Aecom Q4 FY2024 Earnings Call

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 Investors section at www.aecom.com. Later, we will conduct a question-and-answer session. I would now like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Treasury & 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 GAAP 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 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 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.

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 US 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 US 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 US economy. Specific to our US Federal exposure, I want to highlight the following. The US 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 includes 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 are 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 recompetes 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 US 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 a 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 5 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 undergrounding 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 win 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.

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, AECOM 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 AECOM to lead this business. Jill brings a wealth of experience, expertise and market credibility to AECOM 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 FY 2024. 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.

Thanks, Lara. Echoing both Troy and Lara'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 a 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 a 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 lost days 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 the Americas, 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. 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 GBP100 billion for energy, transport, healthcare and housing CapEx and GBP70 billion for growth industries such as green hydrogen and Gigafactories. Additionally, AMP8 spending is set to accelerate and our wins-to-date position us to gain market share. In Australia, our backlog increased by 26%, driven by larger Water and P&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 reaffirming 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, Shimmick 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 and pipeline. We expect revenue phasing 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.

We'll take our first question from Andy Wittmann with Baird. Please go ahead.

Okay, I just wanted to ask for 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 2024, which is quite 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?

Hey, Andy. Thanks for the question. You know what, I'm going to turn that over to Gaurav, but I also acknowledge that is a good observation.

Yes, good morning, Andy. Thanks for the question. So your assumption that FY 2025, 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 have the best growth fundamentals. We have completed through it. There's no new contemplated restructuring. So our FY 2025 results and beyond should be clean.

Got it. Okay. That's good to hear. I have kind of a similar question, maybe another one for you, Gaurav, 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 cost of the enterprise. And as you know, adjusted operating income that we provided for segments did not include corporate cost 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 is attributable 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.

Thanks, Andy.

Our next question comes from the line of Sangita Jain with KeyBanc. Please go ahead.

Yes, 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. I will pass it over to Lara.

Thank you, Sangita, for the question. We closed another strong year for International and we're seeing continued strength among all of those key end markets for us, whether it's the UK, Australia, New Zealand, Middle East. So where the growth 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 frameworks, 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 recompetes 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. But 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 FIFA World Cup and also the other initiatives there. And then also Australia, 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%. But should we expect the same pace of improvement in fiscal 2025 or should we moderate expectations somewhat as we go into 2025?

Yes. Hey, good morning, Sangita. 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 our art of possible. And as we have made investments in prior years, including FY 2024, what we've realized the ceiling of that art of possible 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 FY 2025 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 FY 2025 but continue to lead our industry in margins, but exit FY 2027 at 17% for the enterprise. And beyond that, we are now pretty confident again that feeling, it is 17% or more with all the significant initiatives and investments we're making.

Okay. Thanks so much, Gaurav.

Thank you.

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

Hi, good morning. This is Natalia Bak 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 the Americas grow faster? And if you could also update us if you've seen any improvement in the pauses you had in the Middle East?

Sure. Good morning. I'll address the first part and Lara will provide insights on the Middle East. We are anticipating an organic growth for NSR in FY 2025 of 5% to 8%, aligning with the long-term growth strategy we presented on Investor Day. In the second half of the year, we expect the Americas to lead in organic growth between the two segments for NSR. International growth is expected to start off slow this year, due to the fact that funding is beginning to resume in some of our key international markets, and we believe it will increase in the second half.

Yes. 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.

Okay, that's helpful. And then maybe a question focusing on margins. Just on margins. So you did 100 bps of margin expansion in 2024 and I think annually you've averaged about 80 bps or a little over 80 bps of margin expansion from the past few years and with still reasonably good growth in 2025, why would you only average 30 bps of margin expansion in 2025? Like what's holding you back to more margin expansion?

That's a great question. I wouldn't say that margin expansion is being hindered. Over the past few years, we've consistently invested more in the business each year. Looking ahead, we plan to keep investing, which will lead to significant returns, including improved margins and business growth. To highlight our investments, first, we've focused on our workforce, bringing in exceptional professionals and enhancing leadership and technical development. Second, we're transforming our work delivery methods now and for the future, which we believe will significantly benefit our margins. Additionally, we're aiming to expand our business, particularly in engineering and design, which we view as the foundation of our operations. Our goal is to have 50% of our business in engineering and design while the other half focuses on advisory and program management. We’ve made substantial investments in program management over the past three years, growing it to about $1.3 billion of net service revenue last year with expectations for double-digit growth. We are also currently investing in our advisory business, aiming to double it and establish it as our next $1 billion platform. So, it's not that our margins aren't growing; they are indeed growing rapidly. We are simply being strategic about investing in our future, which will enable our margins to exceed the 17% target.

Got it. Helpful. Thank you.

Thank you.

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

Thank you for taking my questions. Troy, I'm interested in the broader implications as we transition to a new administration. There are concerns regarding federal funding and potential budget constraints. Are you hearing any of these concerns from your public sector customers? Is this impacting your pipeline? I know it's early, but I would appreciate your insights on any risks or advantages as we move forward with this new administration.

At the moment, we are not receiving any direct feedback from our clients regarding the impact of the election. The insights we have are primarily coming from the election process itself. Currently, we lack specific information about the agendas of our federal clients. However, we can identify a few key points. First, the federal election brings a level of certainty about the future investment agenda of the federal government. Our business is quite agile, with about 70% of our workforce being adaptable across various markets. Additionally, there is a pressing need for continued investment in infrastructure, which is largely supported by federal funding, as well as by our state, local, municipal, city, and private clients, collectively representing over 90% of our work. Looking ahead, we have considerable confidence regarding the priorities of both the US government and our private clients. We believe that the new administration will prioritize infrastructure investment, as enhancing the manufacturing base in the United States will require upgrades to aviation, ports, railroads, and their supporting infrastructure. Moreover, if there is meaningful permitting reform in the coming years, we anticipate significant infrastructure spending that could improve returns on investments and accelerate infrastructure development. While there is some uncertainty in the current environment, we remain optimistic about the future due to the clear focus of our clients on infrastructure needs.

Helpful, Troy. Thank you for that answer. And just on 2025, it sounds like there were some things that were holding back the NSR growth in Q4 and there's a mention of acceleration of that NSR growth in the second half in 2025. So just curious on the first half or second half and to get that acceleration the second half, does it require certain recompete wins or a bigger pickup in the pipeline that we're seeing now or do you kind of have visibility on that second half acceleration? Thank you.

Yes. We have clear visibility on the acceleration in the second half, driven by the work that has been awarded and that we will be contracting. As Lara noted, due to the election and some shifting agendas, there has been new work coming into the market and it's been awarded through frameworks, which instills confidence that we will be able to utilize that work in the second half of the year. Over the first six weeks of this quarter, we've experienced continued success, which further strengthens our confidence for the year and in the growth of NSR in the latter half of the year.

Great. If I could just sneak one more in, Gaurav, just the 10% of NSR to free cash-flow, is that in your view, is that sustainable? Can you actually expand that in 2025, 2026, 2027? Just curious on how to think about that free cash-flow conversion of NSR going forward? Thanks, everyone.

Sure, Mike, and thank you for recognizing that impressive achievement of 10% growth in NSR. We currently have between 35,000 and 50,000 projects ongoing, so it's challenging to pinpoint an exact number. What's crucial is that cash conversion is ingrained in our culture and the way our team operates. It's one of our core principles. This gives us confidence that the 10% conversion rate is achievable as we progress, along with continued margin expansion on industry-leading margins. We expect our investments will yield substantial returns, driving us to remarkable margin levels of 17% and above. All of these factors suggest we can achieve excellent cash conversion rates consistently, and our ongoing focus will be to deliver the best cash results while maintaining that 10% conversion rate.

We'll take our next question from the line of Steven Fisher with UBS. Please go ahead.

Thanks. Good morning.

Good morning, Steven.

I just wanted to follow-up on the growth rate in the pipeline that you have. I thought I heard you mention 10%, but just if you could kind of remind us what's the growth rate you're seeing in the pipeline of the larger pursuits. I think it was 20% last quarter, but maybe that was just program management. I'm not sure if you're differentiating between kind of large pursuits in general and program management pursuits. So just trying to clarify a little bit on the pipeline growth rate. Thank you.

Sure. Hey, Steven, this is Gaurav. I'll take that question. You're right in your recollection. Our pipeline year-over-year, which was very robust when you compare to this time last year, it's up 10% again in all our end markets. And it gives us a lot of confidence, especially when you look at the book-to-burn in our design business of 1.2 as we exited the year. But as importantly, 50% plus win rates overall that we've been capturing for multiple years in a row. And when you look at our larger pursuits, not only is the pipeline more abundant with those larger pursuits coming in at higher velocity throughout the year, but our win rate is greater than that when it comes to win rates, greater than the 50% plus on the larger pursuits greater than $25 million and including program management where it seems to be we've almost been clearing the deck as those opportunities have come up over the last few years. So it gives us a lot of confidence as we march into FY 2025.

Okay. That's helpful. And then maybe a question around sort of private sector versus public sector and short-term interest rate policy is still a little bit an open question and also the outlook for long-term rates as well. So how do you see the influence there on the private sector and when you think about your business for the next couple of years, how do you see private sector versus public sector from here?

We are optimistic about both sectors. There is a clear need for infrastructure to support economic expansion and to address concerns about resilience and sustainability, especially in light of climate events. Our optimism is reflected in our pipeline, which includes both government projects and our private customer base. One major area of demand is the growing need for energy, which is driving significant investments from our private clients. Overall, we have a positive outlook on the entire pipeline. We hope that permitting reform will enhance returns for our private clients, leading to a stronger appetite for investment in the necessary infrastructure to support their growth ambitions.

Thank you. I wanted to follow up on the permitting reform you mentioned. Where do you think it will have the most significant impact on your business? Is it primarily on the private sector side?

No, I mean, the answer is, I see it across the entire portfolio of work that we do. When you sort of look at whether it's private or publicly funded infrastructure projects, the permitting process can take anywhere from three to six years. That's sort of a statistical industry average. But even beyond that, when you start to look at all of the work that has to get done to take something from design all the way through construction, there is a significant amount of sort of a government regulatory review that goes on in that process. So we actually see that as an opportunity as well for simplifying the process. So it's permitting, but it also extends right into the delivery of the project. And so it's a really significant opportunity.

Perfect. Thanks a lot.

Thank you.

We'll take our next question from the line of Michael Dudas with Vertical Research. Please go ahead.

Good morning, gentlemen, Lara.

Hey.

Good morning.

Good morning.

In your, the new Water and Environment Advisory business that you've created and looking to grow. Is that going to be mostly driven by your current account base and you're just adding, getting more involved in from beginning-to-end type services? Or is there opportunities away from your existing clients? I'm assuming it's both, but where the program management can be much more impactful, especially with some of your non-US government clients as you're looking to grow that program management business.

Thank you for the question, Mike. We're really excited about this new business and our new leader, Jill Hudkins, is off to a great start. Although it's only been six weeks, there has been a lot of positivity both internally and externally regarding this new venture and our ambitions. To answer your question, it's both aspects. We have strong coverage with many municipal water clients, and there are opportunities in the federal sector where we are a leading player, as well as in the private sector. Looking at the core markets, we can certainly capture more market share in the municipal space; for instance, in the US alone, there are 500 municipal water utilities serving populations over 500,000, all of which need significant digital investments to modernize their operations. These existing clients face challenges with water supply optimization, making it the right time for this new business. The fact that we have existing clients and opportunities to gain more market share with additional clients in the new support area is promising. In the UK, there is great anticipation for the work associated with the AMP8 program, and our current positioning and win rate in important frameworks should allow these clients to benefit from the new business we've launched. We are well-positioned to take advantage of this new advisory opportunity, and we are very excited about it.

Excellent. Thank you, Lara.

Our next question will come from the line of Kevin Wilson with Truist Securities. Please go ahead.

Hey, good morning. Thanks for the time. Following up on the Water and Environment Advisory business. I think you spoke to the sort of lower level of investment required. But I'm wondering, understanding it's a higher margin area. Can you speak to sort of the level of business development spending or reinvestment in the business that you're expecting and how that potentially weighs on margins in the shorter-term?

Yes. Hey, Kevin, this is Gaurav. I'll take that question. In terms of lower level of investment, that comment is just a comparative to if we were to do a very expensive M&A, which it would be in this type of space. We've proven our track record, including program management that we're able to make very smart investments through our P&L by attracting great market resources and professionals to drive this organically, right. If you look at our Program Management business, four and a half, five years ago, that was less than 3% of our overall NSR and it's now almost 15% of our overall NSR based on the organic investment. So not to say that they're low investments, but comparatively, the investments we make are organic and drive very high ROI, in fact, close to 40% plus. And when we look at what is the specific investments, it's all included in our guidance because it's all going through our income statement. We don't break out individually what an investment cost. But this again is what we build-on and gives us confidence to continue to be the industry leader and continue to separate ourselves in margin delivery. A few years ago, nobody thought 13% was possible. Two years ago, nobody thought 15% was possible. We're going to deliver 17% and continue to march forward from that 17% plus.

Thanks. That's helpful. And then my second question, I'm wondering if you could speak to if you see a consolidation opportunity in this space among infrastructure services, professional services firms? And if so, why? Are there scale benefits? What would be the biggest risk to something like that, be in your opinion? And sort of related to that, to what extent do you think M&A or portfolio authorization from peers is creating opportunities for AECOM to gain share as peers could maybe be distracted. Thanks.

It's challenging to comment on others' ambitions, but I can share our perspective. When considering mergers and acquisitions, we first assess the need for them. If we are already the leader in the markets we operate in, we don't believe acquisitions are necessary for growth. We recognize that scale is essential for future investments in our business. We are making strategic investments to maintain our competitive edge, as we aim to revolutionize our work delivery methods. This raises the question of whether acquiring more personnel makes sense when, in the long run, we may need fewer people to achieve the same output. Our focus is on organic growth and enhancing how we serve our clients through expanding advisory services and program management. Current acquisition prices are high, which makes it less attractive from a return perspective, especially when we can allocate capital to grow our existing earnings, which have seen over 20% compound EPS growth in the last three years. While there may be opportunities for others in the industry, that’s not our focus. We consider management time our most valuable resource, and it is committed to the strategies I've outlined. Engaging in a significant acquisition would detract from our efforts to maintain a competitive advantage. This is where our concentration lies.

Thank you.

Our next question will come from the line of Adam Thalhimer with Thompson Davis & Company. Please go ahead.

Hey, good morning, guys. Nice quarter.

Thank you. Good morning.

Did you guys see any caution in the US in the months leading up to the election from public or private sector clients? I'm just curious if that was the case, are you seeing any signs of improvement there?

We really didn't see any signs from our clients, whether they were private or whether they were public sector clients. One of the things we did observe, though, as we said this is that when you're focused on larger project awards and we've been focused on that and winning a lot of larger project awards is that, the process to bid, and the process to award, and the process to contract takes a little bit longer. So we didn't see anything unusual, but that was really what we saw in our business as a result of our focus on kind of what we describe as winning the things that matter, the larger iconic or larger programs.

I appreciate the insights. I wanted to ask about the construction management issue you mentioned. Is that something isolated, or does it reflect broader trends in the industry?

Hey, Adam, this is Gaurav. I'll address that question. That was an isolated incident. We haven't encountered that before. As I mentioned in my prepared remarks, whenever there is a situation where a client attempts to impose excessive risk on us, we will decline. We are not interested in assuming excessive risk. The encouraging aspect is that we consistently have between 35,000 to 50,000 projects in progress, and none of those projects are ever significant. Therefore, we will maintain our risk management practices and continue to achieve organic growth. Additionally, as Troy noted in his comments to Kevin, we experienced a 21% EPS compounded CAGR over a five-year span.

And I just want to just add to Gaurav's comment. I think it's not necessarily the project itself. But I think it's also important to recognize that it's, this is something built into the culture of our organization is we're going to continue to make again, really thoughtful decisions about how we manage the risk in our business and we manage the risk around projects. And that when we are uncomfortable with that, we're willing to, again, not chase revenue, not chase revenue growth where sometimes that would be to our detriment in the long-term. So again, that's a really important part of what's become our culture.

And then just real quickly, staying on that theme, could you actually make a case to the opposite that the construction management business is about to get better for the next couple of years?

I have no doubt that it's getting better for the next couple of years. And the reason is, we've won a pretty significant amount of work over the course of the last few quarters and we have good visibility into the future. But in construction management, when you win projects, there's typically a start-up phase and that start-up phase can take anywhere from nine months to a year, we think about it as pre-construction. And during that phase, they are smaller projects. They are sort of on a time and materials basis that don't have significant margins in them, but you then get to the point where you move from that pre-construction phase to award. And then all of a sudden, your backlog expands and you have great projects that show up that you deliver for the next four or five years. And so, that business has had some fairly significant wins. We're in that pre-construction phase. And so it gives the impression perhaps that the backlog isn't as strong as we believe it to be, but it will become visible in a short period of time.

Good color. Thank you.

Thank you.

Thank you.

And that will conclude our question-and-answer session. I'll turn the call back over to Troy Rudd, CEO, for closing remarks.

Thank you. Again, thank you, everyone for joining the call today. And I want to close by just thanking all the people at AECOM for their very significant contributions and effort that they exerted during the course of this year. And what they're doing is we already start entering into this new fiscal year. Again, I thank you all. And thanks again, and we'll talk to you next quarter.

Thank you all for joining today's call. You may now disconnect.