Q2 2020 Earnings Call
[music].
Good morning, and welcome to the E Com second quarter 2020 conference call.
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I would like to turn the call over to will Gabrielski Senior Vice President Investor Relations. Please go ahead.
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, including expected and potential impacts of the cobot 19 pandemic actual results may differ significantly from those projected in today's forward looking statements.
Due to various risks and uncertainties, including the risks described in our periodic reports filed with the FMC, except as required by law. We undertake no obligation to update 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.
The Sheldon Madison services business closed on January 31st the management services business, along with our at risk self perform construction businesses that we intend to exit are classified as discontinued operations in our financial statements. Today's comments will focus on continuing operations unless otherwise noted the discussion of adjusted operating margins reflect segment level perform.
For the Americas, an international segment.
We will also referred to net service revenue or NSR, which is defined as revenue, excluding subcontractor and other direct costs.
Our discussion of margins will be on an NSR basis, unless otherwise noted beginning today's presentation as Mike Burke AIU comes Chairman Chief Executive Officer, Mike.
Thank you will welcome everyone. Joining me today, our Troy Rudd, our Chief Financial Officer, and Randy what ring, our Chief operating officer.
I'll begin today's discussion with a review of our financial and strategic accomplishments I will then review impacts from and our response to cope with 19, Trey will then review our performance and outlook in greater detail before turning the call over for question answer session. Please turn to slide three.
I'm very pleased with our performance in both the second quarter and the first half of the year, which reflects the benefits of the many actions we've taken over the past two and a half year towards achieving our long term financial and strategic objectives.
The second quarter, adjusted EBITDA increased by 16% over the prior year or $282 million.
The first half of your adjusted EBITDA increased by 21% underpinning. This strong performance was continued margin expansion of 200 basis points in the quarter.
I'm also pleased to report that we're continuing to win work at a high rate wins for the quarter totaled nearly $9 billion a record for professional services business strength was broad based then included a greater than one book to burn rate T. O M. Both segments led by several large multiyear wins in the Americas as a result backlog increased by 14.
HM two new all time high of $42 billion, providing substantial visibility against an increasingly dynamic macroeconomic backdrop.
In late January we closed the sale of the management services business for $2.4 billion capitalizing on record high valuations for government services companies. We immediately repaid all of our $1.3 billion of secured debt and we finished the second quarter with an all time high cash balance of $1.3 billion and that leverage.
Of 1.2 times this leverage profile positions us extremely well at a time when liquidity is highly valued.
I also want to highlight another accomplishment this quarter and that is our recently announced industry, leading emissions reduction targets, which are designed to meet the goals of the Paris agreement. This includes a goal of achieving a 20% reduction in emissions by 2025, as well as a 10% reduction and emissions across our supply chain.
Hey, these reductions when achieved would be equivalent to eliminating the environmental impact of burning nearly 40 million pounds of coal every year, our commitment to achieving these targets marks a major milestone on our continued journey to deliver a better world.
Please turn to slide four.
As a global company Cobot 19 has been a part of our daily routine that since the beginning of the year.
In Asia nearly half of our offices were closed and 90% of our workforce was working remotely at peak.
Well, we lost 10 working days in mainland China in February we quickly called upon our resilience ice tea and HR teams to ensure that our employees were safe and accounted for we took immediate actions to ensure a business continuity I am proud of our response in fact in Asia. Despite the challenges presented we achieved our profitability.
He target and exceeded our cash flow target for the quarter markets across Asia are beginning to normalize at restrictions on movement are being reduced.
We are seeing similar impacts from cobot 19 across other markets at our Americas in EMEA regions, 90% of our people are working remotely most major global Metro's have instituted shelter in place orders and halted nonessential activities, including non essential construction.
Additionally, state and local clients are bracing for steep tax revenue decline however, coming into this crisis rainy day funds were at a record high and the Cures Act in Federal Reserve actions are expected to deliver 700 billion. The direct support importantly, though much of our work is of a critical nature for clients and has been deemed essential.
We're working closely with federal state and local clients to respond to the immediate needs created by code 19, including temporary hospitals in April we won more than $200 million have worked to deliver thousands of hospital beds in short order and we are engaged with clients globally to provide additional services, including developing returned to work strategies.
For our clients in fact, we are ranked number one in our industry in terms of work one for the U.S. Federal government for Cobot 19.
As a result, our momentum has continued into the third quarter in April utilization NSR and profitability. We're ahead of our expectations and we are ahead of our plan for the first seven months of the year.
Looking ahead, our confidence in achieving our financial targets is underscored by the strong year to date performance as well as certain attributes inherent in our professional services business that position us well during periods of uncertainty.
First we deliver primarily knowledge based critical and essential services in most cases. These services can be delivered on interrupted while working remotely supported by our long running investments in technology and innovation.
These investments have enabled a relatively seamless transition to remote working in our ever expanding digital solutions are deepening our client engagement as well in fact last month, we announced an innovative virtual consultation tool, which has garnered very positive client reactions. Since launch many of these changes may accelerate innovation and digital.
Transformation trends in our industry, which we are well positioned for.
Second our professional services business has a highly variable cost structure. This allows us to quickly respond to changes in the market beginning in February we built robust mitigation plans to assess different potential virus durations that impacts put in place or freeze on new hiring discretionary spending and instituted a global travel freeze.
With these actions we achieved our top priority keeping our key assets. So many talented people across our organization safe employed and highly engaged with clients.
Third most of our work has continued unabated in most regions transportation water and environmental services, our largest market sectors are considered critical or essential and work continues.
Our construction management business more than 85% of our projects are continuing to move forward, including more than 70% in New York. Despite temporary nonessential construction shutdowns now the vast majority <unk> projects were work as it suspended we continue to have our general conditions paid for by our clients, which covers our costs.
Because of this in our agility and repositioning our workforce, we have repaid nearly 99% of our employees, which positions us even better to respond directly as economic trends recover and client demand accelerates.
Fourth we have built a record $42 billion backlog, which provides an all time high levels of visibility with more than three years of trailing 12 month revenue in backlog. This allows us to operate with a high degree of certainty against a rapidly evolving landscape.
Finally E Com has a proven track record of delivering through periods of slower and negative economic activity as evidenced by our strong organic growth during the global financial crisis. This is largely due to having nearly 60% of our NSR from public sector clients were spending is often inversely correlated to GDP don't.
Stimulus investment in infrastructure that increases during periods of weaker economic activity.
With the cares act and other measures taken weve already seen historic levels of approved public funding.
The Cures act provides for more than two trillion dollars of stabilization spending and the Federal Reserve has created a 500 billion dollar direct lending program for our state and local clients.
Addition, substantial programs in our largest international markets have been put forward, including nearly $900 billion a funding it across the UK, Canada, Australia and Hong Kong.
Encouragingly. These programs continue to prioritize investment in critical large scale transportation and infrastructure projects. These type of projects are precisely where a comic cells as evidenced by our number one ranking in the transportation and general building design markets, which was reaffirmed last week by NR.
I look across the company, our strategic and financial position has never been stronger we have transformed our balance sheet with substantially reduced leverage and ample liquidity, we have consistently exceeded our financial targets over the past six quarters, while delivering 300 basis points of margin improvements since fiscal 2018.
And our agility as an organization has proven to be a key competitive advantage as we quickly mobilized contingency plans for our people to support our clients in the face of unprecedented change.
Before concluding my remarks, I'd like to thank our employees for their tireless commitment to our success and to delivering for our clients. During these challenging times. The last few months have impacted all of us in profound ways and the resilience of our people inspires a great deal of price, but the most talented workforce in our industry I remain confident that the best days.
For a calm our yet ahead with that I will now turn the call over Detroit to discuss our performance and business trends in more detail Troy.
Thanks, Mike Please turn to slide six.
Between Mike sentiments, we're really proud of the organizations response to the challenges presented by Cobot 19.
Importantly, we have built significant momentum across the business, including a sixth consecutive quarter of double digit adjusted EBITDA growth and substantial margin improvement.
Notably margins any Americas segment leader industry, and we have delivered substantially improved margins in the international segment. This strong performance was achieved despite substantial covered related downtime and Asian during February which speaks to the commitment of our people and the resilience of our organization.
Included on performance in April that exceeded our expectations for NSR earnings and cash flow. We have delivered seven months of outperformance compared to our plan this year, which underscores our confidence in achieving our full year guidance.
These accomplishments are the result of strategic actions, we've taken over the past two and a half years.
This includes exiting underperforming businesses and markets optimizing overhead consolidating our real estate portfolio and expanding the use of best cost design and shared service centers.
Importantly, we still see plenty of opportunity to further expand margins and deliver on our long term financial objectives. For instance, we now recognize how productive our employees can remain well working remotely.
With 10 million square feet of real estate, we're developing a workplace of the future strategy, which is targeted at enhancing productivity will further optimizing our operating costs.
We're also continuing to progress on our planned exit our remaining self perform at risk construction businesses.
We are actively negotiating with a potential buyer for our share of the Santa no free nuclear decommissioning project, which would result in a substantial milestone in our de risking strategy.
Although we encountered challenges as we close out the aligned combined cycle power plant that has increased the cost to complete the plant is now generating power and is moving through the MISO certification, which is expected to be completed over the next several days.
Finally, I should note that our results in our discontinued operations in the quarter included an approximately $89 million noncash impairment of goodwill intangible assets on certain oil and gas related businesses as a result of the dramatic fall in oil prices.
Importantly, as our performance in professional services business underscores, we're benefiting from our lower risk profile, which validates our strategy.
Please turn to slide seven.
In the Americas organic NSR was effectively unchanged with the prior year.
I should note that excluding the impact of elevated levels of storm recovery work from the prior year organic NSR in our design business increased by 2%.
This is the last quarter of material headwinds to growth related to our storm recovery work.
This performance reflects continued underlying strength in our core transportation and water markets and in our construction management business.
The Americas segment had a 15.6% adjusted operating margin, which marked the 160 basis point improvement over the prior year.
Was ahead of our expectations for the quarter.
Our backlog in the Americas increased by 16% and set a new record.
Prior to the impacts of covert 19 state and local tax receipts were trending positively through April which provided for a solid base of project funding.
While the forecast of tax receipts is clearly lower today.
Contributions from the cares Act and the Federal reserve are set to provide $700 billion of funding capacity to our clients.
And talks of additional infrastructure stimulus or continuing.
Which we are well suited to benefit from.
Please turn to slide eight.
Turning to our international segment.
Organic NSR declined by 2% or adjusted operating margin for the second quarter was 5.9% a 240 basis point increase over the prior year.
Increasing our international margins, a top priority any critical component of achieving our long term financial objectives.
Both the EMEA and Asia Pacific regions contributed to this improvement with the benefits primarily from optimized overhead costs and expanded use of best cost design and shared service centers, resulting in increased profitability.
Importantly, as Mike noted, we're also successfully mitigating the headwind from 10 lost workdays in mainland China, and we are seeing market conditions begin to normalize.
We are positioning to capitalize on substantial stimulus and emergency Cobot 19 response efforts in our international markets.
This includes a more than 700 billion dollar infrastructure investment program in the UK, along with approximately one or $100 billion of stimulus funding in Australia in Hong Kong.
As a result with very favorable funding conditions in our largest international markets. We are poised to capitalize on a growing opportunity set that is well suited for our leading capabilities.
Please turn to slide nine.
Underlying cash generation in the quarter was mostly consistent with our expectations and we remain confident in achieving our outlook for the full year.
Let me walk through the details of our cash flow.
Free cash flow was a use of $330 million. There were a few factors that I want to specific we address.
First following the completion of the M.S. sale in January we terminated these receivable sales program associated with that business.
Which resulted in a 180 million dollar impact to cash flow.
This was contemplated in our original guidance for the year.
Second we incurred cash restructuring cost of approximately $40 million in the quarter as part of our strategic actions that resulted in substantial margin improvement for six consecutive quarters. This was also contemplated in our original guidance.
Finally, the EMS business delivered cash flow below our expectations for January.
Resulting in an approximately 130 million dollar impact.
However, we expect to recover this timing related impact in the third quarter three favorable net working capital purchase price adjustment.
The mandated accounting treatment for this collection is that'd be recognized in the investing section of our cash flow statement.
This is a timing only impact and our full year free cash flow guidance includes this collection.
As such we have reiterated our guidance for full year free cash flow of 100 million to $300 million.
Our confidence is supported by the highly cash generative nature of our business, which remains unchanged as well as the normal second half weighted phasing of our free cash flow.
In addition, we expect to benefit from tax incentives and certain elements of government stimulus programs across the globe, including advance billing for central contractors.
Retention credits and payroll tax deferrals.
Please turn to slide 10.
We completed the $2.4 billion sale of management services business in January.
As a result, we have transformed our balance sheet and capital structure.
We have repaid all of our secured debt and we exited the second quarter with a 1.3 billion dollar cash balance and net leverage a 1.2 times.
The strong liquidity position combined with our Undrawn $1.35 billion revolving credit facility.
Allows us to operate with certainty. In addition, we've recently closed on a 400 million dollar delayed draw term loan this creates greater flexibility to manage our capital structure going forward.
As we look ahead, our capital allocation priorities are as follows.
First and foremost we're in a fortunate position with excess liquidity at a time when liquidity is scarce.
We will continue to prioritize maintaining excess liquidity and reiterate our long term net leverage target range or two to 2.5 times.
Second when conditions normalize we will look to return substantially all available excess capital to our stockholders.
Please turn to slide 11.
Turning to our financial guidance.
Our updated guidance balances the near term uncertainties posed by covert 19 against the strong backlog growth and underlying momentum in the business.
With that began aggressively stress testing and developing mitigation plans in early February.
This was a global initiative that involve hundreds of key operational and finance leaders across the organization.
Our team's efforts combined with acting quickly to react to the impact to covert 19 underscores our confidence in our updated range.
We now expect to deliver adjusted EBITDA up between 700 million and $740 million, which reflects 10% growth. The midpoint. In addition, our guidance includes an expected 15 million dollar headwind from currency fluctuations.
Based on our global experience with Covance 19, we expect that shelter in place orders and construction shutdowns in the Americas EMEA regions will begin to ease in the third quarter.
As a result, our guidance assumes that economic activity bottoms, and the third quarter and that there are no material project delays and deferrals in the fourth quarter.
With that operator, we're now ready for questions.
Ladies and gentlemen at this time I'd like to remind everyone that in order to ask a question since press Star then the number one on your telephone keypad.
Going back to withdraw your question. Please press the pound sign.
Well pause for just a moment took in politics, you've been a roster.
Your first question comes from the line of Sean Eastman with Keybanc capital markets. Your line is open.
Hi, Tim Thanks for taking my questions or complement on the quarter strong first half and.
Really resilient outlook for the year, Sean first first question for me is you guys came into this crisis with.
A focus on cost and returns I'm, just curious whether there has been a reassessment on the potential for those programs whether some of those actions can be accelerated or expanded and just to what extent a weaker macro backdrop extends the timeline to achieve the financial targets you go lives.
So let me start after that.
Troy kick off.
Any further.
Color on on the guidance, but.
We came into this we've been working on margin in aggregate for two years now.
You've seen the dramatic 200 basis point increase over the past couple years on our margins we didnt.
We didnt stop when we got through network strategy, we're not going to stop as we get through this and Thats next project margin improvement opportunities, we don't see any slowdown in achieving the margin targets that we set out previously we're continuing that work most of the work is already behind us in in fact, so were getting.
Duties, where there could there could be consequences.
And then make that could increase our margins and specifically what I'm, referring to as we've gone through the work from home remote working process were 90% of our people are working remotely.
We have seen.
And employee engagement that is higher than that it was working in the office. If people are enjoying the additional flexibility of working from home, which could be the future will allow us to have a lower real estate footprint and as you probably know we spend almost $400 million a year on rent so taking even a 20.
<unk> percent reduction in that as we move to a slightly larger remote workforce that could be additional opportunities for for margin improvement going forward.
Okay excellent excellent.
Go ahead.
Sean as Troy I was just going to reinforce what what Mike said, which is what we've experienced is.
The pandemic is creating opportunities for actually to accelerate some of the trends that were naturally taking place in the marketplace and one of those is again remote working and and rethinking your real estate portfolio. So we do see that as a fairly significant opportunity to layer on top of the things that we have already executed on and have planned for the red remain.
Andrew this year that will benefit this year and into 21.
Got it thanks and second one for me is.
Just.
Trying to get as comfortable as we can on the swing back in free cash flow to hit the intact outlooks for the full year.
To the extent you can grid just back between just underlying.
Free cash flow any discrete items, helping you get back there and then of course.
Some of the benefits from some of the stimulus programs that are going to help in the back half as well.
Sure. So so first of all in the first half of the year we had.
Within our guidance, we had predicted a number of the items that have impacted cash flow, particularly those of the items related to the sale of the management services business.
As we move into the second half for the year.
We've got again, a clear line of sight to that range of cash flow. So we're highly confident and it's driven by first of all just the earnings performance in the second half of the year.
We have a history of converting EBIT da to cash flow in a fairly consistent basis. We also in the second half for the year have as we set a oh a purchase price the payment working capital adjustment related to CMS transaction that is about $130 million.
That will effectively catches up.
For the first half of the year and then beyond that they're the normal things that we typically see in the business. There's just a natural kind of unwind of working capital in the second half of the year based on increased activity has been consistent with the past and then in terms of what we're seeing as a result of the pandemic and government stimulus.
We haven't planned.
Any of the stimulus into our guidance, but certainly within the range. The number of programs that we see around the world in terms of payroll tax deferrals.
Acceleration of government payments, we have a number of our government clients, particularly in Australia in UK, there that have accelerated payments to us and have a plan of continuing to do that through the year and then there's a number of other programs within Australia, and Canada and the UK.
That will provide deferral of expenses.
Or payment of payment of certain things like taxes that provide a tailwind. So all told told we see there been potentially up to 100 million dollar tailwind just from government.
You know government programs that would support our view of a b within that guidance range.
So Sean was your question relative to the stimulus limited to cash flow or was it a broader question.
Yes, just a just trying to get comfortable in the second half RAF and you guys had mentioned there wouldn't be some tailwinds there.
So I'm good on that when that was really helpful try. Thanks.
Thanks So.
Your next question comes from the line of Michael Dudas with vertical research. Your line is open.
Good morning afternoon, everybody. So Mike I'll, just heated up let me let me hear your thoughts on general stimulus what comes out I mean, it's amazing how much money has been spent by Congress already for this crisis.
How do you see that flowing through and how it impacts some of your public sector client base and then maybe you can do that little bit more in your historic work you've done in New York City certainly.
The revenues from from nearly empty, a and Port authority certainly going to take a big hit here. How is that placement has an impact on what you do and how.
Those agencies use E com.
Two for work through that.
Yeah, great. Thanks, Mike so, but the first round of the care Zack.
Provided quite a bit of access to capital DT state governments.
Through sort of mostly through lending type activity, but we're closely following a couple of new developments. One is the second round meteor assets.
Economic relief there were expecting is probably more like a may June timeframe, where the governor's you're asking for an additional $500 billion eight the the state departments of transportation or asking for about $50 billion of direct funding for transportation in the states and so we think there will be.
The.
Additional economic really through cares to and also there is quite a bit of momentum in Washington for infrastructure stimulus, that's probably more like a june or July timeframe, but.
The House Democrats are moving forward on a five year $760 billion stimulus program and so when we look at all of those together.
It starts to look a little bit like what we saw after the global financial crisis in those 789.
When we look back to 789.
I saw that stimulus activity coming into the market and and we certainly experienced double digit organic growth in 708, no nine stimulus activity came into the market and so.
We are expecting the deficit spending will be the way the world's up for the next 12 24 months and there is a significant momentum to directed towards infrastructure activity that we will benefit from.
And about New York, New York area.
So New York is a new York is.
One of the things that you look at the big markets and half of our state and local spending in the U.S. comes from five states.
California, New York, Texas.
Real big ones in a big news about those stations so states coming into this adds significant stabilization and rainy day fund. So they were in the best position coming into the panel.
So they had a bit of a head start so we're focused on the right markets.
It had strength coming into it and we expected to due to their political clout. They will be primarily beneficiaries of any federal stimulus activity that gets directed towards New York and one other things that we hear that the New York State government agencies talking quite a bit about is this maybe.
The opportunity to accelerate infrastructure spending the reason being ace, it's a lot less expensive to undertake.
Infrastructure projects during certainly doing a time when when there's less traffic or whether it be airport traffic, whether it be mass transit traffic you could get things done much more efficiently. So there may be an impetus to accelerate several of the infrastructure work into New York area.
I appreciate that my follow up for you, Mike or Troy is that.
Can you maybe share a little bit how your customer base is adapting towards the new world that were in specialty with working remotely and being able to engage from.
You know plans that you're sending or or in your conference calls or getting documents to your cost clients and efficient manner. So they can continue to work on their front is that can approve any competitive advantage for you guys. As you as you move forward as the customer base picking more on the on the public side, maybe in private as well accelerating the depth too.
Names that were seeing.
Yes, let me, let me kick that off and then I'll ask Randy to talk about the investments we've made because it's been such big facilitator of this.
We.
We had been preparing for this for quite some time on the T. side and it it became clear that we were able to almost overnight shift 90% of our workforce to a remote working environment and that turned out to be at incredible differentiator in the market.
So it wasn't quite clients weren't willing to wait and see if we could work remotely. They wanted to see that capability immediately and I think it allowed us to differentiate ourselves quite a bit and I think it may be either way of working in the future. We have one project right now that we're.
We're doing down in Florida, we had a 150 different employees around the world working remotely on a project in Florida to get a unemployment setting up in running as quickly as possible, but it's all being done to remotely. It's all being done at a collaborative way right, but that didnt happen overnight it came through.
We have significant investments, maybe Randy could give us a little overview I know what we've done in the I'd said.
Thanks, Mike So a calm as has really been strategically investing in infrastructure and digital tools.
For a lot of years, but specifically over the last three years.
And even with this significant ramp that we've seen with more than 90% of our employees almost overnight working remotely our IP systems, not only performed well, but as Mike said provided us with a differentiator in the marketplace. So all of our employees have video conferencing capability and extraordinary collaboration tools that allow them to care.
Beyond that work, we have put digital tools in the cloud, which certainly enhanced our work from home capabilities and the ease of use for our employees digital digital tools like Autodesk and Bentley for design purposes.
Digital libraries.
Design anomalies detectors and other tools reside in the cloud, which made it much easier for our employees to work.
In addition, E com brought to the market to proprietary software packages built in AMEA, but imported and tailored to U.S. requirements. So the first is the virtual consultation software that Mike talked about that lend us responded to U.S. federal as asks to streamline permitting processes and today.
Date, we've already been working with clients utilizing these technologies and are now selling them to numerous federal state and local as well as international government and private sector clients.
And then secondly, we have a digital environmental impact assessment software that that allowed us to complete the first U.S. ever digital E. Yes for the U R. US Army Corps of Engineers, and that's light years of any head of anything in the market that allows NEPA to be perform better faster cheaper with great Omar.
And is it.
Likely will reduce cost, a 30% and and times more than 50%.
So again I mean.
In this case or I Tito's not only let us continue to perform and work effectively from home, but but we believe give us a differentiator in in the near term and in the future.
Okay, that's great insight, thanks, gentlemen that stay healthy.
Hey, Mike.
Your next question comes from the line of Andy Kaplowitz with Citi. Your line is open.
Good morning, guys hope, you're well nice quarter.
Thank you. Thanks, Sam you might give you give us more color on your construction management business I know you've mentioned that 85% of your where it gets continued obviously, 70% to 75% of bids as New York and L.A. as well as you have a big focus on sports. So how concerned are you that projects.
In that business had moved to the right. Maybe you can talk about your confidence and I know you had a big backlog coming into the pandemic have you saturated potential cm weakness in to guide.
So.
Good question, Andy you know the construction management business first of all its more diversified today than it's ever been if you look back six years ago.
Our commercial and residential real estate was about 80% of our business now that's only 45%.
You are aviation was formerly 1% of our business in Seattle.
Now, it's about 13% of our year to date NSR and about a third of our backlog and so we put forth a considerable effort over the past few years to start to diversify that business.
And you know the aviation business at 13% of our NSR and a third of the backlog those decisions are closer to 10 20 years strategic decisions for airport expansions that they don't change based on changing demand in passenger miles for the quarter for the year, even next year there looking out.
10, 20 years, what they're going to need at JFK for instance, so so that's that's really important.
Secondly, the the projects the as you heard of say 80 plus percent of our projects are still operating today and almost all the projects that are not operating are paying us our general conditions, which covers our costs on those projects because the clients want to keep our teams at the ready to jump back in when construction.
His rebuy.
At L.A. construction is still continuing New York the there's been some non essential construction that has put on halt the governor who said they expect to start back on may 15th, although they've asked us to put forth and plan to start even earlier, which we're working on so we're highly confident it will be back up to full.
Steve So very quickly.
So we're not seeing projects stopped.
Except for a few that I mentioned, which we're not seeing timelines move out as you know in that space. It's rare that once you get started with the construction project is very very rare that it stops the reason being as you've got financing in place that requires you to finish it and so.
The even back in the financial crisis, I can think of less than a handful of projects around the world that literally shuts down for good or the rest of the moved forward. So.
Given that we've got four years of backlog in that space.
I feel pretty good we're back to stay in place we were going back again to the global financial crisis. We had built up a good book of business coming into assembly that way that then carried us through the next few years. So.
That is a piece of the bids we feel very confident and because of the backlog because with the versus.
That's helpful and then well understanding that you lowered your EBITDA guidance, just given the pandemic uncertainty could you tell us independently started how much positive off said you'd seen so far from work from FEMA versus the actual equipment related delays and what would you expect to see moving forward and they're incremental.
It could be there.
Okay. So.
Troy are ready to go to take though yeah sure.
So I'll jump in and take that so first of all Andy just in terms of.
Our guidance.
[music].
When we when we look forward typically we have six months under our belt and we're forecasting the next six months of the year.
We've come to the end of our April results and so where we sit today is we actually have seven months of results and two two months of those results call March and April habits operated in the pandemic pandemic environment that we're in and our April results.
I have exceeded our expectations in terms of NSR.
Earnings and cash.
So just in terms of our confidence moving forward, we have a higher degree of confidence.
In our guidance than we did certainly a few weeks ago and again to your point about what were seen in the marketplace is we certainly have been active in helping local governments.
I'm trying to help people through the impact of the pandemic and supporting health care initiatives and supporting just governments in figuring out how they work their way through this so project manager project management types of projects. So we we've been active in doing that we've certainly one a lot of work.
During the last few months and that has supported our April April results.
But I think even beyond that as we look forward.
The business itself has a number of attributes that we made reference to and Mike with reference to a little bit earlier that allow us to be.
Optimal to the environment, so even as there might be some project deferrals or as we can ramp up to take on certain types of projects to try and support the change that is certainly coming over the next month month. It gives us the confidence that even in a dynamic environment, the agility or the adaptability of our business a lot.
How's us net and gives us confidence to to be able to work through and achieve our guidance. So we have a high degree of confidence in guidance, where we sit today because of the seven months and the results and are they proven agility of the business.
And what we still can see as market opportunities change is ultimately good for what we do we support change in infrastructure and that is coming and will be accelerated by the impact to the pandemic.
Yeah.
I don't want additional items.
One additional I'm there just you asked about what are the positives.
We are seeing coming out of coking related work, where do the plus ups.
So we have one hundreds of millions of dollars were already.
Then at least according to the Bloomberg Government report, we've captured about 25% of all the koby related federal dollars within our industry, where the number one in our industry and winning cobot related work. So and that work is widely varied disaster response work its field hospitals treatment centers.
Medical stockpile facility.
Global supply chain type activity. So it's a it's widely varied and we think we'll be continuing opportunity on that.
Mike So that all sounds pretty good like what would it take for you to restart your share repurchase program you just need to see the pandemic fade a bed and they also you give us color there.
Troy you want to you want to give give some guidance on that.
Certainly.
And I.
Andy you actually can summarize it in a sense, which is.
Our focus today in the current marketplace or market backdrop is is focusing on our liquidity right now we're in a very comfortable liquidity position.
And we're going to be focused on maintaining a comfortable liquidity position until we can cranes, great confidence that the market conditions are going to stabilize and there's a clear line of sight to what the future is going to hold so for the time being that's going to be our focus but it is just a matter of timing and we will then return to our.
Our stated commitment, which is maintaining our leverage target at two to two and half times and returning substantially all of our capital to shareholders, which means that will start buying stock under our existing repurchase authorization.
You know again, there's certainly the big question is when will that will happen.
And we're just going to be working through this and make sure that we.
You know gain more confidence about what's going on in the marketplace before we start trade enough liquidity for repurchases.
Sounds good guys do well.
Thank you thanks.
Your next question comes the line of Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning, and nice quarter, I guess two questions one at the margin Rodney International business improved.
But not at the targeted range, but improved nicely sequentially I guess year over year on is that sustainable I'd love to the back half of the year just given we don't have you know we don't have history. There in terms of how that business.
Performs.
Yes quarterly basis, I guess, then and my second question, Mike any color you can give you know in terms of what's going on with the CEO search is that correct, yes or is the board thinking it makes sense to keep you there indefinitely in particular in an environment like that given your history with the company just any any update.
That you could provide on that front. Thanks.
Sorry, I'll take the first part of that.
The first part of the question Jamie.
The the reached the restructuring actions that we've taken beginning last year and we continue to take this year. What are those are that's what's driving the margin improvement. So it's a combination of the things that we've been talking about consistently for the last few quarters.
Which as you know improving our real estate profile.
Taking advantage of or design centers, and our shared service centers.
And we just continue to to proceed on the path and we expect margins to improve over the course of the year and even beyond this year into the future Theres certainly a run rate impact as a benefit in the year butter about it but an additional run rate impact.
In subsequent years and then the other thing I'd point out as it historically our business.
Does have a ramp up in the second half of the year based on activity in volume. So that's the piece that you know we have to pay a little more attention too as we work through Q3 and Q4 again as we said we see economic activity bottoming out in Q3, so we might not see the impact we typically see but certainly over the course of the.
Sure, we expect margins in international business to improve and to benefit from the activities Weve, but we will we have undertaken.
So Jamie through the second part of your question.
As you know I had announced the my departure at our annual shareholder meeting on March 10.
I'm going along came the pandemic in the board asked and I agreed to stay on the lead us three to crisis and making a rapid change during the crisis. So was it was not a good idea but.
The we certainly have continued with the CEO search process, we are still evaluating potential candidates and it just spend a bit slower slowed down a little reluctant to make a precipitous change there during the challenging times, but I can't give you a specific timeline on that but the process.
This is continuing.
And we'll update you as soon as we have.
Information to to provide.
Okay. Appreciate it glad you guys are healthy.
Great. Thanks, David.
Your next question comes from the line of Michael Feniger.
With Bank of America. Your line is open.
Michael Feniger with Bank of America go ahead. Your line is now open.
Perfect. Thank you. Thank you for taking my my questions just try on the on the free cash flow Bridge I think I missed the few things.
Keith have you observed a pickup in April on working cap phasing in collections.
To give you that that confidence as well or is this really kind of like we saw last year, a very fourth quarter type of phenomenon.
Yeah actually we've we saw a pickup in April is I think I may have mentioned this little bit earlier. Our April results were ahead of our expectations and it's our earnings and cash. So we saw a substantial improvement over what we had forecast for April and you know that that is again.
Just due to the activities of people being focused on collections with their clients. They clearly in this environment where people are concerned.
About delay in payment.
We have a highly engaged group of people here there are focused on making sure that they're on top of that but also you know we're seeing a number of our government clients.
Actually accelerate some of their payments just to support the there and caught their economy and support the people working in that account those economies and so we've seen accelerations and Hong Kong Australia.
And even Canada, so again not supporting that bridge in fact is is having us actually collect.
Onto we expected in April so supporting an improvement in working capital in second half of the year and then Additionally, we do see just in our business. There is a natural improvement in working capital during the course here.
One of the significant items that that has an impact than that obviously is compensation, we do make accruals. During the course of the year for some of our compensation that gets paid out the following the first quarter the following year.
Okay, and if we thank you for that and if we take just the low end of your ranges. This year, you did 100 million a free cash flow and the 700 million of EBITDA, Let's say you you don't grow EBITDA next year and you hold the line at 700 million can you just help me understand what the free cash.
Flow you can generate from not 700 million next year is there any stranded costs.
We should be considering a cash to fund some discontinued ops that we should be aware of I guess just to help us get a sense of what are your balance sheet and Leverages now and maybe where could look like in 2021.
Okay, well that's a.
That was a lot to cover I'm going to try and simplify it and I'm sure by by simply saying that we gave a we gave a free cash we give cash flow guidance at our Investor day.
And it was focused on the conversion of our earnings.
D.A. to Unlevered free cash flow.
Within our professional services business, even as we move forward and some subsequent years, we don't see that change in the underlying nature of our business. The conversion of earnings to cash is consistent and so we see 75% of the earnings in 21 converting to a unlevered free cash.
Well for use in the business. So that that that characteristic is remains unchanged and just to the point you made a little bit earlier as you know I don't know where you came up with a 700 million dollar number.
But I certainly don't want it leave anyone with the impression that we believe.
We believe that the subsequent year will look like.
Not at all we still again look forward and we think that based on the underlying nature of our business and the marketplaces that were in that we have the ability to deliver profitable growth into 21.
Oh, Okay, yes, sorry, I got confused I think the 700 million was a I've talked with EBITDA.
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Figure.
With with what you could convert.
To free cash flow and I guess, just just lastly, and Mike I think you touched on it obviously, it's a capital like business high variable cost structure.
I know you had begun to position, where you have a big backlog and only a handful of project in 2008 where were cancelled.
Just help help you understand the sensitivity of your business with the high variable cost structure. If for some reason we did they did see some of the backlog at cancelled and.
Revenue for this professional services business was down 10%, how does that flow through to what percent change to your operating profit. Since you do you have a capital light in high variable cost structure.
Yes, so we've done a lot of modeling.
Type questions.
The good news is we are not expecting a 10% drop in revenue in anyway, but we have modeled that of course as we do a lot of model. These days, but maybe Troy you want it just touch on some some of the the variable cost leverage that we pull but in those scenarios.
Yeah, Yeah, and again one of the things that we spent a lot of time on in February and we still continue to do this almost on a weekly basis is.
Making sure that we keep up to updating and stress testing. What we think is the range of outcomes for the business.
And then with that work.
We've also developed a significant number of of a trigger points for lovers adjustments that we make to react.
So what we might find our there might be on a client basis or a project basis or even an office spaces. So we work through that and what we've determined is that even with a wide range of different outcomes in terms of revenue during the second half for the year that we have the ability to manage to get to stay within our.
Since range. So that's what gives us comfort ultimately that guidance weight guidance range, even with a wide range of outcomes and the things that we focus on again are the things we've talked about which is.
Controlling the cost in the business as we said we currently have have a hiring freeze in place.
We are undertaking any travel so there's some things that just naturally have fallen away in the business.
But then just given the nature of the workforce, we have the ability to again you know adjust if there are dramatic changes in terms of workloads and rebalance work. So those are the yeah. That's the principal lever that we have and then beyond that and I I.
Right I think go ahead as we said so beyond that there are a number of there are number of a programs that the governments around the world and put in place.
To support the the population in our workforce. It also provides benefit or is it is think about it as a lever that has an impact on ultimately our results.
Yes, just so we talk about the modeling we're doing should there be a decline in revenue I, but I don't want to leave anybody with the wrong impression here or what you saw our backlog.
Double digits of $42 billion in the quarter, we rarely see anything drop out of backlog in fact.
We've got 50000 projects going on at any one point in time around the world. So far we've seen 18 cancellations 18 out of 50000.
We've had less than 1% of our projects that had some sort of deferral during the covert crisis.
And right now when I look at the pipeline of opportunities the number of projects in our pipeline is up double digits. The gross margin in those projects is significantly up so we're we're not expecting to see a decline.
Your next question comes from the line of Steven Fisher would you be yes. Your line is open.
Thanks, Good morning, guys.
Just to pick up on that last discussion in about 2021.
I fully recognize that most companies have pulled their 2020 guidance, let alone have anything out there for 2021, but it really wanted to just asking about what the statuses of your specific 2021 expectations that you had out there I notice that we're not in the slide deck of this quarter.
You do have the luxury of having a very robust backlog you just talked about the very small percentage of deferrals and cancellations. So just curious what is the status of your 2021 targets and how confident are you in the backlog that you have in getting there.
So I guess the personal Steve is ours are cadence for providing guidance certainly on the on the next year.
Is when we get towards the beginning of that year. So we want to specifically do that until the fourth quarter. We did at the Investor Day give a guide.
And we remain confident our ability to continue to deliver on profitability and growth.
And as you pointed out it's dependent upon some of the that's the key attributes are business, we do have that record backlog.
And our 2021 plan.
It was built on low single digit revenue growth to achieve a 15% EBITDA growth in 21.
And that was that was built upon the actions that we are taking to improve the efficiency of the business and they were built around real estate improvements design centers built around on use of our shared service center.
And then beyond that we now have a lot of confidence that.
Because of the virus the impact of the virus and our ability for workforce to work remote leashed that also presents additional opportunity.
With respect to how we would change the dynamics of how people work and the impact that would have on our real estate portfolio. So again as Mike pointed out a little early we spent about $400 million here on real estate and there certainly is an opportunity. We believe is accelerated by what the work workplace the future will look like to actually in.
Prove margins and a and to continue to build a passive improve productivity. So you know, it's a long way, saying, we certainly have confidence in the future because of the low single digit revenue growth.
Singled <unk> revenue growth, we had anticipated.
And and our future is built upon improving in productivity and efficiency in the business.
[noise] fixed rate so that just to characterize it would you say that number is still somewhere between valid and.
We just need to see how the pandemic plays out or that number is just still valid at this point I would I would say that we have confidence in the things are within our control.
And as we see the as we see the market stabilize.
We will become you know again will become more confident about our ability to deliver against those future numbers.
Got it and then just a quick follow up on the state and local budget situation I know you've talked a handful of times on the call about the 500 billion seven are doing just just curious about how you think the scenarios will play out for your fiscal year because it you do you have a stronger year enlisted instead.
It's up a June year end.
And you think that federal help will all come in in time too.
I have the state's avoid having any deferral of projects in a meaningful way.
Basically over the summer in your for your fiscal fourth quarter.
So.
We don't think Theres, a negative impact there the reason being the the projects that you're working on are typically funded there's typically money set aside as I mentioned.
We have about 23% of our NSR comes from state to state and local governments half of that comes growing five states that had come into this very strong stabilization rainy day fund so.
The stimulus money that might be brought to bear out in the states in later in the year.
We'll just support the outlook for 21 and forward.
But we're not concerned about the next couple of quarters here.
Okay very good stay well thanks.
Thank you.
Your next question comes from the line of Andrew Wittmann with Baird. Your line is open.
Great. Thanks, I guess my question is.
Focused on liquidity, you've mentioned that given uncertain times, you ought to hold onto liquidity and I think everyone understands that but because the question is how much liquidity is too much liquidity.
Your your guidance is employing like $700 million or free cash flow here in the rest of the fiscal year I don't mean that you only have maybe a couple of hundred million dollars of net debt plus you have.
A U.S. Virgin Islands Big receivable, that's getting paid albeit slowly that's on there. There's some claims that certainly could be a source of cash in the next couple of years ago on your balance sheet as well I mean, it seems like.
There could be an option to do more share repurchase as this castro's coming in even this fiscal year trying to understand what besides being overly conservative with the liquidity could be for factoring into that and just wondering if you could address that.
Thanks, Andy Troy look I think.
I don't I don't believe at this point in time, you can be overly conservative in terms of.
Liquidity, but again as we work away through the year, our liquidity position will continue to improve I mean again, it's I would describe it as being comfortable today.
But it will improve and again as we reach a point, where we start to see.
There'd be some more stability in the marketplace. It becomes just as I said, a matter of timing, where we will return and start buying back buying back stock theres not a pinpoint a you know there's not a point in time, we could say that's exactly when it's going to happen nor would it be appropriate for did for us to do that but certainly we can see based on the underlying attached.
Beach, the business and our confidence in the future that there is a point in time, we're going to move away and rebalance away from liquidity and towards repurchase.
Okay, maybe that's an agenda on us.
Are you guys have talked about.
Dispositions that are in discontinued operations today, either oil and gas so certainly the civil.
Power I was just wondering given the state of the markets right now and AMETEK M&A activity broadly how realistic is that I heard the comments on on the songs job, but how realistic is it still here today that these can be completed assess the year like you previously anticipated or just see some risks that some of the moves into next fiscal year.
Andy This is Randy we are actively working to exit these businesses and you know we we are.
I have made good progress over the last couple of years in.
Getting rid of Ah, we we got rid of our international development business, we sold our production services and oil and gas business.
The completion of the light, we will and and.
Removing two combined cycle jobs from our backlog will affect sort of the combined cycle business.
We are closely managing the at risk business remain at risk civil business and preparing to go back out the market. So we believe that there'll be opportunities as the market and infrastructure spend starts happening we.
Our largest contract now.
About one third of our remaining at risk backlog is the songs contract and we are as we indicated in and discussions there to exit that contract. So we are we're making progress and you know it'll it'll likely be.
Happen you know in lumps, but we expect to make that happened over the you know as soon as the market opens up.
Got it creates takes in the last question is just kind of a technical thing but.
You kind of alluded to this Troy.
Nobody is traveling and that does have the benefit to European now can you just talk.
Historically, maybe what percentage of either gross or net revenue your travel costs such as represented over over the period of time, just so we can have some context as to how much that's benefiting you.
Well the bulk of our travel costs are actually funded by our clients.
So yeah, the impact I would I would I would classify it is in the bundle of travel costs and other types of of out of pocket or amount. So we spend the business.
You know that's going to be this plants, it's less than a percentage point of our entire NSR.
Okay very helpful. Thank you.
Yes. It's also help will remember that people that are traveling you're also billable to clients and so what do you end up having is the you gained some productivity side. So instead of being stuck at an airport get their home office doing works its billable to clients. So it's not it's not just the cost of the airplane ticking hotels et cetera.
Actually the you replace some travel downtime with productive billable time, but while they're not traveling.
Even better.
Thank you.
Your next question comes from the line of Adam Thalhimer with Thompson Davis Your line is open.
Great. Thanks for squeezing me and I wanted to ask.
Yeah, Mike Since Asia was first 10 first out what what kind of demand destruction did you see there and kind of what does that tell us to expect elsewhere in the world SB restart.
So what one of the the one way to look at it is there it's about 10 working days lost.
In Asia, and so you know 10 working days is meaningful if you do you think of 240 working days or show in a year.
It's five 5%, yes, and so that gives you a sense of what we saw but more importantly, as we learn from that experience.
Very quickly and wearable we're learning at scale says, we're talking about 10000 employees across China. So we had an opportunity to learn from that.
And use that experience elsewhere as we move to a remote work environment, but I'll tell you Hong Kong, we Hong Kong's our biggest market in Asia.
Where we've got almost 5000 employees in Hong Kong alone in that market. We went into this year expecting a double digit decline in revenue going into the year because.
Some of the challenges in protest.
In Hong Kong.
In fact coming out of this Ah we are beating our plan in Hong Kong right now despite cobot and we're expecting a stimulus dollars in Hong Kong will give us even more momentum there. So we're actually doing better than our plan. Despite the covert shutdown.
And maybe that's our plan was lower.
That it should have been coming into the year as we're being cautious about some of the the protests that we were seeing at Hong Kong, but we've learned at scale, there and we deploy those learnings around the world, but you are helping us maintain a productivity or in other markets that have got to remote workforce.
Okay, and then with U.S. stimulus I mean, I really hope you're right. The man the Republicans seem to be putting up a big fight on any kind of phase for infrastructure stimulus.
How do you think about that versus the hope for something over the next few months.
Well, there's certainly a lot of momentum.
And I don't know how to handicap it the Adam it's that we're following it very closely.
So far the the amount of money that's been that people are willing to spend in Washington on both sides of the I'll through the first round to the care Act. It seems like the one that's road just about any amount of money to get this economy restarted as soon as possible and infrastructure spending is something that is top of my.
Line for Democrats and Republicans, although there you know you mentioned some of the Republican resistance, but I don't know how to handicap it would put odds on it but.
I just feel it's more likely than not we're going to see a stimulus activity deployed towards infrastructure.
Okay. Thanks, Mike.
Sure.
There are no further questions at this time, Mr. Burke I turn the call back over to you.
Great well well. Thank you everybody for joining today you know this is.
Certainly are unprecedented times, but I have to say that I'm incredibly proud of our organization has responded.
It gives me great sense of pride well to work at some of the incredible employees across eight but there's a few additional points I want to emphasize from today's discussion before we close out here.
Clearly our financial performance over the past six quarters, it's been clear that we're delivering on our strategy and we're exceeding all the targets that we set a we are delivering on our commitments to simplify and de risk our business and expand bard margins.
We certainly have transformed our balance sheet.
After the sale of the management services business, we did that shifted the right time coming into this pandemic, which gives us a lot of flexibility on capital allocation with a lot of liquidity and liquidity is highly valued right now as Troy mentioned earlier and the transformation that we've been.
Undertaken to convert to a professional services business.
Has a lot of advantages that position us quite well to consistently deliver on the financial performance we're talking about.
And we're certainly delighted to see the agility that our employees.
Displayed over the past few months by converting to a well remote work environment.
By providing new services to new clients in new ways.
That depends them because that required so.
We feel pretty good that as we look ahead, there's there's uncertainty in the world.
But we have a lot of confidence in our outlook for the year. We've got a lot of confidence in next year based on the backlog. We have the continued very high win rates, an expansive that backlog and so.
We feel loan a great sense of confidence for Fytwenty.
Why 21, so I look forward speaking to everyone again soon thank you for all your support you'd say stay safe in saying in these difficult times. Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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