AECOM Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the AECOM Third Quarter 2023 Conference Call. I would like to inform all participants this call is being recorded at the request of AECOM. This broadcast is the copyrighted property of AECOM. Any rebroadcast of this information in whole or part that the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investor section at www.aecom.com.

Operator

Later, we will conduct a question and answer session. I would like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Treasury and Investor Relations.

Speaker 1

Thank you, operator. I would like to direct your attention to the Safe Harbor statement on Page 1 of today's presentation. Today's discussion contains forward looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as law requires, we undertake no obligation to update our forward looking statements.

Speaker 1

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. Any references to segment margins or segment adjusted operating margins will reflect the performance of 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.

Speaker 1

Unless otherwise noted, today's discussion of key performance indicators will focus on the continuing operations of the company and will exclude AECOM Capital, which reported as non core given the company's intent to transition the business. On today's call, Troy Rudd, our Chief Executive Officer will review our key accomplishments, our strategy and outlook for the business. Lara Paloni, our President will discuss key operational successes and priorities and Garth Kapoor, our Chief Financial 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.

Speaker 1

Troy? Thank you, Will, and thank you all for joining us today. That the strength and consistency of our results are a testament to the competitive advantage we have built through our think and act globally strategy, which has enabled the strong collaboration of our 50,000 technical experts and a focus on winning what matters to expand the long term earnings power of the company. I'm pleased to see that our leadership was again recognized by ENR in its recent annual survey. In addition to our top rankings in Transportation and Facilities Design and Environmental Design.

Speaker 1

We overtook the top spot in mass transit, chemical remediation and environmental consulting. Our focus on organic growth in our program management business also resulted in us moving up the rankings displacing strong competitors and we expect this trend to continue. These market share gains are especially notable as they are driven by high margin organic growth, which is in contrast to our peer group that remains highly acquisitive. I want to thank our teams for their commitment to our success and congratulate them on these remarkable achievements. Turning to our Q3 performance.

Speaker 1

A few key trends are apparent in our results. First, our investments in organic growth are paying off. NSR growth in the design business was 10%, which is the highest growth rate in many years and includes strong performance across nearly every major geography in which we operate. 2nd, this growth is coming at consistently high margins, which is enabling us to invest in a high rate of growth in our backlog and pipeline. And our adjusted operating margin of 15.2% reflected an all time high.

Speaker 1

This trend affirms confidence in delivering a 17% margin in the future. Both the Americas and International segments contributed to this strong performance, which resulted in adjusted EBITDA and adjusted EPS increases of 10% 12% on a constant currency basis. 3rd, we continue to generate strong cash flow with $265,000,000 of free cash flow in the quarter, which enabled the consistent execution of our returns focused capital allocation policy, including returning more than 2 $20,000,000 to investors fiscal year to date. Finally, we've built a foundation for continued growth throughout our strong pipeline and targeted that the company has a

Speaker 2

strong performance in the business.

Speaker 1

Backlog in the design business increased by 10% to a new record, driven by both the Americas and international businesses. This growth included 3 other noteworthy attributes. 1st, given our record quarterly margins, our backlog is more profitable than ever. 2nd, delivering a double digit increase in backlog on top of a double digit increase in revenue reflects the strength of our pipeline and our continued high win rate. 3rd, our share of wins valued at greater than $25,000,000 have more than doubled over the past few years, which creates greater visibility and certainty into the future.

Speaker 1

Please turn to the next slide. Turning to our markets. In the U. S. Funding for key infrastructure initiatives is advancing.

Speaker 1

This includes increasing activity from the IIJA Inflation Reduction Act and robust state and local infrastructure investment. A great example is our selection to serve as a lead designer for the renovation of the historic of Brent Spence Bridge Quarter Project, which we were awarded after the quarter closed. Our technical expertise beat out formidable competition on this landmark pursuit that is being supported by $1,600,000,000 of funding from the IIJA. We expect these drivers to further accelerate in 2024 and beyond, which is consistent with the continued growth in our pipeline of proposals and bids submitted. In Canada, our backlog continued to increase.

Speaker 1

Both provincial and national priorities are aligned around transportation, environmental remediation, energy transition and hydrogen infrastructure investment markets where we are well positioned to capitalize. Across our international markets, backlog reached a new high with strength across nearly every major market. Importantly, with our margins now at our double digit target, each point of growth is increasingly valuable to the enterprise and our confidence is high in continuing to increase our margins in the future. Importantly, in all of these markets, our program management and advisory businesses have expanded our addressable market to provide a strong complement to our technical expertise. I want to highlight another noteworthy accomplishment during the quarter.

Speaker 1

We successfully positioned AECOM as a leader in the long term rebuilding of Ukraine, which is estimated to cost nearly $500,000,000,000 this included a memorandum of understanding with Ukraine's Ministry for Communities, Territories and Infrastructure Development to serve as its reconstruction delivery partner. In addition, we signed an agreement with the Ukraine State Agency for Restoration and Development of Infrastructure, which will advance national design standards and provide engineering support for critical infrastructure projects. Discussions to begin are already underway and we are proud to be at the forefront of the reconstruction of Ukraine. I'm also pleased that our recent activities consistent with our planned transition of AECOM Capital and include the following. First, we have signed a term sheet to transition AECOM Capital team to a new platform, which will be facilitated by AECOM on a transactional basis and will enable the team to continue to support AECOM's existing investment vehicles and investments in a manner consistent with their current obligations.

Speaker 1

This transaction, which we expect will close later this fiscal year, will create continuity for the team, reduce overhead costs for AECOM and ensure the right level of ongoing support for the management and delivery of our commitments. 2nd, we have completed a project by project review of our existing investments. Based on this review, we expect the disposition of AECOM Capital Investments to return between $50,000,000 $100,000,000 of capital to AECOM over the next several years. 3rd, we also evaluated alternatives for investment on its balance sheet, including funding additional carrying costs that might be required if the current market conditions persist. We determined that additional investments that time and capital in these investments would be inconsistent with our return driven capital allocation policy.

Speaker 1

To reflect this change, we've adjusted the carrying value of these investments, which resulted in a non cash impact to our P and L. However, as I spoke a moment ago, we are confident that the realization of our investments will be a positive cash contributor to AECOM and create additional capital for higher returning opportunities. Before turning the call over to Lara, I want to provide an update on our guidance. Against a strengthening market backdrop and with our strong year to date performance, we are increasing our fiscal 2023 financial guidance. That this performance would mark the 4th consecutive year that we have outperformed our initial expectations.

Speaker 1

With that, I will turn the call over to Lara.

Speaker 3

Thanks, Troy. Please turn to the next slide. The business is delivering at a high level and we are well positioned to capitalize on the of substantial growth opportunities ahead. Against the backdrop of rising demand for talent, we are investing in our teams, which is an essential element of our success. To that point, I am pleased to report that our teams are highly engaged and thriving.

Speaker 3

In our most recent employee survey, a record level of our employees stated that they would recommend that we are committed to executing on our strategic initiatives. This positive feedback validates the benefits of our career and leadership development programs and the superior career opportunities afforded by our leading position on marking projects across the globe. In addition, our safety performance leads our industry, which is a critical advantage that matters to all of our stakeholders. Safety is a key element of any pursuit and our safety record is a great leading indicator of retention, employee satisfaction and the success of the business. In the human capital business, employee engagement and safety go hand in hand with client satisfaction.

Speaker 3

At that point, I am also pleased to report that client satisfaction continues to increase and exceed key benchmarks. That our strong employee and customer satisfaction is especially important as the 3 secular megatrends of continued investments in global infrastructure, sustainability and resilience and long term energy and supply chain transitions converge to create a powerful multi decade growth cycle. That this convergence is apparent as we look across our largest wins over the past year. From transformational high speed rail and transit projects across the globe to critical federal environmental and resilience programs in the U. S.

Speaker 3

And Canada to megacity developments in the Middle East. We are playing a leading role in the most of iconic projects around the world. And in each and every win, our technical excellence remains the key component of our success. As the convergence of these megatrends becomes more ubiquitous, our strength stand us further apart from the competition. Let me share a few examples.

Speaker 3

Across both our transportation and water businesses, projects are increasing in size and clients are demanding more. A great example of how we distinguish ourselves is our global tunneling practice.

Speaker 4

While our

Speaker 3

tunneling team represents a small percentage of a larger project, that the company is an essential element of any proposal and is heavily weighted in overall technical evaluations given its critical nature to our project success. As such, our tunneling expertise has seen us unseat incumbents on projects. Additionally, tunneling has a high pull through rate to the rest of the organization. We estimate that every dollar of tunneling revenue often creates as much as $10 of revenue opportunity for other disciplines within the organization. Investment in Energy Transition is also gaining momentum, particularly in the U.

Speaker 3

S. From funds provided by the Inflation Reduction Act and other initiatives. We are poised to benefit in many ways with leading advisory, environmental permitting, air quality, transmission and distribution and program management expertise. This positions us to lead the rapid growth in offshore wind, where our multidiscipline expertise is well equipped for the technical challenges inherent in this emerging market. Similarly, we are leading the advancement of other forms of alternative energy, such as hydrogen, where we were recently awarded a contract to manage the delivery of a green hydrogen facility for Chemours.

Speaker 3

Our transmission distribution business is also growing rapidly, bolstered by continued growth with San Diego Gas and Electric to move transmission lines underground as well as several engagements to advance proposed mega transmission lines in the U. S. Momentum is also building in the PFAS market, where we are a clear leader with more than 20 years of experience on over 500 sites for the largest clients. That our backlog and pipeline increased 50% 40%, respectively. The EPA's new drinking water regulations passed in March, which created a timeline for water utilities to advance plans to meet stringent requirements.

Speaker 3

Demand in this market is set to accelerate for the next several years. Lastly, our leadership in sustainability continues to create opportunities. Our appointment to advise on delivering a carbon neutral COP28, that a leading global climate summit to be held this November is a testament to our reputation and credibility with the key thought leaders and subject matter experts across the globe. That all of these markets represent substantial growth opportunities for AECOM. As demand increases across our markets, the investments we are making to to extend the capacity of our workforce will enable us to deliver.

Speaker 3

These investments include digital delivery capabilities and automating repeatable elements of the design process. As an example, we are integrating our local teams with our enterprise capability centers to automate computational design scripts for key elements of transportation projects, such as Bridges, which accelerate delivery and improve quality. As an organization, we embrace the opportunity to innovate and transform how we deliver our work, which will compound our competitive advantage over time. With that, I'll now turn the call over to Gar.

Speaker 5

Thanks, Laura. Please turn to the next slide. Our teams continue to embrace our culture and strategy, which is extending our competitive to manage and driving strong performance as evidenced by this being the 4th consecutive year in which we expect to outperform our initial guidance expectations. This year's increase is especially notable in that our strong underlying performance has more than offset the previous removal of the expected 5 a $10,000,000 contribution to adjusted EBITDA from AECOM Capital that was contemplated in our initial guidance. We have spent the last 3 years instilling a mindset of continuous improvement into our culture and we have rooted our decision making and risk adjusted returns on capital and on time.

Speaker 5

As an organization, we avoid unnecessary layers and complexity and focus on winning what matters and delivering for our clients. As a result, we delivered another quarter that included several key milestones, including double digit organic NSR growth and a record design backlog. In addition, our growth remains highly profitable. Our margin surpassed 15% for the first time ever at 15.2%, a 60 basis point increase over the prior year. Our international margins reached 9.9% and we are well on our way to delivering continued profitability improvements across the business as we progress towards our 17% longer term target.

Speaker 5

That all of these accomplishments build on our momentum over the past few years and create confidence in the opportunities ahead. Please turn to the next slide. NSR growth in the Americas was 10%. The adjusted operating margin was 18 8%, up 20 basis points from the prior year. Our proposals and bids submitted are growing faster than our backlog, which allowed us to grow our design backlog by 8%, more than replacing the accelerating revenue growth.

Speaker 5

This reflects our high win rate and continued investments to collaborate and bring the best resources and ideas to our critical pursuits. Please turn to the next slide. NSR in the international segment increased by 10% with growth in nearly every 3 regions. While weakness in Mainland China persists, we have taken actions to significantly decrease our exposure in the region. The adjusted operating margin was 9.9%, reflecting continued progress on our key initiatives to drive operational efficiencies and focus on the highest returning markets.

Speaker 5

Backlog increased by 17% and included several large wins in the UK, Hong Kong and the Middle East that enhance our visibility. Please turn to the next slide. Free cash flow was strong and we affirmed our expectation to deliver free cash flow within our guidance range for the 9th consecutive year. Our balance sheet is unchanged and remains in great shape. We have no bond maturities until 2027 and the vast majority of our debt is fixed or capped at highly attractive rates.

Speaker 5

Our returns focused capital allocation policy is unchanged and is supported by the highly cash generative nature of our business. This includes allocating capital to the highest returning opportunities, which remains organic growth investments, followed by share repurchases and dividends. In addition to our investment in business development and growth initiatives, we have returned more than $220,000,000 to shareholders this year, including our July dividend payment. Please turn to the next slide. As Troy noted, we are raising our financial guidance for this year to reflect our strong growth and margin performance.

Speaker 5

At the midpoint, our guidance reflects 10% and 11% constant currency growth for adjusted EBITDA and adjusted EPS, respectively. AECOM Capital is excluded from the adjusted results given our intent to transition the business. With that, operator, we are ready for questions.

Operator

Telephone keypad. Your first question comes from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open.

Speaker 6

Hi, team. Nice update here. I thought a good place to start would just be kind of driving home some of the comments around the resilience in the revenue build, the momentum in the business headed into fiscal 2024, particularly in light of some confusion last quarter around the commercial real estate exposure, that would be a helpful start.

Speaker 1

Great. Well, good morning, Sean. Thank you for the question. So, maybe I'll sort of start with The success that we've had in the quarter in the last few quarters, we've seen accelerating NSR growth, which has been important. But again, behind that is the backdrop of our pipeline, which has been consistently growing and we've actually seen it continue to grow at a faster that we have been winning work.

Speaker 1

And then behind that is our backlog growth, in particular in our DCS business, which again represents 90% of the overall business. And our backlog grew extraordinarily well, again another 10% year over year in the quarter. And within that are win rates. We are continuing to win work at an extraordinary high level. This is our 7th quarter in a row where our capture rate has been over 50% and just for everyone's benefit and remind you that capture rate is for every dollar we bid, it's how much dollars of work that we win.

Speaker 1

And so that's an extraordinary result. And even within that, in what we refer to as our most important and largest and complex pursuits, we've been winning at even a higher rate. In fact, our year to date capture rate amongst our largest and most important bids is over 80%. So we are winning at an extraordinary rate, which obviously is driving our great success. And what that leads to that leads to great visibility and predictability or even certainty for the future.

Speaker 1

Building kind of builds up the I'll call it the competitive advantage or the muscle to continue to win gives us great confidence that even beyond next year in the backlog that we've built for next year, that we'll continue this kind of success. And again, I should also make a comment just around our construction management business. Again, our construction management business, the way we even work, it's a little bit lumpier than what you see in our design business. And I'll say that, our Q4 is off to a very great start. And so again, it's lumpy, but we've had some really positive success already heading into Q4.

Speaker 1

And then the important thing is around our pipeline in the construction management business. Our pipeline is actually up year over year and even up sequentially. And so what that tells us is that the opportunities in front of us are greater than they were a year ago or even last quarter, but they're just different, All right. We're focused again on different geographies and in particular continuing to have success in aviation, sports and convention centers. So the opportunities for construction management as we go forward in aggregate are actually greater than they were in the past.

Speaker 1

And again, as I said, they're just going to be in different geographies and different markets.

Speaker 6

Thanks for that, Troy. Very helpful. And then switching over to margin, I thought it would be helpful just to get a bit of a refresh on the bridge from the 15% plus segment level margin to the 17% plus target. I mean, we're talking about the enterprise capability centers. There's a real estate strategy, there's new way of working, just kind of the build understanding the building blocks and the most significant contributors to that bridge to 17% would be

Speaker 1

helpful. Yes. Thanks for the question, Sean. In fact, I'll pass the one over to Gar. Hey, morning, Sean.

Speaker 1

How are you?

Speaker 5

Yes, good question. It's a great achievement. The whole team has collaborated towards achieving 15%, a little bit ahead of our expectations, especially what we thought 3 years ago. And the main reason for this, if we want to talk about it is creating a platform over the last 3 years that is built on competitive edge. Yes.

Speaker 5

And what I mean by that is, we're focused on key markets where we dominate in the business lines, have the best growth opportunities in those markets. It's a think and act global strategy, which sounds like a tagline, but it's so important to what we have done over the last 3 years because it's bringing the best talent and winning what matters to us as Troy just articulated on the fantastic win rates we have experienced now for 7 quarters in a row. It's a culture of having continuous improvement on all cost facets in the business. And there's more to go there as you pointed out in a few things, including real estate, our capability centers across the globe of how we share resources and workload, looking at our support functions on the most cost efficient structure. Digital is something we're just scratching the surface and this is more focused on our productivity and delivery platform, digital.

Speaker 5

And then you combine that with the strategy Troy and Lara have initiated very successfully over the last 3 years for our program management business and advisory, those opportunities are abundant. You put all those together it gives us a lot of confidence that we're going to go from what people a few years thought was unachievable 15% to now our ambitious targets of 17% and look forward to laying out the detailed building blocks of each one of those pillars I just discussed during our Investor Day in December.

Speaker 6

Again, really helpful. Thanks, Gar. I'll turn it over there.

Speaker 5

Thank you.

Operator

Next question comes from the line of Andy Wittmann with Baird. Your line is open.

Speaker 7

Great. Good morning, everyone. Thanks for taking my question. I guess,

Speaker 1

probably for Gar,

Speaker 7

the comments on the $24 running at $5 or north of $5 of adjusted EPS It is interesting, but that assumes, like you said, historical interest rates and historical FX

Speaker 5

factors. So Gar, could you

Speaker 7

just help level set us what that means in today's interest and today's FX? I just want to kind of understand what it all boils down to as we head into the year end in your Analyst Day?

Speaker 1

Yes. Andy, it's Troy. I'm going to surprise you by answering that question instead of Gar. I guess, again, first of all, this is an opportunity to talk about our operational performance, Because I think that we sort of separate the world into things that we can control and things that we can't control. And again, as you pointed out and we pointed out in our earnings that based on the path we set out back in 2021, we set a certain bar for performance and certainly financial performance.

Speaker 1

And in terms of what we can control, we've exceeded that and we're continuing to exceed that. And that just gets to outperforming on NSR and organic growth and as Garza said, improving our margins to an all time high. But most importantly behind that is we've been building backlog across the business and our pipeline continues, as I said, to grow. So when we look at that and then combine that with our new margin target and where we expect to get to over time is 17%. We're externally optimistic about continuing to exceed on those things that we can control.

Speaker 1

But as you point out, There are some things that we simply can't control and those are interest rate and foreign exchange. Those are the two things that have the most significant impact, certainly below the operating performance line. And as we look forward, it's our belief that those items have certainly gone against us and our industry and we believe they've stabilized. Again, we can't really be accurate in terms of that prediction, but we do believe that they have stabilized And they're not going to be a significantly growing headwind in the future as they have been over this course of this past year. And so again, Not at this point ready to sort of say, here's what our guidance is for 2024.

Speaker 1

We will give our guide in November. We're right in the middle of our planning process. So it's premature for us to do this and when we do that we will incorporate our foreign exchange and interest that exists at that point in time. But in terms of those long term targets, all I can say is we do believe that in 2024, we will have a significant growth in our overall earnings.

Speaker 5

Okay.

Speaker 7

That makes sense. I guess, just for my follow-up, I just wanted to check-in on your utilization rates and your ability to find the right number and the right people to fill the growth that you're delivering here. Over the last couple of years, it's been common knowledge that that labor of all sorts, including some of the technical labor has been more scarce and we've seen a little bit higher turnover rates in the industry. So I was just wondering what AECOM's experience has been in the last 90, 180 days on that front. Are you seeing greater stabilization for the labor force as well as what are you seeing in terms of the overall costs of labor in the projects that you're executing today.

Speaker 1

Yes. That's a good question, Andy, because obviously our most important input in the business is our people. And what really fuels our growth is obviously our ability to continue to perform really great work for our clients. And so just in terms of our people, I'm going to deal with in 2 respects. First of all, just that our hiring and retention, we've been able to add significantly to the overall headcount in the business over the course of this past year.

Speaker 1

Even though the labor force only grows by a limited rate, we've actually grown at a faster rate in terms of adding people. Our turnover has gone down very significantly over the course of the last year and we can continue to see it decline even in the last 6 months. And we're at a point where we look at the industry benchmarks and we're significantly below that. But also we're at a point where we are comfortable. We sort of set expectations about where we should be with respect to what healthy turnover looks like and we're in a good place.

Speaker 1

I wouldn't see I wouldn't want us to act frankly to go a whole lot lower from where we are. And then just in terms of productivity, you're always trying to drive improved productivity in the business and there are certainly things that we're doing to improve their productivity. And in terms of that, why don't I turn it over and let Lara answer that part of the question?

Speaker 4

Yes. Andy, the other key part of this strategy is just continuing to leverage our enterprise capability centers. And just this quarter, our volumes were up 54% year on year. So it's a key part of our labor and productivity strategy. And just doing on what Troy said, we're going to continue to be laser focused on just continuous improvement with our employee value proposition.

Speaker 4

So the investment in training and benefits, which we really believe are leading the industry. We've done a lot of work on our career path. So we're feeling pretty good about just that the voluntary turnover being exceeding our own expectations and sitting well above of the industry where we know that in the E and C sector that headcount growth typically runs at about 1% per annum. So when you consider all of those things, it's a pretty positive picture in terms of productivity and most importantly, the ability to grow and continue to attract and retain top talent.

Speaker 7

Great. Thank you very much.

Speaker 5

Thanks, Andy. Thanks.

Speaker 2

Your next question comes from

Operator

the line of Steven Fisher with UBS. Your line is open.

Speaker 8

Thanks. Good morning. So it's nice to see the organic growth rate hit that double digit 10% rate. Just looking though at the implied Q4 organic growth rate, it's consistent with the full year of 8%, but that would a little bit of a slight slowdown, I think, from that 10% in Q3. I'm curious what's driving that assumption, if anything, in particular?

Speaker 8

And then kind of related to this, I think you've talked about potential for double digit growth in 2024. So do you see kind of a reacceleration into 2024 on that metric.

Speaker 1

Yes. So Andy, I'm just simply going to use a line that Gar has to become famous for in terms of our guidance, which is we still remain prudently conservative. While we've seen accelerated growth over the years and across the quarters. We set an expectation for 8% for the year and we still think that that's the right approach. And again, you're right to point out, our 10% organic growth is the first time that we've had double digit organic growth in the business for frankly more than well more than a decade.

Speaker 1

So it is a milestone for us. As we look forward, we do see an opportunity to have accelerated revenue growth off the 8% number. But we're always looking to make sure that there's balance to that Because it's our again, it's our priority to not just grow the top line, but to grow the business and make it more profitable. So we are clearly believe based on our wins and the pipeline and opportunities, there is an opportunity to accelerate growth beyond that 8% in the future. But that we're always going to be balancing that to make sure that we're making those important investments in the business and we're maintaining frankly a cost structure in the business that it means that we're going to actually grow profitability at a faster rate.

Speaker 8

Okay. That's very helpful. And if you can just give us an update on what's been the impact of inflation on your infrastructure customers. I know it had been disruptive for a little while. Has that now kind of steadied with some moderating inflation?

Speaker 8

And what has it been doing to the pace of project progression. We heard some rumblings from another company we cover this quarter that is maybe slowing things down, particularly on the kind of the road building transportation side of things. I'm curious what you're seeing the impact of inflation on sort of the whole infrastructure progression of spending?

Speaker 1

Yes. So Steve, we actually have seen inflation obviously have an impact and that impact has been the planned budgets or the ambitions that existed a few years ago. So it certainly has had an impact. The cost of actually delivering infrastructure projects has increased. But The other thing that we started to see is we've seen those costs begin to stabilize.

Speaker 1

And so while they did rise over a period of time, they see the costs seem to have stabilized. But in terms of the opportunities in front of us, What's most interesting is again as we've seen our pipeline continue to grow over that period of time. So I think that's just the fact that there is a lot of funding that has been put in place that exists today that is just starting to get deployed here in the U. S. What we're starting to see this year is we're actually seeing the IIJA money, come into the market for projects.

Speaker 1

And I mentioned the project, the Bruce Spence Bridge quarter project, Sprint Spence Bridge sorry, project in the quarter. And that's a great example of the IHA money coming into the marketplace. And that's significant. That was up $1,600,000,000 planned expenditure. So well, inflation has had an impact.

Speaker 1

We've seen it stabilize, but we don't see it at this point really impacting the pipeline for the future. That our pipeline is still growing at a faster rate than our backlog.

Speaker 8

Okay. Thank you very much.

Speaker 1

Thanks.

Speaker 2

Your next question comes from

Operator

the line of Andy Kaplowitz with Citi. Your line is open.

Speaker 9

Hey, good morning, everyone.

Speaker 1

Good morning. Good morning.

Operator

Good morning.

Speaker 9

So this question might be for Twirla or Ergugard. Like international margin continue to rise basically at double digits. As it's gone there, have you gotten more clarity around where it could go? I think you've said you see it Materially above 10%, but what does that mean? Could it be in a low to mid teens?

Speaker 9

And where are you on your sort of process of making international more efficient these days.

Speaker 5

Hey, Andy, this is Gar. Thanks for that question. It is again a fantastic milestone that we had set for ourselves and achieving it earlier than our expectations we laid out is again a testament to the team. And as we move forward, our objectives are very clear and unchanged. It wasn't to get to double digit.

Speaker 5

Our objective is what we have delivered in the Americas, which is head and shoulders above our competitors. That's what we're targeting to for international as well. And as we sit here today to Troy's point earlier, we're in the middle of our planning process for FY 2024 and we will be having our Investor Day in December. We'll provide much more clarity and detail, but there we clearly see international margins expanding a lot of opportunity for us there that will help us achieve the overall 17% margin ambitious targets that we have laid out.

Speaker 9

Okay, very helpful. And then maybe for Lara, like the longevity of some of the international drivers that you see. Obviously, the Middle East has been pretty strong here recently. Sometimes it does tend to be cyclical or maybe cycle faster. So do you see this as a more elongated cycle in in your international markets and maybe more clarity in sort of your bigger markets there.

Speaker 4

Yes. Thanks for the question, Andy. The sort of book to burn 1.3 very healthy for international So increasingly comprised of much more long term projects typified by a lot of those program management wins. And a lot of those as they are in the Middle East, but it's our strategy obviously to grow that not just in the international segment, but also across the Americas. So I think that strategy about program management is key for getting much more long term visibility of the pipeline and much more longer term contracts that give us much more certainty in terms of the longer term outlook.

Speaker 4

As a key part of the growth and we've set very ambitious targets in terms of the rate at which we intend to grow our Program Management business and it is growing at double digits, so we're on track with our aspiration there.

Speaker 9

Appreciate the color.

Operator

Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open.

Speaker 2

Great. Thanks and good morning. Just curious, I think when you talked about the IAJ funding, if you can give a little bit of color around maybe some of the end markets where you're seeing some of the IHA money? And then maybe just kind of a broader question, as you look across your global footprint, can you maybe talk about some of the end markets that might be doing better than others or have any moderated, have any accelerates, just curious in the macro environment, how the various end markets may be trending? Thanks.

Speaker 1

Sure. Thanks, Ava. So just again around the U. S. And the deployment of IHA money.

Speaker 1

First of all, I'll point out that it's really not the deployment of IHA money, Right. There's also the Inflation Reduction Act, the CHIPS Act. There's just a lot of other things that have caused funding to be in the marketplace and will be there for a long period of time. But nevertheless across all of those, you get all those increased funding opportunities. There there are opportunities across our transportation business and I see it very diversely across the transportation business.

Speaker 1

Again, transit, that, roads, rail, and so there are significant opportunities there. We are also seeing a significant amount of funding come into the water market and we have a number of states that are undertaking some very ambitious water programs that will address either the fact that there's too much water or there's not enough water in a lot of the regions in the U. S. And then also we're seeing the impacts in energy and alternative energy. As Laura mentioned earlier in her script about Again, our impact in hydrogen and new technologies to store and deploy energy.

Speaker 1

And now we're even seeing it in the areas of transmission. And I think that the money is going to be funding those themes for many years, but those are the most significant themes that we see here in the U. S. When we go around the globe, in all of our major markets, we are actually still seeing strength. There are a few exceptions to that, but they're in places, for example, like China.

Speaker 1

We have not seen strength in China. And what we've been doing are again, our reaction to that is that we are actually shrinking that business. And ultimately that means decrease in our exposure to China in the long run. And again, it's not a large market for us. It represents less than I think 1.5 percent of revenue of the business.

Speaker 1

So it's not material to us, but we certainly do see, again, a significant have a significant slowdown in that market. With the rest of the world, we still see very positive funding and we see very positive indications of infrastructure funding. One of the constraints that we have seen in markets is frankly just been the constraint of that our clients have been able to bring their awards and their contracts to market as quickly as they originally had anticipated. And The only thing that I'll say is in a lot of our markets where we have wins, it's taken a little bit longer to get started that our clients had expected and we had expected, but again, that isn't really slowing us down for the moment given the fact that we had 10% organic growth.

Speaker 2

Great. And then just one quick, I guess, follow-up, not to push on the 2024 guidance, but I guess as you look out to the next fiscal year, what inning would you say we will be in kind of the rollout of the IIJ funding? Obviously, a little bit is showing up in the back half of this year. But just curious, when when you look out over the next few years, whereabouts do you think that funding will be over the next year? Thanks.

Speaker 1

I continue to see the IHA, the deployment of IHA funds accelerating next year. And I think we may have said this before, we actually see those funds, deployment of those funds peaking maybe in 20 27 or 20 20 There is a significant amount of money that has been, again, as I said, from not just IHA, but from the all the other funding instruments that's available, but we see that growing in 2024 and growing even through 2017, 2018 and perhaps peaking at that point in time.

Speaker 2

Thanks very much.

Speaker 1

Thanks, Sala.

Operator

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

Speaker 10

Yes. Thank you. Good morning, Laura, Gar, Troy, Will.

Speaker 1

That this morning. Good morning.

Speaker 10

Just following up on some of the international comments. First, you did call out in your prepared remarks Canada. So I just want to CEO, Zach appears to be maybe a better contributor to the overall mix and what areas for AECOM. And secondly, internationally, how do you see the pace of some of the Middle East projects that major the NEOs in the world? Are they still On pace, so there's been a little bit of slowdown in digestion, is that you think going to accelerate as we move over the next couple of years?

Speaker 1

Yes. Again, Mike, thanks for the question. And I will take the first part and then I will turn the second part of the Middle East over to Lara. So With respect to Canada, Canada has always they've always been focused on investing in infrastructure. Certainly, if we go back a number of years, there's been a very robust environment for invested infrastructure and a number of the provinces and federally have sort of re upped their ambitions this past here and the funding for those items.

Speaker 1

But it's actually similar to what we're seeing here in the U. S. It's funding around transportation and a lot of that is around again transit. And then we're also seeing it in water, in major urban markets, the investment in water and then we're seeing it in energy, just significant investments in energy transition and again transmission. So the themes are the same as we're seeing here in the U.

Speaker 1

S. And from our perspective, that really describes our business in Canada. We are a transportation, water and energy business in Canada. So it lines up really well for our Canadian business. So a great amount of optimism for the future in Canada.

Speaker 4

If I could just add also with respect to Canada, some of the world's largest that infrastructure projects that's going to continue to be in Canada, the most ambitious transit programs. And again, we play very well. This aligns perfectly with our number one position in transit globally. So we're bringing not just the fantastic Canadian resources, but a lot of the global that we have from our leading transit business to Canada and the outlook continues to be very strong. And another dimension of that Canadian outlook also is that the growth in some of the environmental projects and very large scale remediation programs, again, that our leading environmental franchise, we're bringing that and those technical skills to bear in the Canadian market.

Speaker 4

And with respect, Mike, to your question about NEOM and the Middle East and the longer term outlook. We're pretty optimistic about that. Projects like NEON now are out in construction well beyond shovel ready. And as you probably know, some very ambitious time frames around the realization of many of these programs. But our strategy in the Middle East and our presence that our bookings aren't just limited to Neon.

Speaker 4

We've had a very comprehensive presence and involvement in all of the major of Gigi City programs, but also some of the newer long term programs in some of the key cities such as Jeddah and Riyadh as well. So it's a much broader sort of play, particularly in Saudi Arabia and we're well positioned in the long term. And as we've said, that these programs are decade long programs and we've been in there since the beginning and we're bringing our global strength across all of the technical capabilities to bear on this, fastly growing market.

Speaker 10

Thank you, Troy.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Adam Thelma with Thompson, Davis and Co. Your line is open.

Speaker 11

Hey, good morning guys. First question on capital allocation. Now that we're in a higher rate environment, does that change your thought process, your calculations at all specifically with buybacks.

Speaker 1

Yes, Adam. It really doesn't. Our capital allocation that our policy still remains unchanged. And again, it's the headline that is that we're always going to deploy capital to the highest returning opportunities. Again, I think sometimes we forget about this, but the first is obviously organic growth that clearly has the highest returning opportunity for us.

Speaker 1

And then beyond that, when we look at the business returning capital to shareholders, it still remains our next highest returning opportunity or priority, even with rising interest rates, in the world.

Speaker 11

Again, when you say invest in growth, I mean, with your backlog growing and you said the opportunities are even greater, are you open to new offices, hiring more people, how does that look?

Speaker 1

Well, the answer is we're not opening a lot of new offices. That's not something that is a significant investment for us. Obviously, as the business grows in certain places you have to create you have to invest in real estate to create capacity for people to work, but that's not part of our overall strategy for investment. I would say that we're just continuing to become more efficient with respect to real estate. However, in terms of growing the business, We are making significant investments in business development.

Speaker 1

In fact, this year's business development spend remains at elevated rates, similar to our past year. And so while we've got so many opportunities in front of us, we're going to continue to invest in business development at an elevated rate, which also is important Because we've been able to get our margins over 50%, we're continuing to have elevated investments in business development. But as the other things that we're investing, when I say organic growth, it's investing to grow our program management business, investing to grow our advisory business, investing in our people and developing our technical ability, investing in our enterprise capability centers and investing in that we can transform the way that we deliver work and become more productive. And so that's what I mean by it might be investment inorganic growth. It's all of those things.

Speaker 11

Okay. That makes sense. And lastly, sorry to sneak one more in. We talked about water more today than we have

Speaker 9

in the past. Just curious if you can help size

Speaker 11

The forthcoming water opportunity versus where that market's been historically?

Speaker 1

Well, water again, I think water when we think about it, we have a tendency to talk about a lot in the United States. That there is certainly funding from the federal government that has been focused on expanding water, but also across all of the states. And so it's very broad based. The fact is, I mean, the best way to describe this is, we have situations where we don't have enough water in situations where we have too much water. And that trend has probably been accelerated over the 1st of the last few years.

Speaker 1

And it really is causing city and state and local governments in the U. S. To focus their investment on water. Again, you look along the Southwest and certainly the biggest impact and the biggest concern is drought and water shortage and you look along the Gulf Coast and you look along the East Coast of the U. S.

Speaker 1

And it's frankly, it's too much water. And so there is just a very significant and focus and investment in it, but it doesn't just end there. It goes across the world because the rest of the world is experiencing those same trends. And we are starting to see more of the funding and focus being put on water projects around the world. So again, I'd say that's from our perspective, that is a great long term fast growing opportunity.

Speaker 11

Okay. Thanks, Troy. Thank you.

Operator

There are no further questions. I'll turn the call back to Troy Rudd for closing remarks.

Speaker 1

Great. Thank you, operator. And again, I'd start by thanking our teams for their tremendously hard work over the course of this past quarter year. And I'm really proud of the team and our very consistent strong performance. It's continued to position us really well to do great things for our clients and have great success and continue to create long term sustained shareholder value.

Speaker 1

So again, thank you for your time today and we look forward to talk to you next quarter.

Operator

This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • In Q3 AECOM achieved 10% net service revenue growth in its design business, a record 15.2% adjusted operating margin, a 10% increase in backlog to a new high, $265 million of free cash flow and has returned $220 million to shareholders year-to-date.
  • The company’s “think and act globally” strategy fueled high-margin organic growth and market share gains — topping ENR rankings in mass transit, chemical remediation and environmental consulting while winning more large program management pursuits than peers focused on acquisitions.
  • Robust funding from the IIJA, Inflation Reduction Act and state/local initiatives has driven record backlog growth both in the U.S. (e.g., Brent Spence Bridge) and internationally, with a pipeline win rate above 50% and major new roles in Ukraine’s reconstruction.
  • AECOM is transitioning its non-core AECOM Capital platform via a signed term sheet to return an estimated $50–100 million in capital over the next several years, resulting in a non-cash P&L adjustment but improved long-term capital allocation.
  • Buoyed by year-to-date results, AECOM has raised its fiscal 2023 guidance and remains confident in achieving a 17% adjusted operating margin over time through digital delivery, real-estate efficiencies and continued operational improvement.
A.I. generated. May contain errors.
Earnings Conference Call
AECOM Q3 2023
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