Q3 2023 AECOM Earnings Call
Good morning, and welcome to the H E Com third quarter 2023 conference call.
I'd like to inform all participants this call is being recorded at the request of AE com.
Cost is the copyrighted property of AECOM.
Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited.
As a reminder, a E. Com is also simulcast thing this presentation with slides at the investors section at Www Dot H E Com dotcom.
Later, we will conduct a question and answer session.
If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
Would like to withdraw your question again press Star one.
I would like to turn the call over to Bill Gabriel Ski Senior Vice President Finance Treasury and 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 various risks and uncertainties, including those described in our periodic reports filed with the SEC.
Except as law requires we undertake no obligation to update our forward looking statements will 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 margins or segment adjusted operating margins will reflect the performance of 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 and its arent backlog growth rates are presented on a constant currency basis, unless otherwise noted today's discussion of key performance indicators and focus on the continuing operations of the company and will exclude AECOM capital, which reported as noncore given the companies.
Tend to transition the business.
On today's call Troy Rudd, our Chief Executive Officer will review, our key accomplishments our strategy and outlook for the business wire Polonia, our president will discuss key operational successes and priorities and guard Kapoor, Chief Financial Officer will review, our financial performance and outlook in greater detail. We will conclude with a question and answer session with that I will turn the call.
Over to Troy Troy.
Thank you will and thank you all for joining us today, the strength and consistency of our results are a testament to the competitive advantage. We have built through our thinking that globally strategy, which has enabled the strong collaboration of our 50000 technical experts and they focus on winning what matters to expand the long term earnings power of the company.
I am pleased to see that our leadership was again recognized by Anr and its recent annual survey.
In addition to our top rankings in transportation and facilities design and environmental design, we overtook the top spot in mass transit chemical remediation and environmental consulting our focus on organic growth in our program management business also resulted in us moving up the rankings displacing strong competitors and we expect this <unk>.
And to continue.
These market share gains are especially notable as they are driven by high margin organic growth, which is in contrast to our peer group that remains highly acquisitive I.
I want to thank our teams for their commitment to our success and congratulate them on these remarkable achievements.
Turning to our third quarter performance.
A few key trends are apparent in our results.
Our investments in organic growth are paying off MSR growth and design business was 10%, which is the highest growth rate in many years and includes strong performance across nearly every major geography in which we operate.
This growth is coming at consistently high margins, which is enabling us to invest at a high rate of growth in our backlog and pipeline.
And our adjusted operating margin of 15, 2% reflected an all time high.
This trend affirms our confidence in delivering a 17% margin in the future.
Both the Americas and international segments contributed to this strong performance, which resulted in adjusted EBITDA and adjusted EPS increases of 10% and 12% on a constant currency basis.
Third we continue to generate strong cash flow with $265 million of free cash flow in the quarter, which enabled the consistent execution of our returns focused capital allocation policy, including returning more than $220 million to investors fiscal year to date.
Finally, we have built a foundation for continued growth throughout our strong pipeline and targeted investments.
Log in the design business increased by 10% to a new record driven by both the Americas and international businesses.
This growth included three other noteworthy attributes first given our record quarterly margins, our backlog is more profitable than ever.
Second delivering a double digit increase in backlog on top of a double digit increase in revenue reflects the strength of our pipeline and our continued high win rate.
Third our share of wins valued at greater than $25 million have more than doubled over the past few years, which creates greater visibility and certainty into the future.
Please turn to the next slide.
Turning to our markets.
In the U S funding for key infrastructure initiatives is advancing this includes increase in activity from the IHA, a inflation reduction act and robust state and local infrastructure investment.
A great example is our selection to serve as the lead designer for the renovation of the historic Brent Spence Bridge Corridor project.
Which we were awarded after the quarter closed.
Our technical expertise beat out the formidable competition on this landmark pursuit is being supported by $1 $6 billion of funding from the JA.
We expect these drivers to further accelerate in 2024 and beyond which is consistent with the continued growth in our pipeline of proposals and bids submitted.
In Canada, our backlog continued to increase.
Both provincial and national priorities are aligned around transportation, environmental remediation energy transition and hydrogen infrastructure investment markets, where we are well positioned to capitalize them.
Across our international markets backlog reached a new high with strength across nearly every major market.
Accordingly, with our margins now effectively at our double digit target each point of growth is increasingly valuable to the enterprise and our confidence is high and continuing to increase our margins in the future.
Importantly in all of these markets our program management and advisory businesses have expanded our addressable market to provide a strong complement to our technical expertise.
I want to highlight another noteworthy accomplishment during the quarter we.
We successfully positioned AE com as a leader in the long term rebuilding of Ukraine, which is estimated to cost nearly half a trillion dollars.
This included a memorandum of understanding with Ukraine's Ministry for communities territories and infrastructure development to serve as its reconstruction delivery partner in.
In addition, we signed an agreement with Ukraine State Agency restoration and development of infrastructure.
Which will advance national design standards and provide engineering support for critical infrastructure projects.
Discussions to begin are already underway and we are proud to be at the forefront of the reconstruction of Ukraine.
I'm also pleased that our recent activities are consistent with our planned transition of AECOM capital and include the following.
First we have signed a term sheet to transition the AECOM capital team to a new platform.
Which will be facilitated by a comment our transactional basis and will enable the team to continue to support <unk> com's existing investment vehicles and investments in a manner consistent with their current obligations.
This transaction, which we expect will close later this fiscal year will create continuity for the team.
<unk> overhead cost for E com and ensure the right level of ongoing support for the management and delivery of our commitments.
Second we've completed a project by project review of our existing investments.
Based on this review, we expect the disposition of AECOM capital investments to return between 50 and $100 million of capital to AECOM over the next several years.
Third we also evaluated alternatives for investment on its balance sheet, including funding additional carrying costs that might be required if the current market conditions persist.
We determined that additional investments of time and capital in these investments would be inconsistent with our return driven capital allocation policy.
Finally to reflect this change we have adjusted the carrying value of these investments, which resulted in a noncash impact to our P&L. However, as I spoke a moment ago. We are confident that the realization of our investments will be a positive cash contributed to AA com and create additional capital for higher returning opportunities.
Before turning the call over to Laura I want to provide an update on our guidance.
Against a strengthening market backdrop and with our strong year to date performance, we are increasing our fiscal 2023 financial guidance.
This performance would mark the fourth consecutive year that we have outperformed our initial expectations.
With that I will turn the call over to Laura.
Thanks, Troy, Please turn to the next slide.
The business is delivering at a high level and we are well positioned to capitalize on the substantial growth opportunities ahead.
Against the backdrop of rising demand for talent, we are investing in our team, which is an essential element of our success to.
To that point I am pleased to report that our teams are highly engaged in driving in our most recent employee survey a record level of employee stated that they would recommend day come as a great place to work.
This positive feedback validates the benefits about Korea, and leadership development programs and the superior career opportunities afforded by our leading position on marking projects across the globe.
In addition safety performance leads our industry, which is a critical advantage that matters to all of our stakeholders safety is a key element of any proceeds and our safety record is a great leading indicators of retention employee satisfaction and the success of the business.
In a human capital business employee engagement and safety go hand in hand with current satisfaction does that point I'm also pleased to report the client satisfaction continues to increase and exceed key benchmarks.
Our strong employee and customer satisfaction is especially important as the three secular mega trends with continued investments in global infrastructure sustainability, and resilience and long term energy and supply chain transitions converge to create a powerful multi decade growth cycle.
This convergence is apparent as we look across our largest wind over the past year.
Transformational high speed rail and transit projects across the globe to critical federal environmental and resilience programs in the U S and Canada, two Mega City development in the Middle East, we are playing a leading role in the most iconic projects around the world.
In each and every win technical excellence remains a key component of our success.
As the convergence of these megatrends becomes more ubiquitous our strength standards further apart from the competition, let me share a few examples.
Across both our transportation and water businesses.
Projects are increasing in size and clients are demanding more.
A great example of how we distinguish ourselves is a global tunnelling practise while it's handling team represents a small percentage of a larger project even essential element of any proposal and it's heavily weighted in overall technical evaluations given its critical Nike to a project success.
As such I'm totally extra data cleanup unseat incumbent on projects. Additionally, tunneling is a high pull through rate to the rest of the organization. We estimate that at retail are handling revenue often create as much as $10 of revenue opportunity for other disciplines within the organization.
Investment in energy transition is also gaining momentum, particularly in the U S from funds provided by the inflation reduction Act and other initiatives.
We are poised to benefit in many way with leading advisory environmental permitting equality transmission and distribution and program management expertise.
This positions us to lead the rapid growth in offshore wind, we're a multi discipline expertise in well equipped for the technical challenges inherent in this emerging market.
Similarly, we are leading the advancement of other forms of alternative energy such as hydrogen.
We're recently awarded a contract to manage the delivery of a green hydrogen facility for <unk> <unk>.
Our transmission distribution business is also growing rapidly bolstered by continued growth with San Diego gas and electric to leave transmission lines underground as well as several engagements with proposed Mega transmission lines in the U S.
Tim is also building in the paper market.
We are a clear leader with more than 20 years of experience on over 500 sites for the logic clients.
Our backlog and pipeline increased 50% and 40% respectively.
The Apa's new drinking water regulations passed in March which created a timeline for water utilities to advance plans to meet stringent requirements.
Demand in this market is set to accelerate into the next several years.
Lastly, our leadership and sustainability continues to create opportunities our appointment to advise on delivering a carbon neutral Cup 28, a leading global climate summit to be held this November is a testament to our reputation and credibility with the case or latest in subject matter experts across the globe.
All of these markets represent substantial growth opportunities for <unk> com.
As demand increases across our markets the investments, we're making to extend the capacity that workforce will enable us to deliver these investments include digital delivery capabilities and automating repeatable elements of the design process.
As an example, we are integrating our local teams with our enterprise capabilities centers to also make computational design scripts to key element to transportation projects, such as bridges, which accelerate delivery and improve quality as an organization William embraced the opportunity to innovate and transform how we deliver outlet which will compound.
Our competitive advantage over time.
With that I'll now turn the call over to John .
Thanks, Laura.
Please turn to the next slide.
Our teams continue to embrace our culture and strategy, which is extending our competitive advantage and driving strong performance as evidenced by this being the fourth consecutive year in which we expect to outperform our initial guidance expectations.
This year's increase is especially notable in that our strong underlying performance has more than offset the previous removal of expected five to 10 million contribution to adjusted EBITDA from AECOM capital that was contemplated in our initial guidance.
We have spent the last three years and filling our mindset of continuous improvement into our culture, and we have rooted our decision, making and risk adjusted returns on capital and on time.
As an organization, we avoid unnecessary layers and complexity and focus on winning what matters and delivering for our clients.
As a result, we delivered another quarter that included several key milestones, including double digit organic MSR growth and a record designed backlog.
In addition, our growth remains highly profitable our margin surpassed 15% for the first time ever at 15, 2%, a 60 basis point increase over the prior year.
Our international margins reached nine 9% and we are well on our way to delivering continued profitability improvements across the business as we progress towards our 17% longer term target.
All of these accomplishments build on our momentum over the past few years and create confidence in the opportunities ahead. Please turn to the next slide.
And as our growth in the Americas was 10%. The adjusted operating margin was 18, 8% up 20 basis points from the prior year, our proposals and bids submitted are growing faster than our backlog, which allowed us to grow our design backlog by 8% more than replacing the accelerating revenue growth.
This reflects our high win rate and continued investments to collaborate and bring the best resources and ideas to our critical pursuits. Please turn to the next slide.
MSR and the international segment increased by 10% with growth in nearly every key region.
While weakness in mainland China persist, we have taken actions to significantly decrease our exposure in the region.
The adjusted operating margin was nine 9%, reflecting continued progress on our key initiatives to drive operational efficiencies and focus on the highest returning markets backlog.
Increased by 17% and included several large wins in the UK, Hong Kong and the middle East that enhance our visibility.
Please turn to the next slide.
Free cash flow was strong and we affirmed our expectation to deliver free cash flow within our guidance range for the ninth consecutive year.
Our balance sheet is unchanged and remains in great shape, we have no bond maturities until 2027 and the vast majority of our debt is fixed or capped at highly attractive rates.
Our returns focused capital allocation policy is unchanged and is supported by the highly cash generative nature of our business.
This includes allocating capital to the highest returning opportunities, which remains organic growth investments followed by share repurchases and dividends.
In addition to our investment in business development and growth initiatives, we have returned more than $220 million to shareholders. This year, including our July dividend payment.
Please turn to the next slide.
As Troy noted, we are raising our financial guidance for this year to reflect our strong growth and margin performance at the midpoint, our guidance reflects 10% and 11% constant currency growth for adjusted EBITDA and adjusted EPS, respectively.
AECOM capital is excluded from the adjusted results given our intent to transition the business with that operator, we are ready for questions.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
First question comes from the line of Sean Eastman with Keybanc capital markets. Your line is open.
Hi, Jamie nice update here.
I thought a good place to start would just be.
Kind of driving home some of the comments around the resilience and the revenue build.
The momentum in the business headed into fiscal 'twenty four.
Particularly in light of.
Some confusion last quarter around the commercial real estate exposure.
That would be a helpful start.
Great well good morning, Sean Thank you for the question.
So maybe I'll just sort of start with the success that we've had in the quarter in the last few quarter, we've seen accelerating MSR growth, which.
Which has been important but again behind that is the backdrop of our pipeline, which has been consistently growing and we've actually seen it continue to grow at a faster rate than we have been winning work.
And then behind that is our backlog growth in particular or in our Dcs business, which again represents 90% of of the overall business and our backlog grew extraordinarily well again, another 10% year over year in the quarter and within that our win rates.
We are continuing to win work at an extraordinarily high level. This is our seventh quarter in a row, where our capture rate has been over 50% and just for everyone's benefit remind you that capture rate.
As for every dollar we bid it's how much dollar of work dollars of work that we win and so that's an extraordinary result, and even within that.
And what we refer to as our most important and largest in complex pursuits, we've been winning and even a higher rate in fact, our year to date capture rate our lunch are amongst our largest and most important bids is over 80%.
So we are winning at an extraordinary rate, which obviously is driving our great success and what that leads to is that leads to great visibility and predictability or even certainty for the future.
Building kind of those.
The I'll call. It the competitive advantage of the Moss will continue to win gives us great confidence that even beyond next year and the backlog that we've built for next year. It will continue.
We'll continue this kinds of success.
And again I should also make a comment just around our construction management business again, our construction management business.
The way we win work, it's a little bit lumpier than what you see in our design business.
And I will say that our Q4 is off to a very great start and so again, it's lumpy, but we've had some really positive success already heading into Q4.
And then the important thing is around our pipeline and the construction management business.
Our pipeline is actually up year over year, and even up sequentially.
So what that tells us is that.
The opportunities in front of us are greater than they were a year ago or even last quarter.
But theyre just different right.
Alright, we're focused again on different geographies and in particular continuing to have success in aviation sports and convention centers. So the opportunities for construction management as we go forward in aggregate are actually greater than they were in the past.
As I said Theyre, just theyre, just going to be a different geographies and different markets.
Thanks for that drive very helpful. And then and then switching over to margins I thought it'd be helpful just to get.
A bit of a refresh on the bridge from this 15% plus.
Segment level margin to the 17% plus target I mean, we're talking.
About the enterprise capability centers.
Our real estate strategy.
<unk> new way of working just.
Kind of the.
The bill understanding the building blocks and the most significant contributors to that bridge to 17% would be helpful.
Yes.
Yes. Thanks for the question Sean in fact, I'll pass that one over to guard.
John how are you.
Yes, good question.
It is a great achievement the whole team has collaborate towards achieving 15% a little bit ahead of our expectations, especially what we thought three years ago.
And the main reason for this if we wanted to talk about it is creating a platform over the last three years that is built on competitive edge.
What I mean by that is we're focused on key markets, where we dominate in the business lines have the best growth opportunities in those markets.
It is to think and act global strategy, which sounds like a tagline, but it's so important to what we have done over the last three years, because it's bringing the best talent and winning what matters to us as Troy just articulated on the fantastic win rates, we have experienced now for seven quarters in a row, it's a culture of having continuous improvement on all cost.
All facets of the business and there's more to go there as you pointed out in a few things, including real estate, our capability centers across the globe of how we share resources and workload.
Looking at our support functions on the most cost efficient structure digital is something we're just scratching scratching the surface and this is more focused on.
Our productivity and delivery platform digital and then you combine that with the strategy Troy and Laura have initiated very successfully over the last three years for our program management business and advisory those opportunities are abundant you put all those together gives us a lot of confidence that we're going to go from what people are few.
Your stock was unachievable, 15% to now our ambitious targets of 17% and look forward to laying out the detailed building blocks of each one of those.
Pillars I just discussed during our Investor day in December .
Again really helpful. Thanks, Karl I'll turn it over there.
Thank you.
Our next question comes from the line of Andy Wittmann with Baird. Your line is open.
Oh, great and good morning, everyone. Thanks for taking my question I guess.
Hey, So just I guess I probably forgot.
The comment on the 24 running at $5 or north of $5 of adjusted EPS.
It is interesting, but that assumes like you said.
Historical interest rates and historical FX.
Factors. So could you just help level set us what that means in today's interest in today's FX.
I just wanted to kind of understand what it all boils down to.
As we head into the year end in your analyst day.
Yeah, Andy it's Troy I'm going to surprise you by answering that question set of Gar Okay.
I guess first of all yes.
<unk>.
This is an opportunity.
To talk about our operational performance.
Because I think that we sort of separate the world into things that we can control and things that we can't control and as and again as you pointed out and we pointed out in the earnings release that.
Based on the path, we set out back in 2021.
We set certain a certain bar for performance uncertainty financial performance and in terms of what we can control we've exceeded that and we're continuing to exceed that and that just gets it outperforming on MSR and in organic growth and Scott said, improving our margins to an all time high.
But most importantly behind that as we've been building backlog across the business and our pipeline continues as I said to grow so when we look at that and then combine that with our our new margin target and where we expect to get to over time is 17%.
We're externally optimistic about continuing to exceed on those things, we can control, but as you point out.
There are some things that we simply can't control and those are interest rate and foreign exchange. Those are the two things that have the most significant impact certainly below the operating performance line and as we look forward. It's our belief that those items have certainly gone against us in our industry.
<unk>.
We believe they stabilized.
Again, we can't really be accurate in terms of that prediction, but we do believe that they have stabilized and they're not going to be a significantly growing headwind in the future as they have been over this course of this past year.
And so again not at this point ready to sort of say, here's so here's what our guidance is for 24.
We will give our guide in November we're right in the middle of our planning process and so it's premature for us to do this and when we do that it will incorporate our foreign exchange and interest that exist at that point in time.
But in terms of those long term targets. All I can say is we do believe that 'twenty four we will have a significant growth in our overall earnings.
Okay.
That.
That makes sense I guess just for my follow up I just wanted to check in on.
Your.
<unk> utilization rates and your ability to find the right number and the right people to fill the growth that you're delivering here.
Over the last couple of years, it's been common knowledge that labor of all sorts, including some of the technical labor has been more scarce and we've seen a little bit higher turnover rates in the industry. So I was just wondering what <unk> experience has been in the last 90 to 180 days on that front.
Are you seeing greater.
Greater stabilization.
For the Labor force as well as what are you seeing in terms of the overall cost of labor in the projects that youre executing today.
Yes, yes.
That's a good point.
Good question, Andy because obviously, our most of our most important input in the business is our people.
What really fuels our growth is obviously our ability to continue to perform really great work for our clients and so.
Just in terms of our people I'm going to deal with some to respect first of all just are our hiring and retention.
We've been able to add significantly to the overall head count in the business over the course of this past year, even though.
The Labor force only grows by limited right, we've actually grown at a fast rate in terms of adding people.
Our our turnover has gone down very significantly over the course of the last year and we continue to see it decline, even though last six months.
And we're at a point, where we look at the industry benchmarks and were significantly below that.
So we're at a point, where we are comfortable we sort of set expectations about where we should be with respect to a healthy turnover. It looks like we're in a good place I wouldn't see I wouldn't want us frankly to go a whole lot lower from one way from where we are.
And then just in terms of productivity.
Youre always trying to drive improved productivity in the business and there are certainly things that we're doing to improve that productivity.
<unk>.
In terms of in terms of that why don't I turn it over and let Laura answer that question that part of the question, Yes, Andy the other the other key part of this strategy is just continuing to leverage our enterprise capabilities centres and just this quarter our volumes were up 54% year on year. So it's a key part of al.
Labor and productivity strategy and just building on what Troy said, we're going to continue to be laser focused on just continuous improvement with our employee value proposition.
The investment in training and benefits, which we really believe are leading the industry. We've got a lot of work on a career path.
We're feeling pretty good about just that.
<unk> exceeding our own expectations and sitting well above industry standards in an industry, where we know that in E&C sector.
Yeah head count growth and typically runs at about 1% per annum. So when you consider all of those things.
As a pretty positive picture in terms of productivity and most importantly, the ability to grow and continue to attract and retain top talent.
Great. Thank you very much.
Thanks, Andy.
Okay.
Your next question comes from the line of Steven Fisher with UBS. Your line is open.
Thanks, Good morning, So it's nice to see the organic growth rate hit that double digit 10% rate just looking though at the implied Q4 organic growth rate, it's consistent with the full year of 8%, but that would be.
Be a little bit of a slight down.
<unk> slowed down I think from that 10% in Q3, I am curious whats driving that assumption if anything in particular, and then kind of related to this I think you've talked about potential for double digit growth in 2024. So do you see kind of a reacceleration into 2024 on that metric.
Yeah, So Andy I'm, just simply going to use align that guards become famous for in terms of our guidance.
Which is we still remain prudently conservative while we've seen accelerated growth over the years and across the quarters.
We set an expectation for 8% for the year and we still think that Thats there.
The right approach.
And again, you're right to point out our 10% organic growth is the first time that we've had double digit organic growth of the business for frankly more than well more than a decade.
So it is a milestone for us as we look forward, we do see an opportunity to have accelerated revenue growth off the 8% number.
We're always looking to make sure that there's balance to that because it's our again, it's our priority to not just grow the top line, but to grow the business and make it more profitable. So we are clearly believe based on our wins in the pipeline and opportunities there is an opportunity to accelerate growth beyond that 8% in the future.
But we're always going to be balancing that to make sure that we're making those important investments in the business and we're maintaining frankly, a cost structure of the business that makes it means that we're going to actually grow profitability at a faster rate.
Okay. That's very helpful and maybe you can just.
Just give us an update on what's been the impact of inflation on your infrastructure customers.
It had been disruptive for a little while has that now kind of steadied with some moderating inflation.
And what has it been doing to the pace of project progression and we heard some rumblings from.
Another company when we cover.
This quarter that is maybe slowing things down, particularly on the kind of road building transportation side of things I'm curious what you are seeing the impact of inflation on sort of the whole infrastructure progression of spending.
Yeah, So Steve.
We actually have seen inflation, obviously have an impact and that impact has been on.
The planned budgets or the ambitions that existed a few years ago.
So it certainly has had an impact the cost of actually delivering infrastructure projects has increased but the other thing that we've started to see as we stated we've seen those costs begin to stabilize and so will they did rise over a period of time they seek the costs seem to have stabilized.
But in terms of the opportunities in front of us.
What's most interesting is again as we've seen our pipeline continue to grow over that period of time. So I think thats just the fact that there is.
A lot of funding that has been put in place that exist today that is just starting to get deployed here in the U S. What we're starting to see this year is we're actually seeing the IHA money.
Come into the market for projects and I mentioned, a project that Bruce Spence bridge quarter project.
Brent spreads spreads right.
Project in the quarter and and Thats a great example of the IHA money coming into the marketplace and Thats significant that was up $1 6 billion planned expenditure. So well inflation has had as an impact we've seen it stabilize but we don't see it at this point really impacting the pipeline for the future pipeline is still.
Growing at a faster rate in our backlog.
Okay. Thank you very much.
Thanks.
Your next question comes from the line of Andy Kaplowitz with Citi. Your line is open.
Good morning, everyone.
Good morning, good morning.
So.
The question might be for Twilio like an international margin continuing to rise basically a double digits as it has gone there have you gotten more clarity around where it could go I think you've said you know you see it materially above 10%, but what does that mean could it be in a low to mid teens and where are we.
Are you on your sort of process of making international more efficient these days.
Hey, Andy this gar thanks for that question.
It is again Fannie.
Fantastic milestone that we had set for ourselves in achieving yet earlier than our expectations, we laid out.
Again, a testament to the team and as we move forward our objectives are very clear and unchanged. It wasn't to get to double digit. Our objective is what we have delivered in the Americas, which is head and shoulders above our competitors, that's what we're targeting to free international as well and as we sit here today to choice point earlier, we're in <unk>.
Middle of our planning process for FY 'twenty, four and we will be having our investor day in December we will provide much more clarity in detail.
But we clearly see international margins expanding a lot of opportunity for us there that will help us achieve the overall, 17% margin ambitious targets that we've laid out.
Got it very helpful. And then maybe for Laurie the longevity of some of the international drivers that you see obviously the middle East has been pretty strong here recently.
Times, it does tend to be cyclical.
Or maybe cycled faster. So do you see this as a more elongated cycle in your international markets, maybe more clarity and sort of your bigger market stats.
Yeah. Thanks for the question Andy That's had a book to burn one three very healthy for international can part because increasingly comprised of much more long term projects typified by a lot of those program management wins in a lot of that is as you say are in the middle East.
But it's a strategy obviously to grow that not just in the international segment battled side.
Across the Americas, So I think that strategy that program management is key for.
Getting much more long term visibility of the pipeline and much more longer term.
Contracts that give us much more certainty in terms of the longer term outlook and it's a key part of the.
And we set very ambitious targets in terms of the rate at which we enter.
And to call out program management business and it is growing at double digits. So we're on track with our aspiration man.
I appreciate the color.
Sure.
Your next question comes from the line of <unk> <unk> with RBC capital markets. Your line is open.
Great. Thanks, and good morning, just curious I think when you talked about the IHA funding. If you can give a little bit of color around maybe some of the end markets, where youre seeing some of the IHA money and then maybe just kind of a broader question as you look across the global footprint can you maybe talk about some of the end markets that might be doing better than others have any moderated have any.
Just curious in the macro environment, how the various end markets may be trending thanks.
Sure. Thanks Alan.
So just again around the U S and the deployment of IHA money first of all to point out that it's really not the deployment of IHA money right. There's also the inflation reduction at the chip sector is just a lot of other things that have caused funding to date and the marketplace will be there for a long period of time.
But nevertheless across all of those and you get all those increased funding opportunities.
There are opportunities across our transportation business and it's a very diversely across the transportation business again transits.
Roads rail.
And so there are significant opportunities. There. We are we are also seeing a significant amount of funding coming into the water market and we have a number of states that are undertaking some very ambitious.
Water programs that will address either the fact that there is too much water theres not enough water and a lot of a lot of the regions in the U S.
And then also we're seeing the impacts and in energy and alternative energy.
As Laura mentioned earlier in her script about.
Our impact in hydrogen and new technologies to store and deploy energy and now or even seen it in the areas of transmission and I think that the money is going to be funding those themes for many years, but those are the most significant themes that we see here in the U S. When we go around the globe.
In all of our major markets, we are actually still seeing strength. There are a few a few exceptions to that but they are in places for example.
China.
We have not seen strength in China, and what we've been doing our again our reaction to that is that we are we are actually shrinking.
Shrinking that business and ultimately that means decreasing our exposure to China in long run and.
Again, it's not a it's not a large market for us it represents less than I think one 5% of revenue of the business. So it's not material to us, but we certainly do see.
Again, a significant have significant slowdown in that market, but the rest of the world, we still see very positive.
Funding and we see very positive indications of infrastructure funding.
One of the constraints that we have seen in markets is frankly, just been the constraint of our clients being able to bring their awards in there mark and their contracts to market as quickly as they originally had anticipated and so.
The only thing I'll say is in a lot of our markets.
Where we have wins.
It's taken a little bit longer to get started than our clients had expected we had expected.
But again, it isn't really slowing us down for the moment given the fact that we had 10% organic growth.
Okay, Great and then just one quick I guess follow up not to push on the 24 guidance, but I guess as you look out to the next fiscal year.
What inning would you say, we will be in kind of the rollout of the IHA funding, obviously, a little bit is showing up in the back half of this year, but just curious when you look out over the next few years, where about do you think that funding will be over the next year. Thanks.
I continue to see the IHA to deploying YJ funds accelerating next year.
And I think we May have said this before we actually see those funds are deploying those funds, peaking navy in 2728.
There is a significant amount of money.
<unk> has been again as I said from largest IHA, but from the all the other funding instruments, that's available, but we see that growing in 'twenty, four and growing even through 2728, and perhaps peaking at that point in time.
Thanks very much.
Thanks Ellen.
Your next question comes from the line of Michael Dudas with vertical research. Your line is open.
Okay.
Michael Dudas with vertical research your line is open yes.
Good morning.
Troy will.
Good morning, good morning.
Just following up on some of the Internet. Some comments first you did call out in your prepared remarks, Canada. So I just wanted to see.
It appears to be maybe a better contributor to the overall mix and what what areas.
And secondly internationally.
How do you see the pace of some of the middle East projects, the major yoda and the homes in the world are they still on pace as it had been a little bit of slowdown of digestion is that you think going to accelerate as we move over the next couple of years.
Yeah, Mike Thanks for the question and I will take the first part and then I will turn the second part of the middle East over to Laura.
With respect to Canada.
There Canada has always.
They've always been focused on investing in infrastructure certainty if we can.
Go back a number of years, there's been a very robust environment for investment infrastructure.
And a number of the provinces in federally and sort of re up their ambitions. This past year and the funding for those those items, but it's actually similar to what we're seeing here in the U S. It's funding around transportation.
And a lot of that is around again transit.
And then we're also seeing it in water.
In major urban markets investment in water and then we're seeing it in energy.
Just significant investments in energy transition in.
And.
Good transmission.
So the themes are the same as we're seeing here in the U S and from our perspective.
That really describes our business in Canada, we are a transportation water and energy business in Canada. So it lines up really well for our Canadian business. So a great amount of optimism for the future in Canada.
If I could just add also with respect to Canada. Some of the worlds largest infrastructure projects that can you continue to pay in Canada.
The most ambitious transit programs and again did we play very well.
This aligns perfectly with our number one position in transit globally.
Bringing not just the fantasy Canadian resources, but a lot of the global expertise that we have from our leading transit.
Business to Canada, and the outlook continues to very strong and another dimension of that Canadian at local surveys.
The growth in some of the environmental projects in very large scale remediation programs again out al leading environmental franchise, we're bringing that analyzed technical skills to bear in the Canadian market and with respect to your question about <unk>, specifically in the middle East in the longer term outlook, we're pretty.
Optimistic about that project and they are now out in construction well beyond shovel ready and as you probably know some very ambitious timeframes around the realization of many of these programs, but our strategy in the middle East and a presence.
Our bookings aren't just limited to me we've had a very comprehensive press.
Presence and involvement in all of the night you gave you said he programs, but also some of the new a longtime programs in some of the key cities, such as Jeddah, and Riyadh as well. So it's a it's a much broader set of play, particularly in Saudi Arabia, and we're well positioned.
In the long term and as I said these programs and the decade long programs and we've been in essence, the beginning and we're bringing our global strength across all of the technical capability to bear on this fast growing market.
The controller.
Thank you.
Line of Adam. Your next question comes from the line of Adam <unk> with Thompson Davis <unk> co. Your line is open.
Hey, good morning, guys.
First question on capital allocation.
Now that we're in a higher rate environment does that change your thought process your calculations at all specifically with buybacks.
Yeah, Adam it really doesn't or our capital allocation policy remains unchanged and again, it's the headline that is is that we're always going to deploy capital to the highest returning opportunities.
Again, I think sometimes we forget about this but the first is obviously organic growth that clearly has the highest return opportunity for us and then beyond that when we look at the business returning capital to shareholders.
It still remains still remains our next our next highest returning opportunities priority.
Even with these rising interest rates.
In.
In the world.
So I guess when you say invest in.
And growth I mean, with your backlog growing and he said the opportunities are even greater and are you opening new offices hired more people how does that look.
Okay.
Well the answer is where we are.
Opening a lot of new offices.
That's not something that is a significant investment for us obviously as the business grows in certain places you have to create you have to invest in real estate to create capacity for people to work, but that's not part of our overall strategy for investment I would say that we're just continue to become more efficient with respect to real estate. However.
Terms of growing the business.
We are we are making significant investments in business development in fact.
This year's business developments spend remains at elevated rates.
Similar to our past year and so while we've got so many opportunities in front of US we're going to continue to invest in business development at an elevated rate, which also is important because we've been able to get our margins over 50%, while continuing to have elevated investments in business development.
But as the other things that we're investing and when I say organic growth is investing to grow our program management business investing to grow our advisory business investing in our people and developing our technical ability in.
Investing in our enterprise capability centers and investing in technologies. So that we can transform the way that we deliver work and become more productive and so that's what I mean, whether it be investment in organic growth. It's all of those things okay.
Okay that makes sense and lastly, sorry to sneak one more in.
We talked about water more today than we have in the past just curious if you can help size.
The forthcoming water opportunity versus where that market has been historically.
Yeah.
Well.
Water again, I think what water when we think about it.
We have a tendency to talk about a lot in the United States.
But there is certainly funding.
From the federal government that has been focused on expanding water, but also across all the states and so it's very broad based the fact is I mean.
The best way to describe this is.
We have situations, where we don't have enough water and situations, where we have too much water.
And.
It's probable that that trend is probably been accelerated over the first and the last few years and it really is causing.
City and state and local governments in the U S to focus their investment on water and again, you look along the southwest and certainly the biggest impact in the biggest concern is drought, which water shortage and you look along the Gulf Coast and you look along the east coast. The U S and it's frankly, it's too much water.
So there is just a very significant focus and investment in it but it doesn't just end there it goes across the world because the rest of the world is experiencing those same trends and we are starting to see more.
More of the funding and focus being put on water projects around the world.
So again I'd say that's a.
From our perspective that is a great long term fast growing opportunity.
Okay. Thanks, Brian .
Thank you.
There are no further questions I'll turn the call back to tie it back for closing remarks.
Great. Thank you operator, and again I'll just start by thanking our teams for their tremendously hard work over the course of this past quarter and year.
And I'm really proud of the team and are very consistent strong performance has continued to position us really well to do great things for our clients and to have great success and continue to create long term sustained shareholder value. So again. Thank you for your time today and we look forward to talking to you next quarter.
This concludes today's conference call you may now disconnect.
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