Earnings Call Transcript - ACM Q2 2023

Operator, Operator

Good morning, and welcome to the AECOM Second Quarter 2023 Conference Call. I would now like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Treasury and Investor Relations.

Will Gabrielski, Senior Vice President, Finance, Treasury and Investor Relations

Thank you, operator. I would like to direct your attention to the safe harbor statement on page 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 reconciliations are incorporated into our materials, which are posted to our website. Any references to segment margins or segment adjusted operating margins will reflect the performance for the Americas and International segments. When discussing revenue and revenue growth, we will refer to net service revenue, or NSR, which is defined as revenue excluding pass-through revenue. NSR and backlog growth rates are presented on a constant currency basis unless otherwise noted. Beginning this quarter, results for AECOM Capital will be reported as noncore and will be excluded from current and comparable prior period adjusted results. Today's remarks will focus on continuing operations, excluding AECOM Capital. On today's call, Troy Rudd, our Chief Executive Officer, will review our key accomplishments, our strategy and our outlook for the business; Lara Poloni, our President, will discuss the key operational successes and 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. The strength of our second quarter performance was underpinned by our competitive advantage, our technical leadership and our disciplined returns-focused capital allocation policy. Our leadership position was reaffirmed last month by ENR, where we were again recognized as the top-ranked transportation and facilities design firm. We also continue to hold the #1 rankings in environmental engineering and environmental science. These recognitions are well deserved, and I would like to thank all of our people for a strong first half of the year and for building a company that reflects our shared purpose of delivering a better world. Turning to our final performance. Our second quarter results were highlighted by 8% organic NSR growth in our design business, continued margin expansion, a new quarterly high for adjusted EBITDA and strong EPS growth. Importantly, our quarterly wins, backlog and pipeline of opportunities hit record levels, with proposals and bids submitted continuing to accelerate at a very strong rate. This is reflective of the competitive advantages we have created through investing in our teams, expanding our addressable market, and by focusing our time and capital on the highest returning organic growth opportunities. Our performance included a record quarter of wins and a 1.5 book-to-burn ratio in the design business, with strength across both the Americas and International segments. Our win rates are well ahead of both internal benchmarks and historical performance. We are winning more than half of every dollar we bid. And on large global bids in the first half of the year, we are winning at an even greater than 70% rate. This success has transformed the composition of our backlog. Today, 30% of wins are valued at greater than $25 million, more than double what it was just a few years ago. When combined with our higher margins, we have substantial visibility and even greater confidence in delivering on our long-term objectives. Key to our success is the realization of several elements of our strategy. First, collaboration. We've instilled a culture of collaboration and technical excellence to ensure that we bring the best and brightest thinking to each and every pursuit. Having a truly diverse set of experiences and ideas to solve some of the most challenging infrastructure problems has been a key competitive differentiator. Second, expanding our addressable market. Organic investments in advisory and program management have elevated our engagement with clients and extended our opportunities. Third, investing in our teams. We have made substantial investments in benefits programs, work-life flexibility, technical excellence, and leadership development to enhance our employee value proposition. As a result, against a backdrop of rising demand and stagnant overall workforce growth, voluntary attrition rates are substantially ahead of our internal targets and key benchmarks for professional services companies. Fourth, disciplined allocation of time and capital. Our first dollar of capital goes towards the highest returning organic growth opportunities. This has resulted in our record-high backlog and win rate and expanded earnings capacity of the business, and we are confident that additional award decisions in the second half of the year will further expand our visibility. Finally, superior value creation. After investing in organic growth, we deploy our strong cash flow to the next highest returning opportunities, which for us remains share repurchases and dividends. As a result, we have returned more than $1.6 billion of capital to shareholders since September 2020 and have repurchased more than 16% of shares outstanding at a highly attractive return. Looking ahead, the three secular mega trends benefiting the markets are accelerating. These include continued investment in global infrastructure, sustainability and resilience, and long-term supply chain and energy transitions. As these recent wins indicate, we are in a leading position to deliver as these trends gain momentum. Let me share a few examples. First, in the areas of sustainability and resilience, we were recently selected to provide PFAS remedial investigation and feasibility studies for the U.S. Army National Guard. This win drew on our environmental and water expertise, multiple decades of PFAS-related client work and innovative solutions to address the long-term management of PFAS. We were also selected to deliver technical and program management services for a large wastewater treatment program in California. This win builds on several large water wins we've had in the Western United States over the past several quarters and reinforces our leading position ahead of accelerating investments to address long-term water security. Second, we continue to demonstrate our leadership in energy transitions and decarbonization. Most recently, the Office of Clean Energy and Demonstrations for the U.S. Department of Energy awarded us a contract that draws on the expertise of our environment and water teams in advancing competitive grants for new clean energy solutions under the IIJA. In addition, for the city of Rialto, we combined our sustainability and energy expertise to develop and design a comprehensive microgrid solution to enhance operational resiliency for the city's wastewater treatment plant. We're now leading the implementation of this project, while also aiding both the city and its water utility in procuring tax incentives available under the IIJA and WIFIA. This project is also a great example of our expanded addressable market, where we are able to play a more meaningful role in our clients' success by engaging earlier and providing multiple professional services. Finally, our world-class program management capabilities continue to create a competitive advantage as projects increase in size and complexity. Several wins in the quarter, such as the sizable California water project that I mentioned a moment ago, and a large international airport project are great representations of the power of combining our technical expertise with program management to create higher value solutions for our clients. As a result, NSR in the program management business has grown at a strong double-digit annual pace over the last several years, and we continue to see opportunities for growth ahead. Taken together, we are executing exceptionally well in our key priorities. I'm pleased with the discipline of our leadership to continue to deliver organic growth, invest in building our backlog, invest in our people and expand our competitive advantage, all while continuing to improve our margins. With a robust growth outlook across our core markets, we remain confident in delivering superior long-term value to our stakeholders. With that, I will turn the call over to Lara.

Lara Poloni, President

Thanks, Troy. Please turn to the next slide. The strength of our teams remains our greatest asset, and we are investing to extend our position as the best place to build a career in our industry. Starting to meet rising demand remains a key challenge for our industry. However, we are encouraged that our employee satisfaction and retention are strong. Voluntary attrition is substantially ahead of industry benchmarks and our internal targets, particularly among high performers. And from that, we are delivering unrivaled technical solutions to our clients. Importantly, from these investments, we are extending our competitive advantage at a time when growth across our markets is accelerating. In the U.S., IIJA funding is beginning to flow, including through new and existing formula grants. For instance, in the second quarter, we were awarded a contract for a major bridge replacement project on a key railway line in the Eastern U.S., where IIJA funding was a key contributor to the project advancing. Additionally, we are beginning to see positive indicators that funding for emerging contaminants, clean energy solutions and larger competitive grants is gaining momentum, which we expect will benefit our backlog later this year and into next year. Adding to this growing momentum is the overall health of our state and local clients, where budgets remain strong, as well as the anticipated benefits from the Inflation Reduction and CHIPs Act, which create additional demand drivers. These initiatives will touch nearly every aspect of our business, from environmental permitting and citing, water, transmission and distribution and offshore wind. While there is funding pressure in certain commercial markets, we have repositioned our diverse business to focus on higher growth markets where public and private funding is more resilient. In Canada, NSR and backlog growth are strong, and the federal government is executing on several infrastructure investments featured in its budget 2023. These investments are centered on transit and green energy, markets where we bring unrivaled expertise and experience. In fact, today, we are part of teams delivering 3/4 of the major transit projects currently underway. Trends are similarly strong in our international markets. In February, the EU announced its Green Deal industrial plan, with the goal of keeping pace with the U.S. and China in energy transition and achieving its net zero targets. These investments play to our strengths. In addition, ongoing investment to diversify the Saudi Arabian economy, combined with our leading presence on key programs, are contributing to continued growth in the region. And in Australia, we have won nearly every key large transportation project over the past year, and our growing pipeline continues to support our expectation for further growth in this market. With market demand accelerating, we are focused on making investments to grow and extend the capacity of our workforce by leveraging the scale of our global capabilities as an advantage. A great example of this is how we are growing our enterprise capability centers. Through these centers, we can tap into a global network of the industry's most talented technical experts, and we are deploying leading digital solutions that create more efficient and consistent ways of delivering at scale. The return on these investments is evident in the growth being supported by these centers and in our margins. Today, we are operating from a position of strength. We are making investments and being deliberately consistent and focused on our approach. As a result, we are delivering strong organic NSR growth, our backlog is growing at a faster rate and our pipeline is growing at an even faster rate than that, which is a great backdrop for continued momentum in the business. With that, I will now turn the call over to Gaur.

Gaurav Kapoor, CFO

Thanks, Lara. Please turn to the next slide. The strength of our second quarter and first half results reflected our highly profitable and high-returning organic growth model and a focus on shareholder value creation driven by our returns-based capital allocation policy. Against a very macro backdrop, we are executing against the factors we have in our control, whether it be winning at a record pace or delivering a record margin for a second quarter, we are producing results. This is clear in our strong NSR growth, record design wins and backlog, record adjusted EBITDA and double-digit adjusted EPS growth. In addition, our segment adjusted operating margin increased by 60 basis points ahead of our expectations for 40 basis points of improvement for the full year, and adjusted EBITDA increased by 14% on a constant currency basis. I want to comment on our decision to explore strategic options for the AECOM Capital business. AECOM Capital will continue to manage existing investments. As part of this process, over the next several years, we expect to realize cash inflow from these investments which will complement our capital allocation policy. Please turn to the next slide. NSR growth in Americas was driven by 5% growth in the design business. The adjusted operating margin expanded by 100 basis points to 18.7%, which set a new second quarter high. This is even as we invest at an elevated rate in business development and in expanding our capacity to deliver our work against a strong demand backdrop. Importantly, these investments in organic growth continue to produce results with our design backlog up 12%, to an all-time high, including 10% growth in contracted backlog, which is also at record level. These successes translated to a 1.5 book-to-burn ratio for design and our key leading indicators of growth. Please turn to the next slide. NSR growth in the International segment was 12%. Our book-to-burn ratio was 1.4 in the quarter, which included strength across our markets. As a result, our backlog and pipeline in each of our major geographies are at or near record high levels, which furthers our confidence in continued growth. We also continue to make excellent progress on margin improvement initiatives, with our International margins increasing 30 basis points to 8.6%. Improvement in our international margins has been a key driver of our enterprise-wide margin expansion and improved profitability, and we continue to expect to deliver a double-digit margin for this business based on the efficiency initiatives we have underway. Our balance sheet is in great shape. We have no bond maturities until 2027 and the vast majority of our debt is fixed or capped at a highly attractive rate. Free cash flow in the first half of the year was $63 million, which allowed us to return more than $120 million to shareholders through stock repurchases and dividends. The inherent attributes of our Professional Services business that contribute to consistently strong free cash flow remain intact. These advantages include a high-quality client base, highly variable cost model and record backlog and pipeline that affords us strong visibility to operate with certainty. With the growth we are delivering and the opportunities apparent in our markets, our capital allocation priorities will remain focused on accelerating investments in organic growth and operational efficiencies, followed by share repurchases and executing on double-digit increases in our quarterly dividend program. Please turn to the next slide. Turning to our financial outlook. We affirm our guidance for all key fiscal 2023 financial metrics, highlighted by an expectation for 8% constant currency organic NSR growth and 10% constant currency adjusted EBITDA and EPS growth at the midpoint of their respective ranges. Due to our operational outperformance in the first half of the year, our guidance is consistent with our outlook at the beginning of the year, despite reporting AECOM Capital as noncore and excluding it from guidance. We also continue to expect 40 basis points of margin expansion to a record annual high of 14.6%. Our ability to expand margins while investing in our teams and delivering top line growth is a testament to the competitive advantage we are creating. We have also affirmed our free cash flow guidance for this year, as well as our fiscal 2024 targets. With that, operator, we are ready for questions.

Operator, Operator

And our first question today goes to Sean Eastman of KeyBanc Capital Markets.

Sean Eastman, Analyst

Just starting high level, we've got elevated organic investments being highlighted, elevated bid proposals, elevated revenue growth and margin expansion. I'm just wondering how we should think about the sustainability of AECOM being able to continue to deliver on all of those metrics at the same time?

Troy Rudd, CEO

Great. Sean, thanks for the question. So you actually were kind enough to point something out that I thought was important that we actually talked about in the call, which is this sustained ability to do all of those things. A lot of businesses, when you're pursuing organic growth, have that trade-off between organic growth and margins. And this quarter, again, we saw an improvement in organic growth. We saw an improvement in our margins. We continue to invest in the business and in people, and that's paid off in significantly growing backlog. And in fact, in that backlog, the one thing that we call out that you don't see in the number is that the quality of the backlog continues to improve. And when I say quality, it means that it's got better margins in it. It's got longer-term visibility in it. And those larger projects that we win usually come with significant change orders on top of that, which effectively look like winning work without having bid costs. And we've been doing that for the last three years. We've consistently been doing all of those things, balancing that trade-off and ending up with organic growth consistently over the last three years, improving margins over the last three years to get to the top of our industry, and continuing to grow our backlog and improve the quality of it. And in all of that time, investing ultimately in the future of the business. So I will say we're very proud of that. Based on history, we think we'll keep that going. And what we think drives that is, frankly, just the disciplined approach of the management team in how we continue to make investments and how we're always focused on the highest returning opportunities.

Sean Eastman, Analyst

All right, helpful, Troy. And then, of course, we're looking at this fiscal '24 target. Obviously, it implies a very healthy earnings growth acceleration. Maybe specifically, what gives you guys the confidence to be standing by that number at this point in the year?

Troy Rudd, CEO

Yes. Sean, I'll let Gaur take that question.

Gaurav Kapoor, CFO

I'm going to borrow something that Troy just articulated, which is we're confident because of the competitive edge platform, as Troy articulated, we have built to deliver not just quarter over quarter, year-over-year, but into the long term. And it's something you've heard me say before, it's a dynamic model, right? It was built on three key underlying growth pillars. One is organic growth, which we're delivering better than what we had planned three years ago; our margins, which are a little ahead of what we had built into our plan again; and our capital allocation policy. We've continued very disciplined and focused, and we will continue to do so on repurchases, while at the same time, we have initiated our dividend program, which we expect and have grown by double-digit every year into the long term. So everything that we have in our control, we're overdelivering. Clearly, there are some things that are not in our control, FX and interest, but we're going to focus and continue to over-deliver on what we do control. And that's why we're very confident as we move forward, that we have built a platform with a competitive edge that will continue to over-deliver as we move forward.

Troy Rudd, CEO

And Sean, I'll just add one thing to that, too, as I mentioned this again, is the composition of our backlog. The fact that our design backlog grew at 12% and has been consistently growing over the last three years gives us great visibility in the future. But more importantly, is, again, the quality of that backlog. If we look at the makeup of that backlog, 30% of our wins are now over $25 million. And if you go back a number of years ago, wins over that size were about 12%. And so that's a significant difference in the composition of the backlog. Again, as I said, those types of larger opportunities and our very high win rate, I made this in the prepared comments that on those large wins, what we consider enterprise-critical pursuits, we're winning over 70% of those in the first half of the year. So it's really the nature of the quality of the backlog and the growth in the backlog that we build our confidence around that Gaur described.

Sean Eastman, Analyst

Maybe just on that last point, Troy. Are you trying to say that based on the composition of the wins, perhaps there's more visibility in the backlog than, say, normal?

Troy Rudd, CEO

I would say, there's been maybe not normal, but certainly more than the past. Absolutely.

Operator, Operator

The next question goes to Michael Feniger of Bank of America.

Michael Feniger, Analyst

Troy, on the infrastructure funding and some of the momentum you're seeing in areas like water, transportation, energy, do you expect the funding to be higher in '24 versus 23, and maybe even in '25 versus 24? Just curious what you're seeing there on the pipeline in terms of what you're hearing on the momentum there on the funding starting to trickle through?

Troy Rudd, CEO

Yes, we definitely see funding increasing this year compared to last year. Looking ahead, we anticipate a peak in infrastructure funding in the U.S., supported by the IIJA and other bills, likely around 2027. Although this estimate may not be precise, that's where we believe peak funding will occur. There's significant funding being prepared, not just in the U.S., which is our largest market, but also globally for infrastructure investments. This is in response to the necessity for infrastructure to support both governmental and private sector initiatives, particularly in sustainability and community resilience. We are also witnessing major long-term transitions, particularly in energy, which will require substantial investments over the next several decades. While there will be some pauses in the funding process, the long-term outlook shows that funding is positioning itself to address these three major investment trends.

Michael Feniger, Analyst

And Troy, just on the other side, some investors worry that you do have exposure to private. On the private side, there's a lot of discussion around commercial real estate and offices. Can you just kind of parse through your private exposure, what do you see as more at risk? What is more resilient type of work that you do for private customers? Just so we can kind of get a sense of when we look at that pie chart, what is more cyclical if we see more slowdown or tightening credit versus some other areas of your portfolio on the private side?

Troy Rudd, CEO

Yes. I'm going to pass it on over to Lara.

Lara Poloni, President

Thank you, Mike. Over the past three years, we have been actively diversifying away from commercial office spaces and shifting towards markets that offer more stable funding. A prime example is leveraging our expertise in building engineering and redirecting it towards opportunities in logistics, freight, distribution, aviation, and even water and energy utilities. We've successfully reduced our exposure to commercial real estate in our portfolio by half over the last five years, highlighting that this was a deliberate and strategic decision made in advance.

Michael Feniger, Analyst

If I could ask one more question about the AECOM Capital position, I assume you have done the necessary groundwork, and we observed this decision. Are there still options available for you as you continue to transform the company into Professional Services? Are there any countries or areas you plan to downplay? It's interesting to note your involvement in commercial real estate. Following the AECOM Capital decision, should we anticipate any additional steps as you further streamline the business?

Troy Rudd, CEO

First, I want to discuss AECOM Capital. We recognized quite some time ago that AECOM Capital was not central to our Professional Services business. However, we had several commitments made before 2018 that required us to fulfill them on behalf of AECOM Capital. We have now reached a point where we are confident we have met or are in the process of meeting those commitments. Consequently, we decided it was time to evaluate options for that team. Over the past three years, we anticipated this development but understood the importance of patience in addressing it. Regarding AECOM Capital, as we move forward, we have included it in our guidance and have since removed it. This change reflects the ongoing strength of our Professional Services business without adjusting the guidance. In terms of our broader business operations, we continually seek opportunities to invest while ensuring we manage the business efficiently. Currently, I don't have specific actions to highlight, but we will consistently explore ways to sustain our Professional Services business as the highest-margin segment in our industry, focusing on organic growth. At this stage, there are no specific initiatives to announce that are on our agenda.

Operator, Operator

The next question goes to Jamie Cook of Credit Suisse.

Jamie Cook, Analyst

I have a couple of questions. First, with half of the year already behind us, could you share your thoughts on your guidance? While I understand you haven't changed it, do you feel more comfortable with the high end or the low end, and what levers might you pull to reach that? Secondly, Troy, I'm interested in your comments about shifting towards higher-margin businesses and the fact that margins in backlog are higher. Could you provide more detail on that? Specifically, where do the margins in backlog stand compared to historical levels, and in which areas of the business are you seeing these higher margin opportunities?

Troy Rudd, CEO

Yes. Sorry, I'll let Gaur take the first part, and I'll take the second part, Jamie, thanks for your question.

Gaurav Kapoor, CFO

Yes. In regards to FY '23, you're right, our Professional Services business has been strong and they have over delivered. And to the point Troy just made earlier, even though we have removed AECOM Capital from our guidance and put it into noncore, there's no change in the range that we have provided. Effectively, it's factoring in the over-performance of that business. And the other thing I would say as we look forward to the second half of the year is one thing last few years have taught us is to be prudently conservative, and we will continue to operate accordingly in FY '23 as well.

Troy Rudd, CEO

And Jamie, with respect to the margins that I described, if we go back about three years, we've actually seen the margins in our backlog increase in sort of the 30% to 40% range. And so there's been a substantial improvement. And I'll just say that, that trajectory continues to improve. So we continue to see margin improvement. It may not be at exactly that same rate, but we certainly see margin improvement as we go forward. And again, I think a really important part of the quality of the backlog is the nature of the projects and the duration of the projects and the complexity of those projects. Because what we've learned in the past is that those are the ones that typically have more change in them as you go through those projects and they result in larger change orders. And as I said, that actually contributes to margins in the future, because it's effectively work that you win without having to incur the business development costs or the time and after to go through a competitive process. So again, we feel better as we start to change the quality of our backlog, which means that margins improve over time.

Operator, Operator

The next question goes to Andy Kaplowitz of Citigroup.

Andy Kaplowitz, Analyst

Troy and Lara, you continue to have strong growth in your International markets, low teens. Maybe you can talk about the momentum in the overall markets? And is it a function of just the larger program management wins really driving that growth and the sustainability of that growth as you go out over the next couple of years?

Lara Poloni, President

Yes, Andy. I'm glad to start with that. We maintain strong confidence in the outlook for infrastructure in our International business. Troy mentioned earlier the firm commitment at the policy level to infrastructure, such as the EU Green Deal industrial plan and the Canadian $20 billion investment beyond the Americas. In Australia, there's a long-term infrastructure outlook that serves as a great example. Over the past year, we have been successful in every major infrastructure transportation bid, and we expect that strong outlook to continue in Australia. In the Middle East, we are also experiencing significant double-digit growth from the giga projects. Therefore, based on policy levels and the outlook we're projecting, we remain confident in the opportunities for improvement and sustaining performance in our International segment.

Troy Rudd, CEO

I'll just add that regarding your question about program management, it is indeed contributing to our success and our win rates for larger programs and projects. It is providing us with more opportunities than we typically had in the past for those large long-term programs, thus expanding the scope of the opportunities we are pursuing. Furthermore, with the high win rate we mentioned, we are experiencing significant success overall, including in program management. Making the decision to focus on program management alongside design and advisory capabilities in our professional services firm was crucial a few years ago.

Andy Kaplowitz, Analyst

And Troy, like obviously, a good follow-up would be your margins in International are still in the mid-8s. I mean they're obviously a lot better than they used to be. But maybe the backlog visibility to get to that double-digit margin, because I think you've said in the past that you expect to be there next year as part of the $475 million. So do you have that visibility as we sit here today to do that?

Gaurav Kapoor, CFO

Andy, this is Gaur. I'll take that question. Simple answer is absolutely. We have the visibility to do that and full confidence to do it. Again, I'm going to borrow from what Troy said opening the call, that confidence is built into this competitive edge platform we've built. And when we talk specific to International, I think it's also a key thing to remind everybody, our results, which is the way we will always report, it still includes FX headwind year-over-year. So if you factor that in, we're delivering over 9% for the first half of the year. But irregardless, again, whatever the headwinds are, our job is to deliver to our commitments. And including the headwinds, we're fully confident that we're going to deliver double digits starting next year.

Lara Poloni, President

Yes. And Andy, just to build on what Gaur said, I mean Troy mentioned the point earlier, 30% increase in projects worth more than $25 million gives us a longer-term confidence in terms of the profile of the work. And I think just to comment about program management, again, they are longer-term, multiyear programs. And I think also in the U.K., I mean we look at the very deliberate action a few years ago to get on to long-term frameworks. All of those strategic and very deliberate actions, I think, give us confidence about the longer-term outlook.

Operator, Operator

The next question goes to Steven Fisher of UBS.

Steven Fisher, Analyst

So regarding organic growth, it has been around 7% to 8% for several quarters now. You've discussed some significant projects and impressive win rates. Can organic growth exceed this range of 7%, 8%, or even 9%? What would trigger such an increase? Do you need this growth to meet your 2024 targets? I'm also considering the possibility of achieving double-digit growth.

Troy Rudd, CEO

Yes. So Steve, I guess the answer is we don't need it to break out to do that because, again, there's constant trade-off, which is growth versus margins. And so as we look forward, we're going to constantly be trying to find that right balance. Because even with the work that you win, you have to be selective to take on work that's going to have the right margins, because you can go out into the market and you can certainly find folks to work on it, but if you're not disciplined about your cost structure to run the business, you can find yourself having breakout growth, but not having breakout margins. And so we're trying to constantly just have that discipline to find that right balance in how we're doing that. And again, as I said, that's been a real focus of us, is trying not to trade off growth for margins but to actually deliver both at the same time, invest in the future of the business. So I think we're sort of on track with where we expect it to be. Could we see that continue to improve? It's possible, but we're going to be focused on that trade-off and making sure that we're finding the right balance to deliver on improving the profit at a rate that exceeds our growth rate.

Steven Fisher, Analyst

Okay. That's helpful. And then just wanted to follow up on Michael Feniger question on private markets. You mentioned, Lara, the point about diversifying. I guess how variable are the trends within those private markets? Can you talk about the trends you're seeing in hospitals or stadiums within that hunt business, and just other buildings and how that's varying around the world in your private markets?

Troy Rudd, CEO

Yes. There will always be markets that slow down at different rates. People have been inquiring about commercial office spaces, as we've observed a significant slowdown in urban centers, which is perhaps an understatement. Nevertheless, we have been adjusting our business for several years to acknowledge that there are trends in facilities that still require skilled professionals. We have multiple avenues within our other business segments, such as transportation and water, where the expertise of those who have been focused on facilities can be applied. For instance, in construction management, we’ve experienced considerable success in aviation as well as with various government building projects in cities. There are certainly many opportunities available, as reflected in our construction management backlog, and our pipeline is improving. However, the nature of these opportunities is changing significantly. In terms of our buildings and places business, including program management and design capabilities, our teams have been involved in public sector work and supporting private sector clients as well. We are witnessing trends where the buildings industry is leaning towards aviation, residential developments, sports and convention centers, and public offices. Additionally, we continue to have a substantial amount of work in transportation and water.

Operator, Operator

The next question goes to Michael Dudas of Vertical Research.

Michael Dudas, Analyst

So as you look in your organic investment, as you continue to invest while growing the top line and growing the margins, what areas, whether it's markets, regions or technologies, are you looking to invest in today that's going to benefit 3 to 5 years out?

Troy Rudd, CEO

Yes. I don't think anything has changed regarding our investments. It's simply a matter of continuing to invest. As we make these investments, what we've done becomes the foundation for the future. First, we are focusing on investing in our people and teams because having the best talent in the industry is crucial. This includes leadership and technical development, which will remain a priority. Next, we are examining how to deliver our work more efficiently by investing in enterprise capability centers and the tools we need. While we refer to these as digital tools, they essentially involve using the resources we have and are developing to enhance business efficiency. This creates more capacity for our existing professionals to engage in higher-value tasks. Additionally, there is a need for standardization in how we deliver services across our business lines. The next significant trend will be in artificial intelligence. We have been investing in and utilizing AI over the past year, and this will undoubtedly accelerate moving forward. By establishing the right foundational elements, we can leverage technology to generate more capacity for our teams. Most importantly, by creating this capacity, we provide our people with time to focus on delivering greater value to our customers. These are the areas we have been investing in and will continue to pursue.

Operator, Operator

The next question goes to Adam Thalhimer of Thompsion, Davis.

Adam Thalhimer, Analyst

Can you frame the PFAS opportunity for us? How big are those projects?

Lara Poloni, President

Yes, I'm happy to take that, Adam. We know there's certainly been a lot of momentum in the funding available for emerging contaminants such as PFAS. We see that as a $10 billion opportunity. We're already the industry leader that has been working in the PFAS space for the past 20 years. Our solutions and strong technical capability will position us very well. We continue to see significant momentum and have achieved some good wins, not just in the U.S., but also outside of the U.S. for both public and private sector clients. Once the minimum containment levels were ratified, we should start to see real momentum in the PFAS area, especially with the funding available. It's certainly a private sector opportunity as well around the world.

Troy Rudd, CEO

And just one thing to add to that is, I think there might be a catalyst in the near future that will kind of sort of spark PFAS activity. And that's because the EPA announced some new drinking water regulations around PFAS. And so they're going through the process, the rulemaking process of review. And so when those regulations do become fine, which we expect sometime this year, we think that that will actually create a catalyst for more PFAS activity. As Lara said, there certainly is the funding in place, but we think that would be, again, an event catalyst for activity.

Adam Thalhimer, Analyst

Great. Okay. And then I wanted to ask about the debt ceiling, and you've got better Washington contacts than me. And the question I'm getting is, is infrastructure funding locked in? Or is there some kind of a risk around federal infrastructure support here?

Troy Rudd, CEO

Well, I believe we have similar visibility to everyone else. However, we are optimistic that sensible leaders will negotiate, and we expect a successful outcome. We anticipate that this uncertainty will eventually resolve itself. Regarding IIJA funding, the short answer is that it is procedurally challenging and politically impractical to retract that funding, so we don't believe it is at risk. Additionally, a significant portion of the funding was designated as emergency funding, which means that it does not contribute to the debt ceiling. Therefore, there are considerable procedural and practical challenges in altering or retracting IIJA funding. Furthermore, there remains bipartisan support and recognition of the necessity for investment in this area, particularly in the U.S.

Operator, Operator

We have no further questions. I will now hand back to Troy for any closing comments.

Troy Rudd, CEO

Right. Again, thank you, everybody, for joining us today. And thanks again for our teams delivering a great quarter, and we look forward to connecting with you next quarter. Have a good day.

Operator, Operator

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect.