Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AECOM (ACM, Financial) reported an 8% increase in net service revenue (NSR) to a new high for the third quarter.
- Adjusted EBITDA and EPS increased by 16% and 23%, respectively, with record quarterly margins.
- Free cash flow has increased by 32% year-to-date, demonstrating strong cash flow performance.
- The company has a robust backlog and pipeline, providing significant visibility and confidence in future growth.
- AECOM (ACM) has repurchased $200 million of stock since the end of the second quarter, with more than $700 million remaining under current board authorization.
Negative Points
- The International segment experienced some client repositioning of priorities and funding, particularly in the UK and Middle East, causing temporary delays.
- The withdrawal of congestion pricing in the New York metro market has created uncertainty in funding for infrastructure investments.
- The company has entered into agreements with its previously disposed civil construction business, including a $30 million revolving loan commitment and a non-cash guarantee on other outstanding debt.
- There is a potential for lumpiness in design backlog growth due to the pursuit of larger projects, which may not provide consistent and linear growth.
- The reprioritization of funding in the Middle East and the pause in the UK due to elections have impacted the International segment's growth.
Q & A Highlights
Q: Can you elaborate on the revenue outlook, particularly the design-only backlog and its impact on long-term growth?
A: (Troy Rudd, CEO) The third quarter saw some clients repositioning their priorities, especially in the UK and Middle East, due to elections and funding shifts. However, the backlog and pipeline remain strong, with significant growth expected in the Americas. The pipeline for fiscal '25 and '26 is larger than at the beginning of fiscal '24, indicating strong future growth potential.
Q: Are there any political or economic risks affecting the conversion of pipeline opportunities into actual contracts?
A: (Troy Rudd, CEO) While larger projects take longer to convert from bids to contracts, this is more a function of the nature of the projects we pursue rather than market conditions. The win rates for larger projects are high, and we see no significant delays beyond the temporary issues in the UK and Middle East.
Q: Given the strong margin performance over the past few years, should we expect margin growth to normalize?
A: (Gaurav Kapoor, CFO) We have consistently delivered on our margin targets, and we expect to continue this trend. The strong backlog and pipeline provide visibility for future years, and we aim to achieve a 17% margin by the end of 2026.
Q: How should we think about the lumpiness of the design backlog given the larger, more complex projects?
A: (Troy Rudd, CEO) The backlog may appear lumpier due to the larger projects we are pursuing. However, this does not change the long-term trends and our confidence in future growth. The current year is unusual due to numerous federal elections globally, but the focus on long-term infrastructure investment remains strong.
Q: Can you point to specific areas where profitability is exceeding expectations?
A: (Gaurav Kapoor, CFO) Our competitive platform allows us to extract great value. This includes strong performance in global program management, advisory and digital businesses, and efficiency measures through our enterprise capability centers.
Q: What are you seeing in the US market ahead of the elections?
A: (Troy Rudd, CEO) We see no material change in our pipeline in the Americas, except for a temporary issue in the New York metro market due to the withdrawal of congestion pricing. Overall, the pipeline continues to grow, and we remain optimistic about future opportunities.
Q: How do the margins in backlog compare to the margins posted for the quarter?
A: (Gaurav Kapoor, CFO) While we don't provide specific margin details for the backlog, we have a long-term target of achieving a 17% margin by the end of FY26. Our track record shows consistent margin improvement, and we expect this trend to continue.
Q: What's the setup for spending on IIJA programs in 2025 relative to 2024?
A: (Troy Rudd, CEO) IIJA funding is being deployed in our pipeline, with about 30% deployed this year. While the exact pace of future deployment is uncertain, we expect it to support pipeline growth.
Q: Can you elaborate on the growth in digital consulting and how it differs from regular consulting?
A: (Lara Poloni, President) Digital consulting is a significant growth area, with revenue increasing by 70% year-to-date. This includes opportunities in environmental remediation, transportation, and water. We see this as a $50 billion addressable market over the next decade.
Q: How are you managing staffing levels to support growth in backlog and pipeline?
A: (Gaurav Kapoor, CFO) We leverage our enterprise capability centers to manage staffing efficiently. Attrition is down, and we are well below industry benchmarks. This, combined with our strong pipeline, positions us well for future growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
