AECOM (ACM) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter AECOM earnings conference call.

I will be your coordinator for today.

(Operator Instructions) Now I'd like to turn the presentation over to your initial host for today's call, Mr.

Paul Cyril, Vice President - Investor Relations.

Please proceed, sir.

Thank you, Angela, and welcome, everyone, to AECOM's fourth quarter 2009 earnings conference call.

If we move to slide two, we'll cover the Safe Harbor statement.

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

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

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

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

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

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

Please go to slide three.

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, everyone, and thank you for joining our call today.

I will begin today's call with a few introductory remarks.

I will then turn the call over to Mike, who will discuss our fourth quarter and fiscal year 2000 financial performance and our outlook for 2010.

Following Mike's comments, I will provide an update on market trends, recent wins and our M&A activity.

Fiscal year 2009 was a solid year for AECOM overall.

Despite the global recession, we executed well.

AECOM has a long history of adapting to changing market conditions, and 2009 was no exception.

We have remained focused on driving strong performance by pursuing opportunities in our key geographies and end markets and consistently realigning our resources.

In the fourth quarter, as signs of economic recovery became more evident, many of our customers began to reactivate programs that were previously delayed or on hold.

We are beginning the year with record backlog of $9.5 billion and a diversified pipeline of new opportunities, including stimulus-funded projects in the United States and around the world.

We have managed our business carefully throughout the economic downturn, as demonstrated by our ongoing margin improvement which will position AECOM for continued profitable growth in the years to come.

With that, I'd like to turn the call over to Mike.

Mike, please go ahead.

Thank you, John.

Please turn to slide six.

I will begin with a review of our fourth quarter results and then briefly review our 2009 annual results.

Our fourth quarter gross revenue was flat to last year's fourth quarter, at $1.6 billion.

Our net service revenue was down 2%, to $989 million.

Our fourth quarter results were impacted by weakness in our private facilities market, and a continued slowdown in project activity, as our customers focused on strategies for obtaining stimulus funding.

This weakness was offset by strength in Asia, Australia, the Middle East and our federal government services sector in the United States.

Also, foreign currency headwinds continued to impact our results in the fourth quarter.

On a currency neutral basis, our organic revenue growth rate was 1%, and net service revenue declined 1%.

Net income from continuing operations was $54 million, up 27% year over year due to strong execution of our margin improvement initiatives.

Diluted earnings per share from continuing operations was $0.48, up 20% year over year.

This also reflects a 6% increase in our diluted share count.

Please turn to slide seven.

Our PTS segment accounted for 82% of our fourth quarter gross revenue.

Net service revenue in our PTS segment decreased 5% from last year's record fourth quarter to $921 million.

The single largest driver of our year over year decline is PTS net revenue was our private facilities business, which declined nearly $45 million from a year ago.

The good news is that our PTS segment backlog increased 12% over last year which bodes well for future quarters.

Operating margins in the PTS segment improved over last year driving operating income to $91 million a 1% increase over the fourth quarter of 2008.

Continued operating margin improvement has been driven by our ongoing efforts to streamline our global operations and the rapid integration of our M&A transactions.

Three years ago, we embarked on a margin improvement initiative that is now producing the intended results.

The performance of our management support services segment, which accounted for 18% of revenue in the fourth quarter continued to be very strong.

Revenue for the quarter was $292 million, up 18% over last year.

This growth was entirely organic, and reflects the increased activity for the U.S.

Air Force under the $10 billion CFT contract.

Operating income increased 64% over last year to $10 million.

We have nearly tripled the size of our MSS segment over the past five years, entirely through organic growth, and just last week, we announced our first acquisition in this segment, SSI services, which serves the $50 billion national intelligence market.

John will discuss all of our acquisitions in more detail later on.

Going forward, we see strong growth opportunities in the MSS segment.

The bottom line is that our prospects for continued growth in this segment, both organic and through M&A remain very promising.

Please turn to the next slide.

In the fourth quarter, our EBITDA margin improved 133 basis points over last year, and is up 74 basis points for the full year.

We have been saying for some time now that we expect our EBITDA margin to improve by 20 basis points annually, and we are pleased to have exceeded that goal by a wide margin.

Over the past three years, we have improved our EBITDA margin by 258 basis points.

Over this period and particularly in fiscal year 2009, we have pushed margin improvement initiatives across the enterprise.

Some of the margin improvement can also be attributed to better economies of scale.

As we have grown, we have realized more synergy from our platform, such as the common Oracle system, our shared services organization and real estate consolidation, to name a few.

Going forward, we expect to continue to strongly execute on our margin improvement plans.

These margin initiatives position AECOM to emerge from the recession stronger as revenue growth accelerates.

Please turn to the next slide.

At the end of the fourth quarter, our balance sheet remains strong, but somewhat under leveraged with $287 million in cash and cash equivalence and debt of only $169 million.

During a period of unprecedented tight credit markets, we have been happy to have a strong balance sheet over the past year.

That said, our goal is to trend back to our target leverage ratio of 1.5 times EBITDA.

We saw a rebound in M&A activity beginning in the third quarter of 2009, and we recently completed three strategic M&A transactions.

We are also looking at a number of additional opportunities that would be a good strategic fit for us, and hope to put some of this cash to work in early 2010.

As of September 30th, we had $470 million in unused capacity under our $600 million credit facility.

Our cash collections were also strong, which improved our cash flow through the fourth quarter by more than $59 million over last year.

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

Please turn to the next slide.

We continue to win business at a steady pace for the fourth quarter.

Our wins drove total backlog up to a record $9.5 billion a 10% increase over last year.

Additionally our PTS segment backlog is up 12%.

The majority of our growth and backlog was organic and was driven by significant increases in our water business and our Asia-Pacific markets.

Note that the reported backlog balance does not include some of the major wins that occurred in October and November, such as the Department of Homeland Security headquarters and the Masdar project in Abu Dhabi.

John will touch on these later in the presentation.

I should note that our backlog figures also do not include numerous IDIQ contracts that we had been awarded by the U.S.

federal government.

Our backlog figures only include specific task orders under the IDIQ contract after they have been awarded.

It's important to understand the changing nature of the IDIQ contracts we have been winning.

Many of these contracts have very large contracting capacity, a limited number of participants, and provisions that almost ensure a minimum participation in the task quarters.

Assuming AECOM wins its fair share of task quarters under these contracts, they could add substantially to our stated backlog.

Currently, four of our largest contract vehicles, BTRIC, WERS, AFRICAP and CFT have a contracting capacity of $16 billion over the next 5 to 10 years.

To date, only a small percentage of these task orders have been issued, and AECOM performed quite well.

Our strong flow of new wins and backlog continue to provide us with good visibility and confidence in our outlook for continued strong performance.

Please turn to the next slide.

In spite of the pockets of weaknesses we saw in our business in the second half of 2009, we had a very strong year.

Our gross revenue increased by 18% over last year to $6.1 billion.

Our net service revenue was also up 16% to $3.8 billion.

Foreign currency headwinds continue to impact our 2009 results.

On a currency neutral basis, our organic growth was 9% for revenue and 8% for net service revenue.

Net income from continuing operations was $187 million, up 27% year over year.

Diluted earnings per share from continuing operations was $1.70, up 21% year over year.

This also reflects a 5% increase in our diluted share count.

Backlog increased 10% to a record $9.5 billion.

We closed the year with $287 million in cash and cash equivalence.

We are well positioned for continued growth in 2010, with solid book of business and a strong balance sheet.

We are pleased with our full-year results and our continued strong growth in particularly in what has been a very challenging year.

Please turn to the next slide.

Now I'd like to update you on our outlook for fiscal 2010.

Based on our strong performance in fiscal 2009 and our outlook for continued growth, we expect diluted earnings per share in the range of $1.90 to $2.00 for fiscal 2010.

The mid point of this guidance implies a 15% year over year growth in earnings per share.

Our guidance includes upside in fiscal year 2010 from the U.S.

stimulus package.

As we have said, we expect stimulus spending will start to make a material contribution to our revenue beginning in the second quarter and continuing into 2011.

Consequently our 2010 results will accelerate after Q1.

You should note we have historically realized 20% of our full-year earnings in the first quarter.

However in the first quarter, we expect to be below our historical average earnings distribution.

This guidance assumes $22 million in amortization expense related to acquired intangible assets, a tax rate of 28%, and a diluted share count of 116.7 million shares for fiscal year 2010.

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

John, please go ahead.

Thank you very much, Mike.

AECOM's business around the world reflects the uneven recovery of the global economy.

In general, most of our markets are doing well, such as our transportation and federal governments markets in the United States as well as our global markets in Asia, the Middle East and Canada.

We expect these markets will continue to grow through 2010.

We have seen some improvement in the public facilities market and in the water markets.

However, our UK and private facilities markets remains soft.

Additionally, continued project delays also affect our organic growth in the second quarter of 2009.

In the United States, these delays were due in part to slower than expected stimulus funding.

The good news, however, is that the United States stimulus funds have begun flowing through numerous federal and state agencies.

As I mentioned earlier, we are seeing strength in many of our global markets where high levels of infrastructure spending continues.

Our Hong Kong, China business appears to be leading the recovery driven by the government's quick implementation of their stimulus packages.

Australia which never actually went into a recession, continues strong.

Our Middle East operations in Abu Dhabi, Qatar, Saudi Arabia, are expecting double digit infrastructure growth.

Canada continues to perform well as the government's infrastructure investment grew by 18% over last year.

We are also excited about opportunities in India, where the government recently announced a five-year plan to spend $150 billion on infrastructure projects.

Eight months after the start of the U.S.

stimulus package, AECOM has won over $530 million in stimulus funded projects in the transportation, facilities, and environmental markets.

Just last week, we were awarded a large stimulus-funded construction management contract for the Department of Homeland Securities new headquarters.

We view this as a positive signal that the U.S.

stimulus program is starting to take hold and will be an important part of our growth strategy in 2010 and 2011.

The global water infrastructure market represents a significant growth opportunity for AECOM.

We have recently won major programs in both, New Zealand and Hong Kong, and the UK government will be awarding around -- the five new water programs with total fees of $140 million.

In the United States, the California legislature recently passed an $11 billion water program that paves the way for many new infrastructure projects.

We saw a continued rebound in M&A activity in the fourth quarter of '09, and two of our recent acquisitions provide entry into new markets, namely the $45 billion health and care facilities market and the $50 billion U.S.

intelligence market.

These are both large high-growth markets that will provide AECOM with significant new growth opportunities going forward.

With signs of an economic recovery we have seen a distinct rebound in project activity.

Where there could be a lag before projects get fully mobilized, the economic rebound will have a positive impact on our results.

Please turn to slide 14.

We have heard from Mike about our 2009 performance and outlook for 2010, and I would now like to focus on some key forecasting indicators for 2010.

Our fourth quarter wins were strong, totaling $1.8 billion, and this will provide fuel for our growth going forward.

In Hong Kong, AECOM was awarded a $60 million project for the redevelopment of the former Kai Tak Airport.

This is one of 10 major infrastructure related projects approved by the Hong Kong government in 2009.

As I mentioned earlier, we won a significant contract for the Department of Homeland Security to provide construction management for its new headquarters.

This is a multibillion dollar program with an initial task quarter of $50 million for AECOM.

Ultimately fees from this project could be substantially higher.

This is one of the largest government facilities programs in the United States, and the first phase of this project will largely be supported with stimulus funds.

In Abu Dhabi, AECOM has been awarded a contract for services ranging from design to construction management for the new Masdar City a 1,500 acre green city, which is designed to be entirely carbon neutral and produce zero waste.

In our environmental segment, we were awarded two major FEMA contracts, including a $73 million contract with the public and technical assistance services.

Finally in our MSS segment, we won a contract with the U.S.

Department of State to provide services for its Africa peacekeeping program with a $1 billion total contracting capacity.

This new assignment will boost opposition in a region with major-long-term potential.

It also further diversifies our work with the U.S.

federal government.

We are currently working on seven of the world's largest infrastructure projects across several continents.

Mega projects are an important part of our growth strategy and have helped AECOM continue to grow through the recession.

There is a very healthy pipeline of mega projects which we are currently pursuing in each of our key market areas, transportation, environmental and facilities.

These projects include transit, water systems, universities and sports facilities.

Either expand our geographic footprint or that have a particular niche, expertise or service offering.

In both cases we have been successful in leveraging our client relationships in an existing platform to accelerate growth.

During the fourth quarter of FY2009 and the first month of FY2010, we continue to execute this strategy by successfully closing three strategic acquisitions.

In August, we acquired LAN Engineering, a California-based design and construction management firm.

This acquisition bolsters AECOM's transportation presence and expertise in California.

Last month, we announced the acquisition of Ellerbe Becket a 650-person architecture interiors and engineering firm.

This acquisition expands our capabilities in a number of attractive end markets including healthcare, sports and education.

These markets provide significant global growth opportunities for AECOM in 2010.

In the healthcare market, for example, the Saudi Arabia government plans to build 240 new hospitals over the next six years.

Our acquisition of Ellerbe Becket positions AECOM well for this work.

And last week we announced our acquisition of SSI services which has an established reputation in supporting operations for the U.S.

intelligence community.

The U.S.

intelligence market is large and growing with a total spend of nearly $50 billion in 2009.

Looking forward, our M&A pipeline remains robust, and we are pursuing several key opportunities with a focus on increasing our penetration of high-growth geographies, such as India, China, Africa and Latin America and enhancing or expanding our expertise in the power and energy market.

Please turn to slide 16.

Diversification has been a foundation of our business model and has been a key enabler for AECOM's consistent growth even through severe economic down turns.

As you can see on this slide at the end of fiscal 2009, our business remained well diversified across end markets, geographies and funding sources.

We continue to have a well balanced mix of end markets, including transportation, environmental and facilities and a growing energy and power business.

Our geographic diversification has been a key success factor enabling us to capitalize on our high growth and emerging markets in 2009.

AECOM, as a global company performed 52% of its work outside the United States with a strong mix of business across Asia-Pacific, the Middle East, Canada and Europe.

Our funding sources have not changed significantly.

In 2009, approximately 70% of our work continued to be generated from public clients.

In the United States, we expect federal funding for the transportation sector to be stable, if not growing in 2010.

We fully expect funding on the SAFETEA-LU to remain at current levels until the next new bill is passed.

However, there is also a possibility for a second stimulus package for transportation.

The second stimulus would increase federal transportation funding by 20% annually for the next two years.

It remains clear that with the U.S.

employment rate at over 10%, that the federal government will continue to invest in infrastructure to create and sustain new jobs.

In the past we have been asked about the viability of U.S.

state and local funding.

First note that only 14% of our global revenue is attributable to this funding source.

While this funding has been under pressure, we expect monies will be available through various sources, namely federal stimulus program, bonds, dedicated tax measures, public-private partnerships and other dedicated sources, such as tolls.

For instance, Build America Bonds now represents approximately 20% of our municipal bonds with $45 billion issued to date, and analysts expect that Build America Bonds could reach $100 billion.

In the PPP arena, AECOM is involved in four of the largest programs in the United States, two in Florida are already moving forward, and two in Texas are set to close their financing shortly.

As we had said before, AECOM follows the money, and the strategy continues to work for us, as it has in this past year.

Moving to slide 17.

This is a snapshot of our revenue growth over the past 10 years.

I wanted to include this chart to illustrate the long term success that our strategy and business model has produced in spite of the economic climate.

Over the past 10 years, our compound annual growth rate has been 20%, evenly balanced between acquisitive and organic growth.

And over the past five years, we have grown at 25%.

As we position AECOM to emerge stronger from the global recession, I am convinced that we have the right strategy.

Please turn to the last slide.

Overall 2009 was a solid year for AECOM.

Our diversified business model enabled us to compete for and win some of the largest projects around the world.

While we saw some project delays in the second half of the year, we see that changing in the first and second quarters of 2010, and the various -- stimulus packages will provide excellent growth opportunity for the future.

We are beginning fiscal 2010 with record backlog of $9.5 billion, a strong and diversified new business pipeline expanding mega project opportunities and growing acquisition opportunities.

We are enthusiastic about our outlook for 2010 and beyond as world economies continue to improve, stimulus funds make their way into the market and projects move forward at a more rapid pace.

I am confident that AECOM will emerge from the global recession with a broader geographic footprint, a deeper skill base, a more diversified service offering and a stronger client relationships.

Looking ahead, we will continue to leverage these strengths and our strong balance sheet to pursue new opportunities in both established markets and emerging geographies around the world.

I want to thank you very much.

I will now open the call to questions.

Thank you, sir.

(Operator Instructions) Gentlemen, your first question will come from the line of Steven Fisher with UBS.

Please proceed.

Hi, good morning.

John, you mentioned the balance of organic and acquisitive growth.

Can you just give us a sense of what you're assuming for that balance in 2010.

Mike why don't you give him the numbers?

Yes.

In 2010, I think, as we've said in the past, Steve, we have not tried to predict the exact split going forward.

We feel very confident that our growth will continue at a 15% compound growth rate at the EPS line, and that will be comprised of organic growth, acquisitive growth and margin improvement, but we have not historically given guidance as to the split between those; but over time -- over an extended period of time, we expect that we would have a healthy balance of both organic and acquisitive growth.

But is it fair to say that maybe the first part of the year, organic growth, at least on the PTS side would be negative and then kind of ramp up as the year goes on to become positive over all for the year?

That's a great question.

As I mentioned in the discussion about the flow of earnings over the course of the year, we would expect Q1 to be steady with Q4, and then we would begin to see a rapid acceleration of organic revenue growth in the second quarter due to our confidence in the backlog that is increasing quite nicely.

Does that respond to your question, Steve?

Yes.

I guess I'm just, bottom line, wondering if you're expecting net organic growth in 2010?

It sounds like yes.

Yes, absolutely.

But as Mike mentioned, it's not going to accelerate until sometime in the second quarter.

Yes.

I know that's fair.

And then I guess I'm wondering how weak the UK and private facilities markets are, and when do you think that could flatten out based on the currently run rate?

Yes.

The UK market is a soft market, has been soft much longer than the markets, say, in the United States.

It's going to remain soft on both the public side as well as the private facilities side throughout 2010.

The good news is we have adjusted our business, and we're in the process of adjusting our business, so it's not going to have a significant impact on our performance in 2010; and also we've had an opportunity to be able to move staff to end work into the location so we can maintain a solid book of business.

Yes, and just to put it in perspective, Steve, the UK is a very small percentage of our business, probably in the 7% range of our total revenue, and then the private sector facilities market is only 10% of our total revenue, and we have seen -- we've already seen and experienced the significant drop in that business from a year ago, but I think to reiterate what John said that part of the business we don't see accelerating for another 12 months or so.

But is the year over year decline expected to get smaller?

Maybe that's what you mean by acceleration, but is it going to get less bad as the year goes on?

It's going to improve as the year goes on.

Okay.

I don't like to think of less bad, but it's -- there are certain things that are happening.

We are working on the Crossrail project, which is a major program.

Also, as I mentioned in my talk, that they're starting with their AMP 5 program, which is -- go out on the street once every five years in getting these IDIQ contracts for -- this is for water work.

So there are things that are starting to happen, but it's a long road for the UK.

Okay.

And just lastly, if I could, shifting to MSS, I'm wondering how increasing Afghanistan troop levels and falling Iraq troop levels are expected to effect your revenues there?

That's a question that seems to be asked of us all the time, and our work is to provide support for the, for our troops, in Iraq, Afghanistan, Kuwait, and we don't see the -- either the decrease -- the decrease in the resources in Iraq impacting us in a negative way.

If it's -- if it increased it would probably need some more support, and also the work that we're doing would carry on beyond the point that American troops are coming out.

By the time we would have to demobilize, it would probably be a period of a couple years.

Okay.

Great.

Thanks a lot.

And gentlemen, your next question comes from the line of Andrew Kaplowitz with Barclays Capital.

Please proceed.

Good morning, guys.

How are you doing?

Good.

Can you give us more color on the U.S.

market in general in terms of backlog.

Did we see -- the backlog was up a healthy amount sequentially.

What is the U.S.

backlog doing?

Is it just kind of stable?

Is it going up, or is it going down still?

Where are we there?

We don't -- Andy, we don't divide our backlog up by region, but let me just give you a sense of the market.

The activity in the United -- in North America and I assume you were focusing on the U.S.

is -- remains strong.

There's a lot of activity that we're seeing in our transportation business, in our U.S.

government facilities business, as I mentioned, that new Department of Homeland Security.

Also, a project that we want, and also energy.

The stimulus funds have flown into and in through federal government agencies faster than they have through the state.

And so, when we look at the backlog, we're very -- we're very optimistic about growth here in the United States, in transportation, facilities, government facilitates as well as energy.

Okay.

That's helpful.

Maybe, John or Mike, is there a way to parse out how much currency helped you on the sequential basis?

Did it add to backlog or sales?

Because I have to believe you're benefiting at least a little bit from the weaker dollar.

Actually it worked against us.

Year over year, but sequentially also?

Sequentially also our foreign currency headwind in the quarter was about 2% on NSR just because of the currencies that we do business in.

We have only 25% of our revenues are subject to non-dollar denominated currencies, and those currencies are the Aussie dollar, the British pound and the Canadian dollar.

I got you.

So it's the currencies that went the other way, we don't play in.

I got you.

And then your PTS margins in the quarter were pretty strong on a net operating basis.

And you talked about all the things that you're doing to improve your margins.

It seems to me like pricing is hanging in there just fine.

So maybe if you could comment on that, and if there's anything else going on.

Is it a mix shift toward -- slowly toward higher margin program management-work that's also helping you, or what's going on there?

The gross margins on the project side have moved up very, very slightly.

The story is really on the net line.

It's on better cost stroll and all of the synergy items and economies of scale that I mentioned earlier.

As we continue to grow, we're getting more juice out of the platform that we've built.

But competition is not -- hasn't been a problem during this recession for you guys, it seems?

Pricing has hanging in there just fine?

On the public side, as we've always said, the public side pricing pressure doesn't impact us as much.

The margins stay relatively constant through good times and bad times.

Where you do see some pricing pressure is on the private sector side.

Which is a smaller part of our business.

Right.

And it's not anything different than we've seen for the last few quarters.

Right, exactly.

As you know, 70% of our business is public sector work that's cost plus.

Okay.

Thanks.

I'll get back in queue.

And your next question will come from the line of Vance Edelson with Morgan Stanley.

Please proceed.

Hi.

Thanks a lot.

The margins have climbed nicely and ahead of expectations.

So going forward how do you go about generating additional margin expansion from here?

Is it scale economies as you grow the business?

Or are there more costs or efficiencies to ring out of the business?

I think it's a combination of both.

The previous person just talked about the mix shift.

As we do shift to more program management, construction management work, the margins are a little bit better.

So a mix in our revenues will help a little bit, but the bigger story is bringing costs out of the system.

We have continued to reorganize our company in a way that squeezes costs out of the system.

We think there's still room for improvement on that front.

Okay.

Great.

And then, John you mentioned the funding for the federal highway bill should remain at currently levels until the new bill is signed.

What's the latest on what the new bill might look at?

Are you hearing anything there?

What do you think the appetite is on Capitol Hill for a new bill and perhaps a larger one?

Yes.

Well initially, the Obama administration was talking about an 18-month extension, which -- before they passed a new reauthorization bill.

That would keep spending at the current levels they are now, which is about, in transportation, about $40 billion a year.

Now what we're hearing because of the unemployment rate at over 10%, that there's a real drive to accelerate the reauthorization; and as I mentioned the new reauthorization, which would be called the reauthorization, but it would be almost another stimulus program, which would front-end the expenditures to increase the spend from, say, $40 billion a year to about $50 billion a year, and that seems to be getting strong support.

So I think the key is that the federal government and Congress as well as the administration, what we're hearing, are really concerned that they want to make sure that they keep the flow of funds moving through -- to the state, and then with the stimulus program, it would really give a jump-start to spending.

I mean you know there's a need for the spending in terms of transportation.

So with the unemployment, this is an excellent way of nipping the problem of unemployment and getting people back to work.

Okay.

That's very helpful.

Lastly Mike, on the low-debt balance and the zero or negative net debt to EBITDA ratio, given what you're seeing in the capital markets and changes over the past year, any thoughts on what the ideal capital structure is now and on the idea of perhaps adding leverage?

Absolutely.

We've been deleveraged for some -- for quite some time and we're certainly a comfortable position to be in, a year ago to ensure that we didn't have debt on the balance sheet.

But right now, we still think the right capital structure for our organization is a debt load of 1.5 times EBITDA.

Obviously, we have a ways to go to get to that, and I think, as John mentioned, we are now picking up the pace with our M&A strategy, with three recently completed deals, and many more very interesting strategic opportunities in the pipeline that hopefully we would be able to put some more debt on the balance sheet that would be very beneficial to us.

Okay.

That sounds good.

Thanks a lot, guys.

Thank you.

And your next question will come from the line of Avi Fisher with BMO Capital.

Please proceed.

Hi, good morning.

Thanks for taking my questions.

Hi, Avi.

How are you doing?

I am good.

You talked about water in your commentary, where are you seeing the water projects coming from?

Well, over this past year, we've seen a lot of activity in China, in Hong Kong.

We also won a very nice job in New Zealand.

We're starting to see work developing in the Middle East.

I mentioned the opportunities in the UK.

In the United States, the key has always been the funding.

The good news is California -- the Governor has signed a bill, which will have to be passed through bond issue, but at $11 billion.

So we're seeing -- we're seeing a movement where there is more funding coming into the water market which bodes well for our business.

Also Canada.

Our Canada business is very strong in terms of water.

It really highlights the geographic diversification.

Yes, exactly.

You talked about also in the commentary, the strength in Asia and Australia.

But when I look in the numbers that I have, it looks like Asia and Australia net service revenues were down year over year quite significantly.

Are you trying to sort of flip --

No.

As a matter of fact, Hong Kong was up -- the Hong Kong business, which includes parts of China was up, I think, 30% --

In Australia, we had some currency issues that affect that.

So a lot of it's on the currency side.

Okay.

And in terms of guidance -- and I know someone asked the first question had to do with how much is acquired, how much is organic.

I thought in the past you'd said about 50% organic, 50% acquired.

Are you stepping back from that for 2010?

No.

I'll let Mike go into more detail, but our target has always been -- we wanted to grow our business half organic and half through acquisitive -- acquisition, and that maintains our target.

So we're just not looking to buy EBIT or buy revenue.

All of our acquisitions are strategic in nature.

But Mike can explain what's going to -- how we see 2010 and 2011?

Yes.

I think the message we'd like to deliver is that over the long course, it will be about 50/50.

It has been that way over the past 10 years.

It's been a 50/50 split.

However, I wouldn't like to try and peg that annually or by quarter.

You look at 2009.

We didn't do a lot of acquisitions throughout the year, and then, all of the sudden, we did three in a row in the past six weeks; and so it's -- trying to peg that exactly 50/50 on an annual basis is quite difficult.

But certainly over the long course, we expect to continue on that path.

Right.

And then, were there any major project cancellations or deferrals in the quarter?

No,, not.

There -- no cancellations.

Deferrals, none that I can think of, but I have to be honest, there are -- there is slowness that's involved in developing in projects.

So they're not being deferred, but they're just taking longer to one, get signed; or two, when we are working on the projects, the schedules seem to be -- being extended.

Okay.

And then a bunch of people have asked about the gross profit margins in the PTS segment, it was up 100 basis points over the quarter, 90 bips year over year.

I was just wondering if I could trail it down.

Is head count down in that segment?

Are you getting better leverage there?

Is it sustainable going forward to continue to see sort of year over year improvement to the gross profit line of PTS?

As I said earlier gross margins have moved up a little bit; but that -- and we will gain some advantage there through a changing mix as we try to shift -- continue to grow our project management and our CM work; but that's -- that's just generally slightly improved.

But we shouldn't be looking for significant changes in gross margin.

I think you're being modest.

I think a 100 bips is pretty good.

You say it's kind of a little bit.

Seems pretty big to me.

And then what gets you to the high end versus the low end of guidance?

Is there -- I don't know if it's -- I think it it's probably impossible to quantify how much is stimulus, but what could a risk to the low, low end of guidance in terms of the stimulus funding looking out for?

I think a slow -- a continued slowness in the money being pushed out from the stimulus package is what could push you to the lower side of that.

We don't anticipate that, but I think it's important to note that when you look at the stimulus monies, the $170 billion portion of the stimulus package that is dedicated to the infrastructure space, you hear the numbers coming out of the Washington that 75% of that has been obligated already.

The important thing to note is that only 10% of that has actually been laid out to the states.

So only 10% of the total amount has been pushed to the states, and then only a fraction of that has actually been spent by the states.

So you have this $170 billion of money moving through the funnel quite slowly, and we see that starting to pick up now; but to the extent that the government channels at the federal level and the state level bog down a bit trying to process that much money that could push more of the earnings to the back side.

Speaking of the state level areas, I think the general view is the state budgets are kind of still going to get worse before they get better.

How do you protect yourself from the malaise in the state budget level?

As John mentioned earlier there's really a number of different sources.

One of them is the public-private partnership.

There's four big projects going on now, two of them in Florida.

The Miami Tunnel and I-595, which have been financed, and we won the work on both of those projects.

Down in Texas, the LBJ and North Tarren expressway are two projects that are awaiting financial close, but we'll be involved in both of those if the financing closes or when the financing closes.

And we're seeing other opportunities on the private side.

So we think the private money will come back to the infrastructure markets that will be helpful for us.

Secondly, you heard John mention about the dedicated sources like the Measure R in Los Angeles that's putting aside $40 billion in sales tax money for more transportation funding or the $11 billion water bill that passed the legislature in California a week or so ago.

And then John mentioned the Build America bonds also.

And so there's a number of sources that are coming to play besides general fund money that is challenging.

Right.

And in the past, you've talked about the percent of large projects -- large projects -- of total, I think total NSR or total revenues.

Can you update that number, please?

What we've said in the past is the top 25 projects make up about 15% of our -- of our revenue, and that's about the same.

Really, the point is that we have thousands of projects being undertaken at any one time; and as a result, if there was some delays or cancellations, we have a good mix of work, so we're not -- we're not held hostage to one or two, three or four projects.

I mean there's thousands of them that we're working on.

All right.

I appreciate you taking my questions.

Thanks very much.

And gentlemen, your next question will come from the line of Andrea Wirth with Robert Baird.

Please proceed.

Morning, guys.

Hi, Andrea.

How are you doing?

Good, good.

I was wondering if you could just back up little bit and talk a little bit about the organic growth rate in the quarter.

I guess I was a little surprised that it did actually turn negative.

And I think when we were talking last quarter it sounded like things actually in July were getting a little bit better.

Just wondering if you could get a little more specifics on what actually maybe slowed incrementally in the quarter, which markets or geographies specifically are we talking about here.

It's really difficult to give you a general answer to that, because there's so many particular markets, but what we did see was the wins increased quite a bit, so we are winning the work and as John mentioned the speed to mobilize on those projects was a little slower than we had anticipated.

So there's really two pieces that story.

One is the stimulus monies that we were predicting from a year ago we were predicting would start to come in the fourth quarter, didn't make their way through the government channels as quickly as we had anticipated.

But we did have -- we did see the wins coming in, as evidenced by the increase in backlog; but as John mentioned, the mobilization on those projects was a little slower.

So it was slow getting into the market, but then, once you won it, it was a little slower for the states to deal with processing that much -- that much money through their procurement channels.

So that's really what is, in a nutshell, if I had to summarize what happened, -- and that's not just in the U.S.

It's stimulus packages around the world.

We're dealing with stimulus packages in Hong Kong, in Canada, in the UK, et cetera.

Yes.

And if I may add, just mention, it's not unique to AECOM.

I mean, this is an industry type of phenomena that we're seeing in the E&C business.

But the real good news is that new work is coming in and is out there, and there's some very, very significant opportunities going forward.

Okay.

And then I guess just curious, on the India comment, I think you talked $150 billion potential stimulus fund there in infrastructure.

Maybe talk a little bit about your position in India specifically in where you could see some benefits from that.

This past year, we won two major program management projects in Kolkata and in Chennai for light rail and transit systems.

We're actively pursuing an acquisition in India, and we're looking at work in the energy, the water, and the transit markets.

Also we're looking at opportunities on the highway side and highway toll projects.

So we have a good position there.

We want to expand our position, and India is being targeted as one of our key emerging markets.

Okay.

And just one last question.

I know we talked about -- you talked about SAFETEA-LU, and the potential for a two-year extension, 20% increase, but I was just curious to see the short-term expenses here have actually had some impact in terms of maybe causing some delays in projects going forward, or do you think it's mostly just stimulus related.

No.

The thing is the reauthorization, and we had five of them -- they're six-year programs.

And what that does is give states a forward-looking view of what their financing will be.

It's not about the money, it's about the fact they see in advance how much money is going to be coming through, and so they can plan, and they can plan on major programs.

With the extension if it's only a 6-month extension or 18-month extension, even though everyone is confident that's it's going to -- if there's one 18-month extension, there may be another one before a new bill would be passed.

The concern that some states have and makes them uneasy is that they don't have that visibility, so there may be an issue that they will not start some of the larger programs, and they will focus in on some of the smaller ones.

Now we haven't seen that impacting us, but it took two years for them to pass the SAFETEA-LU bill several years ago, and during that time, we saw some of the state spending was changed from as I said, the major projects to the smaller projects.

We were fortunate that we had, as we have today, major programs which would straddle any of that softness.

So it's not a matter of the amount of money coming out, and the amount of money being spent.

It's how the money is being spent.

Okay.

And the type of projects.

Okay.

That's very helpful.

And just a final question.

I don't know if you've -- given this number out.

But attacking the acquisitions questions from a little differently.

In terms of the acquisitions you've actually completed now.

How much revenue should we expect -- contribute from those three that have been done in 2010?

Andrea, we have not historically, for competitive reasons, we haven't broken out revenue for deals when we announced them.

Of course, we do announce in our MD&A going forward, how much of that revenue comes from acquisitions but most people try to take -- we do announce how many employees they have, and most people try to take a head count on that and those rules of thumb would still apply here if you're trying to build a model.

Okay.

Great.

Thank you.

And your next question comes from the line of Joe Foresi with Janney Montgomery Scott.

Please proceed.

Hi, guys my first question here is -- we've been talking about stimulus dollars and the flow and what you're expecting.

Have you made any changes, any hires in your business to get ready for 2010, and if so, what have you changed to get ready for stimulus.

Well, we know there's going to be an increase of activity here in the United States just by the fact of the amount of work that we've won.

We've made some key hires in program managers to be assigned to programs that we won here in the United States as well as in some places in Latin America.

And the key places are in transit in some of the highway work, and on, as I said, the mega programs.

And also our PPP projects.

So we don't think of it as stimulus work, but we think of it as the money that's coming in on these major programs; and as a result, we are in the process of looking for key people and making some key hires.

Okay.

I guess a second question here is, just any fears or any projects that you have any worries about at this particular point in time either in London or the US -- anything that could get delayed that would cause there to be any kind of friction in your numbers, and any projects that you have any concern over?

Joe, I don't think there's anything really material.

No matter what the environment, you're always concerned about certain programs, but right now, we've pressure tested all our big projects in looking where the funding is, and we don't see -- we're not concerned that there's going to be any cancellations, as I mentioned to someone before, what we do see is that some projects are -- the schedules are being drawn out.

But right now, what we're focusing in on is getting those projects from backlog into revenue, and we want to move -- and we're working with our clients to try to expedite that, because the funding is in place, the contracts are ready.

Just a matter that many of the agencies, there's a lot of work coming out, and they just don't have the infrastructure to process the work.

That I think is probably the biggest problem that we're seeing.

In both the federal side and the state side.

Mike mentioned it, this funnel that we have of all this work coming out and these states just don't have that infrastructure.

So would you say that the conversion rate from backlog to revenue has slowed because there's kind of a throughput problem there, or has it stayed the same?

I'm just trying to get some sense --

I think in terms, you've seen it in terms of our organic growth.

The backlog is continuing to increase, and our book to burn is increasing, and that's -- and part of that is because the slowness in moving projects into revenue.

Just one last question.

On the competitive environment.

Have you seen -- or are you preparing for any particular changes headed in 2010 as you go out and compete for the projects versus your peers?

Is there any particular trend that you would site as one that maybe you'd put your finger on as wanting to take a look at?

Well the biggest -- I think the one trend that we're anticipating and -- not that we have seen a significant amount of it is on the private side.

Okay, we mentioned the private facility side that has been hurt during this recession, and clearly, there is some pricing pressure on the -- on the private side.

But it hasn't -- we haven't seen -- it so significant that it's causing us to walk away from some projects.

On public side here in the United States, federal government's were booked slower, it's best quality.

We don't have the price pressures.

As a matter of fact, when I was in Hong Kong a couple of weeks ago, we won two projects, and we were not the low bidder, so people are picking us on quality rather than price.

So it's a mixed bag.

But we're not seeing any real serious change, it's all part of how we do business and how we've done business in the

Thank you.

You're welcome.

And, gentlemen, your next question will come from the line of John Rogers with DA Davidson.

Please proceed.

Hi, good morning.

Hi, John.

How are you doing?

Good.

Hey, first question.

In terms of the other income in the quarter?

What was that?

The other income consists of a number of items.

The two most significant items would be are deferred comp plan and some real estate that we hold.

But real estate is a small piece.

The real component, John is -- let me try to explain this as clearly as I can.

In the deferred compensation plan, there was an off-setting amount to the income that you see on that line.

Oh, right.

Yes.

So the offsetting amount is an additional salary expense, which you see -- you would be buried up above the line.

This is the other side of that transaction because of deferred comp plan.

We have hedged the employee's asset selection choice so that $4 million -- really, if I could make my own accounting rules, I would have pushed that above the line and offset it with the compensation expense.

So going forward as it was last quarter, what causes that number to go up or down?

Anything --

Yes.

The markets.

Understanding there's an employee on the other side that made an asset selection choice.

If the market goes up, our employee expense, salary expense goes up, and the other income goes up to offset it.

If the market goes down, it goes the other way.

So if you looked a year ago, you would see it going down, and this year you see it going up in sync with the markets.

Okay.

But that's why -- I think it's more important to look at total EBITDA margins, because those two then net against each other rather than looking at the presentation of operating margins as they're shown on the financial statement.

Okay.

And then, relative to SSI, how many people do you have employed on the management support services side?

10,000.

10,000?

Okay.

And in terms of the pricing for the work that you've got out there, any change in the multipliers or anything that you're seeing?

Is it more so on -- are you seeing more pressure on the private sector versus the public sector?

Because John, you talk about the strengths and the government stimulus programs worldwide, but I get the sense that a lot of companies, whether they were in it before or not, are also chasing that work, and I'm just trying to get a sense of -- increased competition is having any effect on pricing.

The pricing is -- we've seen pricing pressure on the private side.

We haven't seen any significant -- and I'm not saying there isn't any -- but we haven't seen any significant pricing pressure on the public side.

Okay.

And then, just to be clear, Mike, you talk about increase our opportunities to leverage up the balance sheet if you saw acquisitions or -- should we take away from this that you are seeing definitely more opportunities?

Is your pipeline filling up?

Our pipeline is more full than it's ever been?

And is it a series of private companies?

I mean, is it similar to what you've done so far, or are there some very large opportunities at la EarthTech out there?

No.

I think there are some, but you should expect more of the same.

We've just completed three deals in the last six weeks, and those fall on our sweet spot.

There are some opportunities that are on the bigger scale side, but I think you should expect more of the same of what we've done in the past.

And in this kind of environment, given what rates are and multiples, would it be fair to assume that almost any deal at this point would be immediately accretive?

From a cash -- from a cash EPS perspective, definitely, John.

As you know, the amortization intangible -- asset amortization has a big hit in year one when you amortize your backlog; but clearly from a cash EPS perspective, they would be very accretive right out of the block.

Yes.

Okay.

Great.

Thanks, and congratulations on the quarter here.

Great.

Thank you.

And gentlemen, your next question comes from the line of Chase Jacobson with Sterne, Agee.

Please proceed.

Hi.

Good afternoon, guys.

How are you doing?

Good.

I was just -- the gross margin in the MSA segment has fluctuated quite a bit over the last several quarters.

I was just wondering if you can comment on what impacted it this quarter and kind of how we should think about it going forward?

It depends on how you're looking at it.

Are you looking at it as this gross revenue?

Right.

Net revenue.

I think the better way -- how we look at that business is we look at the EBIT that it produces.

That segment can fluctuate from quarter to quarter for varying reasons.

One big reason is the joint venture accounting, right?

If you have a 49% ownership versus a 51% ownership, the economics are obviously 2% off, but the presentation on the balance sheet really throws off the margins.

Secondly, you have award fees that we generally take a very conservative positions on recognizing award fees, and we try not to recognize them until they are relatively certain, because in that segment, you have a small number of very large contracts when one or more fees pops up in a quarter.

It can jump those numbers around.

So I would encourage you not to try to look at it on a quarterly basis, but rather try to look at it on an annual basis is probably the best way to look at it.

And then, I just wanted to go back to the highway bill stuff real quick.

You talked about the funding being flat and the possibility of the multi-month extension but the fact of the matter is that we're on essential a month to month extension right now.

I was just curious as to how you were thinking about that in your guidance next year.

If you're assuming a 6 or 12-month extension or if you're thinking about it in kind of the current state of affairs on more of a month to month basis?

We're looking at the highway authorization.

We're looking at the projects that are coming out versus the extension on that.

And we haven't seen any reduction in the work that's being advertised and coming out.

We're mindful of the fact that things could change, but right now we're working on the assumption that -- this $40 billion of annual expenditure by the federal government will continue throughout whatever extension they have, a 16-month, 18-month, 6 months, and because of the need for this money, for two reasons, one to repair the infrastructure and, two, to get people back to work.

Okay.

Any other questions?

Yes, sir.

Your next question comes from the line of Sameer Rathod with Macquarie.

Please proceed.

Hi.

Good afternoon.

Just a couple of quick things.

First on the SAFETEA-LU and the current, I guess, reauthorization, isn't the run rate closer to $32 billion due to the $8.7 billion recision and not $40 billion, or is that not correct?

Well, yes.

It depends on whether the recision is going to happen or not happen.

But, yes, you're technically --

Okay.

My next question is how much of your current backlog is stimulus related?

I don't -- I don't break it down that way.

I don't know if we keep records that way --

Yes.

We don't.

I can tell you that we have won $530 million of projects from stimulus -- stimulus funded projects that originally went into the backlog-- what I can't tell you is how much of them burned off?

Okay.

No, that's very helpful, and then my last question.

I just want to be clear.

What was the organic growth rate on the backlog?

Well, it was almost entirely -- almost all of the backlog growth was organic, because we only did two very small acquisitions in FY '09.

Oh, okay.

Okay.

Thank you.

Thank you.

And, ladies and gentlemen at this time, I'd like to turn the call back over to AECOM for any closing comments.

I want to thank everyone for their interest in AECOM.

Just to wrap up, as we look forward, we look at 2010 in light of the fact that there are strong wins, a record backlog levels.

In terms of opportunities, we see significant opportunities of mega projects around the globe, and also our M&A pipeline remains robust.

So as we look to the future and we're looking at the second half of the year and past the first quarter, we're very optimistic of the growth that we are projecting in our outlook.

So with that, I want to say thanks again, and we'll see you and listen to hear from you again in three months.

Have a good day.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference.

This does conclude your presentation, and you may now disconnect.

Have a wonderful day.