Q4 2024 AECOM Earnings Call
Good morning, and welcome to the H E Com fourth quarter 'twenty 'twenty four conference call I would like to inform all participants that this call is being recorded at the request of AE Com. This broadcast is copyrighted property of AE com.
A rebroadcast of this information in whole or part without the prior written permission of H E. Comm is prohibited as a reminder, a E. Com is alcohol 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.
Speaker Change: Have a question. Please press Star then one on your Touchtone phone, if you wish to be removed from the queue. Please press star one again I would now like to turn the call over to Wil Gabriel Ski Senior Vice President Finance Treasury and Investor Relations.
Speaker Change: Thank you operator, I would like to direct your attention to the Safe Harbor statement on page one of today's presentation.
Speaker Change: Today's discussion contains forward looking statements about future business and financial expectations actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the S E C except.
Speaker Change: Except as required by law, we undertake no obligation to update our forward looking statements.
Speaker Change: We use certain non-GAAP financial measures in our presentation.
Speaker Change: The appropriate GAAP reconciliations are incorporated into our materials and are posted to our website growth rates are presented on a year over year basis, unless otherwise noted any references to segment margins or segment adjusted operating margins will reflect our performance for the Americas and international segments.
Speaker Change: When discussing revenue and revenue growth, we will refer to net service revenue or N. S. R, which is defined as revenue excluding pass through revenue.
Speaker Change: And as our growth rates are presented on a constant currency basis, unless otherwise noted.
Speaker Change: Today's remarks will focus on continuing operations.
Speaker Change: 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 and priorities and golf Kapoor, Our chief financial and operations Officer will review, our financial performance and outlook in greater detail, we will conclude with a question.
And the answer session with that I will turn the call over to Troy Troy.
Troy Rudd: Thank you will and thank you all for joining us today.
Troy Rudd: Want to begin by thanking our professionals across the globe for their unwavering commitment to our purpose of delivering a better world.
Troy Rudd: And then we bring to our clients and communities every day is a testament to the collective strengths of our organization.
Troy Rudd: I would also like to thank our professionals for supporting our teams and communities impacted by both Hurricanes Helene and Milton the south Eastern United States.
Troy Rudd: All of our employees remain safe.
Troy Rudd: Safety is a core value at AE com, we take great pride in our best in class safety record, which is well above our peers.
Troy Rudd: Before discussing our financials I want to comment on the U S election.
Troy Rudd: First and foremost the election create certainty.
Troy Rudd: Infrastructure investment is a bipartisan priority and do not foresee this changing the incoming Trump administration is focused on a strong U S economy, which is built on a foundation of world class infrastructure, well specific initiatives and objectives may shift with 70% of our workforce fungible across market sectors. We are in a great.
Troy Rudd: Positioned to capitalize on the investments in the U S economy.
Troy Rudd: Specific to our U S federal exposure I want to highlight the following.
Troy Rudd: The U S federal client represents 9% of our revenue.
Troy Rudd: Within that nearly all of our work is for funded multiyear mission critical and essential infrastructure projects.
Troy Rudd: The EPA and USA I D combined represent less than 50 basis points of our enterprise revenue.
Troy Rudd: And similarly, the inflation reduction act accounts for less than 1% of our revenue.
Troy Rudd: On the other side of the equation, we see several growth opportunities emerging from the new administration's priorities.
Troy Rudd: For example, deregulation.
Troy Rudd: Prudent deregulation is a positive for our clients and our business. This includes permanent reform, which is one of the greatest bottlenecks to infrastructure investments and simplification would increase the volume of project opportunities.
Troy Rudd: With respect to the J a.
Troy Rudd: 95% of the IHA funding and secure and not at risk.
Troy Rudd: And with only one third of the money allocated to date plenty of runway remains.
Troy Rudd: A reduction in government staffing with increased demand for advisory Tactical and program management services to support infrastructure investment.
Troy Rudd: Lastly, voters demonstrated continued support for infrastructure funding in the November elections.
Troy Rudd: Including $41 billion of state and local transportation specific ballot measures as well as $20 billion of bonds in California that includes sizable investments in water.
Troy Rudd: Taken together, we expect the next several years to bring new growth opportunities for which we are well suited to deliver on.
Troy Rudd: Turning to our fiscal 2024 financial results and key accomplishments.
Troy Rudd: First our financial performance was strong on all fronts and included records for net service revenue margins earnings and cash flow. We also exceeded the midpoint of our previously increased adjusted EPS and adjusted EBITDA guidance, with 22% and 14% growth respectively.
Troy Rudd: This was driven by 140 basis points of EBITDA margin expansion in the fourth quarter.
And record free cash flow enabled the return of approximately $560 million to shareholders through repurchases and dividend payments.
Troy Rudd: Second we are winning one matters and extending our visibility.
Troy Rudd: We had a one two times book to burn ratio in the design business in the fourth quarter with strength in both segments and we ended the year with a record backlog.
Troy Rudd: In fact, our enterprise wide book to burn ratio has been at one or greater in each of the last 16 quarters, which speaks to our competitive advantage and the strength of our end markets.
Troy Rudd: Our pipeline achieved a new high and increased by 10%.
Troy Rudd: Our win rate remains at a record high at 50% and as notably even higher on larger pursuits, where our competitive advantages are greatest and.
And we are winning re competes at a 90% plus pace in our largest markets.
Troy Rudd: Third we gained organic revenue market share for the first time in our history. We achieved the number one ranking by engineering news record in the water design market.
Troy Rudd: This is consistent with our goal of doubling our water practice over the next five years and we are now number one in every key market sector.
Troy Rudd: I also want to highlight a global program management took another big step forward moving to the number two ranking which is on track to be number one this year following 20% growth in fiscal 2024.
Troy Rudd: Fourth we executed on our returns focused capital allocation policy.
Troy Rudd: This includes record investments in organic growth initiatives continued growth in our dividend and $450 million of share repurchases during the year.
Troy Rudd: Today, We also announced that the board of directors approved an increase in our repurchase authorization to $1 billion.
Troy Rudd: And an 18% increase in our quarterly dividend.
Troy Rudd: Our dividend has increased by an average of 20% annually over the last three years and the indicative dividend yield is now at the top of our direct peer group we.
Troy Rudd: We remain committed to double digit annual growth in the per share value of our dividend for the long term.
Troy Rudd: Finally, we are investing in new high margin growth businesses that leverage existing strengths.
For instance, the water and environment advisory business, which draws on the tactical leadership of our number one ranked water and environment practices furthers, our vision of becoming the global leader in infrastructure Advisory services.
Troy Rudd: We expect this business to double within three years from $200 million of MSR today and will become our next $1 billion platform similar to what we've already accomplished with program management.
Troy Rudd: Importantly, this growth will be at higher margins.
Troy Rudd: Further underpins our confidence in not only delivering on our 17% long term margin target, but exceeding it.
Troy Rudd: As we look to 2025 and beyond the secular growth drivers of our business are firmly intact.
Troy Rudd: The need for infrastructure investment has never been greater for instance, more than 46000 bridges are considered structurally deficient in the U S.
Troy Rudd: And the average bridge is more than 40 years old the IHA created a competitive grant program with the goal of improving bridge safety and reliability.
And larger projects such as the Brent Spence bridge on which <unk> is the lead designer received more than $1 billion of large federal bridge grants and will continue on for several more years.
Troy Rudd: Funding for transit Highway rail and aviation infrastructure is also increasing which is driving the record backlog and double digit pipeline growth were seeing in the Americas.
Troy Rudd: Around the world.
Organization is transforming infrastructure demand.
Troy Rudd: Nearly 70% of the world's population is expected to live in cities by 2050.
Troy Rudd: Which has created enormous investment demand for safe reliable drinking water and for building modern transportation systems, while minimizing environmental impacts.
Troy Rudd: Additionally, energy demand for electrification and Datacenters to support AI creates several growth opportunities, where we are poised to capitalize.
Troy Rudd: From permitting to air quality to energy storage and grid modernization.
To give you a sense of how this has directly benefited us our transmission and distribution backlog has increased five times compared to just a few years ago.
Troy Rudd: Our role as a design partner on the UK is great grid project as the program manager on San Diego gas and electric underground investment.
Troy Rudd: And as the advisory partner for major transmission grid Buildout in Australia demonstrate the depth of our expertise and the strength of our brand in the market.
Troy Rudd: Turning to 2025, our backlog pipeline and continued high win rates underpinned, our conviction and another record year for the business.
Troy Rudd: This includes expectations for 5% to 8% MSR growth and.
Troy Rudd: And adjusted EBITDA, and EPS of $1 9 billion.
Troy Rudd: And $5 10 at the respective mid points.
Troy Rudd: I could not be prouder of what we've accomplished over the last several years.
Troy Rudd: Through our strategy and focus on winning what matters, we've created and are expanding our competitive advantage as we look to 2025 and beyond that the ceiling for what's possible has never been higher.
Speaker Change: With that I will turn the call over to Laura.
Laura Polonia: Thanks, Troy I'm incredibly proud of our team's accomplishments in fiscal 2024, our consistently strong performance reflects the realization of the key elements of our strategy.
Laura Polonia: Let me provide a few examples first is our focus on only the highest growth and best returning markets and clients today, our top four geographies of the U S. Canada U K, Ireland, and Australia accounted for approximately 90% of our profit and our win rate remains at an all time high.
Laura Polonia: Second <unk> is the most desirable place to work in our industry. We have a number one ranked firm by anr across all of our major end markets, which matters to by clients and recruit.
Laura Polonia: We consistently win the kols and the lifestyle, clinique and exciting projects, which creates a tremendous career opportunities for our professionals and.
Laura Polonia: And we have the best leadership and technical development training in our industry in fact more than 10% of our workforce is enrolling and latest chip development training at any given time and the return on these investments is evident in our reduction in voluntary attrition rates amongst participants.
Laura Polonia: Finally, we formed the new water and environment Advisory business. This business will blend strategic advice with that technical and domain expertise to unlock new solutions for our clients and some of the largest and fastest growing markets in the world.
Laura Polonia: The most critical element of any organically led initiative is appointing the right lay down and in September we announced Joe Hudkins, who is joining <unk> delayed this business.
Laura Polonia: <unk> brings a wealth of experience expertise and market credibility to E com and has a proven track record of leading similar value creating initiatives throughout her career.
Speaker Change: As Troy detailed we expect this business to grow rapidly similar to the trajectory we delivered with program management, which increased from only a few hundred million dollars straight years ago to approximately $1 3 billion in FY 'twenty four.
Speaker Change: A great example of the opportunity is in digital water, which is a $17 billion opportunity through 2030 in the U S alone. There are 500 municipal water utility serving populations of over 500000 people and H requires substantial digital investments to modernize operations embed predictive analytics and cyber security.
Speaker Change: And drive process efficiencies.
Speaker Change: Similarly in the UK Amp eight is set to substantially increase regulated water utility investment over the next five years, including a deeper emphasis on digital water investments to date, we have won 100% of the frameworks in which we had an incumbent position and we've also secured 60% of new frameworks.
Speaker Change: Consistent with our focus on gaining market share within the Amp program.
Speaker Change: Expanding our advisory services is a key element of our strategy to more deeply engage with our clients and provide services from conception of the project through execution.
Speaker Change: Importantly, we lead with our scientific and technical Excellence, which places us in a competitively advantaged position as compared to a traditional advisory firms.
Speaker Change: As a result, the energy inside of the organization as we build our advisory capabilities is palpable.
Guy: With that I'll turn it over to Guy.
Guy: Thanks, Laura.
Guy: Echoing both Troy and Laura's comments, we have built our strategy and culture that results in consistently strong performance, which is evident in both our strong 2024 results and in our guidance for double digit adjusted EPS growth in 2025.
Guy: I want to highlight three metrics that underpin our continued value creation the.
Guy: The first is margins, where we continue to lead our industry, we exited the year with a 16, 7% adjusted EBITDA margin in the fourth quarter up 140 basis points from the prior year.
Guy: For the full year, the adjusted EBITDA margin increased by 100 basis points to 16%, reflecting continued execution on key margin expansion initiatives.
Guy: Importantly, this margin expansion is what funds the record level of high value organic investments. We have made and are continuing to make which are expense through the income statement.
The second is EPS growth, we delivered 26% adjusted EPS growth in the fourth quarter and 22% for the full year.
Guy: Our EPS has compounded at 21% rate since 2020, which directly correlates to shareholder value creation.
Guy: Finally, free cash flow, which exceeded 700 million for the first time in our history.
Guy: Notably free cash flow represented 10% of our net services revenue, which is great representation of high quality of our earnings.
Guy: Turning to other highlights from our results for.
Guy: For the year, we delivered record net service revenue, including 8% organic growth in the design business, which is a historically strong growth rate results could have been even better if not for two impacts in the fourth quarter.
Guy: First hurricane Helene resulted in several lost states and a few of our larger markets.
Guy: We expect a similar impact from hurricane Milton in the first quarter, but this is incorporated in our strong guidance for fiscal 2025.
Guy: Second we made the decision to not proceed with an already awarded construction management project, where the owner wanted to change the commercial risk profile we have.
Guy: We'll always prioritize appropriate risk management, even if it means sacrificing some of the revenue in the near term.
Guy: Despite this the competitive edge of our platform was evident in our over performance versus guidance for margins adjusted EBITDA, adjusted EPS and cash flow.
Guy: I also want to comment on the new water and environment Advisory business I am sure you are asking yourselves, how much investment will be required and what is the payback. Unlike M&A, which has a high upfront cost and risk. The cost here is much smaller with focus on hiring the right leader and teams to organically grow the business.
Guy: As we've proven we deliver more than 40% incremental return on capital on our organic growth investments also unlike M&A the cost of our growth runs through our margins and is already reflected in our expectations for another year of record margins in fiscal 2025 and continued expansion beyond that.
Guy: Turning to our segment results.
Guy: Beginning in the Americas net service revenue in the design business increased 9% for the fourth quarter and included strong contributions across all key end markets.
Guy: Key funding drivers, including the Iga are still ramping up and state and local clients continue to have strong budget outlooks, and historically high reserves, which adds to our confidence the design book to burn in the fourth quarter was one two and we are confident that the backlog will continue to increase based on our strong pipeline.
Guy: The adjusted operating margin in the Americas achieved a new annual high at 18, 8%, including 19, 6% in the fourth quarter, we continue to deliver on initiatives that increase margins and return on capital and are confident in our margin expansion in 2025 and beyond.
Guy: Turning to the international segment.
Net service revenue increased by 6% for the year. This was materially consistent with our expectations. We had a one two book to burn ratio in the fourth quarter and backlog remains at an all time high.
Guy: We delivered a 12 six adjusted operating margin in the quarter, which increased 260 basis points from the prior year and is at an all time high we continue to benefit from our focus on our highest growth and lowest risk end markets and clients and ongoing continuous improvement initiatives.
Guy: Across our markets trends are strong the autumn budget in the UK released in late October provides key funding for infrastructure, including a 100 billion pounds for energy transport healthcare and housing Capex and 70 billion pounds for growth industries, such as green hydrogen and Giga factories.
Guy: Additionally, and ate spending is set to accelerate and our wins to date position us to gain market share.
Guy: In Australia, our backlog increased by 26% driven by larger water and PND wins and in the Middle East. We continue to win large scopes of work, including another nine figure win in the fourth quarter and other opportunities in the <unk>.
Guy: They are picking up.
Guy: Turning to cash flow and capital allocation.
Guy: We delivered record free cash flow exceeding 700 million for the first time and increasing 20% from the prior year.
Guy: Free cash flow per share increased even more at 23% further demonstrating the value of our capital allocation policy to shareholders.
Guy: As I noted earlier free cash flow conversion was 115% and as I noted, we achieved a new milestone with a 10% free cash flow margin on net services revenue.
Guy: As a result of our strong cash flow, we repurchased $325 million of stock in the fourth quarter and approximately $450 million for the full year. We also paid $115 million of dividends during the year and we completed the acquisition of an environment permitting practice focus on federal land, which is rapidly growing opportunity under the incoming.
Guy: Trump administration.
Guy: We are affirming our returns focused capital allocation priorities. This includes the increase of our repurchase authorization to $1 billion and the 18% increase to our quarterly dividend beginning with our January 2025 payment.
Guy: Our balance sheet is strong with net leverage of <unk>, eight which supports our ability to remain opportunistic in how we deploy capital.
Guy: I want to provide an update on our discontinued operations.
Since our last quarterly call in August <unk> successfully resolved two legacy projects disputes, resulting in gross cash infusion of approximately $130 million. This infusion of cash enhances their visibility and reduces the risk profile.
Guy: Turning to our guidance.
Guy: We expect net service revenue growth of 5% to 8% in 2025 supported by our one two book to burn ratio in the design business in the fourth quarter and a record backlog and pipeline. We expect revenue phasing to follow a normal seasonal pattern, which means we expect MSR growth will accelerate as the year progresses.
Guy: We expect 30 basis points of adjusted EBITDA margin expansion to 16, 3%.
Guy: Adjusted EBITDA is expected to increase by 9% at the midpoint to $1 $1 9 billion and adjusted EPS to increase 13% at the midpoint to $5 10.
Speaker Change: With that operator, we're ready for questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question simply press star followed by the number one on your telephone keypad, we will take our first question from the line of Andy Wittmann with Baird. Please go ahead.
Speaker Change: Oh, great I just wanted to ask a clarification here I was looking at your adjusted EBITDA guidance and the reconciliation for that and I noticed that after spending $100 million on restructuring and transaction costs.
Speaker Change: 24, which was kind of a big number there was nothing listed in 2025 I was just wondering if that's just because you don't know what it is or if you expect that your earnings will be.
Speaker Change: Avoid these kinds of one time charges.
Hey, Andy Thanks for the question.
Speaker Change: I'm going to turn that over to Gar, but I'm also acknowledged that is a good observation.
Speaker Change: Yes, good morning, Andy Thanks.
Speaker Change: Thanks for the question. So your euro assumption that FY 'twenty five we do not contemplate any restructuring as we've said before.
Speaker Change: There were some significant restructuring program that we have to rightsize as we were exiting countries and being very focused on the six geographies that have the best growth fundamentals, we have completed through it there's no new contemplated restructuring so our FY 'twenty five results and beyond should be clean.
Speaker Change: Got it okay. That's good to hear.
Speaker Change: Kind of a similar question maybe another one for you guys, but just to understand because.
Speaker Change: I, just noticed that youre doing something a little bit different so again here in the adjusted EBITDA you guys are calculated in the margins at 16, 7%, but that's.
Speaker Change: That's not the number that people would immediately calculate from the income statement. So can you talk about what's the difference between the 16, 7% in the $16 or percentages that most of us are calculating.
Speaker Change: What that is and why youre doing that.
Speaker Change: And maybe if you could just maybe to take that same concept in applied towards the guidance when I look at the adjusted EBITDA dollar guidance and look at the implied margins it doesn't back into.
Speaker Change: The organic growth rates that you are talking about and so I think maybe all of this has to do with the same thing and you could clarify that for all of us.
Speaker Change: No absolutely not a problem at all and so specific to two adjusted EBITDA that we're guiding to and we started that mid way through last year as well there was feedback from our shareholders' perspective shareholders that they wanted a margin target that was comparative inclusive inclusive.
Speaker Change: All costs of the enterprise and as you know adjusted operating income that we provided for segments did not include.
Speaker Change: Corporate costs that we're incurring so that is now reconciled within adjusted EBITDA further.
Speaker Change: The denominator and adjusted EBITDA as net services revenue for all consolidated JV, but our EBITDA that we report it is attributable EBITDA only so it excludes NCI.
Speaker Change: Add that back what we have also included as we've included our margin reconciliation bridge in.
Speaker Change: In the release that we provided for you and for investors.
That walks through the separate steps I just articulated.
Speaker Change: And.
Speaker Change: For us it's all about simplicity as we as we go forward with clean results that one.
Speaker Change: Paired easily for us.
Speaker Change: Got it okay.
Speaker Change: Quarter was pretty straightforward. So just those definitional questions for me have a good day. Thank you all.
Speaker Change: Sandy.
And our next question comes from the line of Sandeep Jain with Keybanc. Please go ahead.
Sandeep Jain: Yeah. Good morning, Thanks for taking my question.
Just had a couple on the international segment is there any in particular that you would call out on the international backlog strength in <unk>, maybe a sizeable project or a specific geography, where you may have seen more strength.
Speaker Change: Thanks for the question.
Laura Polonia: We'll pass it over to Laura. Thank you. Thank you for the question we closed another strong year for international I think continued strength.
Speaker Change: Thanks to all of those.
Laura Polonia: The end markets for us whether it's the U K, Australia, New Zealand Middle East.
Where the client is going to continue to be led for us in terms of the long term megatrends infrastructure and energy, we've got renewed optimism in the U K, where now we've got clarity.
Laura Polonia: O&M budget, which creates certainty for the next slate of infrastructure investment and importantly, we can capitalize on that through our long term positioning with fee frameworks, whether they have transportation of water or energy set with a very solid condition and importantly, we have.
Laura Polonia: We've got coverage is most of those frameworks, including in and where we are now 100% of the rate and pace lately with the incumbent and 60% of <unk> and.
Laura Polonia: And importantly.
Laura Polonia: Framework, we're going to continue to define the value of those over the next few months and so then currently not included in our backlog.
Laura Polonia: Equally we have yes.
Laura Polonia: Strength in terms of the KSA market way, we at week, 15% fiscal year.
Laura Polonia: And we continue to see long term opportunities therefore infrastructure and also.
Laura Polonia: D.
Laura Polonia: The 2030 initiatives around.
Laura Polonia: The FIFA World Cup.
Laura Polonia: The other initiatives and then also Australia and New Zealand is a long term trend.
And that we're seeing in terms of $120 billion of long term infrastructure investment as Walter continued strength across all of the key infrastructure segments and our international business.
Laura Polonia: Yeah.
Great. That's helpful. So if I can just stay on international I'll ask you a question on margin expansion.
Speaker Change: Only turned in double digit margins in international just a year ago and now you're over 12.5%.
Speaker Change: Should we expect the same pace of improvement in fiscal 'twenty, five or should we moderate expectations somewhat as we go into 2005.
Speaker Change: Hey, good morning, So <unk> I'll take that question.
Speaker Change: When it comes to margin, where the Northstar industry and we will continue to be the north star industry in terms of artist possible.
Speaker Change: And as we have made investments in.
Speaker Change: In prior years, including FY 'twenty forward, what we've realized the ceiling of that part of possible <unk> continues to increase for both segments.
Speaker Change: We have made and continue to make investments in high growth high margin platforms similar to the advisory services. We have now launched in Q4.
Speaker Change: Investing in efficiently delivering our services and.
Speaker Change: To your point International has led the way on that margin expansion. We provided guidance. We expect on the top end of our long term algorithm range 30 bps is what we expect will be the enterprise increase.
Speaker Change: For margin expansion and.
Speaker Change: And we do expect international will lead that way.
Speaker Change: One thing I do want to note is there.
Speaker Change: The investments that we have made and will continue to make these are record investments again in FY 'twenty five that were contemplating they go through our income statement and it allows us the confidence as we sit here to say not only are we going to be able to deliver our FY 'twenty five continue to lead our industry in margins, but exit FY 'twenty, 7%.
Speaker Change: At 17% for the enterprise and beyond that we are now pretty confidence again that feeling it as 17% with all of the significant initiatives and investments we're making.
Great. Thanks, so much golf.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Speaker Change: Hi, Good morning, this is Italian Bob on behalf of Andy Kaplowitz.
Speaker Change: Good morning.
Speaker Change: First question I would like to ask in the 5% to 8% organic and its harder for 25% in both segments ground range or does America show faster and if you could also update us on.
Speaker Change: The improvement in the positive middle East.
Speaker Change: Sure. Good morning, I'll take the first part and Laura will respond to your question on the Middle East.
Speaker Change: MSR organic growth that we are contemplating for FY 'twenty, five it's 5% to 8%.
Consistent again with our long term algorithm, we articulated during our Investor day.
Speaker Change: We do expect as <unk> seen in the second half of the year Americas will be the organic growth leader between the two segments for MSR growth and expectations on international will be it will start off slower during the year because of Lora articulated in her opening comments and in response to one of the questions. They are funding.
Speaker Change: <unk> is now coming back online and some of our key international markets and we expect that to ramp up.
Speaker Change: Into into the second half.
Yeah, and if I can just ask specifically on the middle East we didn't say slowdown at all in Q4 in fact, our business grew in Q4 a curve it grew in the year.
Speaker Change: And then some of the specific largest segments like the Saudi Arabia business. We won another nine figure major program in Q4, giving us an additional long term visibility.
Speaker Change: And as I said earlier, we've got confidence in terms of some of the longer term programs that are going to continue for us.
Speaker Change: <unk> consulting in the region.
Speaker Change: And we have broad coverage across many of the key programs that cover infrastructure.
Speaker Change: And major projects is up and then.
Speaker Change: That's helpful. Thank you maybe a question focusing on margins.
Speaker Change: Just on margins. So you did 100 bps of margin expansion 20 for it and I think anyway, you've averaged a little over 80 Thats a large expansion for like the past few years and we're still reasonably good growth in 'twenty five why would you only averaged 30 bps of margin expansion 25, what's holding you back from more margin expansion.
Speaker Change: So.
Speaker Change: So great question.
Speaker Change: I would I would not describe it as us being held back for margin expansion.
Speaker Change: We've said this.
Speaker Change: There are times in the last three years is that we're continuing to invest heavily in the business and in each of the last four years, we've invested more in the business than we've had in the prior year.
Speaker Change: And as we move forward, we're going to continue to invest in the business and again there is pretty significant returns from that which is obviously higher margins in the future in a growing business.
Speaker Change: I'll just give you a kind of a highlight of where we've invested first of all.
Speaker Change: We've invested in our workforce we've invested in.
Speaker Change: Recruiting extraordinary professionals to the organization and most importantly, investing in leadership and technical development of our workforce.
Secondly, we are investing.
Speaker Change: In transforming the way that we deliver our work deliver it now and actually deliver it very differently in the future and we think that will have very significant margin benefit to us as we go forward.
Speaker Change: And then we're looking to expand our business.
We have said that design and engineering or our knowledge of science as the base of our business and we look to expand this our vision is to actually have 50% of the business and engineering and design.
And then have our rest of our business. So the other 50% performing advisory and program management work in the future.
Speaker Change: We've made a significant investment in program management.
Speaker Change: In the last three years, we've grown that business represents about $1 $3 billion of minutes or this past year, and we see double digit growth for that business and now we're making investment investment in growing that advisory business, which <unk> referenced in our comments that we're going to look to double that business and make that our next billion dollar platform. So.
Speaker Change: It's again, it's not that our margins are not going as fast growing as fast as they have is that we're being very thoughtful in terms of investing in the future of the business our margins will go well beyond the 70% target.
Speaker Change: All right helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Michael Feniger with Bank of America. Please go ahead.
Speaker Change: Hey, guys. Thanks for taking my questions just Troy I am curious on a bigger picture here as we turn over to a new administration. There are some concerns out there around federal funding and budget could be under tighter scrutiny are you starting to hear any of those concerns from your customers that are on the public side.
Speaker Change: Does it hold back some of the pipeline I know, it's early days Troy, but just would love to get a sense of what you are hearing.
Speaker Change: Risks or tailwind as we're kind of heading into this new administration.
Speaker Change: Yes, so at at the moment, we're not hearing anything directly from our clients.
Speaker Change: I think that.
<unk>.
Speaker Change: So the thoughts around the impact of election are actually just sort of coming from the election process itself and.
Speaker Change: So we don't have any insight.
Speaker Change: On to the agenda of our clients our federal clients than what exists today, but what based on what we do know is we know a couple of things one is is that.
Speaker Change: The federal election does create certainty.
Speaker Change: It means it creates certainty that over a period of time, we're going to understand what the new investment agenda is going to be for the federal government.
Speaker Change: And from my perspective. The fact is we have a very agile business. We made reference to this that about 70% of our workforce is fungible across our markets.
Speaker Change: And the other thing that we do know is that.
There needs to be a continued investment in infrastructure.
Speaker Change: And the majority of that investment.
Speaker Change: <unk> supported by federal funding.
Speaker Change: Predominantly comes from our state and local clients and municipal clients with Citi clients and private clients and that represents more than 90% of our work. So.
Speaker Change: When we sort of look forward, we do have a great degree of certainty on.
Speaker Change: <unk>.
Speaker Change: What the priorities of the government in the U S and the governments in the U S and our private clients are going to have on their agenda and we believe that based on what we know about the.
Speaker Change: Also the.
Speaker Change: The election agenda.
Speaker Change: The new administration is that theyre going to need to invest in infrastructure, because if youre going to strengthen the manufacturing base in the United States Youre going to have to invest in aviation parts railroads and all the supporting infrastructure for those that net increased manufacturing base for.
Speaker Change: Marine investments.
Speaker Change: And then the other thing that we know is if there is permitting reform there.
Speaker Change: There is an awful lot of money.
Speaker Change: That is going to be spent on infrastructure I mean in the next two years.
Speaker Change: And if there is Permian form that's meaningful in the next two years, we see that is actually improving the returns on that investment and accelerating an investment infrastructure. So I think there is an environment of some uncertainty.
I think when we look forward just kind of given the focus of our clients and the focus on the need for infrastructure, we feel very good about the future.
Troy Rudd: Helpful. Troy, Thank you for that answer and just.
Speaker Change: On 2025, it sounds like there were some things that are holding back to MSR growth in Q4, and as I mentioned acceleration of that MSR growth in the second half and 25. So just curious on the first half or second half and to get that acceleration in the second half does it require certain recompete wins.
Speaker Change: Or a bigger pickup in the pipeline that we're seeing now or are you kind of have visibility on that second half acceleration. Thank you.
Speaker Change: Yeah.
Speaker Change: The simple answer is we have good visibility on the second half acceleration.
Speaker Change: And that's driven by the kind of the work that has been awarded that would go into contract on.
Speaker Change: And as.
Speaker Change: And even as <unk> pointed out with some of the as a result of <unk> and some of the changing agendas that that work has been coming to market and it's been awarded through frameworks and that gives us confidence in the second half of the year.
Speaker Change: We will take the work out of those all of those frameworks.
Speaker Change: And then in terms of just what's happened in the first six weeks of this quarter.
Speaker Change: <unk> had continued success, which also gives us confidence.
Speaker Change: In terms of the confidence in the year, but also confidence in the growth and an MSR in the second half of the year.
Speaker Change: Great if I could just sneak one more in just the 10% of MSR to free cash flow.
Speaker Change: Is that in your view is that sustainable can you actually span that.
Speaker Change: Or in 'twenty five 'twenty six 'twenty seven just curious on how how to think about that.
Speaker Change: Free cash flow conversion of MSR.
Speaker Change: Going forward.
Speaker Change: Hey, Ron.
Speaker Change: Sure not a problem.
Speaker Change: Mike and thank you for acknowledging that that fantastic accomplishment for the enterprise up 10% to MSR growth.
Speaker Change: We have $35 to 50000 projects that are ongoing at any point in time. So it's very hard to be precise to say that's the number we're going to land on what more importantly, what has driven these great results.
Speaker Change: As.
Speaker Change: Our cash conversion is embedded in the culture and DNA, how our professionals operate it's one of the core tenants.
Speaker Change: And that provides us the confidence to your point at 10%.
Conversion it is achievable, especially as we move forward continued margin expansion, even on industry, leading margins that we delivered expectations.
Speaker Change: Our investments will pay dividends, leading us to unheard of levels of margin at 17% and 17 plus percent all those things bode exceptionally well for great cash conversion at a very high rate and that will be our focus year in year out.
Speaker Change: To have the best cash results, including continue to continue to deliver on that 10% conversion rate.
Speaker Change: We will take our next question from the line of Steven Fisher with UBS. Please go ahead.
Steven Fisher: Hi, Thanks, Good morning, I just wanted to follow up on good morning, just wanted to follow up on the growth rate in.
Steven Fisher: The pipeline that you have I thought I heard you mentioned.
Steven Fisher: 10%, but if you could kind of.
Speaker Change: Remind us what's the growth rate youre seeing in the pipeline of.
Speaker Change: The larger pursuits, I think it was 20% last quarter, but maybe that was just program management and not sure if youre differentiating between kind of large pursuits in general and program management for <unk>. So just trying to clarify a little bit on the.
The pipeline growth rate. Thank you.
Speaker Change: Sure Hey, Stephen Scar I'll take that question you are right and your recollection, our pipeline year over year, which was very robust.
Speaker Change: When you compare to this time last year, it's up 10% again in all our end markets and it gives us a lot of confidence, especially when you look at the book to burn in our design business of $1 two as we exited the year, but as importantly, 50 plus percent win rates overall that we've been capturing.
Speaker Change: For for multiple years in a row.
Speaker Change: And when you look at our larger pursuits, not only the pipeline more abundant with those larger pursuits coming in at higher velocity throughout the year, but our win rate is greater than that when it comes to win rates greater than the 50 plus percent on the larger pursuits greater than $25 million and.
And including program management, where it seems to be we've almost been clearing the deck as those opportunities have come up over the last few years. So it gives us a lot of confidence as we March into FY 'twenty five.
Speaker Change: Okay. That's helpful. And then maybe a question around sort of private sector versus public sector in short term interest rate policy is still.
Speaker Change: A little bit in an open question and also the outlook for long term rates as well so how do you see.
Speaker Change: The influence there on the private sector and when you think about your business for the next.
Couple of years, how do you see private sector versus public sector from here.
Steven Fisher: So Steve.
Speaker Change: We actually have optimism obviously around both.
Steven Fisher: There is again there is a.
Steven Fisher: Need for <unk>, there is clearly a need for infrastructure.
Steven Fisher: Going to support the expansion in the economy.
Steven Fisher: And it's going to support the agenda of things like addressing the concerns around resiliency and sustainability of infrastructure is certainly as you've seen the impact of climate events. So we have the optimism around the governments and we see that in our pipeline, but we also see that within our private customer base and <unk>.
Steven Fisher: Places to look for that and as you really look at sort of the insatiable need.
Steven Fisher: For energy.
Steven Fisher: And that need is.
Steven Fisher: Really exemplifies the significant amount of investments being made by our private clients.
Steven Fisher: And so where do we sort of look across it.
Steven Fisher: Optimism around that entire pipeline the thing that we're hopeful of is that with permitting reform. It will increase the returns for our private clients.
Steven Fisher: And in fact, our client our private clients will have an even larger appetite.
Steven Fisher: To invest in the infrastructure they need to support their growth ambitions.
Steven Fisher: Yes.
Steven Fisher: As you just said.
Speaker Change: A follow up there I did want to ask you since you talked about the permanent reform, where you see it having the biggest impact on your business is that exactly where you see it on the private sector side.
Speaker Change: No.
Speaker Change: The answer is I see it across the entire portfolio of work that we do.
Speaker Change: Sure.
When you when you sort of look at whether it's private or publicly funded infrastructure projects.
Speaker Change: The permitting process can take anywhere from three to six years thats sort of a statistical industry average.
Speaker Change: But even beyond that when you start to look at all of the work that has to get done to take something from design all the way through construction. There is a significant amount of sort of.
<unk>.
Speaker Change: Government regulatory review that goes on in that process. So we actually see that as an opportunity as well for simplifying the process. So it's it's permitting but it also extends right into the delivery of the project and so it's a really significant opportunity.
Speaker Change: Perfect. Thanks, a lot.
Speaker Change: Thank you.
Speaker Change: We will take our next question from the line of Michael Dudas with vertical research. Please go ahead.
Speaker Change: Good morning, gentlemen.
Speaker Change: Okay, Alright, good morning.
Speaker Change: And your.
Speaker Change: The new water.
Speaker Change: Final advisory business that you've created and looking to grow.
Is that.
Speaker Change: Are you willing to be mostly driven by your current.
Speaker Change: <unk> base and you're just.
Speaker Change: Adding youre getting more involved in from beginning to end type services or is there opportunities away from your existing clients I'm sure. It's both but where the program management can be much more impactful, especially with some of your.
Speaker Change: Non U S government clients as Youre looking to grow that program management business.
Speaker Change: Yes. Thanks for the question Michael We've got a lot of excitement about this new business and our new later, Joe Hopkins is up to a flying start anybody thinks like that.
Speaker Change: I think thats positivity internally and externally in terms of this new business for us in the aspiration that we have to answer your question, it's but and we obviously have very strong coverage across many.
Speaker Change: Municipal water clients.
Speaker Change: There are possibilities in the federal segment, where we're also the leading player.
Speaker Change: But obviously opportunities in the private sector. So if we look at the core markets.
Speaker Change: Certainly opportunities to take more market share within the municipal space.
Speaker Change: Well in the U S. Align for example, there are 500 municipal water utilities, serving populations of <unk>.
Speaker Change: 5 million people in each of them require substantial digital investment to modernize their operations. They all of the existing clients.
Speaker Change: Challenge in terms of water supply optimization.
Speaker Change: Time is right, it's new business and the fact that they are existing clients and these opportunities take moment chamblee.
Speaker Change: Many other clients in the municipal space Augur, well for US and also in the U K and then just the anticipation around the.
Speaker Change: Wave of work, that's coming with the Amp Bank program I mentioned earlier, our positioning at the moment our win rate in terms of the very important frameworks.
Speaker Change: Again, these clients will benefit directly from this new business.
Speaker Change: Established.
Speaker Change: We are poised to really capitalize on the timing it is standing at the senior advisory opportunity Super excited about it.
Laura Polonia: Excellent. Thank you Laura.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Kevin Wilson with Truth Securities. Please go ahead.
Kevin Wilson: Hey, good morning, Thanks for the time.
Kevin Wilson: On the water and environment advisory business.
Speaker Change: I think you spoke to the sort of lower level of investment required but I'm one.
Speaker Change: Understanding at the higher margin areas can.
Speaker Change: Can you speak to sort of the level of business development spending and reinvestment in the business that you are expecting.
Speaker Change: And how that potentially maybe weighs on margins in the shorter term.
Speaker Change: Yes, it does.
I'll take that question.
Speaker Change: In terms of lower level of investment that comment is just a comparative to if we were to do a very expensive M&A, which it would be at this type of space. We've proven our track record, including program management that we're able to make very smart investments through our P&L by attracting great market resources and prefer.
Speaker Change: <unk> to drive this organically right. If you look at our program management business.
Speaker Change: 455 years ago that was less than 3% of our overall MSR and it's now almost 15% of our overall MSR based on the organic investment so not to say that theyre low investments, but comparatively but.
Speaker Change: Vestments, we make our organic and drive very high ROI in fact close to 40 plus percent.
Speaker Change: And when we look at what is the specific investments. It's all included in our guidance because it's all going through our income statement, we don't break out individually with an investment cost, but this again is what we build on and gives us confidence to continue to be the industry leader and continue to separate ourselves.
Speaker Change: And margin delivery.
A few years ago, nobody thought 13% was possible two years ago, Nobody thought 15% was possible were going to deliver 2017 and continue to March forward from that 17 plus percent.
Speaker Change: Thanks, That's helpful and then my second question.
Speaker Change: I'm wondering if you could speak to if you see a consolidation opportunity in this space among infrastructure services professional services firms.
Speaker Change: And if so why are.
Speaker Change: Are there are scale benefits.
Speaker Change: Where did the biggest risks to something like that be in your opinion.
Speaker Change: And sort of related to that to what extent do you think M&A or portfolio optimization.
Some peers is creating opportunities for E com to gain share as peers continue to be distracted.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: Yes, it's difficult it's difficult to talk about what other people's ambitions are but I can talk about our own.
Speaker Change: So first of all the way we think about this is.
Speaker Change: If youre going to do M&A.
Speaker Change: Is there a need for is there a need to do it and so first of all if youre already number one in all of the marketplaces that you serve is there a need to do acquisitions to kind of grow.
Speaker Change: Again grew year capability we.
Speaker Change: We don't think so we.
Speaker Change: We do believe that you do need scale to invest in the future of this business there are some trends.
Speaker Change: I won't even say there is some trends there are investments that we're making in investments that need to be made in the industry to keep up with us and the fact is is that we are going to transform the way that we deliver work and.
Speaker Change: That could lead you to the question does it really makes sense to do an acquisition to acquire more people in our business.
Speaker Change: In a business where in fact in the long term you're going to need less people to deliver the same amount of work.
Speaker Change: So.
Speaker Change: We look at this and say we're focused on.
Speaker Change: Growing the business organically organically transforming the way that we're going to deliver work in the future.
Speaker Change: And the extend our vision of actually expanding.
Speaker Change: How we serve our clients by growing advisory.
Speaker Change: Continuing to grow program management so.
Speaker Change: Organic investments is where we think it's important to be focused.
Speaker Change: Now the other the other issue is when you when you look at making an acquisition in today's market the prices are very expensive.
Speaker Change: And so it just.
Speaker Change: Again, and just in terms of return model it doesn't make any sense to do that especially when we're actually deploying capital and and compounding our existing earnings. So that we're delivering at least in the last three years, we are delivering compound EPS growth in excess of 20%.
Speaker Change: And so that's where we see the greatest opportunity to deploy capital.
Speaker Change: Is there going to be an opportunity for others in the industry, possibly but that's not where we're focused.
Speaker Change: And we also view that the scarcity of resources that we have in the business is actually management time.
Speaker Change: And our management time is dedicated to what I. Just described if we were to do participate in a large acquisition it would absolutely detract.
Speaker Change: From how management is spending their time to continue to create a competitive advantage.
Speaker Change: That's our focus.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Adam <unk> with Thompson Davis <unk> Company. Please go ahead.
Speaker Change: Hey, good morning, guys nice quarter.
Thank you guys.
Speaker Change: Did you guys see any caution.
Speaker Change: In the U S in the months, leading up to the election.
Speaker Change: From public or private sector clients and I'm just curious if that was the case.
Speaker Change: Are you seeing any signs of improvement there.
Speaker Change: We really didn't see.
Speaker Change: Any any signs.
Speaker Change: And from our clients, whether they were private or whether they were public sector clients.
Speaker Change: One of the things we did observe though as we said this is that.
Speaker Change: When you are focused on larger project awards.
Speaker Change: We've been focused on that and winning a lot of larger project awards is that.
Speaker Change: The process to.
Speaker Change: Bid and the process to award in the process to contract takes a little bit longer.
Speaker Change: So we didn't see anything unusual but that was really what we saw in our business as a result of our focus on kind of what we describe as winning the things that winning the things that matter a larger iconic for larger programs.
Speaker Change: Okay interesting thanks, and then.
Speaker Change: I wanted to ask on the construction management issue that you called out.
Speaker Change: Curious if that was a one off issue or is that.
Speaker Change: Or is that a reflection of the state of the industry as a whole.
Speaker Change: Hey, Adam does garner I'll take that question that was a one off issue, we haven't experienced that ever and as I said in my comments my prepared remarks anytime there is a situation where a client will try to push onerous risk on to US we will walk away. We have no interest in taking onerous risk and the great thing is at.
Speaker Change: Any given point in time again, something I alluded to earlier, we have $35 to 50000 projects ongoing and not one project is ever material.
Speaker Change: So we will manage but we will continue to employ a risk management and continue to deliver organic growth and as importantly, Troy mentioned in his comment.
Kevin Wilson: Kevin 21% EPS compounded CAGR over a five year period.
Speaker Change: And I just I wanted just to add to <unk> comment I think it's I think it's not necessary the project itself.
Speaker Change: It's also important to recognize that.
Speaker Change: This is something built into the cultural organization as we're going to continue to make again really thoughtful decisions about how we manage the risk in our business and we manage the risk around projects.
Speaker Change: And that when we.
Speaker Change: Our uncomfortable with that we're willing to again not chase again, not chase revenue not chase revenue growth, where sometimes that would be to your detriment of long term. So again, that's a that's a really important part of what has become our culture.
Speaker Change: And then just real quickly staying on that theme could you actually make a case to the opposite that the construction management business.
Speaker Change: It's about to get better for the next couple of years.
Speaker Change: I have no doubt that it's getting better for the next couple of years.
And the reason is.
Speaker Change: We've won we've won a pretty significant amount of work over the course of the last few quarters and we have good visibility into the future.
Speaker Change: But in construction management when you when you win projects. There is typically a startup phase and that startup phase can take anywhere from nine months to a year, we think about it as preconstruction.
Speaker Change: And during that phase they are smaller projects.
Speaker Change: They're sort of on a time and materials basis. They don't have significant margins in them, but you then get to the point, where you move from that Preconstruction Phase Two award.
Speaker Change: And then all of a sudden you backlog expands and you have great projects that show up that you would deliver for the next four or five years and so.
Speaker Change: But that business has had some fairly significant wins, where in that pre construction phase and so it gives the impression perhaps that the.
Speaker Change: The backlog isn't as strong as we believe it to be but it will become visible in a short period of time.
Speaker Change: Good color. Thank you.
Speaker Change: Thank you.
Speaker Change: And that will conclude our question and answer session I'll turn the call back over to Troy Rudd CEO for closing remarks.
Speaker Change: Thank you again, thank you everyone for joining the call today.
Speaker Change: And I want to close by just thanking all of the people at E. Com for the very significant contributions effort that they exited June and of course of this year.
Speaker Change: And what they are doing as we already start entering into this new fiscal year again and thank you all.
Speaker Change: Thanks, again, and we'll talk to you next quarter.
Speaker Change: Thank you all for joining today's call you may now disconnect.
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