AECOM (ACM) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2010 AECOM earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Paul Cyril, Senior Vice President of Investor Relations.

Please proceed.

Thank you, and welcome, everyone, to AECOM's fourth quarter 2010 earnings conference call.

Let me remind everyone 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 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.

Let me also remind you of some of the important information about our earnings that are posted on the investor website, Investors.AECOM.com.

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

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

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, Chief Executive Officer and President, and Michael S.

Burke, Chief Financial Officer and Executive Vice President.

John, please go ahead.

Thank you, Paul.

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

I will begin with a review of fiscal 2010 achievements, and then I will turn the call over to Mike Burke, who will discuss our fourth quarter financial performance and our outlook for fiscal year 2011.

Following Mike's comments, I will provide an update on our markets and business trends.

Please turn to slide four.

Fiscal year 2010 was a good year for AECOM, a year of many noteworthy achievements.

We successfully navigated through one of the most challenging global economic cycles and delivered industry-leading profit growth.

We also took a number of significant steps to position AECOM for sustained profit improvement.

Specifically, we furthered our core strategy of diversification and balanced growth.

We capitalized on a highly attractive M&A market and completed five strategic acquisitions that positions us in many new, high-growth end markets and geographies.

We realigned our resources in underperforming markets and invested in high growth areas.

And finally, we achieved a record number of wins across our geographies and end markets.

We ended fiscal year 2010 on a strong note with improving organic revenue and backlog growth.

We enter 2011 a far more diversified Company that is better positioned to serve clients with new and enhanced technical capabilities and expanded geographic reach and a truly integrated delivery approach.

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

Mike, please go ahead.

Thank you, John.

Please turn to slide five.

I will begin with a review of our fourth quarter results today.

Fourth quarter gross revenue increased 12% over last year to $1.8 billion.

Our net service revenue increased 14% over last year to $1.1 billion.

The quarter's revenue growth was driven by strength in our business in Asia, Australia, and the Middle East as well as contributions from our recent acquisitions.

That growth was partially offset by continued weak performance in the UK and a relatively flat operating environment in North America.

Organic net service revenue increased 3.8% year-over-year while constant currency organic net service revenue increased 2.4% year-over-year, improving from the prior quarter.

Operating income was $99 million, up 32% over last year's fourth quarter due to our focus on higher margin services and our ongoing cost efficiency initiatives.

This result included $5 million in M&A expenses in Q4, which under the new accounting rules, are required to be expensed rather than capitalized.

Operating income was also reduced by a $5 million increase in labor expense from our deferred compensation plan, which was entirely offset by a $5 million gain on our hedge for the same plan.

However, that gain is reflected below the line in other income.

Net income was $68 million, up 25% year-over-year, and diluted earnings per share were $0.58, up 21% year-over-year.

Please turn to slide six.

Our PTS segment accounted for 84% of our fourth quarter gross revenue.

Net service revenue in our PTS segment increased 11% from last year to $1 billion.

The increase was a result of 3.4% organic growth with the balance coming from our recent acquisitions.

Constant currency organic net service revenue grew 2% year-over-year, which was a one percentage point improvement from Q3.

Asia Pacific delivered organic growth of over 20% for the third consecutive quarter.

Operating margins in the PTS segment improved by 183 basis points, driving operating income to $120 million, a 32% increase over the fourth quarter of 2009.

Our Management Support Services segment, which accounted for 16% of our revenue in the fourth quarter, continued to perform well.

Net service revenue outpaced gross revenue in the period due to a greater portion of work being performed directly by our employees relative to prior periods.

Operating income increased 17% over last year to $12 million.

Please turn to the next slide.

In the fourth quarter, our EBITDA margin improved 113 basis points over last year and increased 55 basis points for the full year.

Excluding $9 million in M&A expenses and $4.5 million in Q1 severance costs, our full-year EBITDA margin would have improved by 87 basis points to 10.26%.

Over the past three years, we have improved our EBITDA margin by 180 basis points.

During this period we have migrated to a higher margin mix of services, improved operational efficiencies across the global enterprise, and achieved better economies of scale.

Going forward, we continue to target 20 basis points annual margin improvement.

Please turn to the next slide.

At the end of the fourth quarter, our balance sheet remains strong with cash and cash equivalents of $613 million and debt of $931 million.

Factoring in our acquisition of Davis Langdon which closed in October, and our planned RSW acquisition, our cash on a pro forma basis was approximately $352 million.

And our net debt to EBITDA ratio was approximately 1.2, well below our target ratio of 1.5 to two times EBITDA.

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

We reported $2.1 billion in new awards, our single largest win quarter ever.

From a combination of record wins and a strong contribution from recent acquisitions, our total backlog reached a new record of $14.7 billion, a 55% increase over last year.

Organic backlog improved 4% from the prior quarter.

Our September 30th backlog included approximately $110 million related to the Hudson River Rail Tunnel project with over 64% of that backlog slated for 2014 and beyond.

At the time that the project was canceled, AECOM had completed two thirds of its design contract and was just beginning its multi-year construction management role that did not ramp up until after 2011.

While we never like to lose contracts, we expect the impact to our earnings in this case to be immaterial since we have already completed the majority of our near-term work on the tunnel, and our remaining backlog is weighted to the outyears.

Looking ahead, our flow of new wins and backlog provide us with confidence in our outlook for continued strong performance.

Please turn to the next slide.

Now I would like to provide our initial outlook for fiscal 2011.

Based on our strong performance in fiscal 2010 and our outlook for continued growth, we expect diluted earnings per share in the range of $2.20 to $2.30 for fiscal 2011.

As you may recall, our business is seasonal, and we typically realize 20% of our full-year earnings in the first quarter of our fiscal year.

Our full-year guidance assumes $73 million in amortization expense related to acquired intangible assets.

As you know, M&A deals in our space carry significant noncash amortization expense in the first year due to the purchase accounting value ascribed to backlog.

Adjusting for intangible amortization expense, our guidance midpoint implies 23% year-over-year growth in pro forma cash EPS.

Our key assumptions in our guidance include -- $43 million of interest expense, a tax rate of 30%, a diluted share count of 119 million shares for fiscal year 2011.

In addition, our guidance assumes a steady foreign currency exchange rate.

The higher amortization expense masks our FY 11 earnings power.

However, as we move forward and the amortization expense burns off, GAAP earnings growth should move closer in line with cash EPS.

Therefore, we are very confident in our long-term EPS growth projections of 15%.

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, Mike.

Everyone, please turn to slide 11.

As we enter fiscal year '11, we are focused on four primary objectives.

Efficiently integrating our recent acquisitions with an eye toward driving both near- and long-term revenue synergies, capitalizing on the opportunities in high growth markets both organically and acquisitively, carefully managing through the economic recovery, and remaining agile to changing market conditions.

And lastly, pursuing further operational efficiencies that will drive margin improvements.

Slide 12.

I would like to discuss our market and geographic conditions.

Due to our diversified business model, AECOM has been able to consistently deliver strong growth for many years, especially through this recent recession.

In the fourth quarter, more than 50% of our revenue came from a strong mix of business across Asia Pacific, the Middle East, Africa, Canada, and Europe.

Overall, the performance of our markets continues to reflect the uneven global economic recovery.

Some of our large markets such as Asia, the Middle East, and Australia, and our emerging markets of Eastern Europe and India are growing rapidly, while the U.K.

remains challenged and North America is relatively flat.

Let me now take you through each of our major markets.

I will begin with Asia, which accounted for 8% of our fourth quarter net service revenue.

Asia has been the growth engine of the world throughout the recession and is our top performing market.

Our business in Asia, which includes China, Hong Kong, India, and Southeast Asia has grown at a rate of over 25% for the past two years.

Growth in this market is being fueled by strong infrastructure spending and long-term investments in urbanization.

There are an extraordinary number of solid opportunities being generated in Hong Kong and China.

And as the largest player in Hong Kong, AECOM is well positioned to capitalize on these opportunities.

India is undergoing vast infrastructure development to support its growing economy.

Transportation and energy infrastructure are key market drivers.

As the United States and India work to establish a $10 billion infrastructure debt fund, we expect India's infrastructure spending to accelerate.

While India is a small part of our business mix today, we will continue to focus on both organic growth and potential acquisition opportunities there.

The U.K.

continues to be our most challenged market.

The private sector is showing some signs of recovery, while public sector remains soft.

We don't expect the U.K.

to spring back for at least another 12 months.

In 2010, we right-sized our business in the U.K.

and added significant new capabilities with the acquisition of Davis Langdon.

Despite near-term headwinds, we continue to win new assignments, and there are long-term opportunities on the horizon.

For example, we recently announced an expansion of our contract with Yorkshire Water that brings our total potential fees to over $209 million.

More broadly, the U.K.

government has significantly increased its commitment to infrastructure investment, and its recently published national infrastructure plan calls for over $300 billion in public and private funding over the next five years.

If achieved, this would represent a 33% increase compared to the previous five years.

Next, Eastern Europe continues to perform quite well, driving -- driven by strong demand for environmental, program management, and construction management services.

Our business accelerated throughout the year with revenues in the second half outpacing the first half by over 10%.

We expect our recent acquisitions will drive new opportunities in this region in 2011 and beyond.

Let's turn to North America.

I will begin with Canada, which represented 11% of our fourth quarter net service revenue.

Canada has demonstrated more resilience to the global economic downturn than most markets and continues to perform well.

It remains a growth market for AECOM, and we expect to see continued opportunities supported by an active P3 market in mining, environmental services, and other large projects with long-term funding sources.

In the United States, we are seeing signs of recovery in the private sector, particularly in our environment and facilities business.

With our recent acquisition of Tishman, AECOM is well positioned to capitalize on the anticipated rebound in the commercial and industrial buildings market.

We look forward to leveraging Tishman's construction management capabilities across our global platform.

To date, less than 40% of the $170 billion in obligated federal infrastructure stimulus has been outlaid.

Therefore, roughly $100 billion in funding has yet to be made available.

In the current climate of reduced spending, there is still an acute need to improve critical infrastructure, which in turn, will create jobs.

We anticipate that infrastructure projects with large and complex funding needs will result in opportunities for private funding alternatives to make these structures a reality.

In addition, we believe public clients will increasingly look to integrated delivery models that improve efficiency and delivery relative to traditional design-bid-build models.

We are monitoring developments across all our markets, and we believe that AECOM is well positioned to capture a growing share of the U.S.

infrastructure market.

The Middle East and Africa accounts for 12% of our net service revenue.

Our business in the region increased by about 10% organically in the fourth quarter driven by key markets of Qatar, U.A.E., and Saudi Arabia.

We see an increase in the number of new opportunities in transportation, water, and facilities.

The Saudi Arabia market continues to grow, and during the past quarter, we have won several transportation assignments.

On Tuesday, we announced a $58-million expansion of our program management work in the new Doha Port in Qatar.

With our latest acquisitions, we are advancing our growth opportunities in the region.

Although we have been in Africa since 1960, the addition of Davis Langdon brings significant new capabilities in sub-Saharan Africa.

In North Africa, we have been engaged for three years with the Libyan Housing and Infrastructure Board.

Our negotiations to expand these contracts are ongoing, and we hope to have something positive to report on -- in the next quarter.

Next, in Australia and New Zealand, which accounts for 13% of our net service revenue, the economy remains strong due to robust global demand for natural resources and increased activity in the oil and gas, mining, ports, and transportation markets.

Commodity prices have helped this market, and much of what comes out of the ground in Australia goes to China.

We expect to see continued strong growth and an increase in P3 funding for projects in this region.

Please turn to slide 13.

Our business model has been to be diversified across geographies, end markets, and services.

We are operating in over 100 countries around the globe and in key markets such as transportation, environment, facilities, water, and energy.

In addition, our goal is to be a full-service provider with capabilities ranging from upfront planning through construction management.

Our recent acquisition of Tishman Construction, a construction management provider, and Davis Langdon, a global cost and project management firm, extended our back-end construction services capabilities.

And together, we are pursuing opportunities in Asia and the Middle East.

Similarly, Ellerbe Becket expanded our architectural service offerings into health care and the sports markets, while Inocsa bolstered our planning expertise in transportation with a particular focus on high-speed rail.

Please turn to slide 14.

As I mentioned, 2010 was another successful year for AECOM -- which further validates our strategy of balanced growth and diversification.

Our client-focus and broad capabilities are continuing to drive new opportunities for AECOM.

Looking ahead, we are poised for continued momentum and growth in 2011 and beyond with our diversified business model, global platform, and integrated services, and our growing presence in high growth, end markets and geographies.

Overall, we see numerous attractive opportunities in the global market as indicated by our $2.1 billion in record wins in the fourth quarter of 2010.

With that, let's go ahead and open the call for questions.

Thank you.

(Operator Instructions)

Gentlemen, your first question comes from the line of Steven Fisher with UBS.

Please proceed.

Hello.

Good morning.

Good morning, Steve.

I know you target 20 basis points of ongoing margin improvement year-to-year, but the way you achieve that in any given year could differ.

I'm just wondering how 2011 margin improvement might differ from 2010, where you had real estate costs and some mix benefit.

Steve, it does continue to vary quarter to quarter.

There's a lot of different levers we're pulling to improve our margins throughout the year.

It's a combination of really two big buckets.

One is the changing mix of our services, as some of our new strategic acquisitions that have moved us into either construction management or the McNeil acquisition that had better margins than we have seen historically in our government service business.

So the first bucket is a changing mix as we try to move more into construction management and program management services.

The second big bucket is, of course, continuing to pull all the levers on cost efficiencies.

Our real estate portfolio has been a big opportunity for us.

Better managing the administrative costs around the organization and driving more revenue through the same platform -- or the same size platform that we have built up over the past few years has contributed to that also.

So it's a broad mix of different items that have been quite helpful.

We also, as we continue to integrate the acquisitions that we've done over the past year, we continue to squeeze out costs from those acquisitions.

Now, initially there's additional costs that we bore this year to both acquire them as well as to integrate them.

But as we continue to plug those companies into our infrastructure -- our internal infrastructure, it improves our margins over time.

So looking out at 2011, you are not expecting any difference in approach to 2010?

We're expecting slightly improved margins, but we'll be getting it from all the usual suspects on our P&L.

Maybe just to add a little bit of detail, can you just give us a sense of how much the mix of program management and construction management might change in 2011 from, say, where you were in the fourth quarter of 2010?

It's maybe about an additional three percentage points increase in that piece of our business.

Okay.

We keep moving up over time.

If you go back a few years ago, it was only 20% of our business.

It's probably getting closer to one third of our business when we take all of our program management, project management, and construction management.

Okay.

The PTS business, that is.

Right.

Yes.

And are you assuming, shifting to focus on Asia,that the 25% growth will continue there?

And if so, do you think the geographic mix within Asia is going to be similar?

It sounds like maybe India could accelerate, and I don't know if that would offset maybe some slowing in Hong Kong?

Regarding Asia, we remain bullish on the outlook for Asia.

As a matter of fact, I just came back from Asia last week.

The mix will change.

Up until now, it has been primarily -- it started primarily with Hong Kong, then our expansion into China.

Now we're looking at opportunities, and we're growing our market with some key projects that we've won over the past year in India as well as in Southeast Asia.

When you go to Asia, and speaking to our clients, some of the funding agencies are looking at major investments in China, as well as India.

And we're looking at places like Vietnam, Malaysia, and Indonesia is finally bouncing back after several years of just not doing -- not progressing at all.

So you think you can sustain that 25%ish growth?

We believe, looking at FY '11, that there are numbers that we're looking at for Asia.

And based upon the budgets that -- and the amount of spending that they're forecasting, we see continued growth through at least the near-term, next two to three, four years.

Great.

Thanks a lot.

Okay.

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

Please proceed.

Hello, guys.

Hello, Vance.

How are you doing?

Doing all right.

Could you provide a water and wastewater update?

Is that still weak because of funding?

As you've mentioned in the past, I think one of your competitors recently mentioned it.

Almost sounds like a new area of strength along with mass transit and high-speed rail.

Any signs of life there?

I think it's a -- I like to say it's a tale of two cities.

It depends what we're thinking about.

In the United States, it's stable.

We're seeing some growth opportunities, but nothing really dramatic.

Where we're seeing some very significant opportunities are in Hong Kong and China, as well as looking at India.

So the water market outside the United States is strong.

But here in the United States, the funding still remains a little bit lethargic in terms of spending.

Even though there's significant need.

Okay, makes sense.

And I didn't hear you mention Latin America at all.

Could you provide an update on plans to expand the presence there?

And does that potentially become a meaningful contributor in 2011?

Or is it more likely to be a drag on performance as you ramp up there?

No, it's not going to be a drag.

We have a modest staff in Latin America, in Brazil, and Colombia.

We are actively pursuing an acquisition in Latin America.

We're focusing on the energy and mining markets there as well as growth markets.

But also bringing our capabilities and expertise in infrastructure, especially considering the sports events which are occurring in the Olympics as well as the World Cup games over the next couple years.

Sure, great.

And, Mike, on the balance sheet.

Very conservative in the past, a little less so now.

Just your current thoughts on leverage, and where you want to take it?

We're still -- even though we did put some leverage on the balance sheet in Q4, our net debt to EBITDA ratio on a pro forma basis, as I mentioned in my earlier comments, is still 1.2 times EBITDA.

Still well below the target numbers we've been throwing out for a while in the 1.5 to two times area.

It really is a good opportunity to put some leverage on the balance sheet for some of these strategic acquisitions, given the fairly attractive pricing in the debt markets today.

So we would be comfortable with expanding that leverage from the 1.2 ratio that we sit at today.

Okay, great.

I'll leave it there.

Thanks.

Thank you.

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

Please proceed.

Good morning.

Nice quarter.

Thank you, Andy.

If I could follow up on Steve's question for one second, Mike.

In the PTS segment, if I look at margins in the 4Q, they were approaching 12%.

I assume that there's good Tishman influence on those margins.

Is that the kind of margins that we should expect in 2011?

Or even a little more than that as Davis Langdon gets ramped in?

I wouldn't be taking a fourth quarter margin and pushing it out for the whole year.

As you know, our fourth quarter is always our biggest quarter of the year because of the construction cycles.

So it's always our biggest quarter for revenue.

It's our biggest quarter for utilization and our biggest quarter for margin.

So I think a better way to look at it is to take the overall year margins, and then improve it from there.

But I wouldn't take Q4 and just run it out for all of fiscal '11.

Okay, Mike, that's helpful.

Let me try and take a crack at something else.

You said that your acquired intangible expense was $73 million for 2011, right?

Up about $50 million from 2010.

As we look past '11, is it fair to say that of that incremental $50 million, half of it would go away in 2012?

I don't have the amortization curve in front of me here.

But generally, that's a good rule of thumb, is to take an amortization from big deals and maybe 40% to 50% of it would burn the first year.

And then it starts scaling down pretty quickly from there.

But then again, that's assuming we don't do more M&A, right?

Of course.

To the extent we do additional M&A, that might replace that.

But if you're looking on a stable basis, that amortization would burn off fairly quickly and provide very significant earnings growth in FY '12.

And you heard me mention earlier the GAAP EPS -- I'm sorry, the cash EPS growth in FY '11.

And I was pointing that out to just give you a better sense for the earnings power in 2012 and forward as that amortization burns off.

Okay, Mike, that's helpful.

Just your opinion on something.

Obviously, we had the elections.

We've got a Republican House.

We've got more Republican governors.

We know what happened to the Trans-Hudson Tunnel.

But there's also a lot of moving pieces around whether Build America bonds get renewed, and what happens to this highway bill.

So what do you think about all these moving pieces?

Do you think there is good appetite in Congress to go forward with the highway bill?

What about Build America bonds.

I know there's a lot of questions in there, but there's a lot of moving pieces.

Let me give you our opinion, and clearly we're not experts on it.

But we're trying to read the tea leaves like everyone else.

Let me begin by saying that there is a definite need for infrastructure improvement.

Also, there is a need to generate jobs.

So right now, I think, my humble opinion, we've seen some political statesmanship in terms of what happened in New Jersey.

What's happened in some of the governors' -- the governor-elects in places like Washington and Florida trying to cut back on some major unfunded programs.

But if you look at -- I don't think any of those -- any of those governors are saying they want to cut back on infrastructure spending.

Governor Christie in New Jersey decided to stop the ARC program.

He gave up a significant amount of funding -- $6 billion -- because he was worried about the unfunded part, which was the overruns.

But he now has said I'm going to -- with that, he's now investing $2.7 billion into infrastructure programs which are immediate needs.

It's highway work, probably some transit work, some airport work.

So what we're seeing is, for those projects which are unfunded, and they're long-term.

If you look at high-speed rail, that's something that we're speaking about ten years down the road when you finally get the first train running.

Or you look at the ARC, which is a longer term project, which may -- which could have some of these projects could put at risk some of the short-term, immediate needs.

We're seeing the shift.

We're not seeing a shift or a lack of interest in infrastructure spending.

We're seeing that there is still a commitment.

And what we're also seeing is projects that are unfunded being, as I mentioned, being postponed.

But there is still a significant amount of spending on those projects which have user fees, toll road projects.

There is going to be a significant increase with the change in Congress in an appetite for public-private partnerships.

There is a significant amount of private money willing to invest in public-private partnerships.

So we see the continued growth in the infrastructure market and a continued amount of spending in the infrastructure market.

Regarding the reauthorization, if you ask me, I don't think we're going to see reauthorization bill until the 2012 elections.

It's going to be a political issue.

But they keep extending the current one.

And these continuing resolutions come.

They come timely.

And overall, it would be nice if we had a reauthorization bill, but it's not like they stop the flow of funds.

And so even though the reauthorization bill may not be passed until after the 2012 elections, there is funding being provided through the continuing resolutions.

Overall, I don't think the infrastructure market in the United States should be looked at as a bleak market.

I think it's still going to be a strong market.

There's a need.

I think the political leaders realize that it's something that they need to invest in to keep the transportation networks functional in their states.

And also, it's a significant driver of growth of jobs.

That's how AECOM is looking at it, and we're being bullish in how we market the infrastructure opportunities.

If Christie takes money from the ARC program, and he puts it into the transportation program within the state.

That's a major change from what we've seen over the past two years where there was very little money coming out of the state, New Jersey State DOT.

So overall, when we're looking at states like New York, New Jersey.

Here in the east, Pennsylvania.

We look at California.

We look at Florida, Texas.

These are still going to be very strong markets for AECOM in terms of infrastructure.

Thank you, John.

That's helpful.

Okay.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

Please proceed.

Good morning.

Good morning.

Quick question.

Thinking about your organic growth rate for next year, and it sounds like we're still seeing fairly significant growth in Hong Kong, Australia, and the Middle East.

But your organic backlog is growing at about 3% to 4%.

Is it fair to assume that you continue to achieve that kind of growth rate into next year from an organic perspective?

And does that also assume that the U.S.

and Europe is down next year?

First of all, the 4% number that you just quoted, that was the sequential backlog growth from Q3 to Q4.

So that was over 90 days.

So I definitely wouldn't take that and multiply it by four and assume a 16% organic growth rate, okay.

Just to be clear, that was the sequential growth rate, a very strong sequential growth.

But I wouldn't be putting those kind of numbers up.

I think we're quite confident in the guidance range that we put out, which implies a healthy organic growth rate.

We are not expecting a decline in the U.S.

or the U.K.

To specifically answer your question, we are expecting slower growth in those markets than we are expecting in the Middle East, Asia, and Australia.

Okay.

And I wasn't anticipating a 16% growth rate, but it sounds like you can definitely do -- call it upwards of 5% to upper single digits in organic growth next year, given the assumptions that you have.

That's not unreasonable.

Okay.

Switching gears to the margins, we talked a little bit about the PTS segment.

But moving on to MSS.

Obviously, with the acquisition of McNeil, which should be a higher margin business.

It's interesting that your margins declined this quarter.

So I was hoping you could maybe shed some light on the sequential margin decline, and whether we'd expect to see a pickup going forward?

Yes, It's -- for those of you that have been following our Company for a while, you know that the margins in the MSS segment are always lumpy.

And they're lumpy because of the nature of that business where you have big award fees.

And so when I look at the sequential quarter, the decline that you mentioned, if you're looking at margins on income from ops dropping about 30 bps.

That was mainly driven by an award fee pickup that we had in Q3.

So all in all, that business has a fairly rational -- fairly normalized rate over the long term.

You are just going see lumps by quarter.

McNeil was only in there for one month in Q4.

So it wasn't there for the full quarter.

But we do expect that acquisition to increase margins, given that it produces higher margins than our historical MSS segment.

Okay, that's helpful.

Lastly, switching gears to M&A.

In the past you've given targets.

Obviously, you had a pretty significant year in terms of M&A for the Company.

Was wondering what your thoughts were over the next 12 to 18 months on the level of acquisitions that you will be pursuing?

Obviously, you mentioned Latin America.

Was wondering if you can give some color on specific targets for next year, or over the next 12 to 18 months?

Over the next 12 to 18 months, we definitely want to do an acquisition in Brazil, India, and in Asia.

Either China or in Taiwan.

And then looking towards the Middle East as well.

Okay, great.

Thank you very much.

They are the targets.

And again, what I mentioned is we're looking to expand -- we're looking to -- in terms of the M&A, we're looking to expand the geographies I mentioned, and our end markets being mining and energy.

In terms of services, it's continuing to bolster our program management and construction management as we leverage Tishman and Davis Langdon into the global arena.

Okay, guys.

Thanks so much.

You're welcome.

Our next question comes from the line of Tahira Afzal with KeyBanc.

Please proceed.

Good morning, gentlemen.

Good morning.

First question is in regards to your amortization.

Obviously with all these acquisitions, as you mentioned, it's going to be fairly high in 2011.

Could you give us a ballpark idea of how much it trails off by as we go into 2012?

It's really going to depend on the M&A transactions in FY '11.

And so that will depend on all the target markets that John just mentioned.

It will depend on whether we find the right deals in those spaces.

The timing of those acquisitions and the size of those acquisitions.

But as I mentioned earlier, the amortization tails off fairly quickly.

Generally, half of the amortization attributable to a transaction -- 40% or 50% of the total amortization hits the P&L in the first year.

So it has a very quick burn rate.

But it's really going to depend on how many M&A deals we do in FY '11.

Fair enough.

I think that sounds pretty fair.

Could you talk about -- I know in Orlando the bids are out for high-speed rail, et cetera.

Could you just give us a bit of an idea of how all of the high-speed bids, et cetera, are playing out for yourselves so far?

We're involved in a team, and we're right now putting in the pre-quals.

But bids don't go in for probably about a year.

It's not anything near-term.

Nothing near-term over there.

On the Orlando.

On the Orlando.

Got it, okay.

And third question is, as you make these acquisitions, would love to get a sense of -- I look across -- there are a lot of your peers that have a lot of cash on their balance sheet and could potentially do what you're doing as well, which is really gain market share internationally fairly rapidly by making acquisitions.

What would you say AECOM's edge is in terms of growing internationally versus some of your peers?

Well, I think what differentiates us is that -- first of all, we've been doing it for 20 years.

We've probably done maybe 50 acquisitions over that period of time.

We have been very, very successful.

We have a model of how we integrate the companies.

We don't initially look at bottom line growth by cutting out all sorts of overhead and taking and changing the culture of the company.

We look for top line growth through synergies.

Then over time, as we integrate the companies, we make them part and parcel of AECOM.

So as I always -- as I've said in the past, with every acquisition, AECOM gets -- becomes a little bit more like the Company we acquired, and the company we acquired becomes like AECOM.

So we're very comfortable with it.

It's a very natural thing for us.

But also, I'd prefer you don't go tell our competitors what our -- .

Fair enough.

I don't think I will.

I guess the last question I had was in regards to Tishman.

We've started to see a lot of the commercial cycle indicators turning the other way now, inflecting back up.

If you look at REVPARs, if you look at vacancy rates, and obviously, the actual construction might follow with a lag.

I would love to get a sense from you on how Tishman is faring in the U.S.?

And then a little more detail, perhaps, on your strategy on how you feel you can leverage Tishman internationally.

Tishman Construction Company -- what we've done was reverse merge our program management, construction management capabilities that we had here in the United States.

So we could broaden their -- broaden the capabilities for that construction services group.

Their major market clearly is New York, as well as in parts of western United States and other -- and New Jersey.

When you look at the New York construction market, it's forecasted for '11.

It will be about at the same level as in 2007.

So the construction market is coming back in New York.

As you mentioned, there is an increase in commercial and industrial activities.

And so we see the opportunities, and as they are booking work and signing up and being signed up to do pre-construction services, which is the precursor to construction.

That activity has increased over the past few months.

Also, as you know, when you look at Ground Zero, Tishman AECOM are working on every one of the buildings down there.

So there is a significant amount of activity that Tishman and AECOM have just here in New York.

But we've also been working with them in the U.A.E.

In Abu Dhabi, where AECOM has been doing work and Tishman.

And now together, the client is looking at the significant opportunity of this type of delivery system.

And we will continue to grow those markets.

But I think the real added value is how we leverage Tishman outside of those two markets, outside of the United States and outside of the U.A.E.

As I said, I was in Asia.

Went along with Dan Tishman.

And we met with several clients, and we see the opportunity of leveraging the construction management capabilities into places like Hong Kong and China and Singapore, Southeast Asia, where they are not as familiar with, say, western construction management, program management.

And so that's where we see the longer term added value of Tishman, as well as Davis Langdon, which also is the third side of that triangle of providing construction services on a worldwide basis.

Thank you very much.

You're welcome.

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

Please proceed.

Hello, guys.

How are you doing?

Good.

My first question here is just I know you gave a range for guidance.

I think I typically ask this at the beginning of every year.

Maybe you could just talk about what gets you guys at the upper end of that range and what puts you at the lower.

What are the assumptions baked into both sides of that range?

Listen, we are cautiously optimistic on the short-term outlook here.

We feel very confident in the range that we've put forth.

Once you get above the high end of that range, it becomes a little cloudy.

Based on some of the first questions we had was about the political environment and some of the instability.

But we feel very comfortable with the range that we've put forth.

Getting over the top end of that range will depend on the strength of the recovery.

We're seeing all the right signs.

We had our biggest win quarter ever last quarter with $2.1 billion.

We're seeing organic growth rates coming back.

We still -- even though there's some political turmoil out there, we still feel good about the focus on infrastructure and some of the commitments not to cut infrastructure spending.

So, although it's a little cloudy above the high end of our range, there is opportunity there.

But -- I will say it again, we're very confident within that range.

But if present demand environment stays the way it currently is, you think you can do --potentially do the top end of the range?

That's what you're implying?

Yes.

We're very comfortable with that range, given the current environment.

Okay.

Great.

Looking at that as well, I know you talked about organic -- some potential organic growth being in the upper digits.

If we look at the acquisitions that were just done, the five.

The guidance includes some level of inorganic contribution from those five acquisitions.

Is that accurate?

Yes, but as I think you know, given the amortization, and of course, the interest costs, generally we don't have any accretion in year one from our acquisitions because the heavy amortization wipes out the earnings in year one.

Year two is when the earnings accelerate.

Right.

So out of the 7% to 12% earnings growth, the majority of that is going to be organic, correct?

If I'm understanding the amortization schedule accurately.

Correct.

Okay.

Then just finally here, maybe you could just talk about the stages, and I know we've touched on the federal government and what's happening abroad.

It seems like early recovery we had the stimulus package here in the U.S., and maybe you can give an update on that.

It seems like going forward, the focus really shifts to emerging markets as maybe the early first movers on the recovery side slow down their spending.

Is that an accurate portrayal?

Maybe could you just talk a little bit about where we stand with the stimulus?

Well, the stimulus package -- the stimulus is getting a bad rap.

Has been in the last six months as we approached the mid-term elections.

And if you've been following our calls, AECOM has had a different sense of that.

We felt, and we still do feel, that the stimulus package for infrastructure has made a difference -- has made a difference for us.

There are still, as I mentioned, about $100 billion that have not been placed yet.

We see that as a source of funding for projects going forward.

Again, it will be interesting to see how that stimulus funding is portrayed going forward as we see the smoke clearing after the mid-term election.

But I believe that, put to the proper use, which it has been on the infrastructure side.

That it will be an important element in the continued advancement of infrastructure improvement in the United States.

I also mentioned in the United States the things that are unfunded will be probably put on the shelf.

Those projects, and there are a significant number of them which are being developed through authorities and government agencies from tolls, dedicated funds, and PPT, will drive the infrastructure market.

Does that answer your question?

I thought -- .

I guess, I'm curious.

It just seems like based on discussion that we've been having, that you expect the growth rates -- obviously, coming off a smaller base, and the potential to be much more interesting over the next 12 to 24 months in emerging markets versus where we originally saw the growth, North America and that particular region.

Yes.

It's really interesting as you said.

It is some really exciting opportunities.

When you go to Asia, you go to Australia, you go to the Middle East.

And even now a new market for us, which based on the Davis Langdon acquisition, which is South Africa.

There are really some significant opportunities that we see.

And when you speak to clients in those market places, they're very positive.

We were in Hong Kong, and the development program in Hong Kong for infrastructure is $50 billion dollars -- Hong Kong dollars -- a year for the next five years.

Significant amount of money being pumped in.

You look at China the same way.

You look at India.

So it's -- in terms of growth opportunities, the emerging markets, or the non-US markets, are very, very promising.

The U.S.

market, though, still is the mother lode in terms of size.

So even though it may be a smaller percentage of growth, it's still a very, very large number.

And AECOM, I believe, is very well positioned to take advantage of the spending that's going to occur here in the United States because of our size as well as because of our geographic diversification.

Okay.

That's very clear.

Thank you.

(Operator Instructions)

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

Please proceed.

Hello.

Good morning.

I haven't heard anyone else ask this question yet, so I will.

I'd like to focus on contracted backlog because that's what really flows into revenues.

What was acquired contracted backlog in PTS and MSS?

Okay.

Hold on.

I am just trying to grab that number.

We've been focusing on the aggregate backlog.

But let me just grab -- we talked about the sequential amount was four point -- about four percentage points in gross, including awarded and contracted.

And I don't have it at my fingertips.

I may have it.

Still looking for it.

Why don't we follow up with you on that, Avi.

I have a number here.

It just doesn't look right to me.

I was slicing and dicing the aggregate backlog, anticipating you would want to know that.

Which is why we put it in the press release.

But I don't have it sliced and diced by contracted acquired.

So why don't we follow up with that question.

Okay.

Tishman, as I recall from when did you the acquisition, there's a high percentage of pass-through costs.

Should we see the rate of pass-through costs increase as a result of that acquisition?

Yes.

It's a much higher proportion of pass-through costs where as our traditional PTS business, general rule of thumb, a third of it is passed through.

Theirs could be as much as two thirds passed through.

Typically in a construction management business, you'd see that.

I also noticed there was a fairly significant jump -- year-over-year jump in total private client gross revenues.

Is a lot of that from the Tishman acquisition?

Yes, absolutely.

And Davis Langdon as well.

And Davis Langdon, okay.

And, finally, and I've asked you about in this the past.

Your cash flow generation relative to your net income.

I don't know exactly what your CapEx was.

Assuming it was what is was last quarter.

Your free cash flow for the year significantly trailed net income.

This is the -- I don't know -- third or fourth year in a row we've seen that.

What can you do to improve the free cash flow?

And I also wonder if your business line managers, are they compensated on organic and acquired margins, or free cash flow?

I'm just trying to get a sense of those.

We are -- all of us, both lower level management and upper management, are compensated on cash flow.

But let me address the cash flow issue directly.

Cash flows were lower than we expected, and it's really attributable to two main contracts.

And there's a lot of ups and downs around the globe.

But two big contracts.

If you look at our federal government business, our net AR from the U.S.

government increased by $72 million year-over-year.

And that is due to just a slowdown in the processing of transactions at the U.S.

government.

Now, what we feel good about that, is it's a good credit risk on the other side.

It's a good client.

But $70 million of that cash flow alone was an increase in our working capital for the U.S.

government.

A second big component was a $25 million increase in our net AR from our Libyan Housing and Infrastructure Board client.

The good news on that is, after the close of the year, we just received notice that we just had the money wired to us in the past few days of $25 million.

So those two amounts, one of them came in, the other one is working through a slower payment processing with the U.S.

federal government.

But if we can fix those two contracts, we're back to where we expect to be.

If I add in the $25 million and the $72 million to year-end cash flow, you'd still be lagging -- trailing your net income for the year.

Sure.

Is your business designed to be cash flow positive?

Absolutely.

So why isn't it?

I'm not sure what you mean, why it's not cash flow positive.

I'm sorry, not cash flow positive.

To generate free cash flow.

I apologize for that.

To generate cash flow ahead of net income.

Or is that just working capital?

You can't generate cash flow ahead of net income if you're continuing to invest in the business.

So as we continue to invest in the business, you've got -- when revenue grows, you've got to fund working capital for the growth in your AR.

So essentially the way to think about it is, the 25%, assuming a 90 DSO, 25% of your increased revenue has to be funded through working capital which comes right out of your free cash flow.

Got you.

I appreciate it.

I look forward to following up with you after the call for the backlog info.

We'll get right back to you on that within hours.

Thanks.

We have a follow-up question from the line of Tahira Afzal with KeyBanc.

Please proceed.

Hello.

Just a quick question.

Could you comment on public-private partnerships in the U.S.?

How those are progressing?

Especially given the recent commentary coming out on the political front?

And then, if you could comment outside internationally as well.

Is that helping from a cyclical angle?

Or will it, in terms of funding for infrastructure projects?

From a very macroscopic perspective, public-private partnerships is increasing here in the United States.

Many states are now adding it to their portfolio.

We're looking at opportunities, public-private partnerships in New York and New Jersey which hadn't occurred in the past.

As I mentioned, there is significant amount of private funding willing to invest in infrastructure projects.

AECOM is a 25% owner of a company called Meridiam which invests in infrastructure projects in Europe as well as in North America.

And they've been very active.

We have highway projects in Texas.

We have a courthouse in Long Beach, and health care facilities in the United States as well.

And we have projects in Europe.

In discussions in Asia, that's also private monies looking to invest in places like Vietnam, looking to invest in India and China.

So the shortfalls in any type of public funding -- it will be, I believe, replaced by the P3-type projects.

And it's on a global basis.

Thank you.

And we have no further questions at this time so I would like to turn the presentation back over to Mr.

John Dionisio.

Okay, I want to thank all of you participating today, especially those of you who are veterans on Veterans' Day for taking time to be on this call.

Please -- thank you for following AECOM, and please feel free to give us a call if you have any other additional questions.

So, with that, we'll be speaking to you on the next quarter.

Have a great day, and the holidays coming up.

Bye now.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.