AECOM (ACM) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen.

Thank you so much for standing by and welcome to the AECOM Fourth Quarter 2008 Earnings Conference Call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions)

As a reminder, this conference is being recorded today on Wednesday, the 12th of November 2008.

I will now turn the conference over to Mr.

Paul Gennaro, Vice President of Investor Relations.

Please go ahead sir.

Thank you Michael and welcome everyone to AECOM's fourth quarter and fiscal year 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 might differ materially from those projected in these forward-looking statements.

Please refer to our press release or slide two of our earnings presentation and to our 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 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 noontime Eastern and will remain there for approximately two weeks.

Please go to slide three.

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

Presenting today will be John M.

Dionisio, President and Chief Executive Officer and Michael S.

Burke, Executive Vice President and Chief Corporate Officer and Chief Financial Officer.

John, please go ahead.

Thank you, Paul.

Good morning everyone and welcome to AECOM's fourth quarter and fiscal year-end earnings call.

To begin our call, Mike will take you through our 2008 financial results including the review of our balance sheet, liquidity position, and backlog.

We will then wrap up with a discussion of our 2009 guidance.

Following Mike, I will discuss our strategic priorities and action plans as we enter 2009 including the business trends we are seeing and why AECOM is well positioned for success in the current economic environment.

We will then open the call up to your questions.

Now I would like to turn the call over to Mike.

Mike, go ahead.

Thank you, John.

Please turn to slide five.

First of all, we're pleased with our strong fourth quarter results and our continuing momentum in this challenging business environment.

I'll provide more details on our fourth quarter performance in a moment but I will first highlight our key performance metrics, all of which were significantly up in the fourth quarter.

Net income from continuing operations was $42.4 million, up 44% year-over-year.

Earnings per share from continuing operations were $0.40 per share, up 38% year-over-year.

Backlog increased 43% to $8.6 billion and we closed the quarter with $271 million in cash and marketable securities.

Please turn to the next slide.

During the fourth quarter we continued to generate solid top line growth and we increased our gross revenue by 46% to a record $1.6 billion.

Our net service revenue was up 51% to $1 billion.

As you know, net service revenue reflects the true earnings power of our business since gross revenue includes a significant amount of pass-through costs that do not generate material margin.

During the quarter, gross revenue grew 22% organically and net service revenue grew 24% organically.

Strong revenue growth and continued margin improvements in and outside the United States drove our operating income from continuing operations to $71 million, a 68% increase over last year's fourth quarter.

Fourth quarter net income from continuing operations was $42 million, an increase of 44% over last year.

This led to earnings per share for continuing operations of $0.40 a 38% increase over last year.

Note that the net income and EPS from continuing operations excludes earnings from discontinued operations for the fourth quarter of $1 million or $0.01 per share that resulted from non-strategic assets acquired as part of the July 2008 Earth Tech acquisition.

Overall, these results reflect the successful execution of the strategies we have put in place and positioned us well for continued growth.

Please turn to the next slide.

We report our financial results in two segments; Professional Technical Services and Management Support Services.

The PTS segment accounted for 85% of our fourth quarter gross revenue.

We generated a strong growth on our PTS segment during the quarter with gross revenues increasing 51% to $1.4 billion and net service revenues also increasing 51% to $964 million.

Operating income for our PTS segment increased 71% over the fourth quarter of last year to $91 million.

This rapid growth in our operating income is attributable to federal leverage of our overhead cost across the organizations.

Our PTS net service revenue reflects a 22% organic growth rate, mainly driven by large multiyear projects across diverse business lines with strong showings across all our regions.

Please continue to the next slide.

We're also pleased with the fourth quarter performance of our management support services segment which represents 15% of our gross revenue in the quarter.

MSS revenue for the quarter was $247 million, up 25% over last year and entirely due to organic growth.

MSS operating income decreased slightly to $6.1 million.

In the fourth quarter, we increased our reserves for a pending contract modification in accordance with government and cost accounting standards amounting to $3.5 million.

As we have done in the past, we take a conservative position on contract modifications and reserve these amounts until final settlement with the US government.

Looking ahead, the future of the MSS segment looks healthy due to several recent wins which John will discuss later.

Please turn to the next slide.

As noted in our recent 8-K filing, AECOM has adopted a common accounting practice for our sector and we have reclassified certain overhead costs in our cost of revenue thereby reducing our previously reported general and administrative expenses.

This treatment is consistent with industry practices and has no impact on our profitability.

It does however change our reported gross margin.

EBITDA margin improves 144 basis points year-over-year due to our ongoing cost containment and cost reduction efforts and operating leverage resulting from our increased scale.

As we have continued to grow, we have gained operating leverage in marketing, shared services and other areas.

In fiscal year 2009 we will continue to focus on reducing costs and driving operating efficiencies.

Please turn to the next slide.

In the current economic environment more than ever we appreciate the need to have a strong balance sheet with a solid cash position and access to credit.

We closed the year with $271 million in cash and marketable securities and debt of $391 million.

Our marketable securities at year-end included $81 million of auction rate securities which we sold at par value during the month of November.

Our cash position reflects better than anticipating cash flow from operations which increased to 15% over last year to $158 million.

As of September 30, we had $650 million in committed bank facilities led by large highly-rated and well-capitalized banks and over $300 million in unused credit capacity.

Our $600 million revolving credit facility does not expire until August 2012.

Our net debt to EBITDA ratio was 0.4 at year end which is well below our target range of 1.5 to 2X EBITDA.

On FY '09 basis, the ratio is even lower.

We have closely managed our working capital in FY '08.

We increased our working capital by 16% while our revenue grew by 23%.

The bottom line is that we continue to generate strong cash flow from operations.

We are in a comfortable cash position and we have an excessive $300 million of available borrowing capacity under our credit facility.

This liquidity position will allow us to opportunistically invest in organic growth initiatives as well as strategic acquisitions.

Please turn to the next slide.

Before I provide backlog numbers, let me reiterate our definition of backlog.

We have two categories of backlog - awarded backlog and contracted backlog.

Contracted backlog represent the amount of work for which we have a signed contract and in the case of public client where the project has been funded.

Awarded backlog represents the amount of work for which we have been awarded but where the contractual agreement has not been completed.

Neither of these measures include any IDIQ dollars, option years, or add-ons.

On a seasonal basis the first quarter is typically slower in terms of project wins but this year we gained momentum and closed the year with backlog of $8.6 billion, a 43% increase over last year, and a 21% increase over the third quarter of FY '08.

Thus far, we have not seen any material project cancellations or delays and do not expect the current economic climate to have a material impact on our backlog.

We believe our strong backlog provides clear visibility into our future revenue streams.

Please turn the next page.

Before I turn to our 2009 outlook, I'll provide a brief recap of our performance metrics for the full year 2008.

We grew our revenues 23% to a record $5.2 billion.

Net service revenue was up 37% to $3.3 billion.

Reflected in this figure is a 20% organic growth rate, more importantly operating income increased 53% to $239 million.

Please turn to the next slide.

Now I'd like to discuss our outlook for fiscal 2009.

We expect diluted earnings per share to be within the range of $1.60 to $1.70 for the full year of 2009.

This guidance assumes the following: $38 million in total amortization expense related to acquired intangible assets; a modest level of M&A for FY '09, which we expect to contribute $4 million to the amortization expense; a tax rate of 33% which has decreased due to our global business mix and tax planning opportunities; a diluted share cap of 107.2 million shares for FY '09; a steady foreign currency exchange rate, but if the US dollar depreciates, we will see an upside to our results.

And with that, I'd like to now turn the call over to John, who will discuss our strategic priorities.

John, please go ahead.

Thank you, Mike, for a very nice report.

Please turn to slide 14.

In today's call, we hope to give you a sense for what the current financial crisis means to AECOM.

There are a number of factors that give us confidence that AECOM is well-positioned for continued growth, even in this challenging economic environment.

I will spend more time today than I have done during past earnings calls discussing the details of AECOM's markets, backlog and opportunities.

As you know, our business model has been one of combined organic and acquisitive growth guided by diversification of end markets, funding sources and geographies.

This business model has served us well since 1990 and positioned us well during past financial cycles.

Going forward, diversification will continue to be a core component of AECOM's strategic and business model.

AECOM is a global company.

What this implies is having a broad geographic footprint and strong local ties in communities we work and to be identified and thought of as a local Company providing global technical expertise and experience.

Approximately 80% of our work is with repeat clients.

Going forward, we will continue to build market share in our existing geographies and end markets by leveraging our existing client relationships to win new projects.

We will continue to drive strong organic growth as there continues to be a strong pipeline of well-funded projects.

As a matter of fact, not only is the pipeline full, the size of the projects continue to grow and we have a successful track record at winning these mega projects.

We are confident this trend will continue.

The mega projects will be a key component of our project mix and growth strategy in the future.

Strategic acquisitions have been a key element of our growth and diversification.

We continue to target those opportunities that expand our existing market share or provide access to the markets.

Some of our near-term business line acquisition targets include energy and power and government services companies; and geographic targets include Europe including Eastern Europe and Russia, India and China.

We have some excellent opportunities in our pipeline, and we believe that in the current economic climate, there will be an even greater number of good companies at attractive valuations.

As we have successfully done in the past, AECOM will continue to focus on driving operational efficiency.

We have a long history of seamlessly integrating acquisitions and going forward, we see opportunities for even tighter integration that will result in additional cost-saving synergies.

Cash remains king, and we continue to focus on our liquidity and maintaining a strong balance sheet.

In the next few slides, I'm going to talk more about the specific details of our strategies and how they will fuel our continued success, even in today's challenging economic climate.

Please turn to slide 15.

In fiscal year 2009, we expect to continue to see solid growth opportunities in our key markets around the world.

Let me take you around the globe to discuss each of our geographic markets.

In North America, we have not seen any material impact from the current economic situation.

And in fact, our backlog in the United States and Canada has grown significantly.

We anticipate that this strong growing backlog, including several multiyear mega projects, will sustain us through any near-term economic slowdown.

The November 4 US election also produced good news for AECOM, as voters approved over $54 billion of state and local bond issues and over $60 billion of tax measures.

Most of this money will fund infrastructure projects and transportation facilities, healthcare facilities, and environmental work in key markets and geographies in which we have established a long-term presence.

This is good news for AECOM since we are positioned well on a number of these programs, including the $10 billion California high-speed rail bond issue and two sales tax measures to fund the $40 billion Los Angeles County Transportation Program and the $17 billion Seattle Sound Transit Projects.

These three programs total approximately $70 billion in infrastructure spend.

Federal support for infrastructure also remains strong, and AECOM stands to benefit from the proposed $250 billion to $300 billion economic stimulus package currently under review by Congress.

This package could include up to $75 billion for infrastructure programs.

We don't know exactly what this means for AECOM, but we expect it will be heavily weighted towards transportation projects in major cities around the US.

In addition, there are $18.4 billion of projects awaiting funding on the transportation ready-to-go list.

We believe these projects may be the first to be funded on the government's stimulus package.

AECOM has particularly strong positions in nine of the top ten states on the list, which account for approximately $9.5 billion of potential good projects.

By the way, none of these stimulus packages have been included in our FY '09 outlook.

The Canadian market remains strong, especially in infrastructure and energy.

The government intends to continue its capital spending through the current slowdown and is proposing some $60 billion plus in infrastructure's stimulus programs.

For AECOM, Canadian transportation, water, energy and power businesses remain strong.

The stimulus program will provide continued long-term growth opportunities for AECOM.

In the UK, construction activity in the private sector has been affected by the economic crisis.

Our public sector investment, which accounts for more than 60% of our business in the UK, remains strong, particularly in the health, education and environmental sectors.

We are working on several major infrastructure programs in the UK, including the 2012 Olympics.

In recent months, we have shifted work to the UK and temporarily reassigned some of the UK staff to the Middle East and North Africa projects.

This load-shifting strategy is working well and has eliminated our excess capacity.

Outside of the work we've performed for the US Federal Government in Afghanistan, Kuwait and Iraq, our key markets in the Middle East includes Saudi Arabia, Abu Dhabi and Dubai, and Qatar.

This region remains strongly committed to nearly $1 trillion in infrastructure projects as part of its economic diversification strategy.

In addition, the Gulf economies continue to enjoy budget surpluses.

Recently, we won a $210 million contract to provide development management services for the Saadiyat Island Cultural District in Abu Dhabi; and just this week, we announced a $150 million contract to provide program management work for Qatar's new $7 billion Doha port.

Other work currently on the way includes Saudi Arabia's new $8 billion financial center.

While business remains strong in Dubai, the general expectation is that the market will moderate from its current hyper-growth trajectory.

But just to be clear, the market for us is expected to remain robust.

Overall, we believe the Middle East will continue to be a strong growth market for AECOM.

We have spoke in the past about our Libyan infrastructure project.

This project will generate over $500 million in fees over the next five years for AECOM.

We have been mobilizing staff to Libya over the past six months, and we'll continue to increase our staff this fiscal year 2009 and into 2010.

The outlook for the Chinese economy remains strong.

Analysts are forecasting 2009 growth of approximately 9%, accompanied by large-scale infrastructure investments.

China is a large market with many untapped opportunities for AECOM, and our recent CityMark acquisition gives us the necessary design licenses and local expertise to expand our operations in this market.

We plan to expand our presence in China by growing market share and pursuing additional acquisition opportunities.

This past Sunday, the Chinese Government announced a $586 billion stimulus program.

Approximately $18 billion of this program will be spent in the last quarter of calendar 2008.

Over the past year in Hong Kong, we have captured significant market share by winning five of nine key transit projects awarded by the government.

We are also proud of our recent appointment by the Airport Authority of Hong Kong to develop the airport's 2030 Master Plan.

Looking forward, the Hong Kong Government has also announced ten new infrastructure projects valued at approximately $32 billion for 2009 and 2010.

We are well positioned to win our fair share of this work.

And looking at Australia, our business remains strong particularly in water, mining and transportation.

The economic pump is being primed by a $15 billion Build Australia fund, which plans to deliver exactly the kind of work we do: transportation, environmental, and facilities.

To summarize, AECOM has leadership positions in many large long-term growth markets.

In each of the markets, we have a local presence and strong client relationships, and our diversified global footprint and broad capabilities enable us to move quickly to capitalize on opportunities by going where the projects are and the money is at any point in time.

Please go to the next slide, slide 16.

Throughout FY '08, AECOM has been very successful in winning new work.

Our total wins exceeded $6.3 billion, a 20% increase year-over-year.

Bookings were up 32%, and our book-to-burn ratio is 1.2.

AECOM ended fiscal 2009 with 170% of its 2008 revenue and backlog.

From a backlog and bookings perspective, we entered 2009 in a much stronger position than we did 2008.

This slide presents some of the global multiyear key mega projects we won in 2008.

Combining these projects alone will generate over $2 billion in revenue over the next five to seven years before any potential add-ons.

The programs shown here are well-funded and long-term projects.

Many of these clients are repeat customers with whom we have long-term business relationships and established our reputation for quality and comprehensive service.

As I previously mentioned, 80% of our revenue is derived from repeat clients.

Projects have trended over the past several years to become larger.

Clients are looking at firms such as AECOM to provide them with fully-integrated services rather than parceling the work among several firms.

To respond to this market opportunity, AECOM has evolved its marketing strategy by increasing our focus on mega projects, which provide long-term annuity over several years.

But at the same time, we continue to pursue modest-size projects.

This has resulted in a good mix of business that we believe will allow us to sustain our strong financial performance in the coming years in spite of the weak financial cycle that may occur.

This strategy and financial model was a key success factor for our continuing growth during the financial slowdowns of 2002 to 2004.

As you can see, Q4 was a particularly strong quarter for mega project wins across multiple business lines and geographies, including program management work for the San Francisco Public Utilities Commission, the Doha Port in Qatar which I had previously mentioned, and the Guam Base Expansion Project for the US Federal Government.

Today, with many such projects sustaining our growth, we expect our expanding scale and presence will allow us to continue to win such mega multiyear projects around the world while maintaining a low-risk profile.

Please turn to slide 17.

While we had strong organic growth of about 20% in 2008, acquisitions also played an important part of AECOM's overall growth.

As we look at potential acquisition opportunities, we evaluate the marketplace and consider companies that would provide us expanded capabilities and expand our market share and geographic presence.

On this slide, you can see how for FY '08 acquisitions advanced our end markets in geographic diversification and growth.

In 2008, five of our acquisitions expanded our facilities end market in Asia and North America.

Three acquisitions, including Earth Tech, strengthened both our environmental and transportation positions in North America.

We also acquired a Canadian firm, which gave us significant hydroelectric expertise that we will expand globally.

We continue to have several good acquisition opportunities in our pipeline, and we will be looking to identify good targets at attractive valuations throughout this period of economic slowdown.

Please turn to slide 18.

On this slide, I'd like to give you some specifics about how we are diversified by end markets, funding sources and geographies.

Looking at our end markets, you'll see that our transportation environmental practice has now comprised 28% and 22% of our business respectively.

AECOM benefited from a particularly strong transportation market in 2008.

In addition, we made solid headway in growing market share in energy and power.

Turning to our funding sources, you'll note that we are well diversified across state, local, federal, non-US Government and private sources.

In 2008, 64% of our revenue came from government funding; and 23% of that was from the US Federal Government, a very stable source of infrastructure funding.

As I said earlier, support for infrastructure funding is strong and could get stronger when the stimulus packages are put into place.

We will continue to see an increase in projects being funded by public/private partnerships, and we expect the private sector will play a significant role in funding global infrastructure projects in the future.

Finally, in 2008, we continued to advance our geographic diversification.

Our revenues were evenly split between the US and the non-US regions.

In response to the financial crisis, there are globally close to $1 trillion of stimulus packages being prepared, excluding the United States' $700 billion financial sector bail-out plan.

As we look to the future, we see significant opportunities to continue to profitably grow our business.

In conclusion, our business model and strategies have resulted in solid performance over the past 13 years.

We have grown our revenue by over 20% annually.

Half of this has been the result of organic growth and half has come from strategic acquisitions.

With that, I would now like to open the call up to your questions.

Operator, you can please poll the audience for questions.

Thank you very much.

All right.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin our question-and-answer session.

(Operator Instructions) Our first question is from the line of Steven Fisher with UBS.

Please go ahead.

All right.

Good morning.

Congratulations on a nice quarter and a nice year.

Thank you.

I'm wondering if you could just talk about the guidance for fiscal '09 in terms of what kind of US and global macro assumptions you have in there, if you'd assume your GDP growth weakens from here.

Yes, Steve, as we have said for quite some time, our long-range assumptions are that we will produce a 15% compound annual growth rate in our EPS.

Clearly, most of the economic data that we look at is looking at a slowing GDP, but our plans are much more based on micro data, infrastructure spending data, stimulus package data, and so the global GDP numbers are not as relevant to our plans to build up from base level economic data around infrastructure, which we expect to continue to grow with the economic stimulus packages that you heard John mention earlier.

The $1 trillion of economic stimulus packages that are presented around the globe will continue to fuel growth in infrastructure spending.

But you did say that you don't specifically have those infrastructure stimulus packages in the numbers.

Is that right?

That's correct.

Okay.

And has anything changed with respect to the Earth Tech accretion?

I think you said it would be $0.04 to $0.05 on a GAAP basis for '09.

We're still comfortable with the numbers of at least that amount for '09, relative to Earth Tech.

Okay.

And then you mentioned, John, the general expectations in the market of slowing in certain parts of the Middle East.

I was wondering if you could just put your exposure in various countries in the region in context.

What's the outlook for the specific types of work you might pursue and I guess specifically, with regard to infrastructure, now what are the opportunities there for you?

Well, yes.

In the Middle East, we see the market as very optimistic.

I mean, it's continuing to grow.

Our focus right now is on Qatar; United Arab Emirates, which is Dubai and Abu Dhabi, and in Saudi Arabia.

As I mentioned on the call, we just won a major program, program management of a port facility in Doha, Qatar, and we see that country also having extensive amount of infrastructure programs going forward in Abu Dhabi and Dubai, also the same thing as I mentioned on the call.

We read that Dubai is slowing down, but it's gone from red hot to hot.

And in Abu Dhabi, we're currently involved in the Saadiyat Island's program, Cultural Center, which is the program management of the island of Saadiyat.

Total island construction is about $50 billion; the Cultural Center's about $20 billion.

And recently, there was an article that came out that indicated that there was slowing down but really, I think is a misperception.

If anything, it's continuing to grow.

Our clients have asked us to do more work, and what's happening is a reprioritization.

The site is going to be a site of several world-class museums, Guggenheim, the Louvre.

And what had happened in the first couple of hours of selling of the land and the houses, they sold them all out so the client is now refocusing its phasing to the schedule.

Some of the revenue producing more revenue, producing investments to go ahead, and that's what's happening.

In the Middle East, there's a significant opportunity for mass transit, light rail systems, subway systems because places like Abu Dhabi and Dubai are being congested with traffic, and the same thing is going to happen in Qatar.

So overall, it remains a very, very hot market.

It's a great place for AECOM and the type of work we do, which is facilities, we're transportation as well as environmental.

Okay, great.

Thanks a lot.

Thank you.

All right, thank you.

Our next question is from the line of Avi Fisher with BMO Capital Markets.

Please go ahead.

Hi, good morning.

Excuse me and thanks for taking my questions.

I apologize, first of all.

I missed the PTS organic growth number that you gave.

I wonder if you could repeat that.

The PTS organic growth is 22% for the quarter year-over-year.

Okay.

And that's NSR or gross?

That is NSR that I just gave you.

Okay.

Thanks, I appreciate that.

In terms of the EBITDA margin expansion figures plus 20 basis points year-over-year, I wonder how far can this go and where do you start bumping up against more difficult expansion opportunities, multiple expansion opportunities.

First of all, the expansion was 144 basis points in the EBITDA margins year-over-year.

The 20 basis points is our projection of what we believe we can continue to do on an annual basis going forward.

Okay.

I apologize.

140 basis points year-over-year and is that 20 basis points, I mean, in light of the fact that you did 140 basis points this year?

Is that conservative and/or where do you start bumping up against problems there of difficulty?

For some time now, for at least a year and a half, we have been projecting that we would improve our EBITDA margins by 20 basis points annually and obviously we have outperformed that by a significant margin, so in hindsight those were very conservative predictions but it's not an endless opportunity.

I don't know where the top is in terms of margin expansion but we continue to see opportunities to take costs out of our system.

We see continued opportunities to create shared service centers that will allow us to leverage the platform that we had as we continue to grow our top line, so we see that 20 basis point improvement continuing for the foreseeable future.

Okay, thank you.

In terms of one of your other end-markets in the wind farms space.

I think you're doing like 2,000 megawatts for the Power Company of Wyoming, in light of some of the changes and other mega projects.

Do you see that going forward?

Any changes to that?

At this point in time, there hasn't been any change in terms of the wind farms.

Now does the entire wind -- renewable energy markets is one that we feel that we need to watch going forward to see what happens as the price of oil goes down.

But again, it's not a significant market for AECOM at this time.

Okay.

And are there other end markets in terms of -- especially with Earth Tech?

I know that they're named on several projects that I've seen, infrastructure projects, big dollar infrastructure, highway, highway-sea projects.

Any that are held up because of credit issues or at least materially?

No.

As a matter of fact just the opposite.

Before this call, I received an e-mail that one of the Earth Tech projects which is now an AECOM project, it's a public-private partnership in Florida I-595 where we are partnered with Dragados.

We won the project so it's just the opposite that's happening.

It looks like private funding is coming through the market in states like Florida which may have some difficulties and have experienced some difficulties, and now moving towards the public-private partnership market which is very good for us.

And another thing, this will be my last question.

Do you have any color or insight into a potential infrastructure reinvestment bank -- reinvestment bank that Obama has talked about?

Is there anything that's on your radar that you have any color on?

I mean it's just something that we're watching to see if it comes to fruition.

I think the president elect is on the right track.

If historically in this country and well in our business, anytime there has been an economic slowdown, the one thing that you could do to really stimulate the economy is infrastructure spending.

As I mentioned on some other calls, for every billion dollars of construction it generates 18,000 to 20,000 jobs.

So something like an infrastructure bank, a stimulus package for infrastructure is I think a key component to a recovery program for the United States.

That's all.

Thanks for taking my question.

Thank you.

Thank you, Avi.

All right, thank you.

Your next question is from the line of John Rogers with D.A.

Davidson.

Please go ahead.

Hi.

Good morning.

Good morning.

In terms of your outlook for 2009, how much of that are you expecting contributions from acquisitions like Earth Tech that you've completed in 2008 and how much is acquisitions that haven't been completed yet?

You know, John, first of all as we've stated in the past, we're estimating this approximately $0.05 accretion included in that guidance relative to Earth Tech.

Right.

We don't give detailed guidance on all the smaller acquisitions we've done but I think it's helpful to reiterate that what we've said for quite some time, we always expect that our growth will be an equal -- not equal balance.

Let's say a healthy balance of both, organic growth and acquisitive growth, and we expect that to continue for the foreseeable future.

In terms of new M&A in 2009, there is -- we have estimated a modest amount of M&A activity during 2009, at least compared to the very significant M&A activity we had in '08.

But you should know that to the extent that we identify new M&A candidates and we add during '09 we would not expect them to be accretive in year one, due to the SFAS 141 intangible asset amortizations.

Typically, the EBIT that's added from year one is typically erased by the year one amortization which tends to be fairly large due to the nature of the acquired backlog.

Okay.

I just wanted to make sure that everything's in place now for this growth.

That's right.

There is no accretive effect in '09 expected from acquisitions that have not taken place.

Okay.

And then along that same thing, Michael, what do you see in terms of acquisition pricing?

Has the private market reacted to the public market change in the public market values?

Yes it has.

I think pricing expectations across the board have been recalibrated given the overall downturn in the sector as well as the market more broadly, and as well as the tightening credit markets.

There is not as many buyers that are at the table with available cash right now and so our access to capital and our cash in our balance sheet gives us a distinct advantage in the M&A markets going forward.

Okay, great.

Thank you.

But also, just to add.

We haven't done any deals that were dilutive and going forward, we'll continue with that position.

And so, if the evaluations that we believe are appropriate don't match the evaluation of the M&A opportunity, well, we're just not going to do the deal.

Okay and I'm sorry, along that same being done in -- in terms of the end markets, any areas of particular focus for you?

As I mentioned, we're still looking at the power and energy side because we're not a big player in that.

We have about 7% of our revenue.

The others is in the government services despite what you might hear about the federal government's budgets, I mean, it's still a very, very strong market.

And the other end markets, we're looking at more geographies as Europe and Eastern Europe, and India.

Okay, great.

Thank you.

For our next question is from the line of Joseph Foresi with Janney Montgomery Scott.

Please go ahead with your question.

Hi.

I was wondering if you could just talk very briefly.

I'm just curious about the re-categorization of the cost side of things.

Any particular reason why we're doing that at this point?

There is no particular reason why it was this quarter other than it's a common industry practice and our auditor suggested that that was a better way to present our gross margin.

It has no impact obviously on profitability.

It's just a financial statement presentation issue.

Okay.

And then -- you've given obviously a little bit of a larger range here, about 10 cent range on the EPS side.

I wonder if you could talk about first what scenario gets us to the high end of the range, and then conversely what gets us at the low end?

Well, the high end of the range would be based on the stimulus packages that we talked about.

There is a lot of opportunity for upside and infrastructure spending around the globe.

It depends on how quickly that money gets pushed into the market.

We mentioned earlier that $1 trillion of stimulus packages.

John mentioned the so-called ready-to-go list that has been published by many of the industry trade groups that could be put to work very quickly.

So it really matters how much of that stimulus package hopefully comes through and how quickly it gets into the market place could push us over the high end of that range.

As far as on the low side, there is nothing that we see on the horizon that would push us to the low side of that range but the economic growth around the world is something that we keep a close watch on but there's nothing particular right now that we see that will push us to the low end.

So just to paraphrase, the low end of the range would be minus any of the stimulus packages and the high end of the range would be assuming that a good number of them will get passed?

Yes that's it.

If everything gets passed, as we've been talking about, we feel very comfortable that you'd be past that high end of the range.

Okay.

And just, I guess, staying with the same theme.

If we -- there's been a lot of talk about the second stimulus package.

I wonder if you could give us some idea of how important the passage is to your domestic transportation business and conversely I think a lot of people correlate the price of oil with the Middle East work.

I wonder if you could give us some idea of how important each of those particular gauges are to that type of work.

I think in terms of the stimulus package, for us they would mean that 2010 would become a strong year.

Right now, we feel very comfortable as I mentioned in 2009 without the stimulus packages.

The projects we have, the funding is in place, we scrubbed all the projects we have in backlog to make sure that the funding was in place, the funding is secure.

The issue is what will happen if the economy continually deteriorates and there is no stimulus package.

It's really more of a 2010-2011 issue.

I see and then just the relationship of oil to the work in the Middle East.

I know you talked about the renewable energy but I wonder if the price of oil continues to come down, would you think demand will tail off in the region.

I think from what we've been -- what we've heard from our clients and the people we speak to in the Middle East, the projects -- first of all the money is already in the bank in terms of the projects that they're going after, that they're putting out on the street.

But, in general, these projects have been priced at about $50 or $45 a barrel.

So I think if the price of oil goes down below $50 or $40 a barrel, we might see some softening of the marketplace.

And then just lastly, you talked about a number of times on debt ratio about 1.5.

I'm just wondering if you could -- given the fact that cash is king these days, is that really the ratio that you're looking to run the business at, given all the turmoil with credit, etc., or you're less likely or less aggressive in your stance on what kind of debt loads you want to take off.

Given the capital markets today, we would not want to be in that 1.5 range.

If the capital markets settle out over the coming year and liquidity comes back to the market, we would consider being in that 1.5 to 2X range again.

But if you're asking a question, as of today, where we sit right now, we probably would not want to go to the high end of that range.

Just to double check, the credit facility is LIBOR plus correct?

That's right.

It's the LIBOR plus credit facility.

We renewed last year, a $600 million revolver over the five-year term, so it expires in August 2012, and it is LIBOR-based.

Okay, thank you.

All right, thank you.

Steven Fisher please go ahead with your follow up question.

Thank you.

In terms of pricing and margins, what kind of expectations do you have for the pricing environment for contracts over the next year?

Would you typically expect to see some softening in margin pressure as you go into a recessionary period?

No.

Frankly, it is something that we have talked about in the good times is that -- because we have 70% of our businesses with governmental clients, governmental clients tend to pay the same profit multipliers in good times and in bad times.

And it's something we've been talking about for a while here.

Although the demand is -- far outstrips supply in our sector over the past few years, we haven't been able to expand our gross margins, and if we look back to our history over past down cycles, we have not had a contracting gross margin either.

So on the public sector side; you just don't see that to be the case.

Okay, that's helpful.

And then, are you expecting to be adding headcount next year?

Okay, great.

Thanks a lot.

(Operator Instructions) Joseph Foresi, please go ahead with your follow up.

Just one last question for you guys.

I was curious about the highway bill which is I guess it's expiring sometime in '09.

Any thoughts you have over there, expression out there and many potential effects and how quickly anyone gets past?

That's $64 million question.

I don't know how much it is, but --

You're right.

Well, yeah -- well all it's much much more than that.

Hopefully it's a $300 billion question.

The last bill took a couple of years to get through congress and we're hoping that it could be accelerated now, in light of the issues we faced.

Although, clearly, the highway builders -- the reauthorization bill is important to the continuing of the highway and transit improvement programs here in the United States, and I think it'll go hand and glove with the stimulus package.

It's the key -- I would think that Congress and the new administration would be on the same page, and it wouldn't take this long to get passed.

All right, thank you.

All right, thank you.

Our next question is from [Tom Carvey] with [Hilton Capital Management].

Please go ahead.

Good morning.

You guys talked about looking into the alternative energy stasis and acquisitions?

I'm just wondering when you look at renewable energy, are there any types of energy in particular that you favor, be it solar or wind, as you look to make those acquisitions.

We've always been and we still remain interested in solar and wind, but the one acquisition we made in January of this year was a company out of Quebec that's very heavily into the hydroelectric business and done major hydroelectric facilities in Canada as well as in Africa and in Europe.

And that's something that we see.

It's a longer term solution to our energy problem and it's easy to build the wind farms and solar farms.

But hydro is something that we feel that there's -- will be a market for globally, and where we feel that is something we want to continue to grow in.

Thank you.

One more question, you mention that, obviously, you're looking to expand through acquisitions and looking into a geographic diversification.

As the coming transition and you look towards more of these mega projects, do you anticipate possibly shedding any of your historic assets?

No.

Not at this point in time.

I mean, if anything -- we're still in an additive mode -- again.

And I say that and put the caveat is that we are still in the process of divesting some of the assets that we bought when we acquired Earth Tech, but it's a small number.

And we had mentioned to the street when we did the Earth Tech acquisition, and we were at the testing of those assets, and they're in with the operation side of the water business.

Great, thank you.

Thank you.

Vince Damasco with Colony Group, please go ahead with your question.

Yes gentlemen.

Just a follow up on the reserve taken on the MSS side of $3.5 million, any color that can be provided there, and then, secondly, if Obama shifts focus to Afghanistan from Iraq, what's the impact for your operations in that region?

Sure.

The reserve that we took in the MSS segment was due to a notification by the federal government that they had questions on the calculation of the award fee on a modification to that contract as we have historically done when we skip those notifications, we reserve the amount right away, and we had a similar reserve that we put up in Q4 of '07 last year, and we resolved that with the government, I think within 90 days later and we received the full amount from them.

So we're fairly conservative on reserving those amounts when we get the notice of initial dispute of the calculation.

But our historical perspective or our simply historical experiences then that we generally resolved those favorably.

With regard to the second part of your question, the type of work that we are doing for the Department of Defense in the Middle East is primarily logistical support work and it is primarily work done outside of Iraq, so it's done in Afghanistan and Kuwait at the Air Force bases and the Army bases in that region.

And should there be an acceleration of the pullout of the troops from Iraq, the logistical support to relocate those assets will actually increase, because those assets will be moving out of Iraq and will probably be moved to some other location in that part of the world and logistical support required to relocate those assets will actually increase.

Okay, great.

Thank you very much.

All right, thank you management.

There are no further questions at this time.

Please continue with any closing comments.

Yes.

First, I'd like to thank everyone for taking this call, and I would like to say a couple of things.

To close today's call and to recap the reasons why we are confident in our positive outlook for 2009 and beyond.

First, we have a long track record of leveraging our diversified business model to drive growth in good times and in bad.

Today, we're far more diversified by end markets and geographies and funding sources than we were in the past, and so we feel that we're in a much better position.

We continue to leverage our leadership position in large and growing markets around the world to win new work.

That has resulted in a strong backlog including numerous mega projects, many of which are -- have been already funded.

The outlook for infrastructure funding is robust.

Following the recent election which I mentioned, we expect funding for infrastructure projects to increase dramatically.

The recent bond issues and tax measures are an example of how this stimulus package will work, and that the increases in the infrastructure spend.

AECOM generates strong cash flow from its operations and the combination of its strong cash flow and the strong backlog with a solid balance sheet will give us the liquidity to fund our business plan going forward.

So we're very confident in our business model which has served us well over the last 18 years, and we're confident that in the strength of the infrastructure market on a global basis as we go forward.

So with that as a conclusion, I'd like to thank everyone for your continued interest in AECOM.

And please if you have any questions feel free to call us and we'll be happy to discuss them with you.

Thank you and I'll see you in three months.

All right, thank you.

Ladies and gentlemen, this does conclude the AECOM fourth quarter 2008 earnings conference call.

(Operator Instructions).

I would like to thank you very much for your participation.

You may now disconnect.

Have a very pleasant rest of your day.