Q1 2022 AECOM Earnings Call
Good morning, and welcome to the E Com first quarter 'twenty to 'twenty two conference call I would like twin formal participants. This call is being recorded at the request of AECOM. This broke cost is the copyrighted property of eight E. Com any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited.
As a reminder, <unk> comes also Shlomo costing this presentation with slides at the investors section at Www Dot H E Com dotcom.
Later, we will conduct a question and answer session. If you wish to ask a question during the Q&A you've todays call. Please do so by pressing star and then one on your telephone keypad, Germany to a question from the queue. Please press star followed by Chase when preparing to ask you. A question later on please ensure that your devices on muted locally I would now like to turn the call over to Gabriel ski.
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 risks described in our periodic reports filed with the SEC.
Except as required by law, we undertake no obligation to update our forward looking statements.
We use certain non-GAAP financial measures in our presentation the appropriate GAAP financial reconciliations are incorporated into our presentation, where available were supposed to our website referenced as the margins and adjusted operating margins reflect the performance for the Americas and international segments. We will refer to net service revenue or MSR, which is defined as revenue excluding pass through revenue.
As a reminder, we closed on the sale of the power and civil construction businesses in October of 2020 in January of 2021, respectively, and the sale of the oil and gas maintenance and turnaround services business in January of 2022.
The financial results of these businesses are classified as discontinued operations in our financial statements are results from discontinued operations include the oil and gas sale and adjustments as clothing working capital estimates for previously completed transactions today's comments will focus on the continuing operations of the professional services business unless otherwise noted.
On today's call Troy Rudd, our Chief Executive Officer will begin with a review of our key accomplishments strategy and long term growth expectations, Laura Polonia, our president will discuss key operational priorities and GARS Kapoor, 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.
Right.
Thank you will and thank you all for joining us today.
We are incredibly pleased with our first quarter performance and momentum is building across our business and our markets I would like to begin today's call by thanking our professionals around the world who are working collaboratively to deliver outstanding results for our clients.
Our success is a result of the passion and dedication that our teams bring to their work and clients everyday. This X. Once was highlighted last week when unfortunate reaffirmed our number one industry ranking on its world's most admired companies list.
The elements for uninterrupted multiyear infrastructure in ESG investment growth our well established these include the $1 two trillion dollars bipartisan infrastructure law in the U S and the global commitments by our clients to deliver an increasingly well defined ESG objectives.
A global infrastructure investment Renaissance is beginning.
And our strategy focused on our teams clients communities and innovation has is better positioned than ever to win.
Through our expanded services, including advisory and program management, a greater share of a growing market is now addressable by <unk> com and we are working to shape the priorities of our clients and deliver value for our stakeholders.
Turning to our first quarter's results, we exceeded our expectations on every key financial metric.
And I'm, sorry increased by 5% with strong growth in both our Americas and international segments Importantly.
Importantly, we are winning work at the highest rate in the history of our company wins.
<unk> totaled $3 $6 billion with a 1.4 book to burn ratio in our Americas design business and a one two book to burn ratio across our global design business.
Our strong book to burn is worth emphasizing given our four quarters of consistent organic N a saar growth.
We also had key wins in our construction management business and our pipeline has never been stronger.
The segment adjusted operating margin increased by 60 basis points to 13, 7%, reflecting continued investments in organic growth and innovation the benefits of our highly efficient global delivery capabilities and the high value. Our teams are delivering for our clients our margins lead our peers, but plenty of opportunity for improvement remains.
Our focus on deploying innovation and digital tools to transform how we deliver for our clients against a backdrop of increasing demand for advisory and program management services supports our guidance for this year and our 17% longer term margin target.
Adjusted EBITDA increased by 10% and adjusted EPS increased by 44%. Our EPS is benefiting from the execution of our focused strategy strong operational performance and accelerating organic growth as well as from share repurchases.
Including $213 million of stock repurchases in the first quarter, we have now repurchased $1 $2 billion of stock since September 2020, when we launched our repurchase program or 14% of our outstanding shares.
This capital allocation benefit to shareholders is driven by our strong conversion of earnings to cash flow in fact cash flow in the quarter was one of the highest in our company's history for first quarter.
The attributes of our business, including any high returning and low risk profile.
On a capital light business model with a highly variable cost structure underpin our expectations to consistently deliver strong cash flow and to deliver on our capital allocation priorities.
Reflecting this confidence we initiated a quarterly dividend program in December and our first dividend payment occurred in January .
It is our intention to increase our per share dividend by a double digit percentage annually.
This marks a milestone for our company's history and demonstrates our steadfast commitment to use capital allocation tools to maximize total shareholder return.
Let's turn to the next slide for a discussion of the trends across our markets.
Beginning in the U S. Our largest market conditions are strong.
Our federal state and local clients are gearing up for several years of sustained increases in infrastructure investment, which includes the expected benefits of the $1 two trillion dollar bipartisan infrastructure law.
This represents a generational investment in U S infrastructure and arrived at an opportune time.
Typically federal support for infrastructure has been inversely correlated to state and local physical health, However, our state and local clients, which account for nearly 25% of our MSR are reporting record revenues and budget surpluses, which is resulting in a very favorable backdrop.
In addition, our public and private sector clients are increasingly prioritizing investments to advance ESG.
Today nearly every project proposal has an element of ESG in its scope and our clients are demanding more holistic thinking any broader advisory relationship to help them achieve their multi decade ambitions, our momentum and the expansion of our addressable market are apparent in our pipeline growth, which is up by double digits. This is noteworthy when you consider how.
Strong wins and backlog growth, where this quarter. The pipeline growth were seeing is especially encouraging considering the benefits of the bipartisan infrastructure law arent likely to be material until our fiscal 2023.
Markets are experiencing very similar positive trajectory.
ESG is front and center in our clients' agendas, and we're seeing strong demand for our advisory services and technical expertise.
Our pipeline increased by high single digit percentage and our backlog increased in each of our largest international markets highlighted by key transportation and infrastructure frameworks in the U K expanded program management roles in the Middle East and high win rates for key clients in the Asia Pacific region.
Looking ahead, the strong foundation, we have built and favorable end market trends have positioned us well for sustained multi year growth.
We spent the last two years narrowing our focus on our higher margin lower risk professional services business and implementing our thinking that globally strategy.
Our strategy is built on our leading technical capabilities global expertise and on bringing new ways of solving our clients' biggest and most complex challenges with innovative digital solutions.
We continue to advance our digital E com strategy and with our success, we are accelerating our investments in this area.
Over the course of the year as these solutions establish a market position, we will announce their launch similar to plan engage which we announced last quarter.
Plant engage our digital platform that reinvest the public engagement process for an infrastructure project is quickly being introduced as a platform for community engagement across our global client base.
As funding from the bipartisan infrastructure Act in the U S is connected with these projects later in 2023, our plan engage tool will become even more valuable.
Across our business one theme is constant our investments will expand our advantage as demand grows and labor constraints challenge the industry.
We are consistently winning our largest and highest priority pursuits with our win rate at all time high levels.
For example, our leadership team identified 10 global pursuits that we deem to be a top priority for strategic positioning and for delivering on our accelerating growth expectations.
I'm very pleased to report that we've already won eight of these 10 projects.
And two are still pending decisions and.
In addition, we've had several other key wins over the past few quarters, including a nine figure takeaway from a key competitor in an international market a nine figure takeaway from our key incumbent on a high value value of U S. Federal environment program, and we had been selected for numerous other key pursuits that underpin our confidence.
I can't say enough about how our culture of winning and excellence has expanded and what it means for our future.
With that I'll turn the call over to Laura.
Thanks, Troy, Please turn to the next slide.
I couldn't be more pleased with what we have accomplished to date and how well positioned we offer the feature against the backdrop of strong client demand and without foundation for success now in place we are taking action to fully capitalize on the opportunities ahead.
First we are fostering a culture that celebrates winning this includes prioritizing our time and investments on the best opportunities and highest value pursuit.
As late as in areas, including electrification transit systems, Environmental assessment remediation water infrastructure resilience climate change and new energy, we are poised to benefit from our exposure to a rapidly growing market.
This is giving us the opportunity to also be selective and disciplined about the types of opportunities on which we invest time and capital with a focus on profitable growth and strong returns on capital.
Second we are continuing to invest in program management and advisory capabilities.
Three of these capabilities, we are expanding our addressable market opportunity by adding services that lead to earlier engagement with clients.
We have on boarded K talent to support several large wins over the past year, including the name and our lunar programs in Saudi Arabia.
Looking ahead as the scope and complexity of infrastructure and S. J initiatives expand high value program management and advisory will take an even more central role in helping our clients and will distinguish a come in the market.
Third we are investing in digital E com to develop and deliver products that extend the capabilities of our teams and transform how we engage with clients.
Our planning gauge tool and commercialization of the flu.
Powertrain solution for the destruction of pathos compounds are great examples.
In addition, we are advancing the development of key digital solutions in the transportation and facilities market that will offer leading parametric and <unk> design tools.
Finally, and most importantly, we are investing in and building teams to deliver in a growing market, which will be increasingly important going forward.
We are focused on ensuring a home is the best place in our industry to build a career.
This point I am pleased to report that the results of our recent employee survey reflect a continued high levels of employee engagement.
Notably this included further increases in the percentage of employees that would recommend E. Com is a great place to work.
There is no higher acknowledgment of our commitment to building a great culture than these measure and this gives us confidence we will remain at an advantage as the overall labor market tightness.
With that I will now turn the call over to Guy to discuss our financial performance and outlook in greater detail.
Thanks, Laura.
Please turn to the next slide.
We exceeded our expectations on every key financial metric in the first quarter, we delivered another quarter of positive organic MSR growth a record first quarter margin double digit adjusted EBITDA and EPS growth and one of the highest first quarter free cash flow in our company's history.
<unk> was a <unk> <unk> benefit to EPS compared to our plan due to the timing and quantum of discrete items.
We also delivered on our capital allocation commitments, including ongoing investments in our teams and digital E com more than 200 million of share repurchases and the initiation of a quarterly dividend program.
The dividend is a complement to our share repurchases.
We have a strong balance sheet and highly predictable cash flow, which allows for investments in the business as well as consistently returning all available free cash flow to our shareholders.
Importantly, we are winning work at a high rate our pipeline across the business is up double digits, and we have not yet begun to see material benefit from the bipartisan infrastructure law.
Please turn to the next slide.
In the Americas, MSR increase by 3% highlighted by growth in both the design and construction management businesses.
Our book to burn in the Americas design business was one four and total backlog and design business increased by 5%, which continues to include a near record level of contracted backlog, which provides for strong revenue visibility.
In addition, we are benefiting from strengthening conditions in our construction management business and believe backlog will increase over the course of the next year.
First quarter adjusted operating margin was 17, 7%, a 30 basis point increase from the prior year.
This result reflects both ongoing investments, we are making to support growth and the ongoing benefits from the actions taken to operate in a more streamlined organization that delivers more efficiently.
Please turn to the next slide.
Turning to the international segment MSR increased by 7% with growth across all of our largest regions.
Our wins were strong and backlog increased by 6% we continue to gain share in the UK public sector. Our building our gains in the middle East and have been successful on a number of key pursuits in Hong Kong and Australia.
Our adjusted operating margin in the first quarter was eight 2% a 110 basis point improvement from the prior year.
We are realizing the benefits of the actions we have taken to eliminate inefficiencies regained market share and better scale, our cost structure, including increasing utilization of our global shared service centers.
Please turn to the next slide.
Turning to cash flow liquidity and capital allocation.
First quarter operating cash flow was $195 million and free cash flow was $163 million.
This was better than we expected and is consistent with our focus on delivering more consistent phasing throughout the year.
This improves our return on capital and allowed us to execute substantial repurchases earlier in the year as a result.
As Troy noted our capital allocation policy is focused on returning substantially all free cash flow to investors in order to maximize total shareholder return and returns on capital.
This included the milestone announcements we made during the first quarter of the initiation of a quarterly dividend program and our intent to grow our per share dividend at a double digit annual percentage.
Our first quarterly dividend payment was made on January 21.
The dividend is a testament to the steps we have taken over the past two years to reduce our financial and operational leverage which has contributed to consistently strong earnings and cash flow.
As we look ahead, we continue to expect to convert our earnings to cash flow at a high rate and we continue to expect free cash flow of between $450 million and $650 million in fiscal 2022.
As a reminder, our cash flow is typically weighted more strongly to the second half of the fiscal year, though we expect our first half cash flow to improve from the prior year.
Please turn to the next slide.
We are increasing our fiscal 2022, adjusted EPS guidance to between $3 30.
And $3 50, which would reflect 21% growth at the midpoint.
This increase reflects operational outperformance, we delivered in the first quarter the benefits of our share repurchases completed in the first quarter and a lower than planned tax rate.
As a reminder, our adjusted EPS guidance only incorporates the benefit of already executed share repurchases, but we expect to continue to buy back stock as part of our capital allocation program.
We also continue to expect to deliver adjusted EBITDA of between $880 and $920 million, which would reflect 8% growth at the midpoint of the range.
Based on our strong start to the year. We are also reaffirming our expectation for organic MSR growth of 6% segment adjusted operating margin of 14, 1% and our long term 2024 financial targets, including adjusted EPS of greater than $4 75.
And approximately $700 million in free cash flow, we expect our full year tax rate to be 25%, which incorporates the impact of our first quarter tax rate and the expectations for approximately 28% for the rest of the year.
Longer term, we expect our tax rate to be in the mid twenties.
With that operator, we are ready for questions.
Thank you very much if you would like to ask a question. Please do so now by pressing star followed by one on your telephone keypad do you feel as though your question has already been asked or wish to withdraw your question from the queue. Please press star followed by Kane I'm preparing to ask a question. Please ensure that your microphone is on muted lately.
Our first question today comes from the line of Michael Feniger from Bank of America, Michael Your line is open.
Yeah, Hey, everyone. Thank you for taking my questions I just wanted to start off with a question on inflation you guys are able to get margins up in the first quarter good start to the year.
Where are you seeing inflationary pressure in the business and maybe just how is this industry built handle inflation is it is the contract structure that helps and I guess, how is the E com better able to handle an inflationary backdrop relative to peers.
Yeah, Michael Troy Good morning, Thanks for your questions.
With respect to inflation I think if you go back and you look at the history of our industry and certainly we've had some periods. We're not we haven't don't have inflation might be doing today, but we have had periods of inflation and typically that that cost has been passed along to our customers.
And so I think when you look at a an industry like ours and in particular our business.
Consulting business predominantly there.
Those costs continue to get passed along to our customers and what you pointed out in your question was is it is already part of our existing contract structures.
We have wage escalations in.
Usually our longer term contracts and then as we continue to bid.
Put together, our our bid costs and that will include the increased cost of either paying our professionals all the other costs incurred to date.
But I'll I'll take you back to one really important point is.
There are a lot of long term costs in our business that are typically fixed.
Our labor is certainly a flexible cost and we certainly see an increased cost of paying our professionals, but there are a number of costs like real estate and other items that are fixed costs in our business and so we don't experience at least inflation today.
And the proof point in terms of our ability to pass along those costs to our customers is the fact that you pointed our margins continued to increase.
And in fact increase at a time, where we're investing and growing the business and growing our backlog and investing in our people and investing in our digital profile. While we continued to improve margins. So again inflation for the most part it's not an impact on our business.
Okay, Troy and it's interesting it's interesting to see you guys repurchased shares in the same quarter of the dividend initiation.
Good to see that now you are seeing some of your peers are being much more aggressive in M&A. Some are even looking at software assets.
I'm just curious how does E com kind of view the M&A landscape and if there's any change in terms of how you guys are going about your capital allocation structure.
Yeah. So first of all there is no change in how we're going about our capital allocation structure. I think we are perhaps a little bit different than a lot of people in our in our industry, we believe that.
We're able to do invest in the business.
Through our margins and we also believe that.
We have an obligation to return capital to our shareholders over the long term and in terms of paying a dividend. We again, we think that sends a strong signal that we have in fact transformed the business to a lower risk higher returning business with a track record of converting earnings to cash.
And with our EPS growth it gives us even more confidence to increase the permanent return of capital to our shareholders. So again no change in how we're thinking about capital allocation and we think we have ample capital to deploy to increase.
The value of the business and to grow the business.
Great I'm just sneak one more in there on the CR are you seeing any disruption on your business with the CR does that impact your view of infrastructure hitting 2023.
You still had good organic growth, even with the CR right now, but how should we how do you see the see are kind of playing out in the next few days and is there any impact it would have the 2023.
Well that's a good question first of all I'm not in the business of predicting what the federal government is going to do so I'll decline to answer that question, but there is a decision can be made the next few weeks about whether the federal government will continue to operate with a continued resolution or in fact, they'll put a bug.
And place, which if a budget in place then it creates the the appropriations.
For funding under the infrastructure Bill.
Again, we view that that is going to happen, there's a lot of bipartisan support for infrastructure and so again, we see the we see the funding eventually coming in place and we believe that it's probably an impact on our business in 2023, but putting that all aside putting that aside.
We didn't we've seen our business grow more importantly in the Americas, We saw book to burn grow at one four times.
And I think Thats, just an indication of the funding that exists broadly across our customer base and in the U S.
So again I think about that the continuing resolution and the infrastructure bill being upside for our business in the long term.
Our next question today comes from the line of Andy Kaplowitz from Citi.
Andy Your line is open.
Good morning, everyone.
Good morning, Andy.
Yes.
Totally alert so 8.2% adjusted operating margin in international I think it was the highest quarterly result, we've seen from that segment. We know the result is just part of the progression to get to 10%, but international margin I think was stuck in the low to mid 7% range for all of 'twenty. One so the mix improve in the first quarter or is this really.
Just the shared service centers kicking in now and does it mean that as sales continue to increase here, we should see it come progressive the eights for the rest of 'twenty two.
Yeah, Andy Thanks for the question and I'm going to pass it off to guard answer.
Hey, Andy Thanks for the question.
Our international margins to your portion increased significantly year over year, and very consistent with our expectations as you probably recall, we've invested quite heavily to.
<unk> uplift those margins in the marketplace and operational efficiencies, which we're starting to see come through.
At a higher clip now.
We're going to continue to March towards double digits is not just 10% of our longer term aspiration is overall for the enterprise to remind everybody is 17% and international is going to be a large part of it now specific to 2022 and progression of the margins for international.
We'll see consistent margin for the international business like we did last year, we're not incurring significant restructuring charges. Our results are very clean and therefore, the phasing is very consistent throughout the year.
Thanks for that color and then maybe I could ask you about phasing of revenue. So you did 5% MSR in Q1, you're guiding to 6% for the year.
We know you've set an infrastructure bill really kicks in more in 'twenty three.
But do you continue to see like a slow and steady ramp up from here normal seasonal seasonal cadence should we be concerned at all about disruption from all micron or supply chain or is this sort of steady as she go and then maybe we see some money from the infrastructure build late in 'twenty two.
So Andy Troy again.
Look I think we're going to see us.
Steady improvement in growth throughout the year, there's certainly has some seasonality to it but also again, we just see in certain markets.
Now that the funding from our clients and the project ramp up incurring overtime.
Again, I don't I don't see anything but sort of continued slow steady growth you are right to point out that.
Coke to Covid did impact everyone's business and we were certainly not immune from that we certainly felt the impact of that in December and through January .
Putting that aside we still grew the business in the first quarter at 5% and our backlog grew.
Substantially, replacing those orders and adding to its significantly.
So I again, I see nothing that will hold us back from just a continued steady improvement in growth over the remainder of the year.
I appreciate it guys.
Thanks Ann.
Our next question comes from Sean Eastman from Keybanc capital markets, showing the floor is yours.
Good morning team.
I'm just trying to think about the risks to this anticipated topline growth acceleration.
Of course, the war for talent tends to be front of mind. There. So can you update us on the pace of hiring and perhaps what E. Comm has been working on.
In terms of productivity enhancements and leveraging that employee base.
Sure. So first of all I think there's two things that go into revenue growth first of all is winning.
You've got to win what matters and I think we were clear in our prepared comments that really feel comfortable based on.
What are people in the market our professionals are doing in the marketplace, certainly we're winning the things that matter to us.
So that's again think about it ticked that box off.
Secondly, you pointed out talent you have to have a great group of professionals to deliver on that work.
It certainly is a market that is challenging but we did see an increase in our professional head count.
During the quarter. So we continue to add people to two.
To grow the business.
But also we are making other investments again those investments are in our people.
And in building a business that more people want to work, we talked about it as well.
Building the place where people want to have a career, we are absolutely focused on that and investing in our people investing in their technicals technical the leadership development and offering opportunities for them for the long term.
We're also investing in digital tools, which is part of that investment is.
Extending the capability or the capacity of our people so they're able to actually accomplish more on the same day than they would've been in the past and that's a focus and then the third thing is.
We've been investing in building capability centers, so that we have the opportunity to take to take work and to put it in and amongst these groups. So ultimately we can improve the efficiency of productivity on that work.
So really to address that that second challenge, which is are there enough talented people in the marketplace to deliver all of this work we're addressing in those three ways.
Alright, thats interesting and going back to the inflation discussion.
It is clear that sort of price the price cost element is not really a concern.
More.
How inflation ultimately impacts demand and I'm just curious how you would characterize the sensitivity.
Yeah.
Core growth drivers behind that 6% organic target over the next couple of years.
Around the broader macro and to the extent inflation does degrade.
Business cycle.
How much risk there would be to that 6% that you've out.
Lines.
Sure well I guess, maybe the easiest way to answer that is that.
Yeah.
We are seeing an improvement in our pipeline.
So the opportunities that were pursuing in the.
The Americas business and the international business as we said are both increasing and if I sort of look at the underlying conditions, we certainly see within our our customer base. There is a significant amount of ambition undertake infrastructure projects and a lot of that is ESG driven.
But also there's a tremendous amount of funding that has been made available and typically when that funding is becoming available it isn't that sensitive to the.
The increase of costs that we're currently seeing now so.
Again, we're just we're just not seeing as a result of inflation a change in the ambition and the change in the funding within our customer base.
Understood. Thanks for the insights.
Yes, Thanks, Sean.
Our next question today comes from Steven Fisher from UBS. Steven. Please proceed with your question.
Okay.
You mentioned that your win rate is very high can you maybe quantify what that was.
And how sustainable you think.
For like.
Alright that support that level of rates.
Great success.
So Steve your your question was a little difficult to understand but I believe you were asking about our win rate and whether our win rate is sustainable.
So you.
One of them.
Sorry, sorry, it's Dave.
You were breaking up but.
I'll try to answer that one question, which is our win rate has been improving.
Steadily over the last four or five quarters and this this last quarter again and for US It hit an all time high.
We're capturing.
We're capturing almost 50% of the work that we're bidding on which is for US. It's an extraordinary result.
And I look at the underlying competence the underlying conditions. So there's great competitors in the marketplace. There is no question. There are really good companies that we compete against that is not changing.
And in terms of what we're doing to win.
Those things that we're doing to win arent changing and those things that we're doing are we're bringing the best of our organization.
Globally to those clients that that matter.
We are investing in digital tools to win to win the work and differentiate ourselves and we've been growing and investing in building in advisory and a program management business. So it actually it actually gives us an opportunity to bid on more than we typically have in the past and I don't think again I don't I don't see us changing what we are.
Because it's working and I don't see the competition changing so all it's all it's a long winded way of saying I don't I don't I don't see a change in the underlying conditions I expect us to have.
Our high win rates for the long term.
Our next question today comes from Michael Davis from vertical research Michael. Please go ahead.
Good morning, gentlemen.
Yeah.
Good morning, Mike.
Good morning.
Just to follow up on your own you answered the question about your project management Advisory business.
I was intrigued on the chart in the presentation of the opportunities that you see for that business.
Okay.
Is that this to grow whether youre growing other than your traditional core design engineering services business relative to what you have.
You have the talent promoted within to do that or is it bringing the expertise from other companies to get to that point and is there a difference in the type of cost or.
Or I'm, assuming there's a difference in the margin profile over a lifetime of a project on the project management. If you have all the design and engineering of below it or separate from that if you. Just think you elaborate on that and looking at that market size, how much that could be important to your margin improvement in the U S and assume abroad as well.
Sure.
Again, my thanks for the question.
So.
We see our opportunities over the long term expanding as our clients again gained more funding. So again, we see the market the size of the market increasing.
But as we've added advisory and program management and are building those businesses. What they do is they allow us to have a much greater share of that growing market. So we're now exposed to more of that addressable spend in the past we were focused on <unk>.
A design business.
And now adding program management advisory we believe that we're exposed to a multiple of what we were exposed to in the past so that could be two or three times. What we are exposed to in terms of those project budgets. The other thing it does by adding advisory and program management. It means that we actually will participate in those projects sooner.
Earlier in the process.
And it means that we have the opportunity to be to participate in those projects for obviously a longer period of time.
So again, that's why we thought it was important to build those businesses because it obviously is complementary to what our design people our design our design business does and the skills of our designers.
In our design business worked perfectly they match perfectly with a advisory and program management business.
No.
Your second question was.
Are we hiring or are we building from within and the answers we're doing both.
We're actually adding adding folks into that business from outside and and we're also then having our people who have those great skills already from the design business participated in network.
And with respect to margins I'll I'll turn it over to guard answer.
Yeah, Michael for margins.
Specific to our PM business, it's very consistent with our core design business.
The reason for that is.
When you look at the overhead that business needs. It's minimal the utilization is much higher there longer term projects that utilization is high much higher <unk>.
Paired to the core design business and other overhead costs are minimal as most of those employees are are within the facilities of our clients now clearly our advisory services does as a higher value.
Services, we provide better margins and those are all embedded within our respective business lines and geographies. So it's part of the design business.
Thank you and is there certain end markets or clients or regionally that your program management platform can do.
To generate better faster more profitable growth than others.
Again, Mike.
I'm going to turn that question over to Laura to give you kind of a flavor of how the program management business.
Rolls out across our across the globe for us.
Yeah, Thanks, Troy and good morning, Mike.
We definitely see substantial opportunities in the infrastructure space for government clients in particular, there's obviously a lot of pent up demand for major infrastructure schemes around the world beyond the Americas as well.
Clients are looking for those front end advisory services to help them with rapid business case project prioritization and then the longer term involvement that we can provide true.
Full project lifecycle program management will assist with ensuring that those projects are delivered with cost and time certainty that we can get earlier engagement with some of the contractors to provide consecutively review sites.
Alright.
Biding front and advisory services, and really extending our involvement so that that support is much elliot, but it extends much longer through the.
The program management role in particular, but it's predominantly those big infrastructure Gainesville, we see tremendous demand.
In particular, but even in the private sector. There are clients for example that are neither.
Approaching us every day with even just some of the front end services like ESG advisory how do they how do they gear up for that.
Is there any as you transition all of those things I would say very fertile ground for us to grow that service offering.
Excellent. Thank you so much guys.
Sure.
Our next question today comes from Jamie Cook from Credit Suisse. Jamie Your line is open.
Hey, good morning, nice quarter, I guess, just two questions.
Why.
You know the free cash flow conversion struck me in the quarter. Obviously it was a record free cash flow quarter for you guys. So can you talk about what changed there or is there any pull forward or is this just a structural improvement and why isn't there upside to that free cash flow guide given where we are in the first quarter and then I guess my second quarter. Two the margins are performing you know better when a lot of other.
Companies are talking about headwinds associated with you know COVID-19 supply chain you know.
People, calling in sick because of omnicare on so I guess like your margins are very good I'm wondering if they're being weighed down by that to some degree. So perhaps your underlying performance is better or more closer to where we need to be on on your longer term targets. Thanks.
Okay. Jamie. Thank you. So I just just a high level comment and then I'm going to turn it over to Garth to answer your specific questions, but I think over the last two years. The one thing that we have learned as we've learned that we have to be agile.
And as we move from week to week month to month quarter to quarter, we're faced with all kinds of challenges in the business and I think our professionals.
Leaders, who have proven that they just have their way to net they've proven that they can navigate through those changing and sometimes difficult environments and I think that's reflective in our results, but with respect to your specific questions on free cash flow margin I'll, let him with our answer that for you.
Hey, Jamie so specific to cash flow you've heard me say this before where we're fostering a environment, which focuses on continuous improvement and that includes cash.
Focus on cash has allowed us as we've said before better phasing throughout the year, that's always a treat priority of ours and you saw that in the first quarter.
Our focus for the remainder of the year is to make sure that the first half cash flow phasing is better than last year, while also acknowledging that.
He's analogy comes into play and that's why our cash flow is always going to be weighted more towards the second half, but this is we're always going to strive to get the best result in cash because you can see what it delivers in terms of capital allocation.
It allows us to repurchase stock it allows us the stability to.
Issue initiate an issue dividends and will continue to do that on the margin part.
It's also part of our continuous improvement culture, but at the same time acknowledging to Troy's earlier comments of how our operational.
Our professionals operate over the last couple of years, they're not being reactive right there, they're really being thoughtful in how they plan and execute projects their businesses.
<unk> and business lines.
And that includes.
US investing strategically in our advisory and PM businesses, which are higher up the value chain.
To the earlier question, we got from Michael Dudas. It also includes investing in digital and innovative solutions, which expand our internal capacity for efficiency of our employees and also in the marketplace.
That Troy and Laura has spoken to the various digital tools, we have available focusing on an international margins are workplace of the future, which we have talked about that includes.
Continued our.
Focus on on real estate.
And also utilizing our global design services and business services capabilities that we have talked a.
Quite a bit in the past as well so all of those things have helped us strategically alleviate potential inflation pressures that are coming through because we will continue to invest in our in our workforce and youre seeing the results of that in our margins, where we continue to expand year over year and the last thing I'll add to all of that is a result.
Our clean when you look at our GAAP results to adjusted results, we're not going through massive restructuring. These this is all very well thought strategic initiatives put in place.
To deliver the results you are seeing.
Yeah.
Okay. Thank you.
Thanks, Jamie.
Our next question today comes from Adam <unk> from Thompson Davis. Please go ahead.
Hey, good morning, guys. Congrats on the good start to the year.
I wanted to ask just generally how are your customers responding to higher materials prices.
Again, I think the best example of how they're responding is there.
They're continuing to let out more work than they have in the past.
Just at a macro level, we look at the funding environment is strong and improving and will improve over the long term.
And our customers again have ambitions to take on more infrastructure projects and more work and we're seeing our pipeline grow so.
I'd say at a macro level. We're just we're not seeing a dramatic impacts from inflation on our customer base at the moment.
Great and then I wanted to ask quickly about your construction management business. What are you seeing in your core metros there.
So we're actually seeing opportunities to grow the pipeline and our construction management business, which is typically driven around core metros.
<unk> has actually been growing and.
You know again sort of the work that we win and that business is lumpy from quarter to quarter, but in terms of what we are pursuing the opportunities have expanded.
What are the things that we're doing is we're being quite thoughtful and selective in how we're moving forward.
One of the things that happens in a marketplace like you know like we're seeing now where the opportunities are expanding and sometimes you have the you have the appetite to maybe take on things very aggressively.
And we're just really managing what we're pursuing and how we're going to grow that business, but for the time being we've got $20 billion of backlog.
And a lot of that has been won over the course of the last two years and either they are they are great projects. Some.
Some of them very significant size in the Metro course.
Great. Thanks for the time.
Thank you.
I have no other questions we have for today, So I'll now hand back to CEO , Troy Rudd for any concluding comments.
Great. Thank you operator, and again I want to thank our teams and our professionals for their great contributions that have got us off to a really strong start of the year.
We put we feel like we've put ourselves in a in the best position possible as we move forward year, and we're again, increasing our confidence around the defaults results will deliver for the year and frankly the results will deliver in terms of achieving our long term objectives again. Thank you everyone for participating this morning, and look forward to talking to you on the next earnings call.
Have a good day.
Yeah.
Yeah.
Thank you everyone for joining us today. This concludes our call. Please now disconnect your lines.
Uh huh.
Okay.
Yes.