AECOM (ACM) 2014 Q1 法說會逐字稿

Good morning and welcome to the AECOM first-quarter 2014 earnings conference call.

I would like to inform all participants that this call is being recorded at the request of AECOM.

This broadcast is copyrighted property of AECOM.

Any rebroadcast of this information in whole or in part without prior written permission of AECOM is prohibited.

As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com.

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

I would like to turn the call over to Paul Cyril, Senior Vice President, Investor Relations.

Thank you, operator.

Good morning.

I'd like to 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.

Our actual results might differ materially from these projections in these forward-looking statements.

Please refer to our press release or on page 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.

Note that we are using certain non-GAAP financial measure as references in the presentation.

The appropriate GAAP financial reconciliations are posted on our website.

Please also note that all percentages refer to year-over-year progress.

We will start today's presentation on page 4. Beginning today's presentation is John Dionisio, Chairman and Chief Executive Officer.

John?

Thank you, Paul.

Welcome, everyone, to AECOM's first-quarter 2014 earnings conference call.

Joining me on today's call are Mike Burke, our president and next CEO, and Steve Kadenacy, our chief financial officer.

First, on behalf of myself and the entire AECOM Board, I'd like to say how delighted we are that Mike will be taking on the role of CEO in March.

Mike's promotion to CEO is part of a long-standing management succession plan.

I know Mike is well-prepared and he will do a great job taking the company to the next level.

Mike is the right person for the job.

He and his leadership team are well-prepared to meet the challenges and capitalize on the opportunities ahead for AECOM.

I will remain as Executive Chairman for one year through March of 2015 to ensure that we have a smooth transition.

During that time, I will provide Mike with assistance in key areas and assignments where my experience and relationships can be of benefit to AECOM.

On March of 2015, I will retire as an employee and remain on the Board through the end of my current term in March of 2016 when I will be up for reelection.

With that, I would like to now turn the call over to Mike and Steve who will take you through our prepared comments and the Q&A session.

Steve?

Thanks, John.

Please turn to slide 5. Our results for the quarter were varied across our geographies.

Some continue to show strong growth while others remain challenged.

We experienced declines in revenue in our design business in the Americas and in Australia, which were the primary drivers for our lower net service revenue.

Mike will walk you through the actions we are taking to strengthen these businesses.

On the growth side, we continue to see strong performance in the Middle East, Europe and Asia and across our global construction business.

On a positive note, wins of $3.7 billion and backlog of $18.4 billion were at record levels.

We are very encouraged by these new wins, particularly in the MSS segment across our global construction business and in large civil and social infrastructure projects in Asia and in the Middle East.

Operating income was $90 million, up 46 percent and our operating margin of 7.9 percent was up 288 basis points.

These results benefited from a significant gain in equity earnings from the increase in value of our AECOM Arabia joint venture.

This gain validates our Saudi Arabian strategy and the value created by the joint venture that has blossomed into an integrated multi-service business capable of delivering very large infrastructure programs.

Our tax rate for the quarter was 29.4 percent.

Net income was $56 million, a 48 percent increase and earnings per share for the quarter was $0.58.

Excluding the non-recurring items in equity earnings and the tax-related impact, our EPS was $0.37.

Please turn to slide 6. Looking at PTS, as I mentioned, the results for the quarter were a mixture of very strong performance and areas of weakness resulting in flat organic gross revenue on a constant currency basis.

While net service revenue was down 4 percent overall, organic net service revenue was up nearly 10 percent in Europe, the Middle East and Africa, and we also delivered solid growth in Asia and in construction services globally.

On the other hand, our Americas design and Australia businesses remain challenged.

Excluding Australia, net service revenue was flat.

Please turn to slide 7. Moving to MSS, our results reflect the effective execution of our strategy to diversify our revenue sources and migrate towards higher-margin business.

The increase in wins and margin demonstrates that we are well-positioned for continued growth and success.

As expected, we experienced a decline in revenue as we wind down less profitable projects.

Operating income more than doubled during the quarter and operating margins almost tripled.

The margins benefited from a gain on a project.

And, excluding the gain, our MSS margins still improved.

I would also like to point out that our backlog does not include approximately $700 million of new wins that occurred since the close of the quarter.

In total, we have booked over $1.6 billion of new MSS work during the past two months.

Please turn to slide 9. Turning to EBITDA margin, cash flow and balance sheet.

In the quarter, we generated an EBITDA margin of 9.7 percent, up 288 basis points.

Excluding the non-recurring items and equity earnings, EBITDA margins were up 7 basis points.

We remain focused on the long-term drivers that will lead to improved EBITDA margins, namely hard cost savings initiatives, improved utilization and project margins.

Examples of hard cost savings include real estate, from which we expect to achieve $38 million of run rate savings by fiscal 2015 and the rollout of eProcurement, which is expected to realize $15 million of run rate savings by fiscal 2016.

Please turn to slide 10.

During the quarter, we generated $117 million of free cash flow, or 206 percent of our net income, reflecting our continued focus on cash conversion.

Looking ahead, we are well on our way towards our goal of delivering between $1.3 and $1.8 billion in cumulative free cash flow from fiscal 2013 through 2017.

We invested $25 million to repurchase 800,000 additional shares in the quarter, bringing our total shares repurchased to over 27 million shares, or 23 percent of the total outstanding shares since we announced the share repurchase program in 2011.

Please turn to slide 11.

Our balance sheet remains strong with $876 million in undrawn borrowing capacity and net debt to EBITDA of 1.1 times.

We also successfully refinanced our revolver in January, which will extend the term of our facility and lower our cost of funds.

We will continue to execute our capital allocation strategy, which includes investing in organic growth initiatives; making strategic acquisitions that will strengthen our competitive position by either adding to the portfolio of services that we offer or expanding our geographic reach; and opportunistically repurchasing AECOM shares.

Please turn to slide 12.

This brings me to guidance for fiscal 2014.

For the year, we are increasing our EPS guidance to the range of $2.50 to $2.60.

This updated range includes the benefit of non-recurring items in equity earnings less additional FX headwinds due to the strengthening of the U.S. dollar.

The midpoint of this range assumes flat net service revenue and slightly improving EBITDA margin.

We expect our second-quarter earnings to be approximately 15 percent of our full-year EPS forecast.

For the year, we expect a tax rate of 29 percent.

We are assuming a diluted share count of 98 million, which reflects no share repurchases after the end of the first quarter.

We are also assuming D&A of $95 million for the year and we are targeting free cash flow to approximate net income.

And now I'd like to turn the call over to Mike who will provide an update on our vision and strategy, and highlights from our geographies.

Mike?

Thanks, Steve.

Today, I am going to talk about how we are going to build on our very strong foundation to position AECOM as the world's premier, fully integrated infrastructure firm.

Then I will provide you with an update on our key markets and our most important strategic priorities.

Please turn to slide 13.

First, I want to make sure that everyone understands the value of a fully integrated infrastructure firm, what it is and why it is important.

Integrated delivery means that we can deliver on all four components of the infrastructure asset lifecycle anywhere in the world -- design, build, finance and operate.

This vision is driven by the need to meet evolving client needs for an integrated solution and differentiates AECOM from the competition.

Under the integrated delivery model, our clients benefit from increased speed to market, the time it takes from project conception to completion.

They also benefit from the ability to work with a single source provider of a broad array of services.

In today's environment, many of our multinational private clients are rationalizing their vendors to gain economies of scale and cost savings by focusing on a few key relationships.

This trend plays to our strength as an end-to-end provider of a complete set of integrated E&C services with a global footprint.

Therefore, through our integrated delivery platform, we are able to create a highly compelling and differentiated offering that clearly distinguishes AECOM from our competitors.

It is a value proposition that helps us reduce business development costs by combining sales cycles for multiple offering and leads to higher margins as we transition to being the partner of choice for our large clients who require an integrated delivery platform.

Now I am going to talk about the four components of our integrated delivery solution.

Please turn to slide 15.

Design is often the engine that drives the process.

Our strong global reputation in this area gives us a tremendous competitive advantage in being invited to bid on some of the world's most prestigious projects.

We are today the largest engineering design firm in the world and we will continue to have clients who will purchase design-only services.

We will continue to invest in being the best design firm in the world, which includes further leveraging our high-value design centers in places like Spain, India and China.

The world-class build capabilities in our construction services business have enabled us to win $3.3 billion in construction services work over the past 12 months.

That being said, today, only $2 billion of our total revenue is from construction management.

Looking to the future, we are focused on becoming as widely recognized for our construction service capabilities as we are for our design services today.

We recognize that we will need to continue to invest in building our capabilities in this area and that will be a key part of our M&A activity going forward.

From a financing perspective, over $900 million in projects are underway as a result of investments made by AECOM Capital, including high-rise residential projects in New York and Los Angeles.

Our criteria for selecting projects for funding through AECOM Capital is based not only on investment returns, but also on our participation in the design and/or construction of the project, making AECOM Capital a vehicle that directly plays into our integrated-delivery model.

We are delighted with our progress and the opportunities ahead for us and we will eventually launch a second fund, which will include capital from third-party investors.

On the operations side, we are very focused on diversifying into non-Department of Defense agencies, foreign governments and the private sector.

While we have historically provided operations and management services to the U.S. government, we are now pursuing several large projects with Middle Eastern governments.

Our recent wins in this space support the success that we are having in executing this strategy.

All told, we believe that we are well on our way to building out our global integrated delivery platform and establishing a differentiating competitive advantage for AECOM, one that we are uniquely able to provide.

Now for an update on developments in our key geographies and markets.

Please turn to slide 16.

The performance of our Americas design business has been below our expectations.

During the quarter, we experienced a decline in revenues and margins driven by weaker backlog and bookings.

We are focused on turning this performance around and are taking the following actions.

First, we are leveraging the integrated delivery model to help drive more revenue.

Our key account management program is at the core of this strategy.

Second, we are continuing to manage overhead costs and drive performance incentives down to the project level to ensure strong project performance and client satisfaction.

And third, we are evaluating key roles in the business to ensure that we are executing accordingly.

From a funding perspective, in the U.S., we are encouraged by the resolution of the federal budget and its expected impact on the elimination of budget uncertainty that contributed to a logjam for pending projects.

As we've said in the past, we saw contraction in awards that was disproportionate with the budget reductions.

Therefore, we expected to see an eventual resumption of projects being awarded.

As I will discuss within the context of our MSS segment, this has begun at the federal level and we expect to see this trend continue at the state and local levels.

The new budget also includes additional funding for infrastructure programs under the TIGER grant program and for the Corps of Engineers.

In addition to the positive impact of a U.S. federal budget agreement, we see clear signs of resurgence in commercial construction activity, particularly in major cities such as New York, Chicago, L.A. and San Francisco.

For instance, in New York, the construction spend is expected to be $37 billion in 2014, just shy of the 2007 peak.

In downtown Los Angeles, there are over half a dozen major developments being planned and several more in the pipeline, including an AECOM Capital project that will develop almost 1,500 high-rise residential units.

Driving some of this activity is an increase in foreign investment in U.S. real estate.

For example, Chinese investments in U.S. commercial real estate soared to approximately $6 billion in 2013, a six-fold increase over 2011 and 2012 combined.

We are pursuing over $7 billion of such projects and were recently selected to provide program management and construction management for phase 1 of the China-based Greenland Group's Metropolis development, a $1-billion project in downtown Los Angeles.

We are also in conversations with a number of other Chinese investment groups about construction management opportunities.

Our ability to take advantage of these opportunities is strengthened by our significant and long-standing presence in China where we have key relationships with major clients and have earned a trusted advisor reputation based on the performance of our 6,000 employees in China.

As Steve noted, in the MSS segment, we are continuing to see improvements in our margins.

The contracts that were recently won will enable us to resume top-line growth in our government services business and to do so more profitably.

In fiscal 2014 to date, including wins recorded in January, we have won contracts totaling $1.6 billion giving us confidence that our diversification strategy is working and that we have a more sustainable business model for our MSS business.

All this should translate into some very positive results for this segment going forward.

Turning to Europe, the Middle East and Africa, our European businesses continue to perform well.

For example, the U.K. commercial construction market ended 2013 on a high note with activity rising at the fastest pace since 2007.

Our business is up 9 percent in the UK and up over 40 percent in Eastern Europe.

We are expanding in the Middle East to meet the large social and civil infrastructure demand being generated in the region, including Saudi Arabia, Qatar and the U.A.E.

More than $500 billion of CapEx investments are planned in the Middle East over the next several years in our key end markets of infrastructure, health care and education.

In Asia-Pacific, we continue to experience momentum across the region with the exception of Australia.

We are cautiously optimistic about the new Australian government's plans for an economic stimulus program to improve the country's infrastructure.

China and Southeast Asia continue to grow nicely and we estimate the annual infrastructure spend for this region to be around $2 trillion over the next several years.

Our recent acquisitions have performed well, contributed to our growth and strengthened our regional capabilities.

We have a long history and a significant presence both in mainland China and Hong Kong and we are now building out our footprint in the emerging markets across Southeast Asia.

As we look to the future, I am excited about the possibilities that our integrated model holds.

At the same time, I know that strong and consistent execution is critical to making it a reality.

So before we open up the call to questions, I'd like to provide a brief overview of key areas where we need to do better and where we feel we are executing well.

Please turn to the next slide.

I will begin with the areas where we are most focused on driving improvements.

First, our highest priority is to stabilize our business in Australia and strengthen our design operations in the Americas.

As I've previously mentioned, this will entail improving our go-to-market strategy while continuing to control costs in these geographies.

Second, while we have made progress in increasing our EBITDA margins, this remains a key priority as we are committed to our goal of generating EBITDA margins of 12 percent over time.

We will continue to focus on the key drivers of margin enhancement — expense reductions, improved utilization and enhanced project margins.

Following our model for success in improving cash flow, we have implemented rigorous programs for each one of these initiatives and we will take a disciplined approach to measuring progress against them.

Now let me summarize the positive indicators in our business.

First, I am very encouraged by the $3.7 billion in wins that we had for the quarter, many of which are very large and strategic in that they support our integrated delivery model.

These wins enhance backlog invisibility — giving us increased confidence in the future and our return to organic growth.

Second, I am pleased with the significant improvements that we have made in driving cash flow.

We've posted our seventh consecutive quarter of free cash flow in excess of net income.

Clearly our focus on cash conversion is working.

Third, we are seeing signs of growth in existing markets and opportunities in new markets.

I believe that we are well-positioned to participate in a long-awaited rebound of North America, Europe and the Middle East and continued growth in Asia.

Our successful joint venture in Saudi Arabia is an example of how we recognize the market opportunity, invested in our capabilities and now have a thriving business able to deliver large-scale, world-class projects.

While there is work to be done, we are confident in the future.

We have taken action to drive improvements and optimize our ability to execute more quickly in better alignment with our markets.

We look forward to updating you on our progress for the remainder of 2014.

With that I would like to open the line for questions.

Operator, please open the line.

(Operator Instructions).

John Rogers, D.A. Davidson.

Hi, good morning.

Good morning.

A couple of things.

First of all, in terms of your outlook for the rest of 2013 -- excuse me -- fiscal 2014, what specifically are you assuming for the foreign exchange impact?

John, we had about $0.07 of FX headwinds for the full year.

All right.

And Stephen, you are just assuming the exchange rates stay where they are the rest of the year then?

That's right.

We are not forecasting any movements.

Okay.

And then just in terms of the EBITDA margin goal of 12 percent, can you give us an update on how far away we are from that, Mike, relative to being a fully integrated model?

Is that still the right way to think -- is the right alignment of the goal there?

John, there is obviously a number of components that I think Steve has explained his thinking on that in the past, but maybe, Steve, do you want to give a current update on where we are heading in terms of the margin?

Yes, I mean we continue to make progress on the cost side, but that cost savings that we has been taking out has been masked by lower revenue, which is offsetting our progress.

We still think that is the right number in the long run despite mix changes and I think that Mike can comment on this that the movement to a more integrated model actually helps us not only from driving the top line, but also reducing some of the SG&A or selling time that was required to get the projects in the door.

So it is still a target, but we don't have a timeframe on it.

Okay.

And then just last thing if I could.

I don't know, Mike or John, either of you could just comment on pricing in the market.

John, pricing is difficult to generalize on that because we are in so many varied end markets and varied geographies.

But pricing ---- U.S. public sector pricing doesn't change very much at all in good times and bad times.

The private sector market is heating up and so we are starting to see better margins in that space than we did from the low points.

But as we grow in places like the Middle East, the margins have always been challenged in the Middle East, but the volume is large and so the projects are bigger there than anywhere else in the world, but the margins are a little thinner.

Europe, as you heard me mention in the comments, Europe is coming back and so pricing power starts to come back slowly.

I am not suggesting that pricing power is dramatically coming back, but I'd say pricing power around the world is somewhat steady except for private sector U.S. where we are seeing the greatest demand and therefore the best pricing power.

So are the margins in your new bookings better than what is in your existing backlog or comparable?

I'd say they are comparable, John, is the best way to think about it.

It depends on the sector.

The biggest difference is in MSS, and that has been part of our strategy -- you've heard us talk about that in the past few quarters where we have been strategically repositioning our work away from the high volume, low margin Department of Defense work into the higher margin projects that we are doing now for the intelligence community and other agencies.

And so, as you've seen in our results, significantly improved margins in that space.

I would also add, John, on the PTS side of the business, significant wins in the construction management space tends to have higher NSR margins as well.

Yes.

Okay, okay.

Thank you and congratulations on the quarter.

Thank you.

Andrew Kaplowitz, Barclays.

Good morning, guys.

Good morning.

Mike or Steve, I think a fairly obvious question as you guide Q2 to 15 percent of your year, so maybe you could talk about that.

I mean I think your average seasonality is at least 20 percent.

So do you have more restructuring costs in 2Q or did something else go on?

Why is the year more back-end loaded?

Well, the reason, I guess, from a sequential quarter standpoint is we won't have the AECOM Arabia pickup or the specific project gain within MSS.

Those are being -- so those are two offsets, but we have PTS business that we expect to ramp back up.

Other than that, we expect the Americas design business and Australia to ramp up through the year.

So we have a little bit more of severance and restructuring costs in Australia, but not too much.

So that is the big bullet points on that front.

Steve, maybe you could tell us how much restructuring was in your quarter in Australia.

I mean your margin was pretty low in the quarter if I take -- I assume the Arabian gain was in that margin.

So if you take that out, our math came out to around 6 percent margin.

So was there -- how much restructuring was in that number and what is the outlook as we go forward there around the PTS margin in particular?

The PTS margin, the math is accurate.

There was $7 million of restructuring in Australia during the quarter.

We expect that to be somewhere between $10 and $12 million for the full year now at current exchange rates.

Okay.

And then maybe if we could just step back, you didn't change really any of your primary assumptions for your FY14 guidance, but you started the year with a pretty significant total MSR decline contrasted with pretty strong awards, especially in the awarded backlog.

So how do we look at the year?

Do you think it is easier or more difficult to make the middle of your revenue range after 1Q's results?

I don't know that we want to give too much guidance within guidance, Andy.

I think we feel comfortable with the guidance range that we gave.

And based on all the assumptions that Steve made, the big change after you pull out the one-time gains, the big change is FX as we began (inaudible) the Canadian dollar and the Aussie dollar.

But taking those numbers out, we are still in the range that we were in and we still feel good about that range.

But trying to get too much tighter within a $0.10 range is probably a little too difficult.

That's fine.

Thanks, guys.

Thank you.

Tahira Afzal, KeyBanc.

Thank you very much.

Congratulations on the strong bookings.

Thank you.

First question is just a follow-up on the strong bookings that you do have.

Could you give us an idea of the milestones we should be looking out for that would give some confidence that those are now ready to convert and really contribute to the top line?

Because it seems that is one of your highest book-to-bills for a long time.

I would assume that it could potentially help your NSR really inflect notably at some point.

So any guidance on what kind of milestones we should look for, whether those be macro or otherwise?

I don't think there are macro milestones that we could point to that would answer that question Tahira, but there are a few items to note within that.

First of all, we obviously are very happy about the wins.

We had a great quarter on wins.

We felt really good about the wins in the MSS segment.

You heard us talk previously about the budgetary gridlock in Washington and we felt that the dropoff in awards was more dramatic than the dropoff in the budget, so we were waiting for that logjam to break through.

And obviously it broke through in the quarter, further broke through with another $700 million of wins in January in that segment.

So we are seeing that logjam breakthrough, first at the federal level due to the federal budget being finalized.

We hope to see that as a milestone that will portend well for the rest of our domestic business here as the federal budget now has created some clarity.

At the federal level, we are hoping that that clarity now cascades down into the state and municipal level.

So that is, let's call it a catalyst versus a milestone, but a catalyst to start bringing more clarity down through the rest of the domestic civil infrastructure market.

With regard to the other large portion of our wins, we have, as I mentioned earlier, we have seen a very nice pickup in the private sector in the U.S. So the U.S. private sector is doing well, but much of the opportunity in that sector, much of the wins in that sector is large-scale construction projects that are delivered over a longer period of time.

And so, although those wins look great, you don't see -- you are not going to see that revenue popping in Q2.

It will start to ramp up, but they are much longer-dated projects, which we like the longer-dated projects; it gives us a lot more visibility over the coming years, but it doesn't create an immediate catalyst on a 90-day basis to revenue.

Got it.

I hope that is helpful.

That actually is very helpful.

Thank you.

And I just had a slight follow-up on that answer.

Given it cautiously ramps up, I would assume you are going to cautiously manage your personnel and assets into that uptake and could it be that -- could there be a chance that if we do see a better inflection than you are thinking in the near term, let's say over the next six months or so, that that could benefit your utilization rates perhaps a little more than you anticipate?

So we could, in essence, end up seeing a nice margin uptick if inflection is stronger?

Well, clearly if the inflection is stronger, there will be upside to our results, but we still feel good about the guidance that Steve mentioned earlier.

But if that inflection happens sooner, there would be upside to our numbers.

I think you've heard Steve talk about it in the past, that both when we gave guidance last quarter and now, is that we have some fairly conservative assumptions in that guidance with relatively flat NSR growth, organic growth throughout the year.

If that comes back faster than the end of the year, there is upside to the guidance.

Got it.

Thank you very much.

Steven Fisher, UBS.

Hi, good morning.

Just a couple of clarifications first.

What was the organic net service revenue growth in PTS in the quarter year-over-year?

4.3 percent on a constant currency basis.

Okay.

And I think it is important just to give one more bit of clarity to that, it is important to point out that if you exclude Australia from that, you get to a flat constant currency organic growth.

So that shortfall is due to -- primarily due to Australia.

Okay.

And then did the JV consolidation add to backlog and if so, how much?

It's about $200 million to backlog.

Is that right, Steve?

That's right.

Okay.

And then I guess in terms of the Australian market, it doesn't sound like anything has changed your view of that market over the last couple of months, but I guess I am wondering do you have any perspective on when you anticipate that will bottom and how you think that infrastructure stimulus program will develop?

I'd like to think it's at the bottom.

I spent some time two weeks ago with our leadership team from Australia and they feel like it is at the bottom.

They feel like activity is starting to come back to the market.

I don't personally expect to see a recovery there in this fiscal year, but I don't expect us to have a decline from last year either on an EBIT basis.

But their stimulus program is much talked about and hopefully they will have more success with their stimulus program than we had here in the U.S. in getting it to the right projects where we can participate.

But, listen, Australia is a strong -- has the strong fundamentals of the market.

They have got very great depth in natural resources; they always have, it has always been a strong part of their economy, and I think it just got a little overheated and the air came out of the balloon, but the fundamentals are still there for a strong market; and especially with the Australian dollar coming back to a little more reasonable levels, I think that will portend well for infrastructure investment certainly in the mining sector.

Okay.

And then just lastly, cash flow was pretty high for Q1 versus your normal seasonality.

I am not sure if I missed it, but what was driving that seasonality and then what is going to make it a little bit softer seasonally in the rest of the year or is that just conservatism at this point?

Well, it is typically a cash burn quarter for us, so we continue to make fundamental progress on DSO improvements despite an increasing mix shift into higher DSO environment, so in one day overall improvement, if you account for the mix shift, it was actually two days.

So the fundamentals are getting better, but we do tend to burn cash for a number of reasons in Q1 for seasonality and there are some temporary impacts in that number that drove it above our -- well above our net income for the quarter.

So, I think some of that will even out during the year as we have been trying to do for the last couple years is try and drive a more consistent cash flow throughout the year and this is kind of representative of that.

Okay, thanks.

Adam Thalhimer, BB&T Capital Markets.

Hey, good morning guys.

Nice quarter.

Thank you.

The MSS project gain you had in the quarter, can you quantify that?

Yes, it is -- net of all the expenses associated with it, it was less than $10 million.

Got it.

And then, I guess people have asked this question a couple ways, but all of the wins, including in January in the MSS segment, does that give you some confidence that the gross revenue level you achieved in the December quarter is probably near the low point?

Listen, I wouldn't be as focused as much on the gross revenue.

As you know, that business has declined from a gross revenue perspective, but the margins are up significantly.

Even if you strip out the one-time project gain, margins are still up very nicely in that space.

And so, part of our strategy was to reposition that business.

As you know, going back a few years ago, we had 80 percent of our business was Department of Defense-related work.

Almost all of it was OCONUS work in Afghanistan and Iraq.

Obviously, we saw that drawdown coming and we have been repositioning our business away from the high volume, low margin work in OCONUS DOD more towards the intelligence community, stateside work and actually focusing on the Department of Defense strategy with a tilt to the Pacific.

We have been focusing our business development activities in that area.

So right now, we are looking at a business that went from 80 percent in the war effort, in the war theater, to a business that by FY15 will have single-digit exposure to the war effort.

So a couple things are going on.

One, an enormous repositioning of our business in that space and these wins are taking us all in the right direction to reposition that business into these new longer-term sustainable areas of the US federal government that don't have the wins of the scaleup and rapid drawdown like we see in the war effort.

So the revenue is off 20 plus percent from the peak.

We don't expect to recover that real quickly.

We are focused on keeping that revenue at the level that it is at, but improving the margin significantly and that is exactly what we are doing.

So that strategy has been working and the specific wins that we had in both December and January were exactly a hit on the strategy that we had deployed to focus on long-term contracts in the intelligence community that aren't subject to big budgetary swings.

Okay, that's helpful.

And lastly from me, I just wanted -- you sounded pretty positive on U.S. commercial construction from the private sector.

Obviously, we have been getting a lot of questions about the ABI, which dipped in the last couple months.

I mean is that an aberration in your view?

Yes, I think it is.

I mean I saw the same dipped numbers in ABI, which I mean that seemed like everybody got stirred up quickly on that number.

But that is not -- we are not seeing that in the marketplace.

And so I'm not sure how the ABI calculates their numbers, but we are seeing more activity in the private sector than we've seen in a long time.

You heard me mention earlier in my comments that the New York construction market is just below its 2007 peak.

And so in the major markets, in private sector construction, it is hotter than it has ever been.

Miami is back at peak levels again.

There is more construction cranes in Los Angeles than there has been in 10 years and like I said, New York is just shy of the peak.

So all the touchpoints that we have are very positive.

I mentioned the amount of capital that is coming into the private sector market from the Chinese developers is quite significant and we stand to participate in that influx of Chinese capital because of our strong foundation and relationships in China.

Okay, great.

Thanks, Mike.

Sure.

Justin Hauke, Robert W. Baird.

Yes, hi.

Good morning, guys.

I guess my question is, I am just trying to understand how the $3.7 billion in gross revenue awards compares to kind of historically how you have reported awards.

And the reason why I ask that is you mentioned the mix shift to more construction management that has more of a gross content.

Also just kind of the pickup of all this government work that was logjammed.

I guess I am just trying to understand how comparable is that awards number to kind of historically how you have reported it?

There is no difference in how we have reported it.

I'm not sure I completely understand the question, Justin.

I guess the question is, on a net revenue basis, would the growth in backlog be comparable to the growth in gross revenue?

Yes, it probably wouldn't be exactly comparable.

The more construction wins you have, you've got some pass-through costs in that.

So I wouldn't call it exactly comparable, but difficult to parse out when we are looking at numbers this big.

It depends on the particular project.

Okay.

And then I guess my other question, just more of a clarification on the guidance, but you did note in the guidance that you now assume margins are up slightly year-over-year at the midpoint and previously it was flat.

I guess the question is, is that just a function of this one-time gain from the JV consolidation or is your operating guidance actually assuming that margins improve year-over-year as well?

Well, the gain definitely impacts those and drives it up farther, but, on a core basis, we haven't changed our assumptions.

We are effectively assuming our EBITDA margin consolidated are flat.

Okay, great.

Thank you very much.

Thank you.

Chase Jacobson, William Blair.

Hi, this is Paul Dircks in for Chase.

How are you guys this morning?

Terrific.

Good, just following up on a couple questions that were asked previously.

First of all, in MSS, obviously, the reported backlog was up considerably sequentially, but given the fact that MSS's contracted backlog was down 14 percent sequentially and continues to trend downward, when should we expect some of that pickup in profitability certainly on the gross margin line in MSS?

Well, listen, we just won -- some of these were won a week before the end of the quarter, so you are going to have movements from awarded to contracted, etc., and then, of course, we mentioned the big win that we had in January also will first go into awarded and then move to contracted.

So that is the natural progression of big wins first of all.

But in terms of the improved profitability, our profit will be slightly up this year over last year, which frankly we are happy with because of the repositioning.

When you are trying to reposition your business with the Iraq business disappearing and the Afghanistan work disappearing, if you go back a year ago, we had 65 percent of our revenue in that space was in Afghanistan.

So obviously, that is coming down.

So we feel good about this repositioning and the wins that we are getting in this new space, but I wouldn't expect this to be a dramatic pickup in profitability in FY14.

This is more of a repositioning for the future.

But profits will be up slightly for FY14.

Okay, great.

That is helpful color.

Steve, for you, was there any factoring in the quarter and, if so, what was its impact both on gross and net basis?

Gross was $66 million or so; on a net basis was less than $10 million.

Okay, great.

And with the JV and the consolidation of AECOM Arabia, how long have you guys been considering this consolidation and maybe you could talk about some of the specific benefits that it gives AECOM now?

I don't know if it is how long we have been considering it.

It came about through the renegotiation of our operating agreement with our joint venture partner there, which goes back many, many years, which increased the level of operating control that we have and that triggered the accounting rules for us to consolidate it.

I think a couple of things that it does for us on a macro basis is it gives you on the street and our investors a lot more clarity into the revenue backlog of that JV and the growth rates that you will see there.

And that is a business that has just been growing terrifically for us in large infrastructure projects over the last few years.

So I think that is kind of the positive of it and we intend to spend more time with it as we go, and the operating agreement allows us to bring it into our systems and processes.

We have put it on our Oracle system so that we can manage that business like we manage the rest of our business and integrate it into the integrated delivery model like the rest of our business and it is responding quite well to that.

That's helpful.

And a final question from me.

Mike, with you taking over as CEO next month, maybe you could talk a little bit about AECOM Capital, in particular obviously $900 million plus of projects have come from AECOM Capital investments.

Could you talk about furthering that strategy and how we can get comfortable perhaps with some of the other risks or execution issues that could come about from the AECOM Capital model?

Yes, sure.

So our first year into this endeavor, we are delighted with the success that we've had.

We have been able to access many more projects than we thought we would in the first year and generate significant projects for our design and construction business at the same time.

Each of these projects that we are involved in we are always at least a 50-50 partner with a very seasoned developer and you will see some of the deals that we have announced previously.

We are partnered with Toll Brothers, one of the largest developers in the United States.

We are partnered with Mack Urban and the Mack family out of New York, that is one of the more significant developers in New York.

So on each of these, to mitigate our risk, we are partnered with very, very strong developers.

Secondly, on all of these projects, we are the contractor.

So we are building the projects, so we feel comfortable that since we are building the projects, we've got control over the costs associated with it.

But from a long-term strategy perspective, we do not anticipate deploying our own capital and using our own balance sheet to grow this business.

The markets that we participate in and we desire to participate in are so large that our balance sheet cannot and will not support the amount of projects that we would like to pursue.

So over the long term, our strategy is to bring in outside capital.

We have a large number of outside capital providers that are very interested in putting their capital into AECOM Capital to deploy to our clients.

So we see ourselves going forward as much more of a fund manager and facilitator of capital to bring to our clients.

Our clients are looking for us to bring the integrated solution to them.

They want us to design it, build it, finance it and operate the asset.

And they are indifferent whether the capital is coming off of our balance sheet or we are facilitating the flow of that capital from an institutional investor.

So over the long term we anticipate being a large provider of capital, but not off our own balance sheet.

Very helpful color.

Thanks, guys.

Sure.

Sameer Rathod, Macquarie.

Hello, thanks for taking my questions.

I think you talked about how projects were being delayed last year due to uncertainty with the budget and what have you.

And I would expect some sort of buildup is being released.

I guess my question is how much more of last year's delays still need to be awarded or when do you expect order rates from the government to normalize?

That is the $64,000 question.

We saw it just in the past two months, at least on a couple very sizable projects for us in the federal government sector breakthrough.

We said on our last earnings call, we saw a disproportionate slowdown in awards.

We know what the federal budgets are, we know what we are targeting, but the awards were just not coming out.

And then all of a sudden, in a four, five-week period, we won $1.3 billion of wins from the federal government.

So that budgetary -- the finalization of the federal budget allowed those numbers to break through.

But now we are hoping that that moves down to the state and municipal level where we will start to see the awards coming out and start to see that converting to NSR.

So that is on the U.S. side.

But where we are seeing very good conversion is in the strong markets, Asia, Middle East and Europe.

You heard us talk about the double-digit growth in the backlog across Europe, especially in Eastern Europe, the Middle East and Asia.

And so those markets are converting much more quickly and we are cautiously optimistic about the long-awaited breakthrough in the U.S. civil infrastructure market.

But, we hope that that is in the near future, because if we can build on that growth in addition to the growth we are seeing in Asia, Middle East and Europe, all the cylinders start to fire at the same time.

Great.

I guess post-taper, there seems like a handful of emerging markets had to tighten perhaps prematurely to defend currencies.

Do you see higher rates being a headwind to construction globally next year or how do you think this plays out?

It depends on the size of the rate increases, right?

Right now, rates at an all-time low clearly help the private development market, but if they move up modestly, as everyone expects, I don't see it being a big deterrent.

But if they ever did move dramatically, obviously that would be a macroeconomic condition that would not be in favor of global construction spend.

But we are not anticipating that kind of movement.

Oh, okay.

I guess, lastly, it seems like the average repurchase price of the stock was $31.25.

However, if I look at the stock price during your first quarter, it seems like the stock was well below this price for the majority of the quarter.

So can you talk about the cadence of repurchase or how it is implemented?

Well, our general philosophy is to buy it on an opportunistic basis against other capital investment opportunities.

For the first quarter, we tend to burn cash throughout the quarter, which is why we slowed down the repurchases during the quarter, for really no other reason.

Okay, thanks.

Okay, well, thank you.

And it looks like there are no further questions.

So thank you, operator, and I would like to thank all of you participating on the call today and I look forward to providing you updates on our progress over the course of the year.

So thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.