AECOM (ACM) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 AECOM Technology Corporation earnings conference call.

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

Later we will be conducting a question and answer session.

(Operator instructions)

Today's event is being recorded for replay purposes.

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

Paul Cyril, SVP of Investor Relations.

Please go ahead sir.

Thank you.

Please turn to Slide number 2.

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 these projected forward-looking statements.

Please refer to our press release or Slide 2 of our earnings presentation and to our reports filed with the SEC for more information on the specific risk factors that could cause actual results to differ materially.

Important information about our earnings is posted to the investor website investors.aecom.com.

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

Note that we are using some non-GAAP financial measures as references in the presentation.

The appropriate GAAP financial reconciliations are posted on our website as well.

Finally, a replay of today's call will be posted to the website at around noon Eastern Time and will remain there for approximately two weeks.

Please turn to slide number three.

Beginning today's call and presentation is John M.

Dionisio, Chairman and CEO.

John, please go ahead.

Thank you, Paul.

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

Here with me today are Mike Burke, our President; Steve Kadenacy, our CFO; and Jane Chmielinski our COO.

After my introduction, I will hand it over to Steve, who will review our financial results.

Mike will cover our outlook, future book of business, and capital allocation strategy.

And I will discuss our markets.

We have several objectives on our call today.

First is to provide you with an overview of our quarterly financial performance and the drivers behind the performance.

Second, we will reaffirm our 2012 earnings per share guidance range, and we will set forth our plan on how we will achieve the $2.45 to $2.65 range this year.

And then we are going to update you on our most important operating initiatives driving new growth and momentum inside our business.

We will then begin the question and answer session.

With that, I would like to turn the call over to Steve for a review of the quarter.

Steve, please go ahead.

Thanks, John.

Please turn to Slide 4.

We reported earnings per share of $0.42 for the first quarter.

As we noted in our fourth quarter call, this quarter would be lighter than our historical average in terms of percentage of annual earnings.

Discrete items impacting the quarter were, specifically, our European transition costs and certain unrecoverable costs on two MSS projects; one that is now -- it is completed and another that is scheduled to be completed in the second quarter.

In addition, you may recall that in the first quarter of 2011 our Libya project was still active and a positive contributor.

Further, we benefited from the R&D tax credit extension in the U.S.

during that quarter.

The balance of the difference was driven by non-operating items and 7% underlying growth in the business.

Our first quarter gross revenue increased 5% over last year to $2 billion and net service revenue increased just over 1% year-over-year.

On an organic basis, gross revenue increased 4% driven by increased construction management activity, while organic net service revenue was up 0.4% year-over-year.

Our total organic net service revenue grew 1.4% on a constant currency basis excluding the impact of Libya.

We continue to see strength internationally, in geographies such as Asia, Australia, Canada and Latin America, and in our private sector business of commercial construction, environmental management and energy.

On the other hand, Western Europe remains challenged.

However, we anticipate that our restructuring efforts will reap benefits in the second half of the year, and we are seeing increased opportunities in this geography, including recent sizable wins that are not yet reflected in the backlog.

We also won $2.2 billion in new work during the quarter for a book-to-burn ratio of 1.1, and our backlog increased 2% from the prior year to $15.8 billion.

Please turn to Slide 5.

We would also like to highlight the cash flow performance in the quarter.

Our cash flow from operations improved by $173 million year-over-year.

This represents our best first quarter cash flow in five years and builds upon our record cash flow achieved in the fourth quarter.

Our PTS DSOs came down by three days year-over-year.

In total, our cash and cash equivalents increased by 20% year-over-year to $507 million, and our leverage ratio declined to 1.4 versus 1.7 in the prior year.

We continue to focus on cash flow as a key measure of operational performance, and we are on track to achieve our full-year target for free cash flow as a percentage of net income.

Please turn to Slide 6.

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

Gross revenue increased by 15% year-over-year driven by an uptick in commercial construction activity in North America.

Net service revenue increased 1% from last year to $1.1 billion.

Organic net service revenue rose 0.4% year-over-year and increased 2% on a constant currency basis excluding Libya.

Operating income in the PTS segment decreased 5% over last year to $87 million, while operating margins fell by 52 basis points year-over-year.

Our margins were negatively impacted by the European transition costs in the current period and by the absence of contributions from Libya, which benefited the first quarter of 2011.

Excluding Libya and the aforementioned European costs, our PTS margins improved by 20 basis points year-over-year.

Our management support services segment accounted for 11% of our first 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 38% year-over-year, while net service revenue increased 1% year-over-year.

MSS segment operating income decreased by $10 million from last year to $12 million.

And operating margins, as a percentage of gross revenue, were 61 basis points below last year.

Operating income was negatively impacted in the quarter by $6 million in unrecoverable costs on two projects.

The factors that led to these losses were unique to each of the contracts and do not have a bearing on the rest of the work we perform for the U.S.

government.

Excluding these project costs, our MSS margins on gross revenue would have increased 180 basis points year-over-year.

Also, the speed of the Iraq draw-down impacted our first quarter results more than anticipated.

We now have little further exposure in Iraq.

Please turn to Slide 7.

Our EBITDA margin in the quarter was 8.4%.

The margins reflect discrete items we already mentioned, and we view this as a temporary dip against the backdrop of otherwise strong margins.

Because of that, we are reiterating our commitment to achieve our long-term goal of 12% EBITDA margins by 2015.

We intend to accomplish this through continued diversification into higher-margin services, such as program and construction management, and Mike will speak further to this point when he discusses our M&A strategy later in the presentation.

We will also continue to drive savings from our scale; this includes areas such as shared services and high-value design centers as well as real estate consolidations.

Capitalizing on these efficiencies also expands our internal collaboration opportunities and improves our overall financial performance.

Now let me turn the call over to Mike.

Thank you, Steve.

Please turn to Slide 8.

Our backlog provides us with good visibility on the remainder of the year and we are reiterating our 2012 earnings per share guidance range of $2.45 to $2.65.

We will drive toward this goal by executing on the margin initiatives we just discussed and achieving strong organic growth in our fastest expanding markets of Asia, Australia, power, energy and mining as well as construction management.

While we expect second quarter earnings per share to be similar to the first quarter, we are confident in our visibility to the second half of the year as we see an increasing conversion of backlog to revenue.

This confidence level is driven by several factors.

First, our successful European restructuring has resulted in a dramatic operational improvement, including over $300 million in new wins in January alone, which is a significant acceleration for this business.

Next, and more importantly, we have almost $16 billion in backlog with specific implementation schedules that provide us with a very strong view of the second half of the year.

Please turn to Slide 9.

Now I would like to spend some time on our future growth, which is underpinned by a solid book of business, flexible balance sheet, and new business momentum.

In our last quarter, we had wins of $2.2 billion for a book-to-burn ratio of 1.1.

We have been consistently adding to our backlog and have also achieved a book-to-burn ratio of 1.1 on a trailing 12-month basis.

We closed the quarter with backlog of $15.8 billion, a 2% organic increase over the first quarter of last year.

In addition, our backlog was strong in both segments, bolstered by an 8% year-over-year PTS backlog growth, excluding the impact of Libya.

The PTS growth came from multiple areas, including a 100% increase in our energy sector wins, taking us to a record energy backlog.

In MSS we were successful on the $900 million global contingency IDIQ for the U.S.

government during the quarter, which joins our portfolio of over 100 other IDIQ contracts.

On a factored basis, our IDIQs equate to an estimated $12 billion in additional pipeline opportunities.

We also had strong PTS performance in U.S.

government wins.

As you may know, a transition is occurring in the Middle East today as the U.S.

military gradually shifts mission responsibilities to the Department of State.

In the first quarter, we won a $177 million contract supporting USAID development efforts in Afghanistan.

In sum, our solid book of business underpins our increased confidence in both the second half of 2012 and our long-term outlook.

Please turn to Slide 10.

We have a number of ongoing initiatives to help drive the next wave of growth at AECOM.

These investments are enabled by our strong cash flow and liquidity.

Let me make some comments on how we are driving this within AECOM's financial framework and the levers we have available to optimize financial performance.

First, we believe that maintaining a consistent investment program across all economic cycles is the best way to create growth and shareholder returns.

We continue to make organic investments in key growth geographies, such as Qatar and Saudi Arabia, and specialty end markets like sporting events and oil and gas.

We expect significant capital expenditures to be made in our markets, and we are positioning to capitalize on these opportunities.

In addition to geography-specific investments that John will discuss, we are also investing in specialty service offerings to target high-growth sectors that fit well with our global platform and integrated services.

For instance, last year we formed a global sports group to capture our share of the $20 billion in annual CapEx that is driven by major international sporting events.

We are leveraging our recent Brazil Olympics master plan assignment to expand our other practice areas.

Our second lever is M&A; we are constantly evaluating acquisition opportunities where we project the returns and growth profile will be attractive for AECOM and its shareholders.

Our primary focus is on the emerging markets as well as power, energy and mining sectors where we see the most attractive opportunities and higher margins.

We currently have several prospects in advanced negotiations that, if successfully completed, will significantly expand our footprint in those areas.

Lastly, we continue to invest in underlying value of AECOM shares.

Our share repurchases accelerated in the first quarter.

The first $100 million tranche is largely complete, and we have bought back about $10 million thus far on the second $100 million tranche.

Now let me hand the call over to John who will discuss our market opportunities.

Thank you, Mike.

Diversification has been a hallmark of our business model, particularly over the past decade as we have worked diligently to increase our exposure to rapidly growing markets.

Now let me spend a few minutes discussing some of the highlights during the quarter from across our diversified platform.

Our Asia Pacific business remains strong with continued double-digit organic growth throughout the region.

A growing pipeline of opportunities across Asia, which includes Hong Kong, China, India, and Southeast Asia, is reflected in our book-to-burn ratio of over 2.0 in the first quarter as we won over $270 million of new work.

In Australia, we have expanded our service offering to better service clients and capture a greater share of mining CapEx.

This expansion combined with our transportation and facilities business has fueled 67% growth in backlog from a year ago.

In addition we continue to evaluate potential M&A candidates in the region that can enhance our collective growth.

We are also benefiting from the surge of investment in the natural resources markets in our Americas geography, specifically in Latin America and Canada.

Our environmental management business is typically an early indicator of private sector investments as permits and planning precede development.

This increased activity has resulted in a record environmental management backlog up over 80% year-over-year.

The commercial construction market is also beginning to improve in concert with a loosening of the credit market.

A great example of this is our recent program management win on the $4 billion Hudson Yards project on New York's West Side.

This is the most transformative project in New York City in over a generation.

We are also seeing a resurgence in the water market, where we recorded a book-to-burn ratio of 1.6 in the first quarter with wins of over $240 million.

Our transportation business continues to be solid with activities across all our market sectors.

This was reflected by key wins during the quarter in transit and rail in the United States in cities like Dallas, New Orleans and Honolulu.

In addition, we have recently become more optimistic that we will finally get a new transportation bill based on current activity on Capitol Hill.

And we are also encouraged by the increased activity in P3 funding as well as projects funded by user fees and tolls.

At the U.S.

federal level, we see strong prospects in environmental management, USAID international development and performance-based energy efficiency contracts.

As Mike mentioned earlier, in the Middle East, we are seeing positive signs of growth and a shift from the UAE market to other geographies.

For example, Saudi Arabia is investing roughly $400 billion in infrastructure over the next few years.

Locally, we have a platform of roughly 1,000 people, and we regularly utilize out-of-kingdom resources to optimize our project delivery.

Recently we won a major health care project that will utilize the full breadth of our services; an opportunity we would not have had just a few years ago.

In neighboring Qatar, we are well-positioned for the coming $200 billion in capital expenditures; a market we have been active in for decades and are currently program managers for the New Doha Port, the largest greenfield port project in the world.

Similarly, the increased activity in our European business highlighted by January wins that were in excess of the prior two quarters combined is showing signs of a dramatic turnaround.

Looking forward, our growth and diversification strategies are closely aligned to achieve the following future objectives; a revenue mix that is 65% international, with a focus on faster-growing emerging and natural resource-rich markets, and 50% of our business coming from the private sector and significantly increased exposure to power, energy and mining demand.

On that note, I would also like to talk a bit about momentum and specifically the traction we are seeing in our power, energy and mining end markets.

As you know, we've been talking about energy and power opportunities for a while and have been making strategic investments along the way.

Five years ago our energy related projects made up only 3% of our overall business, and it has more than tripled to 10% today.

Overall, 10% is still a small part of our portfolio, but we are seeing increasing opportunities globally in this area.

Let me explain why the opportunities have gained momentum and why AECOM is a partner of choice.

Please turn to Slide 12.

The demand for energy-related infrastructure continues to increase, and, by some estimates, the market will require $1.5 trillion of investment annually.

AECOM's global footprint, network and expertise fit naturally into the growing market, and we are looking at both organic and acquisitive investment opportunities.

We are moving forward in four main areas of this part of our portfolio; mining, oil and gas, renewables, and transmission and distribution.

In mining, 90% of the CapEx is dedicated to the infrastructure outside the mine.

Our mining revenue is up 130% year-over-year, and we are working currently on large projects in West Africa and Australia.

This is a new kind of opportunity for us.

And potential customers are finding increasing value in our integrated platform, our global footprint and our suite of services.

For instance, we are currently working on a large mining project in Africa for an Australian customer and are delivering the work utilizing professionals across multiple geographies including Australia, Europe and North America.

In oil and gas, we have substantial expertise in environmental management services and are translating this into new infrastructure opportunities in and around shale plays.

To capitalize on this opportunity, we have recently established a shale center of excellence.

We have a proven track record of working with the large integrated oil companies, and the project-specific needs of these unconventional plays suit our breadth of services well.

In renewables, we are working on several new hydropower projects in Africa, Latin America, Middle East, Indonesia and North America.

We expect to see an increasing amount of revenue opportunity in renewables as companies look to supplement oil and gas production.

In transmission and distribution, we are rapidly expanding our presence in a market valued at over $100 billion over the next four years in North America alone.

Currently, we are pursuing multiple opportunities in North America, Africa, and Australia.

Our integrated service offering fits well in this industry because of these clients' complex project needs.

In conclusion, we have a strong pipeline of opportunities and expect that the pipeline will continue to grow as we leverage our global platform to expand our service offerings beyond our traditional markets.

Please turn to Slide 13.

We hope you walk away from today's call with a better understanding of how we are executing in an improving economic environment.

We are seeing traction and momentum in key growing markets.

And lastly, we are on track to achieve our full-year guidance and remain committed to our long-term annual earnings growth target of 15%.

With that, I'd like to open the line for questions.

And you may direct your questions either to Mike, Steve, or myself as well as Jane Chmielinski.

Operator, please open the line.

(Operator Instructions)

Andrew Obin with Bank of America Merrill Lynch.

Yes, good morning.

Good morning, Andrew.

Just a question.

Can you give us some more details on cost overruns and MSS segments on two contracts?

We have never really had the issue before.

Our federal contracts --

(Multiple Speakers)

Hello?

Go ahead, Andrew.

Sorry.

So the details on the cost overruns and MSS segments on two contracts -- never really had the issue before.

Are federal contracts getting more competitive?

And how do we really get comfortable it is a one-time issue?

Hi, Andrew, it's Steve.

I will address that question for you.

The two contracts -- I don't think it's a pervasive issue.

The first was a termination for convenience and was really related to the Iraq draw-down.

Terminations for convenience are fairly rare.

This one caught us by surprise.

It caught our client by surprise.

In fact, we had just received increased task orders on this project recently before the termination for convenience.

The result was that we had some demobilization costs that were unrecoverable.

The demob costs are typically recoverable as well so that even is unusual.

It's just a rare case in this situation that they weren't.

The other one was just a fixed price contract, Andrew, that we changed our estimate and the cost to complete and took a write-down.

That's unusual for us, but in this situation, it occurred.

Both are nonrecurring.

Right, but I guess the idea is -- has the government changed the way they sort of deal with you guys in these things?

Or do you think these are truly one-off events never to be seen again?

Or never to be seen for a while, I guess?

Well, Andrew, I don't know if we can say we can never see it again.

But I think the unique thing that we saw here applies to the Middle East, Iraq and Afghanistan.

Nobody, our clients nor I think contractors, realized how quickly they were going to shut down Iraq.

And as Steve mentioned, just a couple of months before they gave us an extra on our contract.

So they increased our contract value.

The other one that Steve mentioned was just poor performance by our team in overrunning the budget.

So we are not seeing a change in the contracts from the federal government.

But as you know, everyone is on pins and needles when you're thinking about what the federal government is going to do in terms of spending.

So another question I have, and I apologize if you missed it, could you give us an update on collection of receivables from the MSS contract closed last quarter?

Sure.

The one you are referring to was the large close out that -- on a project took place over a decade.

That receivable is about the same level.

I believe we said on the Q4 call that we expected collection in Q2 or Q3.

That remains the same.

Terrific.

Thank you very much.

Thank you.

Stephen Fisher with UBS.

Hi, this is Brandon Verblow on for Steve.

My first question relates to the 2012 outlook.

I guess you mentioned that the backlog gives you confidence in 2012.

But what areas do you think you still need to book work to hit your 2012 targets?

Like in which end markets or regions?

The opportunities that we see ahead of us are very positive.

And they've been that way throughout FY '11 and as we see going forward in '12.

The issue that we face is delay in projects starting up and converting from awarded backlog into revenue.

That has been sluggish for some time, and it continues to be sluggish.

But we anticipate, as the market is improving -- and if you look at different indicators, the market is improving, and we see an accelerated conversion of this awarded backlog into revenue in this second half of the year.

Okay.

So it is mainly a matter of how -- at what pace the backlog gets converted rather than still needing to book additional work?

Speaking of additional work, Brandon, I think that's a good point you just made.

Another thing that gives us confidence is we had $2.2 billion of wins in the first quarter alone with a book-to-burn ratio of 1.1.

So clearly, the wins are accelerating.

If we look at our PTS backlog, for instance, excluding the impact of Libya, it grew organically at 8%.

So fairly significant growth on the backlog side.

And then also the European turnaround, that we mentioned earlier in the call, where we implemented our restructuring plan in Q4 and Q1.

We were in a loss-making position in Q1 in Europe, and that business has turned around dramatically now.

We have very high expectations for it in the second half of the year bolstered by the $300 million of wins in Europe alone in January and so -- which you are not seeing in these backlog numbers.

Those are wins that came in during January.

There's a lot of things that are pointing to confidence in the second half of the year.

Okay.

And I guess related to that -- so compared to what your organic growth expectations were three months ago, would you say they've improved better, worse or the same?

I'd say they are a little bit better than they were because now we have confidence based on the wins we saw in Q1.

Looking at --when you see a book-to-burn ratio of 1.1, that gives you a little more confidence than some of the backlog numbers we've seen in previous quarters.

So we feel better than we did three months ago.

Okay.

Thanks, that's helpful.

John Rogers with D.A.

Davidson.

Hi, good morning.

Good morning, John.

Just to follow up a little bit on that is -- I mean, based on your guidance and -- I think Mike you've said you're looking at the second quarter being relatively flat with the first quarter.

I mean it's pretty substantial ramp in the second half of the year.

And I guess I'm wondering, are there specific projects or hurdles that you're looking at to give you a big boost in margins or profitability in the second half?

Or is it just a mix?

That is a good question, John.

First of all, it is important to point out that we have historically had a backend loaded year.

Right?

Right.

We expect to have an uptick in performance.

So historically we have earned 55% of our earnings per share the second half of the year.

So that's historically -- we've always had that upward slope.

What I said was that Q2 will be similar to Q1.

So if you extrapolate that out and just take the midpoint of our guidance range, it implies that instead of having 55% of our earnings per share in the second half we will have 68%.

So --

Yes.

So what drives -- you're spot on to the right issue, John.

What gives us confidence in that increased earnings in the second half of the year?

First of all, just let's look at Europe alone.

Europe alone, we lost money in the first quarter.

We have turned that business around through the restructuring.

We will have a $25 million swing in EBIT from the first half of the year to the second half of the year just in Europe.

So that $25 million swing makes up half of the difference between that 55% and 68% that I mentioned.

That's half of it alone.

Secondly, on the project performance question you asked, as Steve mentioned, the MSS projects -- those two projects contributed to a $6 million loss in the first quarter.

We are not going to see those in the second half of the year.

So that makes up another piece.

And then the third piece that gives us confidence in that movement in the second half of the year is, the point that John made, that we can see our backlog pretty clearly.

We have got good visibility the second half of the year, and we are seeing the work that was a little slow in converting it from the win to the revenue.

We are winning the work; now we just need to convert it into revenue.

That was a little slow in Q1 and right now in Q2.

But we've got good visibility to win those projects, come on line in the second half.

Those are really the three major components that give us that confidence.

Okay.

That helps a lot.

And one other quick thing, you mentioned the share repurchases and I missed those numbers.

Could you tell me what you've bought and where you are in that second half?

Sure.

As you know, we announced an authorization of a $200 million share buyback.

We executed on the first $100 million tranche under an accelerated share repurchase program at the beginning of the fiscal year.

We then have been executing in the open market on the second $100 million dollar tranche.

And as of today, we have bought back about $10 million worth of stock against that second tranche.

Okay.

Great.

Thank you.

You're welcome.

Andy Kaplowitz with Barclays Capital.

Good morning, guys.

Good morning, Andy.

Can you talk about the mix of backlog in the sense that you had awarded backlog, up pretty significantly, and contracted backlog, down a little bit?

And what I'm really getting at too is the private nonresidential markets, like there are large projects out there, are you starting to see any of them actually hit your awarded backlog yet?

You mean hit our contract?

Well, I mean because awarded was up a lot, John, so I'm just -- it doesn't seem like they're hitting contracted, but maybe they're hitting awarded.

As I said from -- for the first caller, the issue is converting our awarded backlog into contracted backlog.

It has been a little bit sluggish.

But specifically on the commercial side -- and mostly in the commercial side, we don't really do much in the residential side at all, we are seeing a pickup on the commercial side.

As I mentioned what -- or I think it was -- Yes, I mentioned in my remarks about the West Side Yards, which is a multi-billion-dollar development program.

We were just awarded the program management.

And we are seeing a lot of that.

The Moynihan Station here in New York; we're doing the construction management.

So we are seeing more spending on the private side -- the private commercial side.

And that's accelerating, and it has been accelerating over the past two quarters.

Okay.

That's fair.

One of the things that we've talked about in the past is -- so you're talking about converting awarded to contracted, and we've also talked about converting backlog to revenue, right?

And so people have talked about a slowing in the emerging markets second half of last year, calendar last year, and through today.

Have you seen any slow down in converting revenue in any of these high-growth areas for you guys?

Do you expect to see any?

Or maybe things are starting to improve already?

Can you give us a lay of the land in places like Asia and other emerging markets?

Yes, sure.

We're not -- we haven't seen a slow down.

If anything, we've seen an acceleration in the Middle East, okay, in Qatar and in Saudi Arabia.

As I've mentioned, the market has moved from the UAE to Saudi and Qatar.

And in Asia, when we look at it, it is a different market.

Hong Kong and China still remain very strong.

And the work is vital work and we are converting it into backlog and into revenue at a very nice pace.

The same thing in Australia.

The place, in terms of emerging markets, that we have seen a slowdown in, in converting the wins that we have into revenue, has been in India.

It is taking a bit longer than we ever anticipated.

But again, the good news is we have the opportunities; the bad news is it is taking a bit longer.

But again, it is not a big part of our market just yet.

And it is not a big part of the revenue that we had in 2012.

Okay.

I hesitate to ask you guys this, but I'll do it anyway.

Libya?

Any chance we're going to see AECOM back in Libya in 2012?

In 2012, I would love to say yes, but I'm not an optimist on Libya.

I mean, I think there a lot of things that need to happen in that country.

We have been in contact with our clients.

We have had people back into Libya to see where we can be helpful to the new government and how we can jump start the project.

But I still think it is several months off before we get any clear direction of which way the government is going.

We've gotten a commitment that the project would go ahead, and we could reinitiate our activities, but we haven't seen anything beyond a commitment.

Just quickly on currency; anything on the currency effect on the backlog this quarter?

Currency effect the backlog year-over-year is dead neutral.

Sequentially too?

Sequentially it is a little bit down.

A little down.

I'm sorry, a little up.

A little up.

A little up?

Yes, it was -- we announced that, you'll remember in the last earnings call, we saw that first tick up right at the beginning of the quarter.

Okay.

Thank you, guys.

Thank you.

Chase Jacobson with William Blair.

Hi.

Good morning.

Hi, Chase.

I just wanted to talk about the acquisitions strategy a little bit.

Which acquisition?

Oh, acquisition strategy.

Okay.

Just in terms of the strategy, yes.

You know you talk a lot about adding services and adding your footprint and how that helps improve your organic growth profile.

But I'm just wondering if you can maybe give us a little bit of color on how you look at these in terms of financial returns?

You know, if we look at your return on capital over the last couple of years, it has come down quite a bit.

And I'm trying to get a sense of what the outlook for that type of returns are?

Yes, our typical target returns, we're looking for 20% ROI on acquisitions.

And the acquisitions, as you've heard us say in the past, Chase, they fall into two categories.

Either we are buying a geographic platform through which we will drive the rest of our service offerings through.

Or we are buying a specialty service that we will drive through the rest of our geographic platform.

So it falls in one of two categories.

The type of opportunities that we are looking at are in markets that we believe present an outsized growth opportunities.

So those are either some of the emerging markets that you've heard us talk about in the past or it is in the power, energy and mining sector that you heard John talk about earlier.

That area for us, it historically was about 3% of our business; it is now up to 10% of our business.

It is the fastest-growing part of our business, and we are interested in continuing to make investments in those higher growth areas from an end market perspective and then from an emerging geographic perspective.

Okay.

And then -- that actually kind of leads into my next question.

You know, given that power and energy and mining are such strong markets, and you do have such a diverse footprint at this point in time, when you go and look at your businesses, is there a potential that you would ever maybe look to exit any of the markets that you're in?

If there's any maybe lower margin businesses or services that you offer now?

Is there any chance down the road that maybe those could be pushed to a different company?

I think that the way we look at it would be maybe not exiting the end market, but we could migrate from providing certain services.

Because of the size that AECOM is and that we -- our appetite and our ability to be successful would tend to go to larger projects, the big mega projects, and we might then not play in the market of the smaller projects.

I mean, that's something we are always considering.

Right now, we see a good play for providing fully integrated services, which goes from planning right through to construction management.

But it is something, Chase, that we are always evaluating, and it really has to be part of our business strategy.

And as we look forward in preparing our strategic plan, we pressure test that all the time to see what makes sense.

Okay.

That's helpful.

Thanks a lot.

Joe Ritchie with Goldman Sachs.

Thank you.

Good morning, everyone.

Good morning, Joe.

So I'm just trying to connect the dots a little bit here.

You've got a nice book to bill this quarter of 1.1.

You've mentioned a hard time converting your awarded backlog want to contracted backlog.

I guess my question is as we are ramping through year, what gives you the confidence that the projects are going to start ramping up in the second half of the year?

And in which end markets are you going to see that specifically?

Joe, what gives us confidence is that we have project teams all over the world looking at our backlog very specifically with the start dates.

So we schedule out, and we have implementation plans scheduled out on our projects that allow us to forecast our revenue and, therefore, forecast our labor needed to deliver on those projects.

We have a fairly robust forecasting process here within the organization, and we can get pretty clear visibility to the next three quarters.

Of course, the closer we are, the higher the degree of clarity.

Is there anything specifically that could derail the timing of those projects moving forward?

There's nothing macro.

Of course, on a one-off basis, there's always a project here or there where the things that slow down within the governmental agency decision-making process.

But there's nothing from a macro perspective that I can see that would impact that.

Joe, just from a different point of view, our revenue is comprised of about 30,000 projects.

So there's not one project, no matter how large it is, if it was stalled or would disappear, would it have a significant impact on our revenue.

And that's why we keep talking about the diversification.

So it's not as -- Asia and Australia are going gangbusters; Middle East is strong.

The good news, and we probably didn't speak enough about it, is Europe.

I mean, for the last year we were telling everyone how tough Europe was, but they've won in one month more than they want in the prior quarter.

That is helpful.

I guess one last question and then I will stop beating a dead horse here.

I guess based on what you already have in your backlog today, do you really need to book much more in order to meet your expectations -- your revenue growth expectations for the year?

Joe, it is not about booking more work to meet the next couple quarters.

We have to be booking $2 billion plus a quarter for the future.

We are booking revenue-- we are out selling work now for 2013.

There's always -- depending on the nature of which end markets, some businesses are quicker book-to-burn, and so you've got to sell work yet to deliver on Q4.

But given the backlog we have and the scheduled-out implementation plans, we feel really good about those numbers.

But we've got to keep booking $2 billion plus a quarter for 2013 and '14 and forward.

Now of course, I add, my question is really more related to 2012.

And I guess one last question for you on the one project that is expected to be completed next quarter.

Could you give us a sense on percentage of completion?

And then is this project going to be moving forward I guess at zero margin?

And if you could provide some kind of impact in next quarter, that would be helpful.

Are you referring to the MSS project?

Yes, that's correct.

That -- it's scheduled to be complete in Q2, and we don't expect any further hits from that project.

Okay.

Thank you very much.

I just want to go back to one question that you asked -- did you think we need to book enough -- any more work for '12.

I think what message that will send to you folks, if we said we're not booking any work in the next quarter -- I mean that would send a major rumble through the investment community.

I mean I think it is key that we always need to be looking at new opportunities as we push for our organic growth.

Okay.

Tahira Afzal with KeyBanc.

Good morning, gentlemen.

Good morning.

First question is in regards to Europe, just digging a little deeper.

You are expecting a $25 million swing in the second half of the fiscal year.

How much of that is really just tied to restructuring and stable environment as you are seeing it right now?

Was this a potential uptick?

So I would love to know your macro assumptions around Europe as this year progresses.

And then number two, you know the strong bookings we've seen in the first month of the year and month of the quarter.

Could you talk about whether that's just coming from general activity levels being up or whether you are gaining some market share or doing something different?

First of all, I will start with the macro assumptions.

We are not building in significant GDP growth in Europe -- either GDP growth or sector growth into our models.

That's not what we are anticipating.

We are anticipating that Europe will be slow.

The big turnaround for us was restructuring our organization to get our cost structure in line with revenue.

That is the biggest part of the turnaround.

When Europe declined a year ago we had to restructure our workforce and we had to restructure our lease commitments.

Those two things happened in Q4 of '11 and Q1 of '12.

That is the single biggest contributor.

Now, moving on to the next point about the wins.

The $300 million of wins that we mentioned were projects that we have been pursuing for quite some time, and we are very delighted about it.

I wouldn't anticipate that you're going to see those kind of wins every month or every quarter.

But we are seeing some really interesting opportunities in Eastern Europe; opportunities in Turkey for a sports stadiums; a significant new high-speed rail line in Europe.

There are opportunities there, so we are starting to see some cracks that are causing some optimism.

But we are not expecting dramatic economic growth.

Got it.

That's helpful.

And just following on to that answer.

You know you talked earlier on in your prepared commentary about really having setting up an internal group that focuses on sports events.

Could you talk about some of the milestones you've set for that group to really see if it is getting traction and what the timing of those could be during this year?

And then just recycling back to Europe.

Could you talk a bit, if possible, about the utilization rates you had within your offices there?

And where do you think they would head as we go into 20 -- you know progress in 2012?

That's a multi-part question, so let me try and take it apart.

The single biggest milestone in the sports end market for us has already been achieved, and that was winning the master plan for the Rio Olympics.

When you look at major sporting events, there's about $20 billion a year that is spent on major sporting events.

And I'm talking about World Cup, Olympics, Commonwealth Games, et cetera.

As you know, we were the master planners for the London Olympics of 2012.

We recently won the master planning work for the Rio Olympics of 2016.

That was a significant milestone because the master planning work -- our hope and our expectation is that, that will lead into all the other work that will surround the enormous amount of money that will be spent around that game.

The 2014 World Cup in Brazil, for instance, we are already working on two of the stadiums that are being built in the country.

There will be many more to be built.

So the milestones are that we schedule out all of these major sporting events over the next -- we're looking out to World Cup 2020.

Or I guess 2018, sorry.

But also looking out too, we are working with two groups on pursuing the bid for Olympics in 2020 already.

So the milestones are pretty far out there and the lead time is very long.

But we have made some nice progress on that.

Hi, Tahira.

This is Steve.

On the utilization side in Europe, it really depends on the type of business that we are doing over there.

In transportation, for instance, we run fairly high and some of our consulting practices run fairly modestly.

But I would -- if you're trying to model the utilization somewhere around 65% to 70% would be right.

Got it.

Thank you very much.

You got it.

Adam Thalhimer with BB&T Capital Markets.

Thanks.

Good morning, guys.

Good morning, Adam.

My first question is on Afghanistan.

It does look -- just reading in paper this morning, they're talking about drawing down combat operations.

I'm just curious whether what happened in Iraq could happen in Afghanistan as well, in terms of the government pulling out faster than expected?

I thought it was interesting in the paper today and what you -- we heard from Panetta yesterday that they made these announcements.

What we've been -- what we see going on in Afghanistan, which is a little bit different than Iraq, is that over the next 12 to 18 months there is going to be a surge in our approach to the region.

And so that -- we are trying to gain a position, I'm speaking about the United States, gain a position so they will be able to pull out by mid-'14.

What we are seeing, right now we have 4,500 people in Afghanistan.

By March of '13 we need to have about 7,800 (Company corrected after the conference call) people.

And we are involved in three types of work.

One is O&M of equipment.

The Humvees; all the repairing them, getting them in good equipment readiness.

I think there's thousands and thousands of pieces of equipment that we are working on.

The second phase is a training program.

Where we support the training and development of Afghanis to take over in the O&M piece that when we leave they can take that over.

And also, we are involved in the training of the government in terms of being prepared to take on services, which the U.S.

contractors and military are undertaking.

Then the third piece is -- now that's with the DOD -- and the third piece is with USAID, where we are supporting the efforts in economic development, trade development and infrastructure development and laying out what the future infrastructure should be.

We see ourselves and we plan that one day we are not going to be there.

Just to give you an idea of when we were at the height, about 60% of our MSS work was in Afghanistan and Iraq.

Now we are about 35%; that's in Afghanistan.

And we are in the process of looking to 2014 when we may be exiting, and we are looking at the federal government and other areas that we want to expand our capabilities.

We continue to do some training of personnel, looking at DOE as an opportunity for us, looking at some of the new programs that the military will be undertaking in other places around the world.

What we are seeing is things should move consistently through about 2014.

Then at that time it will probably minimize, get minimized and we would be out of there probably by 2015.

Okay.

(Multiple Speakers)

Okay, thanks for that, John.

And then just curious whether, given the success you had in the month of January, whether you'd be willing to say that you think backlog growth will accelerate in Q2?

I really don't want to try to make predictions now on Q2.

It is too early; we are month into it.

It is probably too early to start making predictions on quarter-specific wins.

Okay.

Thanks, Mike.

Min Tang-Varner with Morningstar.

Hi.

Good morning, gentlemen.

I have a quick question on your MSS segment.

I know you mentioned that you are looking at some contract mix changes and that's one of the major reasons why the revenue declined substantially.

I'm just curious, going forward, do we also see this revenue line as a typical run rate?

Or do you actually think that the revenue will actually materially pick up in the second half as well?

Are you talking about gross revenue or NSR?

Gross revenue.

The changing mix that you've heard us talking about, and it really relates to John's comments -- where we have had historically, if you go back a few years, we had -- 65% of our work in the MSS segment was in Iraq and Afghanistan.

That work was heavily dependent on outsourced contractors that worked for us, so we had high gross revenue and lower NSR.

Now, as you know, we only have 30% of that MSS segment exposure in Iraq and Afghanistan because we have repositioned our work into the intelligence community and sensitive departments within the U.S.

government here on U.S.

soil.

It is also impacted by our JVs, where we had differing amounts of JV income.

And you see that in the minority interest line on our financial statement.

So you need to model that in also where we're bringing in income that is not hitting the revenue line.

When we look at the business, we are looking at the EBIT delivered both from the top part of the financial statement as well as the minority JV amounts.

So there's a number of moving factors there that, as you are seeing work shifting to more NSR type work, less pass-through cost type work that we saw with our CSA joint venture in the Middle East and, of course, the JV number skews the results.

So in terms of the top line revenue growth going forward, is it fair to say that the top line at least, the gross revenue line, would be [majorily] relying on the PTS segment, while on the MMS side it would mostly coming in from the margin contributions -- I'm sorry, from the gross profit after direct costs line then?

I'm sorry.

I'm not sure I understand your question.

You know, when we are looking at the Company's growth profile on the top line, which you know is your gross revenue, if your PTS revenue is heading downward because you are changing your contracts mix and having actually recoup most of the revenue earnings, either from your JV or from operating outside of the direct cost kind of lines, is it fair to say that your corporate-wide earnings revenue growth would be primarily relying on the PTS segment?

Let me just clarify, the explanation I was giving you was to your question about the MSS segment.

So the JV income, the shifting work in the departments from DOD in the Middle East to state side here, that all related to the MSS segment.

SO let me take your questions separately because now you've added the PTS element into it.

On the PTS side, what I said earlier should give you an indicator of what we can expect from that sector.

In the quarter, excluding the impact of Libya, the PTS backlog grew 8% organically.

Yes.

We had a book to burn ratio of 1.1.

And those are the two best indicators for you to help you to think about a model for revenue growth in the PTS segment.

Okay?

Okay.

So that's -- those are indicators that can point you in the right direction.

Now moving to the MSS segment, which is a very different structure.

You should not be as focused on gross revenue for two reasons.

One, the changing nature of the business, which is moving from a business that had a lot of pass-through costs that are included in gross revenue to a business that is more net service revenue or work that's performed by us directly.

Secondly, what it -- it is not as important in that sector because you have significant JV income, joint venture income, that is coming in.

And so, when we are structuring our deals in our joint venture with our clients, we are looking at the EBIT that it will deliver.

Unfortunately, for you it is difficult to model net service revenue in the MSS segment and even more difficult to model gross revenue.

But if you focus on modeling a growth in the EBIT, that will be the easiest way, or operating income in your lexicon, that will be the easiest way for you to build a model.

Okay.

That's very good.

The other question I have is actually heading back to your M&A comment.

I'm just curious because when -- during 2010 you did quite a few deals and 2011 you -- it got into a bit lull period where you digested all of your acquisitions.

So heading into 2012, do you actually think the deal speed will actually pick up or the size of the transactions will actually pick up?

We're looking at a strong pipeline right now, and we are focusing in on some deals in Latin America, Africa and Asia.

So do you actually think that for the target you are looking at is the pricing very attractive now?

Or do you actually think they're still priced high?

I think it is about the same.

I mean it depends where you go.

In India they start out with a very high price and it depends on your negotiations.

But it hasn't really changed much.

There are no fire sales out there, that's for sure.

Lastly, I just have a -- I'm just curious if you can give us some comments on the margin profiles of these different projects that you are going after, of these sporting events or other public works versus mining and power projects.

Is there a margin differential between these different kinds of projects that you are looking at?

Yes, it is something we have been talking about for a while is changing the nature of the projects that we are pursuing, where the margins are greater.

And so over time, if you have been following our Company for a while, we have been moving more into program management, construction management, and program management is the type of work -- it is certainly in the major sporting event category that has the highest margins.

So we have for quite some time -- over the past several years, we've moved our margins up a couple hundred basis points, and that continuing shift in service offering and markets will drive us towards our 2015 goal of 12% EBITDA margins.

Okay, thank you very much.

You're welcome.

Thank you.

Andrew Wittmann with Robert W Baird.

Hi, guys.

I just had a question on the margins as well.

Adding back the effect of the European restructuring and the MSS contracts, I think it is probably good for somewhere around 50 basis points of EBIT margin I guess.

What are you guys seeing in the business that maybe could help offset that in the way of pricing?

And is there something going on in the pricing environment that might be pressuring margins a little bit?

Andrew, the margins, I think you're right.

On a pro forma basis, if you add back some of those one-time hits, the underlying margins were pretty good.

And we are getting that through a number of ways; the revenue obviously, which is in the pricing side, but also through the margin improvement initiatives that we've talked about, which are in the project performance, the mix of work into higher margin businesses and the scale advantages of driving the larger business through our platform.

Okay.

But just looking at kind of on a sequential basis, and maybe it's not fair because of some seasonality, even adding back some of those charges seem to indicate that there's something else that might be weighing on the margins to the negative side.

And I was looking to capture some of that effect maybe.

Sequentially, I think it is a difficult comparison because we are so seasonal.

And so that comparison I just gave you where we are actually up on a year-over-year basis on a gross revenue margin basis for MSS and on a PTS margin basis on NSR.

Those margins underlying net of the one-time charges are up year-over-year.

Because Q1 is such a low-volume quarter for us, you can't really compare to Q4, which is one of our highest volume quarters.

Okay.

But on a net revenue basis, so even a year ago period, EBITDA margins were 11.7.

Now they are more like 11 if you add back some of those one-timers.

And I guess I'm looking for -- trying to understand the gap there on that kind of 70 basis points differential.

Year ago I have us at 9.65% on EBITDA margin basis.

EBITDA over NSR?

Yes.

Okay.

All right.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's event.

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

I'd like to thank everyone for joining our call today and for your continued interest in AECOM.

If you have any further questions, please feel free to give us a call and we would enjoy speaking with you.

With that, we will be back online in three months.

Take care and thank you.

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

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

Have a great day.