AECOM : Q1 2021 Earnings Conference Call Transcript

Corrected Transcript

Total Pages: 19

CORPORATE PARTICIPANTS

William J. Gabrielski	Lara Poloni
Senior Vice President, Finance, Investor Relations, AECOM	President, AECOM
Troy Rudd	Gaurav Kapoor
Chief Executive Officer, AECOM	Chief Financial Officer, AECOM

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OTHER PARTICIPANTS

Sean D. Eastman	Jamie Cook
Analyst, KeyBanc Capital Markets, Inc.	Analyst, Credit Suisse Securities (USA) LLC
Michael Feniger	Michael S. Dudas
Analyst, BofA Securities, Inc.	Analyst, Vertical Research Partners LLC
Andrew Kaplowitz	Steven Fisher
Analyst, Citigroup Global Markets, Inc.	Analyst, UBS Securities LLC
Andrew John Wittmann	Adam Robert Thalhimer
Analyst, Robert W. Baird & Co., Inc.	Analyst, Thompson Davis & Co., Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning, and welcome to the AECOM First Quarter 2021 Conference Call. I would like to inform all participants this call is being recorded at the request of AECOM. This broadcast is 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 atwww.aecom.com. Later, we will conduct a question-and-answer session. [Operator Instructions]

I would like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Investor Relations. Please go ahead.

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William J. Gabrielski

Senior Vice President, Finance, Investor Relations, AECOM

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. As a reminder, we sold the Management Services business last January and sold our Power and Civil Construction businesses in October of 2020 and January of 2021, respectively. 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. Today's references to margins and adjusted operating margins reflect segment-level performance for the Americas and International segments. We will also refer to net service revenue or NSR, which is defined as revenue excluding subcontractor and other direct costs. Our discussions of NSR growth rates will adjust for two fewer available working days in this year's first quarter as compared to the prior year period. Our discussion of margins will be on an NSR basis unless otherwise noted.

On today's call, Troy Rudd, our Chief Executive Officer, will begin with a review of our strategy and key accomplishments. Lara Poloni, our President, will discuss key operational priorities; and Gaur Kapoor, our CFO, 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.

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Troy Rudd

Chief Executive Officer, AECOM

Thank you, Will, and thank you all for joining us today. I'd like to begin by first acknowledging and thanking our 47,000 professionals who've contributed to a great start for the year and are the key reason for our success and trajectory. I'm proud of how our employees have responded over the past year and continue to focus on the health and safety of their families, clients and communities. We have built a track record of consistently exceeding our expectations over the past two years and our first quarter performance continues this momentum. This is a direct result of the commitment of our teams to leverage the strength of our platform and deliver amid an uncertain backdrop. In mid-November, we unveiled Think and Act Globally which outlines the foundation of our strategy and the path forward for AECOM with an ambition of setting a new standard of excellence in the professional services industry. We are well on our way. We've dedicated much of our time over the past few months towards implementing key elements of this strategy. As our financial results demonstrate, we are benefiting from a simpler operating structure, strong collaboration, investments in innovation and delivering the full breadth of our portfolio to our clients across the globe.

We'll now turn to a more detailed discussion of our financial results starting on page 3. We exceeded our expectations on every key financial metric in the first quarter. Organic revenue increased by 2% and NSR declined by 2% from the prior year. Backlog increased by 8% over the prior year and included record contracted backlog providing strong visibility. Our segment adjusted operating margin was 13.1%, which marked a 140 basis point increase from last year and a 560 basis point increase from the first quarter of 2018. Of note, International margins are now at 7% which is more than 400 basis points better when we compare it to the beginning of fiscal 2019. We are operating the business as efficient as ever, investing in business development opportunities to position for growth and transforming how we deliver through innovation. Adjusted EBITDA increased by 9% to $189 million and adjusted EPS increased by 35% to $0.62. Both of these metrics were ahead of our expectations for the quarter and provide a strong start to the year.

We set as a measurable priority this year to improve cash flow phasing and I'm pleased with our results in the first quarter. Operating cash flow was $7 million and free cash flow with a slight use of cash in the quarter. This compares to an average outflow of $230 million in the first quarter over the past two years. This performance combined with our strong balance sheet enabled us to repurchase nearly 9% of our shares outstanding since September. We are increasing our EPS guidance to reflect the strong start to the year, the accelerated pace of share repurchases and the lower interest expense associated with a new sustainability and diversity linked financing. Our guidance does not include any prospective repurchases, though it is our expectation that we willcontinue to deploy cash to buy back stock under the $825 million of capacity remaining on our current board authorization.

Please turn to the next slide. Reflecting on the first quarter performance, several key points are apparent. First, our teams have embraced our Think and Act Globally strategy. This strategy is driving greater collaboration across the organization and serves as a foundation from which we are pursuing accelerated growth and expanding our industry-leading margins. As a result, we are more deeply engaged with clients. We are expanding our advisory practice to shape how clients plan and execute their priority projects. Through our focus on program management, we are supporting clients through their largest and most complex projects. To support growth, we are investing in business development and key client account programs and we are developing new and more efficient ways of working led by deploying innovation at scale and executing our Workplace of the Future initiative to support the growing preference for greater workplace flexibility and to reduce our real estate costs.

Second, we have created a culture of continuous improvement and we are setting new standards for profitability in the industry. We are focused on driving efficiencies across the organization and for our clients. As a result, we are delivering industry-leading margins and unlocking capital to invest in growth and innovation.

Third, we have narrowed our focus to our higher-margin and lower-risk Professional Services businesses. Over the past few months, we completed the exits of our Power and Civil Construction businesses. As a result, our leaders are now exclusively focusing their time and resources on our largest, fastest-growing and most profitable endeavors.

Fourth, several inherent attributes of our business enable us to perform and continue to invest through periods of uncertainty. These include the proven agility of our workforce, a highly variable cost structure with low capital intensity, a substantial backlog with several years of visibility, industry-leading client satisfaction and strong cash flow.

Finally, we are complementing our strong team with new leaders and fresh perspectives. Last month, we announced the appointments of Jennifer Aument as Global Lead for Transportation and Drew Jeter as Global Lead for Program Management. Both are world class leaders who bring proven track records of success and we are energized by the positive response we've received from both our teams and our clients since their appointments. We will continue to strengthen our teams and invest in our people to ensure we achieve our collective ambitions.

Turning to review of our markets beginning in the Americas; our teams remain focused on building a sustainable future and we're bringing elements of sustainability to every aspect of what we do. It bears repeating we are the number one environment firm, the number one transportation design firm, the number one facilities design firm as ranked ENR. We are the leader in the PFAS market having spent decades supporting clients both public and private. And today, we are organized around ESG as a key priority within AECOM. The Biden administration has outlined an ambitious and broad-based plan that touches nearly every element of what we already do for our clients every day in the markets where we lead. These include transportation infrastructure, clean energy, offshore wind, wetland and coastal restoration and PFAS remediation, to name a few. Needless to say, we are well-positioned to benefit from a prevailing direction of US policy and funding.

In the near term, as we wait for clarity on a potential larger relief and infrastructure stimulus bill, our US public sector clients continue to face funding challenges. We've seen clients slow the decision making process and this has impacted our growth over the past several quarters. However, key indicators are trending positively. Vehicle miles traveled have recovered notably since the prior lows in April. The enacted COVID relief bill in December