AECOM (ACM) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 AECOM earnings conference call.

My name is Katie, and I'll be your coordinator for today.

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

We will be conducting a question and answer session towards the end of the conference.

(Operator Instructions)

I would like to now hand the call over to your host for today, Paul Cyril, Senior Vice President of Investor Relations.

Please proceed.

Thank you.

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 2 of the earnings presentation, and to our reports filed with the Securities and Exchange Commission for more information on the specific risk factors that could cause actual results to differ materially.

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

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

A replay of today's call will be posted there at around 11.00 AM 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 Dionisio, Chairman and Chief Executive Officer; and Michael S.

Burke, President.

John, please go ahead.

Thank you, Paul.

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

Joining Mike and me on the call today are Steve Kadenacy, our CFO; and Jane Chmielinski, our Chief Operating Officer.

As we have done in the past, Mike will begin with an overview of our fourth quarter financial performance and discuss our outlook for fiscal year 2012.

Following Mike's comments, I'm going to spend a few minutes speaking about our business, and the trends we are seeing in our different markets, business lines, and geographies.

In the current environment, where the headlines are all about government spending issues, I also want to provide you some detail about AECOM's diversified mix of strong funding sources that support our projects around the world and our future growth.

After that, I will talk about our plans for fiscal 2012, including a review of our most significant operating initiatives.

Then we will open the call to your questions.

However, before I turn the call over to Mike, I am pleased to say that despite numerous headwinds, 2011 was a good year for AECOM.

We executed well, and enhanced our platform and market position around the world.

We enter fiscal 2012 in a stronger position than 2011.

Now I'd like to turn the call over to Mike.

Mike, please go ahead.

Thank you, John.

Please turn to slide 4.

As John mentioned, our FY '11 performance was solid and we finished the year in a strong position.

Now, let's review our financial highlights for the fourth quarter.

Our fourth quarter gross revenue increased 16% over last year to $2.1 billion, and net service revenue increased 20% to $1.4 billion.

More importantly, fourth quarter organic net service revenue increased by 7% year over year.

Organic growth was driven by strength in Asia, Australia, Canada, and Latin America, and in our power, energy, and mining sectors.

Conversely, we continued to experience weakness in Western Europe.

On a constant currency basis, organic net service revenue increased by 3% in the fourth quarter.

We are pleased with the positive trend we are seeing in organic growth, and believe it is a direct outcome of our strategic focus on high-growth emerging markets in natural resource rich regions, strong growth in our MSS business and solid execution.

Operating income increased 35% year over year to $134 million, while net income increased 29% to $87 million.

This resulted in a diluted earnings per share of $0.75, which was up 29% year over year.

Cash flow from operations improved by 128% year over year to $262 million in the quarter.

Please turn to slide 5.

Our PTS segment accounted for 89% of our fourth quarter revenue.

Net service revenue increased 18% from last year to $1.2 billion.

Organic net service revenue in this segment increased by 6% year over year.

Operating income in the PTS segment increased 22% over last year to $147 million, and operating margins improved by 39 basis points year over year.

This margin improvement is a reflection of our efforts to enhance our mix of higher margin services, such as PM-CM, cross-selling efforts, and strong project delivery.

The margin improvement was achieved despite the European restructuring expenses incurred in Q4.

Our management support services segment accounted for 11% of our fourth quarter revenue.

As we mentioned last quarter, this segment is undergoing a change in project mix.

It is moving from contracts with significant pass-through costs to projects with more self-performed work and a higher component of net service revenue.

As a result, gross revenue for the quarter was down 20% year over year, while net service revenue increased 40%.

Organic net service revenue in the MSS segment grew 16% year over year.

MSS segment operating income increased 56% over last year to $18 million, and operating margins on gross revenue improved by 383 basis points year over year.

This quarter's strong margin performance underscores the success of our strategy of moving into high value-added government services through our security and intelligence acquisitions over the past two years.

Please turn to the next slide.

In the fourth quarter, our EBITDA margin increased 47 basis points year over year to 11.6%, continuing our long-term trend of margin improvement.

Our focus on operational efficiencies and improving project margins improved our overall profitability.

Our FY '11 and full year EBITDA margin was 10.1%.

Over the past three years, we have increased our EBITDA margin by approximately 150 basis points.

As we have previously stated, over the next four years, we aim to further improve our EBITDA margin to at least 12% of net service revenue.

The key drivers of our margin expansion will be an increasing mix shift through higher margin services, resulting from our strategic investments.

We will also benefit from operational efficiencies, as our acquired businesses integrate into the AECOM platform.

Please turn to the next slide.

At the end of the fourth quarter, our balance sheet was strong with $457 million in cash and cash equivalents, and $1.2 billion of debt.

During the fourth quarter, we increased our revolving credit facility from $600 million to $1 billion, and extended the maturity until 2016.

More recently, we renewed and expanded our term loan from $600 million to $750 million, giving us additional liquidity and increased flexibility to execute our growth strategy, and further demonstrating the market's confidence in our financial strength and business model.

At September 30, we had $917 million in unused capacity under our new credit facility.

Our current leverage ratio is 1.3 times net debt to EBITDA, below our target leverage ratio of 1.5 to 2 times EBITDA.

In August, we announced a $200 million stock buyback program.

We have already executed and accelerated buyback for the first $100 million.

Our share repurchase program is consistent with our capital allocation strategy of focusing our resources on the highest return opportunities, and reflects the confidence we have in our long-term outlook.

Looking ahead, we will continue to evaluate strategic acquisitions, investments in organic growth, and share buybacks as part of our balanced growth strategy.

Now turning to cash flow, I'm pleased to report that our cash from operations during the quarter improved to $262 million, up $147 million from last year.

Improving our cash flow has been one of our top priorities, and these improvements reflect the successful execution of our working capital initiatives.

As you may recall, several quarters back we laid out a plan to improve our DSOs, and we have made solid progress.

In the fourth quarter, our net DSOs improved by five days from the third quarter.

Our PTS DSOs improved three days sequentially, and are now at the lowest level in eight quarters.

MSS DSOs improved 14 days sequentially, as we collected $55 million on the large US government contract that we mentioned last quarter.

Our free cash flow for the year, excluding items related to our deferred compensation plan termination, was $202 million, which represents a $112 million increase from fiscal year 2010.

These are very solid results, despite the remaining AERs still outstanding from one US government closeout contract, which we expect to collect this year.

Our goal is to generate free cash flow that consistently exceeds net income, and we expect to achieve this in fiscal 2012.

Please turn to the next slide.

New business wins in the fourth quarter totaled $2 billion.

We closed the quarter with backlog of $15.6 billion, a 6% increase over the fourth quarter of last year.

Organic backlog increased by 3% year over year.

Our backlog was impacted by a $150 million in unfavorable foreign exchange moves in the quarter, which have since been largely reversed.

Our backlog does not include IDIQ's or backlog from unconsolidated joint ventures.

Including these, our potential book of business is in excess of $30 billion.

Our solid book of business underpins our increased confidence in our long-term outlook.

Please turn to the next slide.

Now I'd like to provide our initial outlook for fiscal 2012.

Based on our results for fiscal 2011, our outlook for continued growth, and our current book of business, we expect diluted earnings per share in the range of $2.45 to $2.65 for fiscal 2012.

The mid-point of this guidance range implies a 9% year-over-year growth, and the high-end implies a 14% year-over-year growth in earnings per share on a GAAP basis.

Our guidance assumes the following.

$24 million in amortization expenses related to acquired intangible assets.

$75 million in depreciation expense.

Interest expense of $43 million.

A diluted share count of 116 million shares, which only reflects the first $100 million stock buyback.

A tax rate of 29%, including minority interest in pre-tax income.

And finally, stable foreign exchange rates.

A few additional thoughts on our guidance.

And I'll begin with seasonality.

Consistent with prior years, our business is seasonal, and we typically realized 20% of our full-year earnings in the first quarter of our fiscal year.

This year, we also have to consider that the first quarter last year included Libya, which makes for a more challenging comparison.

While this year we face a higher tax rate in the implementation of our European restructuring plan during the quarter, as the year progresses, we do anticipate our European business to benefit from these restructuring initiatives.

While there are a number of tailwinds going into 2012, we also have a few headwinds, such as a 240 basis point higher tax rate.

We feel very confident about where we are today compared to last year.

Before turning the call over to John, I'd like to say that we are pleased with our results for the fourth quarter and the progress we made in FY '11.

We are entering FY 2012 in stronger position, with improved organic growth, cash flow, margins, and financial flexibility.

With that, I would now like to turn the call back to John.

John, please go ahead.

Thank you, Mike.

Please turn to slide 10.

I direct your attention to the center chart.

As you know, AECOM's source of revenue is derived from both public and private clients in over 100 countries around the world.

As we've repeatedly stated, this diversification has enabled us to continue to grow.

For instance, in spite of economic conditions in the United States over the past couple of years, we have continued to strengthen our position in the US market, which is the world's largest infrastructure market.

At the same time, our international markets have expanded rapidly, taking advantage of strong growth opportunities, and making investments in both acquisitive and organic growth.

I'll begin with the United States, which is our largest market.

For the past four years, since our first earnings call, we have discussed with you how we have continuously executed well in this market.

In fiscal year 2011, we won over $4 billion in new awards in the United States, which is up 54% year over year.

In the United States, we have three distinct types of clients and sources of funding.

Namely, private clients, US government, and state and local agencies.

Now let me draw your attention to the US private sector, which is represented in our top left corner.

Today, the US private sector accounts for 21% of our business.

We have grown our private practice over the past several years by leveraging our global technical expertise and international platform to service clients, as well as multi-national clients both in the US and around the globe.

Such clients include hospitality, oil and gas, industrial, technology, and commercial real estate.

Of this market, approximately 40% is in commercial buildings, predominantly large metropolitan areas such as New York, Boston, Chicago, and Washington, DC, which are among the strongest commercial real estate markets in the country.

Because of AECOM's significant presence throughout the United States, and our position in these key markets, we are poised to capitalize on the rebounding commercial construction market.

In addition, we also see renewed activity in other key private markets, such as healthcare, energy, and industrial projects.

Turning to our US federal government market, which is depicted in the lower right-hand corner.

This market accounts for 20% of our revenue, and is well diversified across multiple agencies and departments, working both in and outside of the United States.

We provide a full spectrum of services, ranging from planning, design, and facilities management.

Over the past two years, we have strategically shifted our US federal work to higher growth and higher margin services, such as cyber security and intelligence, which also reflects a shift in the DOD spending.

These areas are considered mission-critical, and are less vulnerable to funding pressures.

As I mentioned, we also support the US government abroad in its overseas contingency operations, in missions in Iraq, Afghanistan, and Kuwait.

As we withdraw our troops from Iraq and Afghanistan over the next few years, it is anticipated services will be needed and shifted to provide support for US military assets, located both in the United States and abroad.

Please turn your attention to the US state and local markets, which is reflected in the bottom center exhibit.

This market comprises 17% of our revenues, and includes state and local governments as well as public agencies and authorities.

Although we have presence throughout the United States, most of our revenue is generated in five key states, which accounts for over 40% of the total state and local infrastructure spending in the United States.

The important take away is that the majority of our revenue in these states is derived from dedicated funding sources and user fees.

For example, in the past three months, the Port Authority of New York and New Jersey approved a 56% increase in tolls over five years to fund $15 billion in capital improvements.

In Los Angeles, a $40 billion transit program is being funded by 0.5% increase in sales tax, and in Dallas, a light rail project expansion is supported by a 1% sales tax increase.

Probably the most significant change in funding, which has occurred over the past four years, is the acceptance by state and local governments to use public-private partnerships is a procurement vehicle to resolve infrastructure funding issues.

We are seeing continued momentum in P3 funding projects.

AECOM is currently pursuing eight P3 opportunities, with a total contract value greater than $15 billion, six of which will be decided this fiscal year.

This is compared to last year, when we were pursuing only two.

P3 funding is also developing for social infrastructure projects, such as schools, hospitals, and correctional facilities.

The P3 market represents an exciting opportunity for AECOM to blend its expertise across our planning, environment, transportation, and construction services.

Now moving on to our non-US business, which represents 50% of our net service revenue.

As part of our diversified, balanced growth strategy, we have focused on expanding our public and private non-US markets in high growth, emerging, and natural resource-rich markets.

These markets delivered double-digit growth in FY '11.

In the most recent quarter, Asia Pacific remains an important growth driver, with organic growth in excess of 20% once again.

The non-US public sector, which is depicted in the top right corner, comprises the largest portion of our non-US business and represents one-quarter of our revenue.

Our largest markets are Asia Pacific and Canada, but we are seeing growth opportunities in the emerging markets of Africa, India, Eastern Europe, and Latin America.

In the non-US regions, infrastructure investments are being funded by strong oil and gas and mining economies.

AECOM now has a footprint in each of the brick countries, from which we look to expand our local delivery capabilities.

Let's look at individual regions.

First, India is a key priority in our expansion strategy.

With a population of more than 1 billion people, and a GDP growth of 8%, India plans to make considerable infrastructure and social infrastructure investments over the next five years.

We continue to make investments and inroads in this important growth market.

In June, we finalized the acquisition of Spectral Services, a green building design firm, which strengthens our position in India.

Now moving to the Middle East.

While Abu Dhabi and the broader UAE remain a significant strategic market for us, we see a shift in growth opportunities to Saudi Arabia and Qatar.

For example, last month the Qatar government forecasted spending $150 billion on infrastructure projects over the next five years, as it prepares for the 2022 World Cup.

AECOM is uniquely qualified to capitalize on this trend, and just last month we launched a worldwide sports group to facilitate the collaboration of our global sports expertise to capture these new opportunities.

Currently, we are managing the construction of the Lusail light rail system, and our program managers for the new Doha Port, the largest green-field port project in the world.

In China, we are seeing a migration of economic development inland to Western cities.

In addition to major infrastructure projects, China is also investing in social infrastructure, commercial, and mixed-use development.

Our strength in the Chinese market is facilitated by an agile business model, which is adapting to these changing trends.

All in all, the demand is strong and the project financing is available.

Turning to Australia, we see a shift from highway and bridge to transit and social infrastructure projects, and we continue to win opportunities across the public client spectrum.

We see substantial growth on the horizon by focusing on these priority sectors and utilizing our integrated platform to serve our clients.

Latin America is another focal point of our expansion strategy.

Our recent Rio de Janeiro Olympics master plan win, and transportation wins in Brazil bode well for our growth strategy.

In addition, we are pursuing several M&A opportunities in the region.

Turning to our non-US private sector, which accounts for 17% of our business, and is represented in the lower left-hand corner, we see an increase in activity in each of our key geographies, and across our market sectors, including commercial buildings, industrial, and energy and mining projects.

In markets such as Australia, Canada, and Africa, growing demand for commodities is fueling significant new opportunities for AECOM.

For instance, we are currently working on several large mining projects in Australia, Africa, and Canada.

Our integrated global platform positions us well as we support our multi-national clients, utilizing technical expertise from around the world.

In addition, AECOM is working for several multi-national clients on social infrastructure projects in sports, education, culture, and commercial facilities in Eastern Europe, Russia, Asia, and the Middle East.

Hopefully, this tour of AECOM around the globe provides you a good sense and a comfort level for the diversity and security of the funding sources behind our projects, and gives you a comfort level that AECOM is in markets where funding for infrastructure projects remains strong.

Please turn to the next slide.

Now looking ahead to fiscal year 2012.

We expect 2012 will present many new opportunities for AECOM.

Although there will be ongoing head winds, and new challenges as the global economy continues to recover, we look to the future focused on a specific short list of strategic priorities.

First, as we did in 2011, we continue to implement our strategy of expansion into high growth markets and services.

We will explore and advance new opportunities for growth in Latin America, India, Southeast Asia, and the Middle East.

We will complete the restructuring of our Europe business to maximize our profits in that region, with special attention on high growth markets in Eastern Europe and Russia.

We will continue to focus on improving our cash flow and profitability.

Finally, we will advance key acquisitions, which will support our long-term growth strategy.

We are excited about the future.

We have the right business model, client mix, and diversification of funding sources to deliver sustainable profitable growth and shareholder value in 2012 and beyond.

AECOM remains committed to our long-term annual earnings growth target of 15%.

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

Thank you very much.

Thank you.

(Operator Instructions)

Your first question comes from the line of Steven Fisher from UBS.

Please proceed.

Thanks.

It's UBS.

On the guidance, can you discuss a little bit on what you're assuming for organic growth trends versus other things that may not show up in the revenue growth, like equity income?

Yes.

First of all, welcome, Steve.

Glad to have you on the call.

We are assuming modest single-digit organic growth rates consistent with what we've seen.

We are assuming slight improvements in our operating margins, our EBITDA margins, as well as our gross margins.

And we've built that up.

And then of course, taking into account some of the things that I mentioned earlier, that our headwinds for us, in particular our higher tax rate which -- has about $0.07 headwind impact in FY '12.

Okay.

And I don't think you've typically given a range as wide as $0.20 if I'm remembering correctly.

I was just wondering if you can comment on what are some of the factors in the wider range this time around?

Obviously it's a pretty uncertain world, but I'm curious for your thoughts.

Sure.

When we started off with the guidance back in 2007, we were about $1 of EPS, and we had a $0.10 range.

Now, of course, were at $2.33 of EPS, so proportionally, that range has expanded.

And secondly, it's commensurate with what we see among our peer group for the type of range they are giving, relative as a percentage of their EPS.

Okay.

So there's not anything particularly, like highway legislation, if it comes through that gets you a much bigger upside, or if it doesn't, one way or the other?

No.

I wouldn't read too much into that.

It's just our EPS is 2.5 times the size that it was when we started giving guidance, and proportionally we expanded that range.

Okay.

And just one last one on the buyback.

Just wondering what happened in the fourth quarter.

It sounds like you did the $100 million, but how many shares did that buy back for you?

Was it 2 million?

No.

We, of course, authorized $200 million.

We immediately affected $100 million of that, and we did it under an arrangement with a collar around a price.

We immediately took possession back of 4.3 million shares, and depending on where the VWAP falls during the testing period, we would end up taking possibly another 700,000 or so shares back, when the close out the transaction with BofA.

But right now, we took delivery on 4.3 million shares, and we took it right at the end of the quarter, so you don't see any material impact on our weighted average outstanding shares during the quarter.

Because it was about, what, 118 to 119 going into the quarter?

That's right.

But it's, of course, as you know, under GAAP, you're doing a weighted average outstanding share count during the quarter.

So taking the shares back in at the end of the quarter is not going to have material impact.

So how should we think about the second $100 million?

We will continue to monitor the market.

We are still very bullish on our stock at these prices.

And we will continue to look at buying back additional shares, as we consider all of our other opportunities for cash, whether it's investing in organic growth opportunities, M&A, or stock buyback.

But we still think that the stock is very attractive at the current price.

So that would take down your assumption of $116 million to something lower?

That's right.

Just to be clear, as I stated earlier in the call here, the share count that we've given as an assumption in our guidance range only takes into account the $100 million stock buyback that we already executed.

It does not take into account any additional buybacks which we hope to make.

Okay.

Great.

I'll turn it over.

Thanks.

Thank you.

Your next question comes from Tahira Afzal from Keybanc.

Please proceed.

Good morning, gentlemen, and congratulations.

Nice quarter.

Thank you.

The couple of questions I had was in regards to your commentary on some of the bids you have in the US.

And you mentioned eight projects, in particular, of very large size, of $15 billion.

Could you talk about what your potential scope on those could be?

And then you mentioned there were two at around this time last year, going into 2011, could you comment on the outcome of those?

Did they go -- did they fall they way of some of your competitors, or have they just been pushed out?

The projects you're referring to are the P3 projects that I mentioned in my talk.

And the scope of work will be providing engineering services for the design of the facilities.

In the United States last year, there were two projects, one in Puerto Rico, one in Canada.

And we won the one in Puerto Rico.

We were not successful in Canada.

Really, the take away there is that there is a shift in terms of infrastructure funding from the state and local side into the private side through public-private partnerships.

Which, when you put it all together, it paints a very positive picture, in that there will be continued movement in infrastructure spending in highway and transit construction.

Got it.

That's all I have.

Thank you very much.

Thank you.

Your next question comes from Avram Fisher with BMO Capital Markets.

Good morning.

Thanks for taking my questions.

Okay.

Thank you for calling in.

What do you expect minority interest to be next year?

We don't try to predict our minority expense.

Frankly, as we've explained in the past, we're focused on the economic EBITDA that is delivered from our projects.

And sometimes we're a 49% owner, where it's all coming in a minority, and sometimes where 51% owner of the JV, where it's all coming in on the revenue line, and then we're backing out minority interest.

So we don't try to predict that.

What we try to predict is how much EBITDA we will deliver to the bottom line from the projects we are pursuing, and we're always in negotiations with our joint venture partners.

We prefer to have 51% and 49%, but it doesn't always work out that way.

So unfortunately, we can't give you too much guidance on that.

Okay.

I was just -- your guidance implies EBITDA growth below the 15% range by my estimate.

And I'm wondering if you expect to acquire more into that for the year, or is this just going to be a year where you're a little bit below the trend line, and above the trend line in future years?

Our guidance, the mid-point of our guidance range is a 9% EPS growth, and the top end is 14%.

And so that's a little below the trend line, given that we just completed a year with 14%, and we have modest M&A built into our numbers for the year.

But remembering that in the first year of an M&A first deal, due to the FAS 141 intangible amortization, it generally does not have an accretive or dilutive effect on EPS during the year, as we expanded the size of our M&A.

Can you talk a little bit about why this is a modest M&A year?

Is it a function of capital preservation, is it a function of not a lot of deals out there, integration?

No.

It's, I guess, modest, relative to the $1.2 billion that we did back and '10 and '11 -- in calendar '10, it's modest.

We continue pursue many M&A opportunities, and if we continue to find the right deals at the right prices in the right high-growth emerging markets and natural resource end markets, we would be more than happy to expand that.

We have plenty of capital.

As you heard, we have almost $1 billion of credit capacity at the end of our fiscal year at very attractive rates.

So we are an active and enthusiastic buyer for the right deals.

And finally, any a stab at what the cash EPS could be for 2012?

Well, are you talking about it relative to the M&A discussion, or just relative to -- well, our free cash flow, we would expect to approximate our net income.

And the timing of that?

You're usually back end loaded.

Absolutely.

We would expect for the full FY '12, we would expect our free cash flow to equal net income.

So it will be about equal to EPS.

And you saw this year a much more heavy back loading than in previous years.

We don't expect that much of a back end loading in FY '12.

But we still have the seasonality that we've always had forever.

Okay.

Thanks for taking my questions.

Sure.

Thank you.

Your next question comes from Andy Kaplowitz from Barclays Capital.

Hi, guys.

Good morning.

It's Alan Fleming standing in for Andy today.

Thanks for taking my questions.

Good morning.

I wanted to follow up on a couple of the previous guidance questions.

Contracted backlog has been up sequentially, pretty good rates the last couple quarters, up 31% this quarter.

And the EPS guidance is implying high-single digits to mid-teens growth.

My question is, is that conservatism?

Is there something else we should focus on?

Are you seeing any delays from the government, similar to what you talked about last quarter, and therefore backlog is not converting to revenue as quickly as you might expect?

I think it's a bunch of everything.

One, we have a global economy that is recovering.

We have areas where it has recovered and is going strong, as we had indicated in Asia and Australia.

The Middle East is strong.

We're looking at the recovery in Europe, which we discussed last time in the restructuring, and in the United States.

So we see the market is recovering.

And as we proceed, in the way our revenues are being projected for '12, we're going to accelerate our revenue stream from the first quarter through the fourth quarter.

There is, without a doubt in the United States, there is sluggishness in converting wins into backlog.

But it's just a timing issue, and we are confident that, the way we have our plans set out, that these projects will be converted.

The other issue is that, we had a very, very strong third quarter in terms of our backlog, and when you normalize that, the fourth quarter, even though it shows a slight decrease, it was a very strong quarter in terms of backlog.

The additional thing is, in the fourth quarter, we had organic growth.

And when you have organic growth, you're going to be burning some backlog.

So backlog is something that you have to look at it, not just from quarter to quarter, you need to look at a year over year.

And the trend is positive.

So with all these things happening around the world, and that's why I probably spent too much time speaking about the funding sources, and when you look at the transcript, and you look at the slides, and you start digging into what I said, you will see that, when you look at the globe at AECOM's business, there's a wide variety of things that are occurring.

And what we've tried to get across is that it's not one thing that could be a fatal blow to AECOM, and we feel that by our diversification, including the revenue streams, the funding, the backlog, the wins, we're in a good position to continue to grow in '12 and into '13.

I hope that answers your question.

It was a very good question, but it's not one that I can give you any yes, no, or easy answer.

No.

That's very helpful.

I appreciate that.

Just a follow-up on the sluggishness in the US that you talked about.

How does that compare to what you've seen last quarter, earlier in the year?

Is a better, is it worse, is it about the same?

Let's see, is the sluggishness better?

I don't know what that means.

But we see that projects are moving into backlog faster than they were at the beginning of say, '11.

There is an improvement.

We see there is improvement on the private side, the commercial facility side, the infrastructure side, so we see things are improving.

But it's a snail pace.

But they're all positive signs.

Okay, thanks.

And one quick one on margins.

I know you guys like to focus on EBITDA margins, but net service margins and PTS were quite good this quarter.

And maybe the highest we've seen in a very long time.

You mentioned, in your prepared remarks, that some of that was due to better mix.

Is there anything else there, and is this kind of margin sustainable going forward?

Well, we have of it as you know, this is always our strongest margin quarter.

But the trend line is positive, and the trend line is something that we expect to continue.

As we said last quarter, and you heard me say again earlier today, we do expect our margins to grow to an annualized 12% EBITDA margins over the coming years.

So these margins are good, and especially taking into account the restructuring charges we took in Q4, our margins would be even better, had we not had some of those restructuring charges.

So I think they are sustainable, and will improve.

Okay.

Thanks, guys.

Nice quarter.

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

Davidson.

Hi, good morning.

Morning, John.

Just following up on the restructuring charges in the quarter, it was a full $0.05 that you expected?

No, we had estimated it to be at $0.05, it actually cost us $0.07.

Okay.

Mike, how much will it cost in you in the first quarter?

So although, as you know, when you undertake your restructuring charges, you put up a reserve for the severance, as well as the lease structuring.

But the labor laws in the UK require us to keep those people on during an extended notice period.

So it will cost us a few million dollars in Q1.

Okay.

But that's it, unless something else changes?

Yes.

That's it.

We have fully accrued for all severance costs.

We've accrued for a lease restructuring.

The only thing we would have is an additional quarter of some labor costs, which are $2 million to $3 million.

Okay.

And then just in terms of margins, you commented about improved margins in '12, and I know that acquisitions dilute margins, and you bring down overhead costs.

But could you give us a little more color on the margin trends, the pricing versus changing more international work, versus cutting your overhead.

What's driving the improvements or the trends there?

Especially pricing in the market.

It's all of those, but generally speaking, if you're talking about -- the way we think about pricing internally is we look at the gross margins.

Which is pricing, our EBITDA margins are everything across the board.

Our project margins were improving in Q4.

That would be a correlation to our pricing.

But as you know, John, pricing, especially the public sector, pricing doesn't really change much in good times or bad times.

It stays relatively constant.

And so there are slight improvements in the project margins.

But where we're seeing the real EBITDA margin improvements is occurring by the shift in our product mix.

As we shift more towards CM and PM services, our EBITDA margins are higher.

As we shift in our government sector more towards the intelligence community work and the cyber warfare type work, our margins are much stronger.

And then of course, we continued to squeeze costs out of our system, as we have for many years.

We continue to squeeze costs out of the system and drive more revenue through the overall AECOM platform that is improving those margins.

So it's a little bit of all the things you mentioned, John.

John, let me just add to what Mike said.

What we're not seeing, and which we had seen, maybe, at the beginning of '11, was some price compression by our clients, who were saying, we want to reduce your profit margins.

We're not seeing that.

It's just the reverse.

Our margins are improving, whereas the beginning a year ago, it was everyone's concern that we were going to be squeezed.

But that has not materialized, and we don't see that occurring going forward.

Okay.

And John, if as we all hope, we get more of a rebound in the commercial and private sector, those markets for AECOM, they carry higher margins than the public sector or lower?

Higher margins.

Okay.

And international versus domestic?

They're higher.

As Mike said, except for Europe.

But they're higher in Asia and the Middle East.

Okay.

Great.

Thanks for the color.

Thank you.

Your next question comes from Chase Jacobson from William Blair.

Please proceed.

Good morning.

I just wanted to ask about the organic growth assumption in 2012.

You mentioned modest organic growth.

Your end market commentary was pretty positive, I think, across the board.

You've anniversaried your last large round of acquisitions.

But, we're not really seeing the improvement in organic growth that I would expect to get from all those cross-selling opportunities.

It's kind of just similar to where it's been, and maybe even a little bit lower than '09, '10, and '11.

I was just wondering what the disconnect is there, and when we start to see the benefit of the acquisitions really helping organic growth in the future?

Chase, in the fourth quarter here, we had 7% organic growth, which, given that we're in a zero growth economy, I think that's pretty strong.

We have seen improved organic growth.

We're not -- and FY '10 was almost flat organic growth.

So I think we've weathered this storm quite well, and we're coming back to the organic growth that we all hoped-for.

But we're not going to get immediately back to the 17% organic growth years, like we saw back in 2007.

We're not going to get they're quickly, anyway.

Hopefully we get back there at some point.

But 7% organic growth in the quarter, we feel pretty good about.

Okay, but in terms of next year, when you say modest single digits, is that 3% to 5%, or is that 5% to 7%?

Chase, as you know, we do not provide guidance on specific revenue numbers.

But you see what our EPS guidance range is.

At the mid-point, it's a 9% EPS growth, and you could extrapolate on either side of that, that you'd like.

Okay.

Thanks.

Thank you.

Your next question comes from the line of Andrew Wittmann from Robert W.

Baird.

Please proceed.

Congratulations on making some good cash flow progress in the quarter.

Mike, with some of your commentary on an expected big payout in the fourth calendar quarter, can you just remind us on the size of the potential payout that you're looking at, and what that can do for DSOs in your fiscal first quarter?

This is Steve.

Thanks for joining the call.

And when you say the pay out on the large government contract, as that what you're referring to?

That's right.

We view that as coming in during the year.

We did make some progress on that during the year, collected about $55 million.

But again, regardless, in spite of the headwind of not collecting all of that, Q4 was the largest cash quarter we've had since IPO.

So we're pretty happy about that.

Looking forward, we view, with the collection of that and the general improvement that we're making in our working capital focus on DSOs that we've already shown, and we plan to show in the future, that we'll approximate free net income in terms of free cash flow going forward in FY 12 and beyond.

Okay.

So it sounds like there's still, I'd say, modest DSO improvement potential, and then it will probably stabilize once you get back to cash flow approximately --

Absolutely.

Improvements during the year.

Okay.

And I appreciated the walk around the funding sources.

It sounds like some very good growth areas internationally, particularly in Asia.

We talked about 20% plus growth rates in some areas.

Just to get a flavor of how it is in the developed markets, can you give us a little bit more color on what the public and private sectors are doing, maybe in the US and Europe, specifically, on an organic basis?

Okay.

Europe, when we think about Europe, we look at it in two buckets.

The UK and Western Europe, and then Eastern Europe and Russia.

There's going to be no growth in the UK and Western Europe.

Any growth that we have, and it's going to be modest growth, will be out of Russia or Eastern Europe, places like Turkey.

We're looking at, probably high-single digit, maybe double digit growth in the Middle East.

I mentioned some of the projects that we're working on in the amount of capital spend.

We're anticipating -- because we have a small market in Latin America, the growth is going to be quite significant for us, because we have a long way to go to get up to mid-season form in Latin America.

Canada, Canada will see nice growth.

The mining business, as well as infrastructure business remains strong.

And in the United States, we'll see modest growth.

It's a large market, but it's not going to have, as Mike mentioned, the double digit growth which we had in 2007.

The good news, as I mentioned, we won in the United States $4 billion worth of work.

Over $3.5 billion -- maybe about $3.2 billion, was organic.

When I say organic, it was not from any of the acquisitions that we made.

And so it shows really nice growth potential for us here in the United States.

Are we being cautious?

Yes we are being cautious.

There are some really great opportunities, but at the same time, we still question what's going to happen after November with Congress, and some of the spending, and that's why I wanted to take time looking at the funding sources from the US government's perspective, to give our investors an indication of where some of this funding is coming from, so when you listen to the news, or you read the paper on what's happening in Washington, you can put it in a proper perspective in terms of what that means for AECOM.

Is that helpful?

Yes.

Just maybe a little bit of color -- that's very hopeful on the outlook.

In the current quarter that was just reported, I'm curious as to what the organic US growth rate is, just for the quarter.

I don't know if we want to go into breaking it down by country, but we did not -- in FY '11, we were flattish in the US organically.

All right.

I'll leave it there.

Thank you.

Thank you.

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

Please proceed.

Hi.

Just a quick question on new awards.

If I compute new awards, it seems that they fell off pretty dramatically this quarter.

Can you comment on that?

We had $2 billion of wins in the quarter.

What you're looking at is, you're probably comparing sequential backlog, I'm assuming, although our backlog was up 6% year over year, sequentially it was down a bit.

And that was driven by a couple of things.

First of all, we had $150 million foreign exchange currency conversion issue in our backlog at the year end.

We reset our backlog at the end of every quarter, based on existing FX rates.

So we had a one of $150 million decrement.

Now the good news is that has entirely reversed itself in the current quarter.

Next is that Q3 was a very large win quarter.

We had 18% organic growth our backlog year over year in Q3.

And we said at the time, that was unusually high number.

So when you get to Q4, obviously, you start to normalize that a little bit.

So the bottom line, year over year, organically up 3% on the backlog, $2 billion in wins.

Put in that context, we feel pretty good about that number.

Right.

But $2 billion would still be less than running per quarter average that I compute that at $2.5 billion.

Are you seeing orders just being weaker in the fourth quarter?

Is this just seasonality?

We had $2 billion of revenue in the quarter, and $2 billion of wins.

So you have got a book-to-burn of 1, which is pretty good, considering that you're going to have some lumpiness.

And you had a much higher book-to-burn ratio in Q3, so you've got to normalize all the quarters, because you will have lumpiness due to the large nature of our contracts.

Our business, when we look at wins and backlog, as I mentioned earlier, it's helpful to look at it on a yearly basis.

You'll drive yourself crazy if you look at it from quarter to quarter.

Things could just --

Right.

What's the trailing four quarter average of new awards?

I'm seeing $2.5 billion.

Is that not correct?

Do you have those numbers?

I can follow up off-line.

Yes.

You're including -- again, we talked about it, you had an 18% growth in Q3 alone.

So if you're trying to average that big large number, if you have the numbers, it is what it is.

I'm just trying to explain that a $2 billion win in Q4 was pretty good, especially following the kind of wins that we had in Q3, that was an 18% growth.

Right.

My next question is on the ABI.

The ABI, historically, has been a good leading indicator for private non-res here in the US How do you kind of reconcile what you're seeing with the weakness in the ABI?

Thank you.

Listen.

ABI is a macro number, right?

ABI, the last time it dropped below 50, the time of before that it was above 50.

So, by quarter to quarter, we spiked above the 50 confidence level, and then dropped below in the last quarter.

However, that's a macro number across the entire US, and when we look at our private sector commercial construction business, which is most correlated to ABI, you need to look at the markets in which we participate.

And we don't participate across all the markets.

As you heard John mention in his comments earlier, that we are most predominant in that space in New York, Boston, Chicago, and Washington, DC.

And if you look in those markets, those are some very strong markets for construction.

The vacancy rates in both New York and Washington, DC are at, not an all-time high, but pretty high, which is driving some of the commercial construction.

So again, the ABI numbers, on a macro basis, are a little bit misleading.

We focus more on some of those other indicators relevant to the markets in which we participate.

Okay.

Thank you.

(Operator Instructions) Adam Thalhimer from BB&T Capital Markets.

Close enough.

Good morning, guys.

Most of my questions have been answered.

I just wondered, what was the actual net DSO number in the quarter?

The net DSO number was 88, Adam.

And remind me, what is your goal?

I think you've given an actual goal for and net DSOs.

We think that to get down to pre-recessionary levels, 80 is a reasonable goal for us.

And how much cash does one day generate?

About $25 million.

Great.

Thanks very much.

At this time, I show we have no further questions.

I'd like to turn the call back over to Management for closing remarks.

I want to thank everyone for joining our call today and showing an interest in AECOM.

If there are any questions you have, please contact us, and we can provide you with some of the answers.

So if no one has any other questions, will see you in 3 months.

Have a good holidays, whichever holidays you celebrate, and we'll see you then.

Thank you very much.

Thank you.

Ladies and gentlemen, thank you very much for your participation in today's conference call.

You may now disconnect.

Have a wonderful day.