Q1 2021 AECOM Earnings Call
[music].
Good morning, and welcome to the E Com first quarter 'twenty 'twenty, One conference call I would like to inform all participants. This call is being recorded at the request of E. Com. This broadcast is copyrighted property of AECOM any rebroadcast of this information.
For our part without the prior written permission of AECOM is prohibited.
Binder E. Com is also simulcasting this presentation with slides at the investors section at Www Dot AE Com Dotcom later, we will conduct a question and answer session. If you have questions. Please press Star then the number one on your touch tone phone, if you wish to be removed from the queue. Please.
The press the pound sign of Husky I would.
I'd like to turn the call over to Wil Gabriella <unk> Senior Vice President Finance Investor Relations. Please go ahead.
Thank you operator, I would like to direct your attention for the Safe Harbor statement on page one of today's presentation.
Today's discussion contains forward looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC except.
Except as required by law, we undertake no obligation to update our forward looking statements we.
We use certain non-GAAP financial measures on my 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 last January and filled our power and civil construction businesses in October of 2020 in January of 2021, respectively. These businesses are classified as discontinued operations in our financial statements.
Today's comments will focus on the continuing operations of the professional services business unless otherwise noted.
Today's references the margins and adjusted operating margins reflects segment level performance for the Americas and international segments.
We will also refer to net service revenue or MSR, which is defined as revenue, excluding subcontractor and other direct costs.
Our discussions of MSR growth rates well of just for two fewer available working days in this year's first quarter as compared to the prior year period.
Our discussion of margins will be on the MSR basis myself the other.
The wife noted.
On today's call Troy Rudd, our Chief Executive Officer will begin with a view review of our strategy and key accomplishment.
<unk> <unk>, our president will discuss key operational priorities and guard for for our CFO will review, our financial performance and outlook in greater detail. We will conclude with the question and answer session with that I will turn the call over to Troy Troy.
Thank you will and thank you all for joining us today.
I'd like to begin by first acknowledging and thanking of 47000 professionals, who have contributed to a great start for the year and of the key reason for success and trajectory I'm proud of how our employees have responded over the past year and continue to focus on the health and safety of their families clients and communities.
We have built a track record of consistently exceeding our expectations over the past two years in our first quarter performance continues its momentum.
This is a direct result of the commitment of our teams to leverage the strength of our platform and delivered amid an uncertain backdrop the men's.
November we unveiled think enact globally, which outlines the foundation of our strategy and the path forward for E com with an ambition of setting a new standard of excellence in the professional services industry. We are well on our way we've dedicated much of our time over the past few months towards implementing key elements of the strategy as our.
Financial results demonstrate we are benefiting from a simpler operating structure.
<unk> collaboration.
The investments in innovation and delivering the full breadth of our portfolio to our clients across the globe.
We'll now turn to a more detailed discussion of our financial results starting on page three.
We exceeded our expectations on every key financial metric in the first quarter of.
Organic revenue increased by 2% and MSR declined by 2% from the prior year.
Backlog increased by 8% over the prior year and included record contracted backlog, providing strong visibility.
Our segment adjusted operating margin was 13, 1%, which.
Which marked a 140 basis point increase from last year, and a 560 basis point increase from the first quarter of 2018.
Of note international margins are now at 7%, which is more than 400 basis points better when we compared to the beginning of fiscal 2019.
We are operating the business as efficient as ever investing the business development opportunities to position for growth and transforming how we deliver through innovation.
Adjusted EBITDA increased by 9% to 180 of $9 million and adjusted EPS increased by 35 per cent to 62.
Both of these metrics were ahead of our expectations for the quarter and provide a strong start to the year.
We set as a measurable priority this year to improve cash flow phasing and I'm pleased with our results in the first quarter of.
Operating cash flow was $7 million and free cash flow was a slight use of cash in the quarter.
This compares to an average outflow of $230 million in the first quarter over the past two years.
This performance combined with our strong balance sheet enabled us to repurchase nearly 9% of our shares outstanding since September.
The increase of our EPS guidance to reflect the strong start to the year the <unk>.
Celebrated pace of share repurchases and the lower interest expense associated with the new sustainability and diversity of linked financing.
Our guidance does not include any prospective repurchases, though it is our expectation that we will continue to deploy cash to buy back stock under the $825 million of capacity remaining on our current board authorization.
Please turn to the next slide.
Reflecting on our first quarter performance several key points are apparent.
First our teams have embraced our thinking that globally strategy. The strategy is driving greater collaboration across the organization and serves as the foundation from which we are pursuing the accelerated growth and expanding our industry leading margins.
As a result, we are more deeply engage with clients. We are expanding our advisory practice to shape, how clients plan and execute their priority projects.
So we are focused on program management, we're supporting clients through their largest and most complex projects.
To support growth, we are investing in business development and key client account programs.
And we are developing new and more efficient ways of working led by deploying the innovation at scale and executing our workplace of the future initiatives to support the growing preference for greater workplace flexibility and to reduce our real estate costs.
Second we have created a culture of continuous improvement.
And we are setting new standards for profitability in the industry.
We're focused on driving efficiencies across the organization and for our clients. As a result, we are delivering industry, leading margins and unlocking capital to invest in growth and innovation.
Third we have narrowed our focus to our higher margin and lower risk professional services businesses.
Over the past few months, we completed the exits of our power and civil construction businesses. As a result, our leaders are now exclusively focusing their time and resources on our largest fastest growing and most profitable endeavors.
Fourth several inherent attributes of our business enabled us to perform and continue to invest through periods of uncertainty. These income.
On the proven the agility of our work force a highly variable cost structure with low capital intensity.
A substantial backlog with several years of visibility.
The industry, leading client satisfaction and strong cash flow.
Finally, we are complementing our strong team with new leaders and fresh perspectives.
Last month, we announced the appointments of Jennifer Amit as global lead for transportation and drew Jeter as global lead for program management.
All of our World class leaders, who bring proven track records of success and we are energized by the positive response, we've received from both our teams on our clients since the appointments.
We will continue to strengthen our teams and invest in our people to ensure we achieve our collective ambitions.
Turning to review of our markets.
And in the Americas.
Our teams remain focused on building a sustainable future and we're bringing elements of sustainability to every aspect of what we do.
It bears repeating we are the number one environment firm the.
The number one transportation design firm the number one facilities design firm as ranked by Anr.
We are the leader in the P fast market, having spent decades supporting clients, both public and private.
And today, we are organized around ESG as a key priority within E com the.
The by the administration has outlined an ambitious and broad based plan that touches nearly every element of what we already do for our clients every day in the markets, where we lead.
These include transportation infrastructure clean energy offshore wind wetland coastal restoration and PFS for mediation to name a few.
Needless to say, we are well positioned to benefit from the prevailing direction of U S policy and funding.
In the near term as we wait for clarity on a potential larger relief and infrastructure stimulus Bureau, our U S public sector clients continue to face funding challenges.
We have seen clients slow the decision, making process and this has impacted our growth over the past several quarters.
However, key indicators are trending positively.
Vehicle miles traveled have recovered, notably since the prior lows in April the.
The enacted Covid relief Bill in December provides 45 billion for transportation, our largest end market and includes $14 billion for transit systems across the country, which represents approximately 75% of normal annual funding levels.
The state tax receipts are benefiting from higher spending due to the stimulus funding.
These trends matter the AECOM U S state and local remains our largest client base at 24% of our MSR and approximately 40% of MSR in the Americas.
Moving to our construction management business, our contracted backlog increased by 26% and our pipeline remains strong.
However, our total backlog declined sequentially in client decision, making has slowed.
In addition, our backlog was impacted by a reduction in scope on a large project. So the impact of profitability was more limited as we continued to perform services for the client.
Positively during January we were awarded more than $600 million of wins in our core markets and in times like these the value of visibility afforded by our substantial backlog and our leading market position are apparent.
Turning to international markets in.
In the U K, our market position has greatly improved over the past several years, we've put in place the right people on strategy and we're taking market share.
This includes gaining significant positions on several leading public sector frameworks, all of which provides substantial opportunities for growth and provide several years of visibility.
In the middle East our sizeable backlog on key programs provides us with several years of visibility, especially in Saudi Arabia, where we have large rolls on projects critical to the kingdom's economic diversification efforts, while others are pulling back from the market given the slowdown in hydrocarbon related activity, we are managing and delivery.
Large complex on iconic projects, which plays to our strengths.
In Australia, we continue to execute several large infrastructure projects such as our work on the Melbourne Metro tunnel, which is supporting high levels of activity.
In Hong Kong, our business was stable and work is progressing on key projects that are supporting high levels of backlog.
Across the business. The next six months include a number of macroeconomic uncertainties and we will be constantly vigilant to manage the business and deliver.
We are energized by our accomplishments and the level of funding and long term commitments to infrastructure investments happening across our largest markets on.
Our momentum in stills, great confidence of our outlook for the remainder of the year and I'm excited by the opportunity to create exceptional value for our employees our clients and shareholders.
Look forward to discussing many of these elements in greater detail at our virtual Investor day on February 16th.
With that I will turn the call over to Larry.
Thanks, Troy, Please turn to the next slide.
As Troy detailed we are focused on driving growth and profitability simplified operating structure greater collaboration across the enterprise and deeper engagement with our clients.
We are in an enviable position from which to execute we maintain a leading position in many of our key markets for now.
Satisfaction scores reflect the market's acknowledgment of the strength.
In fact, our leading position was at Sam's last week with our number one ranking by 14 as the world's most admired company in our industry, which is of Great Testament to the value of our people bring to the clients and communities every day day.
Strength will save as well as the funding environment across our markets improve.
And with the U S rejoining the Paris climate accord and committing to invest to build back stronger we are energized by the opportunities ahead.
The best position of the price, we recently announced two key strategic hires with the additions of journey for <unk> and drew Jason just day to strengthen our already strong leadership team. We are confident that with our established market leadership in these key practices, both Genesis of inter will hit the ground running.
We look ahead, we have tremendous opportunities to leverage our competitive advantages.
The clear advise our clients and to gain greater share in the marketplace.
A great example of this of the market share gains we have made in the UK in particular, where you've been selected for key positions on the 800 million escape framework.
The uk's, leading public sector procurement authority.
Following several years of delivering for our clients. We successfully gained positions on multiple lots that significantly increased our exposure to this framework.
The stated priority for the spring to generate substantial social value through infrastructure, such as designing new bridges, adding electricity charging points to contacts on the hospital Refurbishments and school extension.
In addition, we have gained framework positions for network rail highways, England and transport for London, The Hs similar priorities on advancing infrastructure to benefit communities.
These are precisely the sort of projects, where our expertise can be best for today.
For us on ESG directly aligns with our clients top priority.
I'd also like to take a moment to highlight our commitment to advancing our ESG initiatives, including our efforts to reduce greenhouse gas emissions and to further increase our diversity, we announced the new sustainability linked credit facility yesterday, and I am proud the way of one of the earliest U S companies to do this.
The agreement includes incentives and penalties around achieving our publicly stated science based targets for emission reductions.
Well its targets for the percentage of women employees across our organization, we are literally putting our money where our math is.
We were also pleased with our announcement last month of our fourth consecutive year of receiving a perfect score on human rights campaign Foundation's corporate equality index. This is of great recognition, reflecting our commitment to diversity and inclusion, especially for LGBTQ employees.
The energized by the opportunity to further advance on strategic ESG and diversity initiatives and I am proud of the progress we have already made on this front with that I will now turn the call levity gone on to discuss our financial performance and outlook in greater detail.
Thanks, Laura Please turn to the next slide our first quarter financial performance exceeded our expectations on every key financial metric, including a new high for the first quarter margins strong EBITDA growth and double digit EPS growth.
Importantly to capitalize on this performance, we accelerated our repurchase plans, which is underpinning our increased adjusted EPS guidance and was driven by our best first quarter of free cash flow since 2018.
While pockets of uncertainty remain in several of our markets I am proud of our team's proven ability to deliver.
Looking forward, we will continue to benefit from our substantial backlog position, including record contracted backlog.
In addition, with the highly variable cost structure.
The continued strong cash flow trends, we're confident in our ability to deliver value.
Turn to the next slide.
In the Americas MSR declined by 1% on on organic basis.
Backlog in the Americas increased by 9%, including 15% growth in contracted backlog or construction management backlog declined sequentially, but our design backlog grew and affords a strong visibility.
Although decisions on a few larger pursuits in the construction management business has slowed in the near term our sizeable backlog will continue to provide visibility for the next several years.
The Americas segment had a 17, 5% adjusted operating margin for the quarter, an 80 basis points improvement from the prior year.
America's margin performance demonstrates an ingrained culture of continuous improvement even as we continue to deliver industry leading margins. Please.
Please turn to the next slide.
Turning to the international segment, our MSR declined by 3% on on organic basis contracted backlog increased by 6% and is at record levels, reflecting our successful efforts to gain market share and win key position on large frameworks.
Notably our adjusted operating margin in our international business was 7% a 230 basis point improvement from the prior year and a 440 basis point improvement since the beginning of fiscal 2019.
We are proud of the progress of the teams have made to operate more efficiently while successfully positioning for growth and.
And we reaffirm our confidence to achieve double digit international margins. Please turn to the next slide.
Turning to cash flow liquidity and capital allocation.
As we shared on last quarter's earnings call. We made it a key priority to drive greater consistency in our cash flow phasing.
In the first quarter over the past two fiscal years, we have experienced negative free cash flow of approximately $230 million on average with free cash flow use of $14 million in the quarter. We are pleased to see our efforts quickly translating to results.
Accordingly, we are reaffirming our 425 million to $625 million free cash flow guidance for the full year as a reminder, at the midpoint. This reflects 75% unlevered free cash flow conversion of EBITDA, which is our long term forecast of conversion rate on a normalized basis reflective of highly cash generative.
Sure of our business.
We continue to drive a strong balance sheet and financial position with gross leverage under three times, which is consistent with our long term target.
Reflecting our strong balance sheet and business prospects last night, we announced an amendment and extension of our credit facilities. This reduced our borrowing costs and further our commitment to achieving certain ESG objectives, creating a cost of capital that is consistent with the high quality nature of our business since September we have completed six.
Third 30 million of repurchases, which reduced our diluted share count by nearly 9% and with strong cash generation expected in the remaining three quarters of the year and our ongoing conviction that share repurchases offer the highest return on capital we will continue to execute repurchases throughout the year. Please.
Please turn to the next slide.
This robust start to the year provides confidence in raising our outlook for the full year, we are increasing our adjusted EPS guidance to between $2 60, and $2 80 and.
And now expect to deliver 26% growth at the midpoint of our new range. This increase reflects the benefits of our accelerated repurchase activity as well as lower expected interest expense due to our credit amendment.
This guidance contemplates a fully diluted share count of 151 million shares, which only incorporates our repurchases to date.
With that operator, we are ready for questions.
Ladies and gentlemen to ask a question from quest.
And the number one on the telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Sean Eastman with Keybanc capital. Your line is open.
Hi team thanks for taking my questions.
I just wanted to get some more color on the advisory and program management growth strategy that you guys introduced this quarter.
How would you characterize the growth opportunity here.
How would you characterize the benefit to the client of having AECOM get involved earlier in the sort of stick around longer.
Sure.
Sean Thank you for the question.
First just in a word I would characterize the growth opportunity is extraordinary.
So when we think about the opportunity to help our clients.
<unk> got large infrastructure investments in programs that will be.
Rolled out over the course of the next year and we believe that debt those will go on for frankly for decades.
And also with all of the Decarbonization agenda of our decarbonization ambitions that our clients have.
We also again see that similar opportunity Theres large capital investment that will be made that would last perhaps for for a decade, and we share seems see ourselves being perfectly positioned given our technical ability to.
To support them and also on this may be lost but we actually are a global leader in program management already so it's not like we're starting from from zero for look at the in our rankings, we sit at the top of the top of that group. So we already have a great base and experienced upon.
Of which we can we can fulfill those ambitions.
That was the reason, we're making the investment in bringing people on board. We were really happy to have true jeter join us as a recognized leader in the industry and is taking over leadership of global program management.
So again, we see this as a very sizable business in the future and I don't think it will grow in terms of percent.
We think that we think this has the opportunity to grow in terms of multiples of the business that we do today.
So and along that point.
Just maybe to help make this.
A little more real about what this means in terms of our clients on how we would help them layer. If you wouldn't mind, maybe I could ask you just to give the example of <unk>.
What we're doing for the Neon project in Saudi Arabia.
So thanks for the question Sean.
Alright.
Very excited about this is on my significant growth opportunity.
Looking forward and in the case of May on.
Many of you know either a days of any giga cities of the feature in the Kingdom of Saudi Arabia, and we assisted the kingdom with a lot of front end support it wasn't just project controls and systems. The traditional program management of Frank that many of US talk about there was a lot of front end advisory support to help them Scott the <unk>.
Project considered the set of technology that would be required.
And really the.
The approval of all the permitting and regulatory regimes in the sorts of.
Services at the beginning and then of course that of votes.
A program management.
Contract Admin and then all of the technical and environmental support that we are very strongly placed to deliver on a more recent times that role expanded to include all of the very complex backbone utilities and transport infrastructure.
That evolution from the early front and advisory support to the more traditional place debt.
Play for our clients and bringing the full.
White of global multi disciplinary teams that a client like that expense.
For my AECOM and all performed in a fully digital environment. So it's a very comprehensive.
On opportunity for us and one that we're very excited about and we've got a great pipeline and we really look forward to sharing more of the detail on that.
<unk> virtual Investor day, so thanks for the question Sean.
Thank you Laura and Sean maybe just the simple way to think about this is what we're talking about is not delivering projects.
We're actually.
This program management is delivering outcomes for clients and the simple way to think about it would be again in terms of an Olympic games.
Instead of delivering of venue, which you might do in terms of the design of the construction of it we're actually would be involved as program managers and delivering the games so delivering the outcome of a successful Olympic games and that's the difference.
We look at what our people are already doing.
And the large change its going to go on in the World and we see this as our again as Larry said, our most substantial growth opportunity.
Okay, Great I appreciate the color on that and.
My second one is just on the margins clearly of stronger than expected start to the year.
But the full year margin guidance is intact. So I'm just wondering how you'd characterize that I mean is this just.
Kind of prudent conservatism early in the fiscal year or is there something maybe unsustainable.
From a cost perspective.
Helping the first quarter results.
Yes, so Sean in terms of our margins for the year. We believe first of all of these are sustainable there's no temporary items that we believe are built into the margins that would cause us to back away from our ambitions for the year.
I would describe this as us being prudent we are still in an uncertain environment in fiscal 'twenty, one and I, certainly don't want to make any projections or predictions that.
That would be aggressive in this environment. So we're sticking to our 13, 2% for the year.
Certainly our 13, one 1% in the first quarter.
We were very pleased by and it certainly gives us.
More confidence in achieving the full year and the full year result.
The other point I'll make about within those margins and you know this is difficult to say, but we've continued to invest in business development and we've invested more in our in this year that run for those margins that we have in the prior the prior period and again, we've done that because we are we have conviction about the opportunities in the.
<unk> and <unk> and we see the opportunity to position for things that are going to be coming to market in the second half of 'twenty one on into fiscal 'twenty two.
That's super helpful responses, guys I'll turn it over.
Thank you.
Your next.
Question comes from Michael Feniger with Bank of America. Your line is open.
Yeah, Hey, guys. Thanks for taking my question.
Following up on that.
On the margins are impressive, but there is the view Troy that Acorn is cost cutting its way to growth with another quarter of organic decline of one of your peers reported today taken has visibility to grow in fiscal year 2022, I'm not asking you.
Now for 'twenty, two outlook, but based on what Youre seeing on a state level customer level for many initiatives do you see momentum for organic growth to really return to E. Com in 2022 and that your growth is going to be more driven outside of just.
Being able to cost cuts.
Yeah. Thanks for the question again.
The answer the simple answer is absolutely yes, we.
We do see growth into 'twenty, two and let me give a little bit of of color on that and certainly in terms of our margins.
So we.
We have reduced costs in the organization, we've created efficiency the organization and that's absolutely has benefited our margins.
But.
Today, what we're doing is we're driving efficiency in how we actually deliver the work and we run the business and so again I view that as being sustainable and as I already made the point, we are not cutting our investment in business development, nor cutting our investment in the future and achieving those margins and I'll say it we believe that those are.
<unk> margins and we still have room to improve and we'll certainly share more of that when we get to our investor day of virtual Investor day on the 16th.
When I look at this year again, we said that this year was going to be challenged and we expected our revenue to be around flat for the year.
When we look at the first quarter net.
The comps.
Last year, there was those are pre COVID-19 the COVID-19 periods.
In terms of where we think we are.
I believe that we are holding our own and gaining market share in some challenging markets.
We are investing in growth in the future and I don't see that growth coming in fiscal 'twenty. Two I see this year continuing to be flat, but I do view of there being substantial upside as we move into 'twenty two so growth in 'twenty, two and beyond and again, we'll share more of them those ambitions in detail when we get to our Investor day.
In terms of the.
The backlog on the pipeline, we are seeing some growth.
In our backlog.
But I think more importantly.
If I talk about our pipeline and particularly on our design business in the Americas.
We are seeing the pipeline start to get back to pre COVID-19 levels, which is indicating our clients are gearing up to let out work in the second half of the year in the fiscal 'twenty to 'twenty, two which again leads us to believe there is a significant opportunity to grow into 'twenty two and beyond.
That's the.
Sure that's helpful and just on you kind of touched on some of the funding initiatives.
All of the fast act of extended we just on the Covid relief package, I think extending 40 billion to transportation markets, but yes outside of outside of the Big Bang infrastructure package, obviously that would be the home run.
Outside of that what signposts are you looking for that can be of catalyst outside of that big infrastructure package. So there is a new EPA cheap there.
The fast regulation in the headlines any catalyst that we should be monitoring that would maybe drive momentum outside of the whole infrastructure package in the environmental and water type type of areas that we should be keeping an eye on.
Yeah, Okay, well actually you kind of did my job for me they were listing all of those.
But.
When we look we look at again, so what we're what we're looking towards is we're looking predominantly saar levels of federal funding.
And we are seeing levels of federal funding, improving now and I'm not I'm not thinking about what might come or what president of bite at Biden has announced his agenda that would be kind of upside for the future. We haven't built our plans around that.
We're also look at our state and local governments and.
What has been difficult for them has been funding levels funds had been co vote have been.
Have been devoted to fighting the pandemic.
But we've actually started to see a return of funding to those customers and a lot of the funding doesn't come through the federal budget a lot of it comes through user fees.
And it comes through other measures. So we're seeing because people are returning.
A little bit towards normal we're seeing funding start to build up within our state and local government clients.
And there is no doubt that if there is a package that has passed.
The the stimulus packages passed it will help our state and local government clients.
But but we're again, we're seeing the the kind of the green shoots around funding as people are returning to work in business has started to head in the right direction. So some growth in the economy here in the U S.
Worldwide, it's a little bit different we've actually seen some governments already step up to the plate and provide levels of funding for infrastructure programs and so we've seen that building in Australia, and New Zealand, we see that certainly building in Canada and as Laura as pointed out in our in our her previous points.
Is that in the U K.
We are very confident that we've been taking significant market share. So we've been while the funding has been building in net market. We're confident that we're positioned ourselves through our framework framework wins to grow based on what will be available on the future of that market.
And if I could just add a couple of just very quick points I think.
Infrastructure is obviously the main area of exponential growth and even in the quarter. We did see growth in Australia because of that pipeline continues to be very strong broth. We secured all of the major infrastructure projects, we had growth in Asia again on the back of some strong infrastructure program.
The other exponential growth play that we've talked about previously with feeling pretty bullish about extending our market leadership in the peso.
Mentioned, we think that the 100 billion plus the opportunity overtime and we have you know.
The market latest ship and then we're very excited about the the above and beyond which exists.
Which is really nice.
Area of intense of the destructive technology.
We have a pilot for Huntington commercialize that latency.
That's another example of and of course, the program management, which is the three to four times current opportunity. There just a few examples of very big sort of exponential growth.
But I think we can absolutely signpost, along the way I think six quarters on a couple of years.
Okay.
Your next question comes from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Good morning Hendi.
Troy or is there a better way to frame the piece of operating improvement and cost to take out that you are in the middle of it because obviously it seems to the accelerated in the first couple of quarters that you've been CEO Troy for instance of your sales were down sequentially on MSR basis for both segments recorded margin up 50 basis points sequentially. So can you give us a read.
On how much additional streamlining you've done since you took over as CEO on what that could mean for AECOM is progression toward that 15% longer term margin goals.
Yeah, Andy what I'm going to do is I just want to make the headline comment on the then I'll pass it over to Garth to give some more of the the details.
But in terms of the streamlining changes that we've made for the most part we have made those.
If you look at our results for the quarter again, you'll see the we have very little of restructuring plan for the year. We put most of this behind US our results are at I believe to be very clean.
So we've.
We've taken.
The actions to restructure of the business and now as we move forward, we've really ingrained in our culture, a focus on efficiency and continued continuing to deliver.
And focus on the work, we're bidding and in how we deliver against those margin targets. So we've kind of taken the actions in the past.
And we certainly have a little bit of work that we'll do in the future, which garner will give you a little details on but I view this as kind of changing the culture in terms of our efficiency in running the business and delivery, it's not a significant action undertaken we have to take on to move from here.
Yes, Andy of those guard just adding on to that.
Troy is absolutely right simply put this is the annualized benefit of restructuring that we performed last year.
And that's why you see such a cemetery between our GAAP and adjusted results, we have minimal restructuring going forward.
But consistent with the messaging right being in the upper echelon of margin delivery in our industry, we're not satisfied with that our goal. Our vision is to achieve 15% margins, which we will provide more detail during our upcoming virtual.
The Investor Relations day next week.
And if you were to say well, what's what exactly is changing in the current year. Why are we ahead, maybe a little bit ahead in Q1, I think it really has to go towards the new organizational structure.
That Troy put in place as well right. We have really created a dynamic environment that is allowing us to leverage best practices in terms of cost structuring globally and executing on it.
As quickly as possible because we no longer have the multiple layers as we had in past.
Helpful guys and then you did mention the decline your construction management backlog, but still good visibility. So could you tell us how you're thinking about the growth of that business I know you've had several years of where you have 70 of the backlog coverage, but how does that business factor into your growth assumptions for flat this year and a return of growth in 'twenty two sure.
Well again, just in terms of our construction management business.
Again, it represents about 10% of the the <unk>.
Profit in the MSR of our business overall.
And.
Again, we see the environment that the construction management business and has been challenging there is no question that there are being there are decisions on projects being delayed.
And even some of the work being delayed on some of our existing projects.
So I view that as we're going to be burning off some backlog during the course of this year.
The great thing about the businesses, we certainly have multiple years of more than three years of backlog.
And when we look at the pipeline of the opportunities the actual pipeline of opportunities and the things that we've been pursuing that isn't really shrinking. So I think the story around construction management is more about delays on decisions and projects and maybe some changes in scope, but we certainly don't we don't see kind of a long.
Term decline on the opportunities for that business.
Thanks Troy.
Great. Thank you Andy.
Your next question comes from the line of Andrew Wittmann with Baird. Your line is open.
Oh, great. Thanks for taking my questions.
Most of my questions have been asked and answered, but I thought the couple of technical questions that would be helpful for us all to understand and car starting with you.
What's the expected annualized interest rate savings from the renegotiated credit facility that you guys announced last night.
Andy.
We expect for 2021, it will be $2 million to $3 million, but on a full run rate basis, it will be $4 million to $5 million.
Okay.
And then just in terms of the cash flows here obviously.
Looks like you guys are trying to smooth out the seasonality and that's great.
I assume that part of that is the.
The sale of receivables, but how are you doing it in terms of managing the other parts of the working capital in terms of DSO collections in the payables.
What's the process that you're using to get better.
Smoother quarter to quarter variations in cash flows in and what's the customer experience of that is this is it burning of the customers is it putting your employees how does how does it work to do that just mechanically.
Sure absolutely.
As I mentioned during our fourth quarter year end call last year of key priority for us from cash flow standpoint was not to have the seasonality as we had previously experienced and there are some key contributors to that right. One is it's a simple byproduct of us becoming a true professional services organization, which is lower risk.
The margin profile aided by more predictability in our cash flow because of the disposal of for at risk businesses, we're no longer burdened, but by those huge variations of large construction projects and.
And a key change we made in the current year is we've aligned our operational incentives to align with our cash flow phasing instead of just being the annual target.
In terms of of the specifics you really have to look at how we are transforming our organizational operationally and the finance transformation, we're going through.
This allows us to utilize shared services, where again, we leverage best practices.
On invoicing billing and collections across the board globally, where instead of having these the services being provided in various geographies.
In the center of best practices and leveraging it globally.
Got it thank you for your interest.
Okay.
Your next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning, nice quarter, I guess just.
Two follow up questions one on the cash flow.
I appreciate.
How you helped us figure out how youre doing better sort of seasonality with regards to your cash flow, but given the success that you've had in.
In the first quarter relative to the past few years is it fair to assume you see sort of the mid to high end of your free cash flow of guidance is more achievable just because of where we're starting the year off I guess, that's my first question and then my second question just relates to.
Try it sounds like that portfolio that you have in place after.
You know getting rented 70 some of the assets the construction of at risk business. The management services I'm. Just wondering if you. If you look at your portfolio is there anything else that potentially isn't core to AECOM are there holes in your portfolio.
That could help you achieve some of your longer term goals quicker with the balance sheet, where it is thank you.
Okay. Thanks, Jamie.
The car why don't you take the cash flow question and I'll take the second one absolutely. So jami in regards to of cash range.
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Hit our cash guidance six unit of ROE and we expect current year to be no different we feel very confident in the guidance, we have provided and expect better than historical phasing consistent with our performance in Q1.
Yeah.
And it's a good question Jamie just on the overall business I guess first of all of US I think it's important to make the point that we've been making for a while which is we're going to constantly evaluate our portfolio of businesses.
And make sure that we're in the businesses that we believe have the highest returns and the highest growth potential so.
That's just going to be part of our DNA and our culture will continue to do that.
In terms of as you said holes in the portfolio.
At the moment I don't see any significant holes in our portfolio and to the extent that we do see that there are some opportunities to add some capability.
We are going to do that.
But I have no intention of doing that through M&A, there or other means that we can do that debt. I think are are easier for us the diet to digest and frankly you have.
And have a lower cost associated with them, but we certainly have opportunities to grow some capabilities, we will do that.
But we have we anticipate doing that in investing in those capabilities through our margins not doing M&A.
Okay. Thank you.
Alright.
Your next question comes from Mike Dudas with vertical research your line is open.
Hi, good morning, gentlemen.
Good morning.
Good morning.
The part of your business business development of investment of Troy going forward, certainly I guess would be in expanding or accelerating your euro of best practice centers are of high value added centers that the E Comm has.
Hello.
How's that been progressing and is that an area, where you could see significant help, especially when you're targeting some of the margin potential in the international design business going forward.
Yeah, Mike So that is important to us.
We had set some pretty ambitious objectives of improving the work the work that was going through our design centers.
Through the pandemic, we've actually modified or thinking around debt that it doesn't have to be design centers. We can actually set up kind of regional design centers. The interesting thing about the pandemic. We figured out is that with everyone. Working remotely you can actually connect your teams and have everybody working around the kitchen table quite well. So it means that we can create sort of centers of.
Excellence virtually.
Or even regionally and that's something we've learned through this process.
But more importantly, we're continue to invest in what I'm going to refer to as digital which is.
Having some of the work that we've done in the past.
Be replaced by script or code.
And given our people are freeing up at the time of our people to do things that are more innovative or or focus on their clients and the project of growth opportunities. So I'm going to talk more about that on the 16th but that absolutely is a focus of it and we refer to that has changed in the way that our work is delivered.
I appreciate and I look forward. Thank you mixed week.
Yes.
Appreciate it look forward to the meeting, which we think thanks for great. Thanks, Michael.
Your next question comes from Steven Fisher with UBS. Your line is open.
Hey, Thanks, good morning.
You mentioned that.
Good morning, you mentioned that Americas design customers are gearing up to award more work in the second half do you have any sense from your conversations with them about what has to happen to to give them. The confidence of released those project and in what areas do you think youll most likely seats on those projects.
Releases.
Yes.
I think again it's.
Again, it's difficult to pinpoint something every kind of every client conversation is little bit different.
But generally it.
Through the conversations it's driven by it's again driven by sources of funding and the sources of the funding that is becoming available or the confidence around it becoming available is improving.
And in terms of the areas or the opportunities that we're seeing we certainly are seeing the opportunities in transportation and water.
And also in environment.
Again as I said are our construction management business is certainly challenged at the moment and the pipeline.
Is still robust, but we have not we're not seeing the pipeline or the the pipeline growing in the same way that we are in the design business and certainly in those end markets transportation water and environment.
Okay, and then just kind of curious curiosity as we're thinking about margin improvement from here. How important is increased project selectivity tier plans and.
How would you characterize the work Youre actually turning away at this point.
Is it more regions or types of customers or services.
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So I wouldn't I wouldn't say that we're turning away work at this point, however, I would say we've set.
We have set return targets for the work that we do.
And so we certainly have a a process by which we evaluate the returns on a project and so there might be projects that don't meet our hurdles in terms of returns and there are some other measures that we use to make sure that we're appropriately managing the risk associated with the work that we do.
But there is no. The again, there's no trends in terms of US turning away work. We're just thoughtful in terms of what we want to do to help our clients and making sure that it's going to be appropriately in terms of the turn on the risk that we're taking on.
Got it thank.
Thank you.
Your last question comes from Adam Palmer with Thompson Davis Your line is open.
Good morning, guys the.
Good morning, Adam I wanted to ask about the slower decision, making because it sounds like through this call. It is a little more focused.
On your U S. Construction management business is that right.
Yes that is right I mean think about it is just in terms of the.
The the work that gets done in a lot of the work that we do in that business.
It's it's commercial work it's.
It's been aviation work and it's been sports and sports work.
And again, it's just what we're seeing is that.
Through the pandemic some of those capital decisions.
Are being rethought or they're being again, they're being delayed so its not that there aren't those opportunities as we move out into the future again decisions around aviation projects, there's certainly as the need for that similar to a lot of infrastructure investment.
But some of the decisions today, just in the environment to win that they're being they're being delayed and they may be they may be adjusted or changed.
And Troy.
I would think you guys are in the sweet spot for this.
Next the U S stimulus bill, even if that hits state and local and not transportation specifically.
How quickly could you benefit from that.
Well it certainly if there is the first of all of it we don't have the baked into our result, that's why we're anticipating Ken I'll say of flat year in terms of revenue.
There's no question that if there is the significant funds that are made available either either through another another COVID-19 relief package to support state and local governments or through on infrastructure initiative or program.
From the from the bite administration.
There is a huge benefit to us into our industry.
But I don't see it being immediate it takes it will take a while when those programs are put in place for then the customers to actually put together the projects that they're looking to us to receive that investment so it's probably.
Certainly quarters, a number of quarters before that you would you would see an impact on our business and it could even be a little bit longer than that.
Okay, so kind of.
She is the towards.
You said earlier, which is that.
Okay.
It does it pushes us towards fiscal 'twenty, two yes, great. Okay. Thanks, a lot of great. Thank you.
I'd now like to turn the call back over to true I read for closing remarks.
Great. Thank you operator, again I want to thank our teams for their contributions to a strong start to the year.
We're really pleased when we believe we're in an enviable position we've built a strong foundation in the business.
And I believe we have unrivaled technical expertise.
We have again margins that are near the top of our at the top of our industry, we've been able to grow profitability and more importantly, we're building backlog of opportunities and continue to have strong cash flow of the business positions us well for the future.
So I look forward to discussing these trends a little more of a more detail and sharing more detail about our long term plans and targets at our virtual Investor Day next week. Thank you for your interest have a good day.
Yes.
This concludes today's conference call you may now disconnect.
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True.
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