and strengthen earnings power. The initial components of our restructuring program launched in Q4 are now largely complete. The program was designed to better align our core structure and operating model with our growth priorities. As mentioned last quarter, the annualized savings related to the initiatives already undertaken is $35 million, with over 3/4 of the savings to be realized in fiscal 2026. These benefits combined with disciplined cost management and improved labor efficiency, [indiscernible] an important role in our performance in the fourth quarter, and will continue to do so in 2026.

As we look across the business, I'm proud of how our teams navigated a complex and dynamic operating environment. Not only did we win important new business and strengthen key client relationships, we did so while modernizing our systems, advancing our use of AI, and integrating new tools and processes into the way we work. It speaks to the commitment and adaptability of our people, and these efforts position ABM for long-term success.

Turning now to the year ahead. We are confident in ABM's momentum heading into fiscal 2026. Demand across our key end markets remain healthy, especially within Technical Solutions, aviation and manufacturing and distribution. Combined with a record year of new sales bookings, the major aviation contract win and a strong backlog, we expect another year of solid organic revenue growth. Our recent agreement to acquire WGNSTAR will strengthen our position in the fast-growing semiconductor market and will complement our growth in the strategic space. In addition, our restructuring actions disciplined cost management, and our 2025 share repurchases enhance the earning power of the enterprise. With these tailwinds, we expect fiscal 2026 organic revenue growth of 3% to 4%, and adjusted EPS to be in the range of $3.85 to $4.15 before any potential positive or negative impact from prior year self-insurance adjustments.

With that, I'll turn it over to David to walk through the financial results in more detail.

Before we get into the results, I want to take a moment to clarify how to think about prior year self-insurance adjustments, because they're an important factor in our fourth quarter and full year performance. As a reminder, starting in our second quarter earnings release, and following discussions with the SEC, we updated the definition of all our non-GAAP financial measures, including adjusted net income, adjusted EPS, adjusted EBITDA and adjusted EBITDA margin. Under the revised definition, we no longer exclude the positive or negative impact of prior year self-insurance adjustments from our non-GAAP results.

Prior year self-insurance adjustments represent the net changes to our reserves for general liability, workers' compensation, automobile and health insurance claims that relate to incidents that occurred in prior years. These programs involve numerous claims across many years and some have very long tails, which makes them inherently difficult and in many cases, impossible to predict or forecast with any precision. For this reason, our forward-looking outlook does not include any potential positive or negative impact from these prior year adjustments.

With that context, it's important to note that prior year self-insurance adjustments had no impact on our Q2 results, and an immaterial impact on Q3. They did, however, have a significant impact on our Q4 results, and therefore, on the full year as well. To help you interpret the numbers, we've included a table on Page 4 of our earnings presentation that breaks out the specific impact.

For example, in the fourth quarter, the adjustment created a $0.26 headwind to adjusted EPS. So while our reported adjusted EPS was $0.88, to reflect and truly understand the underlying performance of the business, you would need to add back the $0.26 insurance-related headwind. And as Scott noted, that core performance was above our expectations heading into the quarter. As I'll walk through the P&L this morning, I'll call out the impact of prior year self-insurance adjustments were relevant, so you have a clear picture of our core operating performance.

Let's start on Slide 7. Revenue grew 5.4% year-over-year to $2.3 billion, a new quarterly record, driven by 4.8% organic growth, and a modest contribution from our recent acquisition in Ireland. Similar to last quarter, we saw organic revenue growth across all segments with the strongest contributions coming from Technical Solutions, manufacturing and distribution and aviation. Both B&I and education delivered 2% growth in the quarter, reflecting stable demand and solid execution. Overall, we're very pleased with the growth trajectory of the business and our end markets remain constructive as we head into fiscal 2026.

Turning to Slide 8. Net income from the quarter increased to $34.8 million, or $0.56 per diluted share, compared to a loss of $11.7 million, or $0.19 per share last year. The year-over-year improvement primarily reflects $61.3 million benefit from the absence of the large contingent consideration adjustment related to the RavenVolt acquisition that was recorded in the prior year, as well as higher segment operating earnings, largely driven by strong ATS performance. These benefits were partially offset by a $15.8 million negative impact from prior year self-insurance adjustments recognized in the current period, and $9.5 million in previously communicated restructuring costs.

Adjusted net income was $54.7 million, or $0.88 per diluted share, compared to $55.8 million, or $0.88 per diluted share last year. The year-over-year change largely reflects the $15.8 million, or $0.26 per share, negative impact from prior year self-insurance adjustments and higher interest expense, largely offset by higher segment earnings including the benefits of restructuring actions. Importantly, when adding back the prior year self-insurance adjustment, our adjusted EPS would have been significantly higher than last year and reflects the strong underlying operating performance of the business.

Adjusted EBITDA was $124.2 million, and adjusted EBITDA margin was 5.6%, compared to $125.6 million and 6% in the prior year. Taking into account the prior year self-insurance adjustments had a $22.2 million pretax negative impact on EBITDA, and a 100 basis points impact on adjusted margin, provides a much clearer view of our core operational performance in the quarter.

Now let's turn to segment performance, beginning with Slide 9. B&I revenue surpassed $1 billion for the quarter, up 2% from last year. This performance was driven by higher work orders, expansions with existing clients and continued strength in the U.K., partially offset by certain client exits. Markets remain largely unchanged from last quarter, and we expect modest, steady growth in 2026. Operating profit was $80.6 million and margin was 7.7%, as compared to $72 million and 7%, respectively, last year. The improvements were mainly due to restructuring benefits and the absence of $4 million to $5 million of the street costs incurred in the prior year.

Aviation revenue grew 7% to $296.7 million, supported by positive travel trends and several new wins ramping up, which carried some frictional upfront costs as these programs came online. Operating profit was $16.8 million with a margin of 5.7%. These results primarily reflect the timing of escalations in mix, including some frictional costs in the quarter. As Scott mentioned, we're very excited about the large new passenger services contract we won after the quarter closed, which is expected to begin ramping in our fiscal second quarter. This win, combined with a robust pipeline of new opportunities, positions our aviation business well for healthy organic growth in 2026.

Turning to Slide 10. [ M&D ] generated $417.4 million in revenue, an 8% increase year-over-year. This strong organic growth was driven by recent contract wins, particularly in the technology sector and continued client expansions across the segment. Based on the momentum we've seen in the back half of fiscal 2025, we believe these growth rates are sustainable as we move into 2026. Operating profit was $35.8 million with a margin of 8.6%, compared to $40.4 million and 10.4% last year. As we discussed last quarter, the year-over-year margin change is largely a result of strategic pricing on select new contracts that offer meaningful long-term growth opportunities, as well as ongoing investments in technical sales talent and sector-specific capabilities.

Education revenue rose 2% to $233.7 million, supported by escalations and stable retention rates. Our education team delivered an excellent quarter, increasing operating profit 44% to $18.8 million, and expanding margins by 230 basis points to 8%. This performance was driven by improved labor efficiencies and escalations, as well as the benefits of our strategic mix shift towards colleges and universities where the scope of opportunities and economics continue to be particularly attractive.

Technical Solutions had a phenomenal quarter with revenue increasing 16% to $298.7 million, including 11% organic growth and 5% from acquisitions. Growth was once again driven by robust demands for microgrids where we completed a large number of projects in what is typically a seasonally strong fourth quarter. Our data center and power services businesses also performed well. Operating profit rose 32% to $37.1 million, and margin was 12.4%, up 150 basis points from last year. This strong performance reflects excellent execution, higher volume and a favorable mix, all consistent with what we anticipated heading into the quarter.

Now turning to Slide 11. We ended the year with total indebtedness of $1.6 billion, including $23.5 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.7x. Available liquidity stood at $681.6 million, including $104.1 million in cash and cash equivalents. Fourth quarter cash from operations was $133.4 million, and free cash flow was $112.7 million, a significant improvement compared to $30.3 million and $15.5 million, respectively, in the prior year. This strong performance was driven by continued progress with our ERP conversion and tight working capital management during the quarter.

Now turning to capital allocation. During the fourth quarter, we repurchased 1.6 million shares at an average price of $45.84 for a total cost of $73 million. For the full fiscal year, we repurchased 2.6 million shares at an average price of $47.35, totaling $121.3 million and reduced our outstanding share count by 4%. At year-end, we had $183 million of remaining availability under our share repurchase authorization. Looking ahead to next year, we remain committed to covering annual dilution at a minimum, and we'll weigh additional repurchase activity against the opportunities in our M&A pipeline to drive long-term value creation. Interest expense in the quarter was $24.3 million, up $2.4 million from last year, driven by larger average debt balances.

Turning to our fiscal 2026 outlook on Slide 12, we're excited about our 2026 plan, and expect meaningful revenue growth, adjusted EBITDA and adjusted EPS, all before any positive or negative impacts from prior year self-insurance adjustment. Specifically, we expect full year organic revenue growth of 3% to 4%. Aviation, M&D and Technical Solutions are all expected to grow above that range, while B&I and Education are expected to deliver low single-digit growth. The WGNSTAR acquisition will contribute roughly 1 additional point of revenue growth, bringing total growth to 4% to 5% for the year.

We're also introducing a new metric this year, segment operating margin, which we believe better reflects the core operational health of the business as it removes the noise created by prior year self-insurance adjustments. Segment operating margin is defined as segment operating profit divided by total revenue, and we expect it to be between 7.8% and 8% for fiscal 2026. Interest expense is forecast to be $95 million to $105 million, and our normalized tax rate before any discrete items is expected to be 29% to 30%.

With regard to cash, we expect free cash flow before the impact of transformation and integration costs, the RavenVolt earn-out, and any incremental restructuring to be about $250 million in 2026. Putting this all together, we expect full year adjusted EPS in the range of $3.85 to $4.15. And as a reminder, our outlook does not include any future positive or negative prior year self-insurance adjustments. Going forward, we'll continue to highlight any material impacts resulting from the inclusion of prior year self-insurance adjustments in our non-GAAP results.

Moving to our fiscal 2026 adjusted EPS bridge on Slide 13. We start by adding back the full year 2025 prior year self-insurance adjustment of $0.27 to get to our core adjusted EPS for the year. From there, we layer in the net benefits of [ price, volume ], mix and restructuring savings. Interest expense before the WGNSTAR acquisition is anticipated to be a small tailwind in 2026.

As we discussed earlier, we'll continue investing for the long term in 2026, including adding talent, expanding our AI capabilities and building out our technology stack. After taking into account both the performance gains and these planned investments, we expect to grow our core EPS by more than 10% on 4% to 5% revenue growth. From that number, we then back out the first year impact of WGNSTAR, including associated acquisition-related amortization and interest expense, which gets us to our adjusted EPS guidance range of $3.85 to $4.15 before any potential positive or negative impact from prior year self-insurance adjustments.

With that, I'll hand it back to Scott for closing remarks.

Thanks, David. Before we open the line for questions, I want to take a moment to reflect on the year and acknowledge the tremendous work of our team. Fiscal 2025 was a year of real accomplishment for ABM. We delivered record revenue and record new sales bookings even as we navigate an uncertain macro environment and work through a significant ERP system upgrade that touched every part of our business. These achievements speak to the resilience, adaptability and professionalism of our people. I'm incredibly proud of how our team showed up this year, meeting challenges head on, staying focused on our clients and executing with discipline.

Whether it was delivering complex technical solutions projects, ramping major new contracts, we're advancing and adapting to our AI and technology capabilities across our operations. Our team rose to the occasion, their efforts position ABM very well for the future. Looking ahead, I'm excited about what 2026 holds for ABM. We have large new clients ramping early in the year. The WGNSTAR acquisition will be contributing to our growth and our pipeline across the portfolio remains strong. These elements give us confidence in our ability to drive another year of solid organic revenue growth and continued earnings expansion.

And as we think about the longer term, we will continue to evolve ABM into a higher growth organization. That means enhancing our portfolio, pushing further up the value stream with our clients, expanding our technical and data-enabled capabilities and being disciplined allocators of capital. We will do this with the same focus on clients, people and operational excellence that has guided us this year. To everyone at ABM, thank you for your hard work and commitment. It's made all the difference.

Happy holidays to everyone. And with that, we'll open up the line for questions.

[Operator Instructions] And our first question is from the line of Josh Chan with UBS.

I guess I was -- I'm going to ask about the margin trajectory of the business. I think you introduced the segment operating margin metric. I was just wondering, I guess, what are the drivers between what seems like a relatively flat margin outlook for '26 despite some restructuring savings coming into the business?

Josh, thank you for the question. Yes, we did introduce a new metric next year in segment operating profit margin. And we just feel like that's a really clean metric for us, and it reflects, call it, the operating health of the business, and removes some of the noise created by the prior year self-insurance adjustments. So we do have some benefit from the restructuring built into those margins. Some of that restructuring, as we spoke about in Q3 was baked into the field and operating profit numbers.

And then we have some mix rolling into those numbers in 2026 as well that we're working through, some of which from some of the pricing decisions we talked about in the Q3 call. So it's just a blend of those two things, really, ultimately, but we're excited to introduce this metric. And as I said, it just gives us a real clear picture, and it mirrors actually how we measure and manage the business internally.

Okay. Great. And then maybe a question on the deal. Could you just talk about sort of the strategic attraction of the deal, kind of why you pursue the deal? And then also from a financial perspective that the switch from being dilutive in '26 to accretive in 27. Could you just kind of talk a little bit about whether that's because amortization goes down, or whether that's just pure business growth and margin expansion?

That's great. So look, the strategic imperative with this acquisition is just really compelling. I mean, I guess, we don't have to talk a lot about the semiconductor space, right? Like it's -- it's one of the hottest and fastest-growing segments in the economy right now. And we have a big portfolio, already over $300 million in business in that space. And for us it's incredibly exciting. And the best way to think about this is -- and maybe this will help when you think about this acquisition and what they do.

What I want you to kind of visualize is a picture of bull's eye, right? And if you look at the outer ring of a bull's eye, think of that as a semiconductor facility and the inner ring as the fabrication center, where they're actually doing all the fab. We operate from the outside of the ring to the inside of the ring before you get to the fabrication facility. That's what ABM's core has been doing cleaning, doing technical service, doing support service for staff, but we've never been able to get inside the fabrication facility. Because to get inside there, it's typically sensitive materials, it's restricted. You need certifications. And that's what WGNSTAR brings to the table.

And when you think about the fact that they have over 30 clients in the semiconductor space, and we have over 50, and you put those together, I think it's just going to be fabulous because now we can go to our clients and say, we can now [ broach ] the fabrication center with our skills. So it's just going to open up a whole universe for us. So the strategic possibilities are just fabulous.

And I'll let David answer the dilution question.

Yes. And Josh, thanks for the other question. So from a dilution perspective, as we noted, we expect some nominal dilution in the first year, and that's really, largely, because of the factoring in the amortization and interest cost of the deal. But I think the good news is based on the growth trajectory, we expect a real path to accretion in year 2. And ultimately, if you step back and look at this thing on a forward-looking basis, we see a multiple between 12 and 13x. So we're extremely excited about the acquisition. It's got a great margin profile, a great growth profile. [ Those growth ] profile helps us propel in the '26 and '27, and we see a lot of actual cross-selling synergies opportunities, as Scott just mentioned, with the shared accounts that we have. So really exciting opportunity for us.

Yes. And we feel that there's a lot of parallels between this and what we did with RavenVolt, where we picked a specific segment of an industry, in this case, [ microgrids ] with RavenVolt and said, we see this as a point of acceleration. And just for context, RavenVolt did over $400 million in revenue this year, and thinking about that from where it started with the acquisition. So we feel like WGNSTAR has same principles as RavenVolt, and it's just as exciting for us.

Our next question is from the line of Jasper Bibb with Truist Securities.

I wanted to ask about your experience with pricing concessions and some of the more challenged U.S. office markets you talked about last quarter. Just hoping you could clarify if you've seen any more customer concessions in the B&I business? Or has that slowed down?

Yes. So I think it's stabilized. And we did say last quarter that we thought it was more episodic. We're always having pricing discussions. We continue to have pricing discussions in the fourth quarter, but they weren't as kind of dramatic and didn't add up to what it did in Q3. So we see that stabilizing right now and feel really good about it.

And I guess if you would think about, what we talked about with M&D last quarter, we said those pricing discussions were about capturing market. And specifically for us, it was in the semiconductor space. We knew about WGNSTAR. We knew it was coming. Obviously, we couldn't share that at that time. So part of those pricing discussions was anticipation for the WGNSTAR deal. So hopefully, that gives you a little bit more clarity. But again, we see total normalization now.

Yes, that's helpful. And then I guess, just hoping you could provide a bit more detail on the remaining pieces of the ERP road map that are coming in '26, and how that factors and how you're thinking about the free cash flow outlook for the year?

Yes. Thanks, Jas. This is David. So we're really happy that we've got the vast majority of the transactions throughout the enterprise on the new ERP system. And obviously, we work through that this year, and we think we finished the year on a good note there.

We have a few groups left to go. And the good news is, I think, from a risk and complexity scale level, those groups are much less complex ultimately to get onto the system. And with the advancements of of AI and how we deploy AI, we're learning every day more and more about how more efficiently we can migrate those groups on the system. But having nearly 90% of the transactions on board right now is a great place for us to be.

And relative to cash flow, we're obviously really pleased with where we ended the year on cash flow. A pretty big difference between the first half of the year and the back half of the year. In fact, our DSOs at the end of this year were down 11% from their peak in Q2. And that's, by the way, a reflection of the team's effort. I mean, there's a tremendous amount of focus from the entire team at ABM to get there.

And then looking forward to next year, I do think we're entering the year from a position of strength on cash flow. Our target next year of around $250 million normalized cash flow, even includes an incremental $30 million of anticipated capital spend on buses for an airport contract that we won in 2025. So given that on an adjusted basis, we feel really strong about the cash flow number in '26.

Our next question is from the line of Andy Wittmann with Baird.

Maybe David, can you just keep going a little bit more on the free cash flow. The $250 million normalized. Can you call out what the items that are unusual onetime items that we should be considering in the year? Obviously, some of the restructuring is going to have probably some cash cost. Although it sounds like you got to a lot of that. Maybe if you could just bridge us to what the actual number will be [indiscernible], just so we have an understanding of some of those ins and outs?

Got it. No problem. Yes. So if you started at $250 million, Andy, we'll probably have about $20 million in transformation costs, another $10 million in integration and acquisition costs, plus or minus $5 million in restructuring costs. And then the last piece of it is we do anticipate an additional payout for the RavenVolt contingent consideration. And right now, that's about $30 million. So if you rack all of those up and back it out of $250 million, you get down to a free cash flow number of around $185 million.

Super helpful for those clarifications. Just speaking of earn-outs and payouts. Does the WGNSTAR, is this cash payout that's expected in your fiscal second quarter itch? Or does this one also have some contingencies, earnouts, what have you associated with that? And if you can, if there are any, just -- what can you tell us about those recognizing that, that deal has not yet closed?

Yes. We anticipate the deal to close early in our second quarter of fiscal 26, Andy, and so we'll anticipate funding it at that time. And we've designed some structures on the management side to make sure that the team is motivated, and we'll go into more detail as we through the second quarter here.

Got it. Let's see. Maybe one other one. Can you -- maybe, David, just for understanding here, what is -- what was the segment operating profit in fiscal 2025? I just want to make sure that I understand kind of where you are on the metric, so I can understand the guidance.

Yes. Thanks, Andy. It was 7.9%, so roughly right in the middle of the range of what we're calling out for fiscal '26.

Got it. And then just maybe a final question for me. Obviously, again, you said that the restructuring program has been substantially activated here already. Can you talk about -- how much is left to go and how the rest of it stays in during the course of fiscal 2026? And where the benefits should accrue? I guess, there's some accrual to '27 here?

Yes. So as we spoke about in Q3, we realized about 20% of the benefits of the $35 million in Q4, essentially of 2025. And the balance of that, we still anticipate recognizing in 2026. And that restructuring is largely done essentially. And so beyond that, we continue to look at other areas like real estate footprint, optimizing our spend on subcontract in the early AI-enabled savings. Those will be incremental as they come to anything we announced on the prior restructuring.

Our next question is from the line of Tim Mulrooney with William Blair.

Scott, your guidance framework of organic revenue growth of 3% to 4% next year. What's the assumption embedded in that guidance for the B&I segment? It's your biggest segment. The business it's been accelerating in recent quarters, but you didn't call it out in your outlook section as a growth driver for fiscal 2026. So I'm curious where your head is at, and how you're thinking about the business for next year?

Yes. So look, I think -- so when I think about the B&I segment, which is largely commercial real estate, I feel like from our perspective, the commercial real estate crisis is behind us now. We feel like the work from home versus work in the office has kind of stabilized at this point. So we think we're back to kind of steady state in B&I. And typically, that's been growing at a GDP rate, and that's where we think it's going to land this year, and that's what's baked into our guidance basically normal course now, which, by the way, is a big relief, right, for -- I think, for all of us to feel like we've kind of lapped all the drama of the last few years in commercial real estate.

Yes, for sure. Yes. No, that's good to hear. Steady state, normal course, stabilization. Those are the words that, I think, everyone wants to hear is we're turning the quarter into 2026. So that's great.

David, I have a completely different shifting gears completely here to the self-insurance adjustment. And by the way, the bridges, the slides at the end were really helpful. So thanks for building those out. But I saw that $0.26 impact from your prior year self-insurance adjustments, and I'm wondering if you could just unpack that a little bit more? Because I understand there's a lot of accounting estimates that go into this and you do the best that you can here. But we're trying to understand if this -- this was a discrete event, or if there's potential for a longer tail here in future quarters?

Yes, no problem. Thanks for the question. So the context I would provide you here is this pool overall is a $500 million pool for us. And as we said in the prepared remarks, that's made up of workers' comp, general liability and auto related claims. And I think, obviously, with the health care environment like it is, we know there can be volatility in this space on these claims. But I think when we take a step back and look at it from our perspective, a 4% adjustment on a $500 million pool for a workforce of over 100,000 employees, is really well within industry standards.

And really, the key is nothing's really changed. We had roughly a 4% adjustment last year as well. And some years, we even had a favorable adjustment. So it's just that after our discussions with the SEC, we're now reporting this above the line. But I think that's the key in looking at it. This is something we deal with. We just have a reporting change and now it's reported differently. So it's really nothing more than that, I would say.

Yes. And if anything -- yes, I was just going to say, like when you think about this pool, and again, industry standard, we have such a strong safety culture here. It's just been embedded. Everyone gets a safety message every morning. And I think that's why we've been able to control this so well and keep it within a tight range, which again, as David mentioned, you know what's going on with health care costs with all the costs associated around these kinds of claims to keep it within 4%, we're really proud of that.

I do, and I appreciate that. Sometimes we see these larger impacts and it's just an update to a reserve because there's an ongoing court case or something like that. So I just wanted to clarify, but it sounds like if I could summarize this is well within the range that you see in a typical year, and we're just going to have to get used to the swings now that you can't exclude it from GAAP EPS correct?

Right. I think that's right. And I think that's another reason for us to give clarity in providing segment operating profit margin. Again, as I mentioned, that really just takes the noise out of that adjustment.

Our final question today will come from the line of Faiza Alwy with Deutsche Bank.

I wanted to ask more about the WGNSTAR acquisition. I think, Scott, you mentioned that there's a very small level of business that is outsourced in that sector right now. I guess I'm curious why that is? And are you anticipating that there's going to be -- I assume you're anticipating that there's going to be more of a shift towards outsourcing? And so give us some color around why that is?

And I guess related to that, talk a bit about the underlying competitive environment. Is there a potential additional roll-up opportunity? How should we think about future M&A in this space?

Yes. So I think for us, the way we look at it, from our perspective, the reason so much of the work is in sources because it's highly technical and for some of the semiconductor companies to bridge the gap of outsourcing it. It's a very, very high bar. But with WGNSTAR, so many of their clients are 20-plus-year relationships because they are so good at operating within these facilities and gaining the trust of their clients that what they've seen is in the clients, they've captured, more and more of the work that was in-sourced starts coming to WGNSTAR.

So it really has to do with the high level of proficiency that an employee has to have and having that trust in your provider, right? So we feel really great about that. And that's going to give us high confidence that we're going to get some really nice revenue synergies over time by introducing this capability now to our existing semiconductor clients. And frankly, we think there's crossover to pharma clients that operate in these kinds of facilities. So tremendous potential for us. So I think that's really, in our mind, the key reason.

And when we look at the [ competitive set ], not a tremendous amount of big competitors. It's a lot of small competitors. We could have roll-up potential for us, but it could also be that we could just expand organically with the skill set and just hiring and training on our own. So we have a lot of opportunity here. And I think that's why we're so excited about this.

Great. And then just wondering if you can be a bit more specific around just again, the dilution in '26 and the accretion in '27. Maybe give us a sense of what your -- like what the margins or EBITDA margins are in the business, or the segment operating margin, if you want to put it that way? And then I guess what you're assuming for interest expense and amortization for '26? And then how should we think about -- what [ goes ] into the synergies as we think about that accretion in 27?

Yes. Thanks, Faiza, sure thing. So on the EBITDA margin side, the margins of WGNSTAR are in the mid-teens. So it's a very healthy margin business. And for amortization and interest, on an annualized basis, we assumed roughly $13 million of amortization, and about $12 million of interest. So obviously, for fiscal '26, you take about 3/4 of that, assuming we close the transaction in the first part of the second quarter.

And then on a go-forward basis, as I mentioned earlier, we anticipate growth rate to certainly continue in the double-digit range. And even beyond that, as Scott just called out, the opportunity to drive cross-selling synergies and revenue synergies in this business is really significant given the shared portfolio and the shared vertical space. So that's really where we see a lot of the accretion heading into fiscal '27.

Great. That's all very helpful. Maybe if I can just ask a question on Technical Solutions. Give us your -- how should we think about the lay of the land there? I know that business can be pretty lumpy. So if there's any additional perspective you can provide around the go-forward and the underlying environment and pipeline, that would be really helpful.

Yes, the pipeline and backlog specifically is as healthy as it's ever been in Technical Solutions, Faiza. And what's exciting about that business is it's growing at a rate that we expect it to grow. And back towards the high single digits.

And then the other thing I would say is it is largely a project business. So it does tend to be a little lumpy from a forecast perspective, and there is some seasonality to it as well. There's a lot of work goes in over the summer, for example, when schools are out. Some of the [ microgrid ] work tends to ramp up just based on award schedules towards the fourth quarter, and you saw that in our results that we just reported now. So overall, though really, really exciting headed into '26 on the Tech Solutions business.

We've actually had one late question from the line of Marc Riddick with Sidoti & Company.

I just wanted to sort of touch maybe a little bit on the potential acquisition pipeline following this purchase. Maybe what we're looking at as far as leverage levels post transaction? I'm assuming it looks like we might be approaching around [ 2 ] or so. So maybe you can talk about your comfort level on leverage range and maybe what the acquisition pipeline looks like currently? And then I have a follow-up on the acquisition.

Yes. So it's something that we're always actively looking at opportunities, especially some that will accelerate the specific markets [indiscernible] like semiconductor, or a data center, or pharma. So we continue to look at that, but we're also very balanced, right? This will get us to about a 3x leverage when we when we close this acquisition. And that's kind of the range that we want to be in. So like we'll be really balanced about how we look at acquisitions for the rest of the year.

Again, have a pipeline that's building. But for us, you know we don't do a tremendous amount of acquisitions because it has to be a compelling strategic imperative for us with an IRR that is compelling as well. So we're going to be really balanced in '26 when we look at acquisitions.

And then the press release [indiscernible] the details as far as trailing revenue and the like, is there. Any particular seasonality we should be thinking about for acquisition or whether -- or any sort of particular SKU either from a seasonality standpoint or a geographic standpoint?

No, no real seasonality because they're operating, obviously, indoors in the fabs. So we get around the seasonality. So it's pretty even from a revenue base. And we love the diversity of their clients. They really operate in 9 basic regions of the country where semiconductor facilities are located. So they have good diversity geographically as well within the U.S. And 85% of the business is in the U.S. and the other 15% is in Ireland. So we get a little diversity there as well.

At this time, we've reached the end of our question-and-answer session. I'll hand the call back to Scott for closing remarks.

Well, thanks, everyone, for participating today. And I mean, I could tell you, we are so thrilled at ABM to deliver these kinds of results in Q4. Some of the results actually even exceeded our own internal expectations. So the team just came through. And we are so energized about 2026 and how we're moving forward. And I just hope everybody has a really good holiday, and we're really excited to come back in Q1 and tell you about how we're performing. But thanks, everybody.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.

Greetings. Welcome to ABM Industries' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll hand the conference over to Paul Goldberg, Senior Vice President, Investor Relations. Paul, you may begin.

Good morning, everyone, and welcome to ABM's third quarter 2025 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 2025 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.

But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates and other forward-looking statements. Our use of the words estimate, expect and similar expressions are intended to identify these statements, and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in the 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 now like to turn the call over to Scott.

Good morning, everyone, and thank you for joining us to review ABM's third quarter results. I'm especially pleased to be joined today by our new CFO, David Orr. David has been in the room on many previous earnings calls, but this is his first time as CFO, and I couldn't be happier.

David brings tremendous experience, strong relationships and deep industry knowledge. And we are already seeing the benefits of his leadership, highlighted by our cash flow performance in Q3. On behalf of the entire team, I'd like to welcome him publicly and wish him great success.

Our quarterly performance demonstrated solid momentum in many areas. We delivered 5% organic revenue growth, generated strong free cash flow and continued to win new business despite an uncertain macro environment. Each of our segments once again contributed to organic growth, and we generated over $150 million in free cash flow, driven by disciplined cash collection, resulting in a meaningful reduction in days sales outstanding.

Bookings performance was another highlight. Through the first 3 quarters, we have secured over $1.5 billion in new business, a 15% increase year-over-year, positioning us well for revenue and earnings growth in the year ahead. This success reflects both favorable conditions in most of our markets and our deliberate strategy to strengthen our presence in core markets and build lasting partnerships through thoughtful pricing decisions.

We have robust pipelines across Technical Solutions, Manufacturing & Distribution and Business & Industry, particularly in several attractive geographic markets. At the same time, certain commercial office markets, especially in select West Coast, Midwest and Mid-Atlantic metro areas, are slower to recover. In these areas, we're pushing long-term growth by strategically pricing rebids and extensions and by managing the timing of escalations to protect and expand our footprint.

A similar approach is being applied to competitive end markets, such as semiconductors and e-commerce, where there are terrific opportunities for new business to be on. While these choices did pressure margins and adjusted EPS, we were able to win multiyear contracts and extensions and protect long-term clients, which will support stronger and more sustainable growth over time.

It is important to recognize that our strategy is working. While some peers with comparable U.S. cleaning and maintenance exposure have recently reported meaningful organic revenue declines, we delivered mid-single-digit organic growth this quarter. We are also acting decisively to address the near-term margin impact of our choices. Our teams are implementing labor efficiency measures and we are tightly managing discretionary costs across the company.

In addition, we've launched a company-wide restructuring program, which is already well underway. This program is designed to better align our cost structure and operating model with our growth priorities. When fully implemented by yearend, this program is expected to generate at least $35 million in annual run rate savings. Our actions to boost growth and improve margins, combined with our highly cash-generative business model, reinforce our confidence in ABM's long-term growth trajectory.

Reflecting that confidence, we purchased shares in the third quarter and early into Q4, buying more than 1 million shares during July and August and nearly 1.5 million shares year-to-date for $71.3 million. I'm also pleased to report that our Board increased our share repurchase authorization by $150 million after the quarter closed, giving us added flexibility in capital allocation going forward.

We also continue to invest for the long term, with AI being an important part of that journey. In fact, we've invested in AI tools that enhance the way our teams work today, such as automated and more robust RFP responses and improved HR support services. And we are exploring using agentic AI to supplement client-facing service and operational support.

Looking forward, we see opportunities to leverage AI to uncover new revenue streams, introduce robotics at client sites where it makes sense and drive efficiencies within our finance organization. The benefits will be clear, an enhanced client and team member experience alongside greater efficiency and scale.

Importantly, AI will not disintermediate ABM. Our core business, whether cleaning, maintenance or engineering, is fundamentally people-led delivered in high, highly unique and dynamic environments that do not lend themselves to full automation. AI is not a replacement for ABM's core business but a tool that strengthens our people, improves outcomes for our clients and positions ABM to build on our industry-leading position.

Let me now give you a brief update across our segments. In B&I, we're seeing the prime office market continue to get healthier overall, as evidenced by our return to organic growth in the last 2 quarters. CBRE's midyear outlook shows prime vacancy trending down from about 4.5% today to closer to 13.6% by yearend. What's driving that is a real flight to quality. Tenants want the best buildings and new supply, and that segment is limited. That plays right into our sweet spot in Class A urban properties.

Now it's not the same story everywhere. Some regions, particularly parts of the West Coast, Midwest and Mid-Atlantic, are still under pressure with softer leasing and higher vacancy than the national average. The recovery is happening in these markets, but at a slower pace.

Stepping back, the overall trend in prime is clearly positive. And with our strong positioning in Class A, we're well aligned to capture the upside of that recovery, while being selective and strategic in markets that remain more challenged.

With regard to M&D, we see momentum driven by 3 key forces: technology investments spurred by AI, e-commerce growth and the reshoring of manufacturing. Semiconductors continue to lead the way with more than $450 billion in private investments announced since 2020. E-commerce remains another steady tailwind, with U.S. online retail sales rising 5.3% year-over-year in Q2 of 2025 to over $300 billion.

At the same time, the reshoring of U.S. manufacturing is accelerating, much of it concentrated in pharmaceuticals and automotive production. These are highly attractive markets where we have the clear right to win and where many service providers are eager to participate. ABM's ability to integrate services, scale quickly and execute complex solutions positions us to capture these opportunities. Just as importantly, our model enables us to enhance margins over time, turning wins in demanding high-growth sectors into durable and profitable growth.

The Aviation market continues to experience strength in passenger demand. TSA data shows daily checkpoint screenings routinely averaging above 2.8 million in July and August, up incrementally from 2024, underscoring healthy demand dynamics in domestic air travel. Airports themselves are also in a period of heavy reinvestment. Projects such as the new global concourse at O'Hare, along with the FAA's multiyear program to modernize terminals and airport infrastructure, represent a sustained pipeline of opportunities for us.

Against this backdrop, ABM's technology solution, ABM Connect for Airports, supported by our project delivery engine that enables us to quickly scale new jobs, is a clear differentiator. This combination of strong consumer travel trends, major infrastructure commitments and our ability to mobilize rapidly gives us confidence that our Aviation business will continue to outperform sector growth as new opportunities come online.

In Education, our business continues to benefit from the overall resilience of both higher education and K-12 markets, sectors that are typically -- move steadily even when the broader economy is less predictable. The latest Gordian 2025 State of the Facilities Report shows that institutions are focusing more on modernizing and maintaining existing campuses rather than adding new space.

In short, the Education market remains fundamentally solid, and our team has done a great job executing in this environment. For ABM, our focus on large school districts, colleges and universities should ensure stable contributions, supported by strong client retention and operational efficiency.

Finally, in Technical Solutions, our electrification business, particularly microgrids, data centers and power services, remain strong and now account for nearly 60% of segment revenue. Market fundamentals continue to strengthen. Wood Mackenzie projects the U.S. microgrid market will more than double by 2030, reflecting the growing demand for energy resilience and decarbonization. Meanwhile, global data center capacity is expected to expand at double-digit annual pace to support AI-driven computing needs.

You can see why we're so excited about where ABM is headed. The macro trends shaping our markets, whether the recovery in prime office, the surge in electrification investment and the resilience of Aviation and Education are the very areas where we are focused. These trends are evident in our revenue momentum, improving free cash flow and durable client retention. We believe ABM is uniquely positioned to be a clear winner as these markets continue to evolve and it becomes even more apparent that we are the best partner to help clients grow and transform their facilities.

At the same time, our cash-generative model enables us to consistently return capital to shareholders through dividends and share repurchases, reinforcing our commitment to delivering long-term value alongside sustainable growth. And the AI revolution will be a tailwind for ABM rather than a threat to our core business.

Looking ahead, we expect our fourth quarter earnings and margin to improve meaningfully from the third quarter, driven by the benefits of our cost and restructuring actions as well as from strong performance in our ATS segment. We expect to be towards the low end of our prior adjusted EPS range of $3.65 to $3.80 for the fiscal full year.

With that, I'll turn it over to David to walk through the financials.

Good morning, everyone. I'm honored to be here today and look forward to building a relationship with you all in the coming quarters. I'm also excited to work even closer with the ABM operations and functional support teams.

With that, let's get into the Q3 results, starting on Slide 6. Revenue grew 6.2% year-over-year to $2.2 billion, driven by 5% organic revenue growth and a 1.2% contribution from our recent acquisitions. Of note, our organic revenue growth was the highest it's been since the fourth quarter of 2022.

Like last quarter, we saw organic revenue growth in all segments, led by Aviation, M&D and Technical Solutions. B&I and Education were both up 3% in the quarter. It's clear that our advantaged offerings and service, in conjunction with our market focus and strategic pricing, is driving outsized growth.

Turning to Slide 7. Net income from the quarter increased to $41.8 million or $0.67 per diluted share, compared to $4.7 million or $0.07 per diluted share last year. This increase was driven by the absence of a $36 million adjustment to contingent consideration for our RavenVolt microgrid business that was recorded last year, as well as a decrease in corporate costs, reflecting a smaller negative impact from prior year self-insurance adjustments. These items were partially offset by higher interest and taxes.

Adjusted net income was $51.7 million or $0.82 per diluted share, compared to $53.6 million or $0.84 per diluted share last year. The change largely reflects higher interest and tax expense, partially offset by lower corporate costs.

Adjusted EBITDA was up 5% to $125.8 million, compared to $119.8 million last year, largely the result of lower corporate costs. Adjusted EBITDA margin was flat at 5.9%, reflecting the strategic pricing and escalation decisions Scott discussed earlier.

As Scott mentioned, we're taking several actions to improve margin, including a restructuring program that was launched in August. The program is designed to more closely align our cost structure and footprint with our growth priorities and is initially focused on organizational structure. The actions we've undertaken are expected to yield annualized savings of $35 million at a cost of approximately $10 million. We continue to review other elements of our cost structure for additional opportunities under this plan.

Now let's turn to segment performance, beginning with Slide 8. B&I revenue surpassed $1 billion for the quarter, up 3% from last year. This performance was driven by escalations, expansion with existing clients and continued strength in our U.K. and sports and entertainment businesses.

As Scott mentioned, certain areas in the U.S. remained slow to recover, and we've made some strategic decisions with regard to pricing and the timing of escalations to ensure we position ourselves for sustainable growth. These decisions helped drive growth, although they impacted margin in the quarter.

Operating profit was $73.8 million and margin was 7.1%, as compared to $77.8 million and 7.7%, respectively, last year. Our teams are working actively on plans to drive margins higher through efficiencies and escalations.

Aviation revenue grew 9% to $291.8 million, supported by positive travel trends and several new wins ramping up. Operating profit was $19.7 million, up 11%, with margins up 20 basis points to 6.8%. These results reflect volume growth and the benefits of escalations, partially offset by weather-related headwinds in the quarter.

Turning to Slide 9. M&D generated $408.9 million in revenue, an 8% increase year-over-year. This strong organic growth was fueled by new contract wins and client expansions.

In the third quarter, we were especially pleased to expand our presence in the technology sector, securing domestic business with leading U.S. and Asian semiconductor manufacturers as well as a major capacitor manufacturer. We're making thoughtful pricing decisions to ensure we're well positioned to capture the significant growth in U.S.-based tech manufacturing, much of it driven by enhancements in AI.

Operating profit was $36.4 million with a margin of 8.9%, compared to $40.9 million and 10.9% last year. As mentioned, the margin decline was largely due to strategic pricing on select new business opportunities which offer significant long-term growth opportunities, and also reflects investments in technical sales talent and sector-specific capabilities.

Education revenue rose 3% to $235.1 million, supported by escalations and stable retention rates. Our Education team did a great job by growing operating profit 17% to $21.1 million and expanding margin 110 basis points to 9%, primarily driven by improved labor efficiencies and escalations.

Technical Solutions grew 19% to $249.5 million, with 7% coming from organic growth and 12% from acquisitions. This strong growth was once again driven by robust demand for microgrids and data center and power services, which now make up about 60% of segment revenue.

Operating profit rose 9% to $19.4 million on higher volume, and margin was 7.8% compared to 8.5% last year. The margin performance primarily reflects business mix and higher amortization costs. Our microgrid business performed very well in the quarter. We expect margins to improve in the fourth quarter on healthier mix and higher volume.

Now turning to Slide 10. We ended the third quarter with total indebtedness of $1.6 billion, including $29.7 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 2.8x. Available liquidity stood at $691 million, including $69.3 million in cash and cash equivalents. Our teams across the business did an incredible job on cash in the quarter as they were laser-focused on collections and significantly reducing our days sales outstanding. I want to thank and acknowledge them for their efforts.

Free cash flow was $150 million, an improvement of $135 million over Q2 and up $86 million over the prior year. We continue to make progress with our ERP conversion in the third quarter and anticipate further improvement in the fourth quarter.

As such, we expect to be toward the low end of our normalized free cash flow range of $250 million to $290 million. This range excludes $16 million of the RavenVolt earnout payment that was recorded as a use of operating cash as well as full year ELEVATE and integration costs, which have totaled about $40 million through the first 3 quarters.

With regard to capital allocation, we repurchased 555,000 shares in the third quarter at an average price of $48.77 and a total cost of $27.1 million. We continued buying in the fourth quarter and repurchased 491,000 shares at an average price of $46.83 for a total cost of $23 million. Year-to-date, we've repurchased roughly 1.5 million shares for a total cost of $71.3 million. Additionally, our Board recently approved a $150 million increase in our share authorization, bringing our current capacity to $233 million.

Interest expense in the quarter was $25.3 million, up $4.1 million from last year, driven by larger average debt balances. This result was higher than our expectations as cash collections in the quarter were backend loaded.

Turning to our outlook on Slide 11. Given our higher interest expense and the impact of our strategic pricing and escalation decisions, we now expect full year adjusted EPS and adjusted EBITDA margin to be toward the lower end of our prior guidance.

As a reminder, the range for adjusted EPS was $3.65 to $3.80 and the range for adjusted EBITDA margin was 6.3% to 6.5%. We expect fourth quarter interest expense to be around $25 million. And we continue to expect a normalized tax rate before discrete items of 29%, 30%.

As a reminder, our outlook does not include any future positive or negative prior year self-insurance adjustments. Going forward, we'll highlight any material impacts resulting from the inclusion of prior year self-insurance adjustments in our non-GAAP results.

With that, I'll hand it back to Scott for closing remarks.

Thanks, David. Before we wrap up, I want to thank the entire ABM team for their continued focus and execution in what remains a dynamic and evolving market. This quarter, our teams did an outstanding job not only winning new business, but also retaining and expanding client relationships, an accomplishment that, together with our strong free cash flow, demonstrates the resilience of our core business and the value we provide.

I also want to acknowledge the adaptability of our teams as we modernize how we work. From implementing new systems to embracing AI tools and new ways of doing business, our people are learning and leaning into change with creativity and determination. These efforts are also enhancing how we serve clients, improving efficiency and positioning ABM for long-term success. Thanks to all of you, we are confident in our ability to deliver sustainable value for our clients, our teammates and our shareholders.

With that, let's open the line for questions.

[Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair.

This is Luke McFadden on for Tim Mulrooney. Maybe I want to start here just on the M&D business. Growth in that business was quite a bit stronger than what we were modeling. And I know you've had some headwinds in this segment over the last couple of quarters with respect to that larger customer rebalance. So is this growth acceleration primarily a function of kind of lapping some of those headwinds or really more tied to the underlying momentum you're seeing in the business at this point?

Yes. Look, we're really enthusiastic about our Manufacturing & Distribution segment, especially the end markets we're focusing on with semiconductor and pharma. So I think it's a combination of lapping generally when you look year-over-year. But for us, it's just about attacking strong end markets and investments we've made in salespeople.

In this industry group, it's so focused on having expertise in those areas like semiconductor, what have you. You can't just have a generalist go to those kinds of organizations and sell or be an operational person if you don't have that expertise. So we've made a lot of investments there, and they're really starting to pay off. And that's why you're seeing this accelerated growth. And we're big believers in this growth profile for years to come. So I think this is more about our focus and our expertise.

Understood. Makes sense. And thinking about free cash flow here in the fourth quarter, we just wanted to make sure we're doing our math right. So inclusive of the full year elevation and integration costs, we're getting to about $170 million implied free cash flow for the fourth quarter. Is that the right ballpark, or are we doing something wrong there?

Yes. Thanks. Let me give some color on that. So as you recall, our original normalized cash flow guide for the year was $250 million to $290 million. That includes roughly $70 million -- or excludes roughly $70 million of onetime items related to ELEVATE initiatives and a portion of the RavenVolt earnout payment that is treated as operating cash flow.

To kind of back that down, free cash flow of $180 million to $220 million. We're at $42 million free cash flow year-to-date. So that would imply we need to do about $140 million in the fourth quarter to achieve the range. And again, perspective, we did $150 million in Q3. So that's what gives us the confidence on the Q4 number and the range.

Yes. And what I would add to that, our organization is so acutely focused on cash collections at its core. And I'm just so proud of the team and what we've done. We told you guys that we were going to come back and get to this level, and we're just really happy with what we've done and have every bit of confidence we're going to keep on this momentum.

The next question is from the line of Jasper Bibb with Truist Securities.

I wanted to follow up on the margin headwinds. I guess to clarify, would you categorize the margin pressures as incremental growth investments? Or is there anything else driving this? Because the B&I and M&D growth has actually been really good, so it doesn't seem really like an operating leverage challenge, I guess.

Yes. So it's been a combination of both, right? When I think about B&I, I think about it more about protecting our footprint, protecting our client base. Because where we had the pressures were in 2 or 3 geographic areas that I mentioned in the prepared remarks, so whereas M&D was more about opportunistically expanding on going after new business and maybe lowering our threshold. And maybe I'll give you guys a couple of examples to see if this makes sense.

So in the Northeast, we have a large multi-building commercial office client that was under pressure. And they came to us and they talked to us about the fact that they're looking to trim operating costs across all of their areas, and so they may even have to rebid. And we got in the middle of it because of our relationship, and said, "Look, you don't have to rebid. Let's figure out how we can accomplish what you want to accomplish. We'll look at scope reduction, we could look at timing of escalations."

And it was actually incredible because we came away with this with a margin profile that was still acceptable to us, not as ideal as it was before that negotiation, but still acceptable for us. And we got a long-term extension. And from our view, we really ingrained ourselves with that client because now they think of us as a strategic partner, not just a vendor.

And then we had another example on the West Coast where we have a large client in a pressured area of downtown L.A. and that we had 1 year to go on the contract. And this is one where we proactively went to them because we didn't want them to bid it out or even start thinking about it. And we worked through, again, the same kind of iterations with them. Can we adjust scope? Can we take a person out of the lobby during the day? Can we think about the window cleaning cycles? Like we really got into it with them. And we ended up forging a longer-term contract. And the same thing, walking away with a client that now thinks of us as a strategic partner.

And in both those cases, we protected our footprint. And these were both marquee clients and long-term clients. So for us, we look at this as a really positive result. And you guys know, that have been following us for years, we always rework the margin back up. And I think even if it's a little painful right now, we'll talk about this a year from now and we're going to be really excited about where we are from a margin perspective.

And then the other example I want to give you is Manufacturing & Distribution. We are going after certain submarkets like semiconductor and pharma. And we had a new opportunity with a client that was tangential to semiconductor. It wasn't exactly semiconductor, but was part of the semiconductor supply chain. And we wanted this client, we wanted to get into this vertical.

And you know what, when we bid this contract, we went approximately 100 basis points below what we would normally do as kind of our minimum for bidding new business, because we wanted this strategically. We did that. We secured the new business. And we're already seeing some growth from that client from that bid. So like these are decisions that, again, they impact us in the short term. And we also know that you don't solve these problems in a quarter, so we'll have some effect as we go forward.

But I guess the thing that I'd want to mention here is we're not sitting on our hands when this stuff happens, right? And you heard in the prepared remarks, right, we're looking at discretionary costs, we're going back and relooking at labor efficiencies across our entire platform to make up for this. And to David's credit, initiated a firm-wide restructuring program where we took $35 million of costs out of the company. And that's largely underway, will be finished in the next month or so where we'll have the full run rate by fiscal start of 2026. I'm really proud of the organization for coming together and do that.

So I just -- hopefully, that gives you a little bit more color on kind of how these pricing decisions have impacted us, the examples of it, and kind of what we're doing as an organization in a very agile way to counteract those.

No, that's helpful. And then you mentioned the cash flow outlook. If you could maybe give us some more detail on your progress on collections? Any concerns about delinquencies and maybe a good frame for us where you're at on billing cycles for new revenue versus what could be considered normal?

Yes. No problem. No material concerns on delinquencies. I think as Scott said, there was just a tremendous focus in the quarter on collections overall. In fact, our DSOs were down 7% sequentially Q2 to Q3. And so we're really proud of that because that was the target we were achieving -- we were hoping to achieve.

And then as I said in Q4, we look to carry that momentum in. I mean there's a laser focus throughout the organization, and that goes down from the operators to our back office support functions and everywhere in between. So really proud of where we landed the quarter on cash flow, feel good about it going into Q4.

The next question is from the line of Andy Wittmann with Baird.

I guess I just wanted to kind of dig into the guidance in the quarter and all the implications here a little bit deeper. And I guess, specifically, it's a big quarter-over-quarter EPS ramp. And there can be historically some positive seasonality that helps 4Q or 3Q, but it looks particularly acute this year to achieve the low end of the guidance. So that's really what I want to get into.

When I look at it here, your implied fourth quarter to get to the low end is $1.09 to get there. Consensus is $1.07. So that actually kind of feels like no change. But it feels like there's clearly a change here in terms of the margin rate that your annuity businesses have exited the quarter with on 3Q versus Scott's comments here so far. So I guess maybe the question is, which of the segments sequentially that are going to drive such a sharp acceleration in your operating income dollars and why?

Yes. Thanks, Andy, for the question. So let me dimension it this way. We do, first of all, expect a material sequential improvement in both the EPS line and the margin line. And I'll actually dimension it on the margin side, we're looking at roughly 100 basis points of improvement in margin. And the way I would think about that is we have some moderate improvement in B&I and M&D on the strength of restructuring and the strength of the timing of escalations that are going to come through in the fourth quarter.

But the really big difference in the fourth quarter is our expected performance in Technical Solutions. And if you think about historically what this business has done in Q4s past, it's a seasonally very strong quarter. In fact, over the last 2 years, operating profit margins had been 11% and 13%, respectively, in Q4 for ATS. And we anticipate that to repeat itself in Q4 of this year. So that's a massive part of the margin and EPS improvement.

And then outside of the restructuring impact for B&I and M&D, as Scott mentioned, the restructure was broader than that. It was across the firm. And so we anticipate a benefit from that as well. So we feel like we're lined up to show a very strong sequential Q4.

Got it. Yes, and it's just interesting if you look at the interest expense specifically, I mean, that's a pretty big change in your guidance for interest expense. Just that change in interest expense here for the half year explains really the delta between the high end of your EPS and the low end, now that you're talking about it, is actually almost completely explicable by the change in your interest expense outlook. So just -- I guess that's just a comment more than a question, but still, I think, notable.

Scott, I guess, maybe to you here, just the -- last quarter, it kind of felt like things were kind of firing on most, if not all, cylinders. And it just -- it feels like -- I didn't hear a lot of commentary about some pockets of weakness, tough markets in the West Coast and the Midwest. This quarter, kind of a bigger change.

I guess just like, can you just take us through the time line as to what changed through the quarter? And I would have thought that there had been some indication about kind of some of these pricing negotiations that you're going into. Maybe just take us through kind of how this all evolved and came to be so that we just understand kind of what happened here.

Yes. Thanks, Andy. Interestingly, it's really simplistic. It's just -- and I'm saying this kind of tongue-in-cheek, but it was just bad timing. It's like we had a bunch of clients concurrently come to us and talk about the fact that they're pressured. They're looking at their budgets for 2026, because this is the time, this is the zone when owners are putting together their budgets because most of them largely are on the calendar year. So you're sitting here, for them, in June, July, August and firming up what their P&Ls are going to look like.

And they just came to us and said, look, again, we're looking across the whole spectrum. No one was like targeting cleaning, but they were targeting every expense, their utilities costs, right, waste removal, everything. And they just came to us like, "What can you do?" We don't want to test the market and we never want them testing the market, right? There's a very different outcome from us -- for us on a margin when it's bid versus a renegotiation. So we were happy all things considered to go into a renegotiation.

So it was a timing, a lot happened concurrently, and it just happened in the weaker markets, geographic markets that have not recovered as quickly. And look, I'll tell you some of them and you'll be shaking your head, Portland, Seattle, downtown L.A., parts of Minneapolis, D.C. has been under pressure. So there's been these -- it's different than maybe New York or Center City, Chicago, which are stronger. So it happened in those markets, it happened at the same time.

But to give you some comfort, Andy, I could tell you, at least in the short term, we're already a month into Q4, we are not seeing this happen again. And frankly, I've been around here 20 years, I've not seen, again, having in unison, so many clients at such a short period of time. But again, we thought through it, we reacted really quickly. So we feel like we're in good shape and we feel like we're not going to be having this conversation with you guys again about something that just felt so episodic.

That's really helpful perspective.

Our next question is from the line of Faiza Alwy with Deutsche Bank.

Scott, I wanted to follow up on the same topic. You talked about you don't want to test to the market. And I'm curious if you can talk more about the competitive environment. Like, are you seeing new entrants out there? Because I would have thought just given where we are in terms of the labor environment, there may be some potentially competitive advantages that you might have. So just talk a little bit more about that thought process.

Sure, Faiza. So look, here's the way I think about it. There's not new entrants from a competitor standpoint. Look, in any given market that we have, we're always going to have 3 or 4 really good competitors. It's just a fact of what we do, right? So when we talk about not wanting something to go to market, for us, it's just a very different conversation when you're sitting down with a client and working with them in a collaborative way to come to a result that they want, versus going out to bid and potentially having someone put in an irresponsible bid because they don't know the client as well as we do and know some of the demands that the client would have.

So you'll always find that. I don't think this is necessarily even ring-fenced to ABM. I think you would look at any kind of commercial services vendor in our universe and it's kind of ubiquitous that they would say like, why would you want something to go out to market if you can have a negotiation? So I think this is a result of clients that are under pressure right now because there's been slower to recover markets. And again, I don't -- there's -- just to be clear, Faiza, there is nothing in our mind that's structural that's going on here.

This is a normal event for us. Throughout the year, we see clients come to us all the time on a regular basis, in every industry group. Particular clients become under pressure because it could be their own business model. It could be something that's happening particularly to their business. So this isn't the first time that we've had to sit down with a client and try to work through a result to have them save money. It literally happens every week for us. It's just this was a situation where there were a number of big clients that were prestigious that we did not want these kinds of strategic, big brand name clients getting into the hands of any of our competitors.

Okay. Understood. Makes sense. And then just to put a finer point on what you're saying with respect to B&I versus M&D, because it sounds like those are the 2 segments where you're undertaking the strategic pricing. Like B&I feels a little bit more defensive versus M&D, it sounds like there's a lot of new business opportunities. So I just want to make sure that I'm thinking about it the right way.

And if that's right on M&D, should we expect growth to accelerate from here as you'll get some of this new business, perhaps at a slightly lower margin? I'm just trying to think through like the margin implications for next year.

Yes. So I think the way to think about it is, think about those segments, right? B&I is primarily commercial office. And as you know, for the last few years, it's been under pressure. So it was absolutely more defensive from that way because it was the clients responding. Whereas M&D was more opportunistic, we wanted to get into a particular market.

But then I think what I would ask you to do is also put this in context to the fact of what I noted in my prepared remarks, our bookings were up 15%, we brought in $1.5 billion in new business through the first 3 quarters of the year. So like our momentum in terms of winning new business and bringing them on and the tailwinds into 2026 are really healthy.

Our next question is from the line of Josh Chan with UBS.

I appreciate the color about the strategic pricing and escalation actions, I guess. But could you talk to the magnitude of the margin headwinds? Because I guess, in any given quarter, only a very small portion of your business, I would expect, to be rebid or renegotiated at any time, right? So just to see those more episodic events have that big of a margin impact, could you talk to kind of how that caused the magnitude of the margin headwind?

Yes. I'll let David take that one.

Yes. Thanks, Josh. Yes. So as Scott pointed out a few minutes ago, rebids are a part of our normal course of business. But just the volume and aggregation of this quarter was something we have not historically seen. So you combine that with the decisions we made to protect and preserve the long-term growth footprint, and as we mentioned, there were some timing items on the escalation side that we do believe over the next quarter or 2 will begin to recover. So I think that in and of itself for B&I especially provides most of the bridge on the margin headwinds.

Okay. That makes a lot of sense. And then in terms of the catch-up into Q4, certainly, it does seem like Q4 is becoming a lot healthier. I realize the escalation timing could contribute to that. But I guess, what's your confidence level that that alone can drive the projected level of sequential margin improvement?

Yes. It's -- I wouldn't say it's that alone. It's a combination of other things. So again, if you're talking to enterprise-wise, I mentioned just really anticipate a strong quarter from ATS. And I wouldn't discount the benefits of the restructuring activities as well. As Scott said, those activities are underway. They've largely been completed. And we anticipate roughly 20% of those benefits to come through in Q4 this year, with the balance to come through in fiscal '26.

The next question is from the line of Marc Riddick with Sidoti.

David, certainly looking forward to working with you going forward. Thank you for all the color that you guys have already provided.

I guess I just sort of want to take a different tack on this. I was sort of curious, Scott, maybe you could talk a little bit, you gave some examples on sort of how these opportunities present themselves during the quarter. Maybe you could talk a little bit about the visibility and maybe some of the contract wins, things like that, that maybe sort of the benefits of that retention and how we should think about that vis-a-vis historical visibility levels?

Sure. I mean look, I think it's a ramp-up, right? You make these decisions. And when we restructure these contracts and we're working with owners on how to get to their, really what their goals are for pricing, we kind of -- we think about it strategically too within where we're providing relief, because we'll want to restructure it in a way that we can work the margins back up.

And it's too much sausage-making for this call, but the truth of the matter is our salespeople and our operators know how to provide savings and restructure the contracts and the contract language in ways that, over the next 2 to 5 years, you see the margins come way back and sometimes even stronger than they were at the start.

So you know what, you're taking a little bit of a hit at the start to preserve the long-term relationship. But what's amazing about that is when you have a contract with a significant client, with a significant brand, and you're looking at an expiration date on that contract, and this could be a $25 million, $50 million, $75 million contract, and you're looking at an expiration date of a year from now, and you're like, "Oh my goodness, like what an amazing opportunity to give a little bit of margin back," and ends up with now a 4 or 5-year extension, for us, it's a home run. Because we know we're going to get back to that same margin place, but now we have a 5-year journey ahead of us and locking up a marquee client.

Excellent. And that's kind of where I was going there. So I mean do you sense that there are other similar opportunities that you might be able to take in the near term? Or do you get the sense that that might be driven more so around the differentiation of regional performances that you're hinting at earlier?

Yes. No. I think I may have mentioned this before, but like we do this all the time. So like I have every expectation that in the month of September, there's going to be 4 or 5 exact similar, the examples I gave, 4 or 5 times that's going to happen in the month of September. Different than 30 of them happening in the month of September. Those are anecdotal, those aren't real numbers of what happened.

And I think, you know what, Marc, that's probably the differential, like you always see this stuff happening, it's just, again, to have it happen in unison concurrently in one, that was the one that created the impact. But we're always looking for these kinds of opportunities to continue to secure longer-term contracts with our marquee clients.

Great. So I appreciate the explanation on going over that. The one thing I also wanted to touch on, you mentioned in your prepared remarks AI benefits and the like. Can you talk maybe about maybe the timing of when you might see that and sort of how that might take shape and how that sort of plays into the ERP?

Sure. Listen, AI is probably the most exciting thing that's happening here. But it's still a nascent technology, right? We're looking at areas across the company where we see savings in terms of our overhead, right? But we're also seeing places where we can accelerate from a revenue standpoint and a profitability standpoint that are client-facing in the field with labor or what have you. But it's the beginning, right? It's the beginning of a journey. Not just for ABM, I think we're in good company because I could tell you all the other CEOs that I talk to, everyone's playing around with these initiatives.

But my sense of it is in '26 through '28, you're going to start seeing real meaningful, real meaningful impact. And it's not going to be binary where it's just going to be flip a switch and you're just going to see a ramp-up. So super excited about that.

But I think what we're really excited about, and what we've been reflecting on a great deal, is ABM's business model. And we've been talking to investors that have been talking about where they're placing their bets. And it seems like the investor community is starting to get nervous about certain companies that they think could be completely really disaggregated because of AI and their business model and what can happen to that core.

And you think about ABM's core, right? I don't know how you feel, Marc, but I don't think AI is going to be turning a wrench anytime soon, right, or doing our core services. So we think there's going to be a lot of focus on companies like ABM in the future when you look at the disruption that's going to happen to companies in a negative way from AI, and we look at this and say we are just super enthusiastic about kind of the core services that we provide as a foundation and the fact that they are insulated for years in terms of AI, and then layering on the benefits that we could get in back office and through labor efficiency. And it gets us pretty charged up here that we have an AI-resilient business model when it comes to disruption.

Thank you. This will conclude our question-and-answer session. I'll hand the call back to Scott Salmirs for final comments.

Well, thanks, everyone. Appreciate you following. And you can see there's a lot of enthusiasm here for what we're doing and where we're heading. And we're going to continue on. We're looking forward to talking to you in Q4. At that time, we'll give you our annual guidance for '26. And in the interim, have a good holiday season, and we'll talk to you soon. Thanks, everybody.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.