Aecom (ACM) Earnings

Management highlights

- Industry Leadership & Market Position * AECOM was named the number 1 firm by ENR in the transportation, facilities, and water markets, highlighting its competitive advantage from technical expertise, domain knowledge, and client relationships * Re-compete win rate exceeds 90%, with AECOM consistently securing a larger share of client spend on re-competed contracts, reflecting high client satisfaction and performance - Strategic Initiatives * Proprietary AI development and deployment is on track to meet all internal milestones, with investment ramping to planned levels in Q2. AI has become a core competitive differentiator, enabling major new wins including a large energy re-compete where AI was central to the proposal * The advisory practice is on track to double its NSR within three years, aligned with prior targets. AECOM's infrastructure-focused expertise differentiates it from traditional consulting firms - End Market Performance * U.S.: Demand and funding remain strong, with over half of IIJA infrastructure funding still unspent. U.S. Department of War (AECOM's largest single client) pipeline grew 50%, supported by the proposed $1.5 trillion defense budget that increases facilities work, where AECOM holds leading Army/Navy positions. High-tech/AI infrastructure is one of AECOM's fastest growing U.S. segments, with an expanded relationship with a key hyperscaler positioned for further growth * Canada: NSR growth remains strong and broad-based across all sectors, supported by new national and provincial funding commitments * UK: Growth turned positive, with strength in water and energy from accelerated activity on AMP8 and the Great Grid Project, offset by ongoing weakness in transportation * Australia: Market trends improved, with backlog reaching a new multi-year high. Notable wins include work supporting the $3 billion AUKUS defense partnership, with a growing transportation pipeline for 2027 and beyond * Middle East: Near-term activity is slowed by geopolitical uncertainty, but backlog has grown significantly with large awards post-quarter. An estimated $40–50 billion in planned U.S. military infrastructure investment in the region presents long-term growth opportunity * Power: Power demand growth creates strong opportunity, with AECOM taking a leading position in nuclear fusion. The firm expects nine-figure NSR from fusion projects over the coming years, including ongoing work for Type 1 Energy and TVA in the U.S., and the newly awarded UK STEP fusion program

Guidance

- Full-year 2026 NSR growth guidance is maintained at 4–6% including the impact of fewer workdays vs. the prior year; excluding this impact, guidance remains 6–8% NSR growth - Full-year adjusted EBITDA and adjusted EPS guidance is increased for the second time in 2026, with 7% adjusted EBITDA growth and 14% adjusted EPS growth expected at the midpoint of the updated ranges - Full-year free cash flow guidance is reaffirmed, as is the long-term target of 100%+ free cash flow conversion - Management expects NSR growth to inflect higher in the second half of 2026, supported by strong backlog, recovered federal bookings after the Q1 government shutdown, and a ramp-up of new Middle East wins - Construction management (CM) revenue is expected to remain muted in the second half of 2026 as the segment completes existing large projects and performs early agency work on new wins; significant CM revenue ramp-up is expected starting in Q2 2027 - Management has increased confidence in hitting long-term margin expansion targets for 2027 and beyond, following stronger-than-expected early results from AI deployment

Segment performance

AECOM reports net service revenue (NSR) across two operating segments: 1. Americas: The design business within this segment grew NSR by 8% year-over-year. Adjusted operating margin increased 60 basis points to 20%, driving 10% operating income growth. Overall Americas segment adjusted operating margin was 16.5%, up 50 basis points year-over-year. 2. International: NSR grew 2% nominally and declined 3% on a constant currency basis. Growth in the UK and Australia was offset by declines in the Middle East and Asia. Adjusted operating margin remained flat year-over-year at 11%, while operating income grew 2%. International segment backlog grew 25% to a new record high. On a company-wide basis, total backlog increased 8% to a new all-time record, with a 1.2x design book-to-burn ratio. The quarter saw a 100 basis point headwind to overall NSR from Middle East conflict impacts, with a much smaller impact to profit.

Risks & headwinds

- Geopolitical uncertainty in the Middle East continues, with an unclear timeline for conflict resolution that creates uncertainty around the exact pace of activity and revenue growth in the region in the near term - The Middle East conflict created a 100 basis point NSR headwind in Q2 2026, and caused temporary cash collection delays, though collections recovered in Q3 2026 - Claim resolution on two large projects awarded in 2019–2020 has proceeded much slower than expected, leading to a sequential increase in the claims balance. While management expects full recovery (and has already won four related individual claims), extended resolution timelines create temporary cash flow pressure - U.S. federal defense and infrastructure funding is subject to political budgeting vagaries that create uncertainty around the timing of pipeline conversion to backlog and revenue

Analyst Q&A

• Q: With strong backlog growth, what needs to occur to hit full-year organic growth guidance, and is a quick end to Middle East conflict required? /

  A: Management expects growth to inflect upward in the second half as planned, supported by already strong 7%+ first half growth in the core Americas design business. Recovered federal bookings after the Q1 government shutdown provide a clear tailwind. While Middle East growth was slower than expected in Q2, backlog has grown significantly with large post-quarter awards, so strong second half growth is expected even with uncertain timing of conflict resolution.

• Q: How does AI improve contract profitability and competitive positioning, and what is the commercial model for AI-enabled projects? /

  A: AI creates meaningful margin upside on AI-enabled contracts through gain-share mechanisms that let AECOM share efficiency gains with clients. AI also significantly improves AECOM's win rate on large projects, expanding overall revenue opportunity by creating a sustainable competitive advantage. Two recent large AI-enabled wins total almost $1 billion in aggregate value, with multi-year terms and expanded scope compared to prior contracts.

• Q: What is the magnitude of current AI investment, and when will operating leverage from AI translate into accelerated margin expansion? /

  A: AI investment ramped to full planned scale in Q2 2026, with $13 million in spend equal to ~66 bps of margin. Despite this full incremental investment, overall company margins still expanded year-over-year, as deployed AI tools already drive efficiency gains that offset investment costs. Management confirms full-year 2026 AI investment will remain within the previously guided 60–70 bps range, and remains confident in margin progression for 2027 and beyond as efficiency gains outpace steady investment levels.

• Q: How has the Middle East conflict impacted profit and cash flow, and what is the outlook for growing claims balances? /

  A: The smaller profit impact from Middle East NSR declines is due to significant non-controlling interests in local joint ventures required by regional regulation, so full revenue declines do not flow through to AECOM's net profit. Cash collection delays in Q2 have already resolved in Q3, with advanced payments received for new projects supporting second half activity. Higher claims balances stem from slow resolution on two large creditworthy client projects; management has won four individual claims from these projects already and expects full eventual recovery, so full-year free cash flow guidance remains on track.

• Q: Does AI expand AECOM's total addressable market? /

  A: AI does expand AECOM's addressable market, as AI-driven efficiency and reduced uncertainty on complex projects enables entry into new market segments AECOM previously did not participate in meaningfully. For example, AI tools are enabling AECOM to scale up entry into the global healthcare design market, creating new long-term growth opportunity.