Earnings Call Transcript - ACM Q2 2021

Operator, Operator

Good morning, and welcome to the AECOM Second Quarter 2021 Conference Call. I want to let all participants know that this call is being recorded at AECOM's request. This broadcast is a copyrighted property of AECOM, and any rebroadcast of this information in whole or in part without prior written permission from AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors Section at www.aecom.com, where we will hold a question and answer session. I would now like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Investor Relations. Please proceed.

Will Gabrielski, Senior Vice President, Finance, 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 performance for the Americas and International segment. We will also refer to net service revenue, or NSR, which is defined as revenue excluding subcontractor and other direct costs. As a reminder, we sold the Management Services business in January 2020 and we sold the Power and Civil Construction businesses in October of 2020 and January of 2021, respectively. The financial results of these businesses are classified as discontinued operations in our financial statements. Today's comments will focus on the 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 Gaurav 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, CEO

Thank you, Will, and thank you all for joining us today. I'd like to begin by acknowledging our team's contributions towards our success. Despite the ongoing challenges posed by COVID, we continue to focus on the health and safety of our professionals and their families, which has allowed us to deliver for our clients, communities, and all stakeholders. Today, some of the markets in which we operate are emerging from the worst of the pandemic. However, other markets are not. Through it all, we have demonstrated agility and we are working more collaboratively than ever before. We are unified by our global strategy and as more markets recover we are even better positioned than ever. Turning to our financial performance and outlook for the business. We entered fiscal 2021 with guarded optimism. Trends in many of our larger markets have begun to stabilize and our focus on higher returning and lower risk professional services businesses brought a new energy and determination to the organization. Against this backdrop, I'm very pleased with where we stand today. Revenue trends are improving, including 1% NSR growth in the second quarter. This is consistent with our expectations for improved growth as we advance through the year. Margins also continue to expand and lead our industry. We delivered a 140 basis point increase in our segment adjusted operating margin to 13.1%, a new high for the second quarter and consistent with our expectations for at least a 90 basis point increase for the full year. The actions we have taken over the past few years to streamline our global organization and reduce our overhead costs are contributing to consistent strong profitability. As a result, adjusted EBITDA increased by 11% and adjusted EPS increased by 22%, both of which were slightly ahead of our expectations. Looking ahead, our backlog and pipeline are strengthening, and have provided us with good visibility. Backlog in our design business increased by 8% with growth in both Americas and international markets. This was offset by a decline in the construction management business, which was consistent with our expectations. However, we are now seeing a recovery in the construction management pipeline, particularly as our clients plan with greater certainty against a better economic backdrop. We're pursuing several meaningful award opportunities with decisions expected in the second half of the year. Across the business, our contracted backlog, which is a leading indicator of revenue growth, increased by 30% in total, including 4% growth in our design business. Our focus on our people, clients, and communities has galvanized collaboration creating more and better collaboration and is resulting in a stronger and more valuable company to all stakeholders. As we turn to the second half of the year and beyond, several factors are contributing to our continued confidence in the business and increased optimism in our markets. First, our state and local clients, which represent our largest public sector client base, are on stronger financial ground. Those $350 billion cash infusion from the March COVID relief bill combined with the benefits of the December relief bill, the improving economic activity and strong tax collections have made nearly all 50 states whole for the revenue lost during the year. In addition, the relief bills allocated nearly $70 billion to our transportation clients, which reflect approximately 75% of the annual federal transit and transportation funding, which has led to an increase in our pipeline and improved pace of decision-making. Today, our largest state and local clients are funded at levels higher than pre-COVID and these clients are deploying these funds to job creation and infrastructure investment. Second, the debate on transformational infrastructure legislation in the U.S. continues to advance, including both traditional road and bridge investment, as well as a set of ESG priorities. The set of broader priorities is also apparent in the administration's proposed $2.3 trillion infrastructure bill and the budget proposal for 2022, and in many instances are mirrored in Republican infrastructure proposals. Encouragingly, these include several areas where we lead, such as electrifying transit systems, PFAS remediation, new energy, resilience, and clean water. With federal infrastructure spending as a share of GDP at multi-decade lows, there is a growing backlog of critical projects that could be advanced. Should this federal funding materialize, we are already partnering with clients to be ready for the anticipated increase in funding. Third, our private sector clients are also prioritizing investments in ESG, benefiting our industry-leading positions in green building and green design, environmental compliance and remediation, energy efficiency, and infrastructure resilience. Many of these clients are engaging us specifically in response to ongoing stakeholder feedback to deliver on ESG initiatives. AECOM's position here is very strong. The challenges and opportunities facing our clients are global and require the depth and breadth of our consulting, program management, and advisory capabilities. Fourth, growth outlook and our larger markets outside the United States are improving. In the UK, our largest international market, economic growth forecasts are now projected to recover to pre-pandemic levels in 2022. We delivered a 1.2 book-to-burn ratio in the U.K. in the second quarter, reflecting these better market trends. In addition, we are benefiting from the actions we've taken over the past several years to re-establish our leadership position on key public frameworks where we are now seeing positive contributions. In Canada, we delivered strong growth in the second quarter and were successful on a large pursuit in April that supports our confidence going forward, particularly as the federal government's latest budget continues to prioritize infrastructure investment. In the Asia Pacific region, Australia and Hong Kong continue to recover and our book-to-burn ratio was nearly two in the second quarter. Our focus in our India business is on the health and safety of our workforce and their families and continuing to deliver on our clients' commitments. Finally, and most importantly to our success, the strategic alignment of our professionals around new priorities has created a great deal of energy and momentum. As we discussed at our Investor Day in February, central to our strategic efforts are the actions to broaden how we engage with our clients. This includes expanding our role as key technical and strategic advisors, expanding our project program management business, and continuing to bring the industry's best technical experts and digital solutions. As part of this effort, Drew Jeter joined AECOM in January to lead our Program Management Business. We were recently awarded a Program Management Contract to oversee a $1.1 billion Highway Widening Program, another large program management contract from the Dallas Independent School District for the $3.5 billion bond program, and we are pursuing several larger opportunities. In addition, Jennifer Almond joined our organization in April to lead our global transportation business at a time when funding is set to benefit our key transit clients who are looking to advance complex multi-year programs. Jen's leadership in driving the creation and delivery of large programs will be a key asset and builds on our industry-leading market position. Drew and Jen are complemented by an already strong leadership team. Reflecting momentum in our organization and our markets, bid submissions and active proposals in Americas design business are up by double digits since the start of the year. In April, we saw decision-making begin to accelerate and a number of larger pursuits converted to wins. Importantly, today our 47,000 people are operating from a market-leading position. As indicated by ENR, we are the number one ranked transportation design firm, the number one ranked facilities design firm, the number one ranked program management firm, the number one ranked global environmental consulting firm, and we just improved the ranking of our water business to number two, despite not making any acquisitions. Even during these challenging times, we are confident we are taking market share. When combined with these steps we've taken to empower the organization to grow, we're better positioned than ever to deliver on our long-term financial objectives and outgrow the industry. It includes a commitment to more than double adjusted EPS and free cash flow by 2024 as compared to 2020, and to deliver industry-leading margins and return on invested capital. With that, I will turn the call over to Lara.

Lara Poloni, President

Thanks, Troy. Please turn to the next slide. I echo Troy's sentiments on the momentum in the business and the strength in culture and strategic alignment across the organization. Over the past year, we have undergone a transformation in how we are organized, how we operate, how we go-to-market, and how we serve our clients and communities. Today, our strategy, culture, and capabilities are squarely focused on our people, clients, and communities. We as leaders are inspired by our teams and energized by the opportunities ahead of us. I am particularly excited to see our results begin to reflect our new focus on best advising our clients. A great example of this is the tremendous success we're seeing in the U.K. where we have substantially improved our commercial position and taken market share through our positions on several large frameworks. As a result, our backlog in the country has increased by double digits over the past year, and we are seeing a return to strong revenue growth, which is contributing to our overall improved performance in our international segment. These successes underscore our confidence in our strategy and our ability to outperform the industry over the coming years. Another key element of our strategy is our commitment to leading the industry in ESG. Building on the many actions we have already taken in April, we announced our sustainable legacy strategy. This strategy integrates four key pillars that will embed sustainable development and resilience across our work, improve social outcomes for communities, achieve net zero carbon emissions, and enhance governance. This includes our commitment to achieving net zero carbon emissions by 2030, which builds on our prior science-based targets and shows the address of the entirety of our impact on the environment from our own actions as well as that of our suppliers. Expanding on this point even further, and recognizing that the work we do for our clients has an even greater long-term impact on our environment, we also unveiled our ScopeX process initiative. This includes our commitment to providing our clients with solutions that embed ESG considerations into our design. ScopeX focuses our teams on minimizing energy use, optimizing sources of renewable power, and where feasible we will work with and enhance natural habitats to eliminate carbon emissions. We will also embed net zero resilience and social value targets into our client account management program and the work we do for clients. Our sustainable legacies strategy also includes efforts to further promote the diversity of our workforce, including near-term targets to increase the percentage of women across the company to at least 35% and increase the percentage of women in leadership positions to at least 20%. We are also investing to advance the social value our company can provide to our operations and our projects, including through direct investment in communities and in minority-owned businesses. A great example of sustainable legacies is our 'Workplace of the Future' initiative that is focused on designing a flexible workforce model for our professionals. Through these efforts, we will reduce the emissions associated with our team's commutes, while also reducing our real estate footprint and creating more efficient office spaces. Building on this, last month, we also began to implement our 'Freedom to Grow' initiative, which allows our teams to design the flexible work arrangements they need to be successful. We have made the investments in digital capabilities to leverage remote working to best position our people for success and fulfillment in their careers. We believe the strength of our platform and capabilities will attract the best resources in our industry going forward to support our focus on delivering industry-leading growth. Needless to say, our people are energized by how we are positively impacting the world. With that, I will now turn the call over to Gaur to discuss our financial performance and outlook in greater detail.

Gaurav Kapoor, CFO

Thanks Lara. Please turn to the next slide. Our second quarter results were again strong on every key metric. Our performance on EBITDA margins, EPS, and cash flow were ahead of our expectations in the second quarter and through the first half of the year. There's clear alignment across the organization on our priorities, new level of accountability to deliver on our targets, and an energy within our teams that is building daily. To support the business and create certainty for our clients, employees, and shareholders, we took conditional steps in the second quarter to further strengthen our balance sheet with the refinancing of our 2024 bonds into lower-cost debt. And we continue to deploy substantially all free cash flow to share repurchases consistent with our capital allocation priorities. Please turn to the next slide. In the Americas, NSR declined slightly over the prior year primarily due to pre-COVID comps, notably our NSR increased by 7% sequentially reflecting improving market conditions as we progress through the year. Trends in our Americas design business continue to improve highlighted by 5% backlog growth in the quarter. Further, not only did our pipeline of opportunities increase by double digits, but our capture rates on bids also increased as our 'Think and Act Globally' strategy started to take hold. This provides us confidence that we are gaining market share in an improving market. In our construction management business, we burned backlog in the quarter as expected. As Troy noted, we are seeing pipeline trends improve in the CM business, and our backlog continues to provide significant long-term visibility. As a reminder, approximately 90% of our profit from backlog is driven by the design business due to the high level of past-due costs included in the CM business. The Americas segment had a 17.2% adjusted operating margin for the first quarter, a 160 basis point improvement from the prior year. For the first half of fiscal year, our Americas margin was 17.3%, underscoring the progress we have made and ingraining a culture of continuous improvement into a business that leads the industry in margins. Please turn to the next slide. Turning to the international segment, our NSR increased by 3%, reflecting strong growth in our U.K., Australia, and Hong Kong businesses where we have grown our backlog in each by double digits from the prior year. Our efforts to position this business to capture market share are translating to results. Notably, we continue to make progress on our margin improvement initiatives. Our adjusted operating margin in the second quarter was 7.3%, a 130 basis point improvement from the prior year and a more than 500 basis point improvement since the beginning of fiscal 2019. This progression gives us confidence in our ability to achieve double-digit international margins. Please turn to the next slide. Turning to cash flow, liquidity, and capital allocation. A great example of how the organization has evolved and is collaborating better is through substantial improvement in first half cash flow. In fact, our first half cash flow was the best we've delivered in three years, reflecting our very deliberate actions to improve our phasing. While our full-year cash flow has consistently been within our guidance range in each of the last six years, our phasing had become true to form; a second-half waiting scenario. Improving this phasing favorably impacts our return on invested capital. We put in place specific quarterly incentive targets to drive a better outcome and our teams in the business have responded. As a result, we are reaffirming our $425 million to $625 million free cash flow guidance for the full year. At the midpoint, this reflects unlevered free cash flow conversion of EBITDA at 75%. I am also pleased with the series of transactions we have executed that together extend the maturity of our debt and reduce our interest expense. In April, we successfully tendered for approximately 75% of our 2024 bonds, replacing this debt with a lower-cost term loan B. The transaction builds on the benefits from the redemption of our higher-cost 2022 bonds last year, and the amend and extend transaction of our sustainability-linked credit facility that we executed in the second quarter. When taken together, these actions enhance our balance sheet and contribute to our plan to double adjusted EPS by fiscal 2024 and support capital allocation flexibility. Our strong cash flow and balance sheet have enabled us to continue to repurchase our stock. We have executed $120 million of share repurchases since our earnings call in February and have now reduced our fully diluted share count by 10% since September. Importantly, we currently have $700 million remaining on our board authorization. With strong cash expectations for the second half of the year, we will continue to deploy capital to share repurchases going forward. Please turn to the next slide. We are raising our adjusted EPS guidance for the full year to between $2.65 and $2.85, or 28% growth at the midpoint. This increase reflects our outperformance in the first half of the year, including the benefit of our accelerated pace of share repurchases and the benefit of our debt refinancing. This guidance does not contemplate any additional repurchases, although it is our plan to continue to buy back stock. With that, operator, we are ready for questions.

Operator, Operator

Your first question comes from Sean Eastman with KeyBanc Capital. Your line is open.

Sean Eastman, Analyst

Hi, guys. Thanks for taking my questions. Just in light of the debt activity and award flow improving exiting the quarter. It would just be great to get a little bit more color on how you guys are measuring success around the progress on the organic growth strategy and market share gains? What are you guys tracking there? A little more color on what's giving you confidence that you are indeed gaining share alongside this uplift in activity levels would be helpful?

Troy Rudd, CEO

Sure. Sean, this is Troy. I'm going to go back to just the beginning of the year, because we said that during the course of this year, we saw growth being challenged, and certainly in the first half of the year. But as we move through the year, we've seen a small improvement in the markets that we're participating in. And that's being reflected in the pipeline of bids. So that's going a little bit better than we had expected. At the beginning of the year, we said we need to focus on what we can control. Because we certainly can't control what comes to the market and what our clients have available in terms of funding. So we focused on our clients and bringing the best that we could do globally for those clients and felt that that would be improving our market share or our capture rates. One of the things that we measure in all the work that we do and all of our bids is we measure what we call our capture rate, which is effectively how much we win compared to how much we bid on. During the course of this year, we've actually seen our capture rates increase by 4%. So what that tells us is that's an improvement. I can't tell you where it's coming from, but it tells us that we're improving in terms of our capture rates and our market share. The other thing to rely on, and this is more anecdotal, is we look at how we rank. As I pointed out, ENR has just gone through the updated rankings and in the markets that we're in, transportation, and environment, and facilities, in program management, we've retained our number one ranking. More importantly, in water, we moved from number three to number two, and we did that entirely organically. It's a combination of those things that tells us that we're taking some market share. And as we move forward, we certainly are seeing momentum building up. It's not going to translate into meaningful revenue improvement this year; we certainly believe it will next year. But what we're seeing now is our wins in the month of April and our design business have picked up at a faster rate than we've seen in the first half of the year. We've seen our pipeline of opportunities in our design business improve, so they are actually back to pre-pandemic levels in terms of what we're going to be bidding on in the future. So again, that tells us that things are aligning up so that there will be growth in the business in the future.

Sean Eastman, Analyst

Okay. That's really helpful, Troy. And I know these types of questions are a little tricky to answer. But just in light of the backlog taking down sequentially, and this dynamic where construction management is kind of in more of a burn mode. How much longer does that last? Do you think we reach a sustained sort of positive inflection point in the backlog as we go into the second half, Troy?

Troy Rudd, CEO

Sure. So, maybe breaking it into two parts, just following along your question. In our design business, we've seen our design backlog grow. During this quarter, our design backlog was up 8%. Our construction management backlog obviously was down, but it's again, as we had expected, we expected things to burn off that backlog in the quarter. Those are the types of longer-term decisions that have been pushed off during the pandemic. We burned off backlog in the second quarter, but we were pleasantly surprised because we won a little more than $900 million of work in our construction management in the quarter. That was a little ahead of our expectations. In terms of the pipeline, we are seeing the pipeline of opportunities improve in our construction management business, but certainly not at the level that we're seeing in our design business. Just as a reminder, the profitability of the company is driven by our design business. 90% of the profit of the company comes through our design business and 10% comes through construction management.

Sean Eastman, Analyst

Okay. Got it. One last one for me a little bit more high level. But your peers disclosed an annualized ESG related revenue figure. Where would you place that number for AECOM? Or perhaps what portion of AECOM's revenue mix? Have you seen ESG actually start to drive accelerated growth opportunities?

Troy Rudd, CEO

Yes. So, we actually don't have a measure of ESG revenue. We haven't called it out separately. The reason we haven't done that is because we're really seeing in almost all the work that we're taking on and doing today, there are some elements of ESG included in that. It might be focused on improving emissions or lowering carbon, it's focused on improving communities or helping return to prominence. A significant amount of what we're doing in almost everything is influenced by ESG. We don't look at it as we have a separate ESG business. We look at it as a significant part of everything that we're doing. I'm not going to say that every dollar is ESG revenue, but it certainly is a focus. Just to expand on that, maybe Lara could provide a little bit of background on ScopeX, because that really describes how we're including it in all the work we do.

Lara Poloni, President

Yes, sure. Thanks, Troy. I think there are some very big numbers being thrown around and it's very easy to sort of assign big numbers to entire segments of the market. Our sustainable legacy strategy, which we just launched last month, has been regarded very positively by our clients and by our staff. It's unique in the industry at the moment because it is quite granular. We have a real position of strength because we are the largest and most diverse environmental services firm. We have market leadership and real subject matter expertise in areas such as climate adaptation, carbon capture and storage, and resilience. Based on some of the specialty areas and to Troy's point, one of the commitments that we are focusing on is ScopeX, which is our project where we are embedding through all of our project work and through our design an ESG action plan on all of our major projects. The commitment there is to reduce our carbon impact by at least 50%. That’s pretty bold, and I think that will really demonstrate again at a much more granular level, just how strongly positioned we are and how we're really in a great position to capitalize on this big momentum in the market at the moment around ESG. I hope that answers your question.

Sean Eastman, Analyst

Yes. All very helpful responses. I'll turn it over. Thanks.

Troy Rudd, CEO

Thanks, Sean.

Operator, Operator

Your next question comes from Michael Feniger with Bank of America. Your line is open.

Michael Feniger, Analyst

Thank you for taking my question. Firstly, I noticed that you have repurchased 10% of your shares and maintain an existing share buyback plan. It appears you're not at all-time highs. Are you considering slowing down or reallocating capital to invest in other areas? I'm curious about your perspective on capital allocation after such significant buybacks. Secondly, as we move into a growth environment with funding increasing, will you need to invest more to support that growth? I noticed a 140 basis points margin expansion in the first half. Could there be a temporary pause as you perhaps invest to support that higher growth?

Troy Rudd, CEO

Yes. Thanks for the questions, Mike. I'm going to let Gaur take the first one, and I'll take the second one.

Gaurav Kapoor, CFO

Hey, Mike, this is Gaur. In response to your first question on repurchases, there's going to be no change to our capital allocation policy. We still continue to see a discount between our valuation and what our peers are currently trading at where we believe we have superior earnings growth, clean results compared to our peers, our margin expansion story, and investment in BD, which Troy is going to expand upon, is going to position us to really capture and monetize the global infrastructure trends, ESG, and sustainability that Lara and Troy just outlined. This is also further supported by our plan to double our earnings per share by 2024. So repurchases continue to make the most sense for our capital allocation.

Troy Rudd, CEO

And so, with this, as I said, in the second question, there's no question that as you head into an environment like this, where there is a growth opportunity, that you have to invest more in improving the opportunities that you're bidding and increasing the pace at which you're bidding. As we said in the past, we expect to do all this through our margins. Our objective is to continue to expand our spending on BD. At the same time, we will be living up to our margin improvement commitments. The increased pace of bidding is already included in our results. We've increased the amount we've been spending on BD and time to change this pipeline. We will continue to invest in growth; but again, we will do it through our margins. All of this is built into our long-term commitment to get to a 15% margin target.

Operator, Operator

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

Andy Kaplowitz, Analyst

Good morning, guys. Troy, can I ask you about…

Troy Rudd, CEO

Good morning.

Andy Kaplowitz, Analyst

Good morning. So global backlog and design, as you said, has been high single digits over the last couple of quarters. But revenue has been slow to turn, at least in the Americas. So what do you think the probability is that AECOM could see a relatively strong revenue inflection, as many of your state customers who now have unexpected surpluses turn their FY 2022 budgets over the summer, especially given the $250 billion that you mentioned? I know you mentioned your pipeline is up double digits? Maybe when was the last time your pipeline was like this? And what kind of revenue growth were you able to convert?

Troy Rudd, CEO

Yes. Andy, thanks. If you go back, I think probably I'm going to go back to the kind of 2010, 2009 era where we certainly saw this kind of improvement in pipeline and backlog. At that time, we had strong growth; we're talking at points, double-digit growth and over 10% growth in terms of revenue during that period of time. I certainly see there being a revenue inflection coming. To the point of timing that you alluded to, again, there's a lot of funding that is coming into place. That funding is just being distributed now. So for example, the $350 billion that was in the American rescue package, that money is just getting distributed to state and local governments. It will find its way into budgets. The money devoted to transportation infrastructure is just finding its way into budgets. I think the timing you described is right; we're going to see an increase in the pipeline. We’re expected to be bidding that work which we will get awarded during the second half of this year, leading to an expectation of an inflection point in growth in fiscal 2022.

Andy Kaplowitz, Analyst

Thanks for that, Troy. And then this question might be for Lara. It's kind of a similar question on the international side. Contracted backlog of 16%. That's a big improvement in terms of growth versus the last few quarters. Obviously, easier comparisons help. But it does seem like you're seeing a nice inflection in the international market. Could you give us color on where you're seeing the biggest acceleration? I know you talked about, seems like kind of across the board, U.K., Canada, Hong Kong, Australia, but the improvements you're seeing just broad-based, is stimulus ahead in these places versus where it is here in the Americas? Any more color you could give us?

Lara Poloni, President

Yes. Sure. I think we see continued positive growth in terms of the infrastructure pipeline, in particular. For sure, there's very deliberate positioning to secure market leadership across all of the frameworks that we mentioned in the U.K. is one of those key examples, and that's now paying dividends. A number of wins in this quarter in the U.K. were fairly and squarely on the back of those frameworks. Just our ongoing market leadership in markets like Hong Kong and Australia, where we had some great wins in transport infrastructure. Those are also the markets where we see continued positive growth in terms of the government's commitments to infrastructure through the recent budget announcements. It is looking really positive in that segment of our business for sure. I would say also just a continued focus on our most important clients through our key account management program, which we have really doubled down on in the last couple of quarters as well.

Andy Kaplowitz, Analyst

Appreciate it, Lara.

Operator, Operator

Your next question comes from Andy Wittmann with Baird. Your line is open.

Andy Wittmann, Analyst

Great. Thanks for taking my question. I was just hoping to get a little bit more detail inside of the margin improvements. This has been an important story for your company and your stock for some time. You talked about some of the things that you're going to be driving this. But maybe Gaur, if you could help us break down a little bit of what led to improvements in your consolidated margins this quarter, including the benefit of utilization of your personnel from other things that would be kind of more episodic or structural, in terms of how you've gone to find cost in your business and become more efficient?

Gaurav Kapoor, CFO

Sure, Andy. Specific to margins, one thing I'd like to highlight, as you've already stated, it did significantly improve when you compare the first half of last year to what we experienced in the current year. However, compared to Q1 and Q2, they're quite consistent. It's a trend that we expect to continue. We went through a significant transformation last year, completing a majority of our restructuring activities, that included the right sizing of our real estate opportunities, investments in our global design center, and our business support centers in Manila that we've spoken to previously exiting countries and completing those exits in 2020. This is a byproduct of all those transformational activities that we executed upon successfully, and you're seeing it in our results. One thing I would also like to say is your specific question about utilization. Utilization was consistent with our expectations. But what Troy alluded to earlier in regards to business development, we did have a higher investment in business development based on the pipeline of opportunities we're seeing in the current quarters, specifically in the Americas. Because we're keeping our eye on the price and the future of what potentially could be coming down the pipe.

Andy Wittmann, Analyst

Great. That's helpful. And then, I guess it was probably worth asking here on your guidance. You mentioned a couple of times on the prepared remarks that adjusted EPS, EBITDA, free cash flow, and maybe there's even some other metrics that we all focus on that were kind of at least a little bit ahead of expectations, yet the EBITDA guidance stayed the same. The mechanisms on the EPS with interest savings and the buyback are very clear. Just wondering if you could speak to the fact that despite a little bit of our performance here, not just in 2Q queue, but also a little bit in 1Q, EBITDA didn't get the nudge up. I was wondering the thought process behind that?

Troy Rudd, CEO

Sure. I'll just expand on that. When we started in 2021 and provided the guidance of significant strong growth in 2021 coming off of last year, we had confidence in the guidance we had provided, even though there were a lot of market uncertainties at that time. You're absolutely right, we've delivered the first and second quarter above our expectations on all metrics, including EBITDA. Today, most of our major markets are more stable than they were at the beginning of the year with improving outlook, as I have already spoken to reinforcing our confidence in the second half. But at the same time, we're being prudently conservative. In spite of every one of us on the call today, if you were to ask us five weeks ago, what's happened in Southeast Asia, India, none of us could have predicted. We're just being prudently conservative and confident in what we're going to deliver for the year.

Andy Wittmann, Analyst

Great. Have a good day. Thank you.

Troy Rudd, CEO

Great. Thank you, Andy.

Operator, Operator

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

Michael Dudas, Analyst

Good morning, gentlemen, Lara.

Troy Rudd, CEO

Good morning, Mike. How are you?

Michael Dudas, Analyst

Great. Thank you. So maybe Troy, share your thoughts on federal direction relative to infrastructure bill negotiations. You get optimistic one day and they get pessimistic the next day. Given your exposure in your leading markets and transportation, water, are there some opportunities, some of the consensus here to maybe drive some funding and some opportunities in the water? Maybe before highway your infrastructure comes through? Do you get the sense that the administration and the folks in Washington can get something together that will be meaningful for visibility beyond 2022 and 2023, certainly in the broad part of your services you provide?

Troy Rudd, CEO

Yes. So, Mike, I'm going to answer this in two parts. The first part is that there's already been a lot of action taken by the federal government in terms of funding that will support infrastructure and state and local budgets. What we're seeing today is the state and local budgets have returned and I think are healthy and improving in health. I mentioned that in my prepared comments. We've got a trajectory in terms of federal funding and local funding in markets that supports continued investment in infrastructure, and certainly the places, as you described, in transportation, and in water, and certainly in the environment, are being focused on by the federal government. There is momentum already building and funding. The second part of that is, with an infrastructure bill, this would layer on top of that. Now, I don't want to predict what I think the outcome will be, but it feels like there is support for getting something done. It feels like there is support for finding some form of compromise. So yes, I'm optimistic about that. If that happens, then it gets layered on top. If you just took the President's proposal for his infrastructure plan, in its current form, we think that that would increase the addressable market spend for our U.S. design business by 15% to 20% over and above where it sits today. That would be incredibly meaningful if it got done. Our job is to prepare for that if that happens. We'll see what the outcome is.

Michael Dudas, Analyst

If that happens, it'll be a race for talent, for sure, I would think.

Troy Rudd, CEO

Yes, it will be. We're very conscious about today in preparing for the future just thinking about that race for talent; attracting the right people to the organization. A great example of that is Drew Jeter and other individuals that are joining us. We're focused on continuing our investment in technical and professional development, increasing the strength of the people that are here and attracting more talent to the workforce. A really important part of this, which Lara mentioned, is our 'Freedom to Grow' initiative; we're creating flexible work environments to help attract people here. We've learned through the pandemic that people can be productive remotely, and they can be working virtually, and our clients are very accepting of it. What we learned is that people want that flexibility. Having everyone commuting into a major city for work every day may not be the best answer. It's beneficial to have our employees available to mentor and build relationships in-person, but also let them be home to fulfill other important roles in their lives. Our goal is to enable our employees to be home, as an example, by 3 PM on a Wednesday for their daughter's soccer game. We believe that creating that environment gives us a competitive advantage in attracting talent to AECOM. We're absolutely focused on that as we move forward.

Michael Dudas, Analyst

The resumes will be flying in once this call ends, Troy. Thanks so much for your thoughts. I appreciate it.

Troy Rudd, CEO

Thank you.

Operator, Operator

Your next question comes from Steven Fisher with UBS. Your line is open.

Steven Fisher, Analyst

Thanks. Good morning. I wonder if you could just give us a little bit more color on the larger pursuit. Can you just remind us what you consider a larger pursuit and the timing? How balanced is it between, say, Q3 and Q4? And how broadly these larger pursuits are across the regions and end markets?

Troy Rudd, CEO

Well, I have to say, Steve, I don't really think about the portfolio as large pursuits and small pursuits. We think about our portfolio based around our clients and what's important to them and their initiatives. We are seeing our clients coming to us with those opportunities to ask for help. The place we're first seeing that is in our advisory business. They're asking us to help shape what those outcomes would look like. That's the reason we're building the program management business. We are seeing more large projects come to market as we see the pipeline build. Our focus is on being there on day one to provide that initial advice, being there on day two to help with program management and, of course, throughout the process to help with design. I can't give you stats on big projects, but we are seeing more of them, and the pipeline is expanding broadly.

Steven Fisher, Analyst

Okay. And then I guess just building on some of those comments. It's not that long since your Investor Day, but I was just curious if there are any kind of next key milestones or activities related to the consulting angle or program management initiatives that you have? Any sort of more key hiring or more wins or any other milestones we should be looking for now that you've kind of announced it or are a few months into it?

Troy Rudd, CEO

Yes. Those are actually our milestones; key hires and key wins. We’re not going to announce those key hires, but certainly, we've been making progress in bringing some people into those teams that will absolutely have an impact. In terms of wins, I did mention two wins for program management in the quarter. We can't talk about all the wins because we're simply not allowed to. We have to have our clients' permission to do that. The program management wins are around those key successes and building that business. We've identified a number of projects that are priorities for Drew and his team that represent almost $2 billion of bids. Those are projects over the next 12 months that will be important milestones.

Steven Fisher, Analyst

Terrific. Just one quick clarification on cash flow. I know it’s always difficult to predict the timing with precision, but how Q4 weighted do you think this year will be on cash flow?

Gaurav Kapoor, CFO

Hey, Steve, this is Gaur. I’ll respond to that question. Historically, we've always been a second half weighted cash flow generative company. However, when you look at the current year, one thing we have been successful at is instead of being significantly negative for the first half of the year, we're actually breakeven on its own. That may not seem like a big deal, but when you look at the impact on return on capital, that made cash available for the first half of the year to execute almost $300 million in repurchases between mid-November to today. It’s a significant advantage for us; it drives the right behavior for us in the business as well. We’ll expect positive cash flow in Q3 and the biggest quarter will be in Q4 consistent with our seasonal trends.

Steven Fisher, Analyst

Thanks a lot.

Troy Rudd, CEO

Absolutely. Thanks, Steve.

Operator, Operator

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

Jamie Cook, Analyst

Hi, good morning. I guess two questions. You already answered sort of my question on the guidance, which seems conservative in particular on the margin front, just given the year-over-year improvement you had in the first half versus what's implied in the second half. But I guess my question is, you also talked about business development costs, spending there. Just as you see the pipeline look more robust, I'm wondering if just the BD costs in relative to when you initially guided are higher than what you thought to capitalize on some of this growth and that also would imply, maybe your margins there at a better point than you would have expected as well, even though you're not changing your guidance? And then, my second question, obviously, based on the ENR record, you're in very strong positioning in some of your key markets. As you look at what's proposed under the infrastructure bill, or just in conversations with where clients want to spend their money. Are there any areas that you sort of aren't big enough in where you would like to get bigger? I'm wondering if there are adjacent areas of growth that are underappreciated? Thank you.

Troy Rudd, CEO

Yes, thanks, Jamie. First, with respect to margin and business development, we believe that even though our business development needs are accelerating, we had built that into our plan year-over-year improvement. It was already built into our margins. We believe that in the second half of the year that we can bid all the work that we want to bid and still maintain our margin. You could look at it as maybe we're doing a little better margins than we thought we would be. Nevertheless, we also anticipated reinvesting some of that money in the growth of the business in a future where we saw a clear opportunity. We expect some of our key markets—there absolutely are places where we should invest and we will invest. You can think about it in terms of our business lines. There are places across all of our business lines where we will be investing and investing in our people. The places we said we're dedicated to building and recruiting is certainly in our advisory business, which covers all our business lines. In building up our digital business, we have a group dedicated to digital solutions. The last point is program management; we're absolutely dedicated to investing in that capability. We believe that that's a huge opportunity for us; we can build that business not by percentage points in terms of growth, but by multiples.

Jamie Cook, Analyst

Okay. Thank you.

Troy Rudd, CEO

Thanks, Jamie.

Operator, Operator

And your last question comes from Adam Thalhimer with Thompson, Davis. Your line is open.

Adam Thalhimer, Analyst

Hey, thanks. Good morning, guys. I'm still a little curious about the state and local side; how those customers are reacting to this cash infusion. Could they have a backlog of physical work that they're now working through? Or are they earlier in their process?

Troy Rudd, CEO

Well, Adam, I think it's very particular to each client, but almost all of our clients have had some form of projects that they have in their pipeline that they want to be doing. They already have a long-term pipeline of things that they're working on. An example is here in Los Angeles; a lot of infrastructure is being invested in to prepare for the 2028 Olympics. There’s a lot of work that local politicians want to do in terms of improving the economic conditions in local communities. Funding was challenging for that over the last year. Funding has become available so that agenda can be funded. There is indeed a pipeline that already existed, and there is a new pipeline that is being built upon and invested in. The momentum from the projects laid out before the pandemic will come online and support the projects that state and local governments and private clients have. This is why we feel confident about growth as we move into 2022.

Adam Thalhimer, Analyst

Okay. I think you said the construction management pipeline is improving as well. Can you get some geographic color? I'm particularly curious about New York.

Troy Rudd, CEO

We are certainly seeing an improvement in the pipeline in New York. We are also seeing a pipeline improvement in places you’d expect, the larger cities where there’s growth in population, like Nashville and the Dallas-Fort Worth area. Those are the places where we are seeing growth opportunities and an increasing pipeline. We are seeing improvements in New York as well.

Adam Thalhimer, Analyst

Okay. Thanks, guys.

Troy Rudd, CEO

Thank you.

Operator, Operator

And I'll turn the call back over to Troy Rudd for closing remarks.

Troy Rudd, CEO

Great. Thank you, operator. Again, I want to first of all say thank you to our teams for their contributions to a strong first half of this fiscal year. Our professionals have worked incredibly hard to create a leader industry and have been energized by the mission we’ve laid out. I’m pleased that we are creating a stronger business that's defined by our people’s unparalleled experience. It's our industry-leading margins, providing us with the ability to invest in the business, and the backlog and cash flow we have, allowing us to proceed with our capital allocation program. Again, I'm happy about our momentum. Thank you everyone for joining the call, and thank you to all of our people here at AECOM. Have a good day.

Operator, Operator

Okay. This concludes today's conference call. You may now disconnect.