Q4 2020 AECOM Earnings Call

Good morning, and welcome to the E Com fourth quarter 2020 conference call I.

I would like to inform all participants this call is being recorded at the request of E. Com. This broadcast and see copyrighted property of E. Com any rebroadcast of this information and all or part without the prior written permission of E. Com is prohibited.

As a reminder.

Comments also to passing its present teach and what slide happy investors touch and Www Dot E Com Dot com.

And every will conduct a question and answer session.

And how the question please press star and the number one.

And your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign for hash key.

I would now which and the call over to will keep Belsky 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 and then.

Discussion contains forward looking statements about future business and financial expectations.

Actual results may differ significantly from those projected and 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 our forward looking statements.

We use certain non-GAAP financial measures and our presentation the appropriate GAAP financial reconciliations are incorporated into our presentation, where available which is posted on our website.

As a reminder, we sold the management services business in January and it tends to exit our remaining at risk self perform construction businesses, which include the October 16th cell and the power construction, but.

These businesses are classified as discontinued operations and our financial statements and these comments will focus on the continuing operations of the professional services business unless otherwise noted.

Today's references to margins and adjusted operating margins reflect segment level performance for the Americas and international segments.

We will also refer to net service revenue or NSR, which is defined as revenue, excluding subcontractor and other direct costs.

Our discussion of NSR growth will be adjusted for the impact of an extra week in the fourth quarter, our discussion of margin will be and an NSR basis, unless otherwise noted beginning today's call is Troy Rudd, our chief Executive Officer Trey.

Thank you will.

And thank you all for joining us today.

I will highlight our accomplishments over this past year, our confidence in fiscal 2021 and review our strategy and key priorities. There Pony, our president will discuss key operational priorities and Garca for our CFO will review, our financial performance and outlook in greater detail.

We will conclude with a question and answer session.

2020 has been anything, but a normal year and I want to begin by acknowledging the great work of our teams over this past year dependent MCAD profound impacts on the daily lives of our employees and their families our clients our communities and our business.

At AIU com, our professionals mobilize quickly to provide extraordinary support for our clients and communities. During these challenging times.

Our teams led the industry for disaster response work, including delivery and temporary hospitals at the initial call would peak in April.

And we advised several prominent clients on their say free opening including the N.B. a successful season in Orlando.

We also changed the way, we work with more than 90% of our employees working remotely at peak.

We launched innovative solutions to help our employees remain deeply engaged with our clients and put in our virtual public consultation solution.

True at all our client satisfaction scores have increased and the organization has come together and new ways to deliver for our clients.

We all take great Pride and what we have accomplished and I want to say, thank you to all of our people for their effort dedication and resilience.

I also want to know acknowledge Randy Wotring, who recently announced his retirement after a 40 year career range.

For any provided critical leadership for the organization over the past few years and his contributions have been vital to our success on.

On a personal note for.

And he has been a great partner and I want to thank him for his support and continuing council.

Now, let's turn to our financial results.

Despite the unprecedented challenges in 2020, we improved our underlying business and delivered on our financial commitments, including 14% adjusted EBITDA growth and $341 million of free cash flow for the year.

Both metrics exceeded our guidance.

Our backlog remains near an all time high increasing 13% and providing us with visibility to execute with certainty.

We continue to deliver new highs for profitability.

Segment adjusted operating margin was 12.3 per cent for the year.

Reflecting day 160 basis point improvement from fiscal 2019.

We are proud of the progress we have made on our margin improvement initiatives.

To fully deliver and the value creation opportunity, we see we completed $455 million of stock repurchases between September and mid November we are confident in the trajectory of the business and we believe the purchase of our stock continues to be a great opportunity across.

Accordingly, our board of Directors recently approved an increase and our overall repurchase authorization to $1 billion.

Finally, we have made substantial progress and our transformation into a pure play professional services from in January we completed the sale of the management services business and last month, we closed on the divestiture of the power construction business, we are well positioned on the exit of our remaining at risk construction business as.

With our accomplishments in the year, we are energized by a renewed sense of urgency to realize the full potential of our company to.

To describe how we will unlock this potential today, we unveiled our new think and act globally strategy as a global company with scale. Our goal is to drive collaboration across the organization and to bring the best of E com to all clients there.

This strategy includes several key elements first we have simplified our business. This includes our recent announcement of one global design organization, creating clear lines of accountability and our key priorities, while creating a culture that embraces collaboration to bring our global expertise to each client.

Second we are deepening our engagement with clients to better capture untapped market share and our core markets for instance, our top 20 clients represent approximately 20% of our NSR and more broadly our top and I'm geography is represented more than 90% of our profitability, we will focus our time and capital and these relationships and.

Markets with an emphasis on delivering the full breadth of our capabilities to our clients.

We view this as a key organic growth driver.

Third we are transforming how we work.

This will include our workplace for the future initiative designed to leverage technology and innovation to create efficiencies and greater flexibility for our employees.

Our performance through the pandemic has made it clear that our people are consistently deliver and for their clients well working remotely including.

Including continued strong productivity and increase client satisfaction.

Our clients are executing similar initiatives, which positions us to deal we do best provide knowledge based solutions to shape, our clients address challenges and to capitalize on new opportunities.

Fourth quarter everything we do is driving efficiencies throughout our operations.

By delivering higher margins, we can create a virtuous cycle of capital generation.

And we are able to increase our investments in the business to drive further growth.

And increase our returns to our shareholders.

Finally, we're committed to lead our industry and he is GE, which is becoming a critical growth driver for our business as a global leader and environment and water markets and a leading green designer and builder, we are uniquely well positioned to capitalize on this trend.

Please turn to the next slide for a view of market trends and our fiscal 2021 guidance.

I'd like to begin with a brief comments on the recent U.S. presidential election, which is poised to create opportunities for us.

We are leader and transportation environment water and clean energy markets, providing knowledge base critical services to public and private sector clients, who are increasingly focused on ESG and sustainability and.

As it stands today, we see bipartisan support for funding to help our state and local clients, whether the impacts of covered continue.

Continued focus on infrastructure investments as a job creator and competitive differentiator for the U.S. and an increasing regulatory emphasis on environment and water markets. This is great news for a calm and we stand ready to deliver for our clients.

Looking across our markets more broadly trends are mixed and.

In addition to the impact of cobot, and our markets other factors or influence and our business and the U.S. Our pipeline remains solid the client decision, making has slowed due to funding uncertainty.

And the UK Brexit continues to weigh heavily on private sector activity, which is impacting growth, even as our win rate and activity and the public sector improves and.

And in the Middle East weak oil and gas prices continue to create market headwinds. Nevertheless, our win rate remains high and backlog increased this year, including a win for a key nine figure pursued and third quarter, which will underpin our position in this market for several years.

Encouragingly tax revenues in the U.S. have recovered from the low as earlier this year and vehicle miles traveled and user fees are trending positively.

And Canada, Hong Kong, and Australia infrastructure spending remains a bright spot and we are benefiting.

We are seeing indications that private sector clients are advancing major projects again, and we recently won a substantial environment contract from a large energy client.

We're also seeing customers increasingly invest and new sources of clean energy and.

Market, where our leading environment and energy capabilities position us well for growth.

The efforts, we have made internally to align our cost structure with changing market trends has allowed us to deliver profit growth despite mixed market trends.

Turning to our guidance.

We are forecasting another year of earnings growth and fiscal 2021, including adjusted EBITDA growth of 9% at the midpoint of our range.

We're also initiating guidance for adjusted EPS growth of 23% at the midpoint.

Underpinning this growth is the 13% backlog increase in 2020, and our expectation to prove our industry, leading margins by 90 basis points in 2021.

As always the cash generate of nature of our business remains firmly intact and supports our expectation for another year of strong free cash flow.

Taken together our results this year our strategy for the path ahead inspire confidence and our outlook.

Well, we recognize that certain markets are challenging we are encouraged by how we've responded and delivered in fiscal 2020 and by the progress. We have made on our ongoing actions to create a more resilient and a more profitable business.

We have an exceptional opportunity to extend our position and the market and I'm excited to be leading this great organization to professionals, who share my passion and pursuing this opportunity.

With that and we'll turn the call over Tilera.

Thanks Troy.

And for the next slide.

We are energized by the tremendous opportunities in front of us as we booked for the distinguish ourselves in the marketplace. We hold number one rankings in several key markets, including transportation facilities and environment and we are a top green design for them and green builder.

This position of strength, we are excited about whats possible over the next several years.

I think and act glibly strategy is designed to help us and she'd alcoholic sitting and new standard of excellence in the professional services industry.

To identify areas for improvement we conducted an in depth analysis for that business in the eyes about clients and against our competitors. This analysis revealed that we are an industry leader and client satisfaction. In fact, we have seen a client satisfaction scores increased three d. pandemic and we continue to be widely regarded as a technical leader by.

Clients, which is a testament to our team.

We also focused on for if it's on identifying organic growth opportunities. This includes our emphasis on better collaborating to bring our best to each and every client and deploying best practices that produced consistent results across the entirety of and business.

In certain markets, we have delivered exceptional results for our clients and have a clear lead over the competition.

However, we haven't reached out potential for every client and as Troy noted, while our top 20 clients represent approximately 20% of R&D. So we see opportunities to grow our revenue and profit with these clients by upwards of 50%.

Today, we are focused on building stronger and deeper relationships with clients. This includes senior executive sponsorship and keep the seats and client relationships and.

Bridging the global expertise and they come on every key client account huh.

Getting hiring based on expertise that aligns with clients priority and accountability for results. This.

This is a big opportunity for <unk> com.

Well bring the organization together to think and act globally. We are also reinforcing our commitment to equity diversity and inclusion and.

The ability to draw on day. This global perspective is a competitive advantage for E com.

One key programs to capitalize on this opportunity is out thrived with E Com initiative design.

This includes for this mentoring programs with participation bound by simulated expanded partnerships with community to enhance the diversity about recruiting efforts and to leave stick and t. bias training programs.

We must continue to embrace diversity and celebrate out differences to reach out from potential.

In addition, we are positioned to fully capitalize on E.S.G. opportunities and.

No other company is better suited to address the growing priorities.

We have a culture that is committed to building a better world and that is helping clients and that most sustainable and energy efficient solutions.

Whether its managing the construction of LEED platinum buildings in New York City, helping clients develop and implement energy efficiency and savings programs or advancing proprietary solutions for the clean up for PFS and other emerging contaminants, we are uniquely well suited for the increased prioritization and spending on S.J. initiatives.

In fact more than 1500 companies and 800 cities around the world and sit there and go to achieve net zero emissions targets.

And we are working with our clients to advance their initiatives such as that work on the Washington trends it departments per seat of an ambitious electric retrofit to the bus fleet well.

We are also working with shell on the initial steps to achieve their net zero emissions targets by converting traditional fuel stations to hydrogen and among the first in the European region.

Our unrivaled expertise differentiates us in the market and positions us to grow that business over the next several years.

I'm excited about the opportunities in front of US we are leaders in our industry and more focus and EBITDA on prioritizing time and capital to our best growth opportunities.

With that I'll now turn the call over to GAAP to discuss our financial performance and outlook in greater detail.

Thanks, Laura Please turn to the next slide.

Our financial performance in fiscal 2020 exceeded our expectations highlighted by adjusted EBITDA and free cash flow above our guidance range and margins that exceeded our full year guidance by 60 basis points.

I should also note that we exceeded our earnings guidance, despite and approximately 15 million headwind from changes in foreign exchange rates compared to our plan.

In a normal year this would be an impressive outcome.

For delivered this result against the uncertainty over the past year is a real testament to our team's commitment to deliver for our clients every day.

We have made important progress on our portfolio transformation over the past year.

We sold the management services business in January and in October we closed on the sale of for power construction business right.

Related to the sale of for power business and the exit of our remaining at risk construction businesses, we recorded an impairment to our balance sheet of 247 million in the fourth quarter.

We have eliminated all stranded costs associated with the planned and executed business divestitures.

With our transformation into a professional services from our business has several several inherent advantages that enable us to perform through periods of uncertainty.

We have a highly variable cost model, which creates flexibility to quickly align our cost structure with market conditions.

We have also demonstrated that our workforce is delivering quality work efficiently and effectively love working remotely for.

Finally, we have a highly cash generative business with high quality public and private sector client and a culture focused on cash including incentive for metrics for return on invested capital and shareholder value creation.

These inherent advantages combined with a near record backlog creates visibility and confidence in our business and our ability to drive strong results.

This past year serves as a great example of this please turn to the next slide.

And the Americas NSR declined slightly on an organic basis, and the year and our backlog increased by 14%, including 14% growth and contracted backlog.

Our private sector clients were impacted by near term headwinds from the pandemic and lower oil and gas prices.

Our transportation and water markets performed well for the year, but budget pressures and slower dishes and making it impact the fourth quarter.

Canada remains a bright spot.

We delivered well against our plan for the year and more than 10 billion of infrastructure and stimulus plan for support our expectation for another solid year in 2021.

Our construction management business also performed well and maintains a near record contracted backlog across a diverse set of industries within our core markets.

Nearly every project that pause earlier in the year has resumed activity and we completed several iconic projects during the year, including one Vanderbilt and New York and so five stadium here in Los Angeles.

The Americas segment had a 16.9% adjusted operating margin for the quarter, which contributed to a 16.8% margin for the full year.

This sets a new and you'll high for the professional services business and reflected a 160 basis point improvement over the prior year.

Our margin performance serves as clear evidence that actions, we have taken to drive better profitability are delivering results. Please turn to the next slide.

Turning to the international segment and.

MSR declined by 4% on an organic basis, and the full year with trends mix across our core markets.

In Australia, we delivered growth led by transportation and our backlog increased.

However, our greater China, and UK businesses declined and the middle East market remains pressured by low oil and gas price of our international backlog increased by 6% for the year, including an increase in our contracted backlog, which creates visibility for fiscal 2021.

Importantly, our focus on improving margins delivered results.

Our adjusted operating margin in the fourth quarter was 6.5% and 80 basis point increase over the prior year.

Since the beginning of fiscal 2019, our margin is up nearly 400 basis points.

Deliberate this margin improvement, despite revenue declines, which underscores our confidence and driving double digit international margins overtime.

Let's turn to the next slide.

Turning to cash flow liquidity and capital allocation.

We delivered another strong year of cash generation for quarter free cash flow of 619 million resulted in full year performance above our guidance range.

We benefited from tax deferrals and to your as a result of cold and related government stimulus programs, some of which will unwind over the next year.

Nevertheless, we remain confident and our ability to convert 75% for EBITDA to Unlevered and trouble free cash flow on a normalized basis, which is reflected in our 425 million to 625 million free cash flow guidance.

Importantly, our balance sheet is strong.

We exited the year with gross leverage of 2.7 times, which is consistent with our long term target to operate the business with less than three times leverage going forward.

This is also an improvement from 3.4 times and the prior year.

We are committed to allocating substantially all are available cash and free cash flow to share repurchases to ensure we fully capitalize on the value creation opportunity present in our shares.

We completed 455 million of repurchases from September, which reduced our diluted share count by nearly 7%.

And with strong cash generation expected in fiscal 2021, combined with our expanded stock repurchase authorization from 305 million to 1 billion. We expect to continue to be in the market throughout the year. Please turn for the next slide.

Our performance in fiscal 2020, instills confidence and the organization.

We expect to deliver another year of earnings growth despite varied conditions in our markets.

Key drivers of this expected growth our organic growth initiatives to continue capturing market share benefits from execution of our restructuring and cost efficiency plans and prior year and a streamlined organizational structure.

For fiscal 2021, we expect to deliver 9% adjusted EBITDA growth to 810 million at the midpoint of our range, which includes our expectations for another 90 basis points expansion and our segment adjusted operating margin to 13.2%.

We are reintroducing EPS for the guidance metric consistent with our focus on creating per share value.

We are guiding to adjusted EPS and the range of $2.55 to $2.75, a 23% increase from fiscal 2020 at the midpoint.

Our guidance incorporates the benefit of already completed share repurchases in fiscal 2021 to date any hundred and 53 million average diluted share count.

With that operator, we're ready for questions.

Ladies and gentlemen to ask a question. Please press star and the number one and your telephone keypad for.

Sales for just a moment and how the committee roster.

Your first question comes from Sean Egan with Keybanc capital Your line is open.

Hi, Tim Congrats on the strong finish for the year.

I I just want to just I just wanted to start a high level around the growth strategy. You know, we're rolling out the thinking and globally strategy.

Well just be curious to get your stuff and get a sense from you on the response from the employee base you know maybe from a sentiment cultural perspective, and just perhaps how engagement has trended recently relative to say two to three years ago.

Some perspective on that for it would be helpful.

Sure and Sean it's true I want and I take that question and I'll.

I'll, let Larry add to that.

So <unk> for first of all we've been having this discussion and internally for a few months now and we've now and unveiled the strategy and.

And I think this simply is it's been very positive will be received and I think our our our people as I hear from them and as I speak to them, they're excited about the opportunity to be.

To be focused on our clients to.

To be focused on and equity diversity and inclusion agenda.

And to be focused on a broader U.S.G. agenda is ABSSSI, what our clients are focused on and they're setting large ambitions and it's what our people are excited about so you know I also get the feedback that there is you know theres clarity to what we're focused on and and and that gives them. It gives them a real sense of directed purpose.

So Larry do you have it and get.

Yeah. So thanks, Troy and thanks for the question, so and so I think and absolutely, but the feedback seemed very positive from employees around the world and they're excited about the zinc and exports will gladly strategy.

And in particular, I mean that they're excited that we're going to use and scale and the investments to expand our already strong leadership position across all the global markets and create value for all of the stakeholders and and also creating at the same time and elevation of technical expertise and price.

And with that comes in and greater clarity on Korea pods for employees as well. So I think everyone very energized, it's an exciting time and I'm very confident that we're going to be able to deliver and this commitment.

Thanks for the quick excellent.

Yeah, I think that's important.

Second for me and it's great to see good standing by the 15% plus a segment level margin target.

And it just be great to get a sense for and how it should be bubble that is and maybe some sort of a rough timeline I mean, it just with you guys exiting fiscal 2000 and here and leading the pack here on margins.

And just be great and try and get comfortable around and that next 200 basis points essentially and you know even just some broad strokes around that bridge or would be very helpful.

Hey, Sean just guar I'll take that question you you hit the nail on the head right as to what we have accomplished to date just over the last two year period. We've had significant margin expansion you saw that again and and our 2020 results both in our Americas and international segment and for 2021.

And even though we may have headwind a we're not expecting any growth built into our plan. We still see margin expansion of 90 basis points going to 13.2. So as we look forward beyond that we're not giving any specific timeline for what I can tell you. Some of the initiatives that that are in place specifically in international where.

Our aspiration is really to to deliberate and continue to deliver significant margin expansion.

And that's going to help us get to that 15% Aspirationally target, but if you just look at international isolation, it's up 150 basis points year over year, where we do expect top line headwind in 2021, we still based on all the actions. We have taken initiatives that are put into play for 2021, we expected to grow by.

Another 100 basis points.

And then beyond that you know, our global BCS strategy, which true and Laura articulated to you about is going to provide us opportunity to become more efficient and capturing better market rates and delivering to our clients. We're going to continue to flex on our global design services and our global business Services Center and.

And we will continue to have focus to make sure every capital dollar being spent in our international and Americas business has ROI focus and the right margin profile for US, which you know we've exited 30 countries globally and we will continue that rigorous process because that is now and growth.

And in the culture of how we operate and lastly, I'll also point to digital transformation and workplace for the future and those type initiatives, but there's absolutely no doubt in our mind that those margins will continue to expand because continuous improvement is now being in Korea and into our operational culture, and lastly, I'll just say before I turn.

At over two large and give you an overview of the market.

Right.

Once these markets do stabilize and toppling stabilizes for us our new strategy of thing and and globally will not only help us achieve peer margins and international but it'll help us exceed those margin that's what we're really shooting for here.

So with that I'll turn it to Laura.

Yeah, absolutely shown we're absolutely focused on margin expansion and if we look at average national business. In particular today were seeing a lot of the trends and coal markets.

And certainly you know.

Very focused on recovery and infrastructure, which is obviously, astral and foundation and and and opportunity to really capitalize on l., leading capabilities and as Jay and and wave. One we continue to win a lot of work in that sector, particularly in the last year and and very strong gross margin as well so [noise].

I think you know it's going to remain a very strong questions for us and in line with agency growth I think similar trend not not just in the Americas, but in the middle East whether it's the sustainability work of the work we're doing for me on the coastal restoration opportunities in Asia. So.

That combined with our strength and infrastructure I think positions us very well and in addition to other things that GAAP talked about to improve contingent for dies margins.

Terrific I really appreciate the responses. Thanks.

Thanks, John.

Yes.

Your next question comes from Michael and get off with vertical research. Your line is open.

Hi, good morning gentleman low.

Morning morning, My money, Yeah, I'm an afternoon your first.

Thank you appreciate the first Troy you talked about top 20 customers 20 per cent of revenues growing 50% over time.

The share was a little bit more clarity on that you know the.

Top 20 customers like public versus private I assume government agencies are weighted in the front and is that growth for you. You think overtime is more organic cyclical growth and and what combination of this environmental social and.

And I suspect that could you know that these type customers can drive even further organic growth for you guys. As you as you laid out the plan.

Sure Mike So for.

First of all when we talk about our top you know our top 20% are a top clients. It it includes private clients and and public sector clients. So.

We don't differentiate between the two.

And so those are again globally those are our largest clients and as we think about increasing that it's it's not about them spending more money.

It's about us becoming more embedded.

And that client and taking market share or helping them with a greater portion of their initiatives or their spend.

And that's that's really what we're looking as we're lucky and effectively improving the market share or working with them in a greater capacity to.

To take more of their overall spend and certainly.

Focusing on and is she agenda or a a a low carbon agenda will help with that we're very well positioned to do that type of work and as we look across that client base in fact, all of our client base.

We see that on their agendas and he is GE is important and in particular, there and that you know low carbon agenda. There all setting these large ambitious goals that they're working on to developing plans to achieve.

And where along with them to do that and and over the long period of time. The expectation is that will help them and help them evolve and spend the capex to achieve those ambitious and agendas. It's again, it's for being closer to our clients.

You have a better relationship and do more work and two clearly help them with their their individually as GE as two agendas, which are.

Incredibly important to them.

That makes sense and my follow up is and you highlighted certainly your Q for some of the headwinds that we're all seeing throughout the world given cobas et cetera, maybe you could break down a little bit and little by little bit and some of the markets that maybe a little slower to recover wading through either the ministry.

Yes, and confidence and vaccine I'm, just getting budgets together so is it because it looks like more of a second half fiscal year weighted versus first half generally and relative to your margin targets appears it sounds like you're not expecting much overall revenue growth and 2021 and if there is that certainly could be upside to just wondering.

From that.

Yes, so Michael work for work backwards and your question.

In terms of our growth we're seeing the this next year look flat.

Potentially we see some modest revenue growth and the year.

What do you think that's ultimately dependent on a number of different factors as you described.

And I think a lot of that would be driven by the impact of things would happen in the second half of the year. So there's no question that.

And the impact of the pandemic is has changed the world, but as we look forward, we have some optimism or even line of sight to things improving in the second half of 2021.

We also look at across our markets and yeah. It's it's varied we have some markets, where it's clear that our clients with government support have ambitious infrastructure agendas, we see that in Australia, and we see that in Canada.

And we see that in China, and and even Hong Kong.

But here in the United States.

And we're seeing within our large client base, particularly for state and local government client base and.

And you'd uncertainty over funding, but we do believe that with the that the change in government that in the second half for the year there'll be some certainty around funding that might be helpful for state and local governments.

And we see that their revenues.

For use revenues certainly for transportation will be returning.

And and we also see opportunity for and ambitious presidential agenda focused on and climate change.

Which again as ever to set our clients have great ambitions for and then you know there seems to be some again some interest in a broader infrastructure investment.

And from the New administration, so yeah, and I'm optimistic those things are kind of line and themselves up to us to address some of that uncertainty that exists and they're large U.S. market today.

So that's why and we're getting to kind of flat.

And to a little bit of a a little bit of growth and this next year.

And again underpinning all of our expectations are and revenue is our backlog. So we're at least comfortable and well positioned to have some confidence around that range of outcomes.

Excellent and I appreciate your thoughts thank you.

Thanks, Mike.

Your next question comes from India, and that's with Citigroup. Your line is open.

And you're on mute.

And he kept pilots your line is open.

Your next question comes from Jamie Cook with Credit Suisse. Your line is open.

Hi, good morning, and nice quarter, I guess I thought the other interesting comment you guys made in the prepared remarks that the top non geographies. I think you said represent about 90% of profitability I'm just interesting in the context as we think about your mid Americas versus international margin. So can you give us a little more color and which geographies are driving.

And that and then I guess Troy My other question just strategically as you're looking at your clients and your geography more closely now with the divestitures and that of that you have happened.

I mean are there opportunities for you to you know take a look at the portfolio again, yeah, and I mean, either by geography or by client base to sort of accelerate you know that the margin opportunity here just as you're now are you looking at the company again, thanks Yep. Thanks, Jamie.

So yes, when we look at the geography is there there are a small group of businesses that have dropped that average star highest returning businesses as you can imagine.

It's the ones, we typically talk about.

It is our Hong Kong, China business, or Australia, New Zealand business, our middle East business, or UK business, Canada, and a and the U.S. and that's the focus but within that business. There are also opportunities to take the expertise that we have.

And to take it on a project basis for the opportunities that we think we are best positioned for so large complex infrastructure projects.

Those are those other places that are groups of professionals perform their best work and so even from that platform. We would look to go into those businesses and those areas of the world and and support our clients and support large transformational projects.

So when you talk about are you know our margin, we certainly have opportunities and internationally.

To continue to evaluate some of our businesses and decide whether or not we're going to remain as heavily invested as we have in the past and those places. So it is part of our overall margin improve and agenda and it.

It is and elements of it and ER and we're gonna be continuously focused on being and the places and working on a project for clients and create the greatest the best return on our capital opportunities.

I guess, then and thank you for that one other question just on the on the guide and I'm just trying to understand your comments on revenue is you know relative to your contracted backlog growth that you ended the year you know I don't know if it's just cobot conservatism and I'm, just trying to understand and it sounds like based on your comment or the comments relative.

I have to Mikes Ah Michael that question, but should we really expect earnings to be sort of more backend loaded just with co head you know and the way your fiscal year and thanks.

Sure.

So so when you when you look at our again, what we're describing as revenue compared to our backlog remember that within a design business. There certainly is a significant amount in the year of GAAP.

Work that you that you book and burn in a year and so that's kind of where we see some of that softness related to the the kind of the current funding uncertainty amongst some groups of our clients. So I I guess, maybe you can do it as us being conservative and our expectations about growth.

Based on our backlog for <unk>, but we think just given the environment that we're in it makes a lot of sense. You know there is there is a there's there's a lot of things that kind of need to happen and the first half for the year that would create and improvement in the second half and here now.

Now with respect to the earnings.

You know I think we've we've shown and our people and our management team has shown over this last year that you know, we can react and we can manage and kind of manage the business to maintain profitability throughout that period of time. So I don't see our I don't see our profitability being and any different than it has traditionally been in prior up and price.

And your past years.

Okay. That's helpful. Thanks, nice job thanks.

Thank you Jim.

Your next question comes from India parts and Citigroup. Your line is open.

It's kinda and again can you guys hear me we can Andy.

Excellent and so I just wanted to follow up on that and sort of a new strategy and Troy and.

And the sense that a we know your day come when you set your previous targets, but you did have that significant evolution imagined and and streamlining and business that you've talked about so does this mean, you know and new on analyst day, or maybe setting ups and new goals at some point I mean, you talked a lot about going after existing customers and maybe.

Some sort of above market growth targets. A you know we know about your return targets and your margin targets, but you know can you get to those targets faster.

Yeah, Andy first of all I I have the feeling that maybe you know from someone our investment relations team for I do that question teeing up our and our Investor day that we're going to do in December where we're going to talk about that so thank you for for Ti and it up for us, but the answer is.

We we gave some targets that we thought the business was capable of achieving in 2019.

And even in spite of all the things that have happened in the world, we still have excess similar expectations around the profitability of the business, but as we look forward based on the new strategy and based on our optimism that we see beyond 2021, we certainly will talk about the impact of how our strategy would.

Expect or would it would would adjust for expectations around the future opportunities for growth in our markets and our business.

So we do we do feel quite positive as we move beyond 21, and we'll talk about that and December.

And tell from Troy and then you said in the past that your state and local guar and pipeline of opportunities and down about 10% plus and environmental I think we've done five and 10% plus is that what you're still seeing in terms and impact on the business and would you expect that impact and follow through into revenue and those particular businesses over most of 21.

And so we've actually seen the trends get a little better than than other than we had been seen and third quarter. So.

So the overall trends about the opportunities that are available for a little bit better, but they certainly are down year over year, but.

But nevertheless, and they said our strategy is focused on being closer and more deeply engaged with our clients.

Which means that you know we're looking to do more work for those but that particular client said and we've seen that so our transportation business, even though the opportunities were down our transportation business group, which means that kind of what we're doing to be close to our clients and drive innovation for them.

Is is working so well the opportunities the opportunities that may be shrinking or have shrunk and it's a little it's not quite as bad as we had thought but nevertheless, we're still and seeing the opportunities for growth because of the strength of our business and the strength of our people.

That's helpful and two and then just one quick follow up to sort of level set you know a good guidance Q1, and usually your seasonally weakest EPS quarter anything different about that in Q1 that youd like to talk about.

Andy This guar, we expect our phasing and earnings to be consistent with fiscal year 19, and fiscal 2000 and there we don't expect any difference.

Thanks, guys appreciate it all right. Thank.

Thank you thanks Andy.

Your next question comes from Michael Finer with Bank of America. Your line is open.

Yeah, guys. Thanks for Hum, having having me on excuse me and.

Just curious I know there's been a lot of talk about 50% margin target did you guys put that out obviously you know we've gone through co bid we know how cold it is weighing on the topline and some of your business areas I'm just curious Troy just on the cost side you guys.

Over the last few months really made a lot of announcement that did you relocated your headquarters and you mentioned real estate optimization.

I think you also mentioned on the whole thing about 90% of your work force remote.

I'm, just curious and real estate optimization, and maybe leases coming up can you provide and other buckets of structural upside that maybe we're not seeing and 2021, but like has tailwinds for 2022 and beyond.

Yeah. So.

Let me, maybe and give you the headline on it and then I'll, let guar and give you some other details.

But again this is going back to 2019, where we sit that that 50% target and again. It was it was it that we described it as our ambition.

And what we describe as along the way for improving our margins each year and so we did set a target back in December of 2019 for this coming year and.

And you seem from our guidance, we that that's the target that we're shooting to achieve so you know, we're looking to get above 13%.

So when you look at everything it's happened in this last year. Despite all of that we've been making changes the business to again achieve those margin ambitions.

I'm sorry.

So I get I you know, it's it's it becomes a little a little difficult to say that the path to 50% will be the same because the answer is the world changed but were committed to delivery and ARQ <unk> delivering on that and that ambition eventually.

And and the best thing I can point to is the fact that given everything that's happened in this last year, which was not a normal year.

We still have the expectation to get to the margins that we said, we would and 2019 and beyond the path for that ambition.

And Michael This guard just continuing on what Troy articulated.

You know we have a feeling full confidence not just based on what we have accomplished over the last two years, but even when you look at 2021. It shows that we still have low hanging fruit that we need to address its reflected in the 90 basis point margin expansion and you see from 2020 to 2021.

And we feel like we're just getting started right, it's where a lot of things I mentioned earlier the initiatives that are available to us back in December 2019, when we communicated the 15% margin is that that's going to be transformational. Its aspirationally. We're sitting here today and we're starting to see low blocks to that path being developed and and we're starting to flow.

Look what our execution strategy will be on each one of those.

Starting from again are one global Dcs, where we have market, leading franchises and our core markets, where we either dominate the first or second spot and.

And as we execute on better capture rates wed already industry, leading margin, it's going to really allow us to drive profitability not an absolute number but also on a margin expansion and for all the reasons I mentioned on international as well.

Always and continued focus on ROI in our markets to ensure its meeting our capital thresholds.

And you mentioned you Mitchell.

I appreciate that you mentioned a lot and international is there any reason why you can't get to a double digit margin is that is that possible or is that.

Structurally not not and the cards.

We will absolutely get to double digit margins per year.

Our goal as I stated our ambitions are just like we're in Americas were far ahead of for our peers on on America's margins those are same ambitions and international.

Maybe there enough and yeah, just as Troy just to add something to that is you know there are sometimes easier ways to over and prove the overall profitability of the business and certainly when you are focused on two countries and the fairly large business it becomes a little bit easier to do that and we started on this path to improve internet.

For the large and spikes in 30 countries that was no small feat sounds easy exit 30 countries, but it's a tremendous amount of effort to do that and it takes time to do that when you're thinking about winding finishing projects for your clients.

And and then leaving that business. So you know, it's it's just a more difficult path. It takes a little more time, but as guar said the path. Ultimately is the same we focus and doing the same things. It just takes a little bit longer time to achieve it because it is more difficult.

Fair enough and just just my last last question. If you know if I look at your net debt stands at 380 I forgot you guys plan to generate 425 to 625 for free cash flow you know average right now its just 0.3 times.

And that's trading at a discount to some of your peers. Just Troy do you think you need to use that balance sheet to fill out your portfolio to better compete with those peers or do you like for your portfolio said and that cash can strictly just go to.

She really close and that valuation GAAP. Thank you.

Well first of all our professionals have no problems competing with their peers.

Period.

And you can see that and our backlog of growing our peers and you can see that based on our number one position or number two position in the markets that were and globally.

But I will say, it's obvious that.

People have a recognized for dramatically different companies and we were a few years ago.

And we have every intention of views and our capital to buy back our stock and with the great support of our board and you've seen that and doing other authorization that just approved.

Okay. Your next question comes from Steven Fisher with GBS. Your line is open.

Hi, Thanks, Good morning, guys and Mike.

So.

Morning, typically you guys see it a little more working capital swing in the fourth quarter, helping cash flow and and you didnt have that much.

This quarter.

And so I'm wondering if you know was there any just you know better profit conversion or one key drivers there and you mentioned some of the government unwind a of some of the support there what's the cadence of that unwind.

And then just as you think more big picture by cash flow or do you see potential to smooth that out.

Oh and over time you know.

From a seasonal perspective relative to where its been historically.

Hey, Steve and as Guar I'll respond to those questions.

You're absolutely right working capital conversion was much better than what we have experienced in prior years and and it kind of goes into your third question about having better seasonality of cash that has been a focus of ours and now we're starting to see it.

Now, it's not going to turn around you know over a short timeframe, but it's a focus of ours with continued effort to make sure we drive the best seasonality possible on our cash flows, which then only benefits our capital allocation strategy of returning practically all available free cash flow.

So to our shareholders.

And on your second question, Yeah, we did benefit and the year from a tax deferrals around the globe, but you know as we manage cash we don't think about individual headwinds or tailwinds.

And 2021, you're right we are going to have a tailwind if some of that unwind, but what we're focused on is delivering on our commitment to our investor community, which is 75% attributable unlevered conversion of EBITDA. That's what our target is that for 2021, and we will get to that target.

Just like we have for the last six years continued focus on being highly cash generative.

Okay Fair enough and then couple of clarifications, just maybe a little bit more detail on the cadence of.

The implied revenue guidance or do you think that compared to say the 6% decline we saw in the Americas in the fourth quarter or should we be expecting to see a double digit decline there before it starts to then have a.

For the double digit.

Growth in the second half for you know how how tough for all that that revenue line B and then can you just give us a quick update on some of the remaining a sales of non core assets. Thanks.

Sure Steve So first of all this and set expectations for this coming year is we we see the second half the year, certainly being better than for stuff for the year.

However, we don't see the first of the for the year being anything but flat and I guess. These is the easiest example of that is when I look at our October performance, our first month for the year.

We did see revenue and the month of October being flat with the prior year.

So I think and that sort of sets expectations about seasonality and then with respect to our sales and again that we've you know we've been able to accomplish a part of that agenda. We are focused on the the other cash the exit and the sale and the other at risk businesses and those processes are well underway.

Wake and describe it.

Hey, Thanks, Troy Thanks.

I can ask a question please press star and the number one and your telephone keypad. Your next question comes from Adam Thalhimer with pumps and deepen your line is open.

Ohio, Hey, Troy said that you had seen some slow client decision, making but I think you indicated that started and I saw is that correct.

Yeah, when I refer to flow client decision, making really I think about that as sort of the uncertainty around their funding it's not that they're decisions. This low I think they're just force by having to think about the the funding constraints that they have as to which projects are they prioritize and yes based on what we had seen and the pipeline it.

And the third quarter, we sing.

You know again, a small improvement as we go through the through our fourth quarter.

So it's got it's getting it's gotten a little bit better, but again, that's not our again our focus is low.

Looking at the opportunities to to improve market share and customers.

Got it and then and then playing with your fiscal 21 guidance all morning, I have an easier time being.

Being at the kind of low end to the mid range Im just curious you know to get to the high end of the guidance and.

And what would have to go right.

I guess and I think within our guidance range is fairly narrow.

In an environment that we're in for this fiscal 21 years. So.

Thank you.

I I don't think its a matter of or something and particular, they're going right but.

But as I said, we have some optimism here in the U.S. and the second half for the year just around the the outcomes driven by the federal election. So you know again I don't think its one thing going right. It's just you know maybe a little bit a little a little bit better outcome in terms of some of those decisions that will be driven here and the U.S. for governments.

Makes sense thanks for <unk>.

[noise] there I know for their questions Kim for this time and from the call back over to Troy credit for closing remarks.

Thank you.

And again I'd like to just and this call by again thanking our teams of professionals for their contributions and what was a very successful year at a time. It was by no means and normal year, but it was a successful year.

And.

I think we're in a great positions and move forward, we have transformed the business.

We are now a higher margin lower as per foot lower his professional services business.

We've built a track record that we can deliver and what we said we're going to do by having our industry leading margins great cash flow generation.

A great backlog heading and this next year and frankly, a phenomenal group of professionals that we can rely on and that's been proven out over the course of this last year.

So again, thank you for your time today and your interest and we'll speak to you in the next few months. Thank you.

This concludes today's conference call you may now disconnect.

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