Q2 2022 AECOM Earnings Call
Good morning, and welcome to the E Com second quarter 2022 conference call.
I would like to inform all participants this call is being recorded at the request of AECOM. These broadcast is copyrighted property of AECOM any rebroadcast of this information in whole or part without the prior quite them permission I'll take him he's probably abated as a reminder, AECOM is also simulcasting. This president there.
As shown with the slides at the investors section at Www <unk> Com that calm later, we will conduct a question announce what session. If you would like to ask a question at that time. Please press the star followed by number one on your telephone keypad, if you wish to be removed from the queue. Please press the star followed by number two.
I would like now to turn the call to Wilke, albeit escape Senor, Vice President Finance Treasury 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.
As 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 reconciliations are incorporated into our presentation, which is posted to our website referenced at the margins and adjusted operating margins reflect the performance.
The Americas and international segments.
We will refer to net service revenue or MSR, which is defined as revenue excluding pass through revenue and its arent backlog growth rates are presented on a constant currency basis, unless otherwise noted today's remarks will focus on the continuing operations of the professional services business unless otherwise noted during the quarter, we announced our immediate exit from Russia and when it occurred.
A $69 million pre tax impact, which is excluded from our adjusted earnings result, we expected cash impact from our exit from Russia is approximately $10 million on today's call Troy Rudd, Our Chief Executive Officer will begin with a review of our key accomplishment strategy and growth update and our outlook Laura Polony, our president will discuss.
Key operational successes and priorities going forward 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 Troy.
Right.
Thank you will and thank you all for joining us today.
I would like to begin by expressing my deep appreciation to our professionals for their focus and commitment to their work and their clients and E. Com. We are inspired by a shared purpose of delivering a better world and prepared for the huge opportunity ahead of us as the world embarks on a long term transformation of our infrastructure.
I'd also like to expand on the decision we made during the quarter to immediately exited our operations in Russia.
We are saddened by Russia's ongoing invasion of Ukraine is.
This action is inconsistent with our values as.
As a result, we accelerated our immediate exit from this market in February .
Well see sooner operations, our priority was providing our colleagues with support during this transition. This includes an emphasis on the safety security and wellbeing of our team.
I want to thank our teams and their families in Romania, and Poland for their tireless efforts to aid the families living in the Ukraine as a result of the invasion and all of our professionals, while providing support for these humanitarian efforts.
Turning to our results.
We delivered strong results on every key metric in the second quarter in.
In the design business and as our increased by 5% despite high levels of crime related absenteeism in January and February that have since subsided.
Importantly, the U S government passed its fiscal 2022 omnibus budget in March which creates optimism around the pace of growth for our government clients in the U S. In the second half of this year and fiscal 2023.
We also delivered a record second quarter margin of 13, 8%, which remains at the top of our peer group our margins reflect the value we bring to our clients as well as the positive contribution of our digital advisory and program management capabilities.
Against the backdrop of rising inflation, we are consistently delivering strong profitability, which is a direct representation of the inherent attributes of our professional services business model and the embedded inflation protection built into our contracts.
Importantly, our growth and strong margins are translating to the bottom line.
For the quarter adjusted EBITDA increased by 10%.
And adjusted EPS increased by 24%.
Across the business our end markets are strengthening and our win rate remains at an all time high.
Our book to burn ratio was 1.6.
And was highlighted by strength across the entire business.
Contracted backlog one of the best leading indicators for future growth increased by 20% and the total backlog increased by 4%.
We are realizing the benefits of our think and act globally strategy, which emphasizes collaboration and focus our time and capital on the highest returning opportunities.
I'm also pleased to report that our free cash flow in the first half of the year was one of the highest in our history.
We returned nearly $300 million to shareholders through the first half of the year, which was ahead of our normal cadence and as an accelerant to value creation.
I'm proud of our performance in water professionals have accomplished over the past two years.
Today, we are a highly agile professional services firm with market, leading franchises and a very well defined and focused strategy.
Allocating resources to our largest fastest growing and most profitable geographies and market sectors.
And we are expanding the addressable market and enhancing our client value proposition by investing in high value Digital advisory and program management services.
You had rising inflation, the lingering impacts depend emmick supply chain disruptions war or integrating ESG and client investment decisions and planning the pace of change is accelerating.
Against this backdrop of rising macro risk and geopolitical uncertainty the inherent advantages of our business are driving consistently strong performance.
Let me turn to the next slide for a discussion of the trends across our markets.
In the U S. The outlook for the next several years is as strong as it's ever been.
State and local clients have record levels of funding and our set Additionally, the benefit from the <unk> funds.
Our U S. Federal clients are also are prioritizing investments in areas, where we excel, including environment sustainability and resilience.
As a result, we expect a strong level of federal task activity in the second half of the year and the growth to persist into 2023 and beyond.
Edition P fast investment is accelerating and our leadership in assessment and destruction are leading to substantial growth opportunities.
In fact, the U S pallet, our groundbreaking PFS destruction technology to Florida.
Is now well underway and we are advancing our plans to commercialize this proprietary technology at scale to meet a multibillion dollar demand opportunity internationally.
Internationally markets are also strong in the U K revenue continues to increase and there are several tailwind for our business, including growing investments in rail and transportation markets, where we lead.
In addition, the U K government's leveling up strategy, which includes key prosperity and equity focused initiatives that touch on all elements of infrastructure are creating opportunities for AECOM.
In the middle East investments to create modern ESG focus cities such as me I'm Gonna Lula are drawing on all of our expertise and are creating several years of visibility.
In Australia, our revenue and backlog increased and the outlook for growth across our market remains strong.
At the same time, we are managing through ongoing COVID-19 related shutdowns in China, though as we always do we are remaining agile and don't expect these impacts to be material.
Please turn to the next slide.
Across the business, we have built a platform that positions our professionals to innovate and deliver on three mega trends that will define the next several decades of investment.
A global infrastructure investment a Renaissance ESG investment and the adaptation of infrastructure to a post Covid world.
I'd like to discuss a few examples that bring to life how E. Com is capitalizing on these opportunities.
First we are leveraging our strength as ESG leaders to capitalize on growing demand from our clients to Decarbonize and.
And advance sustainability initiatives.
Recently, we were awarded a contract for a top tier cruise operator to reduce emissions at their cruise terminals, which alone account for a large portion of their total emissions footprint and are critical to achievement of their emissions reductions plans were.
We were also awarded a contract for one of the largest mine remediation projects ever in Canada.
These wins evidence the capabilities of our nearly 50000 industry, leading experts are creating competitive advantages in the marketplace and positioning us for strong growth.
Second our advisory and program management business continue to create opportunities for high value long duration contracts for long standing clients.
This was highlighted by our selection in the quarter for the Air side Master plan at the Dallas Fort Worth International Airport, we have delivered nearly $1 billion of work for this client over the past decade and are pleased to see our success translate into further growth opportunities.
Finally, our scale experience and global execution capabilities are leading to success on complex mission critical programs.
This was apparent on our successful takeaway win from a competitor of the Atlantic region.
<unk> NASDAQ clean environmental action program.
We brought the capabilities of our whole company to bear to distinguish <unk> from the incumbent.
A comprehensive proposal, which also embedded our industry, leading PFS capabilities with a critical determinant of our success and a great representation of the power of our organization when we think and act globally.
In closing our business and brands are built on nearly 50000 of the best professionals in our industry.
Despite the numerous headwinds impacting various parts of the economy, we continue to deliver for clients and create value for stakeholders.
As a result, I am as confident as ever that our strategy focus and discipline will allow us to continue to succeed into the future and capitalize on the opportunities ahead.
With that I will turn the call over to Laura.
Thanks, Troy, Please turn to the next slide.
The strength of our professionals is at the heart of our success.
Our leading position in numerous key end markets was reaffirmed last month. When we were again ranked by <unk> as the number one transportation and facilities design time, and we continue to hold top rankings in several key growth markets, including environment Green design and water.
Of note our leadership in the transportation sector positions us at the top of the market set to benefit from increased funding in fact, some of the most immediate and largest priorities within the I H E. A we're leveraging our number one position in the transportation sector be it our latest sheep and a highly technical and critical discipline like tunneling.
<unk> or our ability to embed ESG and digital solutions in transportation design and program management.
To this point, we are taking key steps to focus our time and resources on aligning our strategy and competitive positioning to capitalize.
We are investing in our ESG advisory practice to meet surging demand to reduce clients greenhouse gas emissions and improve social outcomes.
Infrastructure accounts for up to 50% of all emissions globally and more than 1500 companies have sit there on net zero commitment, creating a large need in the marketplace.
By positioning with our clients early in their planning with our advisory services. We are forging key partnership to help shape, our client plans and manage these programs through execution.
A great example of this is that work for network rail in the UK, we engaged through our advisory practice to develop and execute our strategic review and analysis and drafting of a plan to achieve net zero and sustainability objectives.
This initial Skype, we expanded multiple times always, though which demonstrates the importance of our advisory practice and creating meaningful and lasting relationships with key clients.
This is just one example of the growth opportunities in the U K rail sector.
Second we are constantly challenging ourselves to push the pace of innovation for instance, we recently developed and unveiled a proprietary I I J a specific digital tool as part of that digital E com offering.
This too was built organically by Eric that in response to urgent demand from clients.
This position they project well IH a funding.
Our team has leveraged our existing clients spend platform and built in geospatial machine learning and other AI capabilities to help clients navigate the complexities of the competitive grant parse it for I R. J a funding.
Client feedback and demand have been overwhelmingly positive.
We also recently rolled out a program management delivery system and tool kit, bringing together digital tools and technical capabilities to create a repeatable AE com by delivering World Class program management services.
This is a critical element to our growth ambitions and we'll provide both a delivery benefit to E. Com, while also reinforcing our value proposition to clients.
In addition, we recently entered into a partnership with Microsoft to leverage its leading cloud technology and further enhance our planning gauge offering.
Planning gauges now being promoted by Microsoft, creating another channel from which we can deliver our innovation to the marketplace.
Finally, we are prioritizing recruiting and career development initiatives to best position <unk> come to win.
Our head count increased in the second quarter, and we have an incredible platform with Korea can be built new skills can be learned and innovation can flourish.
And our advantage, we are investing in new Korea, and leadership development spend avenues of advancement for our professionals and we are also focused on increasing the diversity of our workforce.
Diversity is an asset, especially when addressing complex challenges on a global scale.
As a result, we are expanding focused campus recruiting efforts and implemented regional diversity targets to ensure we are building the strongest and most diverse workforce with all of these initiatives are well underway and producing results. We are confident that aegon will lead the way of long term funding costs coming to our <unk>.
History.
With that I will now turn the call over to Guy.
Thanks, Laura.
Please turn to the next slide.
Our second quarter performance reflects the benefit of our disciplined growth strategy the commitment of our highly talented professionals and the strengthening trends across our largest and most profitable market.
Despite an elevated level of global uncertainty, we have delivered five consecutive quarters of MSR growth continue to expand profitability and delivered another quarter of double digit adjusted EBITDA and EPS growth.
While inflation is a headwind to many industries the inherent attributes of our business model and contractual structures create a natural hedge against rising costs and allows us to maintain strong performance through varied environments.
These advantages have resulted in strong cash flow and we returned nearly 300 million to investors in the first half of the year.
In total we have repurchased nearly 15% of our shares outstanding since September 2020, and we are committed to deploying our consistently strong cash flow to accelerate shareholder value creation through ongoing stock repurchases and dividend payments.
Our backlog and strong winds underpinning our confidence in delivering on our financial commitments this year and on our 2024 financial goals. Please.
Please turn to the next slide.
Our performance in the Americas was highlighted by 4% MSR growth and the design business and a one six book to burn across the segment.
Contracted backlog increased by 24%, which supports our expectations for accelerating MSR growth.
We saw an acceleration of growth in March and with the passage of U S. Federal budget for 2022, we are confident in our growth expectations.
We continue to expect <unk> funding to accelerate into fiscal 2023, and beyond which will further benefit our industry leading franchises.
With respect to profitability margins expanded 50 basis points from the prior year to 17, 7%, which reflects growth in higher margin areas, including advisory and program management.
Please turn to the next slide.
We delivered another quarter of strong growth and profitability across the international business MSR increased by 6% led by growth in the U K and middle East.
We also had another incredibly strong quarters win with book to burn of one five and double digit backlog growth.
Our wins are concentrated in our largest and most profitable markets, reflecting our leadership in growing transportation water ESG and program management discipline.
Margin expanded to eight 3% up 100 basis points from the prior year.
This was the seventh consecutive quarter of sequential margin improvement we.
We remain committed to achieving a double digit margin in this business and are pleased with our progress against this go quarter after quarter.
Please turn to the next slide.
Turning to cash flow liquidity and capital allocation, we delivered strong cash performance in the first half of the year with operating cash flow of $193 million and free cash flow of $145 million.
This compares to a free cash outflow of $11 million in the comparable period last year.
This improved phasing is consistent with our focus on delivering more balanced cash flow throughout the year.
Our strong cash performance enabled us to accelerate our capital allocation strategy.
Through April we have repurchased more than $260 million of stock. This fiscal year and we have made two dividend payments under our recently established quarterly dividend program.
As a reminder, we remain committed to growing our dividend per share by a double digit percentage annually going forward.
Please turn to the next slide.
Turning to our financial outlook, we have reaffirmed all of our financial guidance metrics for fiscal 2022, and our long term financial targets.
For fiscal 2022, we continue to expect to deliver adjusted EBITDA in the range of 880 million to 920 million.
At the midpoint this would reflect 8% growth and are supported by our expectations to deliver approximately 6% organic MSR growth and at least 14, 1% segment adjusted operating margin.
We also continue to expect adjusted EPS for the year of between $3 30 to $3 50, or 21% growth at the midpoint.
Per share value creation enabled by accelerating MSR growth expansion of our industry leading margins.
Free cash flow conversion and disciplined capital allocations remain our top priority.
As a reminder, our adjusted EPS guidance only incorporates the benefits of already completed share repurchases, but we expect to continue to buy stock as part of our capital allocation program.
We also reconfirmed our free cash flow guidance for the year of between 450 million and 650 million.
As we look ahead towards our fiscal 2024 target our strong progress to date and strengthening end markets support our expectation for an at least 19% adjusted EPS CAGR from fiscal 2021 to 2024.
Built on the expectations for accelerating MSR growth segment adjusted operating margin of at least 15% in 2024 and continued returns focused capital allocation supporting a greater than 15% ROIC.
With that operator, we're ready for questions.
Thank you if you would like to ask a question. Please press the star followed by number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by number two when preparing to ask a question. Please show your phone is on mute it locally.
And our first question comes from the line of Michael Feniger from Bank of America place My co. Your line is now open.
Hey, Yeah. Thanks, guys. Thanks for taking my.
My call just.
Just to what you were referring to on the free cash. So I'm curious you reaffirmed your full year 2022 outlook given your 2024 target. So it sounds like you have that visibility into growth in <unk>.
Q1, you repurchased $200 million worth of shares I think this quarter was on the $80 million. So just sort of balancing out the dividend strategy. Some of these internal investments.
And in your outlook is is repurchasing still really part of that capital allocation priority list.
Yeah, Michael Detroit, Thanks for the question.
The simple answer to your question is yes.
But remember what we said at the beginning of the year is that we were going to match our repurchases with cash flow during the period.
And so we feel like we're a little bit ahead of where we were we intended on D. Because we had stronger cash flow in the beginning of the year.
It is clearly our intent to continue to return capital to shareholders through repurchase and through our quarterly dividend. So nothing has changed.
Fair enough.
When you think about Alto 'twenty 'twenty four Troy I mean, how does your portfolio kind of start to shift by bad I mean do you see some of your more cyclical areas. If you even if you call that the construction management will that be slowing down by that by then and the contributions from areas like environmental and water B.
B a higher portion of your of your portfolio could the public customer would be a bigger part of the pie there.
Anything you kind of see around those verticals as we kind of move through the second half of 2022, but really into 2023 and 2024.
Okay.
Yeah.
First let me just start at a high level and we think that our future is actually dominated by some some pretty strong macroeconomic trends or cycles.
First we mentioned that is there is clearly a long term investment in infrastructure that's being made.
So.
And we're exposed to it in all of our businesses.
And whether that's construction management or water or environment, certainly transportation. So we're heavily exposed to what we see is a really good long term trend.
And in addition to that there are some other long term mega trends one is just the investments in ESG.
For us what that means is the world is valuing infra.
Infrastructure.
And it's doing a little bit differently than it has in the past and so you have to be prepared.
To adjust the output or the app the obligations of infrastructure to focus on some environmental and social objectives and then the third thing is clearly there is a repositioning of investment in infrastructure around the world as a result of what we've seen in supply chain.
So it's those three trends that give us good long term visibility.
And again everything is sort of lining up the right. If you look just simply in the United States, while we've had the J a.
We actually didn't have a budget that authorized plans and now there's a budget in place its authorized in the funds and it will support very strong state and local budget.
So again when I look across the business. So it's a long winded way of saying I think all of the businesses that we're in today and around the world are exposed to some really good long term trends and we see ourselves positioned to take advantage of it as we continue to progress forward.
I'm going to add one more thing to that too is obviously there is a discussion of a possible slowdown or recession.
But again, it's not something we certainly ever hoped for but you always have to be prepared for it and I think we've shown in our business. The last years that we're agile and we have the ability to attract but also with some really good inherent attributes in our business and that gets to these large investment megatrends.
High quality clients that we have the significant long term backlog that we have and it's also important that we have an asset light business.
We don't have to continue to invest heavily to fund growth. Unlike.
Some other industries.
Michael I'll, just sort of a long answer to your question I think is helpful.
Yeah, No that was try I guess, just a follow up just to round out the discussion your construction management part of your portfolio I think there is a perception that that is.
Viewed as more cyclical than maybe some of the other areas I'm. Just curious if you could kind of comment a little bit more specifically about that area. How big of it is it for your operating profit and how cyclical do you see that in the face of a potential slowdown thanks, Steve.
Sure So first of all.
Construction management business represented about maybe say, 9% to 10% of our of our overall business.
But even even today with.
Again commodity inflation and wage inflation.
We're seeing that business grow its backlog and we're seeing the pipeline continued to expand.
And I think that gets to the fact that the portfolio and that business is diversifying.
So we're having great success in aviation, which again there is a long term trend for an investment in aviation infrastructure.
We're seeing.
Significant wins and opportunities in convention centers or large meeting places.
That that is a result of.
Coming out of Covid, there is a demand for places to be to be together in large cities and there seems to be a lot of competition to invest in that.
We're still seeing strength in commercial and residential real estate, but to be fair. If you head into a recession that is one place that you would see a slowdown and then we're having success in sports in that business and those are really the three things that drive the success of that business.
But again at the moment, you would think that we might see a slowdown because of inflation, but we're not and thats evidenced in our growing backlog and our growing pipeline.
Thank you. Our next question comes from the line.
Our next question comes from the line of Sean <unk> from Keybanc. Please show your line is now open.
Yeah.
Hi, This is Alex on for Sean This morning, Thanks for taking our questions.
Of course.
So first just taking a look at the impacts segment level margin guide it implies that the year over year margin expansion trends kind of flattened out in the second half of the year compared to what we've seen over the past two years.
I just wanted to get your thoughts on why this would make sense, if it's seasonality or tough comps.
Or if there's just general conservatism baked into that given the economic uncertainty this year.
Yes, im going to let <unk> take that question Hey, Alex Thanks for the question.
So.
One thing I would say is you're right. Our first half margins have been very strong and consistent with plan. In fact, if you look at our international business, It's a little bit ahead of plan.
It gives us so much confidence going into the second half, where we typically see a little bit of seasonality, but where we sit today, we could not be happier, where our margins are not because we lead our industry.
In that category, but if you look at what's happened in the first half comparing to some of our peers.
Where they have seen margin contract contraction our teams our professionals continue to deliver year after year quarter after quarter of margin growth consistent in ahead of expectations and this is why we're making significant investments in the business and.
And the various opportunities we have 'twenty two is one of the biggest investment years, we've had an E com over long period of time, so irregardless of what the macroeconomic headwind, maybe let it be inflation or another variant or geopolitical issues logistical issues as Troy articulated earlier, we continue to deliver on our margin targets and Thats why not.
Only a very very confident in our 2022 target of 14, 1%, plus but 2024 targets of 15% plus and our long term addition, ambition of 17% that we feel very confident as time passes by it because of how our teams are delivering and leading the industry.
Okay. That's very helpful and then secondly.
Does the momentum we've seen in the backlog reflect any tailwind from the <unk> II yet.
If not do you have any updated thoughts on when you think incremental funding will start to be visible in the bookings.
Sure.
The answer is we are seeing some impact but it is not material at this point.
What we are seeing is a lot of work going on with their clients.
To position for funding and that really means it's not just.
Working with federal clients that working with state and local clients as they work through that so.
At a high level, what we would expect is a lot of activity with our clients positioning for that funding followed by a very strong award season in the second half of this year and heading into 'twenty three and then we would expect to see the impact of those awards impact our business in 'twenty three and beyond.
And for a long period of time.
Thank you.
Thank you. Thank you. Our next question comes from the line of and the Wittmann from Baird. Please your line is now open.
Thank you and good morning.
I had a question on the comments about absenteeism impacted the quarter Troy could you or either one of you could could you just talk about how much of an impact that was and.
Against expectations for accelerating growth through the year this quarter and the first half of the year, obviously, not your seasonally strongest quarter, but but not seeing a lot of inflection yet. So maybe if you could decompose a little bit about what the differences between the relative growth rates in construction management versus the underlying Americas design business would be helpful.
And our understanding and assessing the net service revenue growth in the quarter.
Yes, absolutely Andy two parts of the question I'll take your first part as to what was the impact of the omicron variant and Andy I'd like to start by saying.
Consistent with the question Alex Irregardless of the macroeconomic headwinds that comes through one thing we're very proud of our teams our nimble irregardless of what it is to continue to deliver to our targets and not using anything as an excuse and.
A lot of it is by design right. We have an enterprise today that takes advantage of our scale. So if there is labor pressures are various pressures in a particular region, we're going to use our ECC.
To drive growth and we're going to utilize our skills in in program management and advisory services to continue to deliver on the growth expectations, but if you were to just isolate omicron, which again, where we're not using back.
Excuse we've beaten on every single metric it had approximately I would say 100 basis points of impact in the current quarter.
And second part of your question you know the real MSR growth quarter over quarter. If you look at our Americas, Our design business, our designer business delivered 5% compared to 4%.
Last quarter.
Our construction management business had negative growth it was minus.
Three 4% in the quarter, which was expected if you would recall specifically in fact in the second quarter of last year. There was a lot of pent up demand for Covid related work.
A lot of people are coming back to work so that came through in the second quarter of last year going forward, we expect construction management business to be positive.
On back of the significant backlog wins, we've had and continued pipeline expansion.
Great. Thank you very much.
Thanks, Andrew.
Thank you. Our next question comes from the line of Saba Hot Khan from RBC capital markets. Please have a heart. Your line is now open.
Great. Thanks, and good morning, just I guess a question on the international segment, and particularly the Europe side and on the U S. The IAG is expected to be a lift to infrastructure spend over the next few years, but I guess, how are you thinking about the.
The European Green deal or that the UK leveling up agenda that you talked about is that over the through 2024 plan is that expected to be a material lift versus run rate spend or is that just replacing maybe some of the old spend or are you baking that into your three year outlook.
Yeah, So it's Troy.
Look I think we have I would describe it is we have that baked into our long term outlook.
We have seen a significant investment in Europe and outside of the United States and infrastructure for long period of time.
And these again these are just the plans in place like leveling up.
That will continue to provide investment in transportation infrastructure in particular for rail where were very strong. So I wouldn't call. This out as being something incremental but we think about this is these are the long term programs that provide us great long term visibility and the opportunity to grow the business.
<unk>.
Okay, Great and then I guess just within that I got the.
<unk> J outlook, and I think you're indicating that probably more of that will start to come through in 2023.
I guess can you maybe talk about where the discussions are right now is it will hurt some of the money that's not been allocated but its been now starting to be discussed can you talk about how you were talking to invest or your clients about it right now what stage of planning, they're at and in which areas do you think the first kind of leg of spending probably come through even if it is.
In 2023 kind of which end markets or you're probably expecting to see the initial benefits.
Sure, so I'm going to I'm going to answer that in reverse order.
First of all we really see the opportunity to cross across all of our all of our end markets here in the United States or all of our business lines in the U S. Clearly everyone is talking about the money that's coming into transportation.
There is also a significant money.
Being invested that we'll see in our water business and then as a result of those projects. They also include the capabilities that are in our BNP business.
And then a part of all of that whether it's the permitting part of the process or its money that's in.
The IHA, a that's going to go to remediation or carry in the environment.
There's a huge opportunity for that and I already made mention of our RP fast technology, we think that.
With the funding in some long term regulatory changes that we expect in the U S. From the EPA that that also provides a significant long term benefit to the business.
So again, it's it's.
Very broad based for us our participation in it.
But in terms of their client dialogue.
There are a lot of clients that have built their long term plans and ambitions about how they are going to invest in infrastructure and those conversations have been going on for a long time.
Right now the conversations are working to fill in the funding gap the expectation of part of that money comes through with the federal government and through these and through this budget and so that dialogue is going on.
To provide that additional or incremental funding those budgets can be rounded out and you begin to projects, but also theres a lot of new money, that's coming to the market.
Where are you again.
These are new programs and new processes, and so we're spending a lot of time actually having conversations with our customers about how they access that money and that was really one of the important things. We did during the quarter, we actually built a tool to make ourselves a little bit more user friendly and expedite that process with clients. When we talked about we talked about our <unk> did in their <unk>.
<unk> prepared remarks.
And so that's an important tool that allows those conversations to pick up momentum and along with our professionals allows our clients to sort of how they quickly access that money to accelerate the programs but.
Again as I said, we don't see that having a significant impact on our business until we get to 2023 in terms of generating revenue.
Okay, if I could just squeeze in one more just quickly on the just the international segment.
I guess FX is being talked about a bit of a headwind can you maybe talk about how that affected.
The quarter and then just maybe how youre thinking about for the rest of the year, obviously, you reiterated guidance, but just thinking how you're taking into account the FX headwind.
Yes, I'll, let <unk> take that one pace Ava thanks for that question.
It is built into our guidance that we have reconfirmed so any pause little positives or negatives as I've said before we're not going to make any exceptions for it our focus is to deliver on the results and commitments that we have made which we're doing for the first half and have full congress confidence to do in the second half of the year.
Yes.
Thank you.
Thank you. Our next question comes from the line of Andy Kaplowitz from Citigroup. Please on the your line is now open.
Good morning, everyone.
Good morning, everybody.
You've mentioned are embedded inflation protection you have in your contracts, maybe if you could give us a little more color around that and getting all the demand. It seems like youre seeing how can or are you adjusting your pricing of your contracts to adjust for inflation.
Sure I'm going to.
Yes.
I'm going to answer that in two parts I guess first of all in <unk>.
<unk> of our.
In terms of our business, we have mechanisms that are already embedded in our clients, which give us the ability to pass along the cost for them and that represents a significant portion of our of our contracts.
And the second thing is is that we have.
We do have fixed price work and sometimes it adds escalations in it but if they're not significant enough to reflect that.
They do sometimes have a short turnover so as they turn over we just adjust the pricing and so the market accept those adjustments in additional labor costs.
But they're really the proof here is in the putting the fact is is that it's not affecting our business because you see our margins continuing to improve and typically if we couldnt pass inflation costs along to our customers given that labor is the largest component of the cost in our business. There would be proof that in fact that we're not able to do that but because our margins are increasing and at the same.
Time.
We're investing to grow the business to those margins.
We're able to prove it up but in fact that is true, but the second answer the question is.
Our customers also have the experience of inflation in their cost.
At the moment, we're not seeing is we're not seeing that influence either in government or in a private customer base their investment decisions and part of that gets to the fact that even though there has been inflation the revenue side of the equation for them when they look at the long term has actually improved beyond the additional costs now I don't know if thats going to hold true for long.
We're at a time, but today that holds true and Thats why we.
You will see our pipeline growing even in this highly inflationary environment.
So can I ask a quick follow up to that just in terms of Q2. If you look at the Americas margins were flattish sequentially did you up your investment costs or is it costing more to hire new people or train new people. When you look at the Americas business.
Yeah No. Good question, Andy if you recall when we put the plan for the beginning of this year. Our margins included significant investment in practically every single business of ours and our people and as you see our utilization is very consistent with our plan.
And where we're marching along exactly where we thought we were in Americas.
Okay. Thanks for that Glenn and then Troy I know Youre sticking with your guidance of 6% sorry go for the year, but what would hold your gross back from starting to rise significantly toward your contracted backlog royalty I think in Americas, you said, 24% up usually funding needs to be in place whether it's in place.
Is it because this concept of backlog mostly used for twenty-three you guys should you can now start to really see the uptake in your MSR revenue.
Yes.
Well I think we've already seen the uptick in our MSR revenue.
Again sort of slowly building for the last the last five quarters, but again, you don't ever want to leave anyone the impression all of a sudden we're going to be growing at 24% along in line with our contracted backlog. The fact of the matter is is when you grow your backlog significantly like that it's usually large chunky programs that can have a longer life. So what this means is we believe we're still.
We're going to grow around that same rate.
But what we do is we believe that this gives us much more visibility into the future uncertainty too.
To achieving that outcome and with again as we look longer term with the additional funding coming into the market as a result of the.
The budget authorizations around the J a.
We see that as we look forward there should be some more opportunities to grow but as we said in the past there are limiting factors limiting factors capacity for us in our industry and that's why we've been investing in our people. We added net head count during the quarter were investing in our capabilities centers to create capacity for the future and.
Again, we're also focusing on making digital investments to think to change the way that we can deliver things to create capacity. So while we're investing deliberately and winning in our winning we're also deliberately investing to increase the capacity of the business for the future.
I appreciate all the color.
Thanks Dennis.
Thank you. Our next question comes from the line of Michael Dudas from vertical research. Please Mike Your line is now open.
Good morning, gentlemen, Laura.
Good morning, good morning.
Troy you guys generate a pretty healthy book to Bill book to burn ratios of this quarter.
Maybe you can touch a little bit about on like where there are certain areas certain end markets international domestic.
Impacted that and how is your program management business aiding that trend and certainly I think going forward on a mixed basis with with margin upward margin pressure because of the mix of your business improving on such good orders just come in.
Yes.
Mike.
We're seeing success across the business.
Success across international markets, and we're also seeing it.
Here domestically in the U S but.
We're always saying this is a trend.
We had again, we said $1 six times this quarter book to burn globally. It was about the same internationally as it was in the U S. A little higher in the U S. But if you recall last quarter, our book to burn in our Americas business was one four times.
And so we're again, we're just we're seen this be I would characterize it as a trend and it is across the entire business and I think fairly youre right to ask the question and point out that program management is an important part of that.
Our program management business in the first half of this year has had very strong double digit growth.
We're winning these big projects that we think are important to us very high win rate and what we've defined as being important to win.
We are seeing.
Again backlog growth higher than the average in our program management business as well. So it is a significant attributed to the business.
Across the world.
And my follow up is maybe for <unk>.
I think in your prepared remarks, you talk.
You talked about investing in the business and still generating very very good margins and margin outlook did.
Did you indicate that maybe this as you put out this plan through 'twenty four was this Steve.
I won't say Pete.
<unk> share of this type of investment is it going to be at the similar levels as we look forward or because the markets are changing opportunities change.
That type of investment will continue into 'twenty three.
Yes.
Yeah.
We will always be focused on investing in the business and keeping our eye to the future and that's because we have a lot of confidence in what we're delivering.
And the commitments that we have made today for fiscal year 'twenty, two including our 2024 plan and that's where you've heard us say before we're not going to be penny wise and pound foolish, we're not just satisfied with delivering $14. One ended this year, we're not just satisfied delivering 15% plus by 2024, our focus is to transfer.
From this industry, we're going to be delivering 17 plus margins.
In the long terms and we're putting those building blocks together by investing in the business and the <unk>.
Enterprise and most importantly in our people to do that.
Great. Okay. Thank you. Thanks, so much.
Okay. Thanks, Mike.
Thank you. Our next question comes from the line of Jamie Cook from Credit Suisse. Please Jamie Your line is now open.
Hey, good morning, a nice quarter I guess, just one follow up question given its late.
So your earnings in the first half of the year would imply we're trending to the high end of the range and you Havent narrowed your guidance just any color around that.
Now with only two quarters left.
Hey, Jamie this is <unk> I'll take that question.
Thank you.
For the comments.
<unk> continues to deliver in a pretty challenging environment with all the macroeconomic headwinds we're talking about one would argue today.
Martin, maybe sometimes more than people than it ever has been but irregardless.
Our teams are putting together a track record our professionals are putting forth the effort to deliver quarter. After quarter. So that gives us a lot of confidence given what we've delivered six months to date and I'll remind you consistent with prior year, we're going to continue to be prudently conservative given the environment, we're operating in.
Thank you.
Thank you Jimmy.
Thank you. Our next question comes from the line of Steven Fisher from UBS. Please ask Steven Your line is now open.
Great. Thanks, Good morning, I, just you were talking to Andy capital, it's about the growth rate of of total MSR.
For the rest of the year curious if you could give a little bit more comment on the design piece of that.
An acceleration in the quarter.
It sounds like it may have even accelerated a little bit more as the quarter went on so I guess I'm curious.
With your overall.
MSR looking to be about steady I think you said in the second half, but I guess your construction management should.
Should be turning from negative to positive what does that imply about the design team. So you can just give a little more color on the design MSR for the rest of the year.
Sure Steve.
First of all for the balance of the year, we still hold the expectation of having an in store growth of 6% for the business.
And.
It's difficult for us to differentiate that because we really view the whole business as a professional services business, but nevertheless that implies for our design business that we can continue to see accelerating growth through the year.
Our growth in the second quarter for the design business was a little bit better than the first quarter.
And that has been a continuing trend for the last five quarters so that.
Without getting into all bunch of detail about what happened intra quarter.
<unk>.
There were some things that impacted growth in the quarter, but.
I look at it as having a successful growth.
<unk> successfully grown the design business in the quarter, even in the absence of some things that are some headwinds that happened during the quarter like on crops.
Okay Fair enough and then maybe can you just give us an update on some of the progress of your core margin initiatives.
And then some real estate.
Alignments, there's been your centers of excellence and designs in Europe .
Back office processing, what are some of the digital initiatives can you talk about what stands out in the first half.
That you accomplished and what we can expect in the second half please.
Sure I'll, let I'll, let Garry take that question sure.
Specific to the to the various initiatives we have underway as you just mentioned real estate is a continual process through the year, it's consistent with our expectations, we're executing to it.
We expect to complete whatever we have projected in the second half of the year now just to put it into context, we had approximately $30 million of restructuring expense related to various initiatives that have double expense real estate being one of them total we have incurred $7 million year to date and it will accelerate into second.
Half of the year in Q3 and Q4. This also includes us continuing to to take advantage of what we call our scale scale for our benefit. This is our global capability centers, So as Troy and Laura have discussed the market ramps up the demand for our services ramp up we're able to take advantage of.
Now with these global capability center irregardless of where the demand may be coming from.
To position, our labor force our scale to deliberate and lastly, also looking at our support functions.
We continue to look for the most efficient way to deliver the services to our professionals through our support functions and that includes taking some repeatable tasks that we can put into our captive centers.
And deliver them not only efficiently, but more effectively than we have so all of those things continue to trend very positively and losses are worked our flexible work arrangements.
That given the challenges that we face is one of the key reasons why you see our growth continuing to accelerate and our design business.
We expect that to provide benefit to us going forward as well.
So thank you.
Thanks, Dave.
Thank you. Our next question comes from the line of Adam <unk> from some some stay base. Please have your line is now open.
Hey, good morning, guys.
First I wanted to ask about the <unk>.
I J a what's your current thinking on.
How much incremental funding could come from that.
Well again I would think about it this way over the next five years.
You can kind of again its uneven because it happens in different places come through throughout our business, but through our client base sort of thinking about as an increase is about 10% in quarter funding year over year over year for our customer base, that's probably the way to think about it with a rule of thumb.
So kind of a compounding 10%.
Yeah, I mean, our product again, yes, I mean, there are obviously other factors.
Is that right like state and local government spending expanding budgets, but again, our state and local governments right now they are have surpluses and so there is possibly an opportunity for that even to expand but it's hard to again hard for me to say if you look out five years, that's what's going to happen. What we can tell you is with the IHA approximately it's think about.
It is 10% in terms of expanding funding for our customers.
Great and then.
Just real quick on E Comm capital, what's what's the high level thought on that as a capital allocation priority going forward.
Yeah again, we still have a business.
Certainly have some great people with some great projects and has contributed to our success, but the most important element of that is we are using third party capital to deploy in those projects not our own capital, but it is it sort of.
It's part of the part of the fabric of our business and many times the <unk>.
<unk> and the discussions that we have with clients.
Okay. Thanks, guys.
Thank you. Thank you thank.
We currently have no further questions I will hand over back to Ross for any final remarks.
Great. Thank you and thank you operator.
I just want to thank our teams for their contributions over this past quarter.
It's the team's effort and diligence has delivered a strong results for the quarter and has positioned us well for the future. So thank you and thank you everyone for joining the call today.
This concludes today's call. Thank you so much for joining you may now disconnect your lines.
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