AECOM (NYSE:ACM) released second-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.
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Summary
AECOM reported record highs in NSR margins, adjusted EBITDA, and adjusted EPS for Q2, with an 8% increase in backlog driven by growth in the Americas design business.
The company is advancing strategic priorities, including AI deployment and expanding its advisory practice, with AI contributing significantly to recent major contract wins.
AECOM increased its full-year profit guidance due to strong year-to-date performance, despite uncertainties in the Middle East; adjusted EBITDA and EPS are expected to grow by 7% and 14%, respectively.
Full Transcript
OPERATOR
Thank you for standing by. At this time, I would like to welcome everyone to AECOM second quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. We do ask you to limit to one question and one follow up. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Will Gabrielski, Senior Vice President of Finance and Investor Relations at AECOM. You may begin.
Will Gabrielski (Senior Vice President of Finance and Investor Relations)
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 uncertainty and including the risks described in our periodic report 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 reference 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 outlook for the business Laura Pelloni, 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 now turn the
Troy Rudd (Chief Executive Officer)
call over to Troy thank you Will and thank you all for joining us today. Our second quarter results demonstrate the strength and resilience of our teams and our focus on delivering the most iconic infrastructure projects around the world. Before discussing our results, I want to highlight that we have once again been named the number one firm by ENR in the transportation, facilities and water markets, our industry leadership, investments in our professionals and technical excellence, infrastructure domain expertise and strong client relationships are pivotal in our competitive advantage and the unparalleled value we deliver to our clients. Turning to our results, NSR margins, adjusted EBITDA and adjusted EPS reached new second quarter highs despite a dynamic market environment and backlog increased 8% to a new record. The increase in NSR was driven by 8% growth in our Americas design business which is our most profitable. The segment adjusted operating margin increased by 50 basis points to 16.5% which is reflective of the high value we deliver to our clients, our focus on efficiency and the benefits of our strategy. Through these margins we are investing in and beginning to realize the benefits from our strategic priorities which include our proprietary AI and growing Our advisory practice backlog reached a new high in the quarter which further enhances our visibility. This was driven by a design book to burn of 1.2 times. This performance reflects the combination of strong secular growth demand and robust funding in many of our markets as well as continued strong win rates. This is especially apparent across our largest pursuits where our advantages are greatest and our win rates are consistently highest. Turning to our development and deployment of proprietary AI, we are delivering on all of our key internal milestones and investments expanded in the quarter as expected. Importantly, deployment of AI onto projects and client deliverables is growing rapidly as are the number of use cases identified by our teams. The best measure of how AI is benefiting AECOM is our largest wins. We were recently selected for a substantial recompete for a major energy client where our proprietary AI solution was a central element of the project proposal and our competitive edge. Notably, this contract includes specific mechanisms that allow us to capture value as deploy AI to deliver greater value to our clients. Turning to end markets in the US both of the demand and funding environments are strong. More than half of the IIJA funding remains to be spent and that number is even greater for several of our largest clients and market sectors. An example of the positive benefit of this funding is the Brent Spence Bridge project in Ohio where our strong performance on Phase 1 helped us win a sizable contract for Phase 2 during the second quarter. As we highlighted last quarter, investment in U.S. national defense is also growing rapidly. Our pipeline with the Department of Defense, which is our single largest client, increased by 50%. The President's $1.5 trillion budget proposal points to accelerating defense spending in the key areas that we support.
Troy Rudd (Chief Executive Officer)
This includes significant increased facilities work where we are a leading provider to the army and Navy in Canada. NSR growth continues to be strong and broad based across all market sectors. We maintain a leading position in this market and recent national and provincial funding pronouncements underpin our confidence that this growth will continue. Turning to the international segment in the uk, growth turned positive with continued strength in water and energy led by accelerated activity on AMP8 and Great Grid project. However, partially offsetting this strength is ongoing weakness in the transportation market. Longer term, there is an undeniable need for transportation investment in Australia. Trends have improved and our backlog reached new multi year high. This includes a notable set of wins to support the $3 billion Aukus partnership and other defense investments. In addition to defense, we also have a growing pipeline of transportation work which bodes well for 2027 and beyond finishing in the Middle East.
Troy Rudd (Chief Executive Officer)
Despite the near term uncertainty, we continue to end work at a high rate, including strong winds after the quarter ended. In addition, an estimated 40 to 50 billion dollars of spending is likely to be needed to repair, fortify and expand the US Military infrastructure in the region, which presents another growth opportunity for us. Turning to our outlook for the remainder of the year, we are increasing our full year profit guidance for the second time this year.
Troy Rudd (Chief Executive Officer)
This guidance increase reflects our strong year to date financial performance, record backlog position, strong funding across our core markets and execution of our strategic initiatives. At the same time, our guidance is capturing uncertainties related to the Middle east as the ongoing conflict continues to have an unclear resolution timeline. At the midpoints of our updated guidance ranges, we expect adjusted EBITDA and adjusted eps to increase by 7% and 14% from the prior year.
Troy Rudd (Chief Executive Officer)
Taken together, we continue to deliver consistently strong performance with a record backlog and pipeline and are confident in delivering on our increased guidance for the year and our long term strategic and financial objectives. With that, I will turn the call over to Lara.
Lara Pelloni
Thanks Troy. Our teams continue to differentiate in the marketplace by leading with technical excellence, strong collaboration across market sectors and disciplines, and focus on delivering unrivaled value to clients. These attributes are key drivers of our record performance. I'd like to highlight a few trends where this is most apparent. First, our clients are investing record amounts in AI infrastructure. Our expertise extends from the conceptual phase of an asset through its ultimate delivery, including environment permitting, site selection and due diligence, stakeholder engagement as well as design, project and program management. Our high tech business is one of our fastest growing, especially in the us. Of note, during the quarter we expanded our relationship with a key hyperscaler that positions us for accelerating growth and we see several similar opportunities across this market. Second, power demand continues to increase. We work across the entire power generation stack and we have taken a leading position in emerging areas as well. One area we'd like to highlight is nuclear fusion where we expect to deliver nine figures of NSR in the coming years. This includes our ongoing work in the US with type 1 energy and TVA as well as our selection during the second quarter to deliver design and technical services for the UK STEP nuclear fusion program these two programs are amongst the most advanced fusion programs in the world and our decades long leadership across the energy sector played an essential role in our positioning. The third trend I'd like to highlight is our incredibly high success rate on recompetes which is a great indicator of the strength of our technical expertise and and high client satisfaction. Our win rate on recompetes is in excess of 90% and increasingly we are securing an even greater share of the client spend on these recompetes which aligns with our focus on expanding our addressable share of the market in the environment sector two marquee recompetes for global energy companies over the past several months tell this story well. On one of these wins our scope is substantially greater than the prior contract. The this outcome not only reflects our strong performance on the last contract, but also the value we are poised to deliver in the future through our strategic investments including AI. On the other end, we stood out against the competition because of our technical expertise and scale. Finally, our advisory business is on track to double its NSR within 3 years consistent with our prior expectations. Importantly, by bringing infrastructure led expertise to our clients, we are differentiated versus traditional consulting peers and we are consistently beating these firms across the globe for our clients most critical assignments. As always, I am extremely proud of our professionals who are energised by our investments to enhance capabilities, better serve our clients and increase the value we can deliver to our stakeholders and communities. The result is sustained strong performance across the business and clear visibility for future growth. With that I'll turn the call over to garage.
Gaurav Kapoor (Chief Financial and Operations Officer)
Thanks Lara. As demonstrated by our second quarter results and increased full year guidance, the business is outperforming our expectations contemplated in our initial guidance. There are a few trends that I would like to highlight within our performance. First, we continue to deliver on all key metrics. I should note this quarter included approximate 100 basis point headwind to net service revenue (NSR) due to the impacts from the conflict in the Middle East. And as a reminder, revenue is disproportionately impacted given the substantial consolidated joint-venture work we have in the region, but the impact to profit is much smaller as demonstrated by our strong earnings growth. Second, strong margin outperformance remains a hallmark of our business. Building on our consistent industry leading profitability, our segment adjusted operating margin increased by 50 basis points year over year. We continue to unlock capacity to invest in our strategic priorities and we are on track with our full year margin expansion goals. Finally, our backlog and pipeline are at a record high including growth in both the Americas and international segments. In fact, our pipeline has increased by double digit for three consecutive quarters which provides for long term visibility. Both our backlog and our pipeline underpin our expectation for strong NSR growth in the second half of the year and beyond. Turning to Americas, NSR in the design business unit increased by 8% as we continue to execute our strong backlog position and capitalize on favorable market trends. The adjusted operating margin increased by 60 basis points to 20% contributing to 10% operating income growth which reflects a continued focus on driving operating efficiencies across the business and the high return on investments we are making to extend our advantages. Turning to the international segment, NSR increased by 2% and declined by 3% on a constant currency basis. Growth in the UK and Australia was offset by declines in the Middle east and Asia. Our adjusted operating margin remained consistent with the prior year at 11% and our operating income increased by 2%. Our backlog in the international segment increased by 25% to a new record and our pipeline of opportunities remained near an all time high as well. This is consistent with our expectation that international growth will improve in the coming quarters. Turning to cash flow and capital allocation, we returned 155 million of capital to shareholders in the second quarter through repurchases and dividends. Underlying cash flow in the second quarter was consistent with our expectation but was offset by delayed payment timing in the Middle east business as well as longer than anticipated claim resolution on certain projects. Importantly, collection in the Middle east have already recovered in the third quarter and we have demonstrated track record of delivering strong fee cash flow. As a result, we are reaffirming our free cash flow guidance for this year as well as our long term 100% plus free cash flow conversion target. We remain committed to our returns focused capital allocation policy which includes returning substantially all available cash flow to shareholders through repurchases and dividends. Concluding with our raised guidance, we now expect to grow adjusted EPS and EBITDA by 14 and 7% respectively at the midpoint of the ranges. As a reminder, our fourth quarter growth rate will be impacted by fewer work days than prior year which is accounted for in our reaffirmed guidance for 4 to 6% NSR growth for the year. Excluding this impact, we continue to expect 6 to 8% NSR growth for the year with that operator. We are ready for questions
OPERATOR
at this time I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad and your first question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead.
Andy Kaplowitz (Equity Analyst)
Good morning, everyone. Good morning, Andy. Good morning, Troy. Your backlog growth has obviously been relatively strong, but I think in order to get to your organic revenue growth range for the year, you'll need a pickup in burn rates to get to your guidance. What needs to happen to see that? Are you counting on a quick ending to the Middle East or do you see the Americas work ramping up faster in the second half?
Gaurav Kapoor (Chief Financial and Operations Officer)
Yeah, you know what? Gar will take that one, Andy. Hey, Andy, thanks for the question. So you're right, you know, our backlog growth has been really strong. In fact, when you look at Our International Trailing 12 months, it's 1.4x book-to-burn that we have delivered. But at the same time, there have been geopolitical issues that have impacted the first half, as we've already discussed last quarter and on our prepared remarks here. But as we go into the second half of the year, given the strong backlog growth that we've had the book-to-burn I just mentioned, we do expect growth to inflect, to support growth we're already seeing in our design business in the first half of the year, which has grown at over 7% in the first half. And Americas' design, just to note, has grown in spite of the government shutdown in Q1 and it also impacted Q2. But we saw recovery of wins and bookings in our federal client where which were impacted by the shutdown in the second quarter. So we expect that to provide good tailwind to us as we go into the second half of the year and feel good about our guidance we have put forth.
Troy Rudd (Chief Executive Officer)
And Andy, I'll add just a little bit to that is, you know, when we started the year, we anticipated growth ramping up in the second half of the year and that was built into our plans. Obviously during the second quarter we did see growth, as we expected, in the UK business and in the Americas business. And we had expected growth to be in the Middle East business, which obviously, for reasons that everyone's discussing, it didn't happen. What we did see though, in the quarter again is actually very significant, the backlog growth in the Middle East. And even post quarter we had some very significant awards that we continue to add to that backlog in the Middle East. So we do expect the Middle East to grow quite significantly. The part that is difficult for us to forecast is sort of exactly the pace that it's going to grow in the third quarter. But, you know, nevertheless, with the backlog in that business, we do have a very good line of sight or visibility to growth in the Middle East.
Andy Kaplowitz (Equity Analyst)
Very helpful. And then, Troy, I want to double click on the marquee wins you're talking about that you've, you know, AI contributed to and how the mechanisms are working. For instance, if you are successful in delivering for the client, what exactly does that mean? Is it like your man hours of revenue are lower in the project than a similar size project without AI? And what is the potential profitability of this type of project versus a similar project without AI? I think more color would be helpful.
Troy Rudd (Chief Executive Officer)
Okay, sure. Well, again, I'll just, I think I pointed out in the prepared remarks one of our wins, but I'll actually say that we've had two wins that I'd report on and the aggregate value of those wins is almost a billion dollars, one of which came after the end of the quarter. So it's not currently in our backlog. But what we, what we would expect to see in the commercial model that we've agreed is that revenue will continue to grow on those projects. But as we deliver using AI, we have a mechanism where we effectively will share the benefit from doing that. And so there's, you know, there's a pretty large upside to that project. I'm not just again, because I'm talking about some client contracts and too particular, I'm not going to share the ranges, but I will say that there is certainly an opportunity for us to share meaningfully in that upside. And then the other thing that we're experiencing, and I think this is the most important message through this, is these are two large projects and two large wins during the year. And so what we also see is we also see an improving win rate in the conversations on these large types of programs and projects. So I would think about it this way in terms of revenue. It's not necessarily that we're going to see more revenue from these particular contracts. We will see improved margins on those contracts. But what we are seeing is an improved revenue opportunity as a result of the competitive, effectively the competitive advantage that we've created. And so I'm going to pass to GAR for a sec to give you some more color.
Gaurav Kapoor (Chief Financial and Operations Officer)
Yeah, Andy, on a little bit more color on some of the contracts that Troy is talking about. Now, clearly we can't go into the details of them, but just to give you an overview Each one of these is a multi year contract. And for specifically on Scottish water that we did give you a lot of detail in Q1 recall. We virtually had practically no exposure to this client. And now we're part of the largest contract water contract that has ever been let out by that client in Europe. UK geography for us and in fact from what we can tell in the water discipline, it is the largest contract that was let out. And the second one that happens subsequent to the quarter also follows a very similar pattern where we did have exposure to the client currently and what we have won again on a multi year basis is a multiple of what we currently deliver on an net service revenue (NSR) basis. So the question that you're specifically asking, how is it impacting man hours revenue? That's a very good direct result of what we're seeing. When you bring technology that drives efficiency, our clients are asking for more because the demand for our services far exceed sometimes the funding that has historically been in place. And specifically on that contract to KPIs where the more efficient we are in delivering, it's a pain-share, gain-share. There's actually no gain share, I should say pain share mechanism on that contract which will allow us to share with with a client that did not exist before that KPI on the gain share.
Andy Kaplowitz (Equity Analyst)
Appreciate the color guys.
Troy Rudd (Chief Executive Officer)
Yeah, thanks Andy.
OPERATOR
Your next question comes from the line of Andrew Whitman with Baird. Please go ahead.
Andy Whitman (Equity Analyst)
Great. Thanks for taking my questions this morning. Gary. I just want. Excuse me, I wanted to dig into your comment about the Middle East. I think you mentioned it was 100 basis points NSR hit from the delays that you saw there. But you said that the profits weren't hit as large as the revenue. Is that because it's like a consolidated joint venture and it reduced your nci? I noticed your NCI (Non-Controlling Interest) guidance was lowered for the year by about 5 million. Is that, is that the delta that you would say between like the. What would be the expected profit and the actual profit hit to you?
Gaurav Kapoor (Chief Financial and Operations Officer)
Yeah. Morning Andy. You're spot on. It's exactly what you have articulated. Middle East is the one region where we have significant NCI regulatorily. You're required to have NC local partners in Saudi Arabia, in uae so the margin impact isn't as equals whatever your NSR miss is. And that's why even though there was some margin impact into the business, the rest of the business, as Troy mentioned and Laura mentioned in her prepared remarks, with uk, Australia, US performing very well, the whole company operationally delivering better than we had expected. It was able to cover that small miss on the bottom line.
Andy Whitman (Equity Analyst)
Okay, great. And then I guess, kind of related to that, you were talking about the impacts to your cash flow. Sounds like some of the delays you saw in the quarter from the Middle East have been resolved after the quarter, and that's good. But as I looked at kind of your claims balance over the last four or five quarters, it has been kind of going up sequentially each quarter by a decent amount, and it sounds like that might continue. So I'm just wondering if you could just give some detail on that and if you're continuing to maintain the $400 million free cash flow guidance. I'm just wondering if there's an offset somewhere else in the business because of that item specifically.
Gaurav Kapoor (Chief Financial and Operations Officer)
Sure, Andy, if I miss anything, please let me know and I'll revert back to it. Specific to full year guidance we have full confidence that we will be delivering on our guidance for the current year to what we have done over the last nine years. And you know, I'll take the last part of your question first, which is what are the offsets? You know, over the last nine years we've looked at what the drivers are on how we deliver on our on our cash so consistently, and there's no consistent drivers. When you have multiple geopolitical and geographic issues that, that you navigate around clients. We deliver anywhere between 35 to 50,000 contracts during the year. It gives you a lot of different paths to deliver on your cash and the current year will be the same. Specific to Middle east you're again spot on in April and continuing into May, our Middle east business is back to the normal cadence we expect on cash receipts, including some advanced payments, which again gives us confidence that some of the large wins that we've had are now setting up to be, you know, we're going to be working on these projects in the second half of the year based on these advanced payments coming through. And last, specific to the claim amounts that you raised. Yeah, these are, you know, projects we bid in fiscal year 2019 and 2022 projects. And for two clients that have very strong credit worthiness and specific to the claims, in our view, we have a clear right to these claims. In fact, what we've seen is four of the claims have individual claims for these two clients have gone through the resolution process and we've been successful on each one of them, but it's just been very slow and dragged out on the resolution process. That is what has surprised us as to how long the process has taken. You know, occasionally we come across these type of issues and you'll see on our results that we have delivered over multiple years. We have a very good history of recovering our balance sheet position and we feel confident on these two as well. Great.
Andy Whitman (Equity Analyst)
Thanks a lot.
OPERATOR
Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook (Equity Analyst)
Hi, good morning. Thank you for the question. I guess my first question, Gaurav, can you help remind us how much you're investing sort of in AI and how that's impacting margins this year? And I guess, you know, the EBITDA margin conversion relative to, you know, sales is still, you know, I don't know, mid single digit at best. I'm just wondering whether when we could start to see the EBITDA or the operating leverage of the business start to accelerate more as you get past some of this investment investment. And then I guess my just second question is as you are talking to your clients about your AI capabilities and what you can deliver, does it change your addressable market at all and that, you know, some customers are more willing to try AI or new technology or think about doing the business differently versus some that are still sort of legacy in an old school way. I'm just wondering if that changes your addressable market at all. Thank you.
Gaurav Kapoor (Chief Financial and Operations Officer)
Hi Jamie, thanks for the questions. I'll take the first one specific on AI leverage and margin EBITDA conversion for the current for first half of the year we've delivered good strong margins a little bit above our expectations of what we had laid out earlier in the year. If you recall, we had said 20 to 30 basis points and been doing better than that. And it's a combination of a few key things. First is, you know, our Americas business organically is very robust and driving incremental margins. Second is, you know, throughout our organization has a very strong operating culture of delivering, continuing to deliver better every single quarter. But third, as you specifically asked about on AI leverage in the first quarter, you would recall we had only ramped up approximately $5 million of spend. Our expectation was 60 to 70bps is what we will spend in FY26. And in fact in Q2 we ramped up that spend to that full scale. We spent $13 million on our AI roadmap equates to about 66bps. So the margin increase that you're seeing where we delivered 16.5% operating margin in the first half of the year versus last year, there is that incremental investment coming through as we move forward. We have a lot of confidence that given what we're already seeing in the early results, not only from the growth standpoint that Troy has already spoken to earlier on some of the Q and A, but if you take a step back with the 66 bits of AI investment we're making in our margins in Q2, our Americas margins continue to grow over prior year and just a little bit better quarter over quarter as well because of some of these tools that we have already deployed, internally developed and deployed internally are driving benefits. And it's much more clear when you look at our international business. International business is not having same robust growth we're seeing in the Americas business, but the margins still held because they're being supported by these tools we've developed, which is being a force multiplier for our workforce and being able to deliver more efficiently. So we expect that to continue. And as you, you know, consistent with our guidance, as we look forward to FY27 and beyond halfway through the year, they're very confident as to the guidance, the margin progression and the conversion that you talked about we had put forth will be delivering.
Troy Rudd (Chief Executive Officer)
And Jamie, to answer your second question, first is our clients, when they have large complex projects, they are looking for a few things. They're looking for an improvement in the value you're delivering and that can be in different ways and either through improving the speed at which you deliver, reducing the cost, but more importantly providing more certainty around very complex outcomes that we deliver for our clients. And so they embrace innovation. And what we're finding in our conversations as we work through this is that they're willing to embrace the innovation that we're providing. And so those conversations are not, they're really not that difficult. And addressing your second question, you know, does this change our addressable market? The answer is it does. And what this does is allows us to actually have a way of entering some markets that we hadn't previously participated in a meaningful way in the past. And an example of that would be healthcare. You know, we haven't participated meaningfully in healthcare design around the world. And so we're effectively again building tools that support our professionals in their conversation with customers, that reduce time, the uncertainty associated with complexity and cost. And so that allows us to more easily enter new markets. And a good example of that is the healthcare market.
Jamie Cook (Equity Analyst)
Thank you.
Troy Rudd (Chief Executive Officer)
Thank you.
OPERATOR
Your next question comes from the line of Adam Beavis with Goldman Sachs. Please go ahead.
Adam Beavis
Hi, good morning. I was just wondering if you could talk about the construction management, revenue growth and book-to-bill trends in the quarter. How are you thinking about that outlook for growth in that business over the next 12 months.
Gaurav Kapoor (Chief Financial and Operations Officer)
Hey Adam, this gar. I'll take that question on cm. You know, CM business is very much impacted by large projects, specifically timing. Just to be a little bit more detailed on what I mean by that is generally when we first contract into these projects, we work on a T&M (Time and Materials) agency basis for the first few months where we help the client out with the design and other factors, procuring subcontractors according to their preference and then we enter into a GMP contract with them usually could be anywhere between 10 to 20 months after we have provided that agency work to them when the design is practically complete. And we have a lot of certainty all the work has been subcontracted through practically. And that's when you see, you know, good book to burn and NSR flow through for that, that CM business. So where we are right now is we've got some large projects that have been completed including you know, the J.P. morgan Tower in New York and alike. And we're in process of some of these new projects that have have come on, including some of the sports wins and convention centers that we've discussed in past couple of quarters. We're performing that agency work right now. And my expectation so that'll continue for the next six months and my expectation is in FY27, especially starting in Q2 2027 and beyond, we're really going to start seeing a good ramp up in that revenue burn. So to drive that, my expectation is, you know, in Q3, Q4, you'll start seeing a good NSR book to burn being contributed by our CM business that we really haven't seen because of the nature of how these projects flow through.
Adam Beavis
Got it. And then separately it's been six months over six months in from scaling your AI tools and your AI acquisition. Can you just talk about if visibility has improved on your ability to hit your margin expansion targets and if you have any updated thoughts on the cadence of margin expansion in 27 and 28.
Gaurav Kapoor (Chief Financial and Operations Officer)
Yes. So we really sort of started this in earnest about as you said six months ago. And if you sort of think about this in chunks, the first three months relate to integration and really ramping up a team and then taking what we had but already working and effectively moving that across our entire population of professionals. So that's started and you know, we have the majority of our people having access to certain kinds of, of AI models and tools that help them in their work. And at the same time, and we mentioned this in our prepared comments, we've been working on actually building out what I'll call the AI model pipeline. And so that's going on in earnest as well. What we are seeing is that we've been investing in building the team, building the AI tools that our professionals will deploy, but we're also now seeing again the benefit of those, those tools be deployed. And so we see that ramping up. All that being said, what we have experienced is we're experiencing an increase in our confidence in our path to ultimately improve margins over the next three years. And so even as we look forward to next year, I'd say that we have increased confidence in our ability to deliver on the margin expectations for next year as well.
Adam Beavis
Great. Thanks so much.
OPERATOR
Thank you again. If you would like to ask a question, press Star, then the number one on your telephone keypad. And your next question comes from the line of Michael Dudas with Vertical Research Partners. Please go ahead.
Lara Pelloni
Good morning gentlemen. Lara. Good morning, Mike.
Michael Dudas (Equity Analyst)
Troy, you called out in your prepared remarks pretty good potential in your US Federal business. Maybe you could remind us what that position is and what areas do you think that could contribute to the pipes pipelines of 50%. What can we maybe think about or look for to see that X you get converted into backlog and revenues over
Troy Rudd (Chief Executive Officer)
the next six to 12 months, assuming again the vagaries of government budgeting process in Washington D.C. yeah, certainly. Well, first I'll just say that I think about defense in terms of our global client set. And obviously within that global client set, the largest is the US Government or the Department of Defense here. And so in aggregate all those defense clients represent about 10% of our portfolio. And the Department of Defense represents, you know, five or a little bit maybe slightly higher than that. But what we have seen in that pipeline certainly here in the US and around the world is we've seen that pipeline increase by about 50%. So you know, that's for us even as you said, putting aside that's kind of the vagaries of funding, there is no question that with a pipeline increasing like that there will be funding that will would certainly match some or all of that. And so I think that with what's happening in the world, it is certainly supporting a larger investment in defence. And again through our long term relationships with these clients in the US in the uk, in Australia and Canada, we see a lot of opportunity for our defence business growing.
Michael Dudas (Equity Analyst)
I appreciate that and maybe touch on you discussed about the height you have a relationship, the new relationship with the hyperscaler and you touched on your, on the power opportunities as you assess what the demand for AECOM services the next couple years, six months to a few years in this cycle, do you think
Troy Rudd (Chief Executive Officer)
you'll get more opportunities with the hyperscale customer side or is it more on the power district T and D power work or is it going to be a combination of both that's going to significantly flex again? I think what we're experiencing is we're actually experiencing an opportunity all three of those markets. And so it is certainly hyperscale clients are an important part of that, but there certainly just a significant amount of spending within that supply chain to ultimately support increased compute capacity. And so it really is across our entire portfolio. But the big places we see it is obviously in investment in data centers and that's all encompassing from the environmental process all the way through the completion of that. Energy and transmission are an important part of that as well. So we're seeing that as a broad opportunity for us. It sort of fits the broad client offering that we have, which within our business there's no one piece that's dominating one over the other. Thank you, Troy.
Michael Dudas (Equity Analyst)
I appreciate it.
Troy Rudd (Chief Executive Officer)
Yeah, thank you.
OPERATOR
Your next question comes from the line of Lauren Silberman with ubs. Please go ahead.
Lauren Silberman
Hi, thanks for taking my question. My question is what do you have embedded in guidance for the pace of ramp for those recent wins in the Middle east that got started a little bit slower than you were expecting?
Gaurav Kapoor (Chief Financial and Operations Officer)
Yeah, I'll let Gar take that question. Hey Lauren, I'll take that specific to the growth in the Middle East which has contracted in the first half of the year. We're expecting the second half of the year we're going to start seeing the growth to support the guidance we have of 4 to 6% excluding the workday impact and including the workday impact impact, 6 to 8% growth. And I can let Lara speak more to the specific opportunities that we have been successful at and we continue to to win even subsequent to the quarter.
Lara Pelloni
Yeah, thanks, Lauren. I mean, just a bit more color. We so far year to date we've won 100% of what we call our enterprise critical pursuits across our Middle east business. And in addition to those recent wins and confidence about the growing pipeline of transportation work, for example in the uae, I think we're well positioned in terms of the pivot that's happening in Saudi Arabia at the moment where there's going to be continued investment in sports, entertainment, and mixed-use development and we have an existing position with many of those clients and there's a very substantial portfolio and pipeline of work. For example, associated with that and some of the downtown mixed use development in Riyadh, when we look across the whole Middle east portfolio, I think long term we're positive about continued growth. Got it. Makes sense. And for my follow up, how do you see your AI investments evolving over the next few years? Will anything change about the type or the magnitude of these investments?
Troy Rudd (Chief Executive Officer)
I mean, so no. The answer is sort of thinking about this financially in terms of the sort of the team and what we've built out. You can think about that as sort of being relatively static over time. But what we are starting to see, and we will see this will continue to grow, is obviously an improvement in the overall profitability of the business and certainly in our margin. So, you know, if you look forward the way you'll be able to sort of get a sense of are we performing or getting significant return on those investments, you're just going to see a margin uplift certainly over the next year and beyond that.
Lauren Silberman
Got it. Thanks.
Troy Rudd (Chief Executive Officer)
Thank you.
OPERATOR
There are no further questions at this time. I will now turn the call back over to Troy Rudd for closing remarks.
Troy Rudd (Chief Executive Officer)
Great. Thank you, operator. And thank you everyone for joining the call today. And I want to make sure that I thank all of the AECOM professionals and employees that have done an outstanding job this quarter delivering in what I'll say it has been a turbulent environment. Thank you.
OPERATOR
And thank you everyone.
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