Earnings Call Transcript - ACM Q4 2021

Operator, Operator

Good morning, and welcome to the AECOM Fourth Quarter 2021 Conference Call. I would like to inform all participants that this call is being recorded at the request of AECOM. This broadcast is the copyrighted property of AECOM. Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. I would now like to turn the call over to Will Gabrielski, Senior Vice President, Finance and Investor Relations. Please go ahead.

Will Gabrielski, Senior Vice President, Finance and Investor Relations

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. 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 use certain 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. References to margins and adjusted operating margins reflect the performance for the Americas and International segments. We will refer to net service revenue, or NSR, which is defined as revenue excluding pass-through revenue. Our discussion of year-over-year NSR growth for the fourth quarter and full year is adjusted to exclude the benefit of the extra week in the prior year's fourth quarter. As a reminder, we sold the Management Services business in January 2020, and we closed on the sale of the Power and Civil Construction businesses in October 2020 and January 2021, respectively. The financial results of these businesses are classified as discontinued operations in our financial statements. Today's comments will focus on our continuing operations of the Professional Services business, unless otherwise noted. On today's call, Troy Rudd, our Chief Executive Officer, will begin with a review of our strategy and key accomplishments. Lara Poloni, our President, will discuss key operational priorities; and Gaur Kapoor, our Chief Financial Officer, will review our financial performance and outlook in greater detail. We will conclude with a question-and-answer session. With that, I will turn the call over to Troy.

Troy Rudd, Chief Executive Officer

Thank you, Will, and thank you all for joining us today. I want to begin by acknowledging our teams across the globe whose contributions made fiscal 2021 a tremendous success. Our people remain our greatest assets, and it's because of their commitment to our success that we are so well positioned for the future. I'm proud of our team's accomplishments, and I'm energized by the opportunities we see in 2022 and beyond. Turning to our results. We exceeded our expectations on every key metric, highlighted by accelerating organic NSR growth, record operating margins, double-digit earnings growth, and strong cash flow. It really was a very successful year. Our NSR for the fourth quarter increased by 6.5%, which marked a third consecutive quarter of accelerating organic growth and included strong contributions from both the Americas and International businesses. We delivered a 14.8% segment-adjusted operating margin in the fourth quarter and 13.8% for the full year. Both results exceed our expectations and extend our lead over the industry. To put this performance in context, our margin in the fourth quarter is more than 600 basis points higher than in fiscal 2018. This performance directly reflects the high value we provide to clients and the actions we have taken to create the best industry delivery platform. Looking back to February at our Investor Day, we set margin targets at the time that were very ambitious. Today, we are ahead of schedule on our plans, and we have even greater conviction in our 17% longer-term goal, which we now view as achievable rather than aspirational. Importantly, our strong margins afford us the opportunity to accelerate investments in our teams to drive organic growth and into our digital AECOM capabilities, which I will discuss in greater detail momentarily. Turning to earnings. We delivered at the high end of our guidance ranges for both adjusted EBITDA and EPS. Full year adjusted EBITDA was $830 million and adjusted EPS was $2.82, which marked an 11% and a 31% increase, respectively. Free cash flow was $583 million and was driven by our strong earnings and continued high cash flow conversion. Our cash flow result is a testament to the focus on efficiently converting our earnings to cash as well as the high-quality, low-risk mix of our business. We have repurchased more than $1 billion of stock since last September or 13% of the company, and we have $940 million remaining under our current authorization. We remain committed to repurchasing stock with available cash and cash flow, which we believe is the best and highest returning use of our capital after our investments in growth. Turning to our wins and backlog. Our win rate remains high, and we continue to gain market share. We delivered $3.7 billion of wins in the fourth quarter, including a 1.2 book-to-burn ratio in the design business. Our contracted backlog, which is a key indicator of revenue growth, increased by 18% and included 4% growth in the design business. Our pipeline of opportunities is up to double digits in the Americas design business. And based on our clients' strengthening funding backdrop, including benefits from the $1.2 trillion infrastructure bill in the U.S., we expect our backlog to continue to grow. Overall, our performance demonstrates that we are outgrowing the industry organically and capturing market share. There are two areas in particular that highlight our success and showcase the value we deliver to clients. First, we set as a key objective to substantially grow our program management business, and we are delivering. This is especially apparent in the Middle East, where we had several recent successes on high-priority and larger programs where a combination of technical leadership, global thinking, and program management expertise were instrumental in our success. This includes winning significantly expanded program management and design roles and transformational projects in Saudi Arabia such as for Al-'Ula City and a large transportation project in Qatar, where more than 100 employees have joined AECOM from the incumbent to support this work. Second, we are demonstrating our leadership on ESG. Our investment at the Natural Capital Laboratory in the U.K. is a great example. We established this project in 2019 to study environmental change and biodiversity impact with precision by leveraging drones, artificial intelligence, GIS data, and thermal imaging. The ability to more exactly measure the impacts of decarbonization is a critical element of the global agenda to drive decarbonization and carbon sequestration. Our investment in our work at the NCL underscores how AECOM and our professionals are leading in the development of standards and methods to measure decarbonization, which will be especially important for creating reliable markets for sustainability investments. Looking to fiscal 2022 and beyond, the spotlight on infrastructure has never been brighter. In the U.S., the $1.2 trillion Infrastructure and Jobs Act marks a generational investment in America's infrastructure. This bill provides much-needed long-term funding certainty across our strongest end markets such as transit modernization, electrification, environmental remediation, and climate resilience. Importantly, we are positioned to benefit from nearly every line item in this bill. We anticipate this funding will increase our addressable market and our most profitable business by double digits over the coming years, and we expect the most meaningful benefits in fiscal 2023 and beyond. In addition to the strengthened federal funding environment, all of our state and local clients are on equally strong footing.

Lara Poloni, President

Thanks, Troy. I am pleased with how well our teams have responded to our new strategy and their many accomplishments in fiscal 2021. In particular, I'd like to highlight our success on some of our larger key pursuits, our global approach, technical leadership, program management capabilities, advisory expertise, and multiyear investments that are bearing fruit. A great example of this is in the Middle East, where we prioritize a long-term growth opportunity. We have gained market share with wins from megacities, including NEOM and Al-'Ula in Saudi Arabia. Key to these successes is the integration of global capabilities, including expertise from every region and market sector. Our culture of collaboration has truly distinguished us from competitors, particularly as our clients work to address multi-decade investment programs that require more holistic thinking. Another great example is in the U.S., where we were recently selected for a large program for a client who selected us based on our leadership capabilities in many verticals, including in PFAS, even as PFAS expertise wasn't the main criterion in the pursuit. We are continuing to prioritize our time and capital on the best opportunities, which has been instrumental in our high win rate over the past year and our confidence in continued market share gains. Looking ahead, our clients continue to prioritize investments in ESG, and we are well positioned to capitalize on this trend. At the COP26 Summit earlier this month, this commitment was front and center as the most prominent public and private sector voices spoke with unity on the challenge and the opportunity. In demonstrating how we are leading in ESG alongside our clients, we published our Global ESG Report last week, which includes disclosures aligned with the SASB and TCFD frameworks. This report is an important step in our ESG journey and underscores our commitment to regularly communicating our progress on our sustainable legacy strategies.

Gaur Kapoor, Chief Financial Officer

Thanks, Lara. Please turn to the next slide. Our fourth quarter and full-year results serve as clear evidence of the strength of our business and the benefit of our focused strategy. We delivered accelerating NSR growth, the highest margins in our company's history, another year of double-digit adjusted EBITDA growth, more than 30% adjusted EPS growth, and a seventh consecutive year of free cash flow at or above our guidance range. Our strong financial performance is creating increased opportunities to invest in organic growth while also bolstering our confidence in delivering on our long-term organic growth and financial goals. Importantly, all of this was achieved while making critical investments in people, teams, and digital capabilities that will sustain our advantages in fiscal 2022 and beyond.

Troy Rudd, Chief Executive Officer

In the Americas, NSR increased by 7% in the fourth quarter, including growth in both design and construction management businesses. Contracted backlog increased by 21% to set a new record. This included growth in the design business and a large construction management project that moved into contracted backlog and firmed up our outlook for the year. I should note that our awarded backlog was reduced by $1.3 billion as a result of this client only advancing the first phase of this project at this time. However, the economic impact of the shift is not material to our earnings outlook, and our confidence in the growth outlook for the construction management business is higher than it ever has been in many years. The fourth quarter adjusted operating margin was 19.8%, a 290 basis point increase from the prior year to a new all-time high and reflects strong execution. Turning to the International segment. NSR increased by 6% in the fourth quarter, including growth across all of our largest regions, and backlog increased by 10%. This is a result of our organic growth investments, market share gains, and steadily improving market conditions. Our adjusted operating margin in the third quarter was 7.4%, an 80 basis point improvement from the prior year. We continue to make progress on our margin improvement initiatives and remain confident in our goal of achieving double-digit International margins.

Gaur Kapoor, Chief Financial Officer

Turning to cash flow, liquidity, and capital allocation. Fourth quarter free cash flow of $290 million contributed to full year free cash flow of $583 million. Our performance reflects the benefit of our improved cash phasing throughout the year, which allowed us to accelerate our stock repurchases. We have now repurchased nearly 20.5 million shares since September 2020, or approximately 13% of our starting share count at an average price of approximately $51. As we look ahead, we will continue to make critical investments to build on our industry-leading organic growth. As a result, we expect our capital expenditures in fiscal 2022 to include investment primarily relating to the advancement of our digital strategy as well as ongoing investments to reconfigure our real estate footprint and support our flexible work programs. These investments will impact the conversion of our earnings to free cash flow in fiscal 2022. However, the underlying cash generation within the business is firmly intact. To that point, we expect free cash flow of between $450 million and $650 million in fiscal 2022. Importantly, our investments in growth and innovation will continue to separate us from our peers, and we are progressing towards our 17% longer-term margin target. For fiscal 2022, we are guiding to adjusted EBITDA of between $880 million and $920 million, or 8% growth at the midpoint and adjusted EPS of $3.20 and $3.40, or a 17% growth at the midpoint. This guidance contemplates improved market conditions we're experiencing today, our substantial backlog and pipeline, and the benefits of our investment in our people, client, and digital capabilities. To be clear, this guidance does not reflect any expected benefit from the recently passed legislation in the U.S., which, as Troy mentioned, is expected to benefit us more materially in fiscal 2023 and beyond. We expect our NSR growth to accelerate to approximately 6% in fiscal 2022. This is all organic growth. In addition, we project a further 30 basis points of margin expansion to 14.1% as we continue to expand our lead in the industry while investing in people, clients, and innovation.

Troy Rudd, Chief Executive Officer

So, Sean, it's Troy. Thank you for the question. When we look forward, we actually see that organic growth being relatively easy and across all of our businesses. When we think about our construction management and our U.S. design business, part of what we've been working to accomplish is to have them work together. So when we deliver a project in construction management, there's a material or significant design element to it. But again, we look at the market backdrop, which is increasingly positive, and the business momentum is increasingly positive. We see it across the Americas. We also see something similar internationally. Again, we see the opportunities across the entire portfolio of our business improving over the course of this next year. It's driven by the momentum that we're seeing in the business but also by improved, increasingly positive markets. If we look longer term, the investment that is being made in infrastructure here in the U.S. in the IJAA, and then the investment we're seeing made in infrastructure globally is very significant and long-lasting. We actually see that being accelerated by all the various public and private ESG ambitions. If we think about it as a catalyst for really a large long-term investment we made in infrastructure, we almost think about this as a global infrastructure investment renaissance. It's a really unusual time.

Gaur Kapoor, Chief Financial Officer

We do have a 6% CAGR built into our long-term guidance as well. Now keep in mind, off the strong 2021 and actually a very strong start of 2022 in regards to wins as well, what it does not include is any material impact in fiscal year '22 for the Jobs Act. We're very confident in our projections for a long-term target for '24. The Jobs Act provides a lot of certainty to that comp confidence now, but we really haven't fully baked it in either. As we get more clarity, it's possible there will be more incremental upside to that growth target.

Troy Rudd, Chief Executive Officer

So, Andy, we did see an improvement in the overall Americas business in terms of the client decision-making. But more importantly, we saw a willingness and some very clear agendas to put some long-term programs in place, a lot of this was being done even without the support of the infrastructure, the federal infrastructure bill. When it happens, it certainly provides support for even broader infrastructure investment at the state and local government level. I will just use an example of New York and New Jersey. There are plans for the large transit and transportation agencies to invest, over the next five years, almost $200 billion in capital programs.

Lara Poloni, President

I was just going to expand on Troy's point. In terms of the IIJA, we see all of our capabilities being brought to every single line item of investment in that. And that portfolio that's coming up is a good balance of long-term planning work for a lot of these infrastructure agencies as well as a robust pipeline of design-build work. We're seeing a very robust program of federal work, where we're very strongly positioned as well.

Troy Rudd, Chief Executive Officer

So again, as we tried to point out in our prepared comments, we increased our longer-term view based on the performance of the business to date, and also, what we saw as the momentum being created in the business. They are what we are seeing in terms of the wins but also in terms of the pipeline of opportunities. We really haven't sorted out exactly what the IIJA will mean for our business, but we are working through exactly what that will mean. So, it provides upside to our results, but we try to be somewhat conservative in our views of the business.

Gaur Kapoor, Chief Financial Officer

Yes, Andy. It's exactly what you stated. We're making conscious investments in the business again to support the growth we see coming and also the expansion of our margins. So it's about investment in our digital, in our IT investments. And when you look at the conversion, the underlying cash flow of the business remains strong, and we expect free cash flow conversion to be in the mid-70s. So just keep in mind, we're coming off in fiscal year '21 where expectations were at 13.2%, and we over-delivered on those. Simply put, even when you look at '22 and beyond, we're ahead of schedule in certain regards, way ahead of schedule. We see this as an ongoing dialogue we have with the Board, right? How we allocate capital is an important question that we will continue to evaluate and answer. Today, we're clear on what that answer is.

Troy Rudd, Chief Executive Officer

Again, thank you for your time today and participating in the call. I just want to remind everybody, I want to give a big thank you to our people for doing such a fantastic job in delivering this past year and creating momentum in the business. We have tremendous opportunities in front of us that are long term, and we look forward to talking to you and catching up on our next earnings call.