Aecom (ACM) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to AECOM First Quarter 2019 Earnings Conference Call. I would like to inform all participants 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 in 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 will like to turn the call over to 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 take 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, which is posted on our website. Please note that all percentages refer to year-over-year progress except as noted. Our discussion of earnings results and guidance refers to adjusted financial metrics as defined and reconciled in today’s earnings press release filed with eh SEC and the presentation accompanying this call. Today's discussion of organic growth is on a year-over-year and constant currency basis and as adjusted to exclude impact of non-core businesses. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer. Mike?

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 a discussion of AECOM's results and discuss the trends across our business. I will also provide an update on the strategic actions we have taken and continue to take to enhance the value of our record backlog. Then Troy will review our financial performance and outlook in greater detail, before turning the call over for a question-and-answer session. Please turn to Slide 3. Our first quarter results were ahead of our expectations on nearly all metrics. As a result, we are on track to achieve our fiscal 2019 financial guidance including our expectations for continued revenue growth, 12% adjusted EBITDA growth and $600 million to $800 million of free cash flow. Organic revenue increased by 5% this was led by a continued momentum in our highest margin businesses including third consecutive quarter of double-digit growth in the Americas design business and 17% growth in the management services segment. Both businesses are benefiting from favorable market conditions and near record levels of backlog. Strong revenue growth and solid execution contribute to 16% adjusted EBITDA growth which was ahead of our expectations. Additionally, shortly after the quarter close, we completed the sale of an AECOM Capital property, which resulted in approximately 40% IRR and provides a strong start to our second quarter. Wins of $11 billion set a new high for the Company and had exceeded $6 billion for five consecutive quarters. Our book-to-burn ratio was 2.0, resulting in a record backlog of $59.5 billion, which is a testament to our competitive position and our investment in growth. Our successes were highlighted by the contract for the $7 billion Terminal One project at the JFK Airport in New York City. In addition, backlog in Americas design business increased for the ninth consecutive quarter and we also delivered a 1.3 book-to-burn ratio in management services for our pipeline of qualified pursuits increased by 20% to $35 billion. The second quarter shaping up to be another stellar wins quarter including awards for two projects and building construction valued at approximately $1 billion each. As a result, we expect backlog will increase again in the second quarter. The partial shutdown of the U.S. government had very impacts to AECOM in the first quarter. Approximately 25% of our total revenue is for the U.S. Federal government, primarily in our MS and DCS segments, nearly 80% of this revenue is for the DoD and DOE which are funded through this fiscal year and our work was not interrupted; however, the shutdowns impact was more material to the phasing of our cash flow which Troy will detail. Outside of the shutdowns impact cash flow met our expectations and we expect to achieve our full year cash flow guidance. I also want to provide an update on the strategic actions we continue to take to maximize the profitability of a record $59.5 billion backlog. First, we have taken nearly all the required actions to achieve our targeted $225 million of G&A savings, net of estimated leakage and reinvestment we expect to reduce G&A by $140 million in total, including $85 million expected to be realized in fiscal 2019. These cost reductions are enabled by investments in IT systems, shared services and other efficiency drivers. With these actions and underlying market strength, we are on a trajectory to significantly enhance our margins. Second, we continue to simplify our operating structure and hone our focus on our fastest growing market where our competitive advantages are greatest. We have completed approximately 25% of our plan country exits and continue to target the exit of more than 30 countries, which will ensure management time and capital are allocated for our best growth opportunities. In addition, we recently completed a spin out of the infrastructure investment business, which further narrows AECOM Capital focus on the real estate market. Finally, in addition to the previous announced decisions to exit the fixed-price combined-cycle gas power plant construction market and certain non-core oil and gas businesses, we will no longer pursue at-risk construction projects in international markets. And we are continuing to review our at-risk construction exposure. Upon completion of these initiatives, we will have a greater concentration of higher margin and lower risk professional services work which we believe will result in substantial long-term value creation. To take advantage of these value creation opportunities, we have repurchased $210 million of stock under our $1 billion board repurchase authorization. Going forward, we intend to synchronize repurchases with our cash flow, which is typically second half weighted. Our conviction remains high, that repurchasing stock at current levels is the best and highest use of our industry-leading free cash flow. Please turn to Slide 4 for discussion of our business trends. Beginning in the DCS segment in Americas, revenue increased by 12% with strength across really all market sectors, performance was led by continued high levels of storm recovery work in the Southeastern U.S. and ongoing growth in the transportation market. Today, we have one more than $1 billion of storm recovery work and we continue to pursue a nearly $2 billion pipeline of opportunities. As such, we expect this market to continue to create opportunities for growth in our scale and agility position as well to capitalize. Transportation, our largest market in the Americas is benefiting from increased state and local funding which accounts for more than 70% of public infrastructure investment. Total funding has benefited from the more than $40 billion of transportation specific funding initiatives in 34 states that passed in the 2018 election cycle. These measures which build on the more than $200 billion of infrastructure specific ballot measures that passed in 2016 and ongoing fast act investment demonstrate our client commitment to developing a diverse set of funding sources to meet demand. Turning to our international markets, beginning of the Asia-Pacific region. Increased public sector construction investment in Australia and stable trends in Hong Kong contribute to another quarter of revenue growth. In the EMEA region, uncertainty related to Brexit has negatively impacted business confidence and for investment into the UK and our revenue declined slightly in the first quarter. Even so, the pipeline for major infrastructure projects remained strong and we were recently selected for nearly $100 million contract for network rail to support rail investment. We have already taken actions to align our cost structure with uncertainties ahead of the March 29th separation date and we are well situated to benefit from a recovery and activity. Turning to the management services segment. Following several years of investments in organic growth, revenue increased by 17% in the first quarter. We had $1.4 billion of wins including a nearly $500 million defense project in the UK and increase a number of existing programs, including our classified work. As a result, our backlog remains near an all-time high. Importantly, the finding outlook is strong for both the DoD and DOE our largest clients. As a result of our total pipeline of qualified opportunities has increased by 20% to $35 billion and dominated by pursuits for these two clients. This pipeline features a growing set of higher margin DOE opportunities. As a result, we are reiterating our long-term 7% operating margin target. Pivoting to construction services. In building construction, we remain on track for fifth consecutive year of growth supported by a record nearly $20 billion backlog. Wins in the first quarter included a new $7 billion Terminal One at JFK airport underscoring our successful efforts to diversify the business. While our record wins and 51% backlog growth demonstrate our success in the market, they do not tell the complete story. We were also selected for additional projects valued at nearly $1 billion in the first quarter including another large aviation win. The full value of these wins is not reflected in our win or backlog to see the accounting treatment of agencies basis work. As I mentioned earlier, after quarter close we were awarded two additional projects valued at approximately $1 billion each, which adds to our unprecedented visibility. Performance in the civil construction business exceeded our expectations in the quarter. The pipeline of opportunities is robust and as sold margins continue to improve creating a favorable backdrop for continued profitable growth. In power, the Alliant Riverside gas power plant is approximately 85% complete and remains on schedule and on budget. We've reached another major milestone in December with all buildings now substantially enclosed and we expect to complete this project later this year. Finishing with AECOM Capital, I’m pleased to report that in the second quarter, we closed on another property sale which generated an approximately 40% IRR and $10 million gain on our investment. Activities are well underway to support our new third-party real estate investment joint venture with Canyon Partners importantly, remain poised to fully benefit from the expected embedded gains in our existing portfolio while limiting future investments of our balance sheet. Our strong first quarter results are a testament to the progress we are making to hone our focus on a higher margin and lower risk professional service markets. I will now turn the call to Troy who will discuss the quarter in more detail.

Thanks Mike. Please turn to Slide 6. Our strong first quarter results including record wins and backlog continued revenue growth and 16% adjusted EBITDA growth inspire a great deal of confidence towards achieving our fiscal 2019 guidance and our five-year financial targets. As Mike detailed, we've made substantial progress on de-risking the business and honing our focus, which will allow us to maximize the profitability of a record backlog. We have already taken nearly all the necessary actions to achieve our 225 million G&A reduction plan. The benefits of these actions are expected to result in higher margins, primarily in our DCS segment where we expect to achieve a 110 basis point margin improvement this year and further improvement in 2020 and beyond. Importantly, we expect to deliver 12% adjusted EBITDA growth this year, driven by continued growth and higher margins. As a demonstration of confidence, we have been actively repurchasing our stock under our $1 billion board authorization and continue to believe allocating capital repurchases is the best use of our cash flow. Please turn to Slide 7. Revenue in the DCS segment increased by 7%, led by 12% growth in the Americas growth in Asia Pacific region, and a slight decline in EMEA region due to reduced level of activity in the UK. The adjusted operating margin was 6.2% in the quarter, which is a 150 basis point improvement over the prior year. This operating margin was consistent with our expectations and we expect to achieve a margin of at least 7% this year with sequential improvement as the year progresses. Please turn to Slide 8. Revenue in the MS segment increased by 17% in the first quarter reflecting a full benefit from our large wins and record backlog. The adjusted operating margin was 6.1%, which was consistent with our expectations and reflected solid execution across the business. We continue to expect the adjusted operating margin to approximate 6% this year. We are committed to our long-term target of 7%, supported by favorable mix shift in our pipeline of pursuits and our continued high win rate. The return profile of this business is highly attractive. We require very little capital growth and as a result we generated a high return on invested capital was very little execution risk. Please turn to Slide 9. Revenue in the CS segment declined by 2%. Power revenue declined as expected due to our decision to de-risk business. We also faced a very tough comparison for the building construction business where revenue increased by 22% in the year ago period. However, we are confident that are building construction business backlog and recent wins will result in another year of growth. The adjusted operating margin was 1.5% in the quarter. Reduced activity in the power business contributed to the decline in the margin, but we remain confident in our 2% expectation for the year. Please turn to Slide 10. Operating cash flow was a use of $200 million and free cash flow was a use of $222 million. While cash flow was typically weak in the first quarter, the partial shutdown of the U.S. government and the cash cost we incurred to execute our margin improvement plan negatively impacted performance. We estimate these two factors resulted in approximately $200 million impact to our cash flow. s Mike noted, this is a timing issue, the cash generated nature of our business remains intact. Importantly, we are producing industry-leading cash flow for a number of years including $2.7 billion of free cash flow between fiscal 2015 and 2018 were approximately $675 million per year, and we expect to deliver cash flow within our $600 million-$800 million guidance this year. With the stock trading at a price below what we believe is a long-term value, we continue to prioritize repurchases, we will synchronizer repurchases with cash flow as you move through the year. Please turn to Slide 11. With strong first quarter results that exceeded our expectations, our record backlog and momentum in the business we remain upbeat. As a result, we have reaffirmed our guidance including our expectations for revenue growth, 12% adjusted EBITDA growth at the midpoint of our guidance range and 600 million to $800 million of free cash flow. For the second quarter, we expect adjusted EBITDA to approximate 23% to 24% of the midpoint of our full year guidance. Our guidance balances strong trends in our largest market with ongoing uncertainty around the potential future U.S. government shutdowns and continued uncertainty in the UK market. With that, I will turn the call over for Q&A. Operator, we are now ready for questions.

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

Mike, everything sounds good at CS when you talk about the strong building, construction booking better than expected civil construction business and the progress you're making on your project, but you obviously continue to do strategic review and you decide to exit at-risk international projects. Building construction was down in the quarter on a revenue basis, so when we step back. How should we look at the business going forward? Is CS just going to be a smaller business? How much at-risk international construction is in the backlog? Can you give us your confidence level that building construction revenue grows in FY19 because I think you said last quarter that it will flat?

So, I'll make sure I got all the components of those questions, Andy. But first of all, the international at-risk construction is about zero. There might be one small project that we are finishing up, but it's about zero and will be zero going forward. The backlog, if you take the overall CS business, exclusive civil is still doing well. Power, we've scaled back our market exposure there. And in our quest to de-risk that business, we have scaled it back. But building construction overall continues to grow, we had significant multibillion dollar wins in this quarter already about 2.4 billion of wins in January and February already. We got about $20 billion of backlog in building construction and loans that’s about 3.5 years of revenue. We got about another $10 billion of decisions that were waiting on just in the next 12 months alone. And the importance of that business, you and some others, have been asked about the exposure to the real estate markets and are we close to the peak. I think our backlog and growth in our backlog is evidence that. A couple of things are happening. One is, we are still premium the premier provider of tall vertical construction across the U.S. We continue to win sizable projects in New York city, including a billion-dollar win in the month of January, we spent a lot of time repositioning that business and diversifying it outside of the New York market. Despite the significantly win to New York, we've now grown that business in the West Coast market in Los Angeles that has been booming for us. We also as we talked about over the past year and half, we started to reposition our expertise into the aviation markets because we see here in the U.S alone about a $100 billion of opportunities in the aviation markets and as you seeing we had about $7.5 billion of wins year-to-date in the aviation business. And we continue to look at taking our relationship from the top two developers that were developing in the tall vertical markets that are now developing in the aviation market. You start to see projects at New York, projects at JFK that are being done by private sector developers which were clients of ours in the high-rise vertical market. So all in all, we feel pretty good about that market. We feel the building construction business will continue to grow. And when I look at that backlog that 20 billion the backlog, it tells me that in FY 20 we will grow even faster than we will grow in 19.

Okay, Mike, that’s helpful. Let me shift gears and talk about DCS for a second. I mean you've progressed with this G&A savings plan, I think a little faster even being basically done at this point. I think you said by Q2, it will be 90% done. So when we look at margin going forward, should you experience a decent increase here in Q2 from Q1? I know you mentioned sequentially, sequential improvement, but I guess there is a balancing act here between the improvement from the restructuring and maybe a little bit of UK under utilization. Is there any risk to that 7% guide that you have, if the UK continues to be a drag?

Troy, do you want to take that?

Yes. So, Andy, as you pointed out, we are ahead of the pace we said we will be in terms of completing the restructuring, and we will see the impact of that in our designed business in the second quarter. The margins will improve and we are still are on track as we said to exceed the 7% number for the full year. In terms of the balance again as Mike pointed out in his prepared comments that we have actually undertaken restructuring in the UK to position ourselves for the softness in that market. So at this point in time, we don't see that being a risk to the overall margins in the design business, and also I will remind you that in the UK, it does represent 4% of overall role income. So I declined may have from where we are now would have a modest impact. But again to reiterate our margins, we're on track to the 7%, margins are exceeded at 7% the targets we set out beginning of the year.

And also Andy, you may have seen the announcement last week in the UK that we won a $100 million engineering design fee for network rail, which is the biggest win we had for design work in the UK in couple of year. So that happened just last week, so that portends well for the rest of this year and into 20.

Troy, just one quick follow-up on cash. Do you think you'll catch up to normal seasonality as you go into Q2? Or is it just going to become more backend loaded given the government still seemed to be a little bit uncertain as to what’s doing here over the next few weeks?

So I guess, first the answer is yes. I see it's clearly catching up. We are reiterating our full year guidance of $600 million to $800 million of free cash flow. And there's no question that we were impacted by the shutdown during the first quarter. In fact, it would be difficult to find that it could be worst timing for us. We already have seasonality in our cash flow for the first half of the year and second half of the year. And so, that's impacted that we see that, but we see ourselves catching it up in Q2 and Q3. We also -- with growth in the business, we are considering some to fund that particular growth in working capital as well. And in terms of the timing, we did have a pretty significant impact from one of our projects. Just give you an example, we have the storm recovery work that we're performing in the Caribbean in the U.S. Virgin Islands, and we had at the end of the quarter $185 million of net AR that we had anticipated collecting. And frankly that money to get collected, it has to go through a lot of a lot of hands because it is approved by the customer and also because it's US government funded. It has to be approved by the agency that’s funding that contract, and with the shutdown, those approvals just stopped. So, we are seeing now money being collected last week and this week on the particular contract. So, we do expect that being collected over the course this quarter and into Q3. So, I would say that just in terms of our overall cash flow, we do have confidence around that full year number. And underlying that, there's no real changes in our processes or reward systems that we have across the Company or the nature of the underlying client. So, we see this is timing, not collectibility and we will expect to recover that over the course this year.

Andy, if I could just expand on that or reinforce that, I am not worried about cash flow. Of course, I would prefer the U.S government paid our receivables in the quarter. But having receivables of that level outstanding from a very high credit quality client is not a concern to me for one. But also as Troy pointed out, when you have 7% organic growth in DCS businesses and 17% organic growth in the MS business in the quarter that chose up some working capital but I think it’s a really good use of working capital to see that kind of outsized growth. And we had over the past four years of aggregate of $2.7 billion of free cash flow over the last four years. So, I think our track record on that is pretty strong and that gives us a high level of confidence that we are going to hit our cash flow numbers for FY 19.

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

Michael, talk about or maybe you can expand on your comments about the better visibility in the DoE and BOE pipeline. What kind of change and is it more what type of specialty or types of skill sets that you're bringing to these different and more expanded contracts or different agencies that are allowing you to get better position to do some of this work?

Mike, Randy will take questions, if you don't mind.

What we have said Michael is that pipeline continues to grow. One is because we're better positioned across the marketplace in terms of our footprint with agencies, the projects that were qualified to perform on in the experience we have, as well as the key personnel that we bring to the table. So, over the last few years, the pipeline has been heavily weighted towards Department of Defense opportunities. As we look forward though, we see as I think described as a shift mix to a more, a higher number of DoE opportunities that we are extremely well positioned for. We are currently a leader in the environmental management marketplace in DoE, and we look to over the next few years expand our presence into the nuclear security administration- type work too, the defense type projects within the Department of Energy. So, again half of the pipeline increase that we've announced moving from 30 million to 35 million is in DoE projects alone.

Appreciate that just the second question would be on the, just thinking about the Construction Services Business. One about -- talk about -- a little bit about -- you talk about you're going out of at-risk international project and refocusing on what kind of maybe domestic you’re shying away or repositioning? Maybe you can explain on some of the projects that you would've done and you’re going to do in the future? Does that have any impact on some of the design or kind of like a combined work that you've been able to generate from those types of projects either design or programmer construction management fees? And following that up, how long before we get to see the visibility, the benefits on the margin side in CS as that works through the system?

A prime example of de-risking the portfolio which we talked about quite sometimes, we are clearly evaluating all strategic options to de-risk our construction portfolio. One piece of that is to no longer take on at-risk constructed outside the U.S. A second piece of our prime example was last year, our decision not to pursue anymore combined cycle gas power plants business. It's also a strategic decision on our part to change the risk profile of the projects were willing to take on across the portfolio as well as considering strategic options for segments of construction services. At the end of the day what we expect to have that a higher margin lower risk business much more akin to construction management consulting work, that's our objective that's where we're heading. With respect to margins, we fully expect this year to hit our target of 2% margins in the CS space. And when you think about that business going forward, think about a construction management business that has on a net service revenue basis margins that are in excess of 20%, think about the business that has a negative networking capital. And so, you have a very high return on invested capital, a very low risk business with very high net service revenue margins. That’s the type of business you should be expecting to see as we evaluate our strategic options and execute against that.

I appreciate the comments. Final thought, Mike. You want to take a swing at what might come out of the State of the Union tonight and maybe an update on your thoughts on infrastructure build?

Well, I have been predicting what’s going to come out of the White House for quite some time and I have a very good track record of being wrong every single time. So with that caveat, we have been expecting for quite some time that infrastructure actions would come out of the White House. We clearly have broad bipartisan support for infrastructure right now both side of the aisle, want to get something done. We clearly expected the infrastructure is going to be one of the top five points in the State of the Union tonight. But beyond that, I would be speculating.

Our next question comes from the line of Andrew Whittman of Baird. Your line is open.

I just wanted to get a technical question. All the way, it's not new that you guys have been having significant contribution from storm. I think in the past you've given us some brackets around that. Troy, can you just help us to quantify that in the quarter just knowing that, it's a lumpy business, we'd like to a handle on what's -- how much is actually contributing?

Yes, if you think about what we said about our DCS Americas business, which was up 12% year-over-year in the quarter. I guess at some point I think about absent the storm work, we would've had single digit growth in that business.

Got it, mid single digit or…

Yes, I’m going to say low single digits. Just to be clear and I don’t want to suggest, I don’t want to draw a wrong conclusions from that. Had we not been pursuing storm recovery work, we are pursuing other opportunities and so, I don’t think we ought to be concluding from that, that you take out all the storm work and we'd be growing at 3% or something. It's still -- there is a bunch of resources that would be deployed toward something else.

And then I guess, Mike for you. As I understand that the line that’s called non-core operating losses in your statement, it contains a number of things. I think the biggest chunk of that has been some of the oil and gas business that you’re trying to get out of in Canada, but I think it also includes this quarter some of the other international businesses and offices that's you looking to exit as well. There is my question for you. Is it an update on the process around selling or monetizing or even just shutting down any businesses here? And when we can expect that line to moderate and get closure to zero rather than the numbers that have been up the last couple of quarters?

Troy, do you want to take that one?

Yes, I'll talk that Mike. So, Andy, you're exactly right. That relates to the oil and gas business that we described that we were exiting in Q2 of last year. We’re still continuing that process and then we also are closing down the 30 countries and we're about 25% complete. So at this point time, we have eight countries that were considering dormant. We are still continuing that process through this quarter, but maybe a way if you think about this is, as we get to Q3 that there should be no continuing financial impact as we get to those actions in Q3.

Your next question comes from the line of Tahira Afzal of KeyBanc. Your question please.

Mike, I guess first question. You had very execution you said internally you outperformed. Does that make you a little more comfortable around the midpoint of guidance for the full year? And I guess what I’m trying to get at is, if you haven’t adjusted your guidance up, is that partially just because it's too early?

First of all, it has increased our confidence. When you beat your internal expectations for the quarter and you come out and put 4 billion of wins up in the first of five weeks of the quarter here, we deal pretty good, the governments back open for business. So, there's no question it increases our confidence level, but it's a little early in the year to start putting up an increase in our guidance. And we also had the AECOM Capital gain in the quarter, we expected that in Q1, and so in fact that move to Q2 and we still exceeded our expectations for Q1 tells you that we significant outperformed our internal expectations for Q1. So, there's no question we have more confidence in our guidance range throughout the year, but not prepared increased our guidance just yet.

And Mike, if you back 10 years ago when the whole world was falling apart and really look at this macro downturn which hopefully will be little milder. How do you see the visibility in your backlog? When I did an analysis suggested longer durability and higher visibility projects in terms of funding sources.

So, Tahira, I think back to 10 years ago when we would look at our backlog at that point in time, we would say, 75% of next year's revenue was in backlog. And you so had, maybe a year-and-a-half duration to backlog going back 10 years ago. One of the things that is really changed in our business over the past few years is the duration of the projects that we want. So, with backlog in excess to 60 billion now as of today, that's obviously that's almost three years of revenue. So our duration has doubled over the past 10 years. And I look at our business is some of the that the areas in the private sector, which is generally we hear as a concern sometimes, I look at that business to 20 billion of backlog that’s 3.5 years of visibility with growing demand in the public sector aviation space. So, our backlog is of lot much longer duration than it was 10 years ago. It's much more diverse than it was 10 years ago and gives us a lot more confidence than we would have had at a similar point 10 years ago.

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

First, Mike, obviously, the organic growth has been very strong within the management services business. So can you talk about, understanding the comps get a little bit difficult in the remaining nine months, how we should think about organic growth in that segment? My second question, your EBITDA guidance for the second quarter was 23.5% up total year EBITDA. Just to understand you started the year at 207, if you add back the gain from AECOM capital and then you assume you get some benefit from the restructuring actions you've taken which are ahead where you want to be washing that number be greater, as a percent of total earnings relative to normal seasonality? And then my last question. Tory, I guess it's to you. Just on the free cash flow side again, understanding the nuances of the quarter, but just given the issues with the government and the working capital requirement you've talked about. Is it more prudent for us to think about the low end of the range or low to mid point under the range versus high end?

Jamie, let me -- I'll try and or to straight the different parties to answer that multipart questions. So maybe Randy will touch on the organic growth in MS and what we might expect for the rest of the year on that. And then Troy will take on the cash flow and the guidance piece for Q2.

Okay.

Jamie, what I tell you is that, I think we have great momentum in our growth activities in the MS organization, both in terms of generating pipeline that we qualify quite a long time out and we have great visibility on our bidding activities over the next three years in that business and our win rates and capture rate. Both have been outstanding. We have a lot of confidence that the bids that we currently have under evaluation, we feel good about those and we expect the Savannah River site to be awarded any day now or some news about that that particular bid. And the best predictor I think of our ability to capture business on a go forward basis and continue to bring in backlog and organic growth, there is performance and I'll tell you that that organization continues to perform well across all of our contracts. Last week, we received our latest award fee score on Savannah River site. And again, we received an excellent rating I think captures over 95% of the award fees. So, in my nearly 40 years of experience in this marketplace, the best predictor of capturing growth is performance and that organization continues to perform well, invest wisely and capture business. So, I will leave at that and pass the ball to Troy.

Yes, so Jamie, your questions just on Q2 guidance. I think when we created the Q2 guidance, we were trying to find the right balance. So reflecting the optimism that we have in the business based on what we've done in Q1, the restructuring that we've undertaken and what we see in terms of win, but we also trying to balance that against some the macro events that we're facing including the possibility of a shutdown in a few weeks in U.S. government business. So, the best way to describe this is, this is consistent with what we've typically seen in our quarters in the past year been around 23%, and we want to set a plan that we believe we will achieve and would like to drive our out performance as we have in Q1. And in terms of cash flow, I haven't changed my particular view that we should be guiding to lower end of that range. That range is still intact for us. We have confidence in achieving a number within that range. I said in the last four years on average, we have done $675 million of free cash flow. So, we've got a path based on the expectations of business performance to get into the middle of that range. And then, there are some things that can go our way, A few lumpy collections around the quarter that can have a still in the high end of a pain in the range. So, there is no real change in our confidence in the coming within that guidance range at this point.

Thank you. Our next question comes from Steven Fisher of UBS. Your line is now open.

I was just wondering about the organic growth outlook in the DCS statement. You gave us the 3% or so ex-storm work, but as you do lap that storm work in the second, how easy or hard do you think it will be to continue to show positive organic growth when you lapped those comps? I mean, should we put a decline in there and then parse it out between storm, no storm? Or do you think you can keep it positive overall?

So, Steve, I think we will keep it positive overall. You’re right in pointing out that there are difficult comps as we move through the year. But when you look at our contracted backlog in the design business, it was up 6% in the quarter. And in the Americas, it was up a higher number. So there is a very clear relationship between contracted backlog and growth in the next 12 months. And so, we see based on our contracted backlog, we see sustained growth over the course of the next nine months or the three quarters of the year.

And Steve just to point out, we still have 2 billion of bids that we're pursuing for storm recovery work. We generated about 1.1 billion of wins to-date, but we still have another 2 billion of opportunities that we’re chasing. We don't see that abating. We just finished this year a project from Hurricane Katrina, which you remember that was 2005, so 14 years ago. It gives you a sense for the long tail on this storm recovery work. So, yes, they are difficult comps, but we now have, well, how many quarter of backlog growth in DCS Americas? Will is telling me, nine quarters of backlog growth in a row in DCS Americas. So, we will continue to get up to the market.

And Steve, it's Troy again. Just to tag one for the point on that is, organic growth is now more valuable than it was in the first quarter because having undertaken the restructuring, we’re adding 110 basis points to DCS margins which means, we’re adding 110 basis points to the backlog that we currently have. And that means that, that growth even in mid single digits become more valuable.

And just a follow-up, do you think you are book-to-bill on a contracted basis within the DCS segment is going to start to go over one? As you point out the backlog on a contract basis is growing year-over-year, but basically it was kind of one-time book-to-bill this quarter. You think it will see above one time, and if so, what pieces of the business are going to drive that in the next few quarters?

So, the simple answer to that question is, yes, we do expect book-to-bill to be greater than one for the full year and certainly the next three quarters. And again, we go to the largest markets where we continue to see the largest opportunities, which is in our Americas business, our Asia-Pacific business, we’re seeing the largest growth opportunities.

Steven, I just hear your point on contracted backlog, I just, I can’t help myself here but to reiterate that. Distinguishing between awarded backlog and contracted backlog is not all that meaningful. It is very, very rare that we have an awarded backlog that doesn't move into contracted backlog. And so, I'll just be careful in trying to do too much analytics on just the contracted portion because in my mind the distinction without a difference.

[Operator Instructions] Our next comes from the line of Chad Dillard of Deutsche Bank. Please go ahead.

So, I just want to go back to your review of your at-risk construction business just to understand what sort of accretion opportunities there are. Can you just help us like I guess understand in terms of what the margin profile is for that type business as well as the cash flow conversion rate, just so we can get a sense for what the go forward business will look like?

I'm not sure I understand the question. You're asking for what is our cash flow conversion in our margins go forward. Let me try and I think I know what you're asking. When we go forward on a -- we expect to have a low margin -- I am sorry, low risk, high NSR margin, low working capital business. So, let me try and take that in pieces. On the gross revenue basis, we expect margins to be north of 2%. On an NSR margin basis, we expect that to be around 20%. We expect to have negative working capital in that business. So, it produces a very high ROIC and so hopefully that helps you understand the business that we’re aiming for after we get done with our strategic review.

And then just switching over to DCS. Can you just give some color, if you can some quantitative color the bidding pipelines? How that compares year-over-year? And then, what you’re seeing in terms of relative strengths for New York that has not been one yet?

Well, I think, the 12% organic growth in the Americas business tells you a lot about the market conditions. Our backlog continues to grow. The opportunities in front of us continue to grow. We're -- as we take our attention away from some of these markets that are far afield as we start to retrench from 30 some countries, we're getting more of our resources focused on the hot markets of North America and Canada. We now have about 80% of our business in North America right now. That market continues to be hot. We saw in end of '18 November election cycle, $40 billion of new ballot measures. We see strengthening late cycle, strengthening across the infrastructure market here in the U.S. And hopefully, if there is a federal infrastructure bill that starts to gain momentum coming out of the Sates of the Union tonight, that will be even further fuel to the fire here. So, we feel pretty good about that market. And then the other thing that we feel really good about is, this 100 basis point improvement in our margins in the DCS Americas business was an expectation of another 50 basis point in FY '20 and we're not stopping there. So, we’re seeing organic growth, we’re seeing growth in the backlog, we are seeing strengthening markets. and more importantly 150 basis point improvement in margins that we expect to derive from the backlog over the course of next year and half.

Thank you. At this time, I would like to turn the call over to Mike Burke for closing comments, sir.

Thank you, operator. So, before we conclude the call today, I just want to emphasize a few points from our first quarter results. As you heard me say a few times now, we're continuing to deliver positive organic growth, but most importantly that organic growth is coming in our higher margins DCS and MS segments. And as a result, it contributed to a 16% growth in our adjusted EBITDA, puts us fully on track for our full year guidance of between $920 million to $960 million of EBITDA. Secondly, we are exceptionally well positioned to continue to drive profitable growth. Our backlog grew 22% in the quarter to an all-time high. We had another $4 billion of wins in the second quarter to-date, that just in the past five weeks. We expect more wins on horizon, but even more importantly, we have taken very quick decisive strategic actions to maximize value of our recorded backlog. We’re well ahead of plan on our G&A reductions that will produce more than 100 basis point improvement DCS margins this year and another 50 basis point next year. We are continuing to de-risk our portfolio and the types of projects we're taking on as well as evaluating options to spin off piece of that business that would further optimize our portfolio going forward. So, we’re increasingly confident in our ability to drive substantial value for AECOM and shareholders going forward. And with that, I'll look forward to our next discussion in May. Thank you and have a great day.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.