AECOM (ACM) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Fiscal 2007 AECOM Earnings Conference Call.

My name is Mycia and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

Paul Gennaro, Senior Vice President of Corporate Communications and Investor Relations.

Please proceed, sir.

Thank you, Mycia.

And welcome, everyone, to AECOM's fourth quarter fiscal 2007 earnings conference call.

Please go to slide two.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see it today, and as such, does include risks and uncertainties.

Please refer to our press release or slide two of our earnings presentation for more information on the specific risk factors that could cause actual results to differ materially.

As we begin our call, let me remind you of some of the important information about our earnings that are posted on the investor website -- investors.aecom.com.

First, we posted our earnings release and updated financial statements on the site for anyone who still needs access.

Second, a replay of today's call will be posted there at around noon Eastern Time and will remain there for approximately two weeks.

Please go to slide three.

And lastly, since we are using some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted on our website as well.

Now, I'd like to turn it over to AECOM President and Chief Executive Officer, John M.

Dionisio.

Thank you, Paul, and thank you all for joining us today on our earnings call.

Today I'll start off the call by presenting a snapshot of AECOM's global business and future opportunities.

Mike Burke, our Executive Vice President and Chief Financial Officer, will then discuss our fiscal '07 fourth quarter and full year financial performance, which has grown significantly year-over-year.

As you all are aware, AECOM is a global leader of professional, technical, and management support services.

Our key end markets are facilities, transportation, environment, and energy.

We provide a broad range of services, including architectural and engineering planning, design, program management and construction management.

On slide five, I summarized our fiscal '07 highlights.

AECOM's fourth quarter and full year performance was strong.

Revenues for the year grew by 24% year-over-year to over $4.2 billion and we delivered an earnings per share of $1.15.

During fiscal '07 our consistent, strong organic operating and marketing results strengthened our position in each of our geographic regions and end markets.

In addition, we strengthened our financial performance by completing our IPO, paying down our debt and expanding our credit facility.

During the year we successfully completed and integrated seven key acquisitions into the organization.

Through both organic growth and our acquisitions, we expanded our geographic footprint in Canada, the Middle East, and China, and expanded our environmental and facilities market.

AECOM's outlook remains strong.

Backlog for the year was well ahead of last year.

This growth was fueled by significant wins in each of our key end markets.

Despite the difficult employment market and the war for talent, we added a net 5,300 new employees worldwide.

It was a busy year but a very productive year.

Looking at page six, AECOM's outlook remains strong.

I would like to describe for you how we see our markets going forward.

Overall, the global facilities and infrastructure markets remain strong and we have -- and we have seen -- although we have seen some impact in the market, we have not seen it -- we have not been negatively impacted by the U.S.

credit and subprime markets.

AECOM's broad geographic presence in North America, the UK, China, Hong Kong, the Middle East, and Australia has continued to grow and allowed us to capitalize on existing global market opportunities.

This slide indicates some of the significant opportunities that AECOM has in each of its key geographic markets.

In addition, not shown on this slide, are the opportunities that present themselves in India where AECOM's investments have resulted in key planning wins with private multinational clients in our facilities and environmental markets.

AECOM's non-U.S.

markets are growing at double the rate of our U.S.

markets.

Looking at slide seven, I'd like to highlight AECOM's strength and what differentiates us from the rest of our peers.

It's our diversification.

Diversification is a key strategy to our business model and a critical AECOM success factor.

50% of AECOM's revenue is generated outside the United States, our key geographic markets being North America, the UK, Hong Kong, China, Australia, New Zealand, and Middle East.

In addition to this geographic diversification, our client mix of public and private clients, both in and outside the Untied States, remains balanced at approximately 45% private and 55% public.

This broad geographic and client diversification was a significant factor of our FY '07 growth and a key factor to our continued growth in FY '08 and '09.

The diversification will allow us to take advantage of the strong and growing non-U.S.

markets and at the same time buffer AECOM against any slowdowns in our U.S.

markets.

As I mentioned previously, our non-U.S.

revenue has grown at double the rate of our U.S.

revenue.

In addition, the margins outside the United States are generally higher than our U.S.

project margins.

Our current FY '08 market assessment in each of our key markets, namely non-residential commercial facilities, transportation, environmental management and water and wastewater markets, remain strong.

Our growth and market confidence is fueled by the significant wins we recorded in fiscal '07.

We are confident our existing backlog, which has grown approximately 26% year-over-year, as well as the significant global facilities and infrastructure opportunities we have before us will sustain our growth targets.

Our acquisitions in FY '07 and in the first quarter of '08 continue to advance our geographic diversification growing our China, Canada and Middle East market presence.

Continuing on to slide eight, AECOM's results are reported in two segments, management support services and professional technical services.

On the management support services segment we -- it is comprised of 20% of our fiscal '07 revenue.

In this segment we provide outsourcing for various U.S.

government agencies.

Approximately 80% is with the U.S.

Department of Defense, but we continue to diversify, providing services to Department of Energy, Department of Justice, Department of State as well as Homeland Security.

The management support services segment funded by the U.S.

Federal government remains strong with spending increasing in fiscal '08 over 11% for Department of Defense and Department of State on international assistance programs.

We are positioned well to grow our federal markets.

To assist us, we recently brought onboard Michael Jackson, the former Deputy Secretary of Homeland Security and the former Deputy Secretary of Transportation.

He will be instrumental in helping us to expand our market presence in the federal arena.

The professional technical services area, that's our primary segment.

That consists of 80% of our revenue in FY '07.

In this segment we provide engineering, architectural planning design, program management and construction management services for public and private clients worldwide.

We have a good balance of our key markets.

Our focus, however, is to expand over the next three to four years our environmental market to approximately 30% and our energy and power business to approximately 10%.

I would like to now spend some time discussing three of our key professional technical services markets, facilities, transportation and environment.

So if you look on slide nine, our facilities markets remain strong, both in and outside the United States, despite the slowdown in the U.S.

residential housing market.

Despite the heightened uncertainty in the larger economic picture, demand for services in the facilities market remains strong.

Approximately 48% of our facilities work is outside the United States.

Of the U.S.

facilities market, we do not do residential housing or condominiums but rather focus on major commercial and municipal facilities.

60% of our U.S.

facilities work is with major public agencies.

[Long] global market opportunities have developed in sustainability and in green design.

The Middle East and China are particularly strong facilities markets for us and are driving our growth opportunities.

Current European forecasts predict about a 3.1% increase in non-residential construction in 2008 and in the United States it's predicted to be about 10% increase in the U.S.

non-residential building spending in 2008.

On slide 10, we look at the transportation market.

AECOM is ranked number one in transportation.

As such, we maintain a strong global position in this market.

We are a major player in highway and bridge, transit and rail, marine and airport projects around the globe.

The global transportation market demand remains very strong.

In the U.S., this market is fueled by both federal government and state and local funding.

The concern that has been voiced regarding the U.S.

transportation market is that state and local funding sources will be impacted by the slowdown in the economy.

To date, we have not seen that.

The federal government is moving to continue to fund investments.

As a matter of fact, we see several major project opportunities being launched.

The private investment community remains strong and there is a pent-up opportunity for private funding of infrastructure projects.

Recent wins in the United States and outside the United States will continue to see our market grow in FY '08.

For instance, in Canada, transportation is a growing market, as indicated by the recent Building Canada plan, which provides $33 billion in stable and predictable funding for infrastructure improvements from 2007 through 2014.

In the United States, the November 6th municipal elections saw approximately $29 billion in municipal spending and new bond issues passed for spending on infrastructure nationwide.

The United States Funding Bill has budgeted over $104 billion for spending in FY '08.

It's approximately a 7% increase over last year.

And additional funding is being provided in 2008 as emergency -- to address emergency deficiencies for bridges within the United States.

Our environmental market, which is described on slide 11, AECOM has targeted this market as a key growth market for us.

We do environmental management, water resources, water and wastewater planning and design projects around the globe.

We have expanded our market in FY '07 through acquisitions in Canada and Australia.

Looking to the future, the U.S.

Congress recently passed a $23 billion water bill that will fund water and wastewater projects in the United States.

From a global perspective, there is a need for over $26 trillion of investment globally over the next 25 years.

On slide 12, I briefly describe our acquisition strategy.

AECOM's growth has been a combination of organic and acquisitive growth.

We target 50% of our growth from organic development and 50% from acquisitive.

In 2007 our revenue grew 24%, of which 63% was organic and 37% acquisitive.

We continue, though, to focus on growing our markets and geographies through both organic and acquisitive growth.

We've completed, as I mentioned, seven key acquisitions in FY '07 and in the first seven weeks of FY '08 we've closed on three acquisitions, one of them -- one of our recent acquisitions is a Chinese architectural firm which has given us a Class A license in engineering and architecture.

We believe we are the first western firm that has 100% ownership of a Chinese firm with a Class A license.

This will significantly enhance our growth opportunities in the China facilities and urban planning markets.

I hope that gives you a good overview of AECOM and our position and our strength going forward.

I would like now to turn the call over to Mike Burke, our chief financial officer, to describe some of the highlights -- financial highlights of the year.

Mike?

Thank you, John.

Let me start off with our financial highlights for the fourth quarter and our full fiscal year.

Our fourth quarter revenue was a record $1.1 billion and our full year revenue was a record $4.2 billion.

We experienced record fourth quarter net income of $29.4 million and full year net income of $100.3 million.

Our net earnings were $0.29 per share for the quarter and $1.15 for the year.

In addition, our full year cash flow from operations was $137 million, well above our planned cash flow forecast.

Our operating income grew from $103 million to $156 million and about half of this operating income growth was due to higher margins.

Now let me discuss the results in much greater detail on slide 14.

On slide 14, you'll see that we report our financial results in two segments, professional technical services and management support services.

During the fourth quarter we recorded a 25% revenue growth in professional technical services and a 15% increase in management support services on a year-over-year basis.

These segment results contributed to a 23% growth in revenue on a consolidate basis.

I'd like to draw your attention to our net service revenue growth.

As you've heard from us in the past, we believe net service revenue is a very good indicator of our financial success.

We incur significant amount of pass-through costs that we incur on behalf of our clients that is included in gross revenue.

Net service revenue is an indicator of the true services that we are performing on behalf of clients.

While we had a 23% growth in gross revenue, our net service revenue grew at 32% year-over-year.

We had faster net service revenue growth and revenue growth during the fourth quarter, which reflects the fact that we are self performing more of our work now than we were just a year ago.

Our strategy of broadening our service offerings through acquisitions is allowing us to keep a greater share of our clients' spend.

Our organic revenue growth in Q4 was 12.4%, or 16% on a net service revenue basis, while our growth attributable to M&A was 12.6% on a gross revenue basis and 16% on a net service revenue basis.

As we've always said and you heard John mention a minute ago, our long term strategy is to have a healthy balance of organic and acquisitive growth and our results continue to prove out that strategy.

If you turn to slide 15, you'll see that for the full year we recorded a 23% revenue growth in professional technical services and 26% increase in management support services on a year-over-year basis.

These segment results contributed to a 24% growth in revenue on a consolidated basis.

Net service revenue also grew at a strong pace, increasing 27% over last year.

Our gross revenue grew 15.1% organically and 8.8% through acquisitions.

On a net service revenue basis, we grew 13.9% organically and 12.7% through acquisitions.

This exceptional growth is fueled by our non-U.S.

business, which is growing at twice the pace of our U.S.

business.

Moving on to slide 16, you'll see that our operating income in our PTS segment was quite strong, including a 37% increase during the fourth quarter and a 43% increase for the year.

It's worth noting that our operating income is growing faster than our net service revenue due to our higher margin business outside the U.S.

as well as some benefit from the scaling of our SG&A costs.

If you turn to slide 17, you'll see that operating income in our MSS segment increased 3% during the fourth quarter and 25% for the year.

This slower growth in Q4 is attributable to a few major events.

First, we realized several one-time profit pickups in the fourth quarter of FY '06 on our Iraq related work due to task order completions.

Secondly, in Q4 of fiscal '07 we increased our contract reserves for our CSA contract in the normal course of business for indirect overhead rates in accordance with government cost accounting standards.

And last, we significantly grew our revenue on a cost reimbursable CSA contract that has lower profitability.

Moving on to slide 18, you'll see our net income was also quite strong in the fourth quarter as well as for the full year.

Net income increased to $29.4 million, a 90% increase from Q4 of FY '06.

On a full year basis, net income increased 87% to $100.3 million.

These overall results reflected increase in our margins, in particular our margins outside the U.S., as well as scaling our SG&A costs across the organization and a decrease in our interest expense due to our lower debt level than a year ago.

Please note that our income tax rate of 32% is not indicative of our structural rate, which still remains at 33.5%.

Moving on to slide 19, as I just mentioned, we experienced significant margin improvement during the fourth quarter.

As of September 30th, our year-to-date gross profit margin on net service revenue was 48.27%, an improvement of 59 basis points compared to the same period last year.

Additionally, our pro forma EBITDA margin, excluding the one-time $11.3 million gain on an equity investment we experienced in Q1, was 7.65%, an 84 basis point improvement compared to last year and we expect to see these margins continue to improve over the coming years.

Moving to slide 20, we continued to strengthen our balance sheet.

At September 30, 2007, cash and cash equivalents were $415 million, an increase of $287 million compared to the end of fiscal 2006 and we had total debt of $48 million, a decrease of $89 million year-over-year.

Of course, the increase in cash was primarily attributable to the IPO in FY '07 and strong cash flow from operations throughout FY '07.

During August of this year we increased our credit facility to $600 million, which remains undrawn at this point in time.

As we've said in the past, we believe that our balance sheet is currently underleveraged.

We believe the right capital structure for this business dictates a debt load of about two time EBITDA.

And as John mentioned earlier, we will continue to search for the right strategic M&A opportunities that will allow us to achieve our strategic plan and our optimal capital structure.

Moving on to slide 21, at September 30, 2007, our total book of business stood at $6 billion, a 26% increase over the prior year.

So let me reiterate our definition of backlog and selected, not booked category.

Backlog represents that amount of work for which we have a signed contract and, in the case of a public client, where the project has also been funded.

The selected, not booked category represents that amount of work which we have been awarded but where the contractual agreement has not yet been completed.

Neither of these measures include any IDIQ contracts or option years.

As of September 30th, our PTS backlog increased 17% and our MSS backlog increased 85% year-over-year.

Projects for which we were selected, but have not booked grew at 29%.

This gives us a combined backlog and selected, not booked total of $6 billion, up 26% from nearly $4.8 billion a year ago.

Moving on to slide 22, I'd like to discuss our outlook.

We expect diluted earnings per share for FY '08 to be in the range of $1.19 and $1.26.

This guidance takes into account our strong growth during the fourth quarter across service lines and geographies, our strong backlog and the momentum contributed by our recently acquired companies.

I'd like to point out a few things here.

First of all, the midpoint of our EPS guidance range would result in a 25% increase in net income year-over-year.

However, our increased share count due to the midyear IPO has a dilutive effect on this 25% growth rate.

Due to the IPO in mid '07, in May of '07, our diluted share count is expected to increase 17% next year.

I should say 17% in '08 versus '07.

This guidance assumes our weighted average diluted share count for FY '08 to be $102.3 million -- sorry, 102.3 million shares, which is a steady share count from the beginning of '08 through the end of '08.

Another way to look at our EPS trend line is to eliminate the mid-year impact of the IPO and you see it on slide 22 here.

If the IPO occurred at the beginning of FY '07 so that we had a steady share count from '07 to '08, the EPS would grow by 14% in FY '08, at the mid-point of our guidance range, which is consistent with our long-term growth prospects for EPS.

I'd also like to point out that our FY '08 plan includes some significant non-cash charges that need to be considered.

Due to the nature of our M&A strategy, our '08 plan includes $19 million of intangible amortization, non-cash intangible amortization charges.

As you know, M&A deals in our space carry significant amortization in the first year due to the purchase accounting value ascribed to backlog.

This $19 million non-cash charge in FY '08 equates to about $0.12 EPS after tax in '08.

With that, I'd like to turn it over to John to recap our results and provide his outlook for the future.

Thank you very much, Mike.

As Mike discussed, our business results for the fourth quarter of FY '07 and the full year was strong and our outlook remains equally strong for FY '08.

We expect to continue leveraging our global diversification to take advantage of growing global market opportunities in China, Middle East, Canada and India and leveraging our strong market position in the United States to capture opportunities here.

There are several exciting opportunities that we are pursuing and we hope to continue the momentum we have established in winning key projects.

And finally, our acquisition pipeline is robust.

We look forward to continue seeing the benefits of successful -- of our successful M&A model as we go forward.

Overall, we feel very positive about the future and we look forward to continuing the success we've experienced in FY '07.

I'd like to thank you all for listening and now I'd like to open it up for -- the floor for any questions that you may have.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Our first question is from Andrew Obin with Merrill Lynch.

Please go ahead.

Yes, hi, guys.

I apologize for poor noise.

I'm actually in (inaudible).

But in terms of your guidance, does that include incremental M&A or it's just organic?

Andrew, we have included an amount in our guidance at the midpoint of that range for moderate M&A activity consistent with our history.

We have not included any large very significant M&A activity in that number.

So what's moderate?

You have formula.

I mean, how much should I allocate for M&A in terms of dollars or however you want to calculate it.

I mean --

Yes --

-- if you could quantify earnings per share from M&A, that would be the most useful.

Yes.

I think what would be easier for us to do is just to give you a sense for at the mid-point of the range you might see close to $20 million of EBITDA from acquisitions.

But as I pointed out earlier, Andrew, that does not have an enormous accretive impact in year one because of the amortization.

Okay, so basically, if I'm thinking about it, it's maybe between $100 and $150 spent on M&A in next year but very little accretion from the deals next year.

Well --

Is that a fair way to describe it?

Yes, that's a fair way to describe it because as I pointed out, our amortization charges at the mid-point of the range would be about $19 million for next year.

I mentioned that midpoint would produce about $20 million of EBITDA from M&A, so those essentially wash each other out before we talk about the cost of any debt associated with those.

So if there was no M&A, the guidance would still be pretty close to what you guys published.

Is that a fair statement?

Fairly close, yes.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question is from Chris Gutek from Morgan Stanley.

Please go ahead.

Thanks.

Good morning.

Morning, Chris.

Two questions, first for John.

So you mentioned, John, in your prepared comments that you're seeing some signs of a credit crunch in the market but not necessarily having any negative impact on the Company.

Could you just elaborate a bit more on what you're seeing with your customers or elsewhere in the marketplace?

And just thinking a little bit more broadly longer term, if the consensus economists forecasts are correct and a more meaningful slowdown is likely next year, how much of a lag do you think your business will take before you start to feel the effects and how do you think that would play out?

Where we're seeing it is some impact is in the southeast with certain of the -- of our clients in the water business as well as looking at some of the small developers in the southwest who are in the residential housing markets.

In terms of the clients that we saw and on the private side where we see our major developers, they're looking at -- they're looking at the next cycle.

I mean they're almost looking at beyond the slowdown into their next cycle and taking steps and making plans, providing -- looking for services in terms of planning on how they're going to respond when we go through this down cycle.

So with the backlog that we have and the major programs that we've won, we believe that here in the United States we will not see any significant impact during this slowdown.

If there is a slowdown because again, what we've seen in our marketplace, it remains robust in transportation and the environmental sector as well as in our major public facilities markets.

Presumably, at least with some of the state government funded projects, there would be a bit of a lag effect but there would eventually be some slowdown if state government tax receipts moderate.

But I guess your view is that you're not concerned about that at this point.

We've -- one of the -- you're correct.

After 9-11 there was a similar type of lag.

We were able to withstand that slowdown because of the major projects that we have -- that we had at that time.

I think the same thing is what we see now.

The major programs that we have, which will continue for the next three, five, seven years, are not being -- are not being impacted.

Also, as I mentioned, in the elections that just past there was, what'd I say, 20-something billion dollars of bond issues were passed, which would complement the local, state, and municipal governments to continue their capital programs.

Was that --?

What I'm saying is the revenue that -- the funding that's coming from the states will not only come from sales tax, but it's also going to be coming from the bond issues which were passed, which will continue the programs moving along.

Okay.

And my second question was for Mike.

It's on the backlog.

And, Mike, I know that the backlog is up nicely year-over-year, but looking at it on a sequential basis, third quarter to fourth quarter, it was down slightly despite some acquisitions.

I know there's seasonality and inherent lumpiness and other issues driving the backlog, but is -- could you maybe give us an updated number through the end of November or talk a bit more qualitatively about how you think that backlog will hopefully likely grow over the next couple of quarters?

Yes, that's a good question, Chris.

First of all, this performance in Q4 was consistent with what we've experienced over the last four years.

The federal government fiscal cycle ends at 9-30.

Many state and local governments are on that same fiscal year, so you always see a slowdown of new contracts right at the end of the fourth quarter.

And so for the past four years, like I said, it's either been flat or a dip in our backlog in Q4 and then it comes right back.

And so we feel very confident about the backlog growing in Q1.

The wins that we are experiencing just in the past month or so are very significant.

I don't have an updated number as of November, Chris, but I'm confident that, like we have in the past four years, we'll see a bump up in Q1.

Okay, great.

Thanks.

Thank you.

Our next question is from Steven Fisher with UBS.

Please go ahead.

Hi.

Good morning.

It sounds like you're feeling under-levered at this point and it looks like you've got quite a bit of room to go to achieve your target leverage.

Does that mean you're actively searching for larger acquisitions at this point?

As I mentioned, Steve, our pipeline for mergers and acquisitions is quite full and we are right now looking at several acquisitions.

In the first part of -- first seven weeks of this year we closed on three and we expect that we'll be continuing the strong pace throughout this fiscal year.

And given that it sounds like you expect a fairly steady share count through fiscal 2008, does that mean there wouldn't be much share issuance for these acquisitions?

Yes, that's correct.

That's our assumption, Steve, is that we prefer to do our deals primarily in cash.

Okay.

And then lastly, it sounds like you're targeting taking your energy and power exposure up to about 10% of the business.

Can you just talk about what parts of the market you're targeting at this point?

Well, we're looking at -- in the energy side we're looking at renewables, renewable energy in terms of the wind and water.

We're looking at hydro, the transmission and distribution markets.

And we will be advancing in, say, in the hydro field over the next eight to 12 months.

Okay.

And maybe I could get in one more.

When you talk about the Class A construction license in China, what kind of revenue potential do you see from this opportunity and how competitive might you expect that business to be in China going forward and how attractive could the margins be?

Well, first of all, there is a real pent-up demand for facilities and urban planning in China.

It's a very large market.

We're well positioned, being there as a local company, with about 1,000 employees before this -- before this acquisition.

It is a competitive market.

But again, we have a niche in that because of our strong position in Hong Kong, which has grown significantly.

And we feel that leveraging our position in Hong Kong with partnerships that we have in China as well as this acquisition will put us in good stead in terms of growing and expanding our market.

In terms of revenue, I don't have the numbers of what we're projecting.

Okay, great.

Thanks.

Thank you.

Our next question is from Sam Snyder with Renaissance.

Please go ahead.

Hi.

I was wondering what the organic growth trend was in the PTS segment for the quarter.

The organic growth in the PTS segment, I can give it to you both on a gross revenue as well as a net service revenue basis.

First of all, organic growth PTS was 11.8% on the revenue line and 15.7% on the net service revenue line, which is a more indicative number.

Okay.

And if you could just give us some color on what's driving that in this most recent quarter?

What's driving it is a number of things, but probably the single biggest contributor is our non-U.S.

business.

As you heard John mention, half of our business is outside the U.S.

Our revenue growth in, whether it be Australia, Hong Kong, Canada, Europe or the Middle East, is performing extraordinarily well.

But our U.S.

growth is still very strong also.

But what's moving it up to those levels is the 50% weighting of our business outside the U.S.

Okay.

And you guys will give, like, sales geography breakdown in the Q?

We typically do not provide sales by geography in the Q.

Okay.

All right, thanks.

But it is 50% of our revenue is outside the U.S.

and that's been moving up over -- as of the end of Q3 it was about 47% outside the U.S.; it's now 50%.

Is that mostly in Canada?

No, it's split between Canada -- Europe is twice as big as Canada, the Middle East is about the same size as Canada in terms of revenue and EBIT, Hong Kong, China is bigger and Australia is bigger.

Okay.

Thanks a lot.

Sure.

Thank you.

Our next question is a follow-up from Steven Fisher.

Please go ahead.

Just a follow-up here.

I'm not sure if I missed this, but how should we think about organic growth rates in fiscal year '08 relative to fiscal '07?

Yes, Steve, I think we are giving guidance based on EPS growth and net income growth and you saw that -- I pointed out that at the midpoint of the range we're producing about 25% increase in net income.

I think some of that will come through margin improvement and a better -- continued improved scaling of our SG&A.

But we're not giving specific guidance on revenue growth, but obviously to produce 25% growth in net income there'll be a fairly healthy both organic and acquisitive growth of revenue.

Okay, great.

Thanks.

Our next question is from Josh Gorgon with Crystal Rock.

Please go ahead.

Yes, thank you.

Just two quick questions, if I may.

First, I wanted to just get a data point.

Do you have the amortization number for the fourth quarter that ran through the P&L?

For Q4 I don't have that at my fingertips.

I can tell you what it was for all of FY '07.

The intangible amortization number was $12.5 million.

$12.5 million.

And then secondly, just looking for some color on the margin trends.

Obviously you guys had fantastic year-over-year improvement second and third quarter, and then for the year a little bit of deceleration in the improvement in the fourth quarter.

And just curious if there's some lumpiness in the margins or there was some -- anything in the fourth quarter that was out of normal or any color would be helpful.

Yes, sure.

A couple of things.

If you look at the MSS segment, I mentioned the contract reserve that we set up in Q4 in the MSS segment.

So that was a one-time event in that quarter so had a little downward pressure on the margins in the MSS segment.

The PTS segment we had a, I'll call it 15 basis point drop in our margins if you're looking at it income from operations over our net service revenue, which is how we view the business.

Those 15 basis point drop just in that quarter was primarily attributable to the fact that in the fourth quarter we gave a mid-year salary increase in some of our non-U.S.

markets due to the extraordinary growth in those markets as a real award for talent and we decided to increase the salary across the board in certain hot foreign markets.

And it just takes us a little bit of time, sometimes a quarter, before -- a quarter or more before we can pass those costs through to our clients and through improved contracting terms.

So it was about a 15 basis point drop that we expect that to come right back once we push those costs through our new contracts.

Great.

Thank you.

You're welcome.

Thank you.

Our next question is from Cliff Walsh with Julius Baer.

Please go ahead.

Good morning.

Can you guys just circle back on the non-cash charge that you have in your guidance?

I didn't catch the numbers there.

The non -- oh, the amortization?

Yes, the amortization that you mentioned.

Yes.

At the mid-point of our range we're expecting $19 million of non-cash amortization from acquired intangibles.

That does not include the traditional depreciation and amortization from operations.

Okay.

And would that -- that wouldn't necessarily be any different at the low point to the high point to the guidance either, right?

Well, it could be.

If you grew your business through more M&A you would have more depreciation expense or more amortization relative to software intangibles.

But if you did more M&A, obviously your intangible amortization would increase also.

Okay, so what kind -- I mean how much of a range should we be looking at here?

A range for what?

For the non-cash charges.

You gave a midpoint number, but if you were looking throughout the -- from low to high, how wide could it get?

It's entirely dependent on the size of the transactions.

If we do the standard normal course M&A, it'll be about that $19 million.

If we find the right strategic opportunity and it's a large M&A, that number would increase significantly.

Okay, great.

Thanks for the clarity.

Thank you.

Our next question is from Sun Moo-Young from Golden Tree Asset Management.

Please go ahead.

Hi.

Just a follow-up question on that.

So [we have] non-cash charge recurring beyond 2008?

It would be recurring if we did more M&A.

But, as I mentioned, the way to look at this, what we call the FAS141 intangible asset amortization, is that in our business, since the lion's share of the intangible value is ascribed to backlog and the backlog burns off, depending on the type of business, somewhere in 12 to 18 months, most of your amortization charge is going to hit in year one.

So it's a steep drop-off after year one in intangible asset amortization from M&A.

And so what -- if we continue to do M&A, it would -- at that level, it would continue at that steady state.

If M&A slows down, that drops of dramatically.

And typically, the M&A transactions -- not typically, in all cases the M&A activity is very accretive in year two because of that drop-off in amortization.

Very accretive on a GAAP EPS basis.

They're accretive on a cash basis right away.

Thanks.

Thank you.

And, management, there are no further questions at this time.

Please continue with any closing remarks you may have.

Well, I want to thank everyone again for dialing in and for taking the time to ask us the questions you did.

And we look forward to speaking to you again on the next earnings call.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the fourth quarter fiscal 2007 AECOM earnings conference call.