Q3 2024 AECOM Earnings Call
Operator: I would like to direct your attention to the Safe Harbor Statement on page 1 of today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We use certain non-GAAP financial measures in our presentation. The appropriate GAP reconciliations are incorporated into our materials, which are posted on our website.
I would like to direct your attention to the Safe Harbor statement on page one 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.
As required by law, we undertake no obligation to update our forward looking statements.
We use certain non-GAAP financial measures in our presentation.
The appropriate GAAP reconciliations are incorporated into our materials, which are posted to our website.
Operator: Growth rates are presented on a year-over-year basis, unless otherwise noted. Any references to segment margins or segment-adjusted operating margins will reflect the performance for the Americas and international segments. When discussing revenue and revenue growth, we will refer to Net Service Revenue, or NSR, which is defined as revenue excluding pass-through revenue. NSR and backlog growth rates are presented on a constant currency basis unless otherwise noted.
Growth rates are presented on a year over year basis, unless otherwise noted.
Any references to segment margins or segment adjusted operating margins will reflect our performance for the Americas and international segments.
When discussing revenue and revenue growth, we will refer to net service revenue or MSR, which is defined as revenue excluding pass through revenue.
And as far and backlog growth rates are presented on a constant currency basis, unless otherwise noted.
Operator: Today's remarks will focus on continuing operations. On today's call, Troy Rudd, our Chief Executive Officer, will review our key accomplishments, our strategy, and our outlook for the business. Lara Poloni, our president, will discuss key operational successes and priorities, and Gaurav Kapoor, our chief financial and operations officer, will review our financial performance and outlook in greater detail. We will conclude with a question and answer session. With that, I will turn the call over to Troy.
Today's remarks will focus on continuing operations.
Troy Rudd: On today's call Troy Rudd, our Chief Executive Officer will review, our key accomplishments our strategy and our outlook for the business large Maloney, our president will discuss key operational successes and priorities and guards to pour our chief financial and operations Officer will review, our financial performance and outlook in greater detail.
Speaker Change: We will conclude with a question and answer session.
Troy Rudd: With that I will turn the call over to Trey.
Troy Rudd: Thank you will and good morning, everyone.
Troy Rudd: Thank you, Will, and good morning, everyone. I would like to begin by thanking our talented professionals across the globe. Through their dedication to our purpose of delivering a better world, we continue to create successful outcomes for our clients. Our teams are the best in the industry, and we lead in every market sector in which we operate. To that point, earlier this year, E&R recognized AECOM as the number one ranked water design firm.
Troy Rudd: I would like to begin by thanking our talented professionals across the globe through their dedication to our purpose of delivering a better world. We continue to create successful outcomes for our clients.
Trey: Our teams are the best in the industry and we lead in every market sector in which we operate to that point earlier. This year in our recognized AE com as the number one ranked water design firm, we now hold the number one ranking in water environmental engineering transportation and facilities design.
Troy Rudd: We now hold the number one ranking in water, environmental engineering, transportation, and facilities design. Today, I'm also excited to share that we've moved up two spots to number two in ENR's ranking of program management. This reflects our deliberate focus on extending our competitive advantages with program management, which is ideally suited for projects of increasing size and complexity. Based on the 20% growth in our program management pipeline in the third quarter, I am confident that we are on track to be number one in this category within the next year. Turning to our results, our third-quarter performance exceeded our expectations. As a result, we are increasing our earnings guidance for a second consecutive quarter. For the quarter, NSR increased by 8% to a new high.
Trey: Today I'm also excited to share that we moved up two spots to number two in ours ranking of.
Trey: Program management firms. This reflects our deliberate focus on extending our competitive advantages with program management, which is ideally suited for projects of increasing size and complexity.
Trey: Based on the 20% growth in our program management pipeline in the third quarter I am confident that we are on track to be number one in this category within the next year.
Trey: Turning to our results our third quarter performance exceeded our expectations. As a result, we are increasing our earnings guidance for a second consecutive quarter.
Trey: For the quarter MSR increased by 8% to a new high our adjusted EBITDA and EPS increased by 16% and 23%, respectively, and we delivered record quarterly margins.
Troy Rudd: Our adjusted EBITDA and EPS increased by 16% and 23%, respectively, and we delivered record quarterly margins. We also delivered strong cash flow in the quarter, and on a year-to-date basis, free cash flow has increased by 32%.
Trey: We also delivered strong cash flow in the quarter and on a year to date basis free cash flow has increased by 32%.
Troy Rudd: Importantly, our backlog is strong, and our pipeline is at a record high. This provides us with significant feasibility and is consistent with our view that we are in the early innings of a multi-decade secular growth cycle across our market. This visibility gives us confidence in our future, which underpins the increase in our Fiscal 24 guidance. We now expect to deliver 21% adjusted EPS growth at the midpoint this year.
Trey: Importantly, our backlog is strong and our pipeline is at a record high this provides us with significant visibility and is consistent with our view that we are in the early innings of a multi decade secular growth cycle across our markets.
Trey: This visibility gives us confidence in our future, which underpins the increase in our fiscal 2000 and for guidance.
Trey: We now expect to deliver 21% adjusted EPS growth at the midpoint this year.
Trey: Our performance and our outlook demonstrate that we've built a tremendous competitive advantage through our strategy, which is resulting in a more valuable company.
Troy Rudd: Our performance and our outlook demonstrate that we've built a tremendous competitive advantage through our strategy, which is resulting in a more valuable company. This is evident in our 20% adjusted EPS CAGR from 2020 to 2024 and in our commitment to deliver double-digit annual adjusted EPS and free cash flow per share growth. To fully realize the value creation opportunity, we are continuing to allocate substantially all available free cash flow to share repurchases after investing in high-returning organic growth and dividend payments. To that end, we have repurchased $200 million of stock since the end of the second quarter, including $150 million since the close of the third quarter.
Trey: This is evident in our 20% adjusted EPS CAGR from 2020 to 2024.
Trey: In our commitment to deliver double digit annual adjusted EPS and free cash flow per share growth.
Trey: To fully realize the value creation opportunity, we are continuing to allocate substantially all available free cash flow to share repurchases after investment in high returning organic growth and dividend payments.
Trey: To that end, we have repurchased $200 million of stock since the end of the second quarter, including $150 million since the close of the third quarter.
Troy Rudd: We have more than $700 million remaining under our current board authorization, and we will continue to take advantage of the disconnect between price and value. I would now like to review our strategic priorities. First, we are committed as ever to winning what matters, that is, winning the key pursuits valued at greater than $25 million that enhance our visibility and expand the long-term earnings potential of our organization. Notably, our win rate is at a record level, securing 50 cents of every dollar we bid, and our success rate on large pursuits is even greater. Just this year, we have won 7 out of 8 program management pursuits, each valued at over $25 million. This brings our total to 19 out of the last 20 over the past two years.
Trey: We have more than $700 million remaining under our current board authorization and we will continue to take advantage of the disconnect between price and value.
Trey: I would now like to review our strategic priorities.
Speaker Change: First we are committed as ever to winning what matters that is winning the key pursuits valued at greater than $25 million that enhance our visibility and expand the long term earnings potential of our organization, notably our win rate is at a record level securing 50 of every dollar we bid and our success rate on large pursuits.
Trey: Even greater.
Trey: Just this year, we have $1 seven out of eight program managed pursuits, each valued at over $25 million.
Trey: This brings our total to 19 out of the last 20 over the past two years.
Trey: Across the enterprise, we are pursuing an unprecedented level of larger opportunities.
Troy Rudd: Across the enterprise, we are pursuing an unprecedented level of larger opportunities. In fact, the value of our larger pursuits expected to be awarded in 2025 is approximately 70 percent greater than at this time last year. This includes the growth in program management that I referenced earlier, and strong trends in each of our other markets as well. For example, in water, our large pursuit pipeline increased by 45%. The pipeline and facilities design business, the majority of which is public sector, has increased by nearly 25%. The trends are also strong in the environment and transportation.
Trey: In fact value of our larger pursuits expected to be awarded in 2025 is approximately 70% greater than at this time last year.
Trey: This includes the growth in program management that I referenced earlier and strong trends in each of our other markets as well and water are large pursuit pipeline increased by 45%.
Trey: Pipeline and facilities design business, the majority of which is public sector has increased by nearly 25% the.
Trey: The trends are also strong in environment and transportation.
Trey: Second we are enhancing our employee value proposition, which has a very high payback.
Troy Rudd: Second, we are enhancing our employee value proposition, which has a very high payback. For instance, the number of employees enrolled in the Leadership Development Program has tripled from just a few years ago. As a result, we are equipping our leaders and project managers with the best resources to promote our culture of technical excellence across the organization. These investments are directly linkable to our voluntary attrition, being meaningfully lower than the industry average, and are a key element of winning what matters through our technical leadership.
Trey: For instance, the number of employees enrolled in our leadership development program has tripled from just a few years ago. As a result, we are equipping our leaders and project managers with the best resources to promote our culture of technical excellence across the organization.
Trey: These investments are directly linked to our voluntary attrition being meaningfully lower than the industry average.
Trey: And are a key element of winning what matters through our technical leadership.
Troy Rudd: Third, we are leveraging our scale and capacity to create meaningful long-term operational efficiency. For instance, the adoption of digital tools is growing across the company. As we detailed during our December Investor Day, we aim for 5 to 15 percent of our work hours to be delivered through scripts and code that we create by leveraging our extensive digital library.
Trey: Third we are leveraging our scale and capacity to create meaningful long term operational efficiencies.
Trey: For instance, the adoption of digital tools is growing across the company.
Trey: As we detailed during our December Investor Day, we aim for 5% to 15% of our work hours to be delivered through scripts and code that we create by leveraging our extensive digital libraries.
Troy Rudd: This will increase the capacity and extend the capabilities of our team. We're also transforming how we work through AI by integrating AI into specific areas of business, such as our bid and proposal process. Although it is early to fully measure the potential benefits of these technologies, the signals are quite positive.
Trey: This will increase the capacity and extend our capabilities of our teams.
We're also transforming how we work through AI by integrating AI into specific areas of our business such as our bid and proposal process.
Trey: Though it is early to fully measure the potential benefits of these technologies the signals are quite positive.
Troy Rudd: Overall, these investments are designed to strengthen our company and help us exceed our 17% long-term margin target. Fourth, we are focusing our best resources on the fastest growing, highest value, and most resilient markets and clients to ensure that we fully capitalize on the opportunities ahead. This includes our four largest regions, the US, Canada, UK, and Australia, which generate approximately 90% of our profits.
Trey: Overall these investments are designed to strengthen our company and help us exceed our 17% long term margin targets.
Trey: Fourth we are focusing our best resources on the fastest growing highest value and most resilient markets and clients to ensure that we fully capitalize on the opportunities ahead.
Trey: This includes our four largest regions the U S, Canada, UK, and Australia, which generate approximately 90% of our profit.
Troy Rudd: Also, our largest clients are growing at a rate that is several times faster than the rest of the business due to this effort. Finally, we are seizing new complementary high-value market opportunities. One example is the energy transition.
Trey: Also our largest clients are growing at a rate that is several times faster than the rest of the business due to this effort.
Trey: Finally, we are seizing new complementary high value market opportunities. One example is the energy transition nearly every aspect of our business will be touched in one form or another by this long term secular growth opportunity.
Lara Poloni: Nearly every aspect of our business will be touched in one form or another by this long-term secular growth opportunity. Another great example is digital consulting, where investments are growing rapidly for our infrastructure clients. Our revenue in this market has increased by 70% year-to-date, and we estimate this to be a $50 billion addressable opportunity for AECOM over the next decade. Traditionally, this market has been dominated by management consulting and IT consulting firms.
Trey: Another Great example, as digital consulting for.
Trey: Our investments are growing rapidly for our infrastructure clients.
Trey: Our revenue in this market has increased by 70% year to date and we estimate this to be a $50 billion addressable opportunity for <unk> over the next decade.
Trey: Traditionally this market has been dominated by management consulting and it consulting firms.
Lara Poloni: However, we are winning because of our superior technical expertise, trusted client relationships, and extensive capabilities that set us apart from these traditional competitors. Taken together, we remain very confident in our ability to deliver on our increased guidance this year and on our long-term growth targets, which include our expectation for annual 5 to 8% net service revenue growth, as well as double-digit adjusted EPS and free cash flow per share growth. With that, I will turn the call over to Lara.
Trey: However, we are winning because of our superior technical expertise trusted client relationships and extensive capabilities that set us apart from these traditional competitors.
Trey: Taken together, we remain very confident in our ability to deliver on our increased guidance. This year and on our long term growth targets, which include our expectation for annual 5% to 8% net service revenue growth as well as double digit adjusted EPS and free cash flow per share growth.
Trey: That I will turn the call over to Laura.
Lara Poloni: Thank you, Troy. Our strong performance highlights the effectiveness of our strategy and competitive advantages from our unmatched technical expertise. We have built a backlog and pipeline of opportunities that reflect strength across nearly every market in which we operate and provide substantial visibility. In the U.S., IIJA funding is ramping up.
Laura: Thank you Troy as strong performance highlights the effectiveness of our strategy and competitive advantages from our unmatched technical expertise we.
Laura: We have built our backlog and pipeline of opportunities that reflect strength across nearly every market in which we operate and provide substantial visibility.
Laura: In the U S. II JA funding is ramping up in the U K. The government continues to prioritize investments in infrastructure led by the transportation and water markets in Canada, both national and provincial funding commitments for infrastructure investment remains robust and our backlog in this market hit another record high this quarter.
Lara Poloni: In the U.K., the government continues to prioritize investments in infrastructure, led by the transportation and water markets. In Canada, both national and provincial funding commitments for infrastructure investment remain robust, and our backlog in this market hit another record high this quarter. Across all our markets, the multi-trillion dollar investment needed to address current and future infrastructure challenges is gaining momentum, particularly for areas such as urbanization, the energy transition, and sustainability and resilience.
Laura: Across all our markets the multi trillion dollar of investment needed to address current and future infrastructure challenges is gaining momentum.
Laura: Particularly for areas, such as urbanization, the energy transition and sustainability and resilience.
Lara Poloni: These drivers cut across all of our markets and especially the water and environment markets, which account for 35% of our revenue. For instance, urbanization is driving demand for clean drinking water, energy efficient wastewater treatment solutions, and effective strategies for storing and reusing water supplies. The Energy Transition touches the environment and water sectors in various ways. This includes utilizing pumped hydro storage to enhance the value and reliability of renewable resources, as well as addressing the water and environmental-related impacts associated with mining the resources essential for electrification.
Laura: These drivers cut across all of our markets and especially the water and environment markets, which account for 35% of our revenue.
Laura: For instance, urbanization is driving demand for clean drinking water energy efficient wastewater treatment solutions and effective strategies for storing and reusing water supplies.
Laura: The energy transition captures the environment and what affected in various ways. This includes utilizing pumped hydro storage to enhance the value and reliability of renewable resources as well as addressing the water and environment related impacts associated with mining the ratio is essential for electrification.
Lara Poloni: Moreover, the rise in global flooding and droughts introduces new challenges, prompting our clients to integrate sustainability and resilience more deeply into their planning and decision-making processes. A recent US government report estimated that more than $630 billion of investment in water infrastructure is needed over the coming decades to meet these challenges, which illustrates the scale of the opportunity. Of note, this estimated spend is two times the projected need from just 10 years ago and includes significant increases for stormwater management and wastewater treatment, which plays to our strengths.
Laura: The rising global flooding and droughts introduces new challenges, prompting our clients to integrate sustainability and resilience more deeply into the planning and decision making processes.
Laura: A recent U S government report estimated that more than $630 billion of investment in water infrastructure is needed over the coming decades to make face challenges, which illustrates the scale of the opportunity.
Laura: This estimated spend is two times the projected need from just 10 years ago and includes significant increases fulfillment order management and wastewater treatment, which plays to our strength.
Lara Poloni: A prime example of our leadership in addressing this need is our involvement in the Pure Water Southern California program, which aims to create a sustainable water supply by purifying treated wastewater. Our team is responsible for managing environmental compliance efforts and program managing the development of advanced purification facilities at the wastewater treatment plant, including approximately 60 miles of large diameter water pipeline infrastructure and pump station. In addition, PFAS investment is ramping up not only locally but globally.
Laura: A prime example of our leadership in addressing this need is our involvement in the pure water Southern California program, which aims to create a sustainable water supply by purifying traded wastewater.
Speaker Change: Our team is responsible for managing environmental compliance efforts and program managing the development of advanced purification facilities at the wastewater treatment plant, including approximately 60 miles of large diameter water pipeline infrastructure and pump stations.
Speaker Change: In addition, PFS investment is ramping up not only locally but globally in fact already in the fourth quarter. We secured one of our largest ever pay first claims globally for a project in Australia.
Lara Poloni: In fact, already in the fourth quarter, we secured one of our largest ever PFAS wins globally for a project in Australia. Across our number one ranked water practice, our pipeline of larger pursuits is up by 45% in just the last year alone, which gives us confidence in delivering on our market share gain ambitions and goal of doubling our water revenue over the next five years. Importantly, these same dynamics are playing out across all of our market sectors, and we are focused on capitalizing on them. With that, I'll turn the call over to Gaurav. Thanks, Lara.
Speaker Change: Across a number one ranked order practice our pipeline of larger proceeds is up by 45% in just the last year line, which gives us confidence in delivering on our market share gain ambitions and goal of doubling our water revenue over the next five years.
Speaker Change: Importantly, these same dynamics are playing out across all of our market sectors and we are focused on capitalizing with that I'll turn the call over to Guy.
Gaurav Kapoor: Thanks, Lara. I am proud of our team's performance, which has allowed us to increase the midpoint of our full-year earnings guidance for the second time this year. This quarter was highlighted by strong organic revenue growth, further expansion of our industry-leading margins, and 23% adjusted EPS growth. A key driver of these successes has been our culture of continuous improvement and delivering industry-leading margins while reinvesting in the business. Turning to the Americas Sector, net service revenue increased by 8%, and our adjusted operating margin expanded by 50 basis points to 19.3%.
Guy: Thanks, Laura I am proud of our team's performance, which has allowed us to increase the midpoint of our full year earnings guidance for the second time this year.
Guy: This quarter was highlighted by strong organic revenue growth further expansion of our industrial leading margins and 23% adjusted EPS growth.
Key driver of these successes has been our culture of continuous improvement and delivering industry, leading margins, while reinvesting in the business.
Guy: Turning to the Americas segment.
Guy: Net service revenue increased by 8% and our adjusted operating margin expanded by 50 basis points to 19, 3%.
Guy: America's backlog and pipeline of opportunities continues to be strong with a third quarter book to burn ratio of one one reflecting our high win rate wins were highlighted by strength in transportation, where we were selected for several more transformative projects in both the U S and Canada as well as the environment business, which is benefiting from all that.
Gaurav Kapoor: America's backlog and pipeline of opportunities continue to be strong, with a third-quarter book-to-burn ratio of 1.1 reflecting our high win rates. WINS were highlighted by Strength in Transportation, where we were selected for several more transformative projects in both the U.S. and Canada, as well as the environment business, which is benefiting from all aspects of infrastructure investment growth. Turning to the international side,
Guy: Specs of infrastructure investment growth.
Guy: Turning to the international segment.
Gaurav Kapoor: Net services revenue increased by $7 billion. Our 11.7 adjusted operating margins set a new quarterly high, and we remain confident in further expansion ahead. Our tremendous growth and margin enhancement in the international segment over the past several years has resulted in a 26% compounded profit growth rate since 2020. This is the direct outcome of our focus on higher-returning and lower risk markets and fostering relationships with key clients and partners. Building on the substantial growth we have delivered over the past two years, we expect continued growth from here, even with the reprioritization of funding in the Middle East and the pause in the UK resulting from the July election.
Guy: Net services revenue increased by 7%.
Guy: Our 11, seven adjusted operating margins set a new quarterly high and we remain confident in further expansion ahead.
Guy: Our tremendous growth and margin enhancement in the international segment over the past several years has resulted in a 26% compounded profit growth rate. Since 2020. This is a direct outcome of our focus on higher returning and lower risk markets and fostering relationships with key clients and partners.
Guy: Building on substantial growth, we have delivered over the past two years, we expect continued growth from here, even with a reprivatization of funding in the middle East and a pause in the UK, resulting from the July elections.
Guy: Importantly, the core growth drivers across our international segments are firmly in place.
Gaurav Kapoor: Importantly, the core growth drivers across our international segments are firmly in place. In the UK, the new government has outlined its commitment to investing in infrastructure, the energy transition, and sustainability and resilience. For example, the government has already put in place a new National Wealth Fund designed to drive nearly $30 billion of investments to decarbonize heavy industry and spur activity in new growth areas. In addition, record water investment through AMP-8 is expected to accelerate in 2025 and beyond.
Guy: In the UK, the new government has outlined its commitment to investments in infrastructure energy transition and sustainability and resilience. For example, the government has already put in place a new national wealth fund designed to drive nearly $30 billion of investments to Decarbonize heavy industry expert activity in new growth areas.
Speaker Change: In addition to the record water investment through <unk> eight is expected to accelerate in 2025 and beyond.
Gaurav Kapoor: In the Middle East, key projects underway are advancing, and record levels of capital are being directed to support investments in World Cup and export-related infrastructure, where we are very well positioned. The Australian market is also strong, with several key opportunities to be avoided in the coming quarters. Turning to our Cash Flow, Balance Sheet, and Capital Allocation. We delivered $273 million of free cash flow in the quarter and are on track with our guidance for at least 100% free cash flow conversion.
Speaker Change: In the Middle East key projects underway are advancing and record levels of capital are being directed to support investments in World Cup and export related infrastructure, where we are very well positioned.
The Australian market is also strong with several key opportunities to be awarded in the coming quarters.
Speaker Change: Turning to our cash flow balance sheet and capital allocation, we delivered $273 million of free cash flow in the quarter and on track with our guidance for at least 100% free cash flow conversion.
Gaurav Kapoor: Our cash flow has enabled a return of $407 million to shareholders this year, including $150 million of share repurchases already completed in the fourth quarter. Our balance sheet continues to provide a competitive advantage. Our net leverage was 0.8x exiting the third quarter, and with our completed amendment to our credit facilities in the quarter, we will continue to benefit from a low cost of debt and substantial available liquidity. Before discussing our raised financial guidance, I want to provide a brief update on the financial impacts of discontinued operations.
Speaker Change: Our cash flow has enabled the return of $407 million to shareholders this year, including $150 million of share repurchases already completed in the fourth quarter.
Speaker Change: Our balance sheet continues to provide a competitive advantage our net leverage was <unk> eight X exiting the third quarter and with our completed amendment to our credit facilities in the quarter, we will continue to benefit from low cost of debt and substantial available liquidity.
Speaker Change: Before discussing our raised financial guidance I wanted to provide a brief update on the financial impacts from discontinued operations.
Gaurav Kapoor: After the second quarter earning call, we entered into several agreements with our previously disposed of civil construction business. These included resolving outstanding litigation and providing limited financing to provide the time and capital needed by the civil business to address its near-term liquidity challenges. Our support is in two forms, a $30 million revolving loan commitment and a non-cash guarantee on other outstanding debt. As with all our capital allocation decisions, our choice to provide capital was driven by a returns-based assessment of different options.
Speaker Change: After the second quarter, earning call we entered into several agreements with our previously disposed of civil construction business.
Speaker Change: This included resolving outstanding litigation and providing limited financing to provide the time and capital needed to the civil business to address its near term liquidity challenges.
Speaker Change: Our support is in two forms a $30 million revolving loan commitment and a noncash guarantee on other outstanding debt.
Speaker Change: As with all of our capital allocation decisions our choice to provide capital was driven by a returns based assessment of different options.
Gaurav Kapoor: Importantly, the impact on AECOM, if any, is not expected to be material. Our balance sheet also includes two retained receivables for completed projects totaling approximately $250 million that we retained as part of our divestitures. While we can't predict exact timing for these settlements, we are optimistic that both matters will result in positive cash events for AECOM, and under no circumstances will these result in cash outflows. Concluding with our outlook, I am pleased to report that our year-to-date outperformance has positioned us to increase our full-year adjusted EBITDA and EPS guidance. At our new guidance midpoints, we expect adjusted EBITDA and EPS growth of 13% and 21%, respectively. With that operator, we are ready for questions.
Speaker Change: Importantly, the impact to AECOM, if any is not expected to be material.
Speaker Change: Our balance sheet also includes two retains receivables for completed projects totaling approximately $250 million that we retained as part of our divestitures.
Speaker Change: While we can't predict the exact timing would be settlements. We are optimistic that both matters and result in positive cash events for AE comps and under no circumstances will these result in cash outflows.
Speaker Change: Concluding with our outlook I am pleased to report that our year to date outperformance has positioned us to increase our full year adjusted EBITDA and EPS guidance.
Speaker Change: At our new guidance mid points, we expect adjusted EBITDA, and EPS growth of 13% and 21% respectively with that operator, we are ready for questions.
Speaker Change: Thank you we will now begin our question and answer session. If you have dialed in and would like to ask a question. Please press star followed by the number one on your Touchstone phone.
Operator: Thank you. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your touchtone phone. If you would like to withdraw your question, please press star one again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Thank you. Your first question comes from the line of Andrew Wittmann from Baird. Please go ahead.
Speaker Change: I would like to withdraw your question seemed to breast star one again.
Andrew Wittmann: Okay, thanks for taking my questions, guys. So, I thought I would just ask a little bit about the revenue outlook. It sounds like, you know, the pipeline prospects are good, but I was just hoping you could just drill in a little bit more. When I look at the design-only backlog that you guys report, this is what drives the bus at ACOM. The design-only backlog at the end of the third quarter, I guess my calculation is up 3%.
Andrew Wittmann: Long-term guidance talks about a minimum kind of organic growth rate of 5%. And so I was just wondering if there's anything to read between those two things, if there's a lot more book-and-burn work or prospects that are awaiting notice that you're waiting on to help give some confidence by 2025 will be in that long-term revenue guidance range. Thank you.
Speaker Change: We'll be in that long term our revenue guidance range. Thank you.
Speaker Change: Yes, Andy Thanks for the question. So I guess, maybe the maybe the first point to make is during the third quarter.
Troy Rudd: Yeah, Andy, thanks for the question. So I guess maybe the first point to make is, you know, during the third quarter, in the international business, what we experienced was, I'll call it, some clients repositioning their priorities and their funding. In particular, in the UK, with the election that was called and a change of government, there's clearly a reprioritization of how the government is going to invest in infrastructure.
Speaker Change: In the international business, what we experienced was we actually experienced I'll call. It some clients repositioning their priorities and their funding and in particular in the U K.
Speaker Change: With the election that was called and a change in government. There is clearly a re prioritization.
Speaker Change: Of of how the government is going to invest in infrastructure and so I'll say that that caused a caused a bit of a pause and then in the middle East. We also see the same thing we also see our clients the middle East repositioning their spend so we don't actually see that in decline, but we see a repositioning moving from some projects that will complete.
Troy Rudd: And so, I'll say that it caused a bit of a pause. And in the Middle East, we also see the same thing. We also see our clients in the Middle East repositioning their spend. So, we don't actually see that in decline, but we see a repositioning moving from some projects that were completed and some other projects, I'll say in the Middle East, that had a very long time frame attached to them. And some of the funding for those is being repositioned to some other more important and more urgent projects. For example, being prepared for FIFA's World Cup.
Speaker Change: And some other projects I'll say in the middle East that had a very long timeframe to them and some of the funding on those is being repositioned to some some other more important and more urgent projects for example, being prepared for FIFA World Cup.
Troy Rudd: And so when we look at international business, we really just see that reprioritization as temporary. It doesn't change our view of what the future will hold. And I think, as we've said, our backlog, we feel very positive about it because it is growing and is growing at a faster rate. And so, we feel very good about the future in terms of international business and backlog.
Speaker Change: And so when we look at the international business, we really do see that re prioritization being temporary it doesn't change our view on what the future will hold and I think as we've said our our backlog we feel very positive about it is it is growing and is growing at a faster rate I'm sorry, our pipeline that are back.
Speaker Change: Clog.
Troy Rudd: In the Americas, in the Americas, the backlog growth has continued to be strong, and again, the pipeline is very strong, and as we look forward to fiscal 25 and fiscal 26, I can say that our pipeline is actually significantly larger than it was at the beginning of fiscal 24. So we're seeing the opportunities accelerate in the Americas. Putting that together for the design business means that we have a high degree of optimism and confidence in our ability to grow in the future.
Troy Rudd: And the other thing I'd point out is that, at least for the year, our book, To Burden the Americas, is actually over. So for the entire year to date, it's been over 1.2 times. And our book to burn in international business for the year is Over One Time. So again, putting those things together, I think you can't read too much into a quarter and backlog in terms of our expectations and our confidence in growing in the future.
Troy Rudd: I appreciate that. I guess maybe just to build on that, I'd be curious about the record pipeline that you guys are citing today and your win rate staying at that around 50% range, up from the past. I was just wondering if you're seeing anything from customers on political risk or economic risk that's slowing down the conversion from the pipeline where they're asking for RFPs or what have you, to conversion into actual contracts. Is there any change at all? You mentioned the stuff in the UK and the Middle East. I understand that, but anything more broadly than that, or even in the Americas, where we have the election season here?
Speaker Change: From the pipeline, where they're asking for rfps or or what have you.
Speaker Change: To conversion into actual contracts is there any change at all I mean, you mentioned the stuff in the U K, the middle East I understand that but anything more broadly than that or even in the Americas, where we have the election season here.
Andy: So yeah Andy.
Troy Rudd: So, yeah, Andy.
Troy Rudd: It's a great point about our win rates. Actually, our win rates have been at 50% or greater for the last 12 quarters. So that's been, you know, a change in the business. It's been fairly consistent.
Andy: It's a great point about our win rates actually our win rates are at 50% or greater for the last 12 quarters. So that's been that's been a change in the business that's been fairly consistent.
Troy Rudd: But more importantly, within our larger projects, which we've defined as greater than $25 million, our win rate is significantly higher than that. And that's important because we've been sort of transforming the work that we do in the business and the projects that we pursue, and they're larger. And so that actually does cause a change in the type of time it takes for an award to be made and for the award to convert to contract and begin those projects. So larger projects are, in fact, a little bit longer in terms of the time to actually get working on them. So I don't know if it's necessarily true.
Speaker Change: But more importantly, within our larger projects and we've defined alone is greater than $25 million our win rate is significantly higher than that.
Speaker Change: And that's important because we've been sort of transforming the work that we do in the business and the projects that we pursue and they're larger.
Speaker Change: So that actually does cause a change in the chocolate cakes or at award to be made and to convert award to contract and begin those projects. So larger projects are are in fact, a little bit longer in terms of the time to actually get working on them. So I don't know if it's necessarily.
Troy Rudd: Markets that are causing a change in how long it takes converting a bid to an award to a contract and to work. I think that might just be a function of how we've transformed the business and the size and the nature of the projects that we're pursuing and that we're currently working on. The other part of that equation, of course, is that larger projects mean that you work on them for a lot longer, and you have significantly more visibility, and that means that you also have significantly more upside or changes or change orders or additional work on those projects.
Speaker Change: Markets.
Speaker Change: That are causing a change in our long takes converting.
Troy Rudd: So, you know, when you look at our backlog, because of the transformation, it also means that, you know, we actually have a lot more upside in the backlog that we've stated that will come through change orders and additional work on larger programs or projects during the course of future years.
Jamie Cook: Your next question comes from the line of Jamie Cook from Truist Securities. Please go ahead.
Jamie Cook: Hi, good morning. I have two questions. Just the margin cadence that we've seen over the past couple of years. I mean, this year, your margins will be up, I think, 90 BPS. I think you are 50 BPS from 23 to 2022 relative to the longer term guidance of 20 to 30 basis points a year. Just given the strong performance we've had over the past couple of years, should we expect the margin growth to start to normalize more towards your longer-term goal of 20 to 30 BPS?
Jamie Cook: Are there still opportunities with some of the bookings that you're talking about and these larger, more complex projects? Maybe we can still see above-average sort of margin growth as we look out over the next 12 to 18 months. And just my second question, Troy, just because some of the things that you talked about with larger, more complex projects, et cetera, should we expect the design backlog to be lumpier over time in terms of growth versus sort of the steady growth you've seen over the past couple of years?
Gaurav Kapoor: Thanks, Jamie. I'll let Gaurav take the margin question, and then I'll cover the backlog question. Thanks, Troy. Good morning, Jamie.
Gaurav Kapoor: So, you're right. Over the past four years, we have delivered on our margin targets every time. And over that period, we've gone from being laggards in our peer group to being head and shoulders above everyone in margin delivery. So, we have been and will always be very focused on delivering on our annual target because it is very important to us that every dollar we put into our backlog today is more valuable in the future as we deliver it. And, you know, for this management team, to your point, the Q3 results were strong, but it's just consistent with our expectations. And it's not surprising to us.
Speaker Change: So you're right you know over the past four years, we have delivered on our margin targets every time and over that period, we've gone from being laggards in our peer group to be head and shoulders above everyone and margin delivery. So we have been and will always be very focused on delivering on our annual target because it is very important to us that every dollar we put into.
Speaker Change: Our backlog today is more valuable in the future as we deliberate and you know for this management team to your point. The Q3 results were strong, but it's just consistent with our expectations and it's not surprising to us even while we continue on elevated business development spend in Q3 and year to date compared to our plan.
Gaurav Kapoor: Even while we continue on elevated business development spend in Q3 and year-to-date compared to our plan, and I'm very confident that we will be delivering on the 90 percent increase that we had set out as a target year over year. And, you know, further, when you look at the backlog and pipeline growth opportunities that Troy just laid out earlier, it gives us great visibility for the upcoming years. You combine it with our track record of executing efficiency initiatives.
Speaker Change: And I'm very confident that.
Speaker Change: That we will be delivering on the 90 bps increase that we had set out as a target year over year and further when you look at the backlog and pipeline growth opportunities that Troy just laid out earlier it gives us great visibility for the upcoming future years, you combine it with our track record of executing on efficiency initiatives.
Gaurav Kapoor: I expect us to continue to deliver good, strong margin growth in future periods consistent with the target we had laid out, which is to get to 17% by the end of 2026. And then we're going to be going at 17 plus percent thereafter, and we have a track record of delivering.
Speaker Change: I expect us to continue to deliver good strong margin growth in future periods consistent with the targets, we had laid out which is to get to 17% by end of 2026, and then we're gonna be going at 17 plus percent thereafter, and we have a track record of delivering it.
Jeremy: And Jeremy.
Troy Rudd: And Jamie, your question on backlog is a good observation because, in fact, quarter to quarter, in terms of the dollar volume of bids, because we're pursuing larger opportunities, it is more lumpy. It is not consistent and linear like it is when you have a business that's pursuing, you know, tens of thousands of smaller projects. So that is the case. But I think this year and the second half of this year are a little bit unusual because, when you look around the world, this is sort of the year of the election. I think that in the course of a period of 12 months, there are about 64 federal government elections taking place.
Jeremy: And our backlog.
Troy Rudd: And what that means is that it means a little bit of bumpiness because as governments change, there's no doubt there's a change in new priorities. But what we don't see when we look around is that there's any less of a focus on long-term investment in infrastructure, in more sustainable and resilient infrastructure. I mean, certainly in the infrastructure to support a long-term energy transition. So that's, again, that gets to sort of the point you made about the lumpiness, but also, I think it's important to recognize that it doesn't change the long-term trends, even though it might be a little bit more lumpy.
Sangita Jain: The next question comes from the line of Sangita Jain from KeyBank. Please go ahead.
Gaurav Kapoor: Good morning, and thank you for taking my questions. If I can go back to margins, we know that you're kind of expecting revenue towards the lower end of your guidance, but your EBITDA is still higher. Can you point to any specific areas where you're seeing profitability exceed expectations, or is it more broad?
Troy Rudd: Hey Sangita, this is Gaurav. I'll answer that question. So, our revenue growth is going to be within the range that we had forecasted to begin the year, eight to ten percent, given the outline Troy has provided. We expect it to be in the lower end of the range right now, but what you're seeing is the competitive platform as a differentiator we have created at this enterprise and at this company over the last four years.
Troy Rudd: It allows us to extract great value for our shareholders and for our employees, and this is driven by a lot of different things, our focus on making sure we provide and capture the best growth opportunities in the market as laid out by our global program management, where we're delivering double-digit growth, higher than what we had expected three years ago when we stepped into that organic investment profile. Our advisory and digital businesses, which continue to be very robust in responding to our clients' evolving needs, we're at the forefront of providing that.
Jeremy: Yes.
Speaker Change: To extract great value for our shareholders and for our employees and this is driven through.
Jeremy: Lot of different things, it's our focus on making sure we provide and capture on the best growth opportunities in the market as laid out by our global program management, where we're delivering.
Jeremy: Double digit growth higher than what we had expected three years ago. When we when we stepped into that organic investment profile, our advisory and digital businesses that continue to be very robust and responding to our clients' evolving needs. We're at the forefront of providing that and then you combine that with our efficiency measures on our enterprise.
Troy Rudd: And then you combine that with our efficiency measures on our enterprise capability centers. Recall this is where we provide great technical support to our teams, where the labor markets are more abundant for us, with our centralized support functions and other initiatives put forward. It really has created this great juggernaut of what we call a competitive differentiator in the marketplace from growth to execution and delivery.
Speaker Change: This capability centers recall this is where we provide great technical support to our teams where the labor markets are more abundant for us with our centralized support functions and other initiatives put forth. It really has created this great juggernaut of what we call a competitive differentiator in the marketplace from <unk>.
Speaker Change: Wrote to execution and delivery.
Speaker Change: So you are.
Gaurav Kapoor: Sangita, I just want to add one point to that, which is... You know, our organic growth of eight percent is a pretty significant accomplishment. Our 8% organic growth for the year is probably the best growth we've had in the history of the company. But even more important, I think the thing that we're really proud of is the fact that we've been able to take 8% organic growth and turn it into 16% earnings growth for the business.
Speaker Change: So again I just want to add one at one point to that which as you know.
Speaker Change: Our organic growth of 8%.
Speaker Change: Is a is a pretty significant accomplishment, our 8% growth organic growth for the year is probably the best growth we've had in history of the company.
Gaurav Kapoor: And then, you know, through our deployment of capital, which is, we think, is a high-returning and low-risk way to do it, we've actually deployed capital against that 16% earnings growth to get to 23% EPS growth. And for the year, our EPS is going to grow, you know, in excess of 20%. So, you know, we, I think what we're proud of is the fact that we're growing the business organically, but at the same time, we're actually turning it into a much, again, growing profit at a much faster rate. Please join us. Thank you. Even more important, investing in our margins and investing in the future of the business so that we have even more confidence in the future.
Troy Rudd: Got it. And if I can follow up with one on Troy, you talked about elections globally, and you talked about a record pipeline and larger bookings. Can you tie that all together and tell us what you're seeing in the U.S., in particular, ahead of the elections as you head into fiscal fourth quarter? Sure.
Troy Rudd: We're really not seeing any material change in our pipeline in the Americas. I'll say with one odd exception, and that's in the New York metro market, because with the withdrawal of congestion pricing in this past quarter, there was a lot of funding that was being put in place through congestion pricing that was going to drive some really important and needed infrastructure investment, in particular with some of the larger clients there.
Troy Rudd: And so I think there's a point in time where that's being sorted out, that infrastructure investment is needed. So that's the one place in our pipeline where maybe we see it being a little bit different, and frankly, this place is unknown, but across the entire US business, we see our pipeline continue to build. And what I said about fiscal 25 and 26 is that for the Americas, that pipeline has been growing off what we had seen in 24. And so we haven't seen, we have not seen a change at this point in time.
Andy Kaplowitz: Your next question comes from the line of Andy Kaplowitz from Citigroup. Please go ahead.
Andy Kaplowitz: Morning. Morning. Morning.
Gaurav Kapoor: Toru Garg, can you talk about what maybe changed in your America's margin between Q2 and Q3 because I think you did 130 base points better on only 30 million higher in sales, and I think you still had higher business development expenses in Q3. And then how should we think about America's margin going forward? I know you want us to think about AECOM's margins at the enterprise level, but can margins still ultimately rise from current levels in the Americas in 25?
Gaurav Kapoor: Yeah, good morning. So on the America's margin, again, it's consistent with our expectations, and you're right, we don't take a quarterly view; we do take an annual view, and we will be delivering our America's margin consistent with our expectations and targets we have set. In terms of specifically in Q3, just remember, our second half across both businesses, but particularly in the Americas, there's always seasonal impacts. There are more workdays, more labor hours, so your overhead is spread over a larger base.
Speaker Change: Yeah.
Speaker Change: Hey, good morning, so on the Americas margin again, it's consistent with our expectations and you're right. We don't take a quarterly view, we do take our annual view and we will be delivering our Americas margin consistent with our expectations and targets. We have set in terms of specifically in Q3, just remember it's our second.
Speaker Change: Half across both businesses, but particularly in the Americas. It's there's always seasonal impacts there's more work days more labor hours. So your overhead is spread over a larger base and when you again look at the great backlog, we have won over the 12 months in the Americas.
Gaurav Kapoor: And when you, again, look at the great backlog we have for the next 12 months in the Americas pipeline, it really allows us opportunities, especially on these large projects that we've been successful in capitalizing on and now are delivering. You know, our labor is running very, very efficiently on those projects. So I expect America to continue that same culture we have throughout the organization, which is continuous improvement. Every year, we will continue to get better as we move forward.
Speaker Change: Pipeline continues to be really robust it really allows us to opportunities, especially on these large projects that we've been successful in capitalizing and now are are delivering you know are our labor is running very very efficiently on those projects. So I expect Americas to continue you know like that same.
Speaker Change: Culture, we have throughout the organization, which is continuous improvement every year, we will continue to get better as we execute forward.
Speaker Change: That's helpful and then.
Troy Rudd: Self-regard. Troy, I think you mentioned the moppiness of awards to Jamie as they get larger, but is there any reason, given your pipeline of opportunity that you've been talking about and your current backlog, that you really couldn't do the five to eight percent organic growth in 25? And are you seeing any delays associated with the weaker macro in your private markets? I know you just mentioned congestion pricing in New York. Anything else that's changed from quarter to quarter?
Speaker Change: I think you had mentioned the lumpiness of the wars gaming as they get larger.
Troy Rudd: So first of all, what's changed quarter to quarter, the things that I think I've already mentioned, which are, again, New York, the Middle East, and the UK. And we do see, we do see internationally those things, those issues as being temporary. In New York, I actually believe that it will be temporary as well because we know that there is a significant amount of investment that is needed and is planned for the infrastructure in New York.
Troy Rudd: And I'm positive that, you know, that will be worked out. With respect to Fiscal 25, it is premature for us to give guidance, however, I will say, based on our backlog, and our pipeline, and consistent win rates, that we have confidence in our ability to deliver on our long-term guidance in terms of NSR growth.
Troy Rudd: Thank you. Your next question comes from the line of Judah Aronovitch.
Judah Aronowitz: Your next question comes from the line of Judah Aronowitz from UBS. Please go ahead. Hey, thanks for taking my questions. I'm calling in for Steven Fisher.
Judah Aronowitz: The first question is, how did the margins and back look?
Gaurav Kapoor: Okay, yeah, thanks for that question. We don't provide that information as to the margin and backlog. Now, what I will point out is that we have long-term margin growth targets of 20 to 30 bits every single year. But more importantly, in our investor day, we laid out over the midterm, we do see our margin at the enterprise-wide going to 17% by the end of FY26. So we'll be delivering, you know, at 15.6, head and shoulders above anybody delivering anything in our marketplace right now.
Gaurav Kapoor: And we expect over the next two years, as we exit 2026, we'll be at 17% and then marching to 17 plus percent. And I would like to take this opportunity again to maybe be redundant, but I think it's really important. You look at our backlog record of our team. We have proven to go from the bottom of the pack to the top of the heap in delivering margins. And we have a lot of confidence, for all the reasons based on backlog, pipeline, and efficiency measures, that we will be achieving it year after year and after year. That's helpful, thanks.
Troy Rudd: I can't give you a relative percentage, but what I can tell you is that we see the IAJ funding being deployed in projects in our pipeline, so we have visibility into that. I'll give you a ballpark. We think that during the course of this year, IAJ funding was about 30% deployed, and so it's increasing. But I can't tell you whether the pace at which it's coming to the market is at a faster rate.
Troy Rudd: The reason is, even though our pipeline is growing, our pipeline is actually made up of funding from IAJ, but also funding from state and local government clients and from our private clients. In aggregate, we see that growing. I would expect that IAJ is supporting that growth in the pipeline.
Michael Dudas: Your next question comes from the line of Michael Dudas from Vertical Research Partners; please go ahead.
Troy Rudd: Troy, maybe you can elaborate. You talked about your forays into digital consulting and the growth you've seen in a pretty large market over the next several years. Maybe some examples of what that is and how that differentiates and how that differs from your regular kind of consulting advisory work that you've been doing for your clients.
Lara Poloni: Yeah, certainly. I think Laurel will answer your question.
Speaker Change: To answer your question, Yes, sure. We're certainly as projects are becoming bigger and more complex, which obviously plays to our strengths where the pipeline includes a 17%.
Michael Dudas: Yeah, sure. We're certainly seeing projects becoming bigger and more complex, which obviously plays to our strengths, where the pipeline includes a 70% increase in programs that involve digital consulting. So our revenues from digital infrastructure consulting have increased 70% year-to-date, and over time, we see this as a $50 billion addressable market over the next decade. And for us, it cuts across all of our verticals, the opportunities for digital consulting in environmental remediation, in transportation, and, most importantly, in water. And we've had some great wins in the quarter. For example, a $100 million data framework for the NHS in the UK. But we really see this as a global play with substantial long-term opportunities.
Speaker Change: Increase in.
Speaker Change: Programs that involve digital consulting so our revenues from digital infrastructure consulting have increased 70% year today and over time, we see this as a 50 billion addressable market over the next decade, so anthropic cuts across all of our vertical the opportunities for digital consulting and our environmental remediation.
Speaker Change: In transportation and most importantly in water.
Speaker Change: And we've had some great wins in the quarter for for example, 100 million dollar data framework for the NHS in the U K.
Speaker Change: But we really see this as a global play with substantial long term opportunities.
Speaker Change: Okay, and then my follow up with them.
Gaurav Kapoor: Okay, and then my follow-up would be, as you're looking at the pipeline in front of you and the backlog... and the success of your organic growth. Maybe you could talk about your staffing level today, what you need to grow on an annual basis, and you can grow that at a lower rate than your revenue and your backlog expectations are over the next few years, given some of the different dynamics and different services that you provide your customers.
Speaker Change: As you're looking at the pipeline in front of you in the backlog.
Bruce: Bruce in successive years.
Bruce: You can talk about your staffing levels today, what you need to grow on an annual basis.
Speaker Change: You can grow that at a lower rate than what your revenue and your backlog expectations are over the next few years given some of the different dynamics in different services that you provide to the customers.
Gaurav Kapoor: Hey, Mike Dusgar, I'll take that question. So, yeah, you're right. In our backlog, as Troy pointed out, right, our America's backlog on trailing 12 months is up over 1.2 international over strong organic growth over the last two years, it's still delivering a book to burn up over 1x. And our pipeline is extremely robust across the board. So, valid question as to our labor.
Gaurav Kapoor: This is, again, the point I made earlier about having a competitive, differentiated platform because the war on talent in our industry continues to be very robust across the marketplace. But we're one of the few companies that can leverage our scale to an advantage. And we've laid that out in how we utilize our Enterprise Capability Center, right? These are not just detailed design centers. These are design centers across the world where we may not even have any operational platform anymore, but there's great technical talent that not only helps us deliver these large, complex projects, but it also helps these employees help us; their resumes help us win projects across the globe.
Gaurav Kapoor: And that's how we're gonna be managing our staff while at the same time being very focused on bringing on the best talent, great talent onshore at every opportunity we get. Yeah, and if I can just add, I mean, the good news is also that attrition is down. We're well below.
Lara Poloni: And if I can just add, the good news is also attrition is down; we're well below industry benchmarks and below the competitors across all of our key markets. So when you add that to the optimism that we see in the pipeline, where we're seeing, in terms of those large pursuits that Troy referenced, a 70% year-on-year increase in terms of that element of the pipeline. And that contributes to growing all parts of our business as those projects become more complex and use all of our multidisciplinary services.
Troy Rudd: And that does conclude the question and answer session. I would like to turn the floor back over to the CEO, Troy Rudd, for closing remarks.
Operator: Great. Again, thank you, everyone, for joining the discussion today. And I'm going to end the way I started, which is to thank our teams for their extraordinary performance in serving their clients and their communities over the quarter. We look forward to talking to you in another three months. Thank you.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.