AECOM (ACM) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the AECOM third quarter 2009 finance conference call on the 6th of August, 2009.

For today's recorded presentation, all participants will be in a listen-only mode.

After the presentation, there will be an opportunity to ask questions.

If any participant has difficulty hearing the presentation, please press the star, followed by the zero on your telephone for operator assistance.

I will now hand the conference over to Paul Cyril, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, David, and welcome everyone, to AECOM's Third Quarter 2009 Earnings Conference Call.

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 number two of the 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 the 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 around 12 noon Eastern Time and will remain there for approximately two weeks.

Please go to slide three.

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

Presenting today will be John M.

Dionisio, President and Chief Executive Officer, and Michael S.

Burke, Executive Vice President and Chief Financial Officer.

John, please go ahead.

Thank you, Paul.

Good morning, and thank you all for joining our call today.

First, I would like to make a few opening remarks, and then Mike will discuss our third quarter financial performance.

Following Mike's commentary, I will provide additional detail on our performance, and conditions in our key markets.

As you will see from Mike's presentation, we had a solid quarter.

Our results were driven by a steady flow of new wins across our end markets, including work on a variety of mega-projects.

These projects underscore the fact that AECOM's diversified business model enables us to compete for and win the best and biggest projects around the globe.

Overall, I am pleased with AECOM's performance despite the current economic conditions.

I am also pleased to report that AECOM has been ranked number two in Engineering News Record's annual rankings of the global 150 international ENC firms.

Now I would like to turn the call over to Mike, who will review our third quarter financial performance.

Mike, please go ahead.

Thank you John.

Please turn to slide five.

First of all, to echo John's comments, we are pleased with our third quarter results and our continued growth.

During the third quarter, our gross revenue increased by 16% over last year's third quarter to $1.5 billion.

Our net service revenue was also up 13% to $967 million.

Foreign currency headwinds continue to impact our results in the third quarter.

In a currency neutral basis, our organic growth was 5% for both gross revenue and net service revenue.

Net income from continuing operations was $50 million, up 30% year over year.

Diluted earnings per share from continuing operations was $0.45 per share, up 22% year over year.

This also reflects a 7% increase in our diluted share count.

Backlog increased 30% to $9.2 billion.

We closed the quarter with $275 million in cash and cash equivalents.

Please turn to slide six.

The PTS segment accounted for 81% of our third quarter gross revenue.

We continue to generate solid growth in our PTS segment, with gross revenues increasing 14% over last year's third quarter to $1.2 billion, and net service revenues increasing 10% to $894 million.

At the same time, PTS backlog grew at a very healthy pace of 39% over last year.

Operating margins in the PTS segment improved over last quarter, and over last year, driving operating income to $80 million, a 14% increase over the third quarter of 2008.

These operating margins were driven by our continued efforts to streamline our operations, and the tight integration of the M&A transactions we have closed over the past 18 months.

On a constant currency basis, our PTS net service revenue grew organically at 1%.

As we have previously discussed, we have experienced an overall weakness in our private sector buildings market, as well as in our U.K.

and Dubai operations.

This week, this was offset by strong performance in our U.S.

transportation market, in our Middle East operations, particularly Abu Dhabi and Qatar, in North Africa, and across our entire infrastructure practice in Hong Kong and China.

The performance of our management support service segment, which accounted for 19% of revenue in the third quarter, was also solid.

MSS revenue for the quarter was $286 million, up 28% over last year, and this growth was entirely organic.

MSS operating income increased 23% over last year to $13 million.

Looking to the future, our prospects in the MSS segment remain very promising, and we are tracking and pursuing several multi-year mega opportunities.

Please turn to the next slide.

In our third quarter, our EBITDA margin improved 59 basis points over last year, and is up 58 basis points for the first nine months of the year.

The margin improvement initiatives we have been speaking about for some time now have enabled us to continue to take cost out of the business as we integrate M&A transactions and introduce new systems around the world.

We remain on track to achieve our annual 20 basis point improvement in EBITDA margins.

Please turn to the next slide.

Our balance sheet remains strong.

We closed the quarter with $275 million in cash and cash equivalents, and debt of $241 million.

This net cash position places us well below our target leverage range of 1.5 to 2 times EBITDA.

Looking ahead, we expect to put some of this cash to work as our M&A pipeline continues to pick up.

We are currently pursuing a number of strategic transactions.

As of June 30th, we had almost $400 million in unused capacity under our $600 million credit facility.

Our collections were also strong, which improved our cash flow through the third quarter by more than $13 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.

We continued to win business at a steady pace in the third quarter.

Our wins drove total backlog up to $9.2 billion, a 30% increase over last year.

Through the first nine months of the year, backlog is up 7.3%, and backlog in the PTS segment is up 10.4%.

Virtually all of our growth in backlog in the first three quarters was organic, which bodes well for the strength of our end markets.

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

Please turn to the next page.

And now, I would like to update you on our outlook for the remainder of fiscal 2009.

Based on our strong performance over the past three quarters, and our outlook for continued growth, we have increased our guidance, and now expect diluted earnings per share to be within the range of $1.65 to $1.70 for the full fiscal year.

Our guidance includes only a small amount of upside in FY09 from the U.S.

stimulus package, with the real impact occurring in FY10 through FY12.

This guidance assumes $25 million in total amortization expense related to acquired and tangible 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 third quarter performance and outlook.

John, please go ahead.

Okay, thank you Mike.

-- a few of trends we are seeing in our markets and our business.

As I previously stated at the beginning of the call, despite challenges in some of our markets, AECOM is performing well.

As Mike mentioned, we have seen softness in Dubai and the U.K., and in the global private buildings market.

But this weakness has been offset by strong performance in other parts of our business.

In particular, we have seen strength in our U.S.

transportation market.

We have seen strength across our entire Hong Kong infrastructure market, in North Africa and parts of our Middle East market, and in our management support services segment.

Funding for infrastructure projects in most of our key markets remains strong.

In the United States, although budget issues at the state and local levels have pressured government spending, the stimulus packages have begun to take hold, and have helped sustain infrastructure spending.

This has been the case in the United States, as well as many other of our key global geographic markets.

In the United States, we don't expect that stimulus spending will begin to contribute materially to our revenue until mid fiscal year 2010, continuing through fiscal 2012.

In other key markets outside the United States, such as in Hong Kong, regions of the Middle East, Australia and Canada, stimulus spending has begun.

In Hong Kong, for example, the government plans to invest $30 billion in infrastructure projects over the next 10 years, nearly doubling its annual spend.

Currently, there are 10 megaprojects and an airport expansion program underway.

AECOM is working on a number of these stimulus related projects, including Hong Kong's high speed rail station, the largest underground station in the world.

Throughout this economic downturn, AECOM's diversified business model has served us well, and looking ahead we are well positioned to continue to pursue both organic and acquisitive growth opportunities around the world.

Please turn to slide 12.

The pace of stimulus related projects here in the United States is just beginning to ramp up.

AECOM's early stimulus wins total approximately $350 million, and include projects in transit, energy systems, public facilities such as courthouses, schools, and government buildings, and in highways across several states.

One notable project is a $100 million renewable energy system design project for the United States Navy.

The photovoltaic system will be constructed at six installations around the United States.

In addition, we expect stimulus funding to underwrite future phases of mega-projects where AECOM is already working and well positioned, such as the California High Speed Rail program, and the Second Avenue subway.

The chart on this slide shows U.S.

government expectations for the timing of stimulus funding outlays.

As you can see, the forecast is for infrastructure related outlays to reach a peak of $57 billion in 2010, and significant portions will stretch through 2012.

In addition to stimulus opportunities in the United States, AECOM is positioned to benefit from anticipated extension of the Federal Transportation Bill, which should maintain the current level of spending through next year.

We expect that the combination of stimulus funding and the extension of the transportation bill will lend strong support for the United States transportation market for the next several years.

Please turn to slide 13.

During the third quarter, AECOM recorded a steady stream of new wins, including additional work on a number of mega-projects.

As an example, we won a project management contract with the Republic of Trinidad and Tobago for the first phase of a national highway effort.

The construction value of the first phase alone is $2.4 billion.

We also won an $111 million contract for the final design of the Trans-Hudson Express Tunnel Project, which will be partially funded by the U.S.

Stimulus program.

The 3.5 mile tunnel will double commuter capacity between New York and New Jersey.

Additionally, we are working on the design of two major developments in the Middle East, where our fees will total $60 million.

One is the extension of the Al Raha Beach development project in Abu Dhabi, and the second is the design of Knowledge Economic City in Saudi Arabia.

Both will greatly enhance the quality of life for residents and boost tourism in these areas.

AECOM is now working on six of the world's largest infrastructure projects across several continents.

Although these mega-projects have been important to maintaining our growth throughout this economic downturn, we have a strong balance of all size projects.

As an example, our top 25 projects still only comprise 16% of our net revenue.

Please turn to slide 14.

In the third quarter, diversification across end markets, geographies, and funding sources remain strong.

Looking at the geographic pie chart, you see that 52% of our work was performed outside the United States.

This represents a good geographic balance that allows us to take advantage of our strong markets that exist in the United States, Canada, Europe, and Australia.

It also represents increased spending on infrastructure improvements that is occurring in emerging markets such as China, Eastern Europe, the Middle East, India, and Brazil.

For instance, there has been a shift in spending in many regions of the Middle East from land development and facilities construction to infrastructure improvements.

Although the demand for infrastructure projects in geographic markets remains strong, and we continue to win large projects in each of these geographies, during the quarter we experienced some slowdown of project activity as our customers position themselves for stimulus funding projects.

This market pause resulted in some project schedules being pushed out.

This pattern is consistent with what we have seen in past recessions.

That being said, we continue to win new work at a solid pace, which bodes well for our future growth.

Looking ahead, we expect to see a pick up in organic growth as the economy begins to improve and projects move forward.

Moving to the funding chart to the far right, you can see that our funding sources remain well diversified.

As compared to last year, the mix of private to public funding has decreased from 34% of our revenue to 30%.

Going forward, we see continued opportunities for participation of private investments in infrastructure, which will help state and local governments fill any shortfalls in spending.

As you can see, state and local funding accounts for only 14% of AECOM's total mix.

While this market has been under pressure, we expect federal stimulus funds and other dedicated funding sources, such as the recently issued Build America Bonds, will back fill funding gaps.

Year to date, over $17 billion of Build America Bonds have been issued, and municipal bond issues are up 5% over the first half of last year.

I would like to discuss our M&A market.

For the past 20 years, our M&A strategy has been an important part of our growth and diversification, providing us with either a strong geographic platform with local presence through which we can sell additional AECOM services, or they provide a specific service offering, which can enhance our existing business.

An example of this strategy is our recent acquisition of Savant, a company with over 600 employees in Eastern Europe.

Since the closing, we have won two sizable projects in Eastern Europe, totaling $135 million in fees.

These wins were a direct result of a combination of AECOM's service offerings, and Savant long term local presence.

In the third quarter, we began to see a significant rebound in M&A activity, as valuation expectations in the private market have begun to moderate.

We have been focusing our attention on expanding our market position in existing end markets and geographies, as well as looking for opportunities to enhance our market share and expertise in power and energy, healthcare, and federal government services in emerging geographies such as India, China, Africa, and Latin America.

We currently have several deals in the pipeline, more than we have had over the past 12 months, including one that we expect to announce later this month, and several others that we should be able to announce over the next three to six months.

In conclusion, the first three quarters of 2009 reflect the successful execution of our growth and diversification strategy and position AECOM for a strong 2010.

They also reflect diligent management of our business in a difficult economic environment.

This year, we have won numerous mega-projects around the globe, helping grow our backlog 30%.

We have positioned AECOM to capture its fair share of government funded projects.

We have increased margins, we have expanded our footprint in emerging markets, and we have built a strong pipeline of M&A opportunities.

For all these reasons, we are optimistic about our future, and we believe that we will continue to see strong growth opportunities as worldwide economic conditions improve.

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

Thank you.

Thank you, sir.

(Operator Instructions).

Your questions will be polled in the order they are received.

There will be a short pause whilst participants register their question.

The first question comes from Steven Fisher from UBS, please go ahead.

Hi.

Good morning.

The organic growth rate ex-FX decelerated quite a bit from the last few quarters, from kind of the teens down to 1% PTS, and you explained clearly the reason, and indicated John, that the growth is expected to pick up.

But, I'm just wondering about the timing, and whether you think it could turn negative before it actually starts to turn positive?

Well, I think what we saw in the third quarter, Steven, is that some of the weakness in the markets, which started to show themselves in the second quarter, really didn't take hold until the third quarter.

I think that is behind us now.

One of the reasons was the state here in the United States.

State and local governments were positioning themselves, delaying some projects or extending the projects out until they get their stimulus monies in place.

Again, I believe that is behind us.

So we're looking towards the fourth quarter and into 2010 to see our organic growth accelerate and not see a continued decrease in organic growth.

Okay.

And you're now at a net cash position again of cash flow, which was an improvement over the first half of the year.

Can you just remind us why there is there seasonality of cash flow, and do you expect that by the end of the year your cash flow could be at least 100% of net income?

Yes Steven, the cash flow always has some seasonality to it, primarily due to the government contracting cycles, just the nature of the governments that we do business with.

And 70% of our business is with governments around -- public entities and governments around the world, and they tend to pay their cash out in the last part of their fiscal year, which coincides with our fiscal year.

Cash flow -- we haven't offered projections on cash flow as a percentage of net income, but our free cash flow has been improving quite a bit.

In spite of the economic conditions, we have seen our cash flow pick up quite a bit, and we are expecting to have a very healthy year with cash flow.

Okay, and then I guess really the use of cash -- what kind of target for acquisition spending do you have, say over the next year, as you've laid out a number of the deals that you are about to pursue more aggressively.

Steven we don't set very specific targets for the amount of money that we spend on M&A.

As we have said for quite a bit of time, that we expect our growth to be a healthy balance of both organic growth and aquisitive growth.

We tend to focus on the right strategic acquisitions at the right price, and right now, as you heard John say, our pipeline for M&A activity is more robust than it has ever been.

The buyers' -- or sellers' expectations on valuations have come back to a reasonable level, and you should expect to see us very quickly pick up our M&A activity over the coming quarters.

Great.

Lastly, can you just give us a sense of the pace of growth that you saw organically in the Middle East, Hong Kong, and Australia?

Yes.

In the Middle East, as you heard John say, Dubai clearly slowed down.

The private sector business in Dubai dried up quite a bit.

The public sector market has picked up there, but I don't have specific organic growth rates for the Middle East as a whole, but it's quite significant in places like Abu Dhabi, Qatar, and Saudi Arabia.

So that market has been fairly solid, after you get out of Dubai.

Hong Kong, China, for instance, our profitability there this year is up probably 35% organically.

The markets in Hong Kong and China in particular, the stimulus spending made its way into the market much more quickly than we had seen stimulus money make it into the market anywhere else in the world.

So that market has been very strong for us, and our backlog there is at an all time high, and we expect to see continued growth in both those regions.

And also, Steven, in terms of our emerging markets, these countries have been positioning themselves to advance their infrastructure spend, and we are seeing that taking place right now, and probably the organic growth rate in those emerging countries, Middle East, Latin America, Africa, Eastern Europe, will be greater than in our developing countries.

But our organic growth will be strong in our developing countries.

The issue -- interesting in the Middle East, if you had gone to the UAE in Dubai and Abu Dhabi, you saw the enormous amount of land development in housing, and now with the softness in the economy, the spend is on infrastructure, roads for instance, transit, and I guess it's opportune that which was needed is now coming to the forefront, and they're advancing that at a pretty significant pace.

Sounds good.

Thanks a lot.

The next question comes from Vance Edelson from Morgan Stanley.

Please go ahead.

Hi.

Thanks a lot.

So, just given that the backlog can be volatile, anything we should know about timing issues, or anything else that would have impacted the June 30 number, either favorably or unfavorably, or anything that might bode well or bode poorly for the upcoming September 30 balance of the backlog?

We are continuing to -- as I mentioned in the call, we are continuing to win a significant amount of work going forward.

In July, we won some significant projects that were not part of the back log that we are giving you for the third quarter.

Some work here for highway projects here in the United States, work in Saudi Arabia, the Middle East.

We also won a major program with a global environmental services contract with Chevron.

And so, looking at results for July, since we are in August, we can say that our backlog is growing, and it's continuing to grow at a very significant pace.

Okay.

That's helpful.

And then on the M&A pipeline picking up, it sounds like there might be a particular focus on oil and gas.

Can you just share with us your thinking around what makes that end market an attractive avenue to pursue at this point in time?

Well, in terms of our M&A, we are looking at several things.

We are looking at filling in our geographic markets around the world where -- in the infrastructure.

We are looking at, as I mentioned, the healthcare business, or federal services business in the United States where the federal government continues to spend at a very nice rate, and it's a market that we have significant growth opportunity in.

The reason why we keep looking at the power and energy is just one, the demand in terms of renewable energy.

We see that as a market going forward.

And also, when you look at our -- I don't know if you recall the slide that came out on our market sectors, where we have a balance of transportation, water, and facilities, at around between 25% and 30%, while power and energy picks up only about 5% of our market.

So we figure -- you know again, goes to AECOM's business model of balanced diversification.

We feel that going forward there is going to be a need for renewable energy and energy around the world, and we just feel that we should be in a better -- and have a more -- have a larger position in that end market.

Okay.

That makes sense.

And then finally, on the balance sheet, it sounds like acquisitions could use some of the cash.

So therefore, just any thoughts on levering up the balance sheet, given the continued solid outlook for the overall business and the generally improved credit markets.

You know, our balance sheet obviously keeps getting stronger as we are now in a net cash position.

So we have about $275 million in cash on the balance sheet, and $240 million in debt.

We have almost $400 million of available credit under our revolving credit facility, which still has three years before it is up for renewal.

So liquidity is available to us to complete those M&A transactions.

As we have said in the past, we do believe that the right capital structure would involve some leverage on our balance sheet.

We think that appropriate leverage is somewhere between 1.5 to 2 times EBITDA.

Obviously, we haven't been anywhere near that, but that's probably the right capital structure for an organization of this type.

Okay that's great.

Thanks a lot guys.

The next question comes from Andy Kaplowitz from Barclays Capital.

Please go ahead.

Good morning guys.

John, you said on the call that you expected stimulus to start impacting your business in mid-2010.

I just wonder is that at all a change from what you were previously thinking.

You know, you had told us before, you know it's going to be 2010.

You know, maybe as we're getting closer, you're getting more clarity on these projects.

Maybe just an update on, or color on what you just said.

Well, we had always said that the stimulus package would not have a significant impact on our 2009 numbers.

And even though we said that, there are many projects that have been funded, which we are working on.

I think there is something like $350 million of project activity or fees that we have gotten from the stimulus program.

If you look at some of the reports that come out, I mean right now I think there's about $17 billion of highway stimulus funds have been obligated through mid-July, and this is the low hanging fruit.

States have positioned themselves to take advantage of the funding, and when you look at it, you get projects like pavement improvements and resurfacing, which they can get out on the street quickly.

But as -- what we see going forward is now, once that initial wave goes through, we'll see those major projects occurring.

And stimulus -- you know I think on some of the past calls I said, gee, what stimulus is going to do in terms of new projects.

I think when we look at and we think about stimulus, it's a pool of funds that will go for projects that were on the books that might not have been able to be funded by states, and now they are going to be able to be funded by using stimulus packages, and also some new opportunities with states who did not have the opportunity.

So, to be conservative, we are looking at the beginning of the next calendar year as saying, "Gee, we're going to see some significant improvement as a result of -- or I should say, some additional spending as a result of stimulus."

But look -- and that's U.S.

stimulus, but looking around the world, we're seeing that in Canada, Canada had a major stimulus program of about $15 billion primarily in Toronto.

We are able to win significant work up there, and we're advancing our market organically up there.

We look at Hong Kong, as we mentioned.

We look at the Middle East.

So over all, when you look AECOM and you think about the opportunities going forward, you need to look at the U.S.

stimulus, but also because of our global footprint, it's good to think of us as taking advantage of the other stimulus packages, which are already say in mid-season form going forward.

So John, I don't want to put words in your mouth, but it seems like you are saying that stimulus here is going to offset -- in the U.S.

is going to offset any real weakness of the state and local governments to give us sort of a normal progression of projects, and then, you know internationally, maybe stimulus will give us more than we thought, you know as we get into 2010.

Well as we said, in 2009, our transportation market has been very strong, and I think it has grown at about 30%.

Okay.

That's without stimulus.

And as we see it, the opportunities we have going forward, that stimulus will reinforce that market, and we continue to see ourselves grow in transportation, as well as infrastructure here in the United States.

Okay.

That's fair.

If I look at -- Mike, if I look at G&A, you know a takedown on the quarter, you kind of alluded to the fact that it probably would.

You had some you know IT things that you did in the last quarter.

Is this a good run rate to use?

You know, as we go forward, a $20 million type run rate?

You know, I tell you, they -- the SG&A $20 million run rate number is -- it's all an accounting issue frankly.

There are SG&A expenses that are upping cost of revenue, and the way we manage the business is -- frankly I don't look at that number.

What I look at is my total SG&A, which is a combination of that $20 million number, plus the hundreds of millions of dollars that are up in the cost of revenue.

So the helpful way to look at the business, and the way we look at the business, is EBITDA margins.

And as you heard us say earlier, our EBITDA margins are up 59 basis points.

It's been moving in the right direction for quite some time now, and we expect that will continue to move in the right direction.

So I wouldn't get too focused on that $20 million number, but rather focus on the EBITDA margins as a whole.

Okay great.

And forgive me for being a little nit-picky, because I know you have a lumpy business, but you know you had told us last quarter that you had about $250 million of new awards, or one particular award in your MSS segment that slipped into 3Q, and when I do the math, you know, it looks like your sequential backlog in MSS dropped by $100 million.

So, I'm just wondering what happened?

You know, that is the lumpiest of our business, the MSS segment, Andy.

It's always lumpy, the projects are big.

The type of work that we are winning now is much more IDIQ work, and so, if you look back at our business a couple of years ago, we would win a large, lump sum business, and it would be earned out over a five year period of time.

Very predictable.

The type of projects we are winning now are much more IDIQ.

You heard us talk about the CFT contract, which has an enormous ceiling of revenue, under that whole contract.

But we are winning -- we win the work in small task quarters.

The same thing with the BTRIC contract you heard us announce, which is the biological warfare contract that we just won in the former Soviet states, actually in Kazakhstan.

So it's really the nature of the business is changing a little more to IDIQ and task order work, as well as the general lumpiness of that business.

So that's not something that I'm overly concerned about frankly.

Gotcha.

There was no -- I mean, it doesn't look there was any cancellations in there, and there was -- did currency hit that division harder than past quarters, or?

No.

There no -- that's all U.S.

currency work.

And also, you know, I'm not sure if you're looking at awarded backlog, or contracted backlog, but you know you'll see that the awarded backlog number is increasing quite a bit from Q to Q.

Gotcha.

So it's really just a timing issue.

That's fair.

And then just one more quickie -- you know, in MSS again, you're probably going to tell me it's just lumpy, but you know, I see the margins going down a little bit in the net operating margin versus the last few quarters.

Is that all it is?

Was there something in there?

You know, if you look at the margins -- the way you look at margins, you guys are looking at income from Ops 4.57%.

That is a fairly normal margin if you look back over the last four to eight quarters.

You did see the March quarter of '09 was up a little higher than that, and what that's attributable to, as I think you know Andy, most of our work in that segment is on a cost plus basis, but there is also an award fee of, we'll call it a little premium bonus at the end, or when you hit certain milestones, that we do earn on those contracts.

And depending on when that award fee is settled, it could hit the quarter, and that's what happened in Q2.

So I wouldn't view it as this quarter is down sequentially.

It's much more normal when you look over the past even eight quarters, but Q2 of '09, had a little bit of a bump in there due to an award fee.

Okay.

Great.

Thank you very much.

The next question comes from Joseph Foresi, from Janney Montgomery Scott.

Please go ahead.

Hi guys.

How you doing, Joe?

My first question is just sort of a housekeeping one.

On the other income, it looks like other expenses turned positive this quarter.

I wonder if you could just maybe break down that line and talk about what that particular item is.

Sure.

It's comprised of two principle components: one is our deferred comp plan, and secondly, is some real estate that we own that we acquired through an M&A deal a couple of years ago.

So putting -- so the real estate deal is just simply rental income that is classified as other income.

But the primary thing that causes it to flip back and forth is a fairly complicated hedging strategy within our deferred comp plan, where you're only seeing one side of that transaction.

The other side of that transaction is in our labor costs up above.

And so, when you net them out, they tend to be almost zero, but when you have fluctuations in your deferred comp plan, one side of the charge goes to other income, and the other side of the charge goes to labor expense.

Okay, and you're talking about the $3.2 million in other expenses, right?

That's correct.

Okay, and what should we think about in general for this -- that the other income line going forward.

Is there a general way to model it out, or it just fluctuates?

You can think about it, roughly speaking, of $1 million of rental income, and the other one, it depends on the market.

The deferred comp plan has assets within it that are pegged to things like the S&P 500, etc.

So it depends on the moves in the underlying asset class.

But again, the way I look at it, it's neutral, because if I have a $2 million gain there, I generally have a $2 million loss somewhere else on the P&L that you're not seeing.

So for me, they net out, except for the rental income.

It's just that I don't know how to build that into your model.

I know how to build it into my model, because I look at it net.

Got it.

Very helpful.

And then, just talking about stimulus, I know we kind of timed it to sort of mid-2010.

I know when the package first came out, it was supposed to be shovel ready in 60 days, is when the projects had to be basically sanctioned by the state, etc., etc., etc..

It seems -- it's gotten a little bit of a -- it's taken a longer to see the revenue from that.

I was wondering if you could tell me what you think caused that, from when we first started to hear about it; and then secondly, do you expect it to be larger than you expected it before the impact, or has that not really changed?

Just seeing the delays in how its proceeding as a result of, you know, both the federal government and the state governments had to get their house in order.

We're talking about a new administration coming to Washington, interchanging, I don't know, I mean tens of thousands of people in the different bureaus and departments.

So they had to get their feet on the ground in terms of how they process this amount of money.

The states -- many of the states never were in a position that processed or applied for this type of money, so it was something new for them.

But there were other states that were able to hit the ground running, and they were able to get the funds for some shovel ready projects.

Three of those projects, one in New Jersey, one in Connecticut, and the other is I think in Wisconsin, we -- they did get their money together, and the projects were awarded, and we have already started working on them.

So it will take some time.

We feel that with the fees that we've won so far, we feel pretty good about it.

I mean considering that many other companies have not fared as well.

Now going forward, when you look at the spend, I mean we were looking at $57 billion being spent in 2010.

And then, the end of the stimulus would be about 2012.

We feel that it's going to really ramp up.

It might be three months out, or four months out, but it's going to ramp up, and we feel -- well let me tell you this, we feel much better that there is a stimulus package in place, that we are looking at the amount of funds that we are speaking about, about $120 billion of the total U.S.

stimulus package is dedicated to things that we do in infrastructure.

And I feel good about it, and I feel good about the fact that on top of that, Congress is getting their arms around the Highway Trust Fund, and the Highway Bill.

So the combination of the two I think bodes very well for us here in the United States.

And then on top of that, it's made the other countries that we're in stimulus packages are taking hold.

And just one last one, real quickly -- you talked about this being sort of the lull, and you expected a rebound, and then you talked about bookings in July perhaps getting a little bit better.

You know, I notice that you raised the bottom end of the guidance, but not the top line, and obviously the number is getting a little bit better on the bottom than we expected.

Help us reconcile those two comments with sort of the better back log in July, things are turning around, and your decision not to raise the top end of the guidance.

You know Joe, we feel pretty good about those numbers, and you're looking at the high end of that range implies there is a 20+ EPS growth, and so, I think any suggestion that is not consistent with the statements about improved backlog, I don't think is accurate.

It's a pretty healthy growth number.

We are still having to book in excess of a $1.5 billion of wins every quarter that we got there in the marketplace.

So I think the high end of that range is very consistent with exceptional results and consistent with what we have been saying for quite some time.

Okay.

Great thank you.

Thank you.

(Operator Instructions).

The next question comes from Avram Fisher from BMO Capital Markets.

Please go ahead.

Hi.

Good morning.

Thanks for taking my questions.

I'm not sure if I missed this, if you said it.

Did you disclose the segment backlog contracted or awarded specifically?

I believe that's in the press release.

Yes, it's in the press release that we issued this morning Avi.

I probably overlooked it.

On a contracted and then awarded basis, or just the net number?

Contracted and awarded.

Okay.

I probably overlooked it.

Sorry about that.

The Chevron win - most of the questions have been answered, but the Chevron win, you alluded to when you put out a press release on it -- was that a competitive win?

Did you take that from someone else, or you just sort of added to a list of contractors to work for them?

Can you elaborate on that a little bit?

It was a competitive environment, and what we are seeing with Chevron -- they consolidated the contracts they had, and instead of giving out 10 contracts, they consolidated, and I believe there were three companies that were successful.

So there were -- it sounds like there were 10 contracts previously out there, so some companies that had previous contracts with Chevron don't have them anymore.

Correct.

Okay.

And you're one of the ones -- and you, this is incremental.

Had you had a contract with them before?

Yes we did.

Okay.

So this is sort of a bigger -- do you have now a bigger scope than what you had before?

Yes.

Okay.

I know people asked earlier about the MSS margins, and you indicated that they were going to be lumpy, if I understood correctly.

Do they go lumpy to the downside?

Do they go -- is this sort of as low as they get?

I mean, is there any insight as to where this goes, either on a gross profit or EBIT basis?

Generally, they have had to be lumpy to the upside is how I think about it, and the reason being is that we are not quick to recognize profits related to awards that haven't been finally determined by the federal government.

So, as I mentioned last quarter, in Q2, there was a little to the upside there.

So, I would think that the margins that you are looking at now are consistent with what you would expect.

We did mention on the last quarter earnings call that one of our big significant wins was the new CFT contracts for the US Air Force, and those contracts were - right out of the block were not as profitable, just because it was a new contract for us, getting up to speed on the new procurement model there caused us not to be as profitable.

We are seeing the profitability on those new CFT task orders increasing now and getting back up to a normal rate.

So we feel good about the margins right where they are now.

Do these CFT contracts; does that flow through the JV line?

No.

Okay.

And then, so -- in terms of what you feel comfortable with that you are seeing now -- 14% to 15% gross profit margins, and you know, 15% to 20% EBIT margins, is that?

I -- you guys talk in different margins than we talk about.

Its segment operations --

- relative to NSR.

You know, it's -- we look at the PTS segment relative to NSR.

On the MSS segment it's not as indicative of performance because there -- we, unlike the PTS segment, we do earn profit on the past through cost of gross revenue is important to us in MSS, whereas net service revenue is the single determining factor in PTS.

Yeah.

Sorry to make that more complicated, but that's how we look at it.

Okay.

I would looking at margins -- on income from Ops level margins relative to gross revenue for MSS, and relative to NSR for PTS segment.

Gotcha.

And you know, when you look at the industry scuttlebutt, as I'm sure we all do, you know, you are seeing more and more oversees contractors bidding on infrastructure work.

More and more overseas contractors that were previously specifically in primarily oil and gas refining are now bidding on infrastructure work.

What's the impact of that increased competition, and how do you guys maintain your sort of win rate in overseas infrastructure?

Now, you're speaking about work outside the United States?

I'm sorry I couldn't understand you.

Yes, specifically outside the US.

Well, outside the United States I mean, I - as I have often said, we have very, very strong geographic positioning in our markets.

The UK, Hong Kong, Australia, Middle East -- I mean, we've been in these places for 40 years.

I mean, we're not just a Johnny come lately.

So we have a very, very strong local presence in these places.

We also -- what we overlie that is with a strong global expertise.

So it's -- we're at home in these places and we've worked in these places for quite some time, and we have a good relationship with the clients.

So other firms who see an opportunity coming in, they have a bit of a challenge.

And you know, we have fortunately been successful as a result of the quality of service that we've provided our clients, and the relationship we have provided to them over, you know, as I said, 20, 30, 40 years.

Alright, thanks for the color.

(Operator Instructions).

The next question comes from John Rogers from D.A.

Davidson.

Please go ahead.

Hi, good morning.

Just a couple of follow up questions.

The detail you gave us on revenue by geography, how much different would it be in terms of profitability, especially domestic versus international?

Generally speaking, our margins outside the U.S.

as a whole are slightly more profitable then our domestic operations.

Generally speaking.

And that -- it really depends by regions.

You know, right now if you looked at profitability in the U.K., it would be significantly off, because that's been our weakest geographic market around the globe.

If you looked at right now Hong Kong being our strongest market growth wise, it's running on all cylinders, that might be -- those margins you would be expect to be higher than the norm outside the U.S..

But it's across the board, John.

Okay.

But more -- certainly much more than half of your profits now are coming outside the U.S.

on an operating basis.

No, no.

I wouldn't phrase it that way.

We -- wouldn't say much more.

52% of our revenues are outside the U.S., and we're talking about, I said slightly more profitable outside the U.S., and I really mean slightly.

We're not talking about 300 basis points of margin improvement outside the U.S.

We're talking about negligible difference.

Oh okay.

Okay, sorry.

And then, secondly, I guess Mike or John, could you talk a little bit about what you are seeing in terms of pricing in the markets?

Is it stable, is it getting any better?

You know, as you get larger and offer more services, can you get away with higher pricing, or is it still a matter primarily in terms of margin improvement, operating more efficiently?

Well, you know, in this environment to say pricing is getting better, I mean, would be totally optimistic.

Pricing is overall has been the same.

So it's not deteriorating?

Well, you know, it -- overall, it's not deteriorating.

When you look at some places that we've had some softness.

Yes, you look at the U.K.

and pricing does become an issue.

But in other places where the markets are strong, pricing has remained constant.

Where we've - what we've been doing also is moving into higher margins areas through the type of work we are doing -- doing more program management work, or doing more front end financial planning.

So we're able to demand a higher margin.

But overall, when you look at AECOM's margins, they have been stable.

Yes.

Okay.

Thank you.

And we have no further questions.

So please continue any further comments.

It looks like there is one more person waiting to ask a question.

I do apologize sir, it's just appeared now.

We have a follow up question from Avram Fisher from BMO Capital Markets.

Please go ahead.

Thanks for letting me take a follow up.

I found the backlog numbers in the Press Release.

What -- just quick fellows, what did Earth Tech contribute to the PTS backlog in the quarter?

You mean, when you say contributed to the quarter, do you mean year over year?

Yes.

Actually, I don't know that number.

I mean we've integrated Earth Tech into our business, and we don't measure Earthtech anymore.

It's no more Earthtech -- it's AECOM.

Okay, then I guess, I mean -- how's water doing relative to the transportation side of the business?

Well, the water market is soft here in the United States, compared to the transportation market, which has been quite strong.

But I - we believe going forward that market will strengthen as result of federal funding that we're in process of coming through the -- through the system.

And when you talk about the projects and the revenue that you expect to see in 2010 -- is there -- do these projects change from what we are seeing now?

Not just -- you just mentioned in terms of end markets, you see water being more of a priority, you know, going out.

But, are these going to be longer term projects, or are they also short cycle projects like we've seen now?

Thanks a lot.

We've seen overall over the past year or so a migration to larger projects -- larger megaprojects.

But also -- I mean, they've taken up a larger percentage of our total volume, but still there are those moderate size projects, which we have.

And as I mentioned, you know the top 25 projects make up 15% of our total revenue.

So we focus on the entire spectrum.

One of the things that -- and no one has asked the question, but it's this movement here in the United States, which is something which is already has happened outside the United States, and the market is getting more acceptable of public-private partnerships.

And going forward, we see that the private sector with a desire to invest in opportunities, are looking at the infrastructure opportunities.

Currently AECOM is working on three public-private partnerships -- two in Texas, and one in Florida.

And I see that as a market that in addition to the stimulus funds, it will reinforce the opportunities and the spend in the infrastructure.

Since you brought up 3P, are you seeing more competition for design/build projects.

No, and again, I think the larger projects attract the larger companies, and the larger companies have remained relatively constant.

You know Avi, can I add a point to your earlier about Earth Tech backlog, and as John said, you know, we don't track it as Earth Tech anymore so it was a hard integration, but I would like to add a point that might be helpful to be responsive to your question -- is that in the PTS segment, our backlog increased 17% organically year over year.

So that's gives you a sense of the flavor for how healthy the organic growth has been within that backlog year over year.

Super.

Thanks, that is good data, I appreciate it.

Thank you.

There appears to be no further questions.

Okay.

Since there are no other questions, I would like to thank everyone for your continued interest in AECOM, and as we said on the call, AECOM feels good about the quarter, and good about its results.

You know, we've heard about the market, the softness, and the economy and we feel that our performance has overshadowed the softness in what we're seeing in the economy.

Also, I would like to say that it's due to the diligent management - the team we have around the world -- they're really the top notch professionals, the seasoned professionals, who have kept their focus on business and opportunities, and are able to continue to do the work, you know, provide clients with quality service, get paid for the work, and continue to advance AECOM.

So with that, we will end the call.

We look forward to seeing some of you in the upcoming conferences next week in Chicago, as well as the fall in San Francisco.

So in the meantime, please feel free to call us if you have any questions.

And again, I want to thank you all for your interest, and taking the time to ask us the questions you did.

Take care, and have a good day.

Bye now.

Thank you.

This concludes the AECOM third quarter 2009 earnings conference call.

Thank you for participating.

You may now disconnect.