管理層發言
Greetings, and welcome to the ABM Industries Second Quarter 2026 Earnings Call. Operator provided 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 ramps 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 the 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 environments 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 a 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 measures 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 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.
分析師問答
Operator provided 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 expected in the back half. But on the second quarter specifically, were there any really large projects in there, like the battery storage systems 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 were a couple of large projects, as you mentioned. And those projects carry a different profile; they are heavy on equipment and heavy on infrastructure, and the margins are a little lower because there's so much equipment going into the jobs. But we see that momentum continuing not only on 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. I'll go very high level on this, but when you look at our ATS project work, you can almost think of it in two phases: design and engineering, and then the 'turning the wrenches' part. The 'turning the wrenches' part is lower margin than designing and engineering. So when you look at the mix for this quarter and the margin, we were heavily weighted toward the 'turning the wrenches' part. We think in the back half we'll have a lot more of the designing and engineering work come through, and you'll see 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. HVAC technicians, we all know right now, are in high demand nationwide for data center construction projects. I'm curious if you're seeing more work 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 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 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 a bit, but it still implies 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 two 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... Okay. Great. 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 two quarters as you see the full impact of the exits you talked about?
Yes. Maybe I'll just break down B&I for you. I think the majority of the pressure that we're seeing was 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. Maybe I'll give you a little more background on the way we see that market and what's going on. If you look at vacancy rates in cities like L.A., San Francisco and Seattle, they're probably two or three times worse than New York City. If you think about those markets, the West Coast is kind of tech-heavy, whereas the East Coast is banking and legal. From a return-to-work standpoint, West Coast tech is not returning to work the same way financial services and legal are. So we're seeing pressure in those markets. What ends up happening with that pressure is competitors start making pricing and margin decisions that don't meet our economic thresholds. I've seen this before in my career at ABM and this stuff tends to be episodic and not sustainable, so we see it waning over time. But right now, we're seeing some of that pressure. If I 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, and 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 add one more bit of color looking forward for B&I. The TfL exit accounts for about 300 basis points of growth impact for B&I in the back half. So it's clearly the majority of the impact is 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. 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, and our efficiencies in collecting cash. So we're mindful of that, but the first thing is getting the planning done for the next groups and we'll provide clarity on that in future calls.
I would just say what I'm excited about in terms of getting done with the ERP is we're going to have a clean data set. When you think about AI and all the leverage, it's so important to have clean data to leverage your tools on, and we're heading in that direction. I think you'll see meaningful opportunities in 2027 and 2028 as our data set and AI mature. There's a lot of runway in what we're going to be able to do with scheduling and workforce management. There are a lot of exciting initiatives coming, and while it can't come soon enough, we're mindful of the pace and the balance. We're in this for the long term.
Our next question comes from the line of Andy Wittmann with Baird.
I wanted to first ask about the standby generator microgrid work that you're doing at the retailers. You've had a large retailer that has been working with you to install these for several years now. I think you're on at least your second, maybe third tranche of stores with that legacy retailer. It sounded like there's a new large retailer that signed you up. I'm trying to understand now that you've got two of these, where they are in terms of installing these types of things on their stores, both for the legacy retailer and how much you have with this new customer, and how you're thinking about the long term with this customer. Is this the beginning, or do you expect phases as well?
Thanks. I would say high level, Andy, we think there's a lot more runway in the microgrid business. For us, it's not necessarily customer by customer—having customer concentration is not ideal—so we're focused on broadening our client base and strategically going after a broader range of clients. It's not about one or two clients for the long term. Right now, we are weighted to one or two, but we're growing out of that and we're optimistic about what the next year or two is going to bring in terms of broadening that base. With these clients, we see good runway in their portfolios and their programs.
Okay. Got it. I have a follow-up for David on the prior year self-insurance accounting in your adjusted results. As I understood it, last year you were recording those adjustments in operating results per SEC communications and you had said you would continue doing so, but you weren't factoring them into guidance due to visibility. Did I hear you say you made a change this quarter to include them in the guidance? Can you explain more slowly whether that change had any impact and why you made it?
Sure, Andy. Last year, in Q2, we had communications with the SEC and they strongly advised us to record any prior year self-insurance adjustments above the line as part of our operating earnings, and we did that. For fiscal 2026, we initially said we'd continue recording those adjustments as part of operating earnings but we weren't factoring them into our guidance because visibility was limited. We had a $23 million unfavorable adjustment last year and were not pleased with that. Since then, we've made real investments in the program to dampen volatility and improve predictability: return-to-work programs, timely claims closing, aggressive claims settlement, driver behavior programs, and other insurance-related initiatives. We think the combination of these actions gives us much better predictability. As such, we're now confident that the results of the study we'll do in Q4 for the full year of 2026 can be captured and contemplated within the guidance of $3.85 to $4.15. At the end of the day, this is about transparency: we're going to include it in the guide going forward and treat it like any other operational program at the company.
What I'd add is that this is a significant move because it de-risks Q4 for investors. Prior to this, we didn't have it in guidance, and last year we had a roughly $0.20 hit to EPS in Q4 that wasn't great for the stock. 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.
Okay. That makes more sense. So you've narrowed the program and improved processes so that it's more predictable, and now you can bake it into guidance. That sounds like a good outcome.
You nailed it, Andy. It's all about predictability and we firmly believe the actions we've taken and our focus on the program give 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, are you seeing any changes around the competitive environment there? How do you think about growth—are you growing with new business, or are you seeing just your existing customers grow faster? I'd love to hear more about that.
We're thrilled with the acquisition and integration has gone really well. They're already starting to contribute meaningfully to our semiconductor space. If you think about the semiconductor market as a bull's eye, the center is the fabrication part, which is highly protected; the outside is the facility itself. We were strong on the outside of the fab and WGNSTAR was inside the fab. The combination is making us a seamless provider. Year-over-year in semiconductor, we've doubled our growth there. A few statistics: we have over 60 clients and over 300 sites in semiconductor. We're in about 75% of fab capacity between U.S. and European fab makers. For OEMs, there are roughly 10 big OEMs and we're doing work with seven of them now. So we're well positioned and we expect double-digit growth to continue for a while.
Great. That's helpful. I wanted to follow up on B&I margins because you talked about an improving trajectory. You're also investing in sales resources. Can you give perspective around where steady-state B&I margins should be, how much opportunity is there from mix alone, and what might happen once you ramp down the sales investments?
You saw some sequential movement in our margins; we were up 30 basis points between Q1 and Q2. We're seeing movement. With the decisions we've made specifically on the West Coast and the TfL exit, we're not necessarily expecting positive organic growth in B&I in the rest of the year, but you will see margin acceleration in the back half. The decisions we're making and how we're managing the business will be accretive to margins. We're 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, around 5% to 6%. Your guide is up to the high end of 3% to 4%. Does that deceleration 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 4% growth for the year. Am I on the right track?
Josh, thanks. The deceleration in B&I in the back half is largely driven by the TfL exit and some of the West Coast pressure that Scott described. From a full fiscal year perspective, we're looking at more flat to slightly positive growth for B&I. We see that deceleration and it takes time to lap those kinds of exits, especially with a TfL exit for the year.
Okay. You mentioned price escalations—do you feel like your pricing is sufficient to offset what you're seeing in terms of wage inflation?
One benefit of the new systems we've installed is much better visibility on our cost basis, especially for the larger groups with a high volume of contracts, like B&I. We have a strong focus on escalations and feel good about the path to capturing cost burdens we've experienced. That's part of the momentum Scott mentioned that will help ramp sequential margin performance in the back half.
I'll add that I'm enthusiastic about the AI-based initiatives. On escalations, we have an AI initiative where we scanned contracts and generated escalation letters using AI. These initiatives take time to mature, but escalations is one area where we're already seeing benefits from AI.
Our next question comes from the line of David Silver with Freedom Capital Markets.
I'd like a little color behind the $1.2 billion of new contract wins. It's a big number and you've highlighted it. Beyond that, I'd note you mentioned walking away from some business that wasn't generating sufficient profit. Can you help us understand the mix of the new business wins—how much is driven by strategic offense versus defense? Are you specifically targeting strategic new business or is it more reactive to competitors or regional dynamics?
We do have a history of updating first half bookings in Q2, so it's not entirely unusual. We're excited about the $1.2 billion because you have to step back and look at sentiment: clients continue to want to work with us. We're winning business across broad groups of clients. The majority of it is strategic rather than defensive. We've been hiring business development resources and targeting areas such as the Sunbelt regions and industry groups like data centers and semiconductors. If you combine semiconductors and data centers, that's about 7% of ABM's revenue today—it's a meaningful strategic initiative we set out a couple of years ago. There's some defensive work in any sales pursuit, but the majority of the $1.2 billion was strategic.
On a related note, given your national footprint and segmentation by end market, does it make sense to think about more discrete geographic strategy? For example, the tech business in California versus Texas might require different approaches. Given persistent trends in some regions, what role does a more explicit geographic strategy play?
We do have a geographic strategy. We still firmly believe segmenting by industry group and end market is the right approach. Within those customer segments, we incorporate a geographic focus. We allocate business development assets to growth zones like the Sunbelt and apportion operational resources based on those growth zones. Think of industry groups as the overlay and geography as an important dimension within that overlay.
Our next question comes from the line of Marc Riddick with Sidoti & Company.
I wanted to touch on your expectation of reducing leverage back to about 3x. Can you talk about what you're seeing in the acquisition pipeline and valuation levels over the last few months and how your appetite for M&A looks now?
As we said in Q1, we did anticipate leverage to tick above 3x with the WGNSTAR acquisition. Our near-term priority remains delevering and we anticipate, based on our cash flow strength in the back half, to get back down below 3x by year end. That doesn't mean we're walking away from value creation opportunities or capital return, we're just sequencing them appropriately. Based on the strength of our sequential cash flows, we feel solid.
The M&A pipeline is something we continue to monitor. We think there will be interesting opportunities in the back half of this year and into the first half of next year. That could coincide with our leverage coming down below 3x. We're still integrating WGNSTAR, so we'll be strategic about timing and integrations. We're monitoring it and being selective, more toward the back half and possibly into fiscal Q1.
One quick follow-up: have you seen any effects from the geopolitical disruptions on your pacing through the quarter and into Q3?
Where we see a hint of it is in the aviation sector, specifically in our international business because international volumes have seen some pressure. It hasn't been materially disruptive yet, but we're watching it and staying on top of it. One of the advantages of ABM is our flexible labor model and the non-discretionary nature of many of our services, which helps us ride through cycles.
Our final question this morning comes from the line of Tate Sullivan with Maxim Group.
Thanks. On the free cash flow guidance of $250 million, what does that exclude specifically? Can you close some of the figures for the excluded amounts?
Certainly, Tate. The items that would be excluded total roughly $65 million on an annual basis. That includes some remaining transformation costs of about $20 million, the anticipated final RavenVolt earn-out payment of roughly $30 million, and acquisition costs associated with WGNSTAR of about $8 million to $9 million, plus any other restructuring charges. We feel good about where we are on cash flows; we're about 40% of our pacing on a normalized basis—roughly $100 million out of the $250 million guide—and most of our cash flow is tilted toward the second half of 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. 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.