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AECOM Technology (NYSE:ACM)
Q4 2017 Earnings Conference Call
Nov. 13, 2017 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the AECOM Q4 2017 earnings conference call. I would like to inform all participants that this call is being at the request of AECOM. This broadcast is the copyrighted property of AECOM and 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 and if you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. I'd 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 growth 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%ages refer to year over year progress except as noted.

Our discussion of earnings results and guidance excludes the impact of acquisition and integration related expenses, one-time financing charges, the amortization of intangible assets and financial impacts associated with non-core businesses and assets unless otherwise noted. Today's discussion of organic growth is on a year over year and constant currency basis. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer.

Mike Burke -- Chief Executive Officer and Chairman

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 AECOM's results and discuss the trends across our business.

Then, Troy will review our financial performance and outlook in greater detail before turning the call over for the question and answer session. Please turn to slide three.

We began the year with substantial momentum and delivered on numerous key financial and strategic objectives. First, we delivered 9% revenue growth in Q4 which marked our highest quarterly growth in several years and contributed to the full-year growth of 4%. All three segments grew in Q4 including double-digit growth in building construction and power and growth in our Americas Design business. Second, we delivered record wins of 23 billion dollars and our backlog increased by 11% to a new all-time high of nearly 48 billion dollars.

This performance was led by our higher margin and DCS segments and included double-digit growth in our Americas Design business where we are capitalizing on improving market trends. Third, we had another year of exceptional free cash flow which was consistent with our expectations. We have now paid down approximately 1.5 billion dollars of debt over the past three years, continued to invest in growth and expanded our AECOM capital portfolio. Fourth, we announced a new capital allocation policy in September built on the confidence we have in our five-year financial forecast including 3.5 billion dollars of cumulative free cash flow.

This policy which includes achieving net leverage of 2.5 times and a new 1-billion-dollar stock repurchase authorization underscores our commitment to creating substantial shareholder value. Finally, our design, build, finance and operate capabilities are creating meaningful competitive advantages that is no more apparent than in our selection to deliver the more one-billion-dollar decommissioning of the San Onofre nuclear plant in southern California which we were awarded in first. In addition, in Q4 we won a sizable multiyear global design-build contract for a leading multinational pharmaceutical company. Both of these wins draw on more than one AECOM discipline.

Overall, we are pleased with these accomplishments. However, a few unexpected market challenges impacted our results. Following the US election last fall, nearly 1 billion dollars of projects that we expected would contribute in 2017 were canceled due to NAFTA concerns. In addition, the devastating storms in Q4 impacted some of our larger US markets and low energy prices persisted which weighed on our Middle East markets and pressured our oil and gas environment business in the Americas.

In response to some of these dynamics, we are taking measured actions to streamline a few of our operations to better align our overhead and to deliver work more efficiently. Importantly, we executed through these challenges and ended the year with a record backlog and confidence in the trajectory of our business which is underscored in our financial outlook that Troy will detail shortly.

Please turn to slide four for a discussion of our business and market trends. Beginning with the DCS segment in the Americas, the improved funding environment and strong support for infrastructure investment are creating one of the most favorable growth backdrops in recent history. We exited the year with a record backlog. We delivered substantial growth in our transportation and water markets which account for more than half of the business.

This backlog is already translating into improved results as evidenced by our Q4 revenue performance. Several of our key markets are benefiting from improved overall levels of funding, specifically Los Angeles, Seattle, San Francisco and Atlanta. Across these markets, our clients are beginning to release major projects for bid and we expect 15 billion dollars of projects to be bid over the next 18 months. Importantly, many of these projects are part of our growing 15-billion-dollar pipeline of integrated civil infrastructure pursuits where the acquisition of Shimmick Construction complements our leading design capabilities and expand our addressable market.

We are also encouraged by trends in Canada. Our revenue growth accelerated through the year and backlog increased by 20%. Prime minister Trudeau's 180-billion-dollar infrastructure development plan is providing significant long-term visibility. Some of our markets were impacted by the devastating hurricanes that struck the southeast and Puerto Rico during Q4.

I'm pleased to report that all of our people are safe and have been accounted for. We are mobilized to support the recovery and are working with federal, state and local teams on emergency response efforts. We're also well positioned for and actively pursuing opportunities for the estimated 200-billion-dollar disaster recovery and resilience initiatives to help return these communities to normalcy.

Let's pivot to our international design markets beginning in the [inaudible] region. In the UK, our largest international market, transformational infrastructure initiatives such as High Speed 2 and Crossrail are progressing and we delivered another year of growth. In India, Prime Minister Modi's nearly 60-billion-dollar infrastructure modernization plan and the country's overall economic growth are creating substantial opportunities and are contributed great optimism for modern infrastructure development. Importantly, across [inaudible] we delivered growth despite continued Middle East market pressure from persistently low oil and gas prices.

Encouragingly, the Middle East market is stabilizing and we are seeing signs of improved demand. For instance, Saudi Arabia's recently announced 500-billion-dollar Niamh Development Plan highlights the substantial growth potential in the region as greenfield development advances.

Turning to the Asia Pacific region. We delivered our strongest revenue growth in several years in Q4 which included solid performance in Hong Kong where we maintain leading market share and substantial growth in Southeast Asia where work on several large transportation projects is progressing. Importantly, across the region, we are increasingly leveraging our leading capabilities and expertise from Hong Kong and Australia into new markets which is a competitive differentiator.

Turning to our management services segment. Following nearly three years of intensified business development investments, our backlog increased by nearly 50%. Our wins included a 3.6-billion-dollar contract with the US Air Force which greatly expanded our portfolio of classified work and provided substantial long-term visibility in our highest margin segment. Of note, our backlog does not yet include an approximately 500-million-dollar win that is currently under protest.

These successes reinforce our positive outlook. Our qualified pipeline of pursuits is over 30 billion dollars including 16 billion dollars of expected decisions over the next several quarters. Both the House and Senate approved increased defense spending as part of the National Defense Authorization Act and we are confident that our pipeline of backlog will continue to grow in fiscal 2018.

Let's pivot to construction services segment. The benefits of our diverse industry-leading capabilities resulted in another solid year. In building construction, we delivered a third consecutive year of double-digit organic growth. We broke ground on the iconic One Vanderbilt project in New York, bolstering our resume that includes nearly 60% all towers taller than a thousand feet built in that market in the past decade.

In addition, we continued to expand beyond New York including over 5 billion dollars of projects across California, Florida, New England and Texas and our selection as construction partner for Spire London, the tallest residential building in western Europe. We also delivered to new professional sports arenas in Detroit and Atlanta and broke ground on a new NFL stadium in Los Angeles, bolstering our leadership position in this market.

In power, our work on Alliant's combined cycle gas plant in Wisconsin has cleared its early milestone. Foundation work is nearly complete and underground piping work is progressing as planned. Concluding with AECOM Capital, we completed the first sale by AECOM capital property in 2017 for an approximately 30% IRR in addition to fees earned by our construction services segment. We have a premier portfolio of properties at different stages of maturity and we expect to realize substantial gains in the future.

With AECOM Capital, approximately 2.5 billion dollars of construction value will be executed by our construction services segment and we are building a reputation as a development partner of choice. Across AECOM, our performance in fiscal 2017 underscores the strength of our diverse portfolio of capabilities and end markets. Momentum is building across a number of key markets and we are confident in our long-term growth potential.

I will now turn the call over to Troy who will discuss the quarter in more detail.

Troy Rudd -- Chief Financial Officer

Thanks, Mike. Please turn to slide six. Our results highlighted a number of accomplishments including solid performance across the business, accelerated revenue growth in the second half of the year and positive growth in all three segments in Q4. Adjusted EPS in Q4 was 74 cents and our EPS for the year was within our guidance range.

During the quarter we drove strong outperformance on tax which offset some of the market challenges Mike spoke to. Importantly, we generated 618 million dollars of free cash flow which was within our annual guidance range for the third consecutive year and include very strong performance in Q4, our consistently strong cash performance as a result of our diverse business model and culture focused on driving cash flow. Importantly, our backlog and revenue momentum solidify our confidence in our 2018 outlook.

Let's turn to slide seven. Revenue in the DCS segment increased by 4% in the quarter including growth in the Americas Design business despite the US hurricanes. This strength was led by our transportation and water businesses where both revenue and backlog increased by double digits. We also had growth in our international markets with large transportation projects ramping up across both Asia Pacific and [inaudible] regions.

The full-year adjusted operating margin of 5.9% was consistent with our expectations. The underlying execution was strong and we increased business development investments to capitalize on substantial market opportunities. These investments contributed to our record backlog in the Americas and underpin our confidence in continued growth in 2018. We expect margins to exceed our 6% target especially as volumes accelerate during the year.

Let's turn the slide eight. Revenue in the construction services segment increased by 21% for the quarter and 11% for the full year. The full-year adjusted operating margin was 201% which is a 60-basis-point increase over the prior year. We're benefiting from a favorable mix shift to higher margin power work and solid execution.

As anticipated, the Shimmick acquisition was modestly accretive to our results and we expect additional accretion in fiscal 2018. In addition, we expect our strong backlog of large commercial, stadia and power projects to drive another year of revenue growth and margins consistent with our 2% target.

Let's turn to slide nine. Revenue in the management services segment was unchanged for the year. The full-year operating margin was 8.8%, reflecting strong underlying performance across our vast portfolio of projects. Importantly, our significant investments in business development and leading capabilities contributed to nearly 50% backlog growth which provides substantial long-term visibility in our highest margin segment.

With a large 3.6-billion-dollar Air Force win and carried a longer than typical duration, we expect revenue growth in 2018 and margins to approximate or 7% target which does not include the potential project incentives and award fees.

Let's turn to slide ten. Full-year operating cash flow was 697 million dollars and free cash flow was 618 million dollars. We've now generated 2 billion dollars of free cash flow and reduced our debt by approximately 1.5 billion dollars since closing the URS acquisition in October 2014. In addition, we closed on the Shimmick acquisition in Q4 which greatly expands our integrated infrastructure offering in attractive western US markets.

Our consistent cash performance is a key differentiator that enables significant opportunities for stockholder value creation. Accordingly, we formalized the long-term capital allocation policy to provide visibility into our intended use of capital. This policy includes a commitment to allocate substantially all free cash flow, to continue debt reduction, to achieve our 2.5 times net debt EBITDA target. We anticipate achieving this goal by the end of fiscal 2018 and immediately thereafter allocating substantially all free cash flow to stock repurchases under our new 1-billion-dollar board repurchase authorization.

Acquisitions are expected to be limited to strategic niche targets where we have an established successive history such as Tishman, Hunt, and Shimmick. We're confident in our ability to drive substantial value for our investors.

Let's turn a slide eleven. Our accomplishments provide us tremendous confidence. As a result, we have initiated adjusted EPS guidance between $2.5 and $2.90. In addition, we have also initiated adjusted EBITDA guidance of 910 million dollars.

After adjusting for favorable legal resolutions that we recognized in 2017 and normalizing for tax, our adjusted EPS and EBITDA guidance reflect 10% and 7% growth respectively. We anticipate AECOM Capital to contribute 8 cents at the midpoint of our EPS guidance which compares to 18 cents in 2017. The variation is due primarily to the timing of project realizations which benefited from a large gain we recognized during 2017. We have not yet included any benefit from potential stock repurchases under our new 1-billion-dollar repurchase program.

In addition, while we are hopeful the tax reform proposals translate into action, our expectations do not yet include any anticipated benefits. Our guidance also assumes a 21% tax rate, 210 million dollars of interest expense and a 162 million shares outstanding. I should note that our guidance includes between 20 and 25 million dollars of expected restructuring charges to reduce overhead and drive efficiencies across businesses which Mike spoke to earlier. These costs are expected to be incurred during the Q1 but will largely be offset by the anticipated recognition of discrete tax benefits.

As a result, we expect our Q1 adjusted EPS guidance to approximate 20% of our full-year guidance. This is consistent with historical phasing. We're forecasting free cash flow between 600 million and 800 million dollars. The near-term priority remains debt reduction to achieve our 2.5 times net leverage target.

With that, I'll turn the call over for Q&A. Operator, we're ready for questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. Once again, that's star, then 1 to ask a question.

And our first question comes from Michael Dudas from Vertical Research. Please go ahead.

Michael Dudas -- Vertical Research -- Analyst

Good morning, gentlemen.

Mike Burke -- Chief Executive Officer and Chairman

Good morning, Michael.

Michael Dudas -- Vertical Research -- Analyst

Michael, as you think about business development for 2018, where do you from a border or from executive management level see the best opportunities [inaudible] to kind of achieve and continued growth in 2018 but maybe even looking forward to 2019 and 2020, maybe start with design business than more so on the management services side where I think this could be continued visibility.

Mike Burke -- Chief Executive Officer and Chairman

Sure. Let me start off and talk about the DCS and CS and Randy will talk about MS. So, first of all, based on what we saw in Q4 of 9% organic growth, the highest growth that we've seen in many, many years as well as the 1.2 book to burn ratio gives us a lot of confidence that the momentum is increasing. So, as we start to see momentum increasing, of course we're seeing that because we have invested for the past year in business development activity and we're going to continue to invest in business development activity but when we say we're are at some of the hot markets, you heard us mention some of the recent ballot measures and some of the hot markets that we've seen like Los Angeles, Seattle, San Francisco and Atlanta, if I look at just those four markets alone, we are expecting about 20 billion dollars in bids to be put out to the market in the next 12 months alone, just in those four markets.

So, we are seeing some incredible strength in some of these markets. The US infrastructure market really gives us some real confidence. So, we're starting to see while we've had great growth in construction services three years in a row, double-digit organic growth, now we're starting to see the growth come back to the DCS and the MS segments, our two highest margin segments. And so, it's not only growth but its growth in the right segments and we feel pretty good about the US infrastructure market, the construction markets, we have long been benefiting from the uptick in the vertical construction markets in New York City but we've diversified outside of that market into many other our regions.

You've heard us mention the win in London for the second tallest building in London. You've heard us mention the five other markets outside of New York and in the US where we have over a billion dollars of construction revenue. So, overall, we feel good about the construction markets growing outside of New York and we feel good about the infrastructure markets. We'll let Randy comment about management services.

Randy Wotring -- Chief Financial Officer

Thanks, Mike. We entered the year with about 50 billion dollars in the pipeline and 20 billion dollars of decisions expected in the year and we delivered substantial growth. We had a strong success in converting the pipeline to wins and MS backlog actually increased by nearly 50%. Of the 20 billion in decisions we anticipated, we won about 8 billion dollars or 40% of the pursuits and importantly, as Mike indicated, beyond this success we still have a qualified bid pipeline of over 30 billion which reflects our investment to backfill the pipeline with new opportunities.

And beyond that, I think if you look at defense spending trends, the outlook across defense and intelligence markets remains robust. The President's 2018 budget calls for a 10% increase over FY 2017 budget levels. And so, we're talking budgets well over half a trillion dollars. It's a very large market and growing and AECOM is able to address an increasing amount of the programs that are put out for bid.

And there's also a growing pipeline internationally and governments all over the world are signaling increased defense budgets. And recently we saw the Saudi Arabia, the oil agreement with the US that adds to our confidence that higher global defense spending is going to be in place. So, we feel bullish about the pipeline opportunities in the MS marketplace.

Michael Dudas -- Vertical Research -- Analyst

Thank you, Mike. And my quick follow-up would be when you're talking about your 25-million-dollar restructuring that you expect to hit in Q1, is that just for those underperforming businesses you highlighted, Mike, in the quarters or something more general to those numbers and where you're starting to target maybe some tightening of the belt.

Mike Burke -- Chief Executive Officer and Chairman

Yeah, I'll let Randy answer that, OK?

Randy Wotring -- Chief Financial Officer

Yes. Following several years of integration and a pivot to the external growth focus, we see a few areas that could see some fine-tuning and pruning to drive efficiency in how we operate and deliver work. We're always looking for ways to improve the efficiency with which we operate and deliver work. We're focused on positioning the company best for 2018 and beyond and very much focused on delivering growth and having a highly efficient cost structure.

So, look, I think included in this guidance this year is approximately 20 to 25 million of expense. This will primarily accrue to the DCS business with a little bit in CS where we have reorganized a few businesses to reflect the overall lower business volumes. And you may recall, for instance, as Mike mentioned in prepared remarks, we went from having a few large industrial jobs to none following the election last year and NAFTA concerns. So, you may recall we've talked about pressures on our US government environmental business due to weak oil prices or realigning the cost structure there and if not for that environmental market pressure in Americas DCS, we would have had positive organic growth for the year.

Michael Dudas -- Vertical Research -- Analyst

Excellent. Thanks, gentlemen. Appreciate it.

Operator

Our next question comes from Andrew Kaplowitz from Citi. Please go ahead.

Unidentified Analyst -- Citigroup -- Analyst

Hi. Good morning. This is [Inaudible] for Andy this morning. Mike, I want to come back to the MS backlog because 50% growth there is a great result but I think you had talked about doubling MS backlog this year and it does look like you lost one significant recompete in the quarter.

So, how much of it, if at all, does this impact your ability to generate 5% organic growth in 2018 and beyond? And can you talk about any protest that you filed on the recompete that you lost and maybe your confidence in being successful there?

Mike Burke -- Chief Executive Officer and Chairman

Yeah I'll let Randy respond to that but this could be the first time in history were a 50% increase in backlog is not enough to satisfy but I'll let Randy jump into that one.

Randy Wotring -- Chief Financial Officer

Yeah let me talk about, I think, you're referring to the Savannah River job at the Department of Energy and we're extremely disappointed by that initial decision. Our team has performed very well there, very high performance for us for years and our record is unmatched in the industry relative to our ability to safely treat and dispose of radioactive waste. We're very selective in what we protest and we only move forward with the protest when we believe that an agency is not followed its evaluation criteria or applicable procurement negotiations regulations. We do not believe that the DOE award decision was consistent with the RFP evaluation criteria or applicable procurement regulations.

Now, although protests turn on their individual facts and circumstances, we have a strong record of successfully utilizing the protest process when necessary. So, thus we have filed our bid protest as well as others with the government accountability office. Now, look, we still are very bullish on growth. We still have a full pipeline and from time to time we will lose contracts we should win or win contracts we should lose but we're very bullish that we are continuing to win above industry average and we have visibility on the pipeline that will provide growth well into the future.

Unidentified Analyst -- Citigroup -- Analyst

I appreciate that, Randy. Maybe sticking with MS, I think you guided, I think you said 7% margin there for 2018 but you've done quite a bit better than that the last several years. So, is this just some conservatism on your part kind of given the variability of the performance enhancement fees there and can you do better than that in 2018 if you continue to execute well?

Troy Rudd -- Chief Financial Officer

This is Troy. I'll take that question. So, our guide this year and our guide for next year has been a 7% margin for the MS business and I think we said this in the prepared comments that that excludes any award fees or any significant performance fees that we would earn in the year. So, as we move forward into 2008, our guidance is built around that 7% operating margin and we do see upside in the business as we move forward into 2018 and beyond that.

Unidentified Analyst -- Citigroup -- Analyst

Okay. Thank you, guys.

Operator

Our next question comes from Steven Fisher from UBS. Please go ahead.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning. Mike, over the last few years there have been some false starts on the Americas Design business. In one quarter it starts to look good and then it starts to fade.

How are the dynamics that you're seeing this time different? And I would guess you're going to say it has to do with some of [inaudible] funding initiatives. And if that's the case, how do you kind of think about the federal side of things.

Mike Burke -- Chief Executive Officer and Chairman

So, listen, we have been participating in a difficult environment in the US construction market for quite some time and if you look at the revenue growth, the backlog growth, anything else relative to our peer group, we have considerably outperformed that peer group. Our backlog is up 12% and our book-to-burn rate is up in the key markets of water and transportation, all up double-digit numbers. We're feeling pretty good about that momentum, we're feeling good about our execution, we're feeling good about the investments in business development we've made in target markets and we're feeling good about that 20 billion dollars I mentioned coming to market in the next 12 months in just those four markets of Seattle, San Francisco, LA and Atlanta, all markets we have a very strong presence. And so, I don't know if you'd call it false starts or if you'd just call it participating in a shrinking market for a number of years.

We have taken market share in that period of time and our backlog now portends quite well for FY 2018 and forward.

Steven Fisher -- UBS -- Analyst

Okay. And I don't know if I missed it but can you give us an idea of what you're assuming for overall organic revenue growth in 2018 and then how the individual segments, kind of some color around how they would relate to above or below that overall target?

Mike Burke -- Chief Executive Officer and Chairman

We have not given guidance specifically for FY 2018 on revenue but we have given long-term guidance of 5% organic growth in revenue over the next five years in Kager. We've given guidance of 10% growth in earnings over that five-year period of time and we will be updating that guidance in our December Investor Day and I think everything we're seeing is a positive to those expectations. The momentum feels better than it did a year ago. So, you can read into that what you'd like but we haven't given specific revenue guidance in FY 2018.

Steven Fisher -- UBS -- Analyst

Okay. [Inaudible] just ask you about cash flow then. What do you think your cash taxes are going to be in 2018 and what are the big [inaudible] to free cash flow year over year in 2018 versus 2017.

Troy Rudd -- Chief Financial Officer

This is Troy. I'll take that question. So, in terms of cash taxes, we would see a profile similar to the current year which means that we would expect to have a tailwind from our cash taxes. At the moment I don't have a specific guide to give you on it.

That's my expectation that it would be similar to the prior year. We also don't have any legal settlements that we anticipate to pay out on in the current year. If you recall in this past year we had an unplanned payout of about 60 million dollars. We also don't have any legal settlements or expected payouts in the coming year but putting that all aside, the underlying business hasn't dramatically changed.

We still have a diversified portfolio of projects, we still have an incentive system that rewards people for cash performance and if you look back at the last three years, we've been pretty consistent. We've generated 2 billion dollars of free cash flow in the last three years and it's all been consistent from year to year. So, I just see the underlying performance of the business delivering cash flow similar to as it has in the past.

Steven Fisher -- UBS -- Analyst

Terrific. Thanks very much.

Operator

Our next question comes from Andy Wittmann from Baird. Please go ahead.

Andy Wittmann -- Robert W. Baird -- Analyst

Okay. Thanks for taking my questions and good morning. I guess I wanted to specifically ask about the burn rate to start out with particularly in the DCS and MS segments. I guess over the last few years it slowed down a little bit but there's a little bit more visibility.

Could you talk about how you expect the burn rate to trend in those two segments in particular?

Troy Rudd -- Chief Financial Officer

Yeah. Andy, it's Troy again. So, just at a high level, our backlog year over year is up 11%. And so, just given the nature of some of the projects in the management services business, we see that extending for management services, the burn rate, as you described.

I'm assuming you're talking about the conversion from backlog to revenue. So, we do see that lengthening but we do see growth in that particular business year over year. Our construction services profile really is the same. So, we're expecting, again, that business to grow.

We haven't given guidance yet. We [inaudible] specifically around that business. We do see that growth. In our design business, I don't see a discernible change in the profile of that business.

So, we have seen the backlog grow in our DCS business a little more than 10% and we would expect that to translate into revenue in 2018 at the same rate that it's translated to in the past.

Andy Wittmann -- Robert W. Baird -- Analyst

Great, thanks. I guess my next question I wanted to dig in a little bit more about, kind of the overall industry utilization rates and the impact that it might be having on your pricing or terms and conditions. Unemployment is [inaudible] low broadly speaking but I don't know if it's low for your employee base. Is there enough of a scarcity factor here that you're able to get better pricing or terms and conditions or do you expect that 2018 will be similar to 2017?

Troy Rudd -- Chief Financial Officer

We're expecting 2018 to be similar to 2017 in terms of margins. We've given our margin guidance and we're not expecting labor pools or labor issues impact that except for the fact that we get operating leverage and the more we grow our revenue, the more of a positive impact it has on our margin. So, we are not concerned about labor scarcity in the type work we're doing or in the locations that we are doing it in any way that would negatively impact margins.

Andy Wittmann -- Robert W. Baird -- Analyst

Great. And then I guess my last question is probably for Randy and that just has to do with the federal environment. And, Randy, if you could just remind us which of your recompetes are up in 2018 for the federal?

Randy Wotring -- Chief Financial Officer

I think it's Los Alamos and Hanford but maybe I'm wrong in that, maybe if there are any others that we should be monitoring, it would be helpful to know. Thank you.

Mike Burke -- Chief Executive Officer and Chairman

Yeah, I think there's nothing unusual about what we have next year. I think in fact it's no major recompetes that are up other than those that we've started in the fiscal year 2017. So, I know of no major recompetes. We have a smaller contract, I guess, with DOE at the National Energy Technology Laboratory where we've been for a large number of years but nothing major.

Andy Wittmann -- Robert W. Baird -- Analyst

Okay. Thank you.

Mike Burke -- Chief Executive Officer and Chairman

I will say that we still consider the Savannah River site competition to be open and not closed. So, from that standpoint, it's a major recompete that's out there.

Andy Wittmann -- Robert W. Baird -- Analyst

Fair enough. Thank you.

Operator

Our next question comes from Chad Dillard from Deutsche Bank. Please go ahead.

Chad Dillard -- Deutsche Bank -- Analyst

Hi. Good afternoon, guys.

Mike Burke -- Chief Executive Officer and Chairman

Hello, Chad.

Chad Dillard -- Deutsche Bank -- Analyst

Just wanted to touch on the 20 and 25 million dollars in restructuring. Just wanted to understand how big of a benefit that will be and then how should we think about the timing to win [inaudible] run rate? And then also just related to your 2018 guidance, how much of that [inaudible] benefits included and how much, if at all, you are including non-recurring tax benefits for 2018.

Randy Wotring -- Chief Financial Officer

Chad, I'm sorry I missed the very last part of your question. If you could repeat that, please.

Chad Dillard -- Deutsche Bank -- Analyst

Just how much, if at all, [inaudible] including [inaudible] non-recurring tax benefits for 2018.

Randy Wotring -- Chief Financial Officer

Okay. So, I'm going to answer that one first that in our 21% rate that we're guiding to we do expect a benefit of a restructuring in Q1. Other than that, we don't anticipate anything in the subsequent quarters but it's baked into our 21% rate. In terms of the overall restructuring, first of all, it is included in our $2.70 guidance and we expect that to go through our results in the Q1.

And restructuring will take place in Q1 and some of it in the beginning of the Q2. And in 2018, in terms of the impact, we see a very modest impact in the full-year result but once we get through that, we see a more permanent and lasting impact in fiscal 2019 and beyond.

Chad Dillard -- Deutsche Bank -- Analyst

Got it. And then switching over to management services, you mentioned that you have about 16 billion dollars in your pipeline over the next 12 months. I mean, I understand that this business can be pretty lumpy but it in terms of what you're seeing in terms of visibility, you expect that 16 billion dollars to be more first halfway versus second halfway [inaudible]. And also maybe you can speak to the level of visibility that you're seeing in the international portion of management services.

I think one of your peers today mentioned they're seeing slowdown [inaudible] Defense and I just wanted to get some [inaudible] are you seeing this as a problem and if there is, is how big of an impact would that be into your business.

Mike Burke -- Chief Executive Officer and Chairman

I have to tell you to predict the timeframe when the government's going to make awards is very difficult. So, I would tell you that most of the pipeline that exists where we expect awards in 2018 will be spread over the year. We've seen delays. There was a question earlier about we haven't won as much as we thought we would.

It's because some of those awards were delayed and kicked over into the fiscal year 2018. So, the timing on awards is hard to predict. I'll just tell you that we expect that those will spread over the year. With regard to international activities, we are seeing the tick-up in opportunities in India and we do see some nuclear-related opportunities in the UK.

Although we've seen some of the same slowdown in the UK Defense Department but we're not necessarily impacted by that in the fiscal year 2018.

Chad Dillard -- Deutsche Bank -- Analyst

Great. Thank you, guys.

Operator

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning or good afternoon depending on what time. I guess, a couple of questions. One, back to the management services business, Mike.

You have been very successful, you talk about your backlog is up 50% year over year but I'm just trying to think through. I mean, you said revenues would be up and that you'd assume a 7% margin or so for MS services. At what point do you expect on a profit dollar basis that your management services business can grow over a year? Is that more of a 2019 scenario or could we see that in 2017. My second question is with regard to 20 to 25 million in restructuring.

Do we see this as sort of the last year sort of restructuring or should we think about that as sort of an ongoing improvement that [inaudible] continue to streamline the business? And then my third question is on the longer-term financial targets, based on what you're saying and I know we want to wait until the Analyst Day but should we now assume that your 10% EPS growth target, we could potentially do better than that with now your share repurchase in place because I didn't think before [inaudible] share repurchase when you talked about your 10% EPS growth target.

Mike Burke -- Chief Executive Officer and Chairman

Okay. I think I got all three of those down. Let me start with what our expectations are for us in the MS segment to see growth in 2018.

Jamie Cook -- Credit Suisse -- Analyst

Profit dollar growth.

Mike Burke -- Chief Executive Officer and Chairman

Yes, yes.

Jamie Cook -- Credit Suisse -- Analyst

Okay.

Mike Burke -- Chief Executive Officer and Chairman

Profit. We expect profits to increase in the MS operating segment in 2018 and of course in 2019 and forward. Secondly, on the restructuring, when you is this something we'll be done with it or is it something where there's more to come, I think any business of our size with 18 billion of revenue, we ought to be looking every year what things we can prune so that we can grow. And we don't see any other restructuring charges planned for 2018 certainly after this but I wouldn't rule out us in the future looking to prune businesses based on market conditions.

We saw a downturn in the oil and gas environmental engineering business that's caused us to restructure around that and a few other small areas. So, I think that's just normal and healthy. With regard to your third question, our long-term financial targets when we put them out last year did not include share repurchases. And so, I think you know how to interpret that comment and we will have more to say about that in the December Analyst Day but we still feel very confident in our five-year growth and our cash flow projections.

With cash flow, Troy mentioned, we had 2 billion of free cash flow over the last three years and you could you could straight line that right to our five-year cash flow projections that we had given. So, we think there is upside to that. And the recent organic growth rates give us confidence. We set out a 5% organic growth target.

We hit 4% in FY 2017 with 9% Q$0. So, we like the trajectory of that. We like the trajectory of our win rates. All of that gives us some real confidence in the direction of that business.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you. I'll get back in the queue.

Operator

Our next question comes from Bobby Burlson from Canaccord Genuity. Please go ahead.

Bobby Burleson -- Canaccord Genuity -- Analyst

Yeah, good morning. Just a couple of quick ones. Just wondering about this China-US energy agreement that's kind of a verbal agreement right now, talking about 83 billion in shale gas and chemical investment in the West Virginia area. Wondering how your midstream engineering business is positioned there, whether or not you think there's some meaningful potential uptick in projects coming and what the time frame might be.

I know it's early.

Mike Burke -- Chief Executive Officer and Chairman

It's simply too early to tell on that but it's obviously an area that we have an interest in some capacity but too early to tell this point.

Bobby Burleson -- Canaccord Genuity -- Analyst

Okay. And then nuclear decommissioning. Just wondering if some of the rulemaking changes that fed are in the process could actually speed up the pace of additional projects coming your way or whether or not you think that that's not really a core issue. I understand there's some trying to lower cost during the decommissioning phase by lowering personnel requirements.

Is that something you see as a significant move that might be happening soon?

Mike Burke -- Chief Executive Officer and Chairman

Yeah, the nuclear decommissioning opportunity is a big opportunity. You've heard us mention before. We think that's a 200-billion-dollar market. Clearly, the San Onofre win was the first big one that we were able to compete very well on given our new combined capabilities.

It was a real test case for us to bring together our extensive power construction expertise, our environmental engineering expertise and most importantly our federal government nuclear-decommissioning expertise and put all that together. And I think it was a real testament to the value of our integrated delivery model that allowed us to win that project. And I think it positions us incredibly well for nuclear decommissioning not just here in the United States and all the regulatory loosening around that but Canada has an enormous nuclear decommissioning opportunity. We've been spending time in Japan where they're going to take down 35 reactors.

We've been spending time in Taiwan where they're going to take down a large reactor. So, I think we're as positioned as well as anybody to benefit from that 200-billion-dollar market.

Bobby Burleson -- Canaccord Genuity -- Analyst

Thanks.

Operator

Our next question comes from Tahira Afzal from KeyBanc. Please go ahead.

Tahira Afzal -- Keybanc -- Analyst

Hi folks. Congrats on a good job, given the storm.

Mike Burke -- Chief Executive Officer and Chairman

Thank you.

Tahira Afzal -- Keybanc -- Analyst

I guess my first question, you've talked a bit about or hinted at all the [inaudible] as you look out into your 2018 guidance. I would love to get a little more color in terms of what you've assumed around the interest expense, in terms of debt reduction.

Troy Rudd -- Chief Financial Officer

Yeah, Tahira, it's Troy. So, again, what we've assumed is that we're going to apply substantially all of our cash to pay down debt during fiscal 2018. Now, the profile of the business is typically that debt pay-down in this [inaudible] comes in the second half of the year. So, we have interest expense coming down during the course of the year but as you can see in the interest guide, it comes down when you just look at the rate that we've applied, it comes down in the second half of the year.

And so, it's down a few pennies during the course of the year in our guidance. And I will also remind you that as a result of the bond offering we did successfully in February, we now have more than 90% of our debt being fixed. So, even if we see a rise in interest rates over the course of this year, we're relatively immune to the impact of that.

Tahira Afzal -- Keybanc -- Analyst

Perfect. Thanks. And, I guess I have a follow-up, Mike. You talked a bit about the Niamh City proposed, seems more like the whole state [inaudible] but I guess would love to get your thoughts.

You've seen the King Abdullah initiatives sort of yield mixed results in the past. How real do you think this is based on what you've learned so far and then the timeline and if you roughly break it out, it means there are around 35 to 40 billion dollars in spending every year going on for a decade. What would be [inaudible] as an opportunity within that?

Mike Burke -- Chief Executive Officer and Chairman

Yeah, Tahira, I had the good fortune of being in Riyadh just two weeks ago and participating in many meetings about neat the Niamh project, about the new Red Sea tourism projects as well as the infrastructure growth of the region and I'll tell you I really felt like it was history in the making without being overly dramatic. I've never felt more hope for the country of Saudi Arabia than I did on that trip with the moderation of the cultural issues in the country that are causing many foreigners to invest into Saudi, it's causing them to bring technology and innovation and talent. And tourism to the country and I think as they make their shift away from their dependency on oil, there's a lot of opportunities for companies like us to help them develop industry, tourism, and infrastructure for many, many years to come. So, we feel really good about that.

We feel really good about our position there. We have 700 or so employees on the ground now and I think you're going to see a lot of great things coming from that country.

Tahira Afzal -- Keybanc -- Analyst

Okay. Thanks a lot, Mike.

Mike Burke -- Chief Executive Officer and Chairman

Sure.

Operator

This concludes the question and answer session. I'll now turn the call back over to Mike Burke for closing remarks.

Mike Burke -- Chief Executive Officer and Chairman

Thank you, operator. Hopefully what you take away from this call is that we're really excited about what 2018 holds in store for us. We delivered on growth in FY 2017, we finished with 9% organic growth in Q4 and we expect to continue that growth in 2018 but more importantly, we're seeing growth coming back to the higher-margin segments and we're starting to see an overall mix shift to higher-margin work and we're also seeing that our design, build, finance and operate strategy is truly creating a competitive differentiation, describing success on many very large pursuits. And so, that coupled with another robust cash flow year in FY 2017 and you heard us mentioned a couple times that we've delivered on 2 billion dollars of free cash flow since 2015 and all of that gives us incredible confidence in our five-year growth in cash flow projections and we're hoping to continue this dialogue at our Investor Day on December 12th in New York and we'll be talking more about our strategy and a more detailed look at our capital allocation plan.

So, thank you for your continued interest and hopefully, we'll see you in December. Bye now.

Operator

Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.

Duration: 63 minutes

Call Participants:

Will Gabrielski -- Vice President, Investor Relations

Mike Burke -- Chief Executive Officer and Chairman

Troy Rudd -- Chief Financial Officer

Michael Dudas -- Vertical Research -- Analyst

Randy Wotring -- Chief Financial Officer

Unidentified Analyst -- Citigroup -- Analyst

Steven Fisher -- UBS -- Analyst

Andy Wittmann -- Robert W. Baird -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Bobby Burleson -- Canaccord Genuity -- Analyst

Tahira Afzal -- Keybanc -- Analyst

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