Aecom Q3 FY2020 Earnings Call

Good morning and welcome to the AECOM Third Quarter 2020 Conference Call. I would like to inform all participants that this call is being recorded at the request of AECOM. This broadcast is a 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, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Will Gabrielski, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator. I would like to direct your attention to the Safe Harbor statement on page 1 of today’s presentation. Today’s discussion contains forward-looking statements about future business and financial expectations, including expected and potential impact from the COVID-19 pandemic. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is posted on our website. As a reminder, we sold the Management Services business earlier this year and intend to exit our remaining at-risk, self-perform construction businesses. As a result, these businesses are classified as discontinued operations in our financial statements. Today’s comments will focus on continuing operations unless otherwise noted. Today’s references to adjusted operating margin reflect segment-level performance for the Americas and International segments. We will also refer to net service revenue or NSR, which is defined as revenue excluding subcontractor and other direct costs. Our discussion of margins will be on an NSR basis unless otherwise noted. Beginning today’s call is Mike Burke. Mike?

Thank you, Will. And thanks to all of you for joining us today. I’m joined by Troy Rudd, our Chief Financial Officer, and as we announced in June, our incoming CEO; Lara Poloni, Chief Executive of our EMEA business and incoming President; and Randy Wotring, our Chief Operating Officer. I’ll begin today’s discussion with a high-level summary of our results. Troy and Lara will then review our performance and outlook in greater detail before turning the call over for a question-and-answer session. I’m proud of our people and very pleased with our Q3 FY 2020 results. For the seventh consecutive quarter, we delivered double-digit growth in EBITDA, while hitting our free cash flow targets, continuing to win great new work, growing backlog and advancing our transformation into our industry’s premier professional services firm. For the third quarter, we delivered adjusted EBITDA of $187 million, which is an increase of 18% over the prior year and above our expectations for the quarter. The benefits of our ongoing initiatives to expand margins contributed to this outcome. The segment adjusted operating margin was 13.2%, an increase of 250 basis points over the prior year, setting a new quarterly record for the Professional Services business. With $3.1 billion in new project wins during the quarter, our backlog increased by 16% over the prior year and remains near a record. We have more than three years of revenue in backlog and record contracted backlog. This visibility provides us with many strengths to outperform, including the ability to maintain a strong workforce and provide more certainty for our teams, which includes the best and brightest minds in our industry. Troy, Lara, Randy, and I all share pride in the incredible efforts our employees are making each day to address our clients’ needs. Their efforts continue to make the difference in AECOM rising above an operating environment that changes almost daily because of the COVID-19 pandemic. Given the tremendous progress we are making with substantially improved financial performance and the smooth leadership transition, I plan to accelerate my departure from AECOM and transition my responsibilities to Troy Rudd on August 15th. While we are only six weeks into our transition, Troy and Lara have already proven they are ready to lead this company immediately. I see no reason to further delay this transition. We are all excited about what the future holds for AECOM under their leadership, and we are ready to accelerate the transition to more quickly take advantage of the opportunities in front of us. I remain highly confident in the continued upward trajectory of the business under Troy’s leadership. The transformation of our business is not yet complete, but over the past two years, we have simplified our organization through the sale of our Management Services business, lowered our risk tolerance, improved our margins by almost 500 basis points since FY18, and built the foundation for an incredibly resilient and agile business that allowed us to outperform our sector during the pandemic. After six years, this will be the final time I speak with all of you as CEO of AECOM. I want to thank our shareholders, employees, and all our stakeholders, everyone who counts on the value AECOM creates. I came to AECOM 15 years ago, drawn by its purpose to build a better world. And during that time, we’ve grown from a private company with $1.5 billion in revenue to a public company and market leader with $21 billion in revenue last year. Our innovation and expertise have given rise to iconic projects around the world, from modern airports, ports, and transportation systems to the rebuilding of the World Trade Center. While the look and focus of our great company continue to evolve, the purpose that aligns our professionals around the world is stronger than ever. This has been particularly evident in our response to the coronavirus and the results we are achieving. AECOM is built for moments like these, and our Q3 results and FY20 outlook highlight the momentum that through Troy’s and Lara’s continuing guidance we will carry forward well into the future. I have the utmost confidence that they will continue the incredible trajectory of our business that we have experienced over the past two years. With that, and to go into further detail on our performance, I want to hand it over to our next CEO, Troy Rudd.

Thanks, Mike. I plan to get into additional detail about our financial performance and discuss our strategy. But before I begin, I want to offer a huge thank you to Mike. Under Mike’s leadership, AECOM has experienced phenomenal growth and transformed the company into a market leader whose innovation, technology, and infrastructure solutions are unrivaled in our industry. He’s inspired countless professionals, including me, with his vision and strategic focus. He’s been unwavering in his commitment to shareholders as well as to our employees and our clients around the world who rely on our counsel, ideas, and infrastructure. Personally, Mike has been a strong thought partner, someone I have always been able to count on and someone I’ll be a much better CEO for having the honor of working with Mike these past six years. We’ve been asked, what defines a great professional services business? My answer is always the same. It’s the strength of the people within the organization enabled and empowered by leadership to succeed in the marketplace that defines a great professional services business, my viewpoint of the firm through my more than 11 years of experience at AECOM and having spent my entire career at professional services organizations. AECOM is a great Professional Services business with a limitless future. As my role in the organization expands, including Lara Poloni in the role of President and the rest of the executive team, we will continue to enable and empower the most talented workforce in the industry to reach our full potential. Today, AECOM is a critical partner to the world’s largest governments, companies, and organizations who are leading change in urbanization networks and transforming our environment and water infrastructure while keeping it safe. It bears emphasizing that we’re consistently ranked the number one transportation and facility design firm and the number one environmental firm in the world by E&R, and we hold leading positions in several other market sectors. Over the past few years, our transformation into a pure play professional services business has been evident. We are making investments in people and digital innovations to expand our market share and deepen our client engagement. We are simplifying our operating model, which improves our agility, expands our margins, and increases returns on capital. We are all aligned against a shared objective of building a leading Professional Services firm and creating value for our stakeholders. Our leadership team is executing several priorities towards achieving this vision. First, our commitment to our professionals is critical to our success. We’re investing in our people and innovation and fostering a culture of contributing to the communities in which we operate and creating a culture of one AECOM. As a global company, we have a fully diverse employee base and we benefit from incorporating different perspectives into our culture to create unique experiences for our people and our clients. At this point, we’re advancing reverse mentoring programs along with enhanced community engagement programs and voluntary efforts. With more diverse teams brought to bear on our projects, we believe we can achieve significant improvements. Second, we’re investing to lead the digital transformation. The pace of digital transformation has intensified because of COVID and has magnified the benefits of our longstanding investments in IT and innovation. Third, we will work tirelessly to eliminate inefficiencies; our workplaces present a greater opportunity to optimize our real estate portfolio in tandem with increased employee preferences for greater workplace flexibility. This is an opportunity both to enhance AECOM's evolution as well as to help our clients adapt to similarly changing employee preferences. We’re also expanding our global shared services and design centers, advancing our digital solutions to increase our ability to execute certain tasks from better cost geographies. All of these actions are critical to creating capital that we can invest in our teams. Finally, through our investments in teams and innovation, we are building a highly cash-generative and enduring business model. We are committed to our capital allocation strategy of deploying substantially all available free cash flow. Please turn to the next slide. Turning to our third quarter performance, I’m really proud of how the organization has come together. As Mike discussed, our margins improved substantially over the prior year with strength in both segments, and free cash flow is strong. Our backlog has increased, creating even greater visibility into the future. While we did see some slowdown in the pace of awards in certain markets due to the impact of COVID, we were able to offset these by continuing to innovate and deliver for our clients. Please turn to the next slide for discussion of our segment performance. Organic NSR grew by 2%. This performance was driven by double-digit growth in our Construction Management business and by market share gains in our largest design markets: transportation and water. However, other markets faced declines during the quarter, particularly in the environmental sector, which is more heavily weighted to private sector and oil and gas clients. The Americas segment had a 17.9% adjusted operating margin, marking a 340 basis-point improvement over the prior year and leading our industry. This represents a new high for the business. The backlog in the Americas segment increased by 18% over the prior year and includes a record contracted backlog. However, trends in some markets are beginning to show signs of strain due to funding uncertainty and slower client decision-making. Our state and local clients are impacted by lower tax collections. These clients came into the year with record revenues and rainy day funds, but the impact of COVID has altered their financial outlook. It’s important to note, though, that while state budgets are under pressure, 95% of state transportation department funding is supported by specific fees, which makes this funding more insulated and less discretionary compared to other markets where state general funds comprise the majority of funding. One thing is certain: states will need an infusion of capital to maintain their current spending levels. Importantly, both political parties have expressed support for an advanced proposal to replace the FAST Act and provide assistance to state and local governments. As clarity around funding solidifies, we expect our state and local clients to act with greater certainty. We remain focused on what we can control, specifically running the business as profitably as possible in any environment. I’ll now turn the call over to Lara for discussion of our international performance.

Thank you, Troy. Please turn to the next slide. For the quarter, organic NSR declined by 3%. Declines in the UK and Middle East along with stable trends in Hong Kong were partially offset by continued growth in Australia. The turnaround of our International margins continued to progress. Our adjusted operating margin in the third quarter was 5.7%, a 50 basis-point increase over the prior year. Year-to-date, the adjusted operating margin has increased by 170 basis points, which is a particularly strong achievement considering the 2% decline in organic NSR over the same period. When I assumed responsibility for the EMEA region, the opportunity to improve margins was apparent. As a result, we conducted a comprehensive analysis of our overhead cost structure and the return profile of the business in each of our markets. This analysis resulted in actions to consolidate our real estate portfolio, reductions to our G&A costs to eliminate unnecessary expenses, and our ongoing exits from more than 30 countries. To that end, our performance this year inspired confidence in our trajectory. We have realized $16 million of year-to-date G&A savings in the International segment and we have focused the business on our best growth opportunities. Our actions position us well to benefit as markets recover, and our recent large wins across the region have resulted in market share gains. Backlog is highlighted by 6% growth in the EMEA region. We have made investments over the past several years to ensure we are well-positioned on engineering work in the Middle East, and we have reestablished our leadership position in the UK where we have successfully won positions on more than 250 frameworks, positioning us well for future growth, including most recently securing a leading position on the £500 million four-year services framework for transport for London. In the Middle East, conditions in petrodollar-funded countries are impacted by low oil and gas prices, which is providing some resistance to growth. However, we continue to build a strong backlog of business and mega project developments in Saudi Arabia, including a more than $100 million win in the quarter, which demonstrates our commercial successes while diversifying our work on projects that remain a priority for our clients. As we look across conditions in our international markets, there are pockets of strengths contrasted against certain COVID-related headwinds in various countries. In the EU, government stimulus efforts, including the nearly $1 trillion plan that passed last month, will provide a strong pipeline of opportunities over the coming years. In the Asia Pacific region, stimulus actions in Hong Kong and Australia have helped to stabilize market conditions, resulting in a steady backlog. However, COVID-related headwinds in Southeast Asia have delayed the pace of award activity and may offset some of the growth opportunities we see in other markets. Importantly, our utilization in the region remains high. Our year-to-date NSR has held steady with the prior year and our actions to reduce costs and drive efficiencies have resulted in year-to-date profitability that is ahead of our original plan for the year. Before turning the call back to Troy, I want to comment on my recent appointment as President, partnering with Troy and the great leadership team as we continue on our journey to create the best professional services business. As Troy stated in his remarks, a great professional services business is defined by the strength of its people. It is our job as leaders to enable and empower their success. We must inspire the best minds in the industry to solve the world’s most complex and unique challenges. We must measure what matters, such as client satisfaction and employee retention, and reward and celebrate our successes. Equally as important is holding ourselves and the organization accountable for delivering on our objectives. It is our job to evaluate opportunities and direct capital to the right projects and initiatives that will have the most meaningful impact. We must also know when to make calculated investments and trust our teams to challenge the limits of what is possible. After 25 years at AECOM, I am excited as ever about our future. Because I know that every challenge we face and overcome builds an even stronger organization with dedicated people who are passionate about the possibilities to create a great AECOM. I look forward to getting to know all of you in the future. And with that, I’ll turn the call back to Troy.

Thanks, Lara. Please turn to the next slide. Turning to cash flow, liquidity, and capital allocation. Our financial position is strong with a low-risk business model, strong balance sheet, and a highly cash-generative business. Operating cash flow in the quarter was $186 million, and free cash flow was $272 million. This performance was consistent with our expectations and was highlighted by strong collections across the enterprise. We also successfully collected $122 million as a result of the previously announced favorable net working capital true-up related to the sale of the Management Services business. As a reminder, the MS cash flow during the first four months of the fiscal year was below the contribution we expected in our initial guidance. This was a timing-only difference. Accordingly, we collected the working capital in the third quarter with no material impact on our results for the full year. Debt declined compared to the second quarter, and our gross leverage ratio declined from 3.1 times to 2.8 times, further improving our financial flexibility. I’m also pleased to report that we are continuing to take actions that strengthen our balance sheet and liquidity. On July 31st, we issued a notice of redemption to our holders of our 5% 2022 notes. The redemption will be funded by the proceeds under our existing lower-cost, delayed draw term loan facility that we put in place last quarter. Importantly, as a result of this transaction, the annual cash interest expense will be approximately $6 million lower. Going forward, we will target gross leverage of below 3 times, which we believe will provide us with the best capital structure to operate the business and to execute on our capital allocation priorities. After investing in our people and innovation, our priority remains deploying substantially all available free cash flow to share repurchases. Please turn to the next slide. I want to provide a brief update on our discontinued operations. We are closely managing the operations of these businesses to ensure risk is controlled and the business value is retained. To this point, I’m pleased to report that the underlying profitability improved in both the civil and oil and gas businesses, which generated positive EBITDA. Excluding additional costs to complete the Alliant combined-cycle gas plant, power also generated positive EBITDA. Importantly, we achieved substantial completion on the Alliant plant in July. Our process to exit our at-risk, self-perform construction businesses has intensified with several processes running in parallel. There is strong interest, and exiting these businesses remains a top priority. Finally, I am pleased to note that through our restructuring actions this year, we have fully eliminated stranded costs associated with the sale of the Management Services business earlier this year and other businesses we have exited. Please turn to the next slide. As you heard today, the business is resilient. We are energized by the opportunities in front of us. Productivity has remained strong, even as up to 90% of our employees continue to work remotely. Utilization levels are ahead of our pre-COVID levels and are consistent with the levels that were contemplated in our full-year plan. With that, we are increasing our fiscal 2020 adjusted EBITDA guidance to $720 million to $740 million, representing 11% growth at the midpoint. Our guidance includes an expected $20 million negative impact from changes in foreign currency rates, as compared to our initial guidance for the year. We continue to expect AECOM capital to contribute $10 million of earnings this year. We are also reiterating our free cash flow guidance of $100 million to $300 million and are confident that we will fall within this range based on strong quarter-to-date collections and normal seasonal trends that tend to benefit our fourth-quarter cash flow. With that, operator, we’re now ready for questions.

[Operator Instructions] Your first question comes from Sean Eastman with KeyBanc Capital Markets. Your line is open.

Hi, team. Lara, Troy, congratulations on the promotions. And Mike, all the best on your next endeavors, leaving on a high note here this quarter. I just wanted to start on the state and local budget element, which you called out in your prepared remarks. Troy, could you just level set with us on just how we should be thinking about the magnitude of the potential swing there to the extent global stimulus measures are delayed, whether in the U.S. or internationally? I mean, where is the exposure, where is the concern, and how big of a swing could that be on AECOM’s fiscal ‘21 revenue trajectory in your view?

Yes. Sean, first of all, thank you for the well wishes. With respect to our state and local budgets, it does represent about a quarter of the work that we do, or a quarter of the revenue that we have in our overall Professional Services portfolio. There certainly is an element of that has been impacted by the shortfalls as a result of COVID. But, on the other hand, we are seeing again user fees starting to increase as people return to work and return to traveling. We also have a significant amount of optimism regarding what the Federal government will do to support transportation expenditures and, in particular, state and local governments. In particular, the FAST Act will expire in September. However, I think it’s been decades since transportation funding has gone without being replaced. So, we certainly have confidence that something will be done to support those transportation budgets and transportation expenditures in ‘21. Regarding state and local budgets, again, we have some optimism around what will get done from either political party. More importantly, from our perspective, there are things that we can control. We’ve proven that we can manage our way through turbulent times when there is funding shortfalls within certain budgets. While we don’t have a clear line of sight to what the outcome will look like, we certainly do have confidence in our ability to manage through it. The other important part is we have a great platform and skilled professionals that allow us to win work. Based on what we’ve seen in the third quarter, we believe we’ve taken market share in the area of transportation and water. So, we’ve got great professionals in the marketplace, we are winning work, and replacing the work that we’ve been delivering. Even though there is uncertainty in state and local budgets, we have confidence in our ability to manage our way through it, based on our most recent experiences.

Great. That’s helpful. And maybe just from a strategic direction perspective for you, Troy, as you take the big seat, a lot of announcements on digital innovation and new tools— is that your primary focus here in the immediate term? And maybe you could detail for us some of the early wins on digital that you can build on.

Yes, certainly. Again, if you step back and look at the impact of the pandemic, while it’s been a lot of work and challenging to manage through the environment we’re in, it’s accelerated a lot of things that we’ve done to collaborate and work with our clients. Many of those initiatives are based around what we’re referring to as digital. So, we have been investing in allowing ourselves to have the tools to work together with our clients in a digital environment. At the same time, we’ve been investing in some tools that enable us to work with our clients and continue delivering work. A great example of this is that we’ve developed software for virtual consultations with our clients. We’ve been using that for several of our clients. The most recent experience I can discuss is work we’ve done with Roche in Ireland, and it’s been entirely successful. We are also developing a digital environmental impact assessment tool, which is currently in the pilot stage. It’s the first IAS process we’re working on with the Corps of Engineers, and it is clearly ahead of anything else in the marketplace. We expect to bring it to public use as a tool for government agencies in the future. These are some examples of what we’re working on. However, I’ll let Lara contribute to this as well.

Yes. Thank you, Troy. I also want to emphasize that we are very strongly positioned with our digital tools. To expand on Troy’s point, particularly in our transportation markets, we have a lot of enthusiasm about an infrastructural recovery. Our teams worldwide have done some remarkable work. A recent example would be the launch of our TRIPS tool, which is the Transportation Resilient Integrated Passenger Solution. Given the uncertainty around commuters returning to public transit, this technology platform provides real-time information to commuters and other alerts. It’s a timely solution we have deployed on a project in the Greater New York region. As Troy mentioned, we also maintain a strong position in the environmental sector, and we continue to develop our digital libraries in our Buildings & Places segment, which is a significant part of our business globally. I think these tools will provide continued differentiation for us, and it’s a priority to scale up these innovations throughout our business.

Your next question comes from Michael Dudas with Vertical Research. Your line is open.

Given your perspective, as you’re involved with major cities, state, local, and port authorities, as well as transit, especially in places like San Francisco and LA, a lot of activity is occurring, obviously COVID related. How are you seeing business activity to date? It seems like you’ve managed it very well despite the funding pressures that may or may not come from Washington, and some caution that could be felt amongst governments. Do you sense that there’s a normalization occurring through this or will there be needed adjustments to how your services are tailored on the government side here in the states?

Yes. Mike, I think, it’s difficult for us to provide precise prognostications. However, our people are consistently working with our clients in metropolitan areas globally, adapting to the ever-changing environment. While we don’t want to minimize the challenges, there are many locations where we’re seeing government support for infrastructure investment through stimulus measures. We’re seeing this in Canada, Australia, and Hong Kong. Discussions regarding stimulus investments have also taken place in the UK, which will support that market. Long-term, we remain optimistic about both immediate and long-term stimulus here in the United States to support infrastructure investments and help get people back to work. While we can’t comment on changes in city-funded projects specifically, as we monitor our clients, we see a lot of optimism around infrastructure investment moving forward. Additionally, in our private sector markets, while some awards and bookings have been delayed, we view this as merely a postponement. Our construction management sector still provides good long-term visibility, with a robust pipeline of opportunities.

Sure. Those are very fair remarks, and I appreciate those. My follow-up would be, may you provide terrific progress on the margin front, especially in the Americas, as well as your international and U.S. design business? Could you remind us some of the methods you’ve implemented to improve that business? I assume you increased your global design center as well. You mentioned these have all been helpful in contributing to some margin improvement. Could you offer more comfort on those long-term goals from your remarks?

Sure. The headline here is we absolutely are confident in our continued ability to improve margins beyond the current levels, both in the short and long term. I’ll mention the North American markets first, and then I’ll turn it over to Lara for international comments. In North America, we’ve improved the use of design centers, streamlined the operating structure, and utilized our global business service center effectively. Despite the challenges, we’ve continued to operate in a remote environment adeptly, maintaining those opportunities overseas. Finally, we’re executing a significant real estate restructuring that we intend to complete by the end of the year. Lara?

Yes, and thanks for the question, Mike. We’re firmly focused on improving international margins, and we’re making substantial progress. Year-to-date, our margins have increased by 170 basis points. We’ve successfully executed $16 million in year-to-date G&A savings, ahead of plan, despite revenue headwinds in the larger international markets like the UK and Middle East. We also aim to achieve double-digit margin performance over the next few years. Regarding specifics, we’ll continue to simplify and streamline our portfolio, focusing on parts of the business that promise high returns. We’re also actively reducing overhead and unnecessary expenses, as well as targeting the performance of our global business service operations. In just this year, we’ve seen a 30% increase in volume in our GBS, with ambitious targets for next year. Furthermore, we’ll maintain our relentless focus on gaining market share, particularly in the UK, where we’ve secured more than 250 frameworks despite the current environment.

Your next question comes from Andy Kaplowitz with Citi. Your line is open.

Troy, you mentioned that the pace of orders slowed in June in the Americas. Could you quantify that slowdown for us? You enter this slower order pace with contracted backlog up 13% year-over-year. Can you provide initial thoughts on how that contracted backlog growth gives you revenue growth visibility over the next few quarters? Not necessarily asking for a guide for next year, but to what extent does that current backlog position play into your view of growing revenue in FY21 if there isn’t external stimulus from state and local sources?

The best way to tackle this is through our backlog. The backlog is currently up 16% year-over-year from last year, which provides us with favorable visibility moving forward. Our construction management gives excellent clarity on what to expect in the short term. In our design business, our book-to-burn rate has been over one-to-one for the year, contributing to that visibility. However, as state governments fund projects according to different timelines, those short-term fluctuations impact our performance. We have demonstrated resilience, successfully managing our way through these fluctuations. While we are optimistic about growth, we also prepare for potential revenue stability as we navigate the uncertainty around state and local budgets.

I want to follow up on the margin question. You provided good color on the respective segments, but you have a long-term target of a 15% EBITDA margin. As we consider Americas, margins have trended into the high teens this quarter. What is your insight into the sustainability of that margin, especially if we experience muted growth here? On the other hand, you provided a strong outlook for international margins, but can you still grow that margin even if you encounter business headwinds?

Absolutely, Andy. We have full confidence to continue growing margins into 2021 and beyond. The actions we've implemented this past year will add run-rate benefits extending into the next fiscal year. For example, while there was a contraction in the third quarter for our international business, we have seen margins continue to improve. As we look ahead, we anticipate attaining double-digit margins for our international operations over upcoming years. In the Americas, the successes we’ve achieved reassure us about our long-term targets.

Just a last point, Troy. You’ve mentioned intensifying the exit from your at-risk self-perform construction business. What does that process involve?

Well, let me provide some context. In the second quarter, we were engaged in advanced processes to sell those businesses intending for transactions to close early in the third quarter. Unfortunately, the pandemic halted all of those discussions. Now with increased market certainty regarding how the world will progress over the next few quarters, we have resumed dialogues with potential buyers. We are currently marketing those businesses and actively engaged in discussions with multiple parties.

Your next question comes from Jamie Cook with Credit Suisse. Your line is open.

Hi. Congrats, Troy and Lara, and best wishes to you, Mike. I have a couple of questions. Troy, in the press release, you stated you’re committed to EBITDA growth in 2021. I’m assuming we’re not committing to the numbers provided at the Analyst Day. I mean, the Street consensus seems absent from where the company currently stands. Could you confirm that? Additionally, I don’t believe you addressed the CFO role—are you looking outside or internally for candidates, and what is the expected timeframe? My last question, if I may, is about your strategy: should we assume M&A is off the table, and how are you approaching share repurchase?

That was a lot, Jamie. So, first, absolutely, we are committed to growing our earnings in 2021. However, given the current uncertainty in the world, we are not providing updated guidance at this point; we will address this in November. Although there is some softness in our markets, we maintain strength in other areas, with expectations clarifying around transportation infrastructure as we move forward in the quarter. Confidence relates to our ability to improve margins even when revenue opportunities may slow. In terms of the CFO search, as Mike stated, with the accelerated transition, we expect to have an announcement prior to August 15 regarding that.

And are we looking externally, or is there a focus on an internal candidate?

I won’t make any comments on that.

Okay.

Regarding strategy, we don’t have significant changes in our approach. We continue the transformation of the company into a higher-margin, lower-risk Professional Services business that generates significant cash. We expect to maintain our focus on organic growth opportunities and return capital to our shareholders over time.

Yes. Sorry, I was on mute. Just following up on Jamie’s question, I’m curious, Troy, regarding the guideposts you’re considering for your capital return strategy. You mentioned last quarter about stabilizing capital markets. What timing elements could dictate your strategy execution? Is it dependent on the FAST Act expiration in September, the November elections, the new CFO, or the gross leverage coming down?

Certainly, a few points: Starting with leverage, our gross leverage for the quarter was 2.8 times or under 3. I intend for us to keep that under 3 times as a prudent level to operate the business and ensure we can return capital to shareholders. As we gain certainty and clarity regarding our performance capabilities in the second half of this year, that will create better conditions for capital return decisions. We remain committed to deploying that capital towards stock buybacks over time, but I will refrain from any repurchase activity until we determine the most advantageous timing.

Okay. Fair enough. From a bigger-picture perspective, Troy, you know there’s a considerable valuation discount to you and the premium design peers. Last quarter, when premium players pulled out, you provided guidance, yet you raised it now. You’re aware there’s a perception that an external candidate is necessary. In your upcoming role, do you see any structural differences with those peers that warrant such a discount, or do you believe it can close?

I don’t see a reason for the discount to our peers. We’ve demonstrated that we have exceptional professionals who are leading the way and serving our clients. We ranked number one in transportation, facilities, and environment globally. We’ve successfully improved our operations to achieve margin performance. The focus should remain on managing and delivering value for our clients. Despite challenges, we’ve maintained business health and achieved targets. If there is a discount, we’ll consider re-entering the market and buying back our stock at favorable prices.

Fair enough, Troy. Just regarding the significant question about 25% of your business where state and local factors are cause for concern. If we level set and presumed the FAST Act extends only through a one-year continuing resolution, could you comment on how you would manage through that? Would it be steady as you go for a negative outcome? Is that a still-positive scenario that you feel could provide a base case for you to manage through?

The headline is, we've conducted numerous scenarios throughout the pandemic. Despite potential uncertainties, we are confident in our earnings growth for 2021. I won't pick one item above others. Though funding availability is enhanced in some areas, other aspects are uncertain. Yet, we will manage our way through them, leveraging our strong team and skills.

Thanks. And Mike, best wishes. Congratulations to Troy and Lara. Regarding the building construction business, how do you perceive its trajectory over the next couple of years? Are you forecasting or preparing for potential softness? What mitigation strategies do you anticipate for cyclical downturns? Does the strategic importance of this sector remain as paramount?

Looking ahead, we anticipate growth in that business next year, potentially at double-digit rates, bolstered by the strong backlog generated over the past two years. Visibility remains solid. That said, I expect adjustments to the nature of opportunities pursued. Our strategy is focused on examples of client investment in infrastructure, and we remain well-positioned in that market.

Certainly, the backlog represents one of the strengths of the company. We’re hearing from peers about a slowing burn rate in the existing backlog. What observations do you have regarding that, specifically about airports or the building business, and how might you manage through that?

Across our operations, we have noticed deferrals of work, particularly in the environmental sector, where activity is most pronounced. That said, we view this as a short-term issue. In transportation and water, we have experienced improved market share, even with award opportunities temporarily postponed.

[Operator Instructions] Your next question comes from Adam Thalhimer with Thompson Davis. Your line is open.

Thanks. Hey, guys. Congrats on the good Q3.

Thank you.

In major cities like New York, what are you seeing? There’s talk of deurbanization, but interest rates are low, so how do you see these factors balancing out?

That’s a complicated question to answer as it varies based on various factors. Within New York, we have numerous avenues of work. Our experience suggests that while there is uncertainty, we are unlikely to witness discontinuation in investments. Instead, our business is well-situated for significant opportunities that will emerge.

So, any weaknesses you've seen are more prevalent on the design side rather than construction management?

That’s correct; any weaknesses we observe are primarily on the design side in our private markets.

Corporate SG&A—what run rate should we use going forward?

The run rate is $40 million to $45 million per quarter.

Okay. Lastly, regarding federal spending in fiscal ‘21, I understand that the Federal government is still a good client for you. What’s your outlook on next year’s budgets?

We anticipate no significant declines among the clients we typically serve, such as the Corps of Engineers.

There are no further questions. At this time, I will turn the call over to Chief Financial Officer, Troy Rudd for closing remarks.

Thank you, everyone, for joining today. In this unprecedented time, I’m incredibly proud of our teams for coming together and navigating this environment. It instills confidence in our leadership, our professionals, and our ability to achieve the goals we’ve discussed today. We have finished with a strong balance sheet, strong cash flows, and record backlog, which encourages us as we anticipate growth in fiscal ‘21. I appreciate all of you joining our call today.

This concludes today’s conference call. You may now disconnect.