Q2 2021 AECOM Earnings Call
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Good morning, and welcome to the AE Com second quarter 2021 conference call I would like to inform all participants. This call is being recorded at the request of AECOM. This broadcast is copyrighted property of E com.
A rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited.
Reminder, AECOM is also simulcasting this presentation with slides at the investors section at Www Dot H E comm of dotcom.
Later, we will conduct a question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign of our Husky I would now like to turn the call over to book their Broski Senior Vice President Finance and Investor Relations. Please go ahead.
Thank you operator, I would like to direct your attention to the Safe Harbor statement on page one of today's presentation. Today's discussion contains forward looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risk of this.
Scribed in our periodic reports filed with the SEC, except as required by law, we undertake no obligation to update our forward looking statements we.
We use certain non-GAAP financial measures in our presentation the appropriate GAAP financial reconciliations are incorporated into our presentation, where available which is posted on our website references the margins and adjusted operating margins reflect the performance for the Americas and international segments. We will refer to net service revenue of MSR, which is defined as revenue excluding subcontractor and.
Other direct costs.
As a reminder, we sold the management services business in January of 2020, and we saw the power and civil construction businesses in October 2020 in January of 2021, respectively. The financial results of 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.
On today's call of Troy Rudd, our Chief Executive Officer will begin with the review of our strategy and key accomplishments Laura Polony, our president will discuss key operational priorities and guard for poor our Chief Financial Officer will review, our financial performance and outlook in greater detail. We will conclude with a 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.
To begin by acknowledging our teams' contributions towards success. Despite the ongoing challenges posed by COVID-19. We continue to focus on the health and safety of our professionals and their families which has allowed us to deliver for our clients communities and all stakeholders.
Today, some of the markets in which we operate are emerging from the worst of the pandemic.
Other markets are not.
Through it all we have demonstrated agility and we are working more collaboratively than ever before we are unified by our thinking that globally strategy and as more markets recover we are even better positioned than ever.
Turning to our financial performance and outlook for the business. We entered fiscal 2021 with guarded optimism trends in many of our larger markets have begun to stabilize and our focus on our higher returning and lower risk professional services businesses brought a new energy and determination to the organization.
Against that backdrop, I'm very pleased with where we stand today.
Revenue trends are improving including 1% MSR growth in the second quarter. This is consistent with our expectations for improved growth as we advance through the year.
Margins also continued to expand and lead our industry. We delivered a 140 basis point increase in our segment adjusted operating margin to 13, 1%.
A new high for the second quarter and consistent with our expectations for at least 90 basis point increase for the full year. The actions we have taken over the past few years to streamline our global organization and to reduce our overhead costs are contributing consistently to strong profitability.
As a result, adjusted EBITDA increased by 11% and adjusted EPS increased by 22% both of which were slightly ahead of our expectations.
Looking ahead, our backlog and pipeline are strengthening and this provides us with good visibility.
Backlog in our design business increased by 8% with growth in both of our Americas and international markets. This.
This was offset the decline in the construction management business, which was consistent with our expectations. However, we are now seeing a recovery in the construction management pipeline, particularly as our clients plan with greater certainty of gateway better economic backdrop.
We are pursuing several meaningful award opportunities with decisions expected in the second half of the year.
Across the business our contracted backlog.
Which is a leading indicator of revenue growth increased by 13% in total, including 4% growth in our design business.
Our focus on our people clients and communities has galvanize the organization, creating more and better collaboration and is resulting in a stronger and more valuable company to all stakeholders.
Please turn to the next slide.
As we turn to the second half of the year and beyond several factors are contributing to our continued confidence in the business and increased optimism in our markets first our state and local clients, which represent our largest public sector client base are on stronger financial ground. The $350 billion cash infusion from the March COVID-19 relief Bill combined with the benefit.
<unk> of the December relief, Bill improving economic activity and strong tax collections have made nearly all 50 states hole for the revenue losses during the year in.
In addition, the release sales also allocated nearly $70 billion to our transportation clients, which reflects approximately 75% of the annual federal transit and transportation funding, which has led to an increase in our pipeline and an improved pace of decision, making today, our largest state and local clients are funded at levels higher than pre co.
And these clients are deploying these funds to job creation and infrastructure investment.
Second the debate on transformational infrastructure legislation in the U S continues to advance, including both traditional road and bridge investments as well as the set of ESG priorities. The set of broader priorities are also apparent in present binds proposed $2 three trillion dollars of infrastructure Bill and the budget proposal for 2022 and the <unk>.
Any instances are mirrored in Republican infrastructure proposals.
Currently these include several areas, where we lead such as electrifying transit systems P fast remediation, new energy resilience and clean water with federal infrastructure spending as a share of GDP at multi decade lows. There is a growing backlog of critical projects. It could be advanced should this federal funding materialize.
And we are already partnering with clients to be ready for the anticipated increase in funding.
Third our private sector clients are also prioritizing investments in ESG benefiting our industry, leading positions in green building in Green design, environmental compliance and remediation energy efficiency and infrastructure resilience. Many of these clients are engaging us specifically in response to ongoing stakeholder feedback.
To deliver on ESG initiatives.
<unk> positioning here is very strong the challenges and opportunities facing our clients are global and require the depth and breadth of our consulting program management and advisory capabilities.
For the growth outlook in our larger markets outside the United States are improving.
In the UK, our largest international markets economic growth forecast now projected recovery to pre pandemic levels in 2022, we.
We delivered a one two book to burn ratio in the U K in the second quarter, reflecting these better market trends.
In addition, we are benefiting from the actions we've taken over the past several years to reestablish our leadership position on key public frameworks, where we are now seeing positive contributions.
In Canada, we delivered strong growth in the second quarter and were successful on a large for cedar in April that supports our confidence going forward, particularly as the federal government's latest budget continues to prioritize infrastructure investment.
In the Asia Pacific Region, Australia, and Hong Kong continue to recover and our book to burn ratio was nearly two in the second quarter, our focus in our India business is on the health and safety of our workforce and their families and continuing to deliver on our clients' commitments.
Finally, and most important to our success the strategic alignment of our professionals around new priorities has created a great deal of energy and momentum.
As we discussed at our Investor day in February central to our strategic efforts of the actions to broaden how we engage with our clients. This includes expanding our role as key tactical and strategic advisor expanding our project program management business and continuing to bring the industry's best technical experts and digital solutions.
As part of this effort true Jeter joined <unk> in January to lead our program management business. We were recently awarded a program management contract to oversee a $1 $1 billion highway widening program.
Another large program management contract from the Dallas Independent School District for the $3 $5 billion Bond program and we are pursuing several larger opportunities in.
In addition, Jennifer <unk> joined the organization in April to lead our global transportation business at a time when funding is set to benefit our key transit clients, who are looking to advanced complex multi year programs.
Jim's leadership in driving the creation and delivery of large programs will be a key asset and builds on our industry, leading market position driven Jan are complemented by an already strong leadership team reflecting the.
Momentum in our organization in our markets bid submissions in active proposals in the Americas design business are up by double digits. Since the start of the year and in April we saw of decision, making begin to accelerate in a number of larger pursuits converted to wins.
Importantly, today, our 47000 people are operating for a market leading position as indicated by Anr. We are the number one ranked transportation design firm. The number one ranked facilities design firm. The number one ranked program management firm. The number one ranked global environmental consulting firm and just improve the.
<unk> of our water business to number two despite not making any acquisitions.
Even during these challenging times, we are confident we are taking market share.
When combined with the steps we've taken to empower the organization to grow we are better positioned than ever to deliver on our long term financial objectives and outgrow the industry.
These include a commitment to more than double adjusted EPS and free cash flow by 2024, as compared to 2020 and to deliver industry, leading margins and return on invested capital.
With that I will turn the call over to Larry.
Thanks Troy.
Please turn for the next slide.
I Echo choice sentiments on the momentum in the business and the strength in culture and strategic alignment across the organization.
Over the past year, we have undergone a transformation in how we are organized how we operate how we go to market and how we say that clients and communities.
Can I ask strategy culture and capabilities of squarely focused on our people clients and communities.
His latest are inspired by our teams and energized by the opportunities of BC in front of us.
I am, particularly excited to see our results begin to reflect our need for like it's on basically advising our clients.
Great example of this is the tremendous success with the thing in the U K, where we have substantially improved our commercial position and taken market share throughout positions on several large framework.
As a result, our backlog in the country has increased by double digits over the past year and we are seeing a return to strong revenue growth, which is contributing to an overall improved performance in our international segment.
The successes underscore our confidence in our strategy and our ability to outgrow the industry over the coming years.
The key elements of our strategy is our commitment to leading the industry in ESG.
Building on the many actions we have already taken in April we announced our sustainable legacy strategy the.
The strategy integrates for key pillars that will embed sustainable development and resilience of course that would improve social outcomes for communities achieved net zero carbon emissions and enhance governance.
This includes our commitment to achieving net zero carbon emissions by 2030.
Built on a price science based targets and shows we addressed the entirety of our impact our company has on the environment for their own actions as well inside of our suppliers.
Expanding on this point, even for that and recognizing that the work we do for our clients has an even greater long term impact on our environment.
Also unveiled our scope parts of this initiative.
This includes our commitment to providing our clients the solutions that embed ESG considerations into our design.
<unk> like to think that teams on minimizing energy use optimizing sources of renewable power and way of feasible, we will work with and enhance natural habitat to eliminate carbon emissions we.
We will also embed net zero resilience and social value targets into our client account management program and the work we bid for.
How sustainable the legacy strategy also includes ethics to further promote the diversity of our workforce, including near term targets to increase the percentage of women across the company to at least 35% and increase the percentage of women in leadership positions to at least 20%.
Also investing to advance the social value of our company can provide through our operations and projects, including through direct investment in communities and in minority owned businesses.
Great example of sustainable legacy is a workplace of the feature of an initiative that is focused on designing a flexible work force model for our professionals true.
Through these efforts, we what would you see emissions associated with that team can you well.
Well also reducing our real estate footprint and creating more efficient office spaces.
Building on the last month, we also began to implement our freedom to grow out of initiative, which allows our teams to design to the flexible work arrangements day needs to be successful we.
We have made the investments in digital capabilities to leverage of remote working to best position of our people for success and fulfillment in the careers.
And believe the strength of our platform and capabilities will attract the best resources in areas of <unk>.
The rate going forward to support our focus on delivering industry leading growth.
Needless to say our people are energized by how we are positively impacting the world with the.
I'll now turn the call of duty got to discuss our financial performance and outlook in greater detail.
Thanks, Laura Please turn to the next slide our.
Our second quarter results were again strong on every key metric of.
Our performance on EBITDA margins EPS and cash flow were ahead of our expectations in the second quarter and through the first half of the year.
There's clear alignment across the organization on our priorities.
Of a loaf of accountability to deliver on our targets and in energy within our teams that is building deal.
To support the business and creates certainty for our clients employees and shareholders. We took additional steps in the second quarter to further strengthen our balance sheet with the refinancing of our 2020 for bonds into lower cost debt and we continue to deploy substantially all free cash flow to share repurchases consistent with our capital allocation.
<unk>.
Please turn to the next slide.
In the Americas MSR declined slightly over the prior year, primarily due to pre COVID-19 comps, notably.
Notably, our MSR increased by 7% sequentially, reflecting improving market conditions as we progressed through the year.
Trends in our Americas design business continued to improve highlighted by 5% backlog growth in the quarter.
Further not only did our pipeline of opportunities increased by double digits, but our capture rates on bids also increased as our thinking of that globally strategy starting to take hold.
This provides us confidence that we are gaining market share into an improving market.
And our construction management business, we burned backlog in the quarter as expected.
As Troy noted, we are seeing pipeline trends improve in the <unk> business and our backlog continues to provide significant long term visibility.
As a reminder, approximately 90% of our profit from backlog is driven by the design business due to the high level of pass through costs included in the <unk> business.
The Americas segment had a 17, 2% adjusted operating margin for the first quarter of 160 basis point improvement from the prior year.
For the first half of the fiscal year, our Americas margin was 17, 3% underscoring the progress we have made and ingrain a culture of continuous improvement into our business that leads the industry on margins.
Please turn to the next slide true.
Turning to the international segment, our MSR increased by 3%, reflecting strong growth in our U K, Australia, and Hong Kong businesses, where we have grown our backlog in each by double digits from the prior year.
Our efforts to position this business to capture market share are translating to results.
Notably we continued to make progress on our margin improvement initiatives.
Our adjusted operating margin in the second quarter was seven 3% of 130 basis point improvement from the prior year and a more than 500 basis point improvement since the beginning of fiscal 2019.
This progression provides us confidence in our ability to achieve double digit international margins.
Please turn to the next slide.
Turning to cash flow liquidity and capital allocation.
A great example of how the organization has evolved in its collaborating better to deliver is a substantial improvement in the first half cash flow.
In fact, our first half cash flow was the best we've delivered in three years, reflecting our very deliberate actions to improve our phasing.
While our full year cash flow has consistently been within our guidance range in each of the last six years, our phasing had become too second half weighted.
Improving the speed and favorably impacts our return on invested capital.
We put in place specific quarterly incentive targets to drive a better outcome and our teams in the business have responded.
As a result, we are reaffirming our 425 million to 625 million free cash flow guidance for the full year.
At the midpoint. This reflects unlevered free cash flow conversion of EBITDA at 75 per cent.
I am also pleased with the series of transactions, we have executed that together extend the maturity of our debt and reduce our interest expense.
In April we successfully tendered for approximately 75% of our 2020 for bonds, replacing debt that with the lower cost term loan b.
The transaction builds on the benefits from the redemption of our higher cost 2022 bonds last year and the men and extend transaction of our sustainability linked credit facility that we executed in the second quarter.
When taken together these actions enhance our balance sheet contribute to our plan to double adjusted EPS by fiscal 2024 and support capital allocation flexibility.
Our strong cash flow and balance sheet have enabled us to continue to repurchase our stock.
We have executed $125 million of share repurchases since our earnings call in February and have now reduced our fully diluted share count by 10% since September.
Importantly, we currently have 700 million remaining on our board authorization.
With strong cash expectations for the second half of the year, we will continue to deploy capital to share repurchases going forward.
Please turn to the next slide.
We are raising our adjusted EPS guidance for the full year to between $2 65, and $2 85 or 28% growth at the midpoint.
This increase reflects our outperformance in the first half of the year, including the benefit of our accelerated pace of share repurchases and the benefit of our debt refinancing.
This guidance does not contemplate any additional repurchases all the way it is our plan to continue to buy back stock.
With that operator, we are ready for questions.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
First question comes from Sean Eastman with Keybanc capital Your line is open.
Okay.
Hi, guys. Thanks for taking my questions of course.
Just in light of the.
The bid activity and award flow.
Proving exiting the quarter of it would just be great to get a little bit more color on how you guys are measuring success.
Around the progress on the organic growth strategy and.
The end market share gains or what are you guys tracking there I'm.
The little more color on whats.
Giving you confidence that you are indeed, gaining share alongside of this uplift in activity levels that would be helpful.
Sure Sean this is Troy.
Sure.
When we go I'm going to go back to just the beginning of the year because we said the during the course of this year, we saw growth being challenged and certainly in the first half of the year.
But as we move through the year, we've seen an improvement of small improvement in the markets.
That we're participating in.
And that's being reflected in the pipeline of bids so that going a little bit better than we had expected.
At the beginning of the year, we said we need to focus on what we can control because we certainly can't control what comes to the market and what our clients have available in terms of funding. So we focused on.
Our clients and bringing the best that we could do globally for those clients and.
And south of that would be improving our market share or our capture rates and so one of the things that we measure in all of the work that we do in all of our bids as we measure of what we call our capture rate, which is effectively how much we win compared to how much we bid on and during the course of this year, we've actually seen our capture rates increased 4%.
So what that tells US thats improvement I can't tell you, where it's coming from but it tells us that we're improving in terms of our capture rates in our market share the.
The other thing to rely on and this is more anecdotal.
As we look at how we rank and as I pointed out the <unk> has just gone through the updated rankings and in the markets that we're in in transportation and environment.
And in facilities and the program management, we've retained our number one ranking but more importantly in water. We moved from number three of the number two and we did that entirely organically. So.
It's a combination of those things that tells us that we're taking some market share.
And as we move forward.
We certainly are seeing momentum building up and it's not and it's not going to translate into meaningful revenue improvement.
This year, we certainly believe it will next year, but what we're seeing now is our wins in the month of April and are designed as the sort of picked up at a faster rate than we've seen in the first half of the year.
We've seen our pipeline of opportunities in our design business.
So again that tells us that things are lining up so that there will be growth in the business in the.
In the future.
Okay, that's really helpful Troy and.
I know these types of questions are a little tricky to answer but just in light of the the backlog taking down sequentially and this dynamic where construction management is kind of in more of a burn mode.
Yes.
Uh huh.
How much longer does that last do you think we reach a sustained sort of positive inflection point in the backlog as we go into the second half dry.
Sure. So let me break it into two parts and just following along the question. So in our design business, we've seen our design business in our backlog growth.
During this quarter, our design backlog was up 8%.
And our construction management backlog, obviously it was down.
But it's again as we had expected we expected things to burn of burn off that backlog in the quarter. Those are the types of longer term decisions debt.
Net effect, we have been pushed off during the during the pandemic, but I'll say this as we certainly did burn off backlog in the second quarter, but we were pleasantly surprised because we won about 900 little more than $900 million of work in our construction management in the quarter and that was a little ahead of our expectations and again in terms of the <unk>.
<unk>, we are seeing the.
The pipeline of opportunities improve and our construction management business, but certainly not at the level that we're seeing in our design business.
Just as a reminder.
The profitability of the company is driven by our design business, 90% of the profit of the company comes through our design business and 10% comes through construction management.
Okay got it one last one for me a little bit more high level, but you know one of your peers disclosed an annualized ESG related revenue figure.
Or would you place that number for a call or perhaps what portion of the E Coms revenue mix.
Have you seen ESG actually start to drive accelerated.
The growth opportunities.
Yes.
We actually don't have a measure of ESG revenue, we haven't called it out separately and the reason we haven't done that is because we're really seeing in almost all of the work that we're taking on and doing today. There is some element of the ESG included net and so it.
Might be focused on.
The improving emissions are lowering carbon.
It's focused on improving communities are helping returnees improve our return to prominence.
So there is a significant amount of what we're doing in almost everything that we're doing so we don't look at it is we have a separate ESG business. We look at it is that it's a significant part of everything that we're doing so I'm not going to say that every every dollar is ESG revenue, but it certainly is a focus.
And just to expand on that maybe I could ask you just.
Give a little more background on the scope X because that really describes how we're including it in all of the work we do.
Yes, sure. Thanks, Troy and John look I think there are some very big numbers being turned around and very easy to sort of assign big numbers to entire segments of the market, but I think when we're coming out of our strategy.
Sustainable legacy strategy, which we just launched last month.
<unk> been great very positively by our clients and glanced off and I would say it's unique in the industry at the moment because it is quite granular and that is because we have we are coming from a rail.
The strength because we are the largest and the most diverse environmental service of science side. There we have some market leadership in real subject matter expertise when you dig into areas such as climate adaptation of carbon capture and storage and resilient.
There's some of the what I would call specialty areas and Detroit point, we as part of our strategy to embed ESG in everything we do one of the commitments that we are really.
Following up on.
So the X which of that process, where we are embedding.
Through all of our project work and through AD design and ESG action plan on all of our major projects and the commitment there is to reduce the carbon impact by at least 50%. So that's a pretty bold and I think that will.
Really demonstrate again at a far more granular level, just how strongly positioned we are and how we're really in a great position to capitalize on this.
Yeah, the momentum into the market at the moment around ESG.
Yeah.
Yeah, Yeah, all very helpful of responses I'll turn it over thanks.
Thanks, Sean.
Your next question comes from Michael Feniger with BMO Harris Bank of America of your line is open.
Yeah, guys. Thanks for for taking my question just firstly, you guys have a repurchase 10% of your shares.
You have the existing share buyback.
Plan is kind of the all time highs are you is there any thought troy of slowing it down shifting capital allocation to invest in other areas.
Curious, how youre viewing the capital allocation.
After repurchasing so much already of your of your buyback and then the second question just on the fee.
We are going into this growth environment, and we're expecting funding to pick up is there more investment required for new guys to support that I mean, the 140 basis points of margin expansion in the first half do we see any temporary pause as you guys, maybe invest to support that higher growth backdrop.
Yes, thanks for the questions, Mike I'm going to let <unk> take the first one and I'll take the second one.
Hey, Mike This Garza in response to your first question on repurchases, there's going to be no change to our capital allocation policy.
We still continue to see a discount between our valuation and what our peers are currently trading at.
We believe we have superior earnings growth clean results.
Compared to our peers, our margin expansion story investment in BD, which Troy is going to expand upon.
It's going to position us to really capture and monetize on the global infrastructure trends ESG and sustainability that Laura and Troy just outlined and this is also further supported by our plan to double our earnings per share by 2024, so of repurchases continue to make the most sense for our capital allocation.
And so with respect to your second question.
There is no question debt as you head into an environment like this where there is a growth opportunity that you you have to invest more in.
In improving the opportunities that you are bidding and increasing the pace at which you are bidding, but as we said in the past we expect to do all of this.
Through our margins.
Our objective is to continue to expand our spending on BD and at the same time, we will be living up to our margin improvement commitments.
And and the increased pace of bidding.
It's already included in our results we've increased the amount we've been spending on BD at the time too.
The chase chases pipeline and we will continue to invest in growth, but again, we will do it through our margins and all of this is built into our longer term commitment to get to a 15 of 50% margin target.
Okay.
Your next question comes from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys.
Troy can I ask your bad debt.
So the global backlog in design as you said, it's been up high single digits over the last couple of quarters, but revenue has been sort of turn at least in the Americas. So what do you think the probability is that AECOM could see a relatively strong revenue inflection as many of your state customers, who now have unexpected unexpected surpluses turn their FY 'twenty to budge.
It's over you know over the summer, especially given the 350 billion stimulus you mentioned I know you mentioned your pipeline is up double digits, maybe one of the last time of your pipeline was like this and what kind of revenue growth for being able to convert.
Yes, Andy Thanks.
So if you go back I think probably again I'm going to go back of ways to the kind of 2010 2009.
Era, where we certainly saw this kind of this kind of improvement in pipeline and backlog and I again, I can talk about the industry and talk about at us but at that time, we had strong growth we're talking at points in that time double digit growth. So over 10% growth in terms of revenue during that period of time.
The.
I certainly see there is a growth of revenue inflection that's coming in.
To the.
To the point of timing that you alluded to.
Uh huh.
So again Theres a lot of funding that is coming into place, but that funding is just being distributed now so for example.
The $350 billion that was in the the American rescue package that money is just getting distributed to state and local government. So it will find its way into budgets.
And the money was devoted to transportation infrastructure.
It's just finding its way into budget. So I think the timing of you described is right as we're going to see an increase in the pipeline, we're going to we're going to see and expect to have an expectation that we're going to be bidding that work will get awarded during the second half of this year.
Leading to an expectation of an inflection point in growth in fiscal 'twenty two.
Thanks for that Troy and then this question might be for La it's kind of a similar question on the international side.
Chad the backlog up 16% of that's a big improvement in terms of growth versus the last few quarters, obviously easier comparisons help but it does seem like youre seeing a nice inflection in international markets. So could you give us color on where you're seeing the biggest acceleration I know you talked about it seems like kind of across the board U K kind of Hong Kong, Australia, but of the improvements.
Youre seeing just broad based stimulus just the head in these places versus where it is here in the Americas any more color you could give us.
Yes, So I think we see continued positive price in terms of the infrastructure pipeline in particular, I think for sure al very deliberate positioning to secure.
Market leadership across all of the frameworks that we mentioned in the U K is one of those key examples in that that's now paying dividend and a number of the wins in this quarter in the <unk>.
U K, we're failing and squarely on the on the back of those frameworks and then I think just our ongoing market leadership in markets like Hong Kong, Australia, where we had some great wins in transport infrastructure and day of the market and hopefully we see continued positive growth in terms of the the government commitments to infrastructure sensory.
The recent budget announcements.
I'd say its looking really positive in terms of that segment of our business official and I would say also just continued focus on our most important clients around key account management program, which we have really doubled down.
In the last couple of quarters as well.
I appreciate the Lora.
Sure.
Your next question comes from Andy Wittmann with Baird. Your line is open.
Okay great.
Thanks for taking my question I was just hoping to get the little bit more detail inside of the margin improvements obviously, the instead of the.
The important story for the company and your stock for some time talked about some of the things that we're gonna be driving this but maybe if you could help us break down a little bit of what led to the improvements in your consolidated margins this quarter, including the benefit of utilization of your personnel from other things that would be kind of more episodic for structural.
In terms of hope you of calling to find cost in your business of become more efficient.
Sure Andy specific.
Specific to margins one thing I'd like to highlight as you already stated as it did significantly improve when you compare first half of last year to what we experienced in the current year, however, compared to Q1 and Q2 of their quite consistent and it's a trend that we expect to continue because we did go through a significant transformation.
Last year completed majority of our restructuring activities.
That included right sizing of our real estate opportunities investments in our global design center or our business should support centers in Manila that we've spoken to previously exiting countries completing those exits in 2020. So this is a byproduct of all of those transformational activities that we executed upon.
<unk> successfully and Youre seeing it in our results.
One thing I would also like to state as your specific question to utilization utilization was consistent with our expectations, but what Troy the alluded to earlier in regards to business development. We did have a higher investment in business development.
Based on the pipeline of opportunities, we're seeing in the current quarters, specifically in the Americas, because we're keeping our eye on the price and the future of what potentially could be coming down the pipe.
Great. That's helpful. And then I guess it was probably worth asking here on your guidance you mentioned a couple of times on the prepared remarks that adjusted EPS EBITDA free cash flow and maybe even some other the metrics that we all focus on that we're kind of at.
At least a little bit of ahead of expectations, yet the EBITDA guidance stayed the same I think the.
The mechanisms on the EPS with interest savings from the buyback of very clear, but I. Just was wondering if you could speak to the fact that despite a little bit of outperformance here.
Not just in <unk>, but also a little bit once you EBITDA didn't get the nudge up and I was wondering the thought process behind the sure.
Sure So just expand on that.
When we started in 2021 and provided the the.
The guidance of some significant strong growth in 'twenty, one coming off of last year.
We have confidence in the guidance, we have provided even though there were a lot of market uncertainties at that time.
And Youre absolutely right, we have delivered the first and second quarter above our expectations on all metrics, including EBITDA and today most of our major markets are more stable than they were beginning of the year with improving outlook as Troy has already spoken to reinforcing our confidence in the second half.
But at the same time, we're being prudently conservative because five.
One of us on the call today, if you were to ask US five weeks ago, what's happened in Southeast Asia, India, None of us could have predicted so we're just being prudently conservative and confident in what we're going to deliver for the year.
Have a good day. Thank you great. Thank you Andy.
Your next question comes from Michael Dudas with vertical research your line is open.
The good morning, gentlemen.
Good morning, Michael how are you.
Great. Thank you.
So maybe try to share your thoughts on federal.
The direction relative to infrastructure Bill negotiations.
You get optimistic one day and they get pessimistic next day of.
Given your exposure in your leading markets and transportation water is this water some of the opportunity of some of the.
The consensus appear to maybe drive some funding and some opportunities in the water maybe before highway of your infrastructure comes through them and do you get the sense that the.
Administration and the folks in Washington are.
Can get something together that will be meaningful for you know visibility beyond 'twenty, two and 'twenty three certainly in the broad part of your of the services you provide.
Yes, so Mike I'm going to I'm going to answer this in two parts. The first part is that there has already been of a lot of action taken by.
By the federal government in terms of funding that will support infrastructure and state and local budgets.
So what we're seeing today is the state and local budgets have returned and I think our healthy and improving and health and I mentioned that in my prepared comments so I.
I already think we've got a trajectory in terms of federal funding and state and local funding in markets that supports.
A continued investment in infrastructure and certainly of the places that you described the transportation and water and certainly in the environment.
There are some things that are being done by the federal government to focused for example on things like P. Fast remediation and so there is a momentum already building and funding ability and the second part of that is.
With an infrastructure bill.
This would this would layer on top of debt now.
I don't want to predict what I think the outcome will be.
But it certainly feels like there is support for getting something done and it feels like there is support for finding some form of compromise to get something done so yes optimistic about debt.
But if that happens that it gets layered on top and frankly, if you just took.
The President's proposal and as for his infrastructure plan.
In its current form we think that that would increase the addressable market spend for our U S design business by 15% to 20% over and above where it sits today, so that would be incredibly meaningful if it got done but again.
Our job is to prepare for that if that happens.
And we'll see what the outcome is.
All of that happens there will be a race for talent for sure I would think.
Yes, it will be.
And that's something that we're very conscious about today and preparing for the future is thinking about debt rates for talent is attracting the right people to the organization.
And Great example of that is.
<unk> in general Matt joined US and then there are obviously a lot of folks that are joining around them to the business.
The other thing we're focused on is just <unk>.
Continuing to invest in technical and professional development to increase the strength of the people that are here and attract more people for the workforce.
And then an really important part of the switch Claire mentioned, which is we call. It of freedom to grow initiative, which is we're going to credit flexible work environments.
So that it helps attract people here, what we've learned through the pandemic.
Is that.
People really can be productive remotely and they can be working virtually we've learned that our clients are very accepting of it.
And at the same time of what we've learned that it's what people want to do.
We've also found that having everybody have the commuting to a major city to do all of the work together maybe isn't the right answer every day that maybe its been around each other so you can have of mentoring and apprenticeship.
Environment at the right time to be around your clients for at the same time offering the flexibility of for people to be around their families and their communities.
Simple answer is we want to make sure that our people are able to be home on Wednesday afternoon of three o'clock. The go to their daughter's soccer game and so we're going to create an environment where that exists and we believe that's a competitive advantage to attract talent AECOM. So we are absolutely focused on that as we move forward.
I think the resumes we flying in what's the call ends of the Troy. Thanks, So much for your thoughts I appreciate it.
Thank you.
Your next question comes from Steven Fisher with UBS. Your line is open.
Thanks. Good morning, good afternoon, I Wonder if you could just give us a little bit more color on the larger pursuits can you just remind us what do you consider a larger pursuit.
Kind of the timing how balances it between say Q3 and Q4.
And how broadly these larger pursuits are across the regions and end markets.
Well.
I have to say, Steve I don't really think about the portfolio as large pursuits of small pursuits.
We think about our portfolio as a team based around our clients and what's important to them and their initiatives.
So what we are seeing is youre seeing our clients coming to us with those opportunities to ask for help.
And the place the were first seen that is in our advisory business, So where they're asking us to help shape. What those outcomes will look like and then that's the reason we're building of the program management business of expanding upon that is to actually help them then take those projects through that lifecycle of delivering outcomes. So it's not so much that we're seeing we're focused on the larger.
I will say, we are seeing more large projects come to market as we see the pipeline build but our focus is on being there on day one to provide that initial device be there on day two to help of the program management and of course throughout the process help with design and again.
I can't give you stats on big projects, we certainly are seeing more of them, but we're seeing our pipeline expand Robert.
Okay, and then I guess just building on some of those comments, it's not that long since your Investor day, but I was just.
Curious if there were any kind of next key milestones or activities related to.
Of the consulting angle or program management and initiatives that you have any sort of more key hiring or more wins are of any other milestones. We should be looking for now that you've kind of announced that or a few months into it.
Yes, those are actually our milestones it is actually key hires in key wins.
So we're not going to we're not going to announce those key hires but certainly we have been making progress in bringing some people into those into those teams that will absolutely have an impact.
But in terms of wins I did mentioned two wins for program management in the quarter.
We can't talk about all of the wins because.
We are simply not allowed to we have to of our client permission to do that.
But I can tell you that the program management.
It is around those key wins and building that business and we've identified a number of projects that are priorities for drew and his team and that pipeline that they are bidding right now represents a little less than $2 billion of bids.
So those are winning one of the projects over the next 12 months will be important milestones.
Terrific just one quick clarification on cash flow I know, it's always difficult to predict the timing with precision, but how Q4 weighted do you think this year will be on cash flow.
Hey, Steve This is <unk> I'll respond to that question.
Historically, we've always been a second half weighted.
Cash flow generative company. However, when you look at the current year. One thing we have been successful at is instead of being significantly negative for the first half of the year were actually breakeven on its own it may not be a big deal, but when you look at the impact on return on capital and that it made cash available for the first half.
A year or two execute almost $300 million of repurchases between.
Mid November to today.
It's a significant advantage for us and drive the right behavior for us in the business as well. So we will expect a positive cash flow in Q3 of the biggest quarter will be in Q4, consistent with our seasonal trends.
Got it thanks a lot.
Absolutely Thanks, Steve.
Your next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning of nice I guess, good morning, your time and nice quarter I guess two questions you already answered sort of my question on the the guidance, which seems conservative in particular on the margin front just given the year over year improvement you had in the first half versus what's implied in the second half, but I guess my question is you also talk.
About the business development costs.
The spending there just as you see the pipeline look more robust I'm wondering if just the BD costs and the relative to when you. Initially guided are higher than what you thought. So you can capitalize on some of this growth and that also I guess would imply maybe your margins are at a better point than you would've expected as well, even though you're not changing your guidance and then my second question.
Obviously, you know based on the in our records.
Very strong positioning in some of your key markets, but I guess as you.
Look at what's proposed under the infrastructure Bill or do you just in conversations with where clients want to spend their money are there any areas that you sort of arent big enough and where you would like to get bigger.
Bigger and I'm just wondering if there's adjacent areas of growth that are under appreciated. Thank you.
Yeah, Thanks, Jamie So first.
With respect to margin and business development.
We believe that over the course of the year, even though our business development needs are accelerating we had built that into that we had built some of that into our plan year over year improvement. So it was already built into our margins.
And we believe that again in the second half of the year that we can bid all of the work that we want to the need to bid and still maintain our margins. So you could look at it as maybe we're doing a little better margins than we thought we would be but nevertheless.
We also anticipated reinvesting some of that money in the growth of the business in the future we saw that as an opportunity.
In respect of some of our key markets.
There absolutely are places, where we should we should and we will be invested in the markets.
Maybe you can think about it in terms of our business lines in there of places across all of our business lines.
We will be investing and investing in our people.
But the places that we said we are dedicated to building and recruiting is certainly in our advisory business, which covers all of our business lines.
And building up our digital business, we have a group that is dedicated to digital solutions and then the last point is program management, we're absolutely dedicated to investing in that capability, we believe that as a huge opportunity for us as I said I think we can over.
Over the next few years, we can build that business up five percentage points in terms of growth but by multiples.
Okay. Thank you thanks.
Thanks, Jim.
And your last question comes from Adam.
The with Thompson Davis your line is open.
Hey, Thanks, Good morning, guys I'm still a little curious on the state and local side.
How those customers are reacting to this cash infusion like did they have a backlog of physical work that they're not working through or are the earlier in their process.
So Adam I think it's very particular to each again to each particular client, but almost all of our clients have had some form of projects that they have in their pipeline that they want to be doing so.
You already have a long term pipeline of things that they're working on so again I'll just use here in Los Angeles.
There is a lot of infrastructure that has been invested in to get prepared for the 2028 Olympics.
So there's a lot of work that the.
The local politicians want to do in terms of improving the economic conditions in their local communities.
And funding was difficult for that over the last year.
Now that funding has become available so that agenda can be funded and those new opportunities and priorities for our the state and the local governments here now can be funded so there certainly is a pipeline that already existed.
And there is a pipeline that is being that is being built up into the invested it and this is where it gets to the point of ESG.
There are a whole bunch of projects over the last year that will come online that will add to the inventory because of the ambitions.
Local governments and private clients et cetera themselves.
We go back a year ago. It's certainly certainly we're at these ambitions that were laid out that our debt are laid out today, and so thats, where youre seeing the momentum for the new projects that builds of all along the already existing portfolio of projects debt.
Debt those clients want to fund.
So there certainly is a lot of opportunity.
And now the funding is lining up behind us and Thats why we feel we feel confident about the growth as we move into into 2022.
And I think you said the construction management pipeline is improving as well can.
Can you give some geographic color and I'm, particularly curious about the New York.
I can say that we are certainly seeing an improvement in the pipeline in New York.
And we are seeing a pipeline of improvement in the places you would expect.
The larger cities, where there is where there is an <unk>.
And the population so places like in the Nashville area, the Dallas Fort worth area.
So those of the places where we are where we are seeing that growth opportunity or the increase of the pipeline, but certainly again, we are seeing the pipeline improve in New York as well.
Okay. Thanks, guys.
Thank you and I'll now turn the call back over to Troy Rudd for closing remarks.
Great. Thanks.
Thank you operator, and again I want to first of all say, thank you to our teams for the contributions to a strong first half of this fiscal year.
Our professionals of worked incredibly hard to create a lead our industry and are the and energized by the mission that we've laid out.
Yeah.
Im pleased that we are creating a stronger business and it's defined by our People's unparalleled experience.
It is our industry, leading margins, giving us the ability to invest in the business.
And the backlog and the cash flow we have so we can proceed with our capital allocation program. So again I'm happy about our momentum and I want to thank everyone for joining the call and thank you to all of our people here at AECOM.
Good day.
This concludes today's conference call you may now disconnect.
Okay.
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Thank you.
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