AECOM (ACM) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal 2008 AECOM Earnings Conference Call.

My name is Vince, and I'll be your coordinator for today.

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

If you are listening to the call via telephone and webcast, you may want to mute or lower the volume on your computer.

We will conduct a question-and-answer session after the conference.

(OPERATOR DIRECTIONS)

As a reminder, this call is being recorded for replay purposes today, Thursday, May 8, 2008.

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

Paul Cyril, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Vince, and welcome, everybody to AECOM's Second Quarter Fiscal 2008 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.

As you know, our actual results may differ materially from those projected in these forward-looking statements.

Please refer to our press release or slide two of our earnings presentation, and the reports filed with the Securities and Exchange Commission 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 on investor earnings that are posted our website, investors.aecom.com.

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

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

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.

Good morning, everyone and welcome to AECOM's Second Quarter Fiscal 2008 Earnings Conference Call.

During today's call, I will provide you with an overview of our second quarter performance highlights, and an update on business trends, key project wins, and recent acquisitons.

Then, Mike will take you through the financial results and our revised guidance, and open the call up to your questions.

Please go to slide five.

We had a very strong second quarter.

All our key performance indicators were up.

Revenue for the quarter was $1.2 billion, net earnings were $36 million or $0.35 per diluted share.

Backlog remains strong at $7.1 billion.

This represents an increase of 20% over last year's comparable quarter, and 18% over the end of fiscal 2007.

As many of you know, our operating strategy is based on diversified end markets, geographies and services.

This strategy has continued to serve us well in the past quarter.

What's more, we believe this strategy will position AECOM for continued and strong growth in years ahead.

As we look forward, we plan to continue leveraging AECOM's world-class global expertise as we work to capitalize on opportunities.

I would now like to start our review of the quarter by looking at our professional technical services section.

The PTS segment comprises about 80% of our gross revenue, and is well diversified across our core end markets; facilities, transportation, environment, and energy and power.

Please go to slide six.

Starting with the right-hand side of the pie chart, you'll see that our facilities market made up 35% of our second quarter PTS revenue.

Much of the work in this segment is for government clients.

This work includes projects such as schools, correctional facilities, courthouses, and other government buildings.

In addition, a significant portion of our work in the facilities segment is in high-growth markets outside the United States.

One example of this kind of work is our recent $574 million contract for the Libyan Housing and Infrastructure Board.

Elsewhere in the Middle East, we are seeing strong funding for museums and cultural facilities.

For example, AECOM was recently selected as the project manager for the multi-billion dollar Saadiyat Island Cultural District in Abu Dhabi.

In addition to our government clients, we also serve a number of commercial, multi-national clients in high-growth markets around the world.

As we look to the future of the facilities segment, we continue to see strong demand for our services.

According to a recent global insight study, the worldwide facilities market is expected to grow at an annual rate of 9%.

In addition, we see good underlying demand for our services.

For example, we expect to see an increase in the federal funding for the types of facilities projects that are in our sweet spot.

Moving on to transportation, this end market comprised 34% of our second quarter PTS revenue.

Our work in transportation includes planning, design and program management for highways, bridges, transit and rail facilities, tunnels, airports, and marine facilities.

During the second quarter, we had a steady of stream of new wins in transportation.

These wins included a $20 million contract for the New Jersey Department of Transportation to provide design and construction engineering services for the Princeton, New Jersey Penns Neck project.

Another win was the $25 million contract for program management services to support the capital improvement program at Los Angeles International Airport.

Ultimately, the LAX program will include projects totaling $5 billion to $8 billion over the next ten years, and we will be working to position AECOM for follow-on contracts.

The global transportation market is expected to grow at an annual rate of 10%.

Now, turning to our environmental business, this segment comprised 27% of our second quarter PTS revenue.

Our work includes environmental management, drinking water and wastewater treatment, and water resources projects.

Our wins during the second quarter included the renewal of our master service agreement with British Petroleum to perform remedial consulting in the United States.

Another key win was a new assignment for Shell to provide services to their South American operations.

The environmental market is expected to grow at an annual rate of 9% over the next five years.

We see significant growth opportunities in this market, driven by the heightened focus on environmental management, water resources, and sustainability.

Finally, turning to our energy and power end market.

Our work in this market consists of transmission and distribution services, energy savings programs, and renewable energies, including solar, wind, and hydroelectric.

With the price of oil at all-time highs, we're seeing the growing demand for alternative energy development and distribution.

This is driving demand for alternative energy infrastructure projects.

The energy and power end markets are important growth drivers for AECOM.

We'll be looking to make acquisition to build our business in these markets to achieve critical mass.

A good example is our recent acquisition of Tecsult, which gives us capabilities in global hydropower.

We expect that, over time, our energy and power business could account for as much as 15% of our total PTS revenue.

As I said, our PTS segment comprises about 80% of our total business.

Not shown here on this slide, our Management Support Service segment comprises 20% of our revenue.

This is approximately a $1 billion business, and provides outreach and logistical support services to the U.S.

Federal Government through its various agencies and facilities around the world.

The Department of Defense, the Department of Energy, and the Department of Homeland Security are the key funding sources for MSS.

This is strong market for us, and we recently won an IDIQ contract from the U.S.

Defense Threat Reduction Agency.

Collectively this is a ten-year, $4 billion contract in total for all contract awardees.

Our team will provide program management services to reduce biological threats in a number of countries.

Please go to slide seven.

We are delivering solid growth both in and outside the United States.

As measured by net service revenue during the second quarter, our U.S business grew at a rate of 17%, and our non-U.S.

business grew at a rate of 39%.

In the second quarter, the U.S.

market accounted for 47% of our net service revenue, while work out of the United States accounted for 53% of our net service revenue.

This geographic diversification positions us to take advantage of the high-growth emerging markets around the world.

Please turn to slide eight.

This slide shows the diversified mix of our client base and funding sources.

We provide a wide array of services, we are focused on a broad base of funding sources, and much of our business involves large governmental contracts.

Taken together, these give us the ability to straddle any cyclical changes that may occur in the economy.

Looking at our revenues in the second quarter, the private sector contributed 37%, non-U.S.

governments contributed 20%, and the U.S.

Federal Government funded 30%, either directly or indirectly.

Finally, 13% of our revenue, the smallest portion, was from state and local governments, and of that, a significant portion was funded by long-term municipal bonds and user fees.

With that type of secure funding, we expect to see continued strength in this market.

Overall, this diversification of funding sources allows us to follow the money.

We will continue to advance our strategy in this market by focusing on large, long-term essential projects, by leveraging our large and growing resource pool to pursue the work, and by being able to shift resources to markets where we see the best opportunities.

Please go to slide nine.

Now let me provide an update on our recent acquisitions.

I'm pleased to report that in March, we closed our acquisitions of both Tecsult and Boyle Engineering, both are completely integrated into our operations.

In early April, we closed the acquisition of TSH.

This Canadian firm works in each of our markets.

We remain on track to close Earth Tech in June.

We have made progress in identifying buyers for Earth Tech's assets, which are outside our core business.

We expect to sell most of these assets by the time the transaction closes.

Mike will provide more information on this in a moment.

We're well down the path of integrating Earth Tech's global consulting and engineering business with ours.

We feel good about how the progress is going, and all told, Earth Tech is a great acquisition.

Our recent acquisitions have advanced our position in the United States and Canada, and in key markets including water and wastewater and hydroelectric.

We're delighted to have found a number of companies that fit so well into our acquisition strategy.

Looking forward, we continue to pursue strategic acquisition opportunities.

Our priorities by end markets are, energy and power and environmental.

Regionally, we are focused primarily on opportunities outside the United States, including Europe, India, and China.

I would now like to turn the call over to Mike, for an overview of our financials.

Mike, please go ahead.

Thank you, John.

Please turn to slide ten.

First of all, we're very pleased with our success in the second quarter and our continued momentum.

We've continued our record of top-line growth, increasing our revenue by 7% in the second quarter, to $1.2 billion.

Our net service revenue was up 27%, to $751 million.

As we have said in the past, net service revenue is an important measure of our performance.

While our gross revenue includes a significant amount of pass-through costs that generate minimal margin, our net service revenue reflects the true earning power of our business.

This revenue growth along with improvements in our margins, which I'll discuss later, drove our operating income to $59 million, a 55% increase over last year.

Our net income was $36 million, up 69% over last year.

This led to diluted EPS of $0.35, an increase of 30% over last year.

Turning to backlog, our total backlog improved by 20% over last year's to $7.1 billion.

These results point to strength in our business that positions us for continued growth.

Please turn to slide 11.

As you know, we report our financial results in two segments, professional technical service, which accounts for about 80% of our revenue, and management support services, which accounts for the remaining 20% of our revenue.

Our PTS segment performed very well during the quarter.

Gross revenue increased by 13%.

Our net service revenue, which does not include our pass-through costs, increased by 27%.

Growth in our net service revenue reflects a 17% organic growth, and a 10% growth from acquisitions.

These results are line with our stated goal of maintaining a balance of organic and acquisitive growth.

Operating income for our PTS segment increased by 54% compared to the second quarter of last year.

We refer to our backlog as either contracted backlog or awarded backlog.

Contracted backlog includes revenue for projects with signed contracts that are fully funded.

Awarded backlog includes revenue related to projects that we have been awarded, but are in the midst of finalizing the written contract.

Overall, backlog for our PTS segment was $5.9 billion, an increase of 23% over last year.

Please go to the next slide.

As you review our MSS results, keep in mind that last year we booked a large, one-time contract modification in the second quarter.

This makes for a difficult year-over-year comparison.

As a result, our second quarter 2008 MSS revenue was 13% lower than a year ago, but 12% higher than last quarter.

Overall, we are pleased with the performance of our MSS segment, which is in line with our expectations.

Our net service revenue for MSS increased by 40% for the quarter, to $40 million.

Our MSS operating income was up 68% over last year.

As we discussed last quarter, we established reserves for a pending government contract issue.

We have now resolved that issue, and recognized the profit on those contracts.

Those profits are reflected in the results for this quarter.

Backlog for MSS was up 6%, but grew at a much faster rate on a net service revenue basis.

We are also seeing higher margins in the current MSS backlog than the comparable period last year due to our current mix of task orders.

Please go to slide 13.

Our total revenue increased by 7% and our net service revenue increased 27% over the second quarter of last year.

As I previously noted, we strive for a healthy combination of organic and acquisitive growth.

Overall for the second quarter, our net service revenue was comprised of 18% organic growth and 9% acquisitive growth.

Operating income grew 55% to $59 million, significantly outpacing our revenue growth rate.

This is a reflection of improvement in both our gross margins and our operating margins, which I will discuss in a moment.

Our net income increased 69% over last year to $36 million.

Next slide please.

During the second quarter, our gross margins increased 104 basis points compared to last year, and 86 basis points over last quarter.

We attributed this improvement to our mix of revenue from newly acquired companies, as well as stronger margins in certain non-U.S.

operations.

Our EBITDA margins improved by 54 basis points compared to last year, and 28 basis points versus last quarter.

This increase was due to better scaling of our SG&A expenses.

On slide 15, you can see a snapshot of our balance sheet at the end of March.

Our balance sheet remains strong.

We closed the quarter with cash and cash equivalents of $218 million, and debt of $52 million.

During the quarter, we reclassified $82 million of auction rate securities into other non-current assets.

In addition, we expect to put more leverage on our balance sheet for the Earth Tech transaction.

As John mentioned earlier, we expect to close this transaction at the end of June.

We are also working with interested parties to sell selected non-core assets within the same timeframe.

We expect the proceeds from these asset sales to be at the higher end of the range we previously announced, which was $175 million to $200 million.

We continue to believe that the optimal capital structure for this business is a net debt-to-EBITDA ratio of 1.5 to 2 times.

Once we close the Earth Tech transaction and complete the sale of certain non-core assets, we expect to have a net debt-to-EBITDA ratio of less than 1.

Please turn to the next slide.

We closed the second quarter with backlog of $7.1 billion, a 20% increase over last year, and an 18% increase over the fourth quarter of fiscal 2007.

The majority of the increase was driven by strong organic growth.

Moving on to the final slide, our revised guidance takes into account our strong performance in the first half of the year, and the visibility provided by our record backlog.

We now expected diluted EPS for the full year 2008 to be in the range of $1.30 to $1.34, excluding the effects of the Earth Tech transaction.

At the midpoint of the range, our revised guidance indicates a 24% year-over-year growth in pro-forma GAAP EPS.

Our pro-forma analysis reflects the share count disparity from our IPO in May of 2007.

The assumptions underlining our guidance include the following.

$27 million of EBITA from deals closed in FY08, excluding Earth Tech, $15 million in total amortization expense related to acquired intangibles, including $12 million from FY08 acquisitions, a fully diluted share count of 104 million shares, and a structural tax rate of 34%.

We expect the Earth Tech transaction to be immediately accretive on a cash EPS basis.

We define cash EPS as GAAP EPS, exclusive of amortization related to acquired intangible assets.

The analysis of Earth Tech's intangible assets and the expected amortization expense will not be completed until after the transaction is closed.

Therefore, we're unable at this time to provide a GAAP EPS estimate.

Now, I would like to open the call up for your questions.

Thank you, sir.

(OPERATOR DIRECTIONS)

One moment please, for your first question.

Your first question comes from the line of Steven Fisher with UBS.

Please go ahead.

Good morning.

Good morning, Steven.

Hi.

I'm wondering, I know you said in terms of the backlog growth the majority of it was organic, but when you look at the 23% growth in PTS, can you give me a sense of how much of that was organic versus added from acquisitions?

The increase in the backlog, Steven, closely tracks to the increase in our revenue.

I would say that the organic increase in our backlog anecdotally is rising at a faster rate, a much faster rate, than the additions through M&A.

It's running in relative proportion to our organic growth rate versus our M&A growth rate.

Okay.

That's helpful.

And in terms of backlog growth that we can expect over the next several quarters, kind of on a sequential basis, should we expect it to be kind of lumpy, or would you expect it to be consistent, steady growth?

You know, we are expecting continued healthy growth in our backlog commensurate with our revenue growth.

We have -- our book-to-burn ratio has been well above one for quite some time now, and we expect that to continue.

But, backlog is always -- can be lumpy if you have a contract that's signed right at the end of a quarter versus two days after the quarter, you can be a bit lumpy.

And we saw that in Q1, where we had a large increase due to some very significant contracts like the Libyan Housing Board contract that came in in the first quarter.

But overall, we're very bullish on the continued increase in the backlog at a rate faster than our revenue burn.

Steven, historically our backlog has always increased in the second half of the year just because of the nature of the government contracts that we have.

Okay.

And then in terms of the MSS segment, how much of the operating income strength was due to the reversals of the reserves, versus the mix of better margin task orders?

It was several million dollars, almost $5 million of operating income due to the contract resolutions.

Okay.

And then, lastly on the infrastructure and state and local government outlook, it sounds like you're giving a pretty positive view.

Can you give us some sense of the discussions you're having with your customers today?

Are you seeing any concerns on their part on slowdowns, or is it really just still strong all the way?

Well, you know, one of the things that we have to be careful of is the macro-data that we get, and that in certain areas, we're seeing some significant growth.

For instance, in the United States in places like Arizona, Pennsylvania, Florida, New York, Minnesota, there's a significant amount of new spending going in through state legislation.

And so, we're so widely diversified we can take advantage of both places.

And the market is so large that we feel that going forward, if there are some places where there might be a slowdown, the places where the spend has increased -- will overcome any short-sidedness in the U.S.

marketplace.

Okay, great.

Thanks.

Thank you.

Our next question is from the line of Vance Edelson with Morgan Stanley.

Please go ahead.

Hi, thanks for taking the questions.

Just one more housekeeping item on the backlog.

Can you comment on what percentage of the backlog is international, or what percentage of the increase is international versus domestic?

I don't have those numbers at my fingertips here, Vance, but again anecdotally, our revenue outside the U.S., as you saw, is growing significantly faster than the U.S.

Although we have a very healthy growth in the U.S., it is approximating, as [I] think you heard John say, a 39% growth year-over-year revenue outside the U.S., but also a very strong 17% growth in the U.S.

And our backlog is tracking pretty close to those ratios.

Okay, that's helpful.

And maybe a broader question, could you elaborate on the trend toward user funding similar to the way I believe, the way the LAX project is being funded, and whether that's a trend that you think has legs?

Thanks.

Yes.

What we're seeing -- and I think the question is focused towards the United States, but it's also something that has been coming in areas outside the United States, and that is the use of tolls to pay for capital programs and maintenance programs.

We're seeing that in the United States that there's a trend towards that, as well as, we believe that, in addition to user fees we will also be seeing in the upcoming years more and more movement towards the public-private partnership way of financing projects.

Okay, great.

And just one last question if I may.

When you look at the acquisition pipeline going forward, do you get the feeling that'll be more on the international front in order to expand the footprint, or is it more domestic?

Can you give us a feel for that?

Yes.

As I mentioned in my comments, this past -- we've done a significant number of acquisitions here in North America, and even though it's a very, very strong market, we feel there is opportunity for us to expand our market share in places like Europe, India, and China, as well as in the power and energy market and the environmental.

So, that's what our focus is on.

We will still be looking at some -- and we still are looking at niche acquisitions and opportunities here in North America to fill in, say, gaps in some technology or a specific geography.

And is Latin America a region you'll continue to not focus on for the time being, is it safe to say?

We have operations in Latin America.

We're looking at that with cautious optimism, and depending upon the economic environment, we would be ready to go in there at the right time.

Okay, great.

Thanks a lot, guys.

Thank you.

(OPERATOR DIRECTIONS)

Gentlemen, there are no further questions at this time.

I'll turn it back to you for any closing remarks.

Okay, thank you, Vince.

First of all, I'd like to thank everyone for joining us today on the call, and for your continued interest in AECOM.

We look forward to seeing some of you next week at the upcoming Merrill Lynch conference.

And if you have any questions, feel free to, please feel free to call us during the next couple of days.

Thank you, and again, thanks for taking the interest.

Bye now.

Thank you, sir.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation, and for using ACT Teleconferencing.

You may now disconnect.