AECOM Q2 2025 Earnings Call Transcript

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Provided by Quartr
May 6, 2025

Key Takeaways

  • AECOM delivered record Q2 net service revenue, achieved a 16.1% segment adjusted operating margin, delivered $1.25 adjusted EPS (up 20%), and generated $178 million in free cash flow (up 141%).
  • Backlog reached a new high, supported by a 1.1x book-to-burn ratio, record pipeline levels, and strong win rates above 80% on large pursuits and over 50% overall.
  • The company secured the top ranking as the #1 overall design firm and was appointed sole venue infrastructure partner for the LA 28 Olympic and Paralympic Games, reinforcing its market leadership in transportation, water, facilities, and environment.
  • AECOM raised the midpoints of its full-year adjusted EBITDA and EPS guidance for a second consecutive quarter, citing robust federal infrastructure funding and ongoing investments in advisory, program management, and innovation.
  • Fewer workdays in the quarter and isolated project delays related to administrative transitions reduced NSR growth by approximately 100 basis points.
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Earnings Conference Call
AECOM Q2 2025
00:00 / 00:00

Transcript Sections

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Operator

Good morning, and welcome to the AECOM Second Quarter twenty twenty five Conference Call. I would like to inform all participants this call is being recorded at the request of AECOM. This broadcast is a copyrighted property of AECOM. Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com.

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.

Will Gabrielski
Will Gabrielski
Senior Vice President of Finance & Investor Relations at AECOM

Thank you, operator. 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. Except as required by law, we undertake no obligation to update our forward looking statements.

Will Gabrielski
Will Gabrielski
Senior Vice President of Finance & Investor Relations at AECOM

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. Growth rates are presented on a year over year basis unless otherwise noted. Any reference 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.

Will Gabrielski
Will Gabrielski
Senior Vice President of Finance & Investor Relations at AECOM

NSR growth rates are presented on a constant currency basis unless otherwise noted. 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 Garav 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.

Will Gabrielski
Will Gabrielski
Senior Vice President of Finance & Investor Relations at AECOM

With that, I will turn the call over to Troy. Troy?

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Thank you, Will, and thank you all for joining us today. The second quarter was defined by change, some anticipated and some unexpected. As we've done over the past six years, where we have faced events that created macroeconomic volatility, we successfully navigated the business to deliver strong results. Our second quarter results are a testament to the strength of our culture and of our professionals across the organization. Our teams are the best and brightest in our industry and through their efforts, we deliver a technical advantage to every client and every project.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Importantly, they continue to showcase the competitive edge that we have created in our platform that allows us to deliver results. I want to highlight two recent notable accomplishments that demonstrate our industry leading market position. First, E and R released its annual survey results last month, and I am pleased to report that we moved up one place to earn the distinction as the number one overall design firm. We also had our number one rankings in transportation, water and facilities affirmed. And when combined with our existing number one ranking environment, we hold a leadership position in each of our end markets.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Second, in March, we were appointed as the sole venue infrastructure partner for the LA twenty eight Olympic and Paralympic Games. We are honored to be selected for an unprecedented scope that includes all critical elements of architecture, engineering, planning, program management and construction management. The unrivaled depth and breadth of our technical expertise, as well as our proven track record of delivering past iconic global sporting events were essential in our success. No other company can rival what we offer and deliver to our clients on these types of large complex projects. Turning to our financial results.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

I'm pleased to report strong second quarter and first half financial results highlighted by record second quarter NSR, margins and EPS. Growth was the highest in The Americas, our largest and most profitable region. IIJ spending continues to increase and with less than 35% of the total funding spent thus far, several years of strong federal funding for infrastructure remain for our markets. I should note, two items impacted our NSR growth. First, we had fewer work days in the quarter due to the timing of holidays.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

This reduced growth by approximately 100 basis points in the quarter. Second, we experienced isolated delays and deferred decisions on a limited set of projects, which impacted our top line growth. That said, these delays are not uncommon whenever there is a change in administration and the impact to our backlog was minimal. The segment adjusted operating margin rose 90 basis points to 16.1%, which is a second quarter record. This increase reflects strong execution, growing contribution from higher margin advisory services, faster growth in our highest margin markets and ongoing continuous improvement initiatives.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Our industry leading margins include record investments in innovation, technical excellence and business development, all of which are accelerating in the second half of the year based on the opportunities ahead. Adjusted EBITDA increased by 8% to $290,000,000 and adjusted EPS increased by 20% to $1.25 both of which also set new second quarter highs. Free cash flow in the quarter increased by 141% to $178,000,000 We returned $110,000,000 to shareholders during the quarter through share repurchases and dividends and 165,000,000 in the first half of the year. Our returns based capital allocation policy remains unchanged, and we will continue to allocate our consistently strong cash flow to the highest returning opportunities. This includes the $900,000,000 remaining on our current share repurchase authorization.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Looking ahead, our confidence for the rest of the year and beyond is supported by several key factors. First, our backlog increased quarter over quarter to a new record, driven by a 1.1 times book to burn ratio. Our underlying book to burn ratio was even higher, but changes in a small number of government contracts following US Federal agency reviews resulted in the removal of approximately $100,000,000 from backlog. In addition, our pipeline of opportunities is also at a record level and growth is fastest at the earliest stages of our pipeline, consistent with our expectations for several years of continued growth in our largest markets. Second, through our competitive edge platform, we are delivering record high win rates.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

This includes 80% success on large enterprise critical pursuits year to date and a better than 50% win rate overall. Our consistent success comes from strategically deploying our best technical resources to the highest value clients and opportunities, strong client relationships and differentiated capabilities across the investment lifecycle from design to advisory and program management. Third, global mega trends remain robust, including $50,000,000,000,000 in projected infrastructure investment through 02/1940 across transportation, water and energy. Aging infrastructure, growing requirements for sustainability and resilience, and the rising energy demand create a favorable backdrop that drives inevitable demand. Infrastructure enjoys strong bipartisan support across all of our markets and is an essential element of thriving economies.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Fourth, we are investing to accelerate organic growth and expand our competitive advantage. This includes ongoing additions to our advisory and program management teams to meet growing demand as our clients navigate greater regulatory uncertainty and larger investments. This is consistent with our long term objective of delivering 50% of revenue from advisory and program management over time. Lastly, against a backdrop of changing political dynamics and resulting policy shifts after the unprecedented number of elections last year, a few points bear repeating. The work we do for our clients is highly technical and critical to their missions.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

In fact, many projects that were paused have now resumed. Given the professional services nature of our work, tariffs are not expected to directly affect our business. Over 70% of our workforce is versatile across market sectors and can be deployed to the strongest growth opportunities. Deregulation and permitting reform are tailwinds to our business. And a declining public sector workforce has been a secular tailwind for our industry and increasingly a demand driver for advisory and program management services.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

To summarize, our first half results were ahead of our initial expectations. Our backlog is at a record high. This performance underscores our confidence and as a result, we are increasing the midpoints of our EBITDA and EPS guidance for a second consecutive quarter. With that, I will turn the call over to Laura.

Lara Poloni
Lara Poloni
President at AECOM

Thanks, Troy. Our consistently strong results, including quarter over quarter growth in backlog to a new record, are a testament to the competitive advantages created by our strategy and our relentless focus on long term value creation. These attributes enable us to deliver even during periods of increased uncertainty. I want to spend a moment discussing trends across our largest markets and how we are positioning to capitalize. Trends in The US remain robust, which is our largest market at more than 50% of our net service revenue.

Lara Poloni
Lara Poloni
President at AECOM

We have built a record backlog driven by a 1.2 book to burn ratio in the quarter. As Troy noted, less than 35% of IAJA funding has been spent, but nearly all has been appropriated, and therefore not at risk of being cut. This creates a great deal of visibility for our clients and for us. Additionally, the passage of the continuing resolution in March provides our public sector clients with budget certainty for the remainder of the year. This includes our US state and local clients, which account for approximately 30% of our revenue.

Lara Poloni
Lara Poloni
President at AECOM

Nearly half of our state and local revenue is from the transportation sector, with the remainder primarily for water and environment projects. All of these markets utilise dedicated funding sources, be it the Federal Highway Trust Fund, dedicated tax or bond measures, user fees, or regulatory drivers. In addition, 75% of our environmental remediation work is driven by state and local regulations, not federal, and we are seeing increased activity as a result. In addition, we are well positioned to capitalize on Department of Defense funding increases, where we provide highly technical and mission critical services. In fact, our pipeline of DOD opportunities was up by double digits over the prior quarter, and our win rate on these pursuits is materially above our enterprise win rates, bolstering our optimism in growth.

Lara Poloni
Lara Poloni
President at AECOM

Canada is strong as well, with double digit growth in revenue and backlog. Prime Minister Carney's election crystallized the country's ongoing commitment to infrastructure, as evidenced by key elements of the new administration's $150,000,000,000 investment plan. In addition, Quebec unveiled its ten year budget in March, which calls for a further 7% increase to its infrastructure investment forecast, providing for a strong market backdrop. Across our international segment, secular drivers are in place, but near term trends remain mixed. In The UK, our largest international market, net service revenue and backlog both increased, and backlog is at an all time high.

Lara Poloni
Lara Poloni
President at AECOM

While larger transportation projects continue to face delays while the UK government works through its budgetary challenges, our large positions on key frameworks create a stable level of activity through periods of reduced large project activity. In the intermediate term, AMP eight water investment is set to more than double AMP seven in the coming years, and so far, our framework capacity is more than 150% higher than in the AMP seven program. This underscores that AMP8 is a key component of our target to double our global water review in the next five years. We are also experiencing strong growth in energy, including our ongoing work for the multi year great grid upgrade program, as well as accelerating opportunities in the nuclear power market. To bolster our capabilities in this region, we recently acquired Alan Gordon, a Scottish water and energy consultancy which enhances our UK and Ireland presence and client relationships.

Lara Poloni
Lara Poloni
President at AECOM

Turning to Australia, trends continue to be mixed. In the water sector, growth is accelerating, and we have had several recent marquee wins, including our recent selection as the design delivery partner for Sydney Water's capital investment program. However, this growth has been offset by a pause in the transportation market following a robust decade of investment. Even so, our backlog increased by double digits in the quarter and our pipeline remains strong, which are good indicators of future growth opportunities. Turning to The Middle East, revenue increased in the first half of the year.

Lara Poloni
Lara Poloni
President at AECOM

While the timing of holidays impacted our second quarter results, growth remains positive. The reprioritization from Giga Cities to projects for the World Cup and Expo is creating new opportunities. These events have delivery dates that are fixed, which creates visibility for our industry leading position over the next few years. To that point, our backlog remains near all time high. Lastly, in Hong Kong, work is beginning on the $30,000,000,000 Northern Metropolis Investment Program.

Lara Poloni
Lara Poloni
President at AECOM

This quarter, we were awarded a contract to provide technical services for the Northern Metropolis Highway that will enhance East West connectivity, which further demonstrates our leading market share in Hong Kong and the scale of opportunities ahead. Across these markets, one trend is clear. The demand for comprehensive design, program management, and advisory services has never been greater. We are extending our competitive advantage with investments in key growth markets and ensuring that we continue to prioritize our resources to the best growth opportunities. I couldn't be more proud of our win rates, record backlog position, and excellence in the marketplace.

Lara Poloni
Lara Poloni
President at AECOM

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

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Thanks, Laura. Our second quarter and first half results underscore the strength of our professional services business model. As a result, we are raising our EBITDA and EPS guidance midpoints for a second consecutive quarter. Our second quarter results included records for net service revenue and margins, which contributed to 8% adjusted EBITDA growth and 20% adjusted EPS growth. Both of these metrics were second quarter records.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Our backlog and pipeline are both at all time highs. Within this, contracted backlog in the design business increased by 5%, and our pipeline has now set new highs in four consecutive quarters, which supports our confidence in the second half of the year and beyond. As Troy articulated, our margins were strong in the quarter and have increased by 70 basis points year to date, which is for the first half of the year. There were no unusual items in our second quarter or first half margins. We are confident in delivering not only on our 16.1% margin guidance this year but in going well beyond our 17% long term target as the opportunities for continued improvements are becoming more apparent.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

This includes a growing share of higher margin advisory services, continued advancement of our AI and digital initiatives, further growth in our enterprise capability centers, and our focus on continuous improvement. Turning to our segment results beginning in The Americas. NSR increased by 6%, including growth in both The U. S. And Canada.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Growth was also broad based across all of our end markets, underscoring continued client demand from the long term secular mega trends and continued robust funding from IIJA state and local budgets and provincial and national funding in Canada. The adjusted operating margin increased by 130 basis points to 19.4%, a new second quarter high. We continue to deliver further expansion on our industrial leading margins, which is unlocking the capacity to invest in high returning organic growth at record levels. Importantly, our backlog in The Americas is at a record level, reflecting a 1.2 book to burn ratio. Our contracted backlog is also at a near record level.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

In the international segment, net service revenue increased by 1%, which continues to reflect the varied trends by market that Lara reviewed earlier. A few factors give us confidence as we look ahead. First, our backlog in the international segment is at a record high. Second, our pipeline is also increasing, including substantial growth in early stages. And finally, we continue to expand our margins, which increased by 10 basis points to 11.1% in the quarter.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Turning to cash flow and capital allocation. Free cash flow increased by 80% in the first half of the year. As a result of the strong performance, we returned $165,000,000 to shareholders through repurchases and dividends over this period. We maintained excellent balance sheet strength with net leverage of 0.7x and certainty of low cost of debt. Turning to guidance.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

As I mentioned, we are increasing the midpoints of our adjusted EBITDA and EPS for the full year, which are now expected to increase 914% from the prior year. While we have experienced greater than expected volatility in certain of our end markets, we have built a track record of delivering through periods of uncertainty which our first half financial results affirm. As Troy noted, we will continue to execute on factors within our control, and our confidence is high in delivering on our full year goals. With that, operator, we are now ready for questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Michael Feniger from Bank of America. Your line is open.

Michael Feniger
Michael Feniger
Analyst at Bank of America

Thank you. Good morning, everyone. Just in terms of the guidance, Troy, implies a second half healthy double digit EBITDA growth. Can you just talk about your visibility into that level of growth in the second half? Is it more top line based?

Michael Feniger
Michael Feniger
Analyst at Bank of America

Is it more bottom line and the confidence in the profit margins? Just given some of the uncertainty out there in the macro, I'm just kind of curious what your level of confidence is on that second half, when you think of top line or bottom line looking at those margins?

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Sure. So good morning, Michael. I'm just going to give you the headline and then I'll give you some more detail. But the headline is it's actually it's going to be balanced. So we expect to continue to have top line growth.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And as we said, even at the beginning of the year, we expected that our revenue would ramp over the year. And that was really a result of the macroeconomic environment that we had forecast. It. And as we said in our prepared comments is that there'd been an unprecedented number of elections, which means that there had been a shift in agendas. But now as we look forward, the first thing we look at is we look at what we actually have in our contracted backlog.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And that grown mid single digits. Our overall growth in our backlog has continued. But the other thing that we see is we've actually seen some really healthy wins in the quarter. And some of those wins actually don't have an impact on our backlog. A good example of that are some of the master services agreements or frameworks that we win.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And when we win them, we don't actually record backlog until we're confident that we actually have that work to do or perform. And typically that's under a task order. So when we sort of look at the success we've had in our backlog, we also have visibility into things that we know that are gonna come through frameworks and MSAs that we've won that will impact the second half of the year. And then the other really important thing is our pipeline. Even through this time, there has certainly been pivots in what might be the components of our pipeline, but our pipeline has continued to grow.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And again, as we said in the prepared comments, we've actually seen growth in the early stages, which, you know, again gives us visibility into the next few quarters, but it gives us actually visibility beyond that into the next few years. So we actually have great optimism, not about certainly about the second half of the year and growth, but we do for the long term. And then I said it was balanced with respect to margins. We still see a lot of room for margin improvement in the business. And I will just attribute that to the investments that we have been making over the past years.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And as we continue to make the run through our margins, And we expect that those investments will continue to bear fruit and have us continue to improve margins as we move forward. So we see our success in the second half year being balanced, both in NSR growth and margins improvement.

Michael Feniger
Michael Feniger
Analyst at Bank of America

Helpful. And just on the comment on the isolated delays, just are we through the worst? Do you feel like on that those isolated disruptions and some of the delays? Do you feel like the disruption could linger? Was it more in the beginning of the quarter or towards the end in April?

Michael Feniger
Michael Feniger
Analyst at Bank of America

Just kind of give us some context on some of those isolated disruptions and delays. And if you and the company feel confident we're kind of have our arms around that.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

I would yes. I think we have confidence that we have our arms around it. Are we finished with the delays? I don't think so. I think they're just sort of their delays caused by again for different reasons.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

On the first thing we saw delays based on decisions that were being made after the second quarter after the result of the US federal election. So, as President Trump took office, there were some changes. As we look at our clients, certainly in the federal government, changes will be ongoing and there still will be decisions being made about who actually will be our clients at some of those agencies. Some people are retiring. And so when you have that kind of personnel change, it certainly has an impact creates disruptions in decisions.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

But remember, the US federal government represents eight or 9% of our overall NSR. So when we talk about disruptions, I don't wanna give the impression that's across the entire business. That's the rest of our business, we certainly don't see that kind of change of disruption, anything from what we typically see during the course of a year.

Michael Feniger
Michael Feniger
Analyst at Bank of America

Great, I'm just gonna sneak one more in there. Just on the free cash flow. Last year, you guys hit a milestone. It it was 10 free cash flow margin on net service revenue. I mean, how are you feeling tracking for 2025 given that first half performance?

Michael Feniger
Michael Feniger
Analyst at Bank of America

Is there some big give back in the second half we should be aware of? Or is there some structural shifts going on in the conversion rate that we should be flagging? Thank you.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

I'm going let Gar take that question.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Hey, Michael. How are you? Specific to free cash flow, and thank you for acknowledging, it was a great milestone event we achieved last year, and that's going to be continued to be our focus on an annual basis. We want to continue to meet that great milestone of 10% free cash flow conversion. But at the same time, quarter to quarter, our focus always is to have as good of a phasing as we can.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

So in first half, it was better than we have experienced in almost over a decade. We'll continue to challenge ourselves every quarter to be better than what we delivered in prior year. But I think for the full year, your expectations are quite consistent in terms of 100% plus free cash flow conversion of our adjusted net income and trying to achieve that 10% to trying to better that again.

Operator

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

Sabahat Khan
Sabahat Khan
Managing Director at RBC Capital Markets

Yes, great. Thanks and good morning. Just I guess maybe just taking the line of questioning to the private sector, guess, maybe if you can talk to us through your overall private sector exposure, what sectors that's focused on and then maybe just, there was obviously a lot of headlines through kind of the calendar Q1 here, maybe just the confidence of the private sector and how your customers are feeling there. Thanks.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Hey, Saba, this is Garv. I'll take that question. So private sector represents approximately 30% of our overall business. And first of all, thank you for that question because I think there continues to be some misconception as to our exposure or cyclicality of our private clients. So the most important thing to note is our private business, that 30% of the overall enterprise number I gave you, it grew in the quarter.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

And we're seeing the same trajectory for remainder of the year as well. More importantly, it is not as cyclical as what one would normally connotate with a private business environment if the macroeconomic uncertainty continues. And the reason we're confident in making that statement is two thirds of our private business is water and environment related. More specifically, it's regulatorily driven and OpEx for those clients because they're large public utilities, also large global ONG majors, you know, who again, statutory and legally have to do environmental remediation work. We've been doing this work, for decades long for these clients.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

It's very consistent, very predictable. And the rest of the design business, outside of that two thirds, it's also not that cyclical. It is focused on our facilities business end market, but it's for ports and airports, where quite a bit of the portion of the funding does come from the public sector. Another great example of that is on our facility sides, we press released the Olympics twenty twenty eight. It's a long term, not cyclical work over the next three and a half years as we support that client for that event. So that's part of our private business as well.

Sabahat Khan
Sabahat Khan
Managing Director at RBC Capital Markets

Okay, great. And then maybe just, I guess, given all that is going on sort of, it seems like the underlying business trends are good, balance sheets in good shape, but obviously a lot of sort of market volatility on the stock side. What are your main perspectives on share buybacks, capital allocation here for the rest of the year? Thanks.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

I'll respond to that as well, Saba. There's no change in our capital allocation strategy. We continue to execute our capital allocation strategy in the first half in the current quarter. And specific to our repurchases, we've told our investors, it will be consistent with the free cash flow we generate, which generally is second half weighted for us. Great, next.

Operator

Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Hey, good morning, everyone.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Good morning.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Good morning.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

So I think we understand that you want to be conservative and also invest in your business. As you said, you were 70 basis points ahead on margin in the first half of the year versus 30 basis points guided. So maybe you could just give color into the better performance in The Americas. Are you expecting to invest more in the second half? Or maybe given international margin was only up modestly in Q2, you want to be conservative? I just think more color would be helpful.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Sure, Andy. When we think about kind of investing to create an improved margin, we think about that across the entire business. And again, recognizing that each of our geographies and frankly lines of business, they come with different margin, natural margin profiles. And those are things that we simply can't control. Those are driven by the market or by the size or scale of those particular businesses.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

But as we think about how we're continuing to invest, we're going to continue to invest heavily in the second half of the year, similar to what we did in the first half. And think about this as investing in a few different ways. First is we're always going to continue to invest in business development. We said our pipeline continues to grow. We're not going to shrink away from investing in future work or future opportunities.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Secondly is we continue to invest in how we actually drive efficiency in what we do. And whether that's in how we run the business or how we deliver our work, we're going to continue to make those investments. And those investments come in the way of either technology or they they come in the way we think about how our teams actually come together and share work and deliver it. And one of those examples that we've talked about frequently has been our enterprise capability centers. We continue to expand the use of those capability centers because they drive great efficiency in how we deliver our work and they also help with quality.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And so we will continue to accelerate investments in technology to support the business and in things like our capability centers. So those things aren't going to change for us in the second half of the year.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Very helpful. And then maybe just like thinking about book to burn, you've continued to have strong book to burn, 1.1 here. Does the current environment allow you to continue to book that kind of level of work, Troy? And have you seen any incremental slowdown in May? Or is it sort of steady as you go here?

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

And what markets are sort of driving the growth? Is it still more on the water side? Or is it kind of balanced as you said?

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

So I guess the simple answer is yes, we have confidence that we'll continue to book more business than we burn in a quarter. And I think this is, I think this might be our eighteenth consecutive quarter of book to burn greater than one. So that obviously gives us some confidence that we know how to win work. And our win rates, we made this reference, I think in our prepared comments that our win rates are also at an all time high. We win of every dollar that we bid across the entire business, we win more than 50% of what we bid.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

But again, I think thing you should think about coupled with our win rates is again, our pipeline and our pipeline continues to grow. So we have confidence that we'll continue to book more work each quarter than we burn.

Andy Kaplowitz
Andy Kaplowitz
Analyst at Citigroup

Thanks, Troy.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Thank you.

Operator

Your next question comes from the line of Adam Bubes from Goldman Sachs. Your line is open.

Adam Bubes
Adam Bubes
Vice President, Equity Research at Goldman Sachs

Hi, good morning. Wanted to circle to the Americas margin performance. Really impressive, up 130 basis points year over year. You cited growth in higher margin projects, continuous improvement. But wondering if we could just unpack that 130 basis points margin performance because it really stands out.

Adam Bubes
Adam Bubes
Vice President, Equity Research at Goldman Sachs

What's the greatest driver of that margin expansion? Which higher margin end markets are supporting that growth? Any color there would be helpful.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Hey, Adam, this is Gar. I'll take that question. It was exceptional performance by Americas in margin. And what really contributed to it is four folds. I'll go into the detail.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Some of this Troy's already shared in his previous response. We've made significant organic investments over the past few years. So the results we're seeing today, it's not based on actions we took in Q1 or Q2. These are continued organic investments this management team has made over the last two to three years. It's on high return on invested capital organic investments like our program management initiative that we started five years ago, that went from 3% to now greater than 13% of our overall enterprise top line.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

It's also in the second half of the year, we invested in our advisory business. We're already seeing very good early returns, but more importantly, we're seeing better rigor and better focus on pricing in that business that already existed for us. It's also a byproduct of our capability centers. These are design centers that we have across the globe. Mind you, these may be in countries that we operationally have exited, over, you know, 60 plus countries that we've exited, but we still keep our capability centers to drive work because they have the best, not only the best technical capabilities, but they also provide benefit to us when we go to market in pricing and also leveraging it when we deliver those projects for margins.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

And also, if you would recall last year in the first half, we had significant restructuring that we had initiated. So now what you saw in the first half of this year in our trailing twelve months result is the full benefit of that restructuring show up, even though our results in the current year are clean and will continue to be very clean, meaning no restructuring forecasted.

Adam Bubes
Adam Bubes
Vice President, Equity Research at Goldman Sachs

Terrific. And then is there a way to provide a context as to the magnitude of margin differential between advisory and program management and the balance of the business, And just how you're thinking about the potential for a mixed tailwind to margins as you folks continue to grow that part of the business?

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Yeah, so maybe think about it this way is that program management has margins, net margins that are very similar to our design business. And the advisory business, those margins are actually higher than that. But we haven't given guidance on specifically what those ranges look like, but you can rest assured that they're better.

Adam Bubes
Adam Bubes
Vice President, Equity Research at Goldman Sachs

Great. Thanks so much.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Thank you.

Operator

Your next question comes from the line of Steven Fisher from UBS. Your line is open.

Steven Fisher
Steven Fisher
Managing Director & Equity Research Analyst at UBS Group

Thanks. Good morning. I just wanted to ask you to put a finer point on the expectations you have for the growth rate in the second half. If we're talking about, say, the midpoint of your organic growth rate, you kind of have to be at the upper end for the next couple of quarters. I know in your first and Mike Feniger's question, talked about sort of an EBITDA perspective and just sort of focusing on top line part of it.

Steven Fisher
Steven Fisher
Managing Director & Equity Research Analyst at UBS Group

With the visibility you have, do you think you're aiming for the midpoint at this point? Do you think the uncertainty kind of at this point leaves you thinking about sort of the lower end? How are you thinking about sort of a finer point on the growth rate expectation for the next couple of quarters?

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Hey, Steven, this is Gar. I'll take that question. So as we move into the second half of the year, I think your calculations are spot on in terms of to achieve the midpoint, what we have to deliver. Now remember, our first half growth was impacted by fewer workdays. The second half of the year is going to be benefiting as we turn around, right?

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

And in the second half, we are going to see some tailwind from it. When we look at our pipeline, more importantly, our backlog contracted, awarded backlog, our book to burn, all those things provide us with good confidence in the second half of the year that we'll be able we're still very confident in delivering the midpoint of our range. Now, with all that said, as Troy has commented earlier in previous quarterly calls, we're not that precise where we have 35,000 to 50,000 ongoing contracts. You know, if it's off by 50 basis points, either way, 25 basis points within a quarter or a couple of quarters, that's manageable for us. And as you pointed out, when we bring that into balance with our margin delivery, our organic investments that we made, it provides, it continues to provide us with, you know, utmost confidence that all the key metrics that create shareholder value, the earnings metrics, our cash flow metrics, we have full confidence we'll be achieving those as well.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

And on the earnings side, as you may have noticed for the second quarter in a row, we've raised the midpoint to articulate the confidence we're seeing.

Steven Fisher
Steven Fisher
Managing Director & Equity Research Analyst at UBS Group

Super helpful. And then, you know, good progress on the international margin front, albeit a little bit slower than The Americas to be expected, right? But I guess, curious if you have a playbook of things that are within your control that you can implement to drive any more improvement in those international margins. I know selectivity has been a big focus area for you, for example. So just curious if there's anything kind of within your control that you're focusing on for the international side. Thank you.

Lara Poloni
Lara Poloni
President at AECOM

Thanks, Steven. It's Lara. I'll take that. I mean, think a lot of the drivers are similar to the ones that Gar mentioned earlier, so the strategy to leverage our enterprise capability centers, that's equally mature, for example, in the international segment. And you're right, I mean this quarter was tempered in terms of top line growth, but the most positive thing that we see was that pipeline was up 6%.

Lara Poloni
Lara Poloni
President at AECOM

So you're right, selectivity in terms of the clients, the key pursuits, so we've had some good wins in the quarter equally between the Americas segment and the International segment, and we'll continue to work the frameworks. I think those frameworks are particularly important on the international side, particularly in our largest international market like The UK. So we've got good coverage there not just in transportation but also in AMP8 where we're sitting at about 150% coverage building on the position we had in AMP7. And I think Spring Statement, the new Planning and Infrastructure Bill, all of those sort of policy shifts will help to accelerate. And now that we also have an election outcome in Australia, again, it'll allow us to double down in terms of the momentum and the pipeline that we've been very focused on with some of our core infrastructure clients as well.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

I'm gonna add one more point.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

I'm gonna add one finer point to that, which is that when we look at our business and we look at where we're investing in the business, we don't necessarily focus on simply organic growth or margin improvement. We also look at return on our capital. And so sometimes when you look at markets that might have lower margins, when you take into account how quickly you can effectively record and collect the work record recording your books and collect the work that you're for the work that you're performing. We actually see in a bunch of our international markets that we do very well in terms of the DSOs or sales outstanding. And so when we evaluate those markets, it isn't simply the margin profile, the margin is improving and is certainly good margins.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

But we also look at the return on capital and the return on capital and bunch of international markets that might look like lower margins have great returns on capital for us.

Steven Fisher
Steven Fisher
Managing Director & Equity Research Analyst at UBS Group

Thank you very much.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Thank you.

Operator

Your next question comes from a line of Jamie Cook from Truist Securities. Your line is open.

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

Good morning. Two follow-up questions. A nice quarter. Specifically, just given where we started, I mean, for the year in international, I mean, is your expectation for international margins year over year for the full year? Do we expect them to be flat?

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

Or can they grow just, again, based on where we are and understanding the America margins were very strong, but just clarification there. And then my second question, just on your longer term margin targets, you target the 5% to 8% top line growth and then the 20 to 30 bps margin expansion. If we look at your actual performance, you know, you continue to exceed expectations on the margin side, right? You're doing much better than the 20 to 30 bps, whereas the top line, seems to be more challenged not challenged, I mean you're doing a good job, but it's always harder to get the top line growth. So I guess, is there any we get this question, is there any view that potentially we could switch the targets and potentially have a more aggressive margin target and a less aggressive top line target? Thank you.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

Hey, Jamie, I'll take the first half of the question. Specific to international and DCSA margins, as we look to the entirety of the year and second half, we expect DCSA and our American margins to continue to improve. Now, you know, as Laura articulated just before in the question, one of the things we're really proud of is our international and Americas business continue to make significant investments through our margins in the first half of the year. Now, this also means that in our international business, where we don't did not have the growth as we were expecting on the revenue side in the first half of the year, we're willing to make that investment in our people because it's going to drive that return on investment. That is always our key focus and mentality of how we operate.

Gaurav Kapoor
Gaurav Kapoor
Chief Financial & Operations Officer at AECOM

As we look forward to the second half of the year, again, one of the things to factor in is we expect growth, you know, consistent with the margin guidance that we have provided, but also balance it. You're not going to see the same result in the first half, because now the restructuring benefit is included that we undertook in the first half of the year last year. It's now included in our trailing twelve months, but still the margins should be growing.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And Jamie, I just want to add something to that. This is I think it's an important concept and it's something that we think about a lot when we run the business and that is not all growth is of equal value. Because as you point out, top line growth can be hard. The contrary point is top line growth could be really easy. If we want to erode our margins and actually deliver work and grow a lot faster rate, we could.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

That is not a problem. We could bid work at lower rates and we could live win a lot more work and we could drive our margins down. And so I think in this business, a really important sort of tenant for making sure you're making good decisions is we should be finding competitive advantage and competitive advantage turns into work that is more valuable for our customers and for us. And that sometimes might mean that your top line growth maybe looks a little slower. So I think it's an important part of what we think about when we run the business and we make decisions on what's important in creating value.

Jamie Cook
Jamie Cook
Managing Director - Equity Research at Truist Securities

Thank you.

Operator

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Hey, good morning guys. I'm trying to think through the gross revenue versus net revenue and I think that's starting to reflect, you talked about walking away from some construction management opportunities. Is that reflective of you deemphasizing construction management? Or is there anything or is there something starting in construction management that will that would cause gross revenue to increase more in the coming quarters?

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Yeah, so good, again, observation. And it's really a combination of two things. One is being really thoughtful about the work that you're going to do and the risks that might be inherent in it. But also recognize that in construction management, there are cycles. And so what we have been experiencing in the businesses, we've been working through a cycle and we've been repositioning that business to do different kinds of work in the future.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

And as you reposition the business, you burn off backlog. And so as you're burning off backlog, you'll see a decline in gross revenue. And as we've built that backlog up in the future, it starts out in the first few years, usually a year or two years where you're doing, I'm going call it preconstruction work that doesn't come with it, the significant amount of gross revenue as you start to procure to build. And so we're just really going through that cycle. We've been burning off backlog.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

As we've refilled the backlog with, I'm going to call it with great projects. We're in that phase where we just don't have that same amount of procurement through those through that through that work, but it will it will improve over time.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Okay, perfect. And then just quickly, can you give us an update on the wind down of AECOM Capital? And just curious if we should keep modeling something for that business in 2026.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

No, you shouldn't.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Thank you very much.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Okay. Thank you.

Operator

And that concludes our question and answer session. I will now turn the call back over to Troy Rudd for closing remarks.

Troy Rudd
Troy Rudd
Chairman & CEO at AECOM

Yeah, again, just want to end by complimenting all the folks here at AECOM. They've done an outstanding job working together to work through an uncertain time in an uncertain environment. And as a result of their extraordinary effort, it's proven up in our results. So thank you to our team and thank you all for joining us today. Take care.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect.

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