Q4 2022 AECOM Earnings Call
Good morning, and welcome to the E Com fourth quarter 2022 conference call I would like to inform all participants. This call is being recorded at the request of E com.
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Now, let's turn to collect to will <unk> senior Vice President Finance Treasury Investor Relations.
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 the various risks and uncertainties, including the.
Risks described in our periodic reports filed with the SEC.
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 materials, which are posted to our website.
Any references to segment margin or segment adjusted operating margins more flexible performance for the Americas and international segments.
When discussing revenue and revenue growth, we will refer to net service revenue or MSR, which is defined as revenue excluding pass through revenue.
Sorry in backlog growth rates are presented on a constant currency basis, unless otherwise noted for year over year constant currency growth for 2023 guidance foreign exchange rates are based on the underlying rate used when we set our 2024 targets in late 2021.
Turn on invested capital as measured on the continuing operations of the business and excludes any retained assets or liabilities previously with both businesses.
Today's remarks will focus on continuing operations and exclude the impacts related to our exit from Russia on today's call Troy Rudd, Our Chief Executive Officer will review, our key accomplishments our strategy and our outlook for the business.
Laura Polonia, our president will discuss key operational successes in priority and garner support 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 try right.
Thank you will and thank you all for joining us today.
Fiscal 2022 was a year of many accomplishments and successes.
Want to begin by thanking our employees for their unwavering dedication to their clients and to our purpose of delivering a better world.
Our teams truly differentiate us in the market and are key to our widening competitive advantage.
Fully capitalize on this advantage, we are continuing to invest in the professional development and personal well being of our teams. So let me give you a few examples.
First we recently made a substantial investment employee health care benefits in the United States beginning in 2023 employees premiums are being reduced by as much as 80%, which is especially beneficial against the backdrop of continued rising health care costs and inflation we.
We expect our health care benefits to lead both our industry and fortune 500 companies.
Second we are investing to expand our technical practice networks, which bring together the best and brightest minds to share ideas and experiences today tens of thousands of our professionals are connecting with colleagues around the world, which is furthering our commitment to enhanced collaboration.
Finally, we're doubling down on professional career development, we have multiple leadership programs underway to expand opportunities for our employees. This includes a partnership with the Wharton School of the University of Pennsylvania or people are benefiting individually from these programs and the opportunity to expand their global collaborative relationships.
Please turn to the next slide.
Turning to our fiscal 2022 results.
We extended our track record of delivering on all of our financial targets for the year.
Our success in the market has transformed that trajectory and expanded the long term earnings power of our business.
Our fourth quarter results were highlighted by 9% organic MSR growth in the design business, which is the highest quarterly growth rate in more than a decade.
This performance reflects our continued high win rate.
Record design backlog and healthy end market conditions.
Notably this performance does not include a material benefit from IHA funding, which has materialized at a slower than anticipated pace.
Turning to profitability the full year segment adjusted operating margin increased by 40 basis points to a new high exceeded guidance and included accelerated business development investments in the fourth quarter. We also achieved our earnings guidance, while overcoming a significant currency headwind, particularly in the fourth quarter.
For these impacts we would have exceeded our ranges for both adjusted EPS and EBITDA.
Importantly backlog in the design business, which accounts for approximately 90% of the MSR and profitability.
Increased by 8%, reflecting an all time high win rate, while our pipeline of opportunities is also at a record level.
We are winning what matters to transform the earnings power of our business.
Please turn to the next slide.
Our successes are the direct result of the deliberate actions we have taken over the past two years to deliver on our thing connect globally strategy and capitalize on our strengths. These actions have included collaborating globally like never before to capture the full power of our industry, leading technical capabilities.
Expanding our addressable market through a program management and advisory services to complement our technical expertise.
Investing in digital AE com to enhance our value proposition for clients.
And finally prioritizing our resources to the highest return and growth opportunities.
Today. These actions are bearing fruit in the form of a record win rate accelerating growth industry, leading margins and increase return on capital.
I should note that our momentum has continued in all of these fronts into fiscal 2023.
We had notable design wins in the first quarter of fiscal 2023 that further underpin the confidence we have in our growth outlook.
As we look ahead three secular growth drivers are accelerating across our markets.
The first secular growth driver is the global infrastructure investment Renaissance, which is driving synchronized funding growth across a number of our largest markets.
In the U S. Multiple bills have been signed into law to fund infrastructure investment, creating many years of funding visibility.
This includes the IHA, where as I noted funding has not materialized as quickly as expected. However, this funding is committed and we expect these short term impacts to resolve and create strong multiyear tailwind.
Internationally, the Australian and Canadian provincial governments are committed to their sizable infrastructure investments in our backlog growth and win rates. In these markets remained exceptionally strong in fact in both markets. We have secured large wins in the last few months to further solidify our confidence in growth for the next several years.
The second secular growth drivers demand for sustainable resilient infrastructure and investments in energy transition the need for this investment is especially apparent in the aftermath of the Hurricanes and Fiona in fact, we recently aided the rebuilding of the Senate Bill Causeway that was severely damaged by Hurricane Maria.
Were also recently selected by San Diego gas and electric for a program management contract to move a substantial share of its grid infrastructure underground to protect the communities against wildfire, which is a growing demand driver for which we are well positioned to deliver <unk>.
Finally, our clients are accelerating investments to adapt assets and supply chain to a post COVID-19 new normal.
The U S. For instance is prioritizing the re shoring of critical manufacturing capabilities.
Europe in many parts of the world are advancing energy transition priorities.
It bears repeating.
We're ranked at or near the top of every high value market that is critical to delivering these secular growth drivers.
We're number one in transportation design facilities design Green design, environmental engineering and hold several leadership positions in the water sector.
In addition, we have built a world class program management business, which is a distinguishing competitive advantage that we did not have at scale in prior cycles.
Capability has resulted in a step change in how we engage with clients and the scope of the opportunities on each project and has resulted in some of our largest wins over the past two years.
For example, we just announced our appointment as the program manager for a California high speed rail.
Please turn to the next slide.
We've initiated fiscal 2023 guidance for adjusted EBITDA of between $935 million and $975 million and adjusted EPS guidance of between $3 55.
And $3 75.
This guidance is based on accelerating organic MSR growth of 8%, which is underpinned by our strong backlog position and a 20% increase in bids and proposals submitted in our design business.
This expectation is also balanced against near term uncertainties and a few markets.
Most notably in the U K, we're funding on major highway programs is uncertain due to the leadership transition and the potential austerity measures.
In addition, we expect to deliver 40 basis points of adjusted operating margin expansion to 14, 6%, a new high with profitable growth, enabling both margin expansion and a continued high level of investment in our teams and to capitalize on a record pipeline.
Finally, we expect another year of strong cash flow and we are reiterating our returns driven capital allocation policy.
Including our intent to return substantially all available cash flow to shareholders through repurchases and dividends.
I should note the rising U S dollar.
Which is not within our control is having a translational impact on our international earnings.
In fact, if not for impacts of foreign exchange, we would've expected to deliver adjusted EBITDA in excess of $1 billion.
In 2023 at the midpoint.
This would have been ahead of the expectation built into our long term model that supports our 2024 targets as a result of this underlying outperformance we are affirming our 2024 adjusted EPS target of at least $4 75.
We're also increasing our 2020 for return on invested capital target from 15% to 17% to reflect our strong performance to date and continued discipline on capital allocation.
Taken together the strength of our outlook speaks to the durability of our strategy and platform and the benefits of our focus on organic growth and high returns I am proud of how well, we are collaborating and going to market.
Through our actions, we have created enduring competitive advantages with unrivaled technical expertise and a culture that is fully committed to our purpose of delivering a better world.
With that I'll turn the call over to Laura.
Thanks Troy.
Please turn to the next slide.
Our total placements over the past year was transformational and represented the realization of that strategy. We are a purpose driven company and we continue to be inspired by the positive impact that <unk> had for our clients and in our communities.
Our competitive advantages and culture of global collaboration are visible in the many momentum changing wind that are changing the trajectory of the business I will take you through a few examples.
Beginning in the transportation market. We were recently selected for a nine figure contract with California High speed rail this.
This win reflects so much of what makes collaboration play powerful.
We called upon our World Class Rail program management digital and local market expertise to create an innovative approach.
Our offering was substantially and hit a very formidable competition.
Our transportation business not only late in the U S, but globally as well.
The ingenuity of our team was on full display recent win in Australia. We were selected for a substantial tunneling project that will transform trend adoption for the community.
Key to our selection was the close relationships, we have built with key partners and our approach to reducing technical risk and construction cost through our design.
We were also recently selected for the known things link in Melbourne, Australia won several notable projects in Canada, including the 16 kilometer, Ontario lines out the metro links and have keep seeds in the U K with decisions expected this year.
It was a great year for insurance retention business.
Turning to our industry, leading environment isn't it we had several marquee wins journey alright.
For instance, we were.
We're awarded the multiyear netback Atlantic contract by the U S Navy I'm thinking a very formidable incumbent and we.
Also holds the contract for another key large region for these clients.
On a combined basis, we now have the greatest value exposure to this client environmental programs.
In addition, we are gaining critical share with FEMA as demonstrated by our selection for the risk in that program early this year.
This program represents the key flood risk assessment and disaster response program with this client.
Our success also extends to the private sector, where we are advising on two of the largest and most complex environmental remediation projects in the world, including the Ferro mine remediation program in Canada, which is the largest project of its kind in that country.
In water, we are increasingly responding to growing demand for clean and safe drinking water supply.
Jamie Lee with selected for the Padre Dam East County Advanced purification program.
This facility will recycle up to 95% of water throughput, which will fit the bottled water reuse.
This program is part of an expected nearly $10 billion.
Allocated in California line to address the growing need to ensure adequate <unk>.
<unk> <unk>.
Similarly in Canada, we were selected for the no show wastewater treatment plant a LEED certified facility that will save a quarter of a million residents in the Vancouver area.
These large complex facilities are a great representation of how we are helping clients and communities address the biggest challenges at that time.
These wins are changing our momentum and our digital E. Comm investments are expanding our advantages further.
A great example is in the water market way, we recently unveiled our pipe insights product, which uses proprietary algorithms to accelerate water system inspections and enhance defect detection.
Through this technology, we can provide actionable insights to our clients in one hour versus the several weeks or months it takes out competitively.
This is possible because of our deep technical understanding of our clients' critical infrastructure.
Apart.
Across all of the successes we are in great position to lead the development of transformational projects that will leave a lasting impact for future generations.
With a strong foundation in place and further progress on our strategic priority. We are confident that Aegon will continue to lead the industry with our expectation of delivering over the long term.
With that I will now turn the call over to Don.
Thanks, Laura.
Please turn to the next slide.
Our focus on sustained value creation through highly profitable organic growth and disciplined capital allocation is resulting in consistently strong performance.
In fiscal 2022, we encountered numerous unplanned market headwinds.
Even so the competitive advantage of our platform and dedication of our teams to delivering on our commitments produced another strong year of performance.
In the fourth quarter, we delivered our highest organic MSR growth and the designing business in nearly a decade, our margins for the year reached a new all time high and exceeded our guidance and strong cash flow and supported our shareholder value focused capital allocation policy.
Importantly, we are positioned for continued growth with record full year wins, and the designing business and our near record backlog position.
As Troy Lahr noted our success in the market is transforming the trajectory and long term earnings power of our business.
Please turn to the next slide.
MSR in Americas design business increased by 5% in the fourth quarter, which was the highest growth rate. This year and reflects the continued acceleration we saw throughout the year.
Our wins and pipeline were strong.
At a one two book to burn ratio in the design business in the fourth quarter, which resulted in 9% total backlog growth in the designing business to a record high and our contracted backlog also increased.
Our Americas business continues to lead the industry margins and delivered in the fourth quarter consistent with our expectations.
We strategically accelerated business development during the quarter to capitalize on unprecedented pipeline of opportunities, which contributed to double digit growth in our bids submitted and proposals. These.
These investments already started to pay dividends and early wins in fiscal 2023 as noted by Troy Lahr earlier.
Investing in the future, while leading our industry in margins is a perfect example of the competitive advantage, we have built within our platform.
Please turn to the next slide.
MSR growth in the international segment accelerated to 13% in the fourth quarter and included growth in all of our largest geographies.
Key to delivering this double digit growth as our high win rate in our core markets.
Backlog increased by 6% highlighted by strong growth in the UK, Australia and the Middle East contracted backlog also increased it remains near a record high which is a great leading indicator of growth.
Margins expanded two 9% in the quarter, a new high for the segment and 160 basis point increase from the prior year.
We have made tremendous progress on our target of double digit margins by executing our strategy and creating efficiencies within the organization.
We have exited and we will continue to exit lower returning markets. So we can prioritize our capital in time to our highest return opportunities.
Please turn to the next slide.
Turning to cash flow liquidity and capital allocation.
Our returns focused capital allocation policy is unchanged as such our first priority is investing in our teams our digital capabilities and to capitalize on the strong organic growth opportunities ahead, which provide an incremental return on capital of approximately 50%.
After these investments which are made through our margins, we are repurchasing our stock and paying dividends with substantially all available cash flow.
During the year, we returned nearly $500 million, including more than $420 million of share repurchases.
In total we have bought back two 6 million shares since September 2020, when we initiated our repurchases or 16% up our shares outstanding and have turned a high return.
We continue to believe investing in ourselves through organic growth or share repurchases provide for a superior EPS growth and returns when compared to other options.
This includes M&A, given today's disparity between value and price and market. The result of our capital allocation policies evidenced in our EPS growth, which has increased at double digit pace organically and our strong ROIC.
With respect to dividends it remains our intent to grow our per share dividend by double digit percentage annually for the foreseeable future.
Our ability to deploy capital is supported by strong cash flow.
For the year, our free cash flow of 586 million exceeded the midpoint up our guidance and we had a better phasing of cash flow throughout the year, which is a benefit to our return on capital.
Given the volatility in many sectors of the economy and across the globe. It is worth repeating that our business has inherent attributes that led to consistently strong cash flow through cycles.
These include a highly variable cost model strong backlog visibility are high quality and diverse client base and a highly agile culture focused on profitable growth and cash conversion.
In addition, our balance sheet is in a very strong position.
80% of our debt is fixed or capped over the next several years and we have no bond maturities until 2027.
We believe our balance sheet is a competitive advantage.
Please turn to the next slide.
Turning to our financial outlook.
We expect organic MSR growth to accelerate in fiscal 2023% to approximately 8%, reflecting momentum in our backlog and across our markets.
We expect adjusted EBITDA and adjusted EPS to both increase by 10% respectively at the midpoint on a constant currency basis.
The rapid rise of the U S. Dollar will have a translational impact on our reported results. We expect MSR growth to be negatively impacted by approximately 400 basis points, including a more than 500 basis point impact in the first two quarters of the year.
We expect to deliver 14, six adjusted operating margin for the full year, which represents a 40 basis point increase from fiscal 2022.
This would mark a new high and includes an approximately 10 to 20 basis point FX impact.
We are continuing to make growth investments to achieve our long term target.
We are also affirming our fiscal 2024 financial targets as Troy noted. This includes outperformance on underlying MSR growth and profitability, which are within our control and includes headwinds from FX, which are outside of our control. We are increasing our return on capital target from 15.
<unk> percent to 17%, which reflects strong profitability and the benefits of our return focused capital allocation policy.
Consistent with our approach our guidance does not include any future share repurchase activity.
With that operator, we are ready for questions.
As a reminder, if you'd like to ask a question today. Please press star followed by one of your telephone keypad now from the parents asked a question. Please ensure your Hudson's Philippe payment on mute locally.
Ask the question and start to to withdraw.
And our first question today comes from Michael Feniger from Bank of America. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my question the targeted investments you're making in America is that kind of weighed on the margin in the second half can we get margin expansion in 2023, and Americas next year, where are these investments and what kind of leads to that margin coming back up.
Pickup in growth. So utilization goes up is it a drop off in investments so love to understand the cadence as we think the Americas heading into next year.
Hey, Michael This is Carl ill take that question.
Our goal as a management team. If you just take a step back is to deliver on sustained long term value creation path to deliver that for us is to meet or beat every single target that we've put forward today, while at the same time, creating a competitive edge or expanding the competitive edge, we have created on our platform.
Tomorrow and in the future and margins a perfect example of this competitive edge that we have created this is where again in FY 'twenty two we beat our target for the enterprise, we have put forth while investing in the business more than we ever have and the investments specific to your question on business development opportunities.
And abundant pipeline that we saw in front of us in the second half of the year some of which we've already started to capitalize on as Lora and Troy commented in the opening remarks. It also includes our digital capability RPM and advisory services, which will expand the total addressable market.
<unk> available to us.
And we have no interest in just growing what we always will have interest on is growing with profitable growth profitable growth is always a focus of ours and this is where you step back in say two and a half three years ago. When a lot of people thought we put forth a very aggressive target of 15% to deliver in 2014 is no longer a quest.
Tomorrow, we will deliver 15% FY 'twenty three will be a continuation of that where we expect margin expansion as we put forth on the enterprise level, but also at both of the segments.
And we're putting forth the stepping stones to what we want to deliver in the future our mid to long term target of 17% and then just to be redundant to what I've said before is we're never going to be penny wise today and pound foolish tomorrow.
And Michael this is Troy as well I'll just make a couple of quick points here.
To be maybe a little bit more specific about this as <unk> said.
For us this is about balance we're trying to create again sustained growth in earnings and that's a balance between growth and investing in the future and this past quarter and frankly through this past year.
There are a couple of things that gave us that great opportunity a.
Few quarters ago, we talked about the increase in our pipeline and we said that was in our pursuits, which is where our clients are telling us about the things, we're bringing to market.
In this last quarter, we actually saw that moved through our funnel and.
There was a significant increase in the bids that we submitted and the proposals that we're investing today to bid on and that increased by almost 20%. This last quarter and so again, that's an important investment in the future any other investor would make it as something like program management.
We said, we would double the size of that business over a three year period, and we expect it to grow that business, 25%. This year, while that business grew over 30% this year and has us well on track to double it in that two year period, and that's a very specific investments that we're making to deliver today, but also build into the future.
So again I just think about it this way theres not one thing that we're going to be doing but we're focused on finding that balance which is continuing to invest in a business, while continuing to expand the margins of that business in the future.
Thank you and Troy just on balance I mean, when we think of that 'twenty 'twenty four targets you all laid out.
Since you laid those targets out what dynamics are.
Coming in better than expected what headwinds are coming in strong.
Stronger than expected it looks like FX would be one and just help us get comfortable with how you build off of that 2023, and the building blocks to kind of accelerate us to that EPS target in 2024, how should we kind of think about that thanks, everyone.
Okay, Yes, good question.
When we laid that pass out a few years ago, we did anticipate that things were going to change and they certainly have.
But there are a lot of things as you said theres a lot of lot of things have gone in our favor a lot of things that kind of have gone against us, but through all of that.
We've been increasing the earnings capacity of the business. So you mentioned foreign currency and that certainly is a headwind in <unk>.
It was a headwind in the second half of this last year and we predicted it will be a headwind into this next year.
And that's not really what our guidance is dependent upon.
The other thing that's happened in this past year is a lot of over the last two years is a lot of money is actually come into the market to support the long term future of infrastructure.
But through all of that we focused on delivering on increasing the earnings capacity of the business and frankly, when you take those factors out.
We have actually built the earnings capacity of business at a faster rate than we had anticipated and so that's given US again, I'd say, that's given us confidence in the longer term and achieving our targets.
I'll give it a passive regard to give you a little more detail.
Yes.
You said it best.
The targets, we put forth in FY 'twenty four it is a dynamic model there is not a singular path that we will take to achieve it.
And as you noted Michael the key metrics, let it be MSR margins or a steppingstone ROIC. We're ahead on every single one of <unk> compared to what we've built into that model almost two years ago.
When we unveiled it.
Everything that is in our control is ahead and things that are not in our control like FX.
A headwind where FX would be <unk> to 24 months from now your guess will be as good a mine, but at the same time just be cognizant. When we built that model. Another dynamic piece to it is utilization of our very strong balance sheet that we have created which we will continue to utilize for capital allocation.
Purposes.
The next question comes from Andy Kaplowitz from Citi. Please go ahead. Your line is open.
Good morning, everyone.
Good morning, good morning.
So.
Total backlog is up by your contracted backlog is down year over year and sequentially, particularly in the Americas can you give us a little more color into what's going on in your expectation for contracted backlog heading into 'twenty. Three have you seen any signs of slower wasn't designed it doesn't look like you have and should we generally see sequential and year over year growth in <unk>.
<unk> backlog from here.
Yes, Andy.
The answer is yes.
We'll see a significant increase in contracted backlog from where we sat at the end of the year and ill break the backlog down into two components our design business.
Which over the course of the year was up 8%.
The fastest growing part of that was in the Americas and as we mentioned in the call transportation and so we've seen.
Some slowness and conversion of that backlog and that just gets to the again the situation some of our clients, which frankly are overwhelmed with the amount of opportunities that are out in the marketplace that theyre managing so that will just convert over time and that has been a little bit slower to convert that we had.
<unk>.
With respect to our construction management business, you remember that business is a little larger and a little lumpy.
And so we have some awards that we received.
That had not converted by the end of the year, but I can say with a very high degree of certainty that they will be converted to <unk>.
Contracted backlog in the quarter and you will see our contracted backlog grows significantly.
Very helpful. Troy, maybe just following up on that just a little more color regarding the balance between your 8% designed backlog growth in the double digit pipeline that you mentioned versus sort of watching some markets like the U K.
When you're doing when you made this guide and you talk about 8% MSR growth how much visibility do you have into generating that revenue growth how dependent is it on IHA funding ramping in the U S and is the growth backend loaded at all I know you mentioned currency is front end loaded, but what about organic as you go throughout the year.
Okay, Andy that was a lot.
I'm going to I'm going to give you that.
To give you a little bit higher level, and then I'll, let Larry give some more detail on this you asked about a few markets.
First of all I would expect our back our <unk> to grow in the same way that it has over the past few years, which is it's a little a little lower in the first half of the year and we will grow in the second half of the year and again that gets to the that gets to the trajectory of the backlog, but that also gets to what I described is in our pipeline.
As move through our pipeline, we hear from our clients, what's going to come to market.
And then comes to market, we submit the bids and proposals, which we've been doing this last quarter and we will.
We will work through that in the first half of this year. There will then be the awards and it will head to contracted backlog and we will start to deliver it so that will contribute to this next year, but nevertheless, we go into the year with 8% growth in our Dcs backlog, which as we've always said is the best indicator of the future.
And so I will pass it over to Larry for a little bit more detail and particularly about the U K, yes. Thank you Troy and Andy with respect to U K business is that it's a key part of that business. It did grow 7% over the last year.
Despite the changes in Prime Minister and some of the other headwinds that we have navigated, let's not forget it.
We had a very deliberate strategy to either go to secure key long term decisions.
The U K frameworks, we have achieved that and that gives us confidence about the longer term and there is some very.
Key.
Perfect.
Decisions on but despite that we closed the year with a one one ratio.
After the UK, so we have a lot of confidence.
A long time.
I appreciate all the color.
Thanks, Andrew.
The next question comes from Andy Wittmann from Baird. Your line is open. Please go ahead.
Yeah, great. Thanks for taking my question.
I guess.
I guess when you guys set the original 2024 guidance is $4 30, then you raised 475 your stock was cheaper at the time and the free cash flow yield is probably in the high single digits and that was cheaper than two.
And so your long term targets were therefore benefiting much more substantially from the buybacks impact to EPS accretion than they can today with the stock being frankly, just more expensive as well as the debt being more expensive. So I was just wondering.
If that changes your approach at all towards.
The velocity of your.
Share repurchase plan or even your confidence in achieving the 470 524 guidance.
Yes, Andy.
So youre right to point out that as your stock price increases you should at least be thoughtful about how you are buying back stock.
But I'll start with the headline is we set that goal as you said, we started our $4 30 moved it to $4 75 based on our growing confidence in the business and we still maintain that confidence and that's why we've retained that target.
As we said, we still believe the right way to allocate capital is to allocate the majority of that first of all the extent organic growth and secondly.
To our shareholders through repurchases and dividends and we will remain true to that the other element of it is we don't have any intention of using debt markets to go out into borrow too.
But more over the long term in terms of our capital allocation strategy again, but I'll say, we'll always be opportunistic.
And then when we look forward, we said we would match our cash flow our buybacks with our cash flow and we intend on doing that although we will look for opportunities as we did this past year to accelerate those opportunities.
Okay that makes sense, yes, if you are funding the buyback totally out of free cash flow.
That and the arbitrage works a little better.
Okay. So I guess the other thing I just wanted to ask about here is trying to understand.
The organic growth.
Revenue guidance that you're that you're delivering here today.
Theres, obviously, some degree of inflation, that's causing wage rates and therefore, the multipliers or whatever you're using to build your clients to go up slightly too. So is there a is there a way you can help us just think about how much is it.
Kind of pass through pricing here versus actual volumes of man hours labor hours delivered something to get an idea of kind of price versus volume in these numbers I know, it's tricky in a business like yours, but I think it's an idea that I think would resonate and be helpful is to understand how the business is progressing.
Hey, Andy this is Scott.
In terms of your specific question is two hours versus.
Right.
We don't provide guidance or breakout on each of those specific metrics, but overall.
We are in a very strong position to manage our contracts which in general.
At a point in time, we are 40% of 2000 contracts going on average term is call it 5% to six months or less.
So these are not long for any contracts that allows us to price them appropriately.
And there is going to be some.
Deals that we're going to leverage for our benefit in terms of increasing our hours by utilizing capability centers across the globe.
To deliver the work.
Got it thanks.
The next question comes from Steven Fisher from UBS. Steven Your line is open. Please go ahead.
Hi, Thanks, good morning, or afternoon, nice to see the international margins closing in on double digits here.
How much of that is driven by mix versus operational efforts or anything else. I know you just mentioned in centers of excellence. So just curious kind of but you also have some of these bigger programs in say the middle East what are the drivers of the margins in international and what do you see the runway from here.
Yes, Stephen this girl I'll take that question.
International margins are clear example of us realizing the strategy we have put forth.
Focused on winning the big transitional jobs that Laura pointed out too early while at the same time being very cognizant of running a very efficient and effective cost structure. So it's a combination of all of those all of those matters and in terms of the market opportunity and I'll turn it over to Laura to provide a bit more clarity on it.
Sure savings away continuing to see a very strong.
Restructure outlook a good example of that in the China market way, we secured some key wins that we've announced at the end of fiscal 'twenty. Two there are another couple of big transformational transportation ways that we'll be able to announce that we're not too distant future and then the other another great example of that work in the mid to late mid to late <unk>.
Notably Saudi Arabia.
83% in terms of MSR growth year on year.
The long long term outlook for aircraft program management capability and infrastructure generally is very strong.
Our strong outlook in this asset.
The realization of our strategy and how can connect globally.
Strategy.
Okay, and then I'm wondering if you could just give us a little bit more specificity or breakdown of bridging from 5% MSR growth in 'twenty to two 8% in 2003 and any sense of whats the Americas design growth you expect for 'twenty three what's the construction management international.
Any of those sort of bridge items to get that acceleration.
Yes, so Steve maybe think about it this way as we did have.
<unk> growth in the international business this past year.
And so to actually have that expand at a significantly faster rate would be difficult. So.
Thats, where we will have very good growth, but in terms of a significant improvement that's more difficult.
But turning to our Americas business, and particularly our Dcs business.
That's where we see there is a larger opportunity to grow that business in the future.
Can you quantify what the Americas design growth you expect for 'twenty. Three then no no we're not going to we're not going to refine that because when we look across the business you make dynamic decisions all through the year about the things that we're going to take advantage of so again I'll just describe it as a balance.
And we're not giving we're not giving up a projection of our prediction of what that would look like in each of the businesses.
Okay understood. Thank you.
Yes. Thanks.
The next question comes from Sean Eastman of Keybanc Capital markets. Please go ahead. Your line is open.
Hi team thanks for taking my questions.
So just could you help me out with that last discussion on.
On the revenue ramp.
So we're stepping up from 5% to 8% like you've called out there.
A lot of that ramp is being driven by Dcfs and you guys are also saying that there's it sounds like theres not much tailwind from CIO, Jay and this fiscal year. So.
I guess, what I'm driving at here is that it sounds like we're still going to have some gas in the tank in terms of the Americas design business.
As we go into next year as well with.
That big funding tailwind still not really driving the model is that fair.
I think so Sean I think that's a fair characterization, but.
When we did we are again, we said we saw an increase in what we thought was when our clients are telling us is coming to market. We've seen an increase in terms of what we're bidding and a lot of that is in the Americas and that is in the U S. So.
I think we're starting to see the impacts from IHA, a what I think we've been describing is it slower than we had been anticipating but it is nonetheless, nonetheless, we are starting to see that.
It's impossible to sort of break down and say well this percentage of that increase is related to IHA and this percentage isn't the fact is it's influencing all of our clients and creating positive momentum.
So I think the way that you actually described it is it is it is a tailwind for the business and something that we will capitalize and we see this as now entering into the market and we think we will expect to see that in our results in 'twenty three and beyond.
But again, if something doesn't come to market as fast as you had thought that means that it's probably going to stay there for longer than you had thought. So I think you should think about this as a long long long long term tailwind for our U S business.
Okay got it that makes sense.
You guys highlighted.
Re shoring of critical manufacturing is kind of a core mega trend.
It would be helpful just to get a little more color on.
How do you think about <unk> exposure around that trend in particular and what types of things are kind of entering the pipeline around that theme.
Yes, well again I would describe it as.
I mean, the trends themselves I think.
Im not going to describe I think they've been they are well described by <unk>.
You the analyst community and fairly well understood, but in terms of our exposure to them our exposures is fairly broad.
Through our buildings in places business.
We certainly have a lot of exposure to clients as a real estate relocate and build new infrastructure to support supply change changes.
But our exposure is actually broader than that because we're exposed well across our business because you sort of think about those trends there has to be the planning you do upfront, which again our business is exposed to the program management work that you do along the way, which our business is certainly now exposed to more than it ever has and then there's always some.
<unk> infrastructure for example, a lot of these changes in facilities that are being built.
Use a lot of water.
And kind.
Our water business is participating in that as well you think about.
Semiconductor facility, that's being built were built over a long period of time, but you go through the permitting process. There is program management element to it.
Our buildings in places exposure to that and.
Our water business is exposed to that now we certainly don't do any work inside that facility, but frankly.
Nobody nobody really does because that is proprietary to that particular manufacturer.
So.
We're fairly well exposed to all of those trends broadly across our business.
Thanks, a lot Charlie I'll turn it over.
Okay. Thanks.
The next question comes from Jamie Cook of Credit Suisse. Jamie. Your line is open. Please go ahead.
Hi, good morning.
Jim follow up follow up question I think in your prepared remarks, Troy you talked about.
The percent increase in bid prospects.
And I'm just sort of wondering.
Where that's coming from is it increasing.
Is it market share specific to certain market are you.
Looking at additional markets that you haven't looked at before so any color on that front.
And then I guess my second question back to your 2024 targets again, just comfort to get there.
Given where you're guiding for 2023.
Can we just assume like the sort of constant EBITDA growth that you guys had been targeting in that high single digit to 10% range and then you get the rest of it through just.
To hit the EPS targets.
We're going to just buying back the stock that's how you get there. Thanks.
Sure. Thanks, Jeremy So first first question.
The 20% is coming across our entire business.
And.
We're saying that we described in the opening comments that certainly is here in North America, and the U S and in Canada and in Australia and in the Middle East. So that is that as we're seeing that broadly across the business. We're also seeing that broadly across our business lines. The one differences now we have an exposure to program management that we didn't have two years ago. So if you want to look at something that is.
<unk>.
We are exposed to more of those those markets and we have been in the past. So certainly some of that increase of 20% is coming through an increased exposure to program management.
Those opportunities are fairly large opportunities.
In terms of the in terms of the guidance I'm going to hand, it over to Garth.
So FY 'twenty four again, just a reminder, it's a dynamic model right theres not one singular path and that's how you get there but to give you. Some examples of this dynamic model is if we would achieve.
Very low double digit organic growth in FY 'twenty for mind, you were already doing.
Two 8% in FY 'twenty, three without significant tailwind from from GE, and we achieve our 15 plus percent margins, which we have full confidence then that will propel us consistent with our capital allocation strategy, we have built into our model to get to the 475, while incurring significant headwinds from.
FX, which is not in our control.
And the second thing as a reminder, for our FY 'twenty three EPS guidance, we put forth. It does not incorporate any repurchases beyond what has already been executed in FY 'twenty two.
Thank you.
Thanks, Jamie.
The next question comes from Michael Dudas from vertical research Michael Your line is open. Please go ahead.
Good afternoon gentlemen.
Good afternoon.
Troy can you maybe.
Give us a little more.
What's on your federal business, which I missed.
<unk> been tracking it seems to be doing.
It's been growing quite well and as the funding in excess of issue there as opposed to like some of the complication is seeing and getting it from federal states to these projects.
Talk about the pipeline and then secondly on construction, Matt is just the general tone of Youll, given the sharp backup interest rates. What's the temperature of developers are folks you say you've got some contracts converting here in the next couple of quarters is that.
So that's something to kind of plateau.
Like kind of getting a lag about itself or is there some concern about the opportunities maybe for $24 25 given.
Some of the funding issues youre seeing in the market.
Okay.
So first with respect to federal again, our U S federal business.
<unk>.
For I guess, the most important point there is just the starting point is we've been ceding some.
Some incumbents on some rather large programs are high value programs.
That obviously gives us confidence as we move into the future.
The thing is.
A lot of our activity in that market as determined by the kind of the contract vehicles or the IDI cues that you've won.
Over this past year, we've had a great amount of success, there increasing our <unk> capacity and as it stands today, we have over again this isn't in our backlog, but we have over $100 billion of IQ capacity, which means that we will have an ongoing have an ongoing dialogue with those federal clients.
To do project work for them under those contract vehicles.
And they're experiencing the same thing that all of our clients are they have a lot of things they have to they're gone they're working to accomplish.
But its a lot for them to handle and so it's a little slower I think than then.
Then we would've had anticipated, but nevertheless in terms of that long term opportunity with the programs of <unk>.
It does create a great long term tailwind into the future.
And with respect to the construction management business.
We certainly have seen.
In the quarter.
A couple of I'm going to sort of some non traditional development investors kind of not the large mainstream.
<unk>.
They've decided to not proceed with projects and so we certainly did see that in the quarter.
But I will say this again just about our construction management business. It is.
A much more diversified business than it has been in the past.
We now have a fairly significant exposure to aviation.
Convention centers government buildings and sports facilities.
And so where we are in terms of that portfolio, we're less dependent upon commercial office and mixed use development and so that's what we're seeing today.
And I think two other important points to highlight which is we have three and a half years of backlog in that business now.
And it certainly had even even this past year, we came out of this past year.
A one book to burn a one times book to burn in that business and it does represent somewhere between 8% 9% of the overall business.
Again, it's a contributor it's a significant contributor the way that our design businesses.
And it's even even with some of the market turbulence is set up well for the future.
Thank you Troy.
Yes. Thank you.
The next question comes from Paul.
Thompson Davis. Please go ahead your line is open.
Hey, guys congrats on a solid Q4.
Yes.
Sure.
One more if you will on the JA in terms of okay, not coming as fast.
Alright in terms of not coming as fast as expected was that a transportation comment because I feel like some of the water and wastewater opportunities are starting to flow through I'm curious on that.
Actually I'm just I'll, just say Adam it's fairly broad based again, there's some elements of the IHA funding has come through a little bit faster than others and water is certainly a place because there is a little more direct path to market than there is in transportation transportation usually comes.
Through another agency. So it has to be again it has to be married up with either it's a local government agency.
Or a state agency.
That is that is certainly true, but we have seen that broadly across.
All of the business all of our business lines.
It has just been slower to market, but again.
What we're seeing now and as I said, it's difficult for us to differentiate say within our pipeline of what we are being submitted today is it purely IAA or not.
It's a fair comment to say that that entire increase the pipeline certainly is contributed to by JA.
It was slower than.
I think we everyone had anticipated when the bill was passed.
Got it Okay and then.
Lastly wanted to ask on the 30 to 40 million of restructuring expenses next year can you talk about what investments youre, making there.
And what's the benefit long term is for a come from those investments.
Adam This is Gary I'll respond to that question.
I think I've mentioned this before we're always committed to driving profitable growth in our business. While at the same time being very cognizant of markets that may not meet our hurdles are hurdles on ROIC.
Growth margin profitability and cash conversion.
If they don't meet those in the in the small mid to long term in those markets. We will prove it and we will always hold ourselves accountable to deliver as high a return on invested capital returns to our shareholders as we can and a great example of that is we've already increased our ROIC target from 15%.
To 17% based on these <unk>.
<unk> tweaks and pruning what I would call.
I have led to better working capital conversion better profitability better growth and really focused on in geographies and markets that have the long term fundamentals to support the growth strategy we've employed.
Okay. Good answer thank you.
Yes.
Thank you.
We have no further questions at this time, so I'll hand back to Troy Rudd for concluding remarks.
Alright, Thank you and I will I will keep these brief look I said. This is the opening we've had a successful year and as we look forward. We certainly feel good about the business because we're exposed to what we think are some very long term investment trends in infrastructure.
We've built a business that.
Has created some long term competitive advantage and frankly, we have a lower or a higher returning lower risk business model and as Gar made reference we're always looking to fine tune and improve that.
And ultimately in a difficult time, if there is one I had.
90% of our costs are valuable and when you add all this up it means that we have a great platform for the future.
And I have to end the call. Most importantly by just thanking our teams again for their contributions.
Past year, you aggregate the contributions of all of the people that work here in aggregates to our strong results. So thank you all and thank you everyone for joining today's call.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.