Q4 2019 Earnings Call
Ladies and gentlemen, thank you for saying Goodbye and welcome to the E Com fourth quarter 2019 earnings Conference call.
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I like to hand, the comfort from to your speaker today will Gabrielski Vice President Investor Relations. Thank you. Please go ahead, Sir Thank you operator, I would like to direct your attention to the Safe Harbor statement on page one of today's presentation. Today's discussion contains forward looking statements about future business and financial expectations actual results may differ significantly from those projected in today.
Forward looking statements due to various risks and uncertainties, including the rest described in our periodic reports filed with the FCC, except as required by law. We undertake no obligation to update our forward looking statements were using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation, where available which is posted on our website <unk>.
Senators in today's discussion refer to a year over year progress, except as noted organic growth as presented on a year over year in constant currency basis, and as adjusted to exclude impacts of noncore businesses and plan than actual dispositions.
I should note, we will now refer to our building construction business as a construction management business consistent with the professional services nature of the work we will refer to our professional services business in our presentation, which is comprised of the design of consulting services segment. The construction management business and you come capital adjusted EBITDA for these businesses exclude stranded costs associated with.
Plant separations, and divestitures, which are expected to be eliminated.
Historical professional services financial metrics reflect our current estimates based on information available. After the date of this presentation. The final figures may differ materially from these preliminary amounts due to the completion of our financial closing procedures final adjustments and other developments of the may arise between the date of this presentation and the time to recast quarterly results are finalized.
We believe adjusted EBITDA for the professional services business provides additional insights into business performance by excluding the results of plans business divestitures. However, such estimates are forward looking statements and are inherently uncertain as such you should not place undue reliance on such statements as actual results may differ materially reconciliation of adjusted EBITDA for the professional service.
This business for fiscal 2020 to the most directly comparable GAAP measure is not available without unreasonable effort because the company cannot predict with sufficient certainty all the components required to provide such a reconciliation at this time.
Today's call include discussion related to the previously announced sale of the management services business, which has not yet been completed.
And includes a potential risks and uncertainties, including that the transaction does not close or the closing maybe delay finally I should note that fiscal 2020 as a 53 week period, beginning today's presentation as Mike Burke AIU comes Chairman and Chief Executive Officer, Mike.
Thank you will welcome everyone. Joining me today are Troy Rudd, our Chief Financial Officer, and Randy Watt rank, our Chief operating officer I'll begin with a discussion of Akens results in the trends across our business, including an update on the strategic actions. We are executing that have resulted in a substantial increase in shareholder value then Troy will review our financial performance.
An outlook in greater detail before turning the call over for question and answer session.
Please turn to slide three.
Fiscal 2019 was a successful year for eight common several fronts first we exceeded our expectations on nearly every key financial metric adjusted EBITDA grew by 13% and we delivered a fifth consecutive year of free cash flow in excess of $600 million, including record cash flow in the fourth quarter importantly, our professional.
Services business delivered an even stronger 25% adjusted EBITDA growth rate second through the sale of the management services business at a premium valuation, we unlock substantial shareholder value. The expected cash proceeds will transform our balance sheet enable us to accelerate stock repurchases at a highly attractive price under our existing.
Authorization.
Third the restructuring actions, we have taken it continued to take part resulting in record profitability, including an all time high Dcs margin in the fourth quarter and for the full year with the additional actions, we're taking to enhance profitability, we reiterated our expectation to achieve an 8% Dcs margin in fiscal 2020 on a net.
Service revenue basis that excludes pass throughs. This translates to an approximately 11.5% margin, which is consistent with our peers. Finally, we are winning work at a strong pace and backlog remains near an all time high at $60 billion as our fiscal 2020 guidance confirms we expect another year of strong adjusted EBITDA.
Growth, including our expectation for 12% adjusted EBITDA growth in our professional services business supported by a 19% backlog growth in fiscal 2019.
All of these accomplishments in our positive outlook for fiscal 2020 are the result of our deliberate and focused efforts. We began executing two years ago to enhance shareholder value. Please turn to slide four.
We have been steadfast in our commitment to enhance profitability into fully capitalize on our near record backlog, we executed a $225 million restructuring plan. During 2019, we announced additional restructuring actions in August as a result, we continue to expect to achieve greater than 210 basis point increase in Dcs.
Margin by 2020 compared to fiscal 2018 supported by the already achieved 120 basis point increase in fiscal 2019.
We are evaluating additional opportunities for further margin upside. These include further investments in best cost shared service centers and global design centers to lead our industry and delivering we're consistently and efficiently.
Additionally, we are focused on improving return on capital and return on management time. This includes continued progress on our plan to exit more than 30 countries, where we are nearly 50% complete.
We're continuing to evaluate our entire portfolio to ensure we are investing in markets that are aligned with our strategic and financial priorities.
We're also making progress on our commitment to de risk our business. The alliant combined cycle gas power plant is expected to achieve substantial completion on time later this year.
In addition, we have divested several low returning businesses over the past two years, including our international development business and numerous oil and gas businesses that were not aligned with our strategic and financial priorities.
As we continue to pursue the exit from our remaining self perform construction businesses. We are managing our risk reward profile on this work to maximize the ongoing value and attractiveness of these businesses to third parties. We're committed to an end state goal of nearly zero at risk self perform construction exposure.
Finally last month, we announced the sale of the M.S. business for 2.4 or $5 billion at a premium valuation, which is expected to close in the second quarter. The sale unlocks value much sooner than the proposed spin off and creates certainty for all stakeholders. This transaction will generate substantial cash proceeds, which we will deploy to reduce.
Debt repurchase our stock at what we view as a substantial discount to professional service peers in our estimate of intrinsic value. Please turn to slide five for a discussion of our business trends.
Beginning in our professional services business in the Dcs segment performance was strong in 2019. This was highlighted by record profitability in our largest market. The Americas, where we are benefiting from efficiency gains and favorable market conditions in both the us in Canada.
State and local clients continue to operate with healthy budgets and record rainy day funds. The addition over the past year five states faced in gas tax increases underscoring our clients focus on funding critical infrastructure importantly, bipartisan support for infrastructure investment remains strong. We are also delivering growth in our work for federal client.
It's where we support the number of agencies and have a growing pipeline.
Conditions in Canada, or similarly, strong we're executing on several large transportation projects in the region and delivered double digit revenue growth for the year led by our leading transportation franchise.
Turning to our international markets.
We delivered solid results in EMEA region led by large wins in Saudi Arabia and growth in the UK across the region profitability is benefiting from the actions we have taken to more efficiently deliver work and to extract ourselves from lower returning markets.
With Brexit now delayed until at least January we're closely monitoring the macroeconomic environment to ensure our businesses resilient across a range of potential outcomes importantly, the UK government remains committed to supporting economic growth in his prioritizing infrastructure investments to address potential economic weakness.
We maintain a leading position that allows us to capitalize on these opportunities.
Asia Pacific region. The macroeconomic backdrop is mixed but execution remains strong geopolitical uncertainty in a slowing rate of economic growth in Hong Kong is balanced against public sector investment in Australia, resulting in stable growth across the region.
Profitability is benefiting from a sharp focus on execution and operating efficiencies.
Pivoting to the construction management business execution was strong which led to a substantial increase in profitability our backlog increased by 45% and we're pursuing a robust pipeline of larger opportunities. The year was highlighted by our selection to deliver the new terminal one project at JFK Airport in New York City, demonstrating both our strengthened.
The aviation market and our leadership position in New York.
As a result, our backlog represents nearly four years of annual revenue and we expect revenue and profit growth in 2020 and beyond.
It management services, we delivered 12% revenue growth, which reflects the successful growth investments, we've made and strong market trends. The strength of this platform was evident in the premium valuation we realized as part of last months announced sale.
Across Asia execution in 2019 was stellar across a number of key financial and strategic initiatives.
We are continuing to make progress on our transformation into a higher returning and lower risk professional services business, where we are energized by our performance in 2019, including 25% adjusted EBITDA growth and 19% backlog growth. This momentum underpins our expectations for another year of double digit growth this year.
We remain focused on capitalizing on the opportunity to further enhance value in 2020 as we continued to deliver against our commitments I will now turn the call over Detroit, who will discuss the quarter in more detail.
Thanks, Mike Please turn to slide seven.
We delivered a number of financial and strategic accomplishments in fiscal 2019, including exceeding our expectations are nearly all of our financial targets.
Before reviewing our performance in greater detail I want to discuss a few financial impacts associated with the strategic actions, we've taken and continue to take to maximize value.
First we recognized a $588 million noncash impairment to goodwill associated with the at risk self perform construction businesses in the fourth quarter.
We intend to exit these businesses apart as part of our strategy to de risk the business profile.
Second as Mike detailed we continue to take actions during the year and anticipate further actions in fiscal 2020 to enhance profitability.
This includes the commencement of restructuring actions in the fourth quarter associated with the margin improvement plan, we announced in the third quarter as well as actions required to eliminate stranded costs.
Finally, we expect to report the first quarter, a onetime reduction to equity related to real estate of approximately $125 million from the adoption of the new lease accounting standard.
There is no pino impact from this adjustment and this is a noncash item I will discuss the cash components of these restructuring actions shortly.
Please turn to slide eight.
And the Dcs segment underlying performance was strong.
The adjusted operating margin was 8% in the fourth quarter, which marked a new record any 190 basis points increase in the prior year.
The substantial improvement reflects the benefits from already completed restructuring actions and solid execution.
The full year adjusted operating margin was 7.1% also a new high for Dcs and exceeded our expectations.
For the full year revenue increased in the low single digits, we faced a challenging comparison in the fourth quarter due to elevated storm recovery work last year.
Revenue increased excluding this impact contracted backlog increased by 6% to an all time high led by 8% growth in the Americas, which supports our expectation for continued growth in 2020.
I should note to the growth rates in the first half of 2020 will continue to be impacted by the high volumes of storm recovery work executed in the first half of fiscal 2019.
However growth is expected to accelerate as the year progresses, and we expect to deliver a low single digit revenue increase for the year.
Please turn to slide nine.
Organic revenue in the CS segment declined by 3% in the full year. This performance include a decline in the power business, which was expected due to our decision to no longer pursue fixed price combined cycle gas power plants.
The Alliant combined cycle power plant, the only large fixed price new generation project in our backlog is on track to be completed later this year.
The adjusted operating margin was 2% for the full year, which was consistent with our expectations.
In CS construction management profitability improved significantly in 2019, and we expect double digit growth in 2020 supported by 45% increase in backlog.
As a reminder, our construction management business, which comprises approximately 70% of the revenue in this segment contains a high level of pass through revenue.
On our NSR basis, which excludes these passers the adjusted operating margin was 15.2% for the year.
Please turn to slide 10.
Revenue in the Emmis segment increased by 12% in the year and set a new record.
Activities on several of our larger projects have now fully ramped up.
The adjusted operating margin was 6.5% in the fourth quarter resulted in a full year margin of 6.1%, which exceeded our 6% expectation.
Let's turn to slide 11.
Fourth quarter operating cash flow and free cash flow were 794 million and 779 million respectively.
Both metrics set new records and resulted in full year free cash flow of $694 million.
This is a great outcome.
Flex the efforts across the organization to drive cash flow. Despite continued headwinds from delayed collections for our completed work in the U.S. Virgin Islands.
Generating cash is ingrained in our culture as as demonstrated by the $3.4 billion of free cash flow we've generated since fiscal 2015.
Turning to our capital allocation priorities, we will continue to allocate our capital consistent with our commitment to maximize shareholder value.
Our substantial cash generation in the fourth quarter enabled $413 million of debt reduction.
And our net leverage ratio exiting the fourth quarter was 2.2 times.
This is within our target range of two to 2.5 times.
In addition, we repurchased $75 million of stock during the year at an average share price of $31 and have $760 million remaining under our 1 billion dollar authorization.
The sale of the MSP business is expected to close in the second quarter.
We expect to allocate cash proceeds to debt reduction consistent with our leverage goals and to execute share repurchases.
With our expectations for continued growth and our transformed leverage profile. We continue to expect to allocate available free cash flow to repurchases thereafter, as we continue to believe our stock trades at a substantial discount to a fair estimate of intrinsic value.
Please turn to slide 12.
We are reiterating our fiscal 2020 guidance, we expect enterprise adjusted EBITDA of $1.060 billion at the midpoint, which includes 12% growth for our professional services business.
Excluding any impacts from the sale of Dms business, our planned exit from at risk self perform construction and on a consolidated basis.
We would have expected jet to generate free cash flow within our 600 million to $800 million range.
This would have reflected both our expectation for continued earnings growth lower interest expense and the expected incretion in cash taxes.
However, a few variables may impact our cash flow this year.
First we expect to receive approximately $2.2 billion of net proceeds from the MSL in the second quarter.
And we will continue to pursue the items associated with the $150 million of contingent purchase price.
Which would substantially add to available cash for capital deployment.
Second we expect a cash use of between $160 million and $180 million to restructuring activities.
There are two main drivers of this cash use the first is the additional restructuring actions, we announced in the third quarter to further increase margins.
This plan is focused on driving real estate efficiencies and increased usage of the best cost design and shared service centers.
The second is the elimination of stranded costs associated with the management services business and the planned divestitures of the at risk self perform businesses.
Third we expect the MSL to close in the second quarter likely at a point in the year one year to date cash flow is typically negative.
As such fully full year cash flow will be impacted because we don't benefit from as cash flow as the year progresses.
Finally, there will be a headwind to cash flow from the elimination of receivables that we had sold within the MX portfolio.
This will negatively impact cash flow in the short term. However, we intend to replace this program overtime with other receivables from the professional services business.
We're not ready yet to provide formal cash flow guidance, we will provide the details on fiscal 2020 cash flow at our Investor Day on December 10th in New York City.
Looking ahead, we're confident in the direction of the business.
Our professional services business is expected to deliver double digit EBITDA growth in fiscal 2020.
It is expected to convert adjusted EBITDA to Unlevered free cash flow at a greater than 75% rate on a normalized basis.
This strong cash flow profile creates continued opportunities to deploy capital to repurchase stock and to enhance shareholder value.
With that I will now turn the call over for Q and a operator, we're ready for questions.
As a reminder, ladies and gentlemen.
You asked a question you will need to press star one and your telephone to withdraw your question press the pound Keith Please stand by what we've compiled the Q any roster.
Our first question comes from Andy Kaplowitz with Citi. Your line is open.
Good morning, guys nice quarter.
Okay. Thanks morning, Andy.
Can you talk about the 8% operating margin Dcs in Q4 as well as your ongoing focus on cost out you mentioned last quarter that you've ramped up peanuts consulting effort within the business and so as you proceeding along both from your planning of what future Dcs looks like it's part of our main call as well given what you are actually executing.
Are you getting more confidence that it that 8% margin on slide 21 to sign post in the longer relative margin expansion and at the analyst Day will you give us any target that can come down in terms of margin goal for that segment.
Thank you Andy.
The majority of the actions that.
We've taken to get to that 8% to.
Margin target happened in F why 19.
Or would be taken in the first half of the year of 20.
We have made a lot of progress on those actions over the past year, we still have some that were executing on right now, but we have a high level of confidence in that we still have additional opportunities for continued margin expansion both through the the.
Continued increase of our global business services centers in our global design centers.
We have a we still have some actions that we have planned and are taking on the continued reduction of our real estate portfolio. As we continue to refine the right places that we wanted to have a have a platform within and where we want to deliver that work.
His gives us a pretty good.
Outlook, there that 8% margin on an NSR basis translates to about 11.4.
Im sorry, 11.8%.
NSR basis, and so it gives you a sense, where we were and how far how much progress we've made over the past two years and the opportunities in F. Why 20, but we'll continue to give a.
More insight into the future margin improvement opportunities when we get together in December .
Thanks for that Mike inventory free cash flow of 708 million in a quarter I know you've kind of pre announced that you're going to do but full year 700 versus you would have gone to the low end.
800, and continued didn't collect significant payments from the Virgin Islands, what the refinery I think you've mentioned in the past its obviously quite good. So what was so much better than your expectations was there any pull forward of cash from 2020, and if you get Virgin Islands cash I mean, assuming that the company was still together.
There you can you do 800, plus LNG sit here today.
Yes, so Andy Theres no single item that I could point to that said, we outperformed kind of what we guided to last quarter in terms of free cash flow.
It was really an effort across the entire company of.
Folks focusing on cash flow and driving a.
Outsized result.
And when we look at the last five years. They said, we generated $3.4 billion of cash flow and within that timeframe things move around from quarter to quarter. So when I look at this entire year, we did certainly come within our our guidance range the organization pulled together and did.
Other than we had expected in the fourth quarter.
And the reason that we gave the guidance for the entire company for next year of 600 $800 million was.
Just to make sure that we gave indication that there wasn't something significant that we were pulling forward from a subsequent year. We still have we still have the same belief the business continues to turn earnings into cash on a consistent basis again, recognizing that there are fluctuations between quarters.
I will say that.
Having.
The year end on September 27th instead of September Thirtyth did provide a small benefit for us in terms of timing and I estimate that to be about $50 million a benefit.
In terms of in terms of the.
The 20 or the 19 performance.
And then just a quick clarification on the 160 880 million of cash restructuring costs. I think you said it was 93 of regional program I know Troy you talked about in these spend even taking care of stranded costs could also focused on core Dcs, yes, I think about that ratio in the past that 90 to 225.
Is it similar ratio for the subset of cash costs.
It's focused on incremental margin and Dcs.
No, it's a slightly different profile.
The because part of what the restructuring that we are undertaking now is related to real estate.
And so the payback is a little bit longer term. It certainly is a significant cash payback, but it has a little bit different profile.
And then the other significant element of that is stranded costs, which will have a benefit to the company, but that's not a benefit that we would see in margins. That's the benefit again for moving those costs as a management service business would exit some time, we think in Q2.
Thanks, guys.
Thank you. Our next question comes from Michael Feniger with Bank of America. Your line is open.
Hey, guys, yes, thanks for taking my questions I know your quarter obviously.
Ended at the end of September I'm, just hoping maybe Mike you can talk about in October and already with a week or so in November is there anything you're seeing Mike in terms of hesitancy on the awards.
Any any slowdown that thats you highlight on or is that it is there anything that's giving you confidence that especially in Dcs you expect your organic growth to accelerate once you lap some of those tougher comps in the back half.
Sure well certainly we're not seeing any indications of a slowdown in fact enough why 19, we had 27 and a half billion of wins.
If you look at what we'll call the professional services segment. The Dcs in the NCM business, we had a book to burn of 1.2 and half way 19. So it kind of gives you a sense for the momentum you have coming into.
Fytwenty.
We still believe that mid single digit to organic growth is the right to target for us in both the short and longer term in that business, but we haven't seen any market indicators.
A broad scale.
But.
That gives you a sense.
That's fair and then just thinking about the backlog.
But you're seeing in in CSN and Dcs just.
Sure. So is there any view internally that with the backlog in the visibility now that you have that that.
We are in the backlog is now Q push more price do you get a little bit more selective as you approach. Some of this pipeline that you say still robust I'm just curious how how you manage that.
Yes, so again the professional services.
Segment is got a 19% increase in backlog for the year.
We are definitely.
Continuing to grow but we are being selective about what kind of a risk profile. We want we continue to.
Stay laser focused on higher growth and higher margin markets.
There's a there's no question, we have a different focus on the type of projects were willing to take on.
But I I don't want to suggest that somehow that is going to have an enormous impact on.
And an enormous negative impact on organic growth, we still feel confident in the mid single digit growth rates.
And just lastly, just.
There's still some lease sounds I know you guys have oil and gas side, you talked about civil construction can you provide us an update on on the timeline there. The fact that the cash flow came in so strong in the fourth quarter does it change your timeline at all especially with what we're seeing on the public market side on on some ASP.
That's for civil construction I'm, just curious how how you're thinking about that Mike and Troy.
We approached 2020.
So it is still our strong intention to divest ourselves of the at risk self perform work during the year, we did sell or international development business, we sold portions of oil and gas, we're wrapping up our alliance a combined cycle gas power plant this quarter.
But as I've said in the past the market conditions are difficult to be selling civil construction assets right. Now so we continue to market that asset.
But in the meantime, we're really focused on carefully managing the risk in that portfolio and we're also focused on ensuring that we maintain the value that exist in that business today for a potential sale, it's performing well, it's generating cash flow and we want to make sure that we maintained that so we're certainly not gonna give those assets away, but we still have the same.
The intention to divest of those business.
Thank you. Our next question comes from Sean Eastman with Keybanc capital markets. Your line is open.
Hi, guys. Thanks for taking my question.
First one for me is just on the cash flow clearly a ton of moving parts into fiscal 20 and sounds like we'll get more color in December .
But just coming back to those items, Andy brought up the USPI receivable in the refinery claim.
Just those two big discreet items I, just wondered how are those likely to be additive and fiscal 20 and could they maybe help drive a less back end loaded free cash flow cadence as we look into fiscal 2000.
Yes, so Sean as we look forward, we certainly have some elements of collections of the U.S. fee Virgin Islands project built into our cash flow forecast.
And but we do have some upside beyond what we're guiding for what is baked in and similar for the up the refinery project at this point in time.
We don't have a projection of when that will be resolved. So that would also provide upside to our to our guide for this coming year.
And the additional point again this gets to our capital allocation as those items are resolved and they provide upside to our cash flow, we would view that capital as being deployed against.
Our our stated intentions in terms of buying back stock.
Got it and then and then just diving in on the capital allocation plan as we move out over the next few quarters.
Clearly and in Fourq, you well within the income net leverage target, but I think you guys are still above that three times.
Threshold on a gross basis, but I'm just trying to get a sense for when we kind of moved from deleveraging to buybacks.
How much more debt do you guys want to pay down before.
Buyback start to take priority.
So I think we certainly we're pleased to in the quarter to to achieve our net leverage target.
To do that down to two too.
With a record quarter that we had it in the fourth quarter, but we're just not yet ready to preempt our plans with public comments on specifics about a buyback in giving the market exact timing and quantity and price.
But we will have a substantial opportunity to deploy a the expected net proceeds from the management services deal.
As Troy noted in his remarks earlier, we've got some timing considerations on sources and uses of cash this year.
Certainly on day, one after the transaction will be expected to be paying down our debt debt and developing a plan to repurchase subsys a substantial number of shares a consistent with the capital allocation priorities that we previously talked about which is keeping our net debt ratio in that two to two and a half a but.
We'll we don't want to preempt the market.
On the exact timing.
Okay, and then last quick one for me just on the.
Station program exiting more than 30 countries.
Kind of.
No present completion.
Are we add on that process right now and do you think we might have to see more impairment charges as you sort of rationalize some of those more exotic locations.
So we're about 50% of the way complete with exiting those 30 countries. We are doing them very carefully we've got work, we've got a client commitments and some of those places that were winding down.
I don't anticipate a impairment charges.
Those countries that we're working on.
But we will continue to look for opportunities to simplify this organization overtime. We we want to ensure that we are spending our management's time and energy focused on the highest margin lowest risk highest growth markets and not getting distracted by some of these small.
Countries that we're we're currently operating and so there'll be continued opportunities for us to get more and more focused on the biggest and best opportunities.
So that we can extract the highest margin from from the work that we're delivering.
Got it I appreciate the time I'll turn it over there.
Thank you. Our next question comes from Michael Davis with vertical research. Your line is open.
Hi, Good morning, gentlemen, Mike as you and I'm sure, we'll talk more about it in December Investor day, but as you look at the pro forma restructure professional services business Dcs NCS.
Any out any thought on.
Where are your to add more talent more investment relative to returns on each of those businesses are are we just looking at as one more holistic business, where where there's opportunities that just come about how best to think about when we're looking over the longer term, how I see the CSRA cm business can contribute to come on.
<unk>.
Yes, so yeah. Those those businesses are in markets, where we have a very strong competitive position.
We continue to constantly look for opportunities that line up with higher growth markets and our skills and services and so one of those are the saw this year, we saw an opportunity in the aviation space, where we saw an aviation market in North America that look to be about two.
Two.
Moving to a very expansionary time, and so we dedicated a lot of our business development dollars in that market and achieve the I think the last number I saw 8 billion or so of wins in that space and so we'll continue to look at markets to provide outsized growth opportunities. So that we can get good focus.
And there are a number those new change from time to time.
You've heard us talk about the the PFS opportunity that.
It is really strong opportunity there is expected to be billions of dollars spent to decontaminate soils from that toxic.
Mess.
So we still.
Our core markets. The transportation continues to be a good market, we are seeing as I mentioned earlier.
Yes tax increases and a special funds for transportation across the big markets in which we operate.
And as well as water markets.
How does have some pretty good opportunity and it lines up well with our skill sets. So there's plenty of opportunity there, which will make sure that we are focused on the biggest growth areas with the highest margin in the least amount of risk.
And following up my thinking about the at risk business and your intention to monetize or to de risk the business.
Are you working off like Los projects for suboptimal projects are you going to not pick on as many bookings relative to what you're burning off or is that still kind of be in flux, because you're trying to keep the business realistic.
The good level to monetize and is there timing issue I'm sure. The timing is probably a lot longer than you would've thought six months ago, but.
You know is it six months nine months or is it just whenever things.
The market comes back you can monetize yeah, I I don't want to put a real specific timeline on that Michael but as I said earlier.
Those businesses, a are performing well today, and we're not going to give them away.
But every project we look at we're managing the risk reward balance and.
Its a.
I wouldn't say, we're working off big problem projects or anything you know that nothing is ever perfect on every project, but I.
I wouldn't say, we're working off of a number of large.
Problem projects.
But we'll continue to focus on ensuring that we're in the market to maintain the value inherent in those assets to offer them to a buyer when the right buyer comes along at the right price.
Thanks, Mike see next month sure.
Thank you. Our next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning, nice quarter, I'm, I guess just to follow up questions Mike.
When we think about the margin opportunity in Dcs. Your professional services broadly you think about your ability to achieve your longer term margin targets is it just a function of the cost cutting that you've already down or is that contracted backlog that you think bucking what region is it are the margin opportunities.
But in backlog also hired that we could key Sam.
You know potential upside.
I think Jimmy it's it there's a couple of pieces there.
One is just ensuring that we are more focused on the markets to give the most opportunity for margin. So some markets just simply offer better.
Sold margins than than others, and so making sure that we're deploying our resources in those markets that deliver the higher margin.
Projects when you sell them. The second piece of it is continuing to look for opportunities to to a scale to scale up the business without increasing the costs and to continue to reduce our costs as Troy mentioned earlier, but it is that.
What I mentioned the opportunity to utilize the global design centers, our global business service centers at a bunch more rapid pace that will present opportunities for continued margin expansion. So it's a little bit of all of that Jamie I I can't say, it's a it's it's one or the other but it's a combination of all those.
Yes.
Okay, and then can you just comment obviously the bookings with NGC hasn't been very strong.
Throughout the years you're going.
During this exercise GK sort of the backlog congratulate can continue to pace that you have Ben just given the opportunity there that are out there or is that.
You know I guess, just because everything that's going on internally, maybe perhaps that that's what our backlog growth rates loans for debt before it starts to get back to more normalized trend. Thank you. Yeah, you know I I I don't want to try and forecast future wins, but you know we have had a really good track record of growing up.
Backlog over the past couple of years.
And Ah I don't want to suggest that our construction management business is going to have another year of almost 50% growth in backlog.
That might be.
A bit too much to expect so I.
I think that was an abnormal year.
But I did mentioned the 1.2 book to burn in our professional services business, which which feels pretty good.
So we're still seeing market opportunities in front of us.
And Ah I don't see that changing it certainly in the near term.
Thank you thank you Jamie.
Our next question comes from Andrew Wittmann with Baird. Your line is open.
Okay, great. Thanks, I wanted to ask a couple more questions on cash flow here from the skeleton balance sheet. You gave us we've got cash accounts receivable and then in the working capital changes here it looks like on the liability sizable ledger, you're you've increased the liability Troy can you talk about what the payables balance was at the end of the.
Year, and how that change sequentially.
Yes, Andy so year over year, just first of all in terms of talking about total working capital.
Our total working capital over the course the year.
Was a effectively a use of cash.
So in aggregate was a use of cash in terms of the course of the year, we saw our our receivables balances.
Increase and we saw our.
Our payables and the and accrued liabilities increased by almost a commensurate amount.
And as I said, a little bit earlier, the one thing that.
That impacted at the end of the year was affected we had the timing of our year end. The fact is is that we payments going out the door in September thirtyth with us with a September 27th year end, we did benefit from the time to that and there was about $50 million.
Got it what was the payables balance at the end of year.
I don't have the payables belts.
So I'll have to have to share that with you.
Okay.
Yes on the.
You mentioned that the some of the receivables that you sale that you've previously sold there are going to unwind in 2020, presumably.
That has to do with the credit facility had I think a governor on the maximum all that you could do on that I think last quarter. You finished about 306 $9 million on that I was just wondering is should we assume that the size of the reduction in the amount that you're allowed to sale to sell of receivables is commensurate with the reduction in the.
EBITDA that the company is going to be generating next year. After the M.S. sale is that kind of a good way of thinking about what that unwind could be in terms of dollars.
Andy I'll no I'll tell you think about a little bit differently, which as you know we have.
We have.
Programs.
Within the business that we've been selling receivables for the last four years and those those programs had been running.
Plus or minus $50 million to last years at about the same level.
As we exit the management services business.
We have been selling that receivables within that business.
With the sale of business will no longer have that opportunity and those sales will effectively unwind.
But what will be doing is replacing that with programs in the remainder of the business. So when you think about.
When you think about the up to kind of the program that we have it's not dependent upon EBIT day, it's just dependent upon us actually putting a additional program in place to replace the one that was currently in our management services business. So.
Theres certainly won't be an impact in the year I view it as a timing impact as we move.
Out of one programming into another another place in the business.
And Andy to answer your other question the the right side of the balance sheet. The APN accruals over the course of year increased by about $400 million.
Okay. That's helpful. And then my last question I guess is for Mike can.
You know there's been lots talk about buyback you've been talked about that for a long time, but I was just wondering if a dividend is isn't the conversation at the board level was as another option and how seriously you would consider that is.
The deployment of capital.
It's always in the consideration and it's just a matter of timing right now we feel pretty good about the opportunities to buy our stock back and so.
That would be a matter of Ah first importance for us.
Then that at some point, we may certainly consider dividend, but is something that we at the board level talk about quite a bit when we go through our capital allocation plans on a year by year basis, but it's definitely something that could be a possibility in the future.
Perfect. Thank you very much thank you.
Our next question comes from Steve Fisher with you May ask your line is open.
Thanks, Good morning.
If you guys I guess Troy could walk through some of the puts and takes to margins in construction services in 2020 should we be thinking a higher than than where we are holding in the fourth quarter and how does some of these pthree projects like JFK effect.
The margins for that segment.
So if we're talking about the construction services segment in its entirety.
We wouldn't see the margins changing in that business and 20.
However, again, we've we've taken that business and we're thinking about it in two components one is construction management.
And the other is in the at risk businesses.
If you think about the construction management business and I think that's that's where the work of the JFK terminal is.
The margins that were thinking about in that business again.
We're describing an NSR basis are.
In the mid teens.
So as we move forward with our professional services business will be reporting net service revenues and net service revenue margins and the margins across that business will be a will be in the kind of 11.5% range, we expect in the coming year in aggregate.
Okay. That's helpful. And then I guess, maybe Mike if you could talk a little bit about the status of the private sector markets. In particular I heard you talk a lot about state funding and robust infrastructure opportunities wondering if you could just talk about what some of the trends you're seeing in the private sector markets.
Particularly in the U.S.
Yes, so our largest private sector component is in the construction management business.
And you heard me mentioned earlier that our backlog in the in that space was was up almost 50% to this year and so we continue to see a very robust.
Opportunity for that type of work.
So it's it feels it feels still feels pretty good you know we've been saying for quite some time.
That we don't see that kind of of growth in backlog, increasing forever, but it just keeps coming and so right now we're not seeing signs of a slow down on that side of the business.
The other big component of our private sector businesses, the environmental engineering business and that work is not necessarily driven by capex or or new developments. Most of the work that we do is heavily driven by regulatory demands the increase in regulatory required.
As for environmental cleanup I mentioned, the PFS opportunity earlier.
The those continue to present opportunities for us to continue to grow it in that space and then of course, the other pieces of the private sector business. We are to have it divesting from.
From components of that when we divest of our at risk construction business.
Okay, and then just lastly, I know might you have talked about.
To answer some questions about moving to higher margin.
Type businesses that are putting our focus on higher margin things within Dcs I guess to what extent to.
To achieve that are you going to be focusing more on increasingly technical type services, because it seems like that.
Popular approach at enhancing valuations I'm wondering if there are specifically technical areas. I mean, you mentioned things like PFS is that an area, where you really do explicitly one increase youre out your exposure.
Yeah. So this is this is randy.
Hey, good just lay the context like indicated we're not going to be doing everything for everybody anywhere. So just the fact that we will be focused on markets that are higher margin will give us.
A leg up and increasing margins on a go forward basis that said, we're making significant investments in digital transformation activities and we expect that.
Those will lead to increased margins as well as our focus on shared service centers that were previously mentioned global business shared services and our global design centers, which also allow us to implement digital transformation on an accelerated basis.
Great. Thank you.
Thank you. Our next question comes from Chad Dillard with Deutsche Bank. Your line is open.
Hi, good afternoon, everyone.
Chad.
So I just want to go back to that guidance for Dcs, So I've single digit revenue gross.
And I just want to understand I'm, just what's embedded in there I was hoping maybe kind of a couple of different ways domestic versus international public versus private poverty, saying, there hobbies type opportunity into tied up very helpful. Thank you.
Sure so.
The Dcs business.
We'll see slightly more growth in the Americas. A then you will see outside the U.S.
We'll see low single digits in EMEA.
We're still waiting for the Brexit a resolution that has frozen up some projects in capex in that market. So we're not seeing a big big growth the opportunity there would be low single digits.
APAC is a mixed bag some markets are doing.
Really well in some some are not to we're seeing markets like Hong Kong that where you're not going to see organic growth you're going to see organic decline as a protest there continues to worsen. So when you put all those all those together.
You get to a low to mid single digits opportunity for growth.
In F why 20.
That's helpful and then on the operating cash flow just given a number.
Number of living hurts us through the year.
How should we think about the cadence of cash flow first half for second half how should we think about that bill.
Yes, that's it.
Okay. So so Chad.
To start and just talk a little higher level and work down to some of the detailed but we think about our year.
In terms of the underlying performance we gave the guide for the enterprise is 600 $800 million again, we see that the earnings growth contributing to that we also will have a cash tax headwind that we haven't had in the past year, so getting to that getting within that range earnings performance underlying.
Earnings performance has improved with the similar cash conversion profile.
And the tax headwind when I look at the elements of the year, obviously, there's a timing of events that would impact that that make this a little more challenging first of all is the timing of the management services sale.
The timing of that will have an impact on full year free cash flow.
When we look at the at risk businesses, which we expect to generate cash flow during the year, but the nature of those businesses means that it's a little bit lumpier than our our professional services business. The timing of some things that might happen in that business also impact the free cash flow guide for the year and the other elements to that.
Pointed out or the restructuring.
We see some cash in first half the year being spent on restructuring and then as those business as the divestitures take place the stranded costs.
And the cost of restructuring for stranded costs will be impacted the timing will be impacted by that and then the last thing as.
You know the at the sale of our receivables and our management services program as a as management services leaves will have to replace that program from other places in the business and that will also impact the timing so.
Unfortunate that's not a great answer for you Chad, but our our underlying cash on the business remains our ability to generate remains similar.
But there are a lot of moving parts near that make it difficult for us to guide very specifically.
Gotcha Gotcha, alright, Thank you very much I'll pass it on.
Thank you and I'm currently showing no further questions at this time like kind of call back on Mike FERC for closing remarks. Thank you operator, so before we conclude the call today I just want to reiterate a few takeaways from today's call.
Two years ago, we embarked on a very deliberate process to transform our business and position us for long term success and of course to maximize shareholder value and as part of this journey, we said our top priority was delivering on or commitments and achieving our plan in fiscal 19, we clearly did that with the 13th.
I think growth in our EBITDA, a 25% growth in EBITDA in our professional services business.
We also said that we were going to substantially enhance our margins in the fourth quarter. We delivered 190 basis points of margin expansion of the Dcs segment, and we are quite well poised to continue on that trajectory in fiscal 2020.
We also said we were going to <unk>, we're going to evaluate our portfolio to unlock value.
And last month, we announced the sale of our management services business at a premium valuation and it's going to allow us to accelerate our capital allocation plans.
We also said that we were going to de risk our business and transform us into a higher returning and lower risk professional services business.
And as I mentioned earlier, we have exited several of our noncore oil and gas businesses, we sold our international development business.
We're about 50% complete with the exit from 30 countries a that I mentioned earlier.
And finally, a we said we were going to prudently allocate our capital and.
The we had our fifth consecutive year of free cash flow in excess of $600 million, we bought back $75 billion of stock last quarter.
At a very strong discount and we substantially reduced our debt. So as a result, though we are exceptionally confident in our ability to prove to position the company for tremendous growth opportunities in front of us and I look forward to discussing these trends in the vision for our company in greater detail at our Investor.
Day in December will be joined by this team.
As well as Steve Morrison Lora Bologna, the two executives that lead our Americas in EMEA businesses, respectively.
And we'll be had there'll be sharing overviews of their business and some of the market trends that they're seeing on the ground.
And then finally will showcase several innovations such as our augmented and virtual reality.
Products the demonstrate how we're differentiating ourselves to the market. So.
We're looking forward to it and hope to see all of you in New York next month. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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