Aecom 2026 Q3 Earnings Call

You may begin. 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. 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 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 unless otherwise noted. Today's remarks will focus on continuing operations. On today's call, Troy Rudd, our Chief Executive Officer, will review key developments and accomplishments this quarter, as well as our outlook for the business. Lara Poloni, our President, will discuss key trends across our markets, 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.

We had many accomplishments in the quarter, and I am proud of our teams and the positive impact we are having on our clients' critical infrastructure investments. But before getting into the details of our results, I'd like to address the $337 million pre-tax charge included in the quarter. The charge is primarily the result of a delay in delivering a large construction management project due to several factors, the largest of which is overall productivity of subcontractors on the last phase of this project. We had expected this project to be substantially completed in the first quarter of fiscal 2027 and now expect this near the end of the second quarter of fiscal 2027.

In addition to the financial impacts in this period, we are pursuing sizable claims for this project, and our confidence in recovery has been validated by our success in the dispute resolution process to date. We expect resolution of the remaining claims will take some time, and this will continue to burden our cash flow through the first half of 2027. We are disappointed with this outcome, but I want to add some context. This project was bid in 2019. Since that time, we have changed leadership and tightened our risk controls. We decided many years ago to no longer pursue design-build work for P3 clients in the construction management business due to the inherent challenges this structure can present. As a result, this project would not clear our risk hurdles today.

I also want to provide an update on the second design-build P3 project in construction management, which was bid around the same time. We are progressing towards the planned substantial completion date of phase 1 in the first quarter of fiscal 2027, and this remains consistent with our previous forecast. The second CM project also has a significant claim position to recoveries due to delays not caused by us. Finally, notwithstanding these two projects, the construction management business has produced strong cash flow and high returns on capital consistently over time. Based on the composition of our backlog and pipeline today, I expect this trend will continue. Now turning to the details of our results. Our teams are winning work at a record rate.

Our backlog increased 13% to a new all-time high on record quarterly wins and a 1.6 book-to-burn across the business, including 1.8 times in the Americas. Year to date, our book-to-burn is 1.4 times, providing extraordinary long-term visibility. Adjusted for one less working day in the quarter, NSR in the design business increased by 5%. This was led by 6% growth in the Americas design business, as well as a return to growth in the international business, which increased 4%, led by the U.K. and Australia. Even so, overall NSR growth in the quarter was below our expectations. The primary drivers are slower than anticipated new project starts in the construction management business and the continued impact from the conflict in the Middle East, which we see continuing through the fourth quarter.

While both businesses have fallen short of our expectations in the second half of fiscal 2026, they have strong backlogs and are well positioned for return to growth in 2027. Excluding the financial impacts of the construction management project charge, adjusted EBITDA and EPS improved year over year by 5% and 11%, benefiting from the return to NSR growth, which resulted in margin expansion in the international segment. We also delivered positive free cash flow of $55 million despite the headwind from the construction management projects mentioned earlier, demonstrating the strength of our historically consistent free cash flow conversion. Turning to financial guidance. Our updated financial guidance captures three main changes from last quarter: The impact of the construction management project charge, lower than expected NSR growth, and continued margin outperformance.

As a result, we now expect full-year NSR of approximately $7.3 billion and adjusted EBITDA and EPS of $950 million and $4.05 respectively at the midpoint of the ranges. Adjusted for the charge and to help with comparability, we now expect full-year NSR of $7.65 billion to $7.7 billion and adjusted EBITDA and EPS consistent with our prior guidance at $1.29 billion and $6 at the midpoints. This includes a raised expectation for adjusted EBITDA margin to 17.4% versus the 17% previously. We also expect to deliver free cash flow of $300 million for the full 2026 fiscal year. With that, I will turn our call over to Lara.

Thanks, Troy. The strength of our technical expertise and the success we are having in the market are a testament to our teams and the investments we are making to extend our advantages. There are many marquee wins this quarter, but there are two in particular I want to highlight. Included within our record backlog, we won two of our largest recompetes ever. Both are in the environment business, one public and one private, and despite the industry's vast amount of consolidation, our leadership position persists. More importantly, our scope across these projects has expanded significantly. As I look across our markets, there are several additional positive developments that give us optimism. Starting with the U.S., our state and local clients continue to prioritize infrastructure and water investment.

In recent months, several of our largest state clients have announced major multi-year infrastructure plans focused on highways, bridges, transit, and rail, all areas where we have the number one ranked practice. Additionally, growth opportunities are robust in our U.S. water business, where our pipeline expanded by 30%. On the U.S. federal front, rapidly growing investment in national defense remains a key theme, and our pipeline with the Department of Defense, our largest single client, increased by approximately 30% in the quarter. Congress continues to advance fiscal 2027 defense budget legislation, and we expect healthy growth in the key areas we support. This includes significantly increased facilities work, where we are a leading provider to the U.S. Army and U.S. Navy. Additionally, Congress is progressing the next five-year surface transportation authorization.

The House's initial $580 billion proposal includes key funding for all key areas to which we are exposed and gives us further conviction in the continued bipartisan commitment to infrastructure investment. It is worth noting that unlike past reauthorization cycles, today's funding environment is incredibly healthy. Less than half of the Infrastructure Investment and Jobs Act funding in our core markets has been spent, which adds to our visibility and confidence. U.S. private sector investment is also accelerating. This is particularly true in data centers, which remains one of our fastest-growing businesses and where we have been expanding our hyperscaler relationships. In Canada, activity has been very strong and broad-based across all market sectors, driving continued double-digit NSR growth. Notably, after the quarter, we won a 10-year program management role for a highway and bus transit project that represents one of our largest wins in Canada to date.