AECOM (ACM) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to second quarter fiscal 2009 AECOM Earnings Conference Call.

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

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

We will conduct a question and answer session at the end of this conference.

If you would like to ask a question, please press star, one on your touch tone phone.

If you would like to withdraw your question, please press star, two.

If you are using speaker equipment, it may be necessary to lift your handset before making your selection.

As a reminder, this call is being recorded today, Thursday, May the 7th, 2009, for replay purposes.

I would like to turn the call over to Mr.

Paul Gennaro, Senior Vice President and Chief Communications Officer.

Please proceed, sir.

Thank you, Joshua, and welcome, everyone, to today's AECOM Second Quarter Fiscal 2009 Earnings Conference Call.

Please turn to slide number 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 number 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 1 p.m.

Eastern Time and will remain there for approximately two weeks.

Please turn to slide number 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.

John?

Thank you, Paul.

Good morning and welcome to our earnings call.

I will begin with a few opening remarks, and then Mike will discuss our financial performance.

Following Mike's comments, I will provide additional detail on our second quarter performance and outlook, including an update on how AECOM will benefit from the American Recovery and Reinvestment Act, and other stimulus packages around the world.

As you will see from Mike's presentation, we had an excellent second quarter.

I am pleased that we have been able to continue to generate strong financial results in the midst of the worst economic conditions that we have seen in decades, and I am most proud of the many accomplishments that demonstrate AECOM's industry leadership.

For example, AECOM recently was ranked number 14 in total shareholder returns among all Fortune 500 companies in 2008.

In addition, AECOM moved up to number two in ``Engineering News Records'' top 500 overall rankings, and maintained its number one in pure design ranking as well as number one in transportation, general buildings, and hazardous waste.

In the second quarter, we continued to win some noteworthy assignments, and today we are working on six of the 15 largest civil infrastructure programs in the world.

Four of these are new projects that we have won this year.

These mega-projects, which I'll talk about shortly, underscore the fact that AECOM can compete for and win the best and biggest projects around the globe.

We attribute our continued growth to our diversified business model, which has strategically positioned us to pursue growth opportunities in geographies around the world and across our end markets.

Now I'd like to turn the call over to Mike, who will review our second quarter financial performance.

Mike, please go ahead.

Thank you, John.

Please turn to slide five.

First of all, as John said, we are pleased with our second quarter results and our continuing momentum.

During the second quarter, we generated strong top line growth, increasing our gross revenue by 29% over last year's second quarter, to $1.5 billion.

Our net service revenue was also up 29%, to $966 million.

Gross and net service revenues were up 8% organically, in spite of strong headwinds due to foreign currency devaluations.

On a currency-neutral basis, our organic gross revenue growth rate was 14% and our net service revenue grew 17% organically.

Net income from continuing operations was $43 million, up 20% year over year.

Please note that in the second quarter, we had $8 million of additional amortization expense related to acquired intangible assets versus last year's second quarter.

Diluted EPS from continuing operations was $0.40 per share, up 14% year over year.

Backlog increased 30%, to a record $9.2 billion.

We closed the quarter with $241 million in cash and cash equivalents.

Please turn to slide six.

The PTS segment announced for 83% of our second quarter gross revenue.

We continued to generate strong growth in our PTS segment, with gross revenues increased 30% over last year's second quarter, to $1.2 billion and net service revenues increasing 27%, to $899 million.

Operating income for our PTS segment increased 31% to $79 million, over the second quarter of 2008, due to improved leveraging of our overhead costs across the organization.

Our PTS net service revenue grew organically at 4.7% and 14%, after adjusting for foreign currency devaluation.

This growth was fueled by strong performance across our operations, but particularly in the Middle East, North Africa, China, and Canada.

Performance of our Management Support Services segment was also strong.

MSS revenue for the quarter was $258 million, up 24% over last year.

This growth was entirely organic.

During the quarter, we saw a more rapid increase in net service revenue relative to gross revenue, due to a higher level of self-performing work in our current mix of MSS contracts.

MSS operating income increased 8% over last year, to $15 million.

We recently expanded our service offerings to the U.S.

Air Force through the CFT contract.

Our margins on these contracts during the second quarter were lower than our typical MSS margins.

As a new entrant to this business, we incurred some ramp-up costs and expect our margins to improve going forward.

Looking to the future, our prospects in the MSS segment remain very promising.

Please turn to the next slide.

In the second quarter, our EBITDA margins improved 24 basis points over last year, and is up 63 basis points through the first six months of the year.

If you look at SG&A, you'll see a year over year increase in costs, which are related to the integration of Earth Tech and other acquisitions we closed in FY '08, as well as increased sales and marketing costs related to the pursuit of new mega projects, which John mentioned earlier.

We expect that a significant amount of one-time expenses will be eliminated by the end of 2009.

We remain to our ongoing cost containment efforts, and we will continue to focus on controlling costs and driving operating efficiencies.

Please turn to the next slide.

Our balance sheet remains strong.

We closed the quarter with $241 million in cash and cash equivalents, and debt of $290 million.

Our net debt to EBITDA ratio was 0.15 at the end of the quarter, which is well below our target range of 1.5 to 2 times EBITDA.

As of March 31st, we had almost $350 million in unused capacity under our $600 million revolver.

We raised $92 million of equity this quarter in a secondary offering.

We temporarily used the proceeds to pay down our revolver.

However, longer-term, we plan to invest this capital in future growth opportunities, including M&A.

Our M&A pipeline continues to be active, and we are currently pursuing several targets, which we expect to close in the next six to 12 months.

Our working capital increased 26% year over year, while our revenue grew by 29%.

Our collections were also strong, which improved our cash flow through the second quarter by more than $8 million over last year.

All told, our financial position is strong and we have ample liquidity to pursue our growth strategy.

Please turn to the next slide.

Despite weak economic conditions, we continued to win business at a fast pace in the second quarter.

Our wins drove total backlog up to $9.2 billion, a 30% increase over last year, and a 2.5% increase over the first quarter.

Through the first half of the year, we have grown backlog by 7%.

All of the growth in backlog through the first half of the year is organic growth.

Our PTS backlog grew by 5% over Q1 and 10.2% for the first half of the year.

During the second quarter, MSS backlog declined $179 million.

However, as you know, the federal government contract awards are lumpy, and during the first week in April, after the close of the quarter, we were notified by the U.S.

federal government of an extension of one of our significant contracts.

This modification adds approximately $250 million to MSS backlog.

If this additional work had been signed a week earlier, MSS backlog would have been up 8% over Q1.

Our backlog continues to provide us with good visibility and confidence in our continued growth.

Please turn to the next page.

Now I'd like to update you on our outlook for fiscal 2009.

Based on our strong performance over the past two quarters, and our outlook for continued growth, we now expect diluted earnings per share to be within the upper half of our earnings guidance range of $1.60 to $1.70 for the full fiscal year.

Our guidance includes only a small amount of upside in FY '09 from the U.S.

stimulus package, with the real impact occurring in FY '10 and FY '11.

We have a high level of confidence in our earnings outlook in spite of significant foreign currency headwinds and increased share count.

This guidance assumes $26 million in total amortization expense related to acquired intangible assets, a tax rate of 30% and a diluted share count of 109.6 million shares for fiscal year 2009.

And with that, I would now like to turn the call back over to John, who will provide additional detail on our second quarter performance and outlook.

John, please go ahead.

Thank you, Mike.

I want to first describe some key business trends.

Overall, the infrastructure market remains strong.

As Mike said earlier, our backlog was $9.2 billion at the end of the second quarter, and we had strong organic growth in both our MSS and PTS businesses.

We continue to win major projects across our end markets and geographies at a good pace.

The pipeline of project opportunities, including mega-projects, remains robust and AECOM is well-positioned to continue to win this full range of facilities and infrastructure projects.

The outlook for funding for infrastructure projects as a result of stimulus packages around the globe is strong, and I'm going to address this in more detail shortly.

As a result of the current economic environment, the staffing shortage that we saw during the past few years has changed, and we are now seeing an increase in the availability of qualified talent.

We have capitalized on this trend by making selective new hires in each of our high-growth markets.

These key new hires will enable us to continue to meet the business growth and the strong demand for our services.

We continue to see attractive M&A opportunities.

Just last week, we announced the acquisition of a project and construction management company with a strong footprint in Russia and Eastern Europe.

M&A remains a core component of our growth strategy, and we are evaluating a number of opportunities both in and outside of the United States.

We are particularly focused on opportunities in power and energy, as well as geographic expansion opportunities in Europe, India, and China.

We expect to complete some additional acquisitions in the next six to 12 months.

We believe AECOM is well-positioned to capitalize on the existing market trends and to drive continued strong growth.

Please go to the next slide.

Of the $2 trillion-plus that we has been announced as part of the global stimulus packages, it is estimated that $1 trillion has been allocated for infrastructure projects.

This presents significant opportunities for us.

The U.S.

alone will spend an estimated $170 billion on infrastructure projects, with the spending focused on areas such as transportation, education, facilities, energy, and environment.

In each of these areas, AECOM is ranked as a market leader and is well-positioned to capitalize on the spending.

Stimulus funds are just now hitting the market.

For instance, we have already won transportation projects in Wisconsin, New Jersey, and Connecticut, as well as EPA Superfund projects in the Northeast.

Other states, as well as the U.S.

Army Corps of Engineers, have announced projects that are ready to be implemented.

Going forward, we expect to see an increased level of wins from stimulus packages, beginning in the fourth quarter of this year, which will contribute to our revenue in fiscal 2010.

Outside of the United States, measures have also recently been announced, including packages in Australia, Canada, Hong Kong, and the Middle East.

In addition to stimulus funds, the credit market for infrastructure has recently shown signs of loosening.

In March, financing successfully closed for the $1.4 billion interstate 595 P3 project, for which AECOM will be providing lead design services.

This financing was oversubscribed, which bodes well for future P3 financing.

In addition, we expect two P3 projects in Texas to close in calendar 2009.

We will be providing design services on both of these projects.

Please turn to slide 13.

AECOM continues win mega projects around the globe.

This slide is a snapshot of some of our recent key wins.

Looking at some of the projects highlighted on this slide, in March, we won a $146 million program management contract for the London Crossrail Project, which has a construction value of $24 billion.

This is the largest civil infrastructure project in Europe since the Chunnel.

Our program management work for the Libyan Housing and Infrastructure Board, which is a $575 million contract for this $50 billion capital program, is going well and is expanding.

We also will be working on the design of two Metro systems in India, a key growth market for us.

They are an extension of the Kolkata Metro system, and the new Chennai transit system, with construction values of $1 billion and $3.5 billion, respectively.

Kolkata and Chennai are the second and fourth-largest metropolitan areas in India, and are home to almost 20 million people.

These are currently two of the largest civil infrastructure projects in India, and both projects will clearly help in improving the quality of life in both cities.

We are also working on the largest civil infrastructure project in Bangladesh, the Padma Bridge, which has a $1.5 billion construction value.

Additionally, we were awarded an $80 million design and construction management contract for the modified central bypass and corridor link in Hong Kong, which has a construction value of $3 billion.

As you know, President Obama has placed significant emphasis on the need for high-speed rail across the United States.

AECOM has been awarded contracts on four of the eight segments of the $40 billion California High Speed Rail Program.

With AECOM fees valued at more than $70 million, we are providing environmental and preliminary engineering services on this important program.

While large projects are an important part of our business, they remain in balance with our total project mix.

For example, during the second quarter, our 25 largest projects contributed only about 15% of our net revenue, which highlights the diversification of our revenue sources.

Please go to slide 14.

In the second quarter, we continued to achieve an excellent balance of diversification across end markets, geographies, and funding sources.

We continued to have a healthy balance of end market revenue.

Looking ahead, our goal is to continue to capture market share in each of our end markets, both organically and through acquisition.

During the second quarter, 52% of our work was performed outside of the United States.

This represents a good geographic balance and allows us to take advantage of the strong markets that exist in the United States and Canada, Australia, China, and the Middle East, particularly Abu Dhabi and Qatar.

And although a series of- and through a series of recent key wins in the UK, we see the market improving.

In many of these markets, infrastructure and public facilities remain strong, and we are winning some of the largest projects in each of these markets.

In the chart to the far right, you can see our funding sources.

In the second quarter, 30% of our revenue came from the private sector and 70% from government clients, and clearly the expectation is for significant increases in government funding in the years ahead.

We expect the global private facilities market to remain weak through this year, but as you know, it only represents a small percentage of AECOM's business.

The government facilities market, however, remains healthy and likely we will further benefit from monies allocated through the stimulus packages.

To conclude, by any measure, we had an excellent quarter.

What is specifically gratifying to all of us is that throughout these turbulent economic times, our people have continued to focus on our clients, we have grown our market share, we have won significant mega-projects, and we have grown our base business in existing and emerging markets.

We have the right people, the right business model, and key relationships around the world to continue to build on this growth in the years ahead.

AECOM has begun to position itself for post-stimulus spending and a post-recession economic environment.

We are evaluating alternative funding sources, types of procurement, and opportunities for geographic expansion.

It is our goal to emerge from this period stronger than we were before.

We look forward to reporting on our progress.

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

Thank you.

(Operator Instructions)

Our first question is from the line of Steven Fisher with UBS.

Please go ahead.

Good morning, guys.

Good morning, Steven.

Good morning, Steven.

You mentioned that-- or actually, the PTS organic growth accelerated in the second quarter from the first quarter, and you mentioned the strength in Middle East, North Africa, China, and Canada.

Is that-- was that the main sources of the acceleration?

Yeah, Steve, we had an acceleration in our organic growth rate in just about all sectors, except for the private client-- or I should say private company facility development type work.

But the robust growth was in those markets that I had mentioned.

OK, then I guess moving on to that private area, I'm just wondering how to take about that 30%?

I mean, is all of that 30% a drag, or are there some pockets of strength and weakness in there?

Yeah, of that 30%, we have about 10% of our total business that is private sector facilities market, and that's the market that we've been talking about for a while, so it's not the 30% that's a drag, it's the 10% of our total business that's subject to private sector facilities market.

And frankly, we think we've seen- we've seen the most of that downturn and that's behind us.

Not that we're expecting excessive growth out of that 10% in '09, but we don't anticipate it dropping further.

OK, and can you just give us some examples of maybe where, in the other 20 percentage points, you're seeing some growth opportunities?

In the private side, the clients include multi-national clients as well as contractors.

What we're seeing on the infrastructure side, say, in a P3 market, the working for contractors in providing the design of infrastructure.

That's one example.

We have in Hong Kong, for instance, we categorize as a private client the contract we're working on in the design of a transit systems, OK?

So the way we define our private client is who pays us the-- who's paying us the fees, and not where the fees are being generated out of.

So, in the market that we have, where it's 30% private, as Mike mentioned, 10% is in the private facilities side, the other are in, as I said, multi-national clients or contractors.

And that's why we have more security in that 20%, in terms of longevity and transparency, than on the private developer side.

Which has hurt us in the UK, Dubai, and in some pockets of the United States.

Steve, another positive segment of that private portion is the environmental work.

We have a significant portion of environmental business, our environmental management business, is done for the private sector, and as you know, we're seeing increasing government regulation of environmental issues around the globe, and so that is still something that we are very, very bullish on for the future.

And as someone just reminded me, also on the energy side, the renewable energy, we're working for some private utilities.

OK, that's very helpful.

And can you give us your latest thoughts on whether the stimulus programs are likely to provide incremental opportunities or it is mainly going to fill funding gaps?

We anticipated this question, because it's a question we ask ourselves.

I think it's both, and the-- the programs we see going forward, there are still-- the federal government, state, local, as well as agencies, outside the United States, have funds in place and they will continue with their programs.

Clients here in New York, for instance, or in LA, they have funding programs in place and their projects will continue.

A stimulus which will get mixed in with the regular programs, what they'll do is they will advance some of the projects which might have been slowed down, and could have been slowed down without the funding coming in, and so those projects will have now a longer life, where we get-- Any jobs that we have, the funding needs to be approved, from a state and local and federal government, then the funding needs to be approved before they bring on board a consultant.

And it's usually our fees, plus a piece of the construction that is funded.

What is in jeopardy with slowdowns is maybe that second piece of the funding will not be there.

The stimulus programs will ensure the funding source continues and those projects will go on.

What we're seeing right now also is that from- for agencies outside highway agencies -- for instance, the EPA, who might not have a proactive approach in terms of providing for the first part, and then later on, coming in with additional funding, they would basically just stop those programs.

The stimulus packages now have really re-energized those programs.

As I mentioned, the EPA, for instance.

The EPA and the Superfund programs, without funding, those projects, they would just die on the vine.

Now with stimulus, they've been re-energized.

And so it's a combination-- but the thing is that, you know, in the United States, $170 billion of money dedicated to infrastructure, which will be spent over the next two years -- it's quite a significant amount of funds -- and so you know, we're not sure what bucket they'll go into, but we are confident that it will be a increase in terms of opportunities and with that increase in our revenue.

Great, that's very helpful.

I'll get back in queue.

Our next question comes from the line of Vance Edelson, Morgan Stanley.

Please go ahead.

Hi, thanks a lot.

So with your margins close to record highs, you mentioned you're targeting 20 basis points of annual improvement.

I think that's for this year.

In the past, you've commented on long-term margin expansion in terms of how many basis points per year we might model.

Could you update us on the future potential for scale gains or anything else that might help the margins over time?

Thanks.

Sure, Vance.

We still remain very confident in our ability to continue to improve margins for the foreseeable future.

As we've been saying for some time now, our long-term goal is to increase our EBITDA margins by 20 basis points annually.

We have been fortunate enough to outpace that for the past couple of years, but we are still very confident that a 20 basis point annual improvement for the foreseeable future is well within reach for us.

OK, great.

And you mentioned the increase in availability of qualified new talent.

Sounds like you're hiring very selectively right now.

How would you characterize your overall staffing levels?

Are you adequately staffed now for whatever stimulus work comes your way, or do you see more significant hiring ahead?

Well, we will be doing additional hiring as more of these projects come on board.

The good news is, over these past six months and in the second quarter, there were some slowdowns in the UK, Dubai, and as I said, some selectivity here in the United States, which we had to excess some people.

But our overall headcount remained constant, so we were able to, one, because we had the other work, we were able to bring on more people, and the fact that these people were available and they're very qualified, provided a significant opportunity to us.

Going forward, with the amount of work that we have been winning, it also is an advantage that the market is not as tight as it was, say, a year ago.

OK, got it.

And could you also comment on the pricing environment for bidding out there, and maybe related to that, the level of competition, if you could distinguish between the larger, mega projects and the smaller ones, how is the competitive environment right now?

The environment has always been competitive.

In terms of mega projects, there are not many-- there really are not many competitors.

Crossrail, I think there were three teams that were able to have the qualifications to propose on such a project of that size.

But you know, competition to win it is still quite severe.

And we see throughout the market that competition hasn't really changed much from what it was when the market was hot.

There clearly some firms that are not doing as well as others, but we are confident that we are in the right position, we have the right mix, we provide the local expertise, with local knowledge with global expertise and experience.

Pricing -- overall, the pricing has tightened up slightly in terms of the -- our clients.

But again, the good news is that over 70% of our work is in the public arena, and you know, in the public arena, when things are going very well, it does have a certain margin.

And things, when they're not so well, as in the economic conditions we're in, the margins stay the same, so they don't drop off.

So overall, we see a pretty good balance.

OK, that sounds good.

I'll leave it there.

Thanks.

Thank you.

Our next question comes from the line of Andy Kaplowitz, Barclays Capital.

Please go ahead.

Good morning, guys.

Good morning, Andy.

Good morning, Andy.

Could you comment on-- I noticed you mentioned that you got some initial stimulus-related contracts.

Maybe-- could you comment on the speed of stimulus funds coming out, because it strikes me that maybe it's a little bit faster than some people expected.

You know the government obviously wants to move fast, so maybe you could comment on that?

The way we see it, Andy, is that when you look at the different markets where the stimulus is going to occur, you have transportation, you have facilities, environmental, you have water, right out of the box is transportation.

What's been a custom here in the United States, the DOTs who let out this work, they've always planned in advance, and so they'll have design on the shelf, ready to go, waiting for funding, where some of the other agencies, in the water and the facilities side, they don't operate that way.

They wait until they get all the funds before they go ahead.

And that's a generality, but overall, that's the way it goes.

So, in the states that we just won some of these transportation projects, specifically highway projects, which are shovel ready, the design has been done, we've been brought on board to do the construction management and the program management.

And the construction management, program management, makes up about 30% of our volume, so those projects can get out very, very quickly.

And we're seeing also other agencies getting ready and implementing projects.

As I said, the Corps of Engineers came out with a list of projects last week that they're ready to advertise, that'll be both design and possibly construction management, as well as additional states.

So what we see right off the bat is the highway business, I think the water business will take a little bit longer.

You know, not that much longer, but probably the end of this- our fiscal year, the October timeframe, or early 2010.

And the same thing for the environmental and the facilities.

Gotcha.

And if I could shift gears to MSS for a second.

You mention that you are doing more self-performing work in the quarter, you know, and obviously it's a high-margin business, and so is it sustainable going forward, John?

Yeah, on the MSS segment, we did our relationship between net service revenue and gross revenue did increase because of the nature of the work we won during the quarter, primarily the CFT contract with the Air Force.

And so our margins, we, in the MSS segment, we do expect them to improve going forward, but probably not the same way that you're thinking about it.

The type of margins that you earn on those-- that self-perform work on some of those contracts is not as high as the self-perform work that you might do on some of our historical contracts.

So, the bottom line, is we expect our margins to continue to improve in MSS.

We think the margins for this quarter were slightly less, due to the ramp up costs on those new contracts.

But we picked up significant new volume through that CFT contract that will cause us to improve our overall margins going forward.

OK, I think I understand, Mike.

One more quick one, if I could -- just gauging the overall confidence of the customer base, I mean, I know it's a lot of governments here, but you know, we just went through a pretty bad global economy, in terms of the quarter.

Are people just pretty encouraged because you have the stimulus funds out there?

Has the confidence risen over the last few months?

I mean, how would you gauge the confidence of your average customer?

This is from a global perspective.

The one place I see still very concerned is the UK.

But outside the UK and in all our other markets, there is a real confidence that we're just about at the bottom.

If it's not the bottom now, it'll be in a month or two.

Here in the United States, there is a flurry of activity and people just feel that, you know, let's move on with this.

We have the means through these stimulus packages to really push the envelope.

But as you'll recall, I mean, what-- as I mentioned on some previous calls, for every $1 billion of construction, and we mentioned multi-billion dollars here, for every $1 billion of construction, it generates 30,000 jobs.

So with the work that's coming out, I think people are a little bit more confident that the good times maybe are not around the corner, but we're at the bottom of this slump, and we should be moving out pretty soon.

Thank you very much.

I'll get back in queue.

Thank you.

Our next question comes from the line of John Rogers with DA Davidson.

Hi, good morning.

Good morning.

I was just curious, some of the P3 projects that you talked about and the larger mega-projects globally, has your risk profile changed on any of these projects?

Are you taking-- I mean, are you required to take on more risk, because of the competitive environment, or is the pricing and your role pretty much the same as it's been historically?

John, our risk profile hasn't really changed.

I mean, on the P3 projects, we're the designer, providing planning and design services.

On these mega-projects -- as a matter of fact, on some of the mega-projects, our risk factor has gone down, because we're the program manager.

Right.

As a program manager, there's less risk than being a designer.

So-- and also, in terms of the competition, for these mega-projects and the PPP projects, there's less competition, so again, it's the big firms can play in the game, the other firms can't.

So, from a risk perspective, which is the same, and sometimes less, and the competition, which is less than what it would be on some smaller projects, we find it's really a significant opportunity for a firm- a global firm of AECOM's size.

OK.

And then secondly, just in terms of acquisitions, you talked about some opportunities that might be developing, it sounds like over the next, I don't know, couple of quarters or so.

The-- as we think out maybe on more like a three- to five-year basis, given the downturn in the economy, are we going to see you continue to push that acquisition side even further?

You know, our model, John, over the past almost 20 years has been growth through--

--right--

--balance of acquisitions and organic, and I think over the last 16 years, it's been 50-50.

I mean-- this year, we just closed on Savant, we're looking at another company, where we are in discussions with, in the final stages of negotiation.

And we have significant opportunities in Europe, India, China, as well as the United States.

We're going to keep pushing the model that we- which has been very successful for us over the past 20 years to, one, expand our geographic footprint, to get us into new services or types of services that will be reflective of what we see the business environment will be in the next five years.

As I mentioned in my discussion, you know, what-- we believe that the business environment may be different from what it was previously, when we think about how agencies are going to procure services, where we believe they're probably more in the P3 market going forward than has been in the past.

So, that's a long way of saying yes, we're going to continue to focus on acquisitions as much as we focus on organic growth.

So, the same sort of balance?

Yes.

Yeah, we don't feel-- we feel 50-50 is healthy balance.

We wouldn't want to see a 75% acquisitive and a 25% organic.

We're just not going to buy our profits.

It's doesn't work that way.

We try to build-- not trying, we have been successful in building a team with a combination of both.

OK, great.

Thank you, and congratulations on the quarter.

Thanks, John.

Thanks, John.

Our next question comes from the line of Andrea Wirth, Robert W.

Baird.

Please go ahead.

Good morning.

Good morning, Andrea.

How are you doing?

Good.

I wonder if you could talk a little bit about the Middle East.

You mentioned that it was fairly robust this quarter.

I wonder if you could a little bit about how we look at this robustness -- is it coming mostly from previous projects, and how is really the new flow, I guess, of projects looking, because obviously that region is getting hit pretty hard in general, just in terms of construction activity.

Well, when we speak of the Middle East, and we speak of it in terms of our PTS business, we also have a Middle East business which is part of our MSS business, where we're working for the Army in places like Kuwait, Iraq, and Afghanistan.

But on the PTS side, we're-- our presence is in Qatar, the UAE, Dubai, and Abu Dhabi, and Saudi Arabia.

In Dubai, about 15% of our business was focused in on facilities work, buildings.

That clearly has taken a hit.

But in all the other places-- and our activity is up.

In Dubai, 85% is on infrastructure, so with the exception of the small piece, which was facilities, Dubai is still doing well.

Abu Dhabi continues to grow.

Projects that we have won continue to stay on track.

The big one is the Saadiyat Island, for development of a cultural center.

We're the program manager for the cultural center, which includes several different museums that will be built.

Not in the Middle East, but in northern Africa, we have Libya.

That Libya-- that contract is going to continue to grow.

We're in the process of advancing our relationship with the housing authority, which right now, it's a $50 billion program, but for all infrastructure improvement in Libya, we're looking to expand that into transit, as well as transit and rail, so that is growing.

Qatar, we won a port job, a $7 billion port job, which is just really getting off the ground.

We're the program manager.

And in Saudi Arabia, we're looking at significant opportunities in the- on the infrastructure side as well.

So we see, in our markets, and again, our markets, as I said, are Qatar, the Port of Doha, Libya, which is northern Africa, UAE, Saudi, a strong market and a market which is growing.

Thanks.

That is very helpful.

I wonder if you could comment a little bit on your thoughts on the upcoming transportation bill?

Wondering, just to get your thoughts on prospects for that getting passed?

You know, how much do some of the stimulus funds come in, you know, jeopardize the passage of that?

Just trying to get an update on your thoughts on how that going forward.

You know, I forget how long the last reauthorization bill took to get passed beyond the deadline.

I think it was maybe two years, maybe even longer.

My sense is the current bill, a new bill that's going to be coming out, will probably be delayed slightly.

It's just that-- and again, this is my own sense, that there's so much activity pushing out the almost $800 billion of stimulus funds, that the federal government is-- needs some time to process those funds, so the reauthorization, from what I've read, it'll come out faster than the previous one has, but I think it probably will be delayed six months, eight months.

But again, there's going to be a lot of activity through the stimulus package that I don't think we'll see if any blip on the screen, in terms of activity, for highways and bridges, as well as transit.

Great, thank you.

And just one last question -- you mentioned, you know, some pockets weakness also in the U.S.

Is that just on the private facility side as well or are there some other markets that are seeing some weakness?

It was our private development and facilities business.

OK.

That market doesn't exist.

Got it.

Thank you.

Great quarter.

Thank you.

Thanks, Andrea.

Our next question comes from the line of Avi Fisher, BMO Capital Markets.

Please go ahead.

Hi, good morning.

Thanks for taking my questions.

What are the implications of the shift from private to public work?

Are there any negative implications to margins, just the public versus-- whether one is a higher margin or lower margin business?

Sure.

You know, as I said previously, when things are good, the private clients, they pay at a higher margin than our public clients, and our public clients have modest margins.

Consistent, modest, higher volume, but modest margins.

When things are bad, for instance, as they have been for the last six months, nine months, the private margins go to zero, and where the public clients maintain, the private development type of clients, their margins go to zero.

Not all our private clients.

And the public clients remain the same.

So we could see some negative mix shift, but you're still maintaining your expectations for margin enhancement, is that right?

Let me put it this way -- we'll see some mix shift, I don't know if it's going to be negative.

We will still produce the-- our earnings the way we're forecasting it.

Gotcha.

We are not predicting a negative on margins at all.

I think John's referring to the private sector facilities market.

It's-- you know, the market's not there, so if you don't have the project, you don't have to worry about margin, one way or another.

Projects just aren't there, and they haven't been there for nine months, at least, now.

Right.

But the private sector work in the oil and gas sector, and that type of work, environmental work, the margins are-- always have been our highest margins and will continue to be the highest margin of any work we do, is the environmental management type work, which is private sector, and we expect that to continue to be a healthy market.

Gotcha, all right, thank you.

You booked, by my estimate-- you know, my calculation, about $1.5 billion of awards in the quarter, which, in arguably, one of the worst bookings quarters in recent history.

That's pretty strong.

Can you break out how much of that was new business and how much of that may have been scope add?

I can't answer that question.

We don't cut it up like that.

You know, for us, a win is a win, whether it comes from a scope add, or a new client, or existing client, we're happy to- we're happy for all our wins, so we don't really segregate them that.

OK, thanks.

There was a significant amount of new wins.

For instance, the Crossrail was a brand-new win.

There were several transportation projects.

All the work we've won in Hong Kong is new work, all the work in the UK was new work, and a significant piece of the work in the United States and Canada is new work.

There is a small portion of add-ons, but the majority of the work is from new marketing and business development.

And Avi, just to clarify, the wins for the quarter were $1.8 billion rather than $1.5 billion.

OK, that's gross bookings.

You mentioned on the call that SG&A increased because of the Earth Tech acquisition.

Also, contract bidding on cost on mega-project, but you expect those to come down.

Is there any read-through on that, that your-- is your backlog full to capacity, so you're sort of slowing your bidding, or am I just sort of articulating too much from that statement?

Go ahead, Mike.

No.

I would say our view is that our margins will increase.

Our SG&A-- first of all, our margins year over year were up.

The sequential quarter, if you look at corporate costs in Q2, a little higher than Q1, for a number of reasons.

We made some significant investments in the quarter.

We converted five of our legacy IT systems over to our Oracle platform, that obviously that will produce costs savings in the future, now that we're operating on one system.

We invested in a-- what we're calling our ``Global Stimulus Team,'' that is focused on making sure that we get the maximum market share out of all the stimulus packages globally, so we invested a lot of money in mobilizing teams globally to take advantage of those stimulus packages.

And then we also had some increased SG&A cost, due to the market dislocation.

You know, as John mentioned, our headcount is relatively flat globally, but it's definitely not status quo.

We had some market dislocation, we had to excise some headcount in some of the softer regions we mentioned.

But we hired people in other markets that were hotter.

And so even though you look at a flat headcount number, there was a lot of hard work and quick execution to excise some people in softer markets, where you had severance costs, and hire new people, where you had start-up costs.

And so we believe all those are good, solid investments that will cause us to improve our margins going forward.

Gotcha.

And can you talk a little bit about the re-compete in Kuwait?

As I understand it, you were on some contracts over there that were under re-compete?

Yes, the CSA contract is up for re-compete later this year, and we'll be prepared to put our best foot forward.

And we just recently received an extension for our current contract and as you'll see, or as I mentioned in the comments, after the quarter ended, a week after the quarter ended, we received a quarter billion dollar revenue extension on the CSA contract in Kuwait, but that will be re-competed later this year, and we think we've performed very well on that contract, and expect we'll be successful.

I was asking because I was a little confused about that -- you have a $250 million extension on the contract that terminates in June, and that's under re-compete, or are there two different contracts?

No, it's the same contract, where the current, existing contract is extended, which could mean that they may delay the re-compete.

The re-compete, right.

The other re-compete that we had was FEMA, and we were advised yesterday that we were selected as one of the successful contractors, and now we're negotiating the contract.

So that was a major plus for us, because FEMA had been-- in the United States, it had been one of our largest margin-producing jobs that we had.

Gotcha.

I apologize-- I have three more questions.

Can you talk about-- I'm not sure if anyone asked this yet -- utilization in the quarter?

Our utilization is within the normal bandwidth.

You know, one of the issues that I just mentioned, on the market dislocation, moving some people around, you do have some challenges on utilization on that front, when you're excising people in some softer markets and hiring and getting them ramped up, and those are some of the things that I mentioned, and we consider those as investments, to position us best for the market as it's starting to turn now, so--

Did they decline sequentially or--

I don't know that number off the top of my head, but anecdotally, I would bet they would have been a slight decline sequentially in the quarters, because that's when the utilization declines, that's what drives up your SG&A costs, so when you're-- when you've got people that are out pursuing and positioning for the global stimulus packages, those people are not utilized on billable projects, but it's a good investment that will pay off in the future.

So I'd say anecdotally, I guess there would have been a small sequential decline in utilization, but it's within the normal bandwidth.

Gotcha.

My last two questions are just, if you could elaborate on the timing of the Guam contract, and also on your exposure to wind and transmission?

Thanks very much.

The Guam contract is underway.

I don't know exactly when it started, but we've-- maybe the beginning of this fiscal year.

So, that's moving along.

And what was the next question?

It was just about-- I know you've done, you know, a very small part of your business in the wind area, and also you've talked a little bit about transmission, doing work on the transmission side.

Is that becoming any more material, or is still just--

We like to think we're not doing a very a little piece of our business, but we are doing a small piece.

We're trying to grow that business; we're looking at M&As to do it.

There are something opportunities for us in solar energy, that we're pursuing now, but again, it's-- we're looking at it as a growth area.

All right, well thanks for taking your time in answering my questions.

OK, thank you.

Thanks, Avi.

Our next question comes from the line of Joseph Foresi, Janney Montgomery.

Please go ahead.

Hi, gentlemen.

Hi.

How you doing?

Good.

My first question here, even just going back to the stimulus, I was wondering- are these-- have you hired anyone in lieu of stimulus?

Have you included anything new in backlog due to it?

And as you're looking at the way it comes out, are these new contracts, or simply more of a funding of things that had already started?

So what we've seen on the stimulus side, these contracts out of Wisconsin, Connecticut, New Jersey, they were new projects that now they have this-- the states have the stimulus money, they've let these out, as I said, shovel-ready projects.

The one which clearly was not on anyone's radar before the stimulus because there was no money was the EPA contract for Superfund.

If there was no stimulus, that Superfund program would have just stretched out for years.

Now with the stimulus, the EPA got funded, and so now they accelerated that program.

We've been hiring people for all our projects.

As I said, it gets-- you know, we don't-- once we win the project, if it comes from stimulus, or if it comes from the normal funding sources that a government agency has, you know, to us, we put it all in one bucket and we hire accordingly and move resources around.

What we did do, though, is we have a team of people who are just focused in on looking at stimulus and looking at ways that we can provide additional services for these clients, to-- to meet some of the opportunities which our clients are going to need in terms of just processing the funds that are out there.

I guess maybe secondly here, on the backlog, any change in the realization of that on the revenue side, and when you scrubbed it this time, you know, for this quarter, what were the areas that you kind of scrubbed some things out of, or you took out?

Yeah, I can give you a general view, and then Mike may have some more specifics in terms of the actual numbers.

Where we scrubbed it was primarily on the private side, OK, because some of that work is still not developing, so rather than keep it in our backlog, we just moved it out.

You know, again, most of our work is, over 70% of it is, as I mentioned before, is with public clients.

That work remains secure, the funding for that has not changed, we have not seen any work cancelled that came out of the government side.

And you know, we go through a scrub of our backlog monthly, or definitely quarterly.

And Mike, you can probably--

Yeah, I echo what John says -- I think- to put it in perspective, Joe, we had $1.8 billion of wins in the quarter, and we took about $40 million of cancellations out in the quarter, primarily private sector work.

The first quarter, the number was about $50 million, that we had project cancelled that we took out.

So, you know, by putting it in comparison, $40 million, $50 million on a $10 billion backlog, or $40 million, $50 million against a $1.8 billion wins, it's not abnormal, you know, that that would be numbers that would be cleaned out.

But again, what John said -- the public sector work, it's funded backlog, and so the money is there, and it's been awarded.

It's just very, very rare that they stop a project that's in the government sector.

You guys talked about dislocation, you know, among the employee base.

Maybe you could just talk about where you were adding and where you were taking away?

Well, we've mentioned some of the soft spots -- the UK, we mentioned Dubai, and so if you look at the Middle East, the Middle East is doing quite well, but there's been a move from the stronger markets or in Doha/Qatar, as well as Libya, as well as Abu Dhabi, but not in Dubai, and so there's been a dislocation in that market, certainly.

You know, in Libya, we've added-- we have about 150 people there now.

We went from zero to 150 people fairly quickly.

Australia has seen the numbers come down a little but, but we're seeing significant growth in places like Hong Kong and China, Canada has grown significantly.

The U.S.

transportation business has grown.

OK.

And then just lastly, you mentioned a FEMA renewal.

Is that the joint venture, or what contract was-- were you referring to?

--was a joint venture, but now we've bought Earth Tech, so it's all AECOM.

It's all AECOM.

And is that the map moding with Baker -- is that a different contract?

This is the emergency response, disaster response-

OK.

OK, very good.

Thank you.

OK, thank you.

OK.

I guess if there are no other questions?

At this time, there are no further questions in the queue.

Ladies and gentlemen, if you would like to ask additional questions, please press star one at this time.

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Once again, ladies and gentlemen, if you would like to ask an additional question, please press star one at this time.

At this time, there are no further questions.

I will turn the conference back to management for closing remarks.

Please go ahead.

I'd like to thank everyone for coming on the call today and showing your continued interest in AECOM.

If there are any other questions you may have, please feel free to give us a call, and we look forward to speaking to you all again in three months.

Take care and thank you very much.

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