Earnings Call Transcript - ACM Q1 2020

Operator, Operator

Good morning and welcome to the AECOM First Quarter 2020 Conference Call. I would like to inform all participants that this call is being recorded at the request of AECOM. This broadcast is a copyrighted property of AECOM. Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. Later, we will conduct a question-and-answer session. [Operator Instructions] I would like to turn the call over to Will Gabrielski, Vice President, Investor Relations.

Will Gabrielski, Vice President, 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 are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is posted on our website. All percentages in today's discussion refer to year-over-year progress unless noted otherwise. The sale of the Management Services business closed last week. The Management Services business and our at-risk, self-perform construction businesses have been classified as discontinued operations. You will see that we have re-segmented our business to provide greater visibility and insight into our performance. Our reporting segments now consist of the Americas segment, which primarily consists of the United States and Canada; the International segment which consists of EMEA and APAC regions; and AECOM Capital. Our comments today will focus on continuing operations unless otherwise noted. The discussion of operating margins is on an adjusted basis and reflects segment performance for the Americas and International segments, otherwise referred to as the Professional Services business. We will also refer to net service revenue or NSR, which is defined as revenue excluding subcontractor and other direct costs. Our discussion of margins will be made on an NSR basis unless otherwise noted. Organic NSR growth is presented on a year-over-year and constant currency basis and reflects continuing operations. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer. Mike?

Mike Burke, Chairman and CEO

Thank you, Will. Welcome, everyone. Joining me today are Troy Rudd, our Chief Financial Officer; and Randy Wotring, our Chief Operating Officer. I will begin with an overview of our financial and strategic accomplishments and a review of market trends. Troy will then review our first quarter performance, outlook, and trends across the business in greater detail before turning the call over for a question-and-answer session. Please turn to slide three. We delivered strong first quarter results, demonstrating the benefits of the strategic and financial initiatives that we have executed over the past two years to transform AECOM into a higher returning, lower risk Professional Services business. Building on last year's momentum, adjusted EBITDA increased by 27% in the first quarter, and we reiterated guidance for 12% EBITDA growth at the midpoint of our 2020 guidance range. Key to this growth was another quarter of substantial margin improvement. The adjusted operating margin in the Professional Services business increased by 230 basis points to 11.7%, building on the 200 basis point increase we delivered in 2019, consistent with our expectation for the full year. This outcome reflects strong execution against our plans to drive profitability and create substantial shareholder value. We have executed several initiatives aimed at reducing overhead, simplifying our business, leveraging our scale through greater utilization of best cost, global design and shared services centers, and derisking our portfolio. In addition, we strengthened our business and financial profile with the sale of Management Services at a premium valuation, which closed last week. I want to thank everyone who made this result possible. Today, we are a stronger company and we are confident that we will deliver on our stated goal of delivering industry-leading profitability. We are continuing to win work at a higher rate. We had $3.3 billion of wins in the quarter, and backlog increased by 2% to $37 billion, which remains at near-record levels. In addition, after the quarter ended, this momentum continued with several large pursuits moving into the award phase. As a result, we expect backlog to reach a new record in the second quarter. Importantly, we are delivering strong results even as trends across our business remain varied. In the Americas, nearly every end market we serve grew in the quarter. Continued strong support for public infrastructure investments and strong client budgets support our expectation for growth this year. International performance was more mixed. In Australia, we are benefiting from continued investment in large transportation projects in our backlog, which contributed to growth in the quarter. However, profitability in the UK, our largest International market, remains well below prior peak levels. We are optimistic that recent progress on Brexit and our commercial successes on a large number of key frameworks position us well for the expected post-Brexit infrastructure investment surge. In Hong Kong, we were negatively impacted in the quarter by ongoing political instability, although we expect better performance as the year progresses. As we look ahead, I'm confident that the brightest days for our Company are yet to come. We have a strong leadership team in place and a talented workforce in the industry whose extraordinary efforts have been integral to our success. As you know, the Board, led by the CEO search committee, is actively engaged in identifying my successor to carry the Company forward and build on our many successes and accomplishments. With that, I will turn the call over to Troy to discuss our financial and strategic accomplishments in the first quarter and the outlook for the rest of the year. Troy?

Troy Rudd, CFO

Thanks, Mike. Please turn to slide five. Our first quarter results demonstrate the progress we have made on transforming into a focused and highly profitable Professional Services business. As Mike noted, adjusted EBITDA of $173 million increased by 27% from the prior year. In addition, the adjusted operating margin of 11.7% was consistent with our full-year margin target, despite the first quarter typically being our seasonally weakest quarter. These accomplishments are a direct result of the strategic actions we've taken and continue to take to drive strong financial performance. These actions include the already executed $225 million G&A reduction that further aligned our cost structure with our transformation into a more-focused professional services organization. We also continue to simplify the business and prioritize investments where the return opportunities are the greatest, including our planned exit from more than 30 countries, which is more than 50% complete. We continue to review our portfolio to ensure we are delivering profitable growth and returns consistent with our ROIC goals. In addition, we are progressing with a substantial real estate consolidation. In total, we expect to reduce our real estate footprint by more than 5 million square feet compared to fiscal 2015, including a more than 1 million square foot reduction as part of the current plan. Finally, we are leveraging our scale and global delivery capability by driving greater utilization of our best cost-shared services and design centers to ensure we are efficiently delivering our work, including a nearly 20% increase in hours delivered through the best cost design centers in the first quarter. Please turn to slide six. Revenue in our Americas business declined by 4%. Importantly, NSR increased by 2% on an organic basis with strength in our core transportation, water, and environment markets, and double-digit growth in Construction Management, consistent with our expectations for growth this year. The Americas business had a 16.6% adjusted operating margin, which marked a 220 basis point improvement over the prior year and was ahead of our expectations for the quarter. Contracted backlog, one of the best indicators of future growth, increased by 27% to a new record in the quarter, driven by several key trends that inspire continued confidence in growth. First, state tax revenues increased by mid single digits in 2019 and five states implemented gas tax increases last year, which are key funding sources for public infrastructure investment. Second, building on the theme of strong funding, many states in large metros are proposing plans for substantial infrastructure investment. In our largest U.S. market, New York, Governor Cuomo recently unveiled a $275 billion infrastructure plan, which would be the largest statewide plan in U.S. history and would support MTA’s more than $50 billion capital spending plan. We have actively onboarded several key leaders in this market to further strengthen our competitive position. Third, the recently proposed changes to the National Environmental Policy Act demonstrated political focus on accelerated infrastructure investment. For example, the Federal Highway Administration has an approximately $10 billion order backlog of projects that have undergone environmental assessment for more than a year that would move forward much more quickly under the proposed NEPA change. Fourth, demand for more innovative solutions continues to rise as resiliency and sustainability remain front of mind with our clients. With our investments in proprietary technologies, many of which we demonstrated at the innovation expo on our Investor Day in December, we are ideally suited to capitalize on this demand and lead our industry. Finally, the pipeline in the construction management business remains strong. We are pursuing sizable opportunities across our core building, stadium, and aviation markets. This includes large expected wins in the second quarter that underpin our expectation for growth in 2021 and beyond. Please turn to slide seven. Turning to our International business. While revenue declined slightly, organic NSR was effectively unchanged over the prior year. Our adjusted operating margin for the first quarter was 4.7%, a 210 basis-point increase over the prior year, with strong performance in Australia and results in the UK. Trends across our international markets are mixed. Our business in the UK, our largest International market, is improving. Following December's election, the Prime Minister signed a withdrawal agreement from the EU last month, which provides greater certainty in the marketplace as economic conditions steadily improve. In addition, the new government has indicated support for an additional $100 billion in infrastructure investment in its first budget, which would add to our pipeline of opportunities. We've been successful in winning more than 250 frameworks, including key positions for Highways England and Network Rail where we are already winning assignments. In Australia, we extend our sympathies to those impacted by the devastating fires in the region. We're proud of our local teams who have been engaged in their communities to support the recovery efforts. Revenue in Australia increased during the quarter as large infrastructure projects continue to progress. In Hong Kong, macroeconomic and political uncertainty impacted our first quarter performance where we had forecasted a 20% revenue decline for the year. However, our performance was better than we originally contemplated. We expect to see further improvement as the year progresses. The long-term outlook for infrastructure spending in Hong Kong is robust, and we retain the leading position in this market. In the Middle East, we are closely monitoring the evolving political tensions. To date, we have not experienced a material impact on any of our projects. Activity in Saudi Arabia, our largest Middle East market, continued to progress as expected. Importantly, across the region, the decisive and deliberate actions we have taken to align our portfolio and cost structure with these varied trends resulted in a strong year-over-year improvement in profitability, and we expect further margin improvement as the year progresses. Please turn to slide eight. I'd like to spend a moment providing an update on the strategic actions we continue to take. We closed the sale of the Management Services business last week. Following our separation announcement in June, we moved quickly to capitalize on strong market demand for a high-quality asset and realized a premium valuation through the sale. The net proceeds from this transaction will allow us to repay a substantial portion of our outstanding debt and to repurchase stock. We're advancing towards our goal of exiting nearly all at-risk, self-perform construction businesses by the end of this year, including progress on certain transactions that are advancing towards completion in the coming quarters. I also want to provide an update on our combined cycle power plant construction project. Although we recently encountered a few challenges that resulted in higher estimated costs to complete, we expect to successfully deliver the state-of-the-art plant to the client in our fiscal second quarter. All these initiatives enable us to operate as a more focused and more profitable company. Please turn to slide nine. Operating cash flow was a use of $207 million, and free cash flow was a use of $238 million. Cash performance across the business was mostly consistent with expectations. However, our cash flow was most significantly impacted by timing delays in Management Services, nearly all of which we've recovered prior to the close of the sale last week. Adjusted for this impact, our first quarter cash flow was consistent with our expectation for seasonal cash flow performance. We continue to pursue a large outstanding balance related to our disaster recovery work in the U.S. Virgin Islands, and we are optimistic that recent positive developments support our expectation to collect a large portion of this cash in fiscal 2020. As a result, we are reaffirming our guidance for $100 million to $300 million of free cash flow this year. Turning to capital allocation. Net proceeds from the MS transaction totaled $2.2 billion, which does not include approximately $150 million of contingent purchase price. As a result of this transaction, our pro forma net leverage is approximately half a turn. We will use the proceeds to transform our balance sheet, including the immediate repayment of approximately $1.2 billion of pre-payable debt. Successful execution of our strategic actions has closed some of the valuation gap between us and our professional services peers. However, our valuation remains at a discount to our estimate of intrinsic value. We are committed to returning capital to our shareholders with the remaining $760 million of capacity under our $1 billion Board repurchase authorization. We will provide more details on how we will execute these plans when finalized. Please turn to slide 10. We started the year with a strong first quarter on nearly every key metric and leading indicator. Our professional services margins are near all-time highs. Our backlog remains near an all-time high, and nearly every end market is strong or improving. As a result, we have reaffirmed our financial guidance for fiscal 2020, including our expectations for adjusted EBITDA of between $720 million and $760 million, which would mark a 12% increase from last year at the midpoint of our guidance. With that, operator, we're now ready for questions.

Operator, Operator

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Kaplowitz of Citi. Your line is open.

Andrew Kaplowitz, Analyst

Mike and Troy, it's interesting to see your new segments, because while your Americas NSR 65.6% is very good, margin is very good, your International NSR of 4.7%, as you said, has lots of room for improvement. So, could you give us more color as to how and why your international margin is so low versus Americas, and could you talk about where you think international margins should be, and how quickly it could get there, given the consolidation of your geographic footprint and the additional restructuring you're doing?

Mike Burke, Chairman and CEO

Andy, let me start off with that and then I’ll turn it over to Randy. I think you correctly pointed out the opportunity for improvement that we see outside the U.S. -- a big part of that is due to the wide distribution we've had across 150 different countries. We’ve announced the exit of 30 of those that we're underway on. We're not stopping there. We're continuing down that path. We're simply in too many places. When you distribute your efforts in that many places, it affects margins. As we continue to refocus our energies in a concentrated way in the major markets, we see a significant opportunity for increased margins. But, I'll let Randy take you into a little more detail on that.

Randy Wotring, COO

Hey, Andy. So, we are committed to driving profitability across the organization, and we've been successful in the Americas. Many of the actions that we are taking will benefit the International business work. As you can see, we've had a 210 basis-point improvement from last year, but there's a large gap, and we're focused on that. Today, we have real alignment of our strategy, business model, and execution. We're laser-focused on higher margin, higher growth markets, as Mike said, simplifying the business and leveraging our organization from a size and scale standpoint. There are no sacred cows. You heard Troy talk at the Investor Day about the expanded review of geographies and business lines and the continued push to deliver our work more efficiently. We are having successes. The frameworks we've won in the UK are producing positive results and position us well for post-Brexit investments in the UK. We've also won large projects in Saudi Arabia where our scale and city planning capabilities are an advantage. As noted in the prepared remarks, profitability in the UK is still suffering from Brexit, but simply normalizing would add 100 basis points to our international margins. We have the plan, the roadmap, and the international leadership team to drive a better result over time, and we're confident we'll do that.

Andrew Kaplowitz, Analyst

Thanks for that, guys. And then, obviously there are some other topics of conversation that don't have much to do with the quarter. So, let me just ask, can you give an update on the new CEO search to the extent you can? And then, given you haven't picked a new CEO yet, you're sitting on a significant amount of cash, which would seem to make you more attractive to potential suitors. Can you talk about your appetite for potential M&A transactions with a potential suitor?

Mike Burke, Chairman and CEO

Yes. So, I'll take those in reverse order, Andy. We’re not going to comment on speculation in the market about mergers or acquisitions. So, I'll pass on that one. Regarding appointing my successor, the Board has put together a search committee. That search committee has been working actively to identify both internal and external candidates. That process is underway. As soon as we have something to announce, we will. I think we're all very confident that the Company is positioned well for a new leader to take us to even greater heights. So, things are all on track in the right way on that front.

Andrew Kaplowitz, Analyst

So, just real quickly on the new model. I mean, your DCS business, you suggested tough comparisons in the first half of 2020 would hold growth down, but for the year, you project low single-digit growth. I would assume that same general pattern would hold for the new Americas segment, including the construction management-related revenue, whereas your International segment could act a little differently. Any more color there would be helpful.

Mike Burke, Chairman and CEO

Yes. Sure, Andy. So, you're right that we expect growth to ramp over the beginning of the year. As we said back at Investor Day, we saw modest growth in the first quarter of the year. So, we're on track with where we expect it to be. Growth in the second half of the year will be driven by the improvement in our contracted backlog across our design business, particularly in the Americas. Our contracted backlog in that business is actually up 27% year-on-year. There are also a lot of opportunities in the marketplace. Our pipeline is up almost 10% from where we’ve seen it last year. We feel good about the prospect for growth as we continue through the year. One other point is when we talk about growth, there is a difference between what I call good growth and declining in markets where we see lower opportunities. So, within our 1%, there’s good news buried in that—we’re growing in higher returning markets and shrinking in lower returning markets. Sometimes, you just have to take that modest growth with a grain of salt; we’re focused on creating better growth in the business.

Operator, Operator

Our next question comes from Michael Feniger of Bank of America. Your question, please?

Michael Feniger, Analyst

Just to kick off, to be clear, the $100 million to $300 million of free cash flow, does that include the FEMA collection and refinery receivable in your guidance? Can you help just with the cadence of the free cash flow through the year? Obviously, Q1 was soft, and you explained the rationale for that. But, I'm curious if there's anything we should keep an eye on as we move to Q2 and beyond on that $100 million to $300 million number?

Mike Burke, Chairman and CEO

First of all, we don't see any change in the seasonality of the business. Typically, we see 10% to 20% of free cash flow in the first half of the year, and the remainder coming in the second half of the year. That doesn't change. There are several factors underlying that that remain consistent. Regarding the guide itself, the $100 million to $300 million, we do see a significant amount of collections coming through USVI, certainly not all of it. We had over $200 million invested in net working capital in that project, we have not collected any. But, we expect to collect that in Q2 and through the rest of the year. As for the refinery project you mentioned, we don't have anything included in our guidance today. So, that would be upside to that number.

Michael Feniger, Analyst

And just, we were talking about the successor process. Is the successor contingent on executing your capital allocation strategy and your buyback strategy related to that? Just to be clear, you had a very detailed Analyst Day, and provided 2021 targets. Is it our understanding that anyone who does come on board is signing off on what the Board has agreed to as a capital allocation strategy?

Mike Burke, Chairman and CEO

Yes. The Board has made a clear decision on capital allocation, and Troy stated it very well. The successor would be required to follow the Board's decision on that point. I don't see any change at all on that point. The Board is firmly committed, and the current management team is also very committed to executing against that plan.

Michael Feniger, Analyst

Just lastly, your quarter ended December 31st. You made a couple of comments about the backlog and award activity in January. Just anything you want to touch on with the virus impact and any of your exposure out there? Thank you.

Mike Burke, Chairman and CEO

We have not seen any direct impact on AECOM yet, in our Asia Pacific region or elsewhere. We have isolated a number of employees in Greater China that are affected by certain quarantines but not directly by the virus itself. We have proactively directed our employees across the Greater China region to work from home, until at least February 6, and we’ll continue to evaluate that guidance as we start to see things normalize after returning from their travels around the Chinese New Year holidays. As we look ahead, we currently don't expect this to have any material impact on our business. Just to put it in perspective, the Greater China area is a single-digit percentage of our net service revenue, but we don't see an impact currently. If we do see any change in that, we will be sure to let you know.

Operator, Operator

Thank you. Our next question comes from Jamie Cook of Credit Suisse. Your line is open.

Jamie Cook, Analyst

Good morning. I guess, a couple of questions. One, obviously the EBITDA growth in the quarter was strong at 27%. I know for the full year you’re expecting 12%. But given your bullish commentary and backlog opportunity, just trying to understand why we didn't increase the guide or why would growth be moderating from some first quarter levels, if there was anything one-time in there? My second question, following on Andy's, you didn't give a formal target for the Americas versus International longer term. Is there any way you can help us with how you are thinking about the margin for each segment, at least for 2020? And then, my third question, just on capital allocation. You don't have the proceeds from MS, you’re going to pay down the debt. How quickly can we move on a share repurchase? Should we assume that we ramp on that fairly quickly? Thank you.

Troy Rudd, CFO

Yes. This is Troy. Jamie, that was a lot. I think you captured it all. So, I'm going to take the first two of your questions. First, on EBITDA performance. We certainly had a good quarter, growing EBITDA 27% year-over-year. Given the markets we are in, the backlog we have, and our expectations, we feel very confident about achieving that result for the year. So, it's a little early for us at the end of the first quarter to effectively call up our guidance. The best way to describe this is based on performance, we feel confident about our ability to deliver on that number for the year. Regarding your target for margin, we can comfortably say that we believe our U.S. business is at the head of our class in terms of margins in our Americas business. Internationally, clearly, there is upside for us, and we believe we can come up to where we see some of our peers in terms of international margins, which we estimate could reach low-single digits. We see that slowly improving over the year, buoyed by stability in the EMEA market as well as improvements in Hong Kong. I’ll let Mike take the last question.

Mike Burke, Chairman and CEO

Yes. Jamie, as you know, we closed the sale of our Management Services business just last Friday. We expect to use about $1.2 billion of those proceeds to pay down our debt. The remainder of that will be used to repurchase stock, along with cash flow throughout the year. We expect those stock repurchases to happen in the second half of our fiscal year, which is just on the horizon here.

Operator, Operator

Our next question comes from Michael Dudas of Vertical Research. Your question, please?

Michael Dudas, Analyst

Good morning, everyone. Mike, best wishes on your next endeavor. Looking at the Americas, your backlog growth and your confidence on Q2 with some projects, your backlog cover has grown. You have almost three years of cover on your backlog relative to revenues. Are the projects getting longer in scale? Is the cadence of the bookings going to quicken as these budgets and findings move through at least from a planning stage to execution? Will the mix of America's going forward still lean on a percentage basis towards your traditional transportation, water, and environmental business? Is there any upside or some activity in the construction management side that could skew the numbers going into 2020 and 2021?

Troy Rudd, CFO

Mike, thanks for the question. First of all, when we look at the backlog, remember that even in a design business, there is some lumpiness quarter-to-quarter. Our total backlog has continued to progress but has seen some lumpiness from quarter-to-quarter. What we’ve seen is contracted backlog growth in the business and particularly in the Americas, which gives us near-term visibility. We have some other awards we're expecting in the second quarter; they're imminent. We expect that will give us longer-term visibility. In terms of the overall makeup of backlog, there isn't a dramatic difference in the length or duration. It has remained relatively constant over the last few quarters. So, no change there. The mix of business also remains stable; our design business represents around 85% to 90% of the overall NSR revenues of the entire professional services business.

Mike Burke, Chairman and CEO

As Troy correctly pointed out, you'll see lumpiness in wins quarter-to-quarter. Since the beginning of 2019, over those five quarters, we continue to book more than we burn. Just importantly, as you know, we provide transparency through contracted backlog and awarded backlog as precursors to that. Also, there's our qualified pipeline; when I look at our qualified design pipeline, that's up 8.5%. So, not only are we seeing contracted backlog up higher in our highest margin business, but we're also seeing that 1.3 book-to-burn ratio over the last five quarters, and our contracted backlog is going up 27% year-on-year along with a robust pipeline.

Michael Dudas, Analyst

And just a follow-up on that relative to your high value engineering and your global design centers. You mentioned in the prepared remarks some good growth there. Is that expected to continue, and do you have the capacity to improve that mix into your revenue flow and your margins?

Randy Wotring, COO

Mike, this is Randy. The answer is yes. We saw great growth in the first quarter. Over the remainder of 2020, we're planning on seeing more than 25% growth over FY19. We have the capacity and capability. Our global design centers allow us to accelerate the application of new technologies and innovation. Demand for our design centers is growing, and it's working out well for us.

Operator, Operator

Our next question comes from Sean Eastman of KeyBanc. Please go ahead.

Sean Eastman, Analyst

I wanted to go back on cash flow. We've touched on the USVI receivable and refinery claim, but just hoping to get an update on some of the other discrete items. I know there was an opportunity to launch a receivable factoring program to help replace the program in Management Services. Also, it would be great to get an update on the probability of seeing the contingent consideration brought in during fiscal '20?

Troy Rudd, CFO

In terms of discrete items, absent the U.S. Virgin Islands, our portfolio has a long list of small discrete items, which don't stand out. When we balance that overall portfolio of collections, nothing else really drives a change in that outcome. The U.S. Virgin Islands outstanding balance is large enough that we call it out. Secondly, in terms of the Management Services program, yes, we are building a new program to replace the sale receivables program with the departure of Management Services, and that is factored into our cash flow guidance. We expect that to contribute over the year. Regarding the contingent consideration, we feel we've made some progress prior to the sale of Management Services, and we anticipate collection could occur in the next 12 months.

Mike Burke, Chairman and CEO

Yes. Sean, let me try and provide a quick overview. We are fully committed to extracting ourselves from all at-risk self-perform construction businesses as we transform ourselves into a higher margin, lower risk professional services organization. We already closed on oil & gas production services and our international development divestitures. We are more than 50% done with our country exits, and moving along with a few sales of the remaining businesses. It’s not the best time to sell construction-related assets. We will not give away those businesses; they are profitable with working capital investments to harvest shortly. Continuing to be in the marketplace, we will not rush the sale to a buyer who is not receptive to construction assets today. I should also note that the Alliant plant is nearly complete, and we’ve de-risked the remainder of our power business.

Operator, Operator

Thank you. Our next question comes from Chad Dillard of Deutsche Bank. Your question, please?

Chad Dillard, Analyst

You mentioned $100 billion in infrastructure opportunities in the UK, post-Brexit. I wanted to get a sense of how you're thinking about the timing for when AECOM sees the benefits? What is your relative position over there and what sort of incremental margins tailwind there can be?

Troy Rudd, CFO

Chad, the best way to explain it is that we've been incredibly successful in winning almost all the frameworks that we've bid on, including rail and highway projects. I can't speak to how the infrastructure plan in the UK will roll out; it would take years. However, our positioning and the work we are winning under those frameworks puts us in a great position to capitalize on those investments in the long term. We see short-term impacts from the wins in that area, and we see that improving over the year.

Mike Burke, Chairman and CEO

Chad, it’s consistent with our transformation. We’ve been withdrawing from numerous countries in continental Europe, allowing us to focus our best resources on prime opportunities in a post-Brexit setting. It’s not just improving market conditions in the UK, but we redirect our top resources towards that opportunity rather than diffusing them across multiple countries.

Chad Dillard, Analyst

Got it. Just to clarify on the at-risk construction and sale of that asset. Are you still bidding work within that segment, and how should we think about revenue and margins over the next few years?

Mike Burke, Chairman and CEO

Regarding the at-risk business, in our power business, we’re not bidding any fixed-price at-risk construction work. We've discontinued that for over a year. In terms of our civil construction business, we continue to bid work but manage the risk profile. We focus on O&M work and clients we're familiar with. We're being prudent in our bidding approach while managing our civil construction work carefully.

Operator, Operator

Thank you. Our next question comes from Andy Wittmann of Baird. Your question, please?

Andy Wittmann, Analyst

Okay, thanks. So, this question was asked earlier concerning guidance. There's excellent margin performance in the first quarter, and it’s too early to raise for the year; I get that. But was there anything one-time that made this seasonally weak quarter particularly strong?

Troy Rudd, CFO

No, there wasn't a one-time item. Our margin improvement is a result of the actions we took beginning in the first quarter of last year and have continued executing to improve those margins. This is a portfolio effect and execution against our plans that have driven those margins. Thus, nothing we would categorize as a one-time item.

Andy Wittmann, Analyst

Okay, great. Then, for modeling purposes, I think it would be valuable to get your thoughts on a couple of key lines that are hard to deduce. The two that stand out are corporate segment costs and unallocated segment costs as well as your thoughts on the tax rate or comments on interest expense.

Troy Rudd, CFO

You should think about corporate segment costs as being consistent with what it’s been in the past, about $140 million for modeling. Non-controlling interest in the professional services business will be around $20 million to $25 million. It was higher in the quarter because Management Services was with us for the entire quarter. The tax rate is a little higher for the quarter, but I expect it to be consistent with the long-term guidance. Regarding interest expense, it’s premature for me to provide guidance at this moment; the situation is evolving as we just received almost $2.2 billion from the MS transaction. Clearly, paying down $1.2 billion of pre-payable debt will lead to changes, but I can’t offer guidance right now.

Operator, Operator

Our next question comes from Adam Thalhimer of Thompson Davis. Your line is open.

Adam Thalhimer, Analyst

I wanted to start with private construction in the U.S. What are you seeing on the Tishman and Hunt side and some of the biggest U.S. cities in non-residential areas?

Mike Burke, Chairman and CEO

In New York and Los Angeles, we estimate about 75% of our business is in those two markets. We see strong diversification beyond commercial real estate. Some of the biggest projects in New York involve work at JFK airport. Additionally, aviation-related opportunities and sports facilities in LA are significant pursuits. Our markets are still growing substantially. Our book-to-burn in these markets is well above 1. We have several billion dollars' worth of work we expect to be awarded in Q2. The non-residential markets in these geographies have remained slow for some time; however, demand for commercial real estate is still robust.

Adam Thalhimer, Analyst

Regarding your $100 million to $300 million of free cash flow guidance, just to clarify, that excludes the potential $150 million contingent purchase price, excludes the sale proceeds from self-perform construction. The opportunity to replace the MS receivables factoring is not in your cash flow guide either?

Troy Rudd, CFO

Yes, the first two items you mentioned are not included in our cash flow guidance. Regarding the guidance, we do expect to take some actions to replace the previous MS factoring program with something in the DCS business over the next three quarters, and this is included in our guidance.

Mike Burke, Chairman and CEO

Thank you, operator, and thank you everyone for participating today. I'd like to make a few comments. As we reflect on the quarter, it's helpful to remember where we've been. It's nearly two years since we set a course for transforming this organization. We aimed to reduce the risk inherent in the organization, improve margins, grow EBITDA, achieve better focus as we withdraw from various countries, and unlock value by reassessing our portfolio. We have now implemented tighter risk management protocols across the organization. We are a lower-risk business today and continue to exit at-risk construction markets. We achieved a 200 basis-point improvement in margins and expect another 100 basis-point improvement in FY20. You saw a 27% increase in Q1 EBITDA. We’re over 50% complete with our exit from 30 countries, and we closed last Friday on our MS transaction, unlocking substantial value for the organization, reflected in our share price performance. Our share price gained 64% in 2019 along with an increase of about 12% year-to-date. So, we are on the right path regarding this transformation. This is just the beginning of our continued evolution and positive trajectory as a company. Thank you for your support through this process over the past couple of years, and we look forward to an exciting future ahead. Thank you and have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.