AECOM (ACM) Earnings Call Transcript & Summary

Okay. Hey, everyone. Michael Feniger of Bank of America's machinery, engineering and construction analyst. For next session, we're really lucky to be hosting Rosa of AECOM as many of you might be aware, actually #1 rank with the engineering news record in water, environmental and several other markets that are kind of key players in tackling this PFAS issue. So right now, I'm going to pass it over to Rosa, who's going to introduce herself. She has slides prepared, she will share her screen and go through some of the slides, and then we're going to jump into some Q&A. Anyone in the audience, if you want a copy of the slides, feel free to reach out to me, I can put you in touch with Will of AECOM and or shoot over the side myself and happy to kind of carry this conversation further beyond the session. So with all that being said, Rosa, over to you.

All right. Well, I'm glad to be part of this, and I've really enjoyed the prior presentations. By way of introduction, my name is Rosa Gwinn and I am AECOM's Global PFAS technical lead. And that just means I get to do all PFAS all the time for -- and have been doing that for some time. So it's kind of awesome. I'm going to share my screen and talk about today the addressable market for PFAS in the consulting services. So let's begin first by just acknowledging the disclosure statement, which is those who receive the slides will be able to have the time to read and understand the limitations and disclosures. All right. So thank you, Michael. You already shared some of the information, who is AECOM? Well, we are the world's trusted infrastructure consulting firm. That means we're the combination of a consulting firm for technical and professional services. And our focus is infrastructure, transportation, water environment facilities. And as you mentioned, we are routinely ranked #1 and have the pleasure this year of being ranked #1 in water, environmental science and engineer and environmental engineering, all of which are highly relevant to the PFAS question. We're a firm of 52,000 employees and our revenue in FY '23 was $14 billion. And I can just say on a personal level, I'm coming up on my 33rd year anniversary at AECOM. So this is my home, a great place to work. So we've had a lot of great detail on exact detail on exact regulations but let's step back a little bit. I'm going to talk about the philosophy of regulation. That's on the left-hand side of this slide. What are the regulatory drivers, prevention, manufacturing bans, product bans. We heard Ms. Sullivan talk about the defense limiting their purchase of PFAS containing materials and equipment, right, ahead of the pipe doesn't allow PFAS to get out into the wild. Then there are controls, right? Understanding what PFAS are out there, where they are and then applying limits on discharge or other permitting requirements. And we heard a discussion about that for landfills just in the prior presentation. And then, of course, there's the drivers of treatment, getting PFAS out of places where they don't belong, so that we can preserve human health in the environment. And that is going to be focused on each of these subcomponents that are summarized there for you to review. Interestingly, clients have been taking action on PFAS sort of ahead of the regulations, preparing themselves for what was described by again by Ms. Sullivan as this tidal wave bigger than asbestos and lead and many other items combined. So what are they doing? What are our clients doing? Of course, looking at sources, identifying where they are and in some cases, highly characterizing where they occur. Forensic evaluation, which is going to be very important for that principal responsible party question. Right? We have entities looking at their catchment, whether it's all the sewers coming into their treatment facility or it's just the surface water groundwater that is coming into a drinking water plant. Right, potable water plant. And the potable water people are already designing, implementing, mitigating the PFAS that are coming into their plants so that they can manage that. And of course, I also list wastewater treatment disposal and incineration of biosolids is occurring ahead of biosolids bans universally in this country and storm water management. And I'm going to make one other comment. These regulatory drivers on the left are global. We are seeing them around the globe. This is not just a U.S. question. This is not just a North America question and so this geography is expanding. It's giving me the opportunity to work with a lot of excellent AECOMers outside of North America where I sit. So I'm sure people are keenly interested. How much work is there out there? We're interested in that. And on 2 points, what is it that we're going to provide? And are we going to have the right resources to do it socially, globally as a community. And I've shared these estimates of our global market opportunities based on other publications of other folks and then ground truthing them against our own understanding. And we see a potential for $250 billion just flat out for the global PFAS market. And that encompasses everything including what happens with bans and alternative manufacturing and so forth. But it doesn't include the cost to all of us at the -- for the health concerns or other personal liability issues that aren't included in that number. And then if we take that $250 billion and conservatively assume that there is a consulting approach to solve 20% of those types of problems. And I do think that's conservative. That's about $5 billion a year out there ready to be expanded on finding solutions. So you can do the arithmetic there. That's a $50 billion opportunity over the next decade. How in the world is AECOM and others going to do that? What do we have that puts us kind of at the leading edge of this. And first and foremost, our clients are great. We got a lot of work across a broad range of industries and client types and they are feeding into just the broadest range of our technical expertise. I could tell stories. We've already mentioned our rankings but we've been doing this for over 20 years. We have learned a lot of hard lessons in the early days about how tricky PFAS are and of course, as the science advances, we're staying abreast of it. We're not going to just sit around. We invest in innovation. We've invested in some development of proprietary solutions for PFAS. We operate at a global scale that helps some of those larger clients are seeing discontinuities between how Asia is responding versus North America versus Latin America. And of course, we have cross-market collaboration. We see -- I work with people who are doing water treatment who are doing compliance reporting, you name it. And what that gives us is the opportunity to provide a holistic solution, where we can provide program management approaches to actually do the work. Clients are going to need to figure out where do we need to spend our efforts. First, fast and foremost, and where can we gain efficiencies over time. And that's what we love to do is figure out the hardest problem. So I think we're ideally positioned to do that and I think we're doing a terrific job. She said modestly. So how is this going to happen? I mean those are some big numbers I threw out. Of course, it can be viewed as an opportunity but there are headwinds. How is this going to be paid for, right? And right now, we're seeing a lot of focus on the water side of things. And in the water side of things, you kind of have 3 levers: rate increases, right, pass it on to the user like you and me, people who drink water or use sewer systems. Government funding and the polluter pays principle. Whoever caused the PFAS problem, that's going to be who pays for the PFAS solution. So if you look over on the right-hand side, I delve in a little more into each of these 3, rate increases you might be able to do that in a large city where the increase then would be spread over a large population. But what you're not going to be able to do is increase the rates in small communities or traditionally underserved communities, historically underserved communities because that is a burden that people cannot bear and arguably should not bear to have basic need clean water, right? I think we all can get that. So in the U.S., government funding has moved to fill the gap. We've already heard about some of the EPA, IIJA funding us, earmarked for PFAS and there's the Defense Authorization Act funding that has also rolled through. The EPA estimates for the drinking water rule alone, $1.5 billion a year of cost. And the American Water Works Association or AWWA, says, yes, you might be off by a factor of 2. We think it's bigger. So we're going to have to achieve that. And one of the last levers that I mentioned is the polluter pays and folks like myself are paying a lot of attention to the multi-district litigation that's going on in the U.S., where a number of industrial private entities are looking at managing the litigation under the -- litigation liability under that overall umbrella. So this graphic at the bottom is sort of what's going on here. So we identify a PFAS site or problem or issue we analyze it. We take characteristic samples or we think about it and we understand what -- how it all fits together. It might be a wastewater or a wastewater treatment problem, it could be an environmental problem, environmental release that we're trying to manage. And then what happens all of a sudden is we get new regulations. The MCLs are more stringent than the prior health advisories. You go back to the beginning or maybe halfway through this process. You keep getting on to this continual cycle unless, unless you can engage a destructive solution. That is your exit ramp. That is the exit ramp to resolving this PFAS problem that might have been identified at the beginning. So we've heard a lot about destruction versus disposal on today's calls. And I think that's part of the negative of the solution. So we're up for a challenge. We're happy to do it. We've done a ton of work in the federal space. And we heard from a number of speakers, the U.S. federal government, specifically the Department of Defense, Tip of the hat was an early mover, absolutely moved out ahead of the concerns, first by identifying drinking water components that could have been affected in mitigating those. And now there is this really big problem. Ms. Sullivan shared the map of 715 DoD sites and I'm here to tell you that AECOM is supporting every branch of the DoD in getting across this PFAS issue. We hold the largest contract capacity in each of the services, you might nitpick and say Rosa, you didn't list Air Force, but I'm telling you Air Force is buying a lot of work through the U.S. Army Corps of Engineers. We're doing programmatic work for some federal agencies, which I list at the top or also for the Army National Guard. We're looking at their entire suite of sites and helping them manage those according to priority. And of course, I don't want to leave out the civilian agencies like NASA for whom we have just recently won a terrific contract mechanism. And we have just endlessly tappable contract capacity already in place for each of these clients. And of course, existing agreements and MSAs with a ton of private industry. So at the end of the day, I think AECOM is positioned really in a superb location to help capitalize on this market and help provide solutions to create a better world. What do we have? We're doing PFAS work in about 20 countries. We've looked at PFAS. It's 600 distinct locations around the globe. Not in Antarctica yet, I was going to say on every continent. We have over 300 unique clients. We work -- my job is to collectively get our technical experts, not just in the U.S., Australia or the EU, but Latin America, Asia and Middle East, where we're seeing a lot of client demand starting to emerge. We run a PFAS academy where we train folks and they love it. I was surprised how much they love it. It's like going back to PFAS school. And we invest in innovation. And the proof is in the pudding. That's on the right-hand side. We have seen a 50% increase in our year-over-year backlog in the PFAS market. We can project comfortably 2 to 3 times revenue growth over the next couple of years. And we think that's going to impact our net service revenue. So this is a growth accelerator for AECOM, and we're really looking forward to tackling it. So I'm going to leave it there. There is a QR code to our AECOM PFAS site and there's my contact information there as well. So there you have it, Michael, hopefully, with enough time to chat.

Yes. Yes, that was great, Rosa. I really appreciate those slides. Again, if anybody wanted a slide, please feel free to reach out, happy to send over. So Rosa, I thought the last slide actually was kind of interesting, how you saw this big pickup in your backlog for PFAS. I believe AECOM said 1% of overall revenue today, it's clearly going to be growing. But what is driving the backlog growth today? Because we obviously had the April announcement with the designation and other things. So that's kind of on the comp. So just curious if you could kind of walk through what is driving the activity that you're seeing that's picking up right now?

Absolutely a terrific question. And I will say that those regulations that just kind of were fully promulgated in April and May and come into effect in different dates in June and July. Those didn't occur in a vacuum. All of us in the market were like is it today? Is it today? Is it today? And I think that drove quite a bit of the proactive efforts on part of our clients and customers to reach out to get ahead of that wave, that tidal wave. So for example, that $9 billion of IIJA funding, it came out gosh, I don't even remember what year now. I'm embarrassed to say 2021. And that money is out there, right? So you want to be a first mover on that money. And you know why? What if you can't buy the GAC you need or the [indiscernible] vessel made. So there is a distinct sense in those who know already, they need to perform treatment to know that there's going to be a supply chain crunch coming. And so they get out ahead of that because they're smart.

And Rosa, let me ask you because earlier we kicked off the day with David Dunlap, the former EPA admin and he went through the time line and April was a pretty important month. It seems like we finally got standards of a designation of 2 compounds for hazardous and then there was obviously the drinking water standards. So just help us understand from AECOM's point of view, what did April do in terms of triggering any events? And how does that happen in April, the designation, the standard drinking water, how does that filter going through to AECOM at some point?

Well, oddly, because of this premonition right, it's been out in the universe. We didn't see what I'd call a quantum step in interest with the MCL. There was certainly a great interest in what the actual numbers were going to be. But we had a lot of activity against the draft MCLs, which, of course, came out last October and earlier. So in a way, April was super important and solidified that this must happen, it started the clock for affected utilities to have to take those actions within the 5-year, 3-year plus the 2-year time line, I'm sure David explained it. So that's important. I got to tell you, what's really happening now is what I am hearing, I'm not kidding, there is so much focus on what's going to happen with storm water and surface water discharges. The plan 15 for effluent limitations guidelines. That is what is on people's mind. It's almost like those April issues are fully baked but we got to see the better getting made and popped in the oven, and we waited for months. It didn't come out as a surprise. There was a long ramp to that. Now there is a long ramp to these next ones. Let me make, for example, a comment. The hazardous substance designation was for 2 PFAS, but we got an advanced notice of rule making, I forgot the acronym [indiscernible] 7 additional compounds and precursors to PFAS and PFOA. And if you're not a PFAS nor that precursors to PFAS and PFOA sounds like a throwaway, but I am kidding, it is a beast. It's a beast.

And Rosa, as you emphasized, AECOM's #1 in the water market. We've seen some other peers talk about the pipeline in order growing substantially right now. And what has always been a topic for investors that's always been out there. But has kind of has it really seen the growth that maybe people expect? It seems like the last 3, 6 months, we're seeing a lot more activity going on the water level. So just with AECOM's exposure with that customer in that vertical, how does the drinking water standards impact AECOM's clients on the water side? What type of things are you doing today that you're seeing that maybe we weren't seeing a year ago?

Well, absolutely. So one of the interesting items, of course, in the water side of things is there were some entities who had some data on their PFAS influence, and they were interested in kind of taking care of that. And we did some work evaluating the catchments and looking at where the PFAS might be coming from, but they weren't obliged to take active treatment steps, which quite bluntly are more expensive than evaluating the catchment, right? So that is the distinct change associated with this. And just a couple of days ago, the UCMR5 next tranche of data drop. I think we've got about 40% of the utilities that are going to be monitored already reporting. You can go look it up, we do. And so we have a good idea who's doing what, where, who's going to have the issues and who's going to need to respond. I just have -- so the difference is understanding at a more academic level has transitioned into we need help. We have a partner who asked us several months ago, they said, we have so much work to do, design work to do for PFAS just in the Northeast. Would AECOM be willing to take these x number of projects for us. I mean do you see what I'm saying, the demand is so great that companies are without enough bench. I want to make one other quick comment. Those catchment studies that I mentioned, we're starting to see them in Europe. So if you think it was a harbinger of more work to come in the U.S., I'm telling you it's coming in the U.K. I'm telling you.

Yes. And I'd love to talk because you guys are global, I'd like to get into the global aspect. But before we jump in, a couple of questions on the line, Rosa was when we think of the PFAS business for AECOM today, is it majority of that just the testing and the monitoring and not yet the remediation side. And I guess where I'm going with this is over the coming years, what do you feel like is the bigger opportunity for AECOM? Are we still kind of in early innings on the testing, monitoring and the remediation side? Or are you starting to see that today?

Well, I always get a little defensive because I think the site characterization and monitoring is actually where you can do some of your most creative work at a certain level. Maybe that's just because that's the side I came from -- but you heard Ms. Sullivan say the DoD is not allowed to budget beyond a certain step within circular, right? So we are only now just seeing the funding for what's known as the feasibility studies, and we are seeing some funding for time-critical and non-time critical removal actions, both of which are circular terms. So what I'm telling you is that is a new facet of the DoD early driver work that has come out in the last, I would say, 10 months. If I had to push it way back, I'd say, 12 months or something. But more and more, we are seeing that remediation phase. And indeed, the costs for remediation at any one site can be mind blowing. She mentioned a few numbers for you but at some other sites, it's not as much. And it's really a mix depending on the severity of the problem and the number of receptors and some other kinds of factors, the trickiness of the geology, those kinds of things. Absolutely. I mean, so I mentioned that I've been doing this for 30 years and about 15 or 10 years ago, somebody said well, aren't you guys just working yourself out of work, you clean up these sites and everybody is so happy they move on, but you're not going to have a job. And I'm like PFAS has taken us back to those early days of my career where we were just identifying, I mean, I've been doing this for 30 years, identifying sites, characterizing, analyzing and finding solutions. We are just about to embark maybe we've learned, maybe we can compress that time. But if this is that much more massive, it's hard to imagine. It's just -- it's a little bit hard to imagine. We're not done. We've done plenty of damage to the planet to fix.

And maybe Rosa on that. I'm getting a few questions. You made a comment earlier about the PFOS comment that you had precursor comment. I think it might have been a drinking water or hazardous has in -- you also mentioned that you had advanced notice for maybe 7 additional compounds that potential precursor. So the audience was asking if you kind of expand on that and potential implications when you kind of think about there?