AECOM

Good morning and welcome to the AECOM fourth quarter 2024 conference call. I would like to inform all participants that 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 without 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. Later, we will conduct a question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press star 1 again. I would now like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Treasury, and Investor Relations.

Thank you, operator. I would like to direct your attention to the safe harbor statement on page 1 of today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We use certain non-GAAP financial measures in our presentation. The appropriate gap reconciliations are incorporated into our materials and are posted to our website. Growth rates are presented on a year-over-year basis unless otherwise noted. Any references to segment margins or segment-adjusted operating margins will reflect the performance for the Americas and international segments. When discussing revenue and revenue growth, we will refer to Net Service Revenue, or NSR, which is defined as revenue excluding pass-through revenue. NSR growth rates are presented on a constant currency basis and less 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. Laura Piloni, our President, will discuss key operational successes and priorities. And Gaurav Kapoor, our Chief Financial and Operations Officer, will review our financial performance and outlook in greater detail. We will conclude with a question and answer session. With that, I will turn the call over to Troy.

Troy? Thank you, Will, and thank you all for joining us today. I want to begin by thanking our professionals across the globe for their unwavering commitment to our purpose of delivering a better world. The value that we bring to our clients and communities every day is a testament to the collective strengths of our organization. I would also like to thank our professionals for supporting our teams and communities impacted by both hurricanes Helene and Milton in the southeastern United States. All of our employees remain safe, and safety is a core value at AECOM. We take great pride in our best-in-class safety record, which is well above our peers. Before discussing our financials, I want to comment on the U.S. election. First and foremost, the election creates certainty. Infrastructure investment is a bipartisan priority and we do not foresee this changing. The incoming Trump administration is focused on a strong U.S. economy, which is built on a foundation of world-class infrastructure. While specific initiatives and objectives may shift, with 70% of our workforce fungible across market sectors, we are in a great position to capitalize on the investments in the U.S. economy. Specific to our U.S. federal exposure, I want to highlight the following. The U.S. federal client represents 9% of our revenue. Within that, nearly all of our work is for funded multi-year mission critical and essential infrastructure projects. The EPA and USAID combined represent less than 50 basis points of our enterprise revenue. And similarly, the Inflation Reduction Act accounts for less than 1% of our revenue. On the other side of the equation, we see several growth opportunities emerging from the new administration's priorities. For example, deregulation. Prudent deregulation is a positive for our clients and our business. This includes permitting reform, which is one of the greatest bottlenecks to infrastructure investment, and simplification would increase the volume of project opportunities. With respect to the IIJA, 95% of the IIJA funding is secure and not at risk. And with only one-third of the money allocated to date, plenty of runway remains. A reduction in government staffing would increase demand for advisory, technical, and program management services to support infrastructure investment. Lastly, voters demonstrated continued support for infrastructure funding in the November elections, including $41 billion of state and local transportation-specific ballot measures, as well as $20 billion of bonds in California that include sizable investments in water. Taken together, we expect the next several years to bring new growth opportunities for which we are well-suited to deliver on. Turning to our fiscal 2024 financial results and key accomplishments. First, our financial performance was strong on all fronts and included records for net service revenue, margins, earnings, and cash flow. We also exceeded the midpoints of our previously increased adjusted EPS and adjusted EBITDA guidance with 22% and 14% growth respectively. This was driven by 140 basis points of EBITDA margin expansion in the fourth quarter. And record free cash flow enabled the return of approximately $560 million to shareholders through repurchases and dividend payments. Second, we're winning what matters and extending our visibility. We had a 1.2 times book to burn ratio in the design business in the fourth quarter with strength in both segments, and we ended the year with a record backlog. In fact, our enterprise-wide book-to-burn ratio has been at one or greater in each of the last 16 quarters, which speaks to our competitive advantage and the strength of our end markets. Our pipeline achieved a new high and increased by 10%. Our win rate remains at a record high at 50% and is notably even higher on larger pursuits where our competitive advantages are greatest. And we are winning re-competes at a 90% plus pace in our largest markets. Third, we gained organic revenue market share. For the first time in our history, we achieved the number one ranking by engineering news record in the water design market. This is consistent with our goal of doubling our water practice over the next five years. And we are now number one in every key market sector. I also want to highlight that global program management took another big step forward, moving to the number two ranking, which is on track to be number one this year following 20% growth in fiscal 2024. Fourth, we executed on a returns-focused capital allocation policy. This includes record investments in organic growth initiatives, continued growth in our dividend, and $450 million of share repurchases during the year. Today, we also announced that the Board of Directors approved an increase in our repurchase authorization to $1 billion and an 18% increase in our quarterly dividend. Our dividend has increased by an average of 20% annually over the last three years, and the indicative dividend yield is now at the top of our direct peer group. We remain committed to double-digit annual growth in the per share value of our dividend for the long term. Finally, we are investing in new high margin growth businesses that leverage existing strengths. For instance, the water and environment advisory business, which draws on the technical leadership of our number one ranked water and environment practices, furthers our vision of becoming the global leader in infrastructure advisory services. We expect this business to double within three years from $200 million of NSR today and will become our next $1 billion platform. similar to what we've already accomplished with program management. Importantly, this growth will be at higher margins, which further underpins our confidence in not only delivering on our 17% long-term margin target, but exceeding it. As we look to 2025 and beyond, the secular growth drivers of our business are firmly intact. The need for infrastructure investment has never been greater. For instance, more than 46,000 bridges are considered structurally deficient in the U.S., and the average bridge is more than 40 years old. The IIJA created a competitive grant program with the goal of improving bridge safety and reliability. And larger projects, such as the Brent Spence Bridge, on which AECOM is the lead designer, received more than $1 billion of large federal bridge grants and will continue on for several more years. Funding for transit, highway, rail, and aviation infrastructure is also increasing. which is driving the record backlog and double-digit pipeline growth we are seeing in the Americas. Around the world, urbanization is transforming infrastructure demand. Nearly 70% of the world's population is expected to live in cities by 2050, which has created enormous investment demand for safe, reliable drinking water and for building modern transportation systems while minimizing environmental impacts. Additionally, energy demand for electrification and data centers to support AI creates several growth opportunities where we are poised to capitalize, from permitting to air quality to energy storage and grid modernization. To give you a sense of how this is directly benefiting us, our transmission and distribution backlog has increased five times compared to just a few years ago. Our role as a design partner on the UK's Great Grid project as the program manager on San Diego Gas and Electric's underground investment, and as the advisory partner for a major transmission grid build-out in Australia, demonstrate the depth of our expertise and the strength of our brand in the market. Turning to 2025, our backlog, pipeline, and continued high wind rates underpin our conviction in another record year for the business. This includes expectations for 5% to 8% NSR growth, and adjusted EBITDA and EPS of $1.19 billion and $5.10 at the respective midpoints. I could not be prouder of what we accomplished over the last several years. Through our strategy and focus on winning what matters, we've created and are expanding our competitive advantage. As we look to 2025 and beyond, the ceiling for what's possible has never been higher. With that, I will turn the call over to Laura.

Thanks, Troy. I'm incredibly proud of our team's accomplishments in fiscal 2024. Our consistently strong performance reflects the realization of the key elements of our strategy. Let me provide a few examples. First is our focus on only the highest growth and best returning markets and clients. Today, our top four geographies of the US, Canada, UK, Ireland, and Australia account for approximately 90% of our profits, and our win rate remains at an all-time high. Second, ACOM is the most desirable place to work in our industry. We are the number one ranked firm by ENR across all of our major end markets, which matters to both clients and recruits. We consistently win the key roles on the most iconic and exciting projects, which creates a tremendous career opportunity for our professionals. And we offer the best leadership and technical development training in our industry. In fact, more than 10% of our workforce is enrolled in leadership development training at any given time. And the return on these investments is evident in the reduction in voluntary attrition rates amongst participants. Finally, we formed the new water and environment advisory business. This business will blend strategic advice with our technical and domain expertise to unlock new solutions for our clients in some of the largest and fastest growing markets in the world. The most critical element of any organically led initiative is appointing the right leader. And in September, we announced Jill Hudkins was joining ACOM to lead this business. Jill brings a wealth of experience, expertise, and market credibility to ACOM and has a proven track record of leading similar value-creating initiatives throughout her career. As Troy detailed, we expect this business to grow rapidly, similar to the trajectory we delivered with program management, which increased from only a few hundred million dollars three years ago to approximately $1.3 billion in FY24. A great example of the opportunity is in digital water, which is a $70 billion opportunity through 2030. In the US alone, there are 500 municipal water utilities serving populations of over 500,000 people, and each requires substantial digital investments to modernize operations, embed predictive analytics and cybersecurity, and drive process efficiencies. Similarly, in the UK, AMP8 is set to substantially increase regulated water utility investment over the next five years, including a deeper emphasis on digital water investments. To date, we have won 100% of the frameworks on which we had an incumbent position, and we've also secured 60% of new frameworks, consistent with our focus on gaining market share within the AMP program. Expanding our advisory services is a key element of our strategy to more deeply engage with our clients and provide services from conception of the project through execution. Importantly, we lead with our scientific and technical excellence, which places us in a competitively advantaged position as compared to traditional advisory firms. As a result, the energy inside of the organization as we build our advisory capabilities is palpable. With that, I'll turn it over to Gar.

Thanks, Laura. Echoing both Troy and Laura's comments, we have built a strategy and culture that results in consistently strong performance, which is evident in both our strong 2024 results and in our guidance for double-digit adjusted EPS growth in 2025. I want to highlight three metrics that underpin our continued value creation. The first is margins, where we continue to lead our industry. We exited the year with a 16.7 adjusted EBITDA margin in the fourth quarter, up 140 basis points from the prior year. For the full year, the adjusted EBITDA margin increased by 100 basis points to 16%, reflecting continued execution on key margin expansion initiatives. Importantly, this margin expansion is what funds the record level of high-value organic investments we have made and are continuing to make, which are expensed through the income statement. The second is EPS growth. We delivered 26% adjusted EPS growth in the fourth quarter and 22% for the full year. Our EPS has compounded at 21% rate since 2020, which directly correlates to shareholder value creation. Finally, free cash flow, which exceeded $700 million for the first time in our history. Notably, free cash flow represented 10% of our net services revenue, which is great representation of high quality of our earnings. Turning to other highlights from our results. For the year, we delivered record net service revenue, including 8% organic growth in the design business, which is a historically strong growth rate. Results could have been even better if not for two impacts in the fourth quarter. First, Hurricane Helene resulted in several loss dates in a few of our larger markets. We expect a similar impact from Hurricane Milton in the first quarter, but this is incorporated in our strong guidance for fiscal 2025. Second, we made the decision to not proceed with an already awarded construction management project where the owner wanted to change the commercial risk profile. We will always prioritize appropriate risk management, even if it means sacrificing some of the revenue in the near term. Despite this, the competitive edge of our platform was evident in our overperformance versus guidance for margins, adjusted EBITDA, adjusted EPS, and cash flow. I also want to comment on the new water and environment advisory business. I am sure you're asking yourselves how much investment will be required and what is the payback. Unlike M&A, which has a high upfront cost and risk, the cost here is much smaller with focus on hiring the right leader and teams to organically grow the business. As we've proven, we deliver more than 40% incremental return on capital on our organic growth investments. Also, unlike M&A, the cost of our growth runs through our margins and is already reflected in our expectation for another year of record margins in fiscal 2025 and continued expansion beyond that. Turning to our segment results. Beginning in America, net service revenue in the design business increased 9% for the fourth quarter and included strong contributions across all key end markets. Key funding drivers, including the IIJA, are still ramping up, and state and local clients continue to have strong budget outlooks and historically high reserves, which adds to our confidence. The design book to burn in the fourth quarter was 1.2, and we are confident that the backlog will continue to increase based on our strong pipeline. The adjusted operating margin in the Americas achieved a new annual high at 18.8%, including 19.6% in the fourth quarter. We continue to deliver on initiatives that increase margins and return on capital and are confident in our margin expansion in 2025 and beyond. Turning to the international segment. Net service revenue increased by 6% for the year. This was materially consistent with our expectations. We had a 1.2 book to burn ratio in the fourth quarter and backlog remains at an all-time high. We delivered a 12.6 adjusted operating margin in the quarter, which increased 260 basis points from the prior year and is at an all-time high. We continue to benefit from our focus on our highest growth and lowest risk end markets and clients and ongoing continuous improvement initiatives. Across our markets, trends are strong. The autumn budget in the UK released in late October provides key funding for infrastructure, including 100 billion pounds for energy, transport, healthcare, and housing capex, and 70 billion pounds for growth industries such as green hydrogen and gigafactories. Additionally, AMP8 spending is set to accelerate, and our wins to date possession us to gain market share. In Australia, our backlog increased by 26%, driven by larger water and T&D wins. And in the Middle East, we continue to win large scopes of work, including another nine-figure win in the fourth quarter and other opportunities in the UAE are picking up. Turning to cash flow and capital allocation. We delivered record-free cash flow exceeding $700 million for the first time and increasing 20% from the prior year. Free cash flow per share increased even more at 23%, further demonstrating the value of our capital allocation policy to shareholders. As I noted earlier, free cash flow conversion was 115%, and as I noted, We achieved a new milestone with a 10% free cash flow margin on net service revenue. As a result of our strong cash flow, we repurchased $325 million of stock in the fourth quarter and approximately $450 million for the full year. We also paid $115 million of dividends during the year, and we completed an acquisition of an environment permitting practice focused on federal land, which is rapidly growing opportunity under the incoming Trump administration. We are affirming our returns-focused capital allocation priorities. This includes the increase of our repurchase authorization to $1 billion and the 18% increase to our quarterly dividend beginning with our January 2025 payment. Our balance sheet is strong with net leverage of 0.8, which supports our ability to remain opportunistic in how we deploy capital. I want to provide an update on our discontinued operations. Since our last quarterly call in August, SHMIC successfully resolved two legacy project disputes resulting in gross cash infusion of approximately $130 million. This infusion of cash enhances their visibility and reduces the risk profile. Turning to our guidance, we expect net service revenue growth of 5% to 8% in 2025, supported by our 1.2 book-to-burn ratio in the design business in the fourth quarter and a record backlog in pipeline. We expect revenue fading to follow a normal seasonal pattern, which means we expect NSR growth will accelerate as the year progresses. We expect 30 basis points of adjusted EBITDA margin expansion to 16.3%. Adjusted EBITDA is expected to increase by 9% at the midpoint to $1.19 billion, and adjusted EPS to increase 13% at the midpoint to $5.10. With that operator, we're ready for questions.

At this time, I'd like to remind everyone in order to ask a question, simply press star followed by the number one on your telephone keypad. We'll take our first question from the line of Andy Whitman with Baird. Please go ahead.

Oh, great. I just wanted to ask on a clarification here. I was looking at your adjusted EBITDA guidance and the reconciliation for that. And I noticed that after spending $100 million on restructuring and transaction costs in which is kind of a big number. There was nothing listed in 2025. I was just wondering if that's just because you don't know what it is or if you expect that your earnings will be devoid of these kinds of one-time charges.

Andy, thanks for the question. You know what? I'm going to turn that over to Gar, but I'm also acknowledging that as a good observation.

Yeah, morning, Andy. Thanks for the question. So your assumption that FY25, we do not contemplate any restructuring, as we've said before. There were some significant restructuring programs that we had to right-size as we were exiting countries and being very focused on the six geographies that had the best growth fundamentals. We have completed through it. There's no new contemplated restructuring, so our FY25 results and beyond should be clean.

Got it. Okay, that's good to hear. Kind of a similar question, maybe another one for you, Gar, but just to understand because I just noticed that you're doing something a little bit different. So again, here in the adjusted EBITDA, you guys are calculating the margins at 16.7%, but that's not the number that people would immediately calculate from the income statement. So can you talk about what the difference between the 16.7% and the 16.0% is that most of us are calculating what that is and why you're doing that. And maybe if you could just maybe take that same concept and apply it towards the guidance. When I look at the adjusted EBITDA dollar guidance and look at the implied margins, it doesn't back into the organic growth rates that you're talking about. And so I think maybe all of this has to do with the same thing, and you could clarify that for all of us.

No, absolutely. Not a problem at all, Andy. So specific to adjusted EBITDA that we're guiding to, and we started that midway through last year as well, there was feedback from our shareholders, prospective shareholders, that they wanted a margin target that was comparative, inclusive of all costs of the enterprise. And as you know, adjusted operating income that we provided for segments did not include corporate costs that we were incurring. So that is now reconciled within adjusted EBITDA. Further, the denominator in adjusted EBITDA has net services revenue for all consolidated JVs. But our EBITDA that we report, it is a charitable EBITDA only. So it excludes NCI. We add that back. What we have also included is we've included a margin reconciliation bridge in the release that we provided for you and for investors that walks through the separate steps I just articulated. And for us, it's all about simplicity as we go forward with clean results that one can compare easily for us.

Got it. Okay. I thought the quarter was pretty straightforward, so just those definitional questions for me. Have a good day. Thank you all. Thanks, Sandy.

Our next question comes from the line of Sangeeta Jain with KeyBank. Please go ahead.

Yeah, good morning. Thanks for taking my question. I just had a couple on the international segment. Is there anything particular that you would call out on the international backlog strength in 4Q? Maybe a sizable project or a specific geography where you may have seen more strength?

Thanks for the question, and I'm going to pass it over to Laura.

Thank you, Sangeeta, for the question. We closed another strong year for international, and we're seeing continued strength amongst all of those key end markets for us, whether it's the UK, Australia, New Zealand, Middle East. So where the quark is going to continue to be led for us in terms of these long-term megatrends in infrastructure and energy. We've got renewed optimism in the UK where now we've got clarity in terms of the autumn budget, which creates certainty for the next wave of infrastructure investment. And importantly, we can capitalize on that through our long-term positioning with the whether they're for transportation or water or energy, so we've got a very strong position there. And importantly, we've got coverage of most of those frameworks, including in AMP8, where we've now won 100% of the re-competes where we were the incumbent and 60% of new frameworks. And importantly, those frameworks, we're going to continue to define the value of those over the next few months, and so they're currently not included in our backlog. Equally, we have strength in terms of our KSA market, where we grew 15% fiscal year, and we continue to see long-term opportunities there for infrastructure and also the 2030 initiatives around the Fever World Cup and also the other initiatives there. And then also Australia and New Zealand, there's a long-term... trend there that we're seeing in terms of $120 billion of long-term infrastructure investment as well. So continued strength across all of the key infrastructure segments in our international business.

Great. That's helpful, Lara. So if I can just stay on international and ask you a question on margin expansion. You only turned double-digit margins in international just a year ago and now you're over 12.5%. Should we expect the same pace of improvement in fiscal 25 or should we moderate expectations somewhat as we go into 25?

Hey, morning, Sangeeta. This is Gaurav. I'll take that question. When it comes to margin, we are the North Star industry and we will continue to be the North Star industry in terms of art of possible. And as we have made investments in In prior years, including FY24, what we've realized, the ceiling of that part of possible, it continues to increase for both segments. Because we have made and continue to make investments in high growth, high margin platforms, similar to the advisory services we have now launched in Q4. Investing in efficiently delivering our services and To your point, international has led the way on that margin expansion. We provided guidance. We expect on the top end of our long-term algorithm range, 30 bps is what we expect will be the enterprise increase for margin expansion. And we do expect international will lead that way. One thing I do want to note is The investments that we have made and will continue to make, these are record investments, again, in FY25 that we're contemplating. They go through our income statement. And it allows us the confidence as we sit here to say, not only are we going to be able to deliver our FY25, continue to lead our industry in margins, but exit FY27 at 17% for the enterprise. And beyond that, we are now pretty confident that Again, that ceiling, it is 17 plus percent with all the significant initiatives and investments we're making.

Thanks so much, Grove.

Thank you.

Our next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.

Hi, good morning. This is Natalia Boxbaum on behalf of Andy Kaplowitz.

Good morning.

First question I'd like to ask, in the 5 to 8% organic NSR growth for 2025, do both segments grow in the range, or does America's grow faster? And if you could also update us if you've seen any improvement in the policies you've had in the Middle East.

Sure. Morning. I'll take the first part, and Laura will respond to your question on the Middle East. The NSR organic growth that we're contemplating for FY25, it's 5 to 8%. which is consistent, again, with our long-term algorithm we articulated during our investor day. We do expect, as you've seen in the second half of the year, Americas will be the organic growth leader between the two segments for NSR growth. And expectations on international will start off slower during the year, because as Larith articulated in her opening comments and in response to one of the questions, Their funding is now coming back online in some of our key international markets, and we expect that to ramp up into the second half.

Yeah, and if I can just add specifically on the Middle East, we didn't see a slowdown at all in Q4. In fact, our business grew in Q4. It grew in the year. And then some of the larger segments like the Saudi Arabia business, we won another nine-figure major program in Q4, giving us additional long-term visibility. And as I said earlier, we've got confidence in terms of some of the longer-term programs that are going to continue for us, where we are the leading consultant in the region, and we have broad coverage across many of the key programs that cover infrastructure and major projects as well. And then... Okay, that's helpful. Thank you.

There's maybe a question focusing on margins.

just on margins. So you did 100 bps of margin expansion in 24, and I think annually you've averaged about 80 bps or a little over 80 bps of margin expansion for the past few years. And with still reasonably good growth in 25, why would you only average 30 bps of margin expansion in 25? What's holding you back from more margin expansion?

So it's a great question. I would not describe it as us being held back from margin expansion. we've said this a number of times over the last few years, is that we're continuing to invest heavily in the business. And in each of the last four years, we've invested more in the business than we've had in the prior year. And as we move forward, we're going to continue to invest in the business. And again, there's pretty significant returns from that, which is obviously higher margins in the future in a growing business. I'll just give you kind of a highlight of where we've invested. First of all, We've invested in our workforce. We've invested in recruiting extraordinary professionals to the organization, and most importantly, investing in leadership and technical development of our workforce. Secondly, we are investing in transforming the way that we deliver our work, deliver it now, and actually deliver it very differently in the future, and we think that will have very significant margin benefit to us as we go forward. And then we're looking to expand our business. You know, we have said that design and engineering or, you know, our knowledge of science is the base of our business. And we've looked to expand this. Our vision is to actually have 50% of the business in engineering and design and have the rest of our business, so the other 50%, perform an advisory and program management work in the future. We've made a significant investment in program management. In the last three years, we've grown that business. It represents about $1.3 billion of NSR this past year. And we see double-digit growth for that business. And now we're making an investment in growing an advisory business, which Laura referenced in our comments, that we're going to look to double that business and make that our next billion-dollar platform. So, again, it's not that our margins are not growing as fast as they have. It's that we're being very thoughtful in terms of investing in the future of the business so our margins will go well beyond the 17% target.

All right. Helpful. Thank you. Thank you.

Our next question will come from the line of Michael Finnegar with Bank of America. Please go ahead.