AECOM (ACM) 2015 Q2 法說會逐字稿

Good morning and welcome to AECOM second-quarter 2015 earnings conference call.

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

This broadcast is the copyrighted property of AECOM.

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

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

(Operator Instructions).

I would like to turn the call over to Will Gabrielski, Vice President Investor Relations.

Thank you, operator.

Before reviewing our fiscal 2015 second-quarter results, I would like to direct you to the Safe Harbor statement on page 2 of today's presentation.

Today's discussion contains forward-looking statements based on the environment as we currently see it.

These items may include projections of growth and future profitability.

This outlook includes risk and uncertainties.

Actual results may differ significantly from those projected in today's forward-looking statements.

Please refer to our press release, page 2 of our earnings presentation, and our reports filed with the SEC for more information on the risk factors that could cause our results to differ materially from projections.

Except to the extent required by applicable law, we take no obligation to update any of our forward-looking statements.

We are using certain non-GAAP financial measures as references in the presentation.

The appropriate GAAP financial reconciliations are incorporated into our press release which is posted on our website.

Please also note that the percentages refer to year-over-year progress except where otherwise noted.

Additionally, we may refer to certain metrics on a constant currency basis.

In addition, our discussion of financial results and our outlook will exclude the impact of acquisition and integration related expenses, financing charges in interest expense and the amortization of intangible assets unless otherwise noted.

Please turn to slide three.

Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer.

Mike?

Thank you, Will.

Welcome everyone to our fiscal second-quarter earnings call.

Joining me today is Steve Kadenacy, President and Chief Financial Officer.

I will begin with an overview of AECOM's results for the first quarter.

Then Steve will review our financial performance in greater detail and provide an update on our full-year outlook.

I will conclude with additional remarks on the trends across our diverse business.

Please turn to slide four.

Our second-quarter financial results beat our expectations and the forecast we provided last quarter and we are on track for the full year.

Organic revenue grew nearly 10% at constant currency marking our highest growth rate since 2009.

The result was driven by 62% growth in our Construction Services segment and a return to growth in DCS.

We delivered $4.6 billion of wins and our backlog grew to nearly $41 billion.

We also delivered on our commitment to pay down debt with our strong cash generation.

Uneven global economic activity creates both opportunities and challenges.

However, our diversification allows us to deliver consistent financial performance as evidenced by our solid second-quarter results.

We are particularly proud of this quarter considering the enormous integration efforts underway.

We are also pleased with the progress of our integration and cost synergy efforts.

I will now turn the call over to Steve who will discuss the quarter's financial performance in greater detail.

Thanks, Mike.

Please turn to slide five.

I want to remind everyone that my comments today speak to our adjusted results unless otherwise noted.

Before beginning, I would like to provide some additional background on the impact of our financial results from acquisition and integration related accounting items.

For the full-year, we expect these items to benefit our EPS by $0.30.

As required under GAAP, our first-quarter results have been retrospectively adjusted higher by $0.09.

These items did not substantially impact our second quarter results.

The increase to our adjusted EPS guidance for full-year 2015 reflects the total anticipated impact.

Turning back to our results, across our diversified portfolio of businesses, a couple of trends are emerging.

First, organic revenue growth is improving.

Second, we are increasingly confident in our cash flow targets for the year.

Third, we are delivering on our integration priorities.

Our second quarter revenue was $4.5 billion which is a 141% increase from last year and was driven by both organic and acquired growth.

We had overall organic revenue growth of 10% and we are encouraged by their return to positive organic growth in the DCS segment which was driven by our international markets and improving trends in the Americas.

Additionally, building construction revenue growth accelerated from the first quarter and our management services segment delivered solid financial performance.

Our second quarter EPS was $0.58 which was better than the outlook we provided last quarter.

Please turn to slide six.

As Mike noted, we ended the period with nearly $41 billion of backlog.

This is a slight increase from the first quarter and reflects our sixth straight quarter with a book to burn ratio over one.

Excluding the impact of FX, organic backlog increased 6% and was driven by growth in APAC, the Middle East and our private construction markets.

In the past quarter, our Management Services segment's contracted backlog increased 20% from the nearly $800 million extension to our Savannah River contract.

We are confident that our pipeline supports continued growth.

Please turn to slide seven.

Revenue in our DCS segment was $2 billion.

The operating margin was 5.3% which compares to 6.2% in the year ago period and 5.2% in the first quarter.

While we are pleased with our return to organic growth in DCS, room exists for further improvement in our Americas design business.

Backlog in the Americas improved slightly and our pipeline is strong.

As this backlog converts to revenue, we expect better cost leverage and margins.

Ultimately our larger revenue base will support improved profitability and allow for additional investment in growth.

Please turn to slide eight.

We delivered 62% organic revenue growth in our construction services segment.

We benefited from a robust backlog and continued investment by our residential and nonresidential clients.

The operating margin in the quarter was 1.6% which was down sequentially due to the favorable items we mentioned last quarter.

The margin is also being challenged by weaker oil and gas revenues and slow decision-making by private sector, power and industrial clients.

Many of our private sector clients that benefit from lower energy prices are planning new expansion projects.

However, the transition to growth resulting from low energy prices will take time to offset the weakness in our oil and gas operations.

Also while beneficial to our bottom-line, the growth in our building construction business comes at a lower margin due to the mix of pass-through revenue.

This lower margin profile is offset by our higher return on invested capital and more favorable cash terms.

Please turn to slide nine.

In the Management Services segment, revenue was $829 million.

Organic revenue declined due to the lower overseas contingency operations activity in Afghanistan and Africa.

The operating margin increased from 5.2% to 12.7% due to a better mix from our combined operations.

Earnings from Chem Demil declined as expected.

This decline was partially offset by a benefit from the release of the Libyan payroll tax liability.

These two items netted a negative $0.12 impact on our EPS as compared to the first quarter.

Please turn to slide ten.

Turning to the balance sheet and capital allocation, we are pleased with the progress we have made against our cash flow and capital allocation commitments.

During the quarter, we generated $19 million of free cash flow bringing our first-half free cash flow to $277 million.

We are on track to achieve our $600 million to $800 million annual free cash flow target.

We used $52 million of cash for acquisition and integration related items.

This was down from $235 million in the first quarter.

We are on track to complete nearly 80% of our total A&I cash outlay this year.

This forecast remains consistent with the guidance we provided in our December Investor Day.

We paid down more than $100 million of debt in the second quarter and ended with no drawn balance on our revolving credit facility.

Since closing the combination in October, we have repaid more than $450 million in debt.

Please turn to slide eleven for our financial outlook.

We increased our fiscal 2015 EPS guidance range to $3.15 to $3.55.

The increase reflects the $0.30 of acquisition related accounting adjustments I discussed earlier and confidence in our operating outlook.

Our guidance is based on approximately $110 million of realized synergy savings, interest expense of approximately $220 million, and a 30% adjusted tax rate.

We reduced our full-year capital expenditure guidance by $10 million to approximately $160 million.

This reduction reflects lower spending in our oil and gas business and higher than expected disposals in the first half of the year.

Our expectation for depreciation of approximately $210 million for the year is unchanged.

While not included in our adjusted results, we have revised our expectations for amortization and A&I expenses for the year.

We now expect amortization of approximately $410 million which compares to $220 million previously and we expect approximately $400 million of A&I expenses, up from $340 million previously.

The increase in our A&I expense is mostly non-cash and relates to some acceleration of real estate and IT synergies.

These synergy benefits will have a favorable impact in the coming years.

Before turning the call back to Mike, I will provide an update to our integration activities.

Our IT integration is tracking to our initial schedule and by the end of this month, we will complete both the Americas design and Management Services ERP consolidations.

Moving to real estate, we completed 90 office consolidations resulting in nearly 1.3 million square feet of reduced space.

Efficient use of our 16 million square feet of global office space is a key component of our overall cost synergy plan.

We are also seeing improved pricing on procured items.

We expect that our increased size will create meaningful savings opportunities over time.

I will now turn the call back over to Mike for an overview of the operations and end market trends.

Mike?

Thanks, Steve.

Please turn to slide twelve.

As Steve discussed, we are confident in our fiscal 2015 outlook.

The growth in our international design, building construction and management service markets is offsetting challenges in the oil and gas and civil infrastructure markets.

Taken together, our diversified business is proving resilient and the long-term outlook for our services is strong.

Projected global infrastructure investment through 2030 is expected to exceed $50 trillion.

This includes an estimated investment of $23 trillion in transportation, $12 trillion in power, and $11 trillion in water infrastructure.

Through our fully integrated delivery model we are strategically positioned to play a leading role in these markets.

Let me now turn to a discussion of our segments beginning with DCS.

In the Americas, economic growth rates in underlying trends continue to improve which contributed to a slight increase in our organic backlog.

State and local tax revenues are above pre-recession levels and leading indicators remain positive.

However, uncertainty around transportation funding and this month's expiration of the current Highway Bill are resulting in uneven performance across our Americas business.

Importantly, the nation's infrastructure is the backbone of our competitive economy.

Both parties are clearly aware of the need for reliable funding sources to ensure this backbone remains strong.

There have been several ambitious proposals from both sides of the aisle.

Whether our funding is secured through the taxation of repatriated earnings, an increase to the gas tax or innovative financing tools, any resolution would improve our visibility.

In the domestic private sector, activity continues to improve.

Lower oil and gas prices create new opportunities in power, industrial and chemicals, end markets where we now have significant expertise and experience.

In addition, we are now able to package many services ranging from consulting and design to construction and O&M into a single offering.

This capability differentiates us as clients are more willing to engage at the front end of a project and want us to take a larger role through completion.

Pivoting to our international markets and beginning in EMEA, we delivered topline growth across the region.

The United Kingdom, our largest European market, is benefiting from stable economic activity, low inflation and continued infrastructure investment.

The recent election results are positive for infrastructure spending and we expect continued support for the nearly $75 billion in planned rail and highway spending.

Our leadership role in the UK and early work on some large proposed projects has us positioned to fully benefit from this growth.

In the Middle East, we delivered double-digit growth.

Our clients are making investments in critical infrastructure to keep pace with population and urbanization trends.

These clients have substantial financial resources to mitigate their declining oil revenue and our backlog provides us with a good amount of visibility.

However, we are beginning to see some signs that our recent growth may moderate.

Our pipeline is not refilling as quickly as in prior years and our clients are taking longer to make awards.

Offsetting the risk of a slowdown in the Middle East is the opportunity to meaningfully expand our role on larger projects.

In my recent meetings with several key leaders and clients in the region, it was apparent that we are better positioned today for large integrated projects because of our expanded capabilities and scale.

Clients in the region value these traits when determining who they want managing large developments.

Turning to Asia Pacific, we delivered another quarter of solid growth with double-digit gains across Southeast Asia and steady activity in Hong Kong.

Economic growth and urbanization across the region continues to create opportunities.

This is particularly true within Southeast Asia where AECOM is poised to deliver meaningful growth in the coming years.

This expansion across the region will be helped by initiatives that include the $50 billion Asian Infrastructure Investment Bank.

In addition, the recently announced cooperation between the bank and the Asia Development Bank is a remarkable step toward global cooperation and allows for additional funding sources to fill the estimated $8 trillion regional infrastructure gap.

As we position for growth in the region, our reputation and full suite of design, build, finance and operate capabilities distinguish AECOM and position us as a partner of choice in large pursuits.

In Australia, the outlook for our business is better than it has been in a while but in the short run, momentum has slowed due to delays and market uncertainty following the elections in New South Wales.

However, our pipeline remains strong and we are pursuing several transportation projects that are set to be awarded in the second half of the year.

In addition, we generated consistent profitability in the first half of the year due to the aggressive restructuring we undertook when commodity related spending declined.

This is a prime example of how our DCS business adapts to a dynamic global economy.

Moving to our Construction Services segment, our building construction business delivered another solid quarter highlighted by double-digit organic revenue and backlog growth.

Our pipeline is robust.

We have several large pursuits in our core New York and Los Angeles markets.

At the same time, our client relationships are expanding to match our broader geographic capabilities.

Our growing pipeline of international pursuits stems from the relationships built with our US clients and reflects the strength of our global brand and reputation.

We are confident that we will continue to deliver growth in building construction into 2016.

Turning to our industrial and oil and gas markets, trends are varied.

Beginning with oil and gas, we continue to be negatively impacted by low energy prices and reduced client spending.

We are responding to this market weakness in two ways.

First, we have completed a comprehensive review of the recently acquired oil and gas business and we are in the process of significantly reducing our cost structure.

Second, we are actively expanding our key client relationships both in the oilsands and in other oil-producing regions where both our design and construction services can be utilized.

We are making inroads with clients who now see greater value in our expanded capabilities.

As we execute through the challenges of oil and gas, we are repositioning towards markets that benefit from lower energy feedstock costs which is reflected in our growing pipeline.

In the chemical and petrochemical markets, clients are expanding capacity to take advantage of lower natural gas prices and to build derivative plants that complement increased domestic ethylene capacity.

We are seeing increased CapEx from our auto, industrial and aerospace sectors and we are pursuing several power projects that we are expecting to book in the second half of the year.

Across all of these markets we see opportunities to leverage our design, design-build and construction capabilities.

Abundant energy supply and lower prices will create long-term advantages for our domestic business which accounts for nearly two-thirds of our Company.

However, it will take time to convert our changing mix of pursuits to backlog and revenue and therefore the benefits will be enjoyed by our business in the long-term.

I will finish my comments today on our Management Services segment.

Our long-standing strategy to replace our overseas contingency operations work with higher-margin business is working.

Despite the expected organic revenue decline, profitability improved resulting from our intelligence and cyber security contracts and the mix shift to higher-margin work.

In the first half of the year, client decision-making has been somewhat slower than anticipated but our win rate remains at high levels, consistent with our historical performance.

All told, we have more than $5 billion of bids under evaluation by our clients and nearly $30 billion of potential pursuits.

We are pursuing new opportunities that would combine cyber security, intelligence and operations management capabilities with our design and construction disciplines to meet the demand for integrated services.

For instance, clients that want us to design and build new sports arenas are also turning to us for leading-edge security services for their facilities.

We can provide these services in a single offering.

Before opening the lines for your questions, let me reiterate our commitment to delivering on the priorities we have set out to achieve.

We are on track with our synergy plans, we are delivering on our cash flow and debt reduction targets, and we are actively pursuing opportunities that leverage AECOM's leading capabilities in the markets we serve.

Operator, we are now ready for questions.

(Operator Instructions).

Jamie Cook, Credit Suisse.

Just a couple of questions.

One, with regard to the free cash flow, the free cash flow is weaker in the second quarter versus the first which was expected but a little weaker than I had thought.

So can you talk about do you think the low-end of your free cash flow is more likely than higher end and is it more, is it evenly distributed throughout the second half or more fourth-quarter weighted?

And then I guess my second question relates to the guidance on an EPS guidance, while you have raised the midpoint -- I mean while you raise the midpoint implies it is just the $0.30 you are getting from acquisition.

So can you just -- is that just the Flint or oil and gas business and can you give us an update on how the cost synergies should flow in the back half of the year?

Thanks.

Jamie, it is Steve.

On the cash, cash is lumpy.

Typically AECOM historically burned cash in the first half so we are pretty happy with the $277 million in free cash flow in the first quarter.

But any one quarter can be lumpy just because you collect it on the last day of a quarter or the first day of a quarter can make a huge difference to the quarter.

So we are still very comfortable with our range of 600 to 800.

We are not ready to guide within that just given the lumpiness of it but we are not coming off of that.

In fact, we are quite bullish on our cash forecast for the three-year period.

But it should be more -- is it like a fourth-quarter event or should it be more evenly distributed in the back half just with the URS?

That is my point, Jamie.

It is very difficult to guide free cash flow on a quarter-by-quarter basis because of the issue of collections and or payables on pay-when-paid contracts can impact a single quarter.

So for the overall year, I would stick with the 600 to 800 but I'm not comfortable yet giving guidance within that on a quarter-by-quarter basis.

Okay.

On the $0.30 increase, it wasn't related to acquisition earnings, it is adjusted EPS so it is related to the normalized profit effect on our full-year.

So that is associated primarily with the URS acquisition and a very tiny amount from Hunt.

And that is an adjusted EPS impact.

The way we have accounted for a normalized profit of course increases the value of the backlog intangible and the associated backlog amortization.

So on a GAAP basis, there is hardly any effect but because of the adjusted -- because we add back amortization it does have a $0.30 tailwind for the full year.

So we just added it to the guidance just to maintain as much transparency on that topic as we could.

Last, the cost synergies, did you get any in the second quarter and then how do we think about that in the back half and then I will get back in queue.

Yes, we did.

We are exiting the quarter at about a $70 million run rate.

We are fully expecting to get the 110 realized for the full year and the 180 exit in the fourth quarters so we are continuing to ramp as we go.

And for the FY16, we will give further guidance as we go.

But we are able to accelerate some of our synergies particularly on the real estate side.

We are finding that we are able to execute on our real estate strategy faster than we ever thought.

As I mentioned in my prepared remarks, we consolidated 90 offices since we closed the transaction.

It is pretty significant and we are finding opportunities as we go and we will keep you updated on that.

All right.

Thank you.

Jamie, you did raise a question about oil and gas and just to be clear on that, we are experiencing headwind in the oil and gas market as you are seeing across the entire peer set.

But clearly we expected this in our EPS guidance for the quarter so it was within our expectations.

We reset our expectations near the beginning of the fiscal year for the oil and gas sector.

And sorry, Mike, just one on that, have you seen -- I understand we have seen a dramatic decline since the beginning of your but have you seen any stabilization at low levels or no?

I would say it is stabilization.

In the past quarter I would call it stabilization.

In the past 90 days or so it hasn't gotten worse, it is about what we expected.

Okay.

Thanks.

I will get back in queue.

Steven Fisher, UBS.

Wondering if you guys could just clarify the organic growth rate in the quarter and constant currency and excluding acquisitions, was that the 9.7% number?

Yes, that is organic constant currency entirely exclusive of acquisitions.

Okay and a similar question for construction services, the 62%, is that on the same basis?

Ex the acquisitions and ex currency?

That is correct.

Okay.

So can you just talk a little bit about what specifically -- there must have been some pretty significant projects driving that 62%.

What it was and then how we should think about what you have assumed in your guidance for overall Company and for construction services for the rest of the year?

So first of all, the 62% what is driving it is a very strong vertical commercial real estate market in the major metropolitan areas of the United States as well as other parts of the world.

We are seeing it boom in tall vertical construction like we haven't seen since 2008.

And that is right in the sweet spot of our legacy Tishman business as well as our new Hunt business.

And how should we think about that 9.7% for the balance of the year?

I am assuming that is probably a little better than what you were expecting so far year to date.

So how should we think about what you expect for the rest of the year?

Listen, it was a little better than we expected for sure but for the rest of the year, the important thing with regard to organic revenue is the DCS business.

The DCS business on a constant currency basis returned to organic growth of 1%.

It is our best organic growth in six years and that is the big wheel within the machine here.

If we can turn around the organic growth rate in that segment that is what is going to generate the real growth of the organization.

So that is what we are focused on is getting the organic growth turned around within DCS and that 1% organic growth rate for the quarter was an encouraging step in the right direction.

Okay.

And then you sort of raised a bit of a signal on the slowdown in the Middle East.

But it sounds like you essentially have some bigger programs that could mitigate that.

How material an impact do you think we are going to start to see in organic growth as a result of the slowdown of the Middle East or do you think the timing of some of the bigger programs will really make that dynamic not that material overall?

I mentioned it because I think it is something that is a bit of a wildcard.

First of all, we did have a double-digit organic growth in revenue and the backlog in the quarter in the Middle East.

So I want to make sure put it in the right context but we are seeing a couple of projects that did stop.

We had one stop in the quarter in Saudi Arabia and although the revenues weren't overly material, it is the demobilization costs that really hurt you.

You bear all those demobilization costs in the quarter so we had one big project that stopped.

There are a lot of large-scale infrastructure projects that are still on the horizon but there is uncertainty, there is political volatility, there is concerns around defense, which is exactly what we are focused on there, where we think there is going to be a lot of money spent in the Middle East is around regional defense.

And I just returned from a trip to the Middle East last month where we spent a lot of time talking to our clients and government officials there about the amount of money that they are going to be spending for regional defense is expected to greatly increase.

And the capabilities that we have to be able to design, build and operate those assets for the governments of Saudi Arabia and UAE in particular, is something that is very encouraging to us.

Now whether that will happen in the next two quarters or whether that is a 2016 issue, that remains to be seen but we are watching that region very carefully and remaining very agile on the projects.

Okay.

Thanks very much.

Anna Kaminskaya, Bank of America Merrill Lynch.

Good morning, guys.

I just wanted to go quickly back to the adjustment to the outlook.

Just thinking about it as a non-cash charge, why not just exclude it from the EPS outlook?

And the reported numbers seems like it would provide less noise for instance.

Why was that in the first quarter and not in the second quarter and how will you reflect it by segment?

Is it in one particular business or will it be spread across three segments?

We will just take those in order and if I forget one of the three, just remind me.

But we didn't change our definition of adjusted EPS because we don't want to change it from quarter to quarter, so we thought it was equally transparent just to add it to the overall outlook and quantify it for everyone.

It's spread between all of the segments and impacts them differently, depending on the quarter.

The reason it had an impact in Q1 versus Q2 is there were multiple -- we finalized all of our valuation in Q2.

Well, not finalized, but we are predominantly farther along with our purchase price allocation in Q2 and there are multiple adjustments.

We had the increase in normalized margin.

We also had the increase in the backlog intangible, which affected the amortization increase.

And then there was also an overhead rate adjustment that impacted going the other way.

So in the Q2, those offset.

For the overall year it is $0.30, and we thought it was just as clear just to add it to the earnings guidance.

And how should we think about the charge into 2016, 2017?

Is it at the same pace or will it be coming down over the next couple of years?

It will come down.

The benefit will come down.

I think it is about $0.30 this year and probably cut in half next year.

Okay.

And then as you provided some more positive commentary on the fact that the America is improving in the quarter in your DC segment, would you be able to quantify it as at the number of inquiries; is that your backlog is finally growing in North America and US design business; and where are you seeing the strength?

Particularly, are you seeing any improvement in civil infrastructure, any impact from the highway bill uncertainty into June quarter?

Certainly, we are seeing the activity and pipeline picking up in the Americas, and we are hopeful that the highway bill issues will bring a little more certainty to the civil infrastructure market.

We are seeing bipartisan support to push forward with some creative ideas that would further fund infrastructure, such as the repatriation of untaxed foreign earnings.

And so we are starting to see not only activity in the marketplace, but we are seeing some bipartisan support in Washington for more dollars to support infrastructure.

We are also seeing a continued increase in sales tax revenues across the states.

So there is a lot of leading indicators that are pointing in the right direction.

But will you be able to quantify maybe, I don't know, percentage growth in your inquiries second quarter versus what you saw last quarter?

Is it accelerating, is it converting into -- from backlog in the US?

Just for overall US design business.

I don't think I would be able to guess on the number of inquiries increase.

I can tell you anecdotally, we feel there is a lot more activity in the market, but I really can't give you a specific number.

Great.

Thank you very much.

Tahira Afzal, KeyBanc Capital Markets.

Good afternoon, gentlemen.

This is Sean on for Tahira today.

So in the prepared remarks you guys commented on some customer spending nuances in the power market among others.

So we were just wondering with potential scope reductions on the power generation side, have you guys increased the amount of construction risk you are willing to take on versus say this time last year?

Any change on your construction risk appetite there would be helpful.

No, we have not changed our construction risk appetite.

As I think you know, we are fairly low risk business model.

We always have been.

We have less than 2% of our business is hard bid contract types.

About 22% of our business is fixed-price contracts so we are a fairly low risk business model.

We don't see that changing.

That is good color, thanks very much.

Secondly, on the M&A side and with the oil and gas valuations potentially coming down, are you guys sort of staying on the sidelines there or are you considering some niche acquisitions in the space?

We are not considering any significant acquisitions at this point.

We are focused on successfully integrating the transaction we did last year.

We think there is just a lot of opportunity to bring this organization together and capitalize on those markets and we think we can do that without undertaking a significant acquisition at least in the short term.

Okay, that is helpful.

I appreciate your time, gents.

Take care.

Adam Thalhimer, BB&T Capital Markets.

Good morning, guys.

Nice job in the quarter.

Mike, I am just trying to parse through your comments as you went around the world, does it feel to you like backlog is kind of leveling out here at this current level?

No, it doesn't feel like that.

It feels like our backlog although it appears level from quarter to quarter, we did have a couple of subtractions from that and we also had a foreign currency adjustment.

So even though it is flat quarter to quarter, we did have a 6% impact from foreign currency.

So it would have been up 6% on an organic basis if you took out the currency so the growth in backlog feels pretty good to us.

Okay, but you are not overly concerned about lack of a highway bill in the US, what you are seeing in the Middle East, near-term headwinds in Australia?

There's offsets to that?

Listen, one of the great benefits of our business is we are very diverse and so we participate in a lot of strong growth markets but the flip side of that of that diversity is we also have challenging markets at any given point in time.

And so we take the good with the bad and generally we feel more positive than negative.

So yes, we do have some challenged markets, oil and gas is challenged, Australia is a little bit challenged but we think that we are at the bottom of that cycle.

China continues to grow.

The Middle East like I said, it grew in the quarter but we are watching issues on the horizon and we are dealing with that all around the world.

But on balance we feel more positive than we have in a while.

Okay, perfect.

Just lastly on the A&I expenses, Steve, how should we think about those in 2016?

Well, we are going to burn about 80% of the cash expense in 2015.

Look at it.

So the majority of these spend comes this year and we start reaping the benefits.

So should that bring down 2016 because you pulled some forward to 2015 or just wherever it was before just leave it there?

Well, we could probably work with you off-line on the model because I'm not sure how much you have so don't want to guide you to bring it down unless I have a little more accuracy.

But overall, our expectations haven't significantly changed.

We did increase $60 million for the current year.

The vast majority of that was timing.

And just to give you an example on that, the real estate transaction we did accelerate $20 million of real estate into this year.

Those are mostly non-cash write offs of TIs as we bring offices together.

And then there were some acceleration of severance type expenses that we thought we were going to take in 2016 and we pulled forward as well.

Okay.

Thank you.

Chase Jacobson, William Blair.

Good afternoon or good morning to you.

First question, Steve, on the cash flow, I know you are not going to give specific guidance and I don't expect you to.

But can you maybe talk about -- when we look into the second half of the year, the improvement from here, how much of it are things that are in AECOM's control versus things that are more market related to new awards or just ongoing operations?

On cash, most things are in our control other than clients just cutting off payment.

I don't see anything specific to that.

I have not seen a slow down since payments.

In fact our DSOs are down.

Historically as I mentioned, we burned cash in the first half and historically we produce about 80% of our cash in the second half and we are doing better at modulating that on a more even basis throughout the quarters.

So the other, obviously we have been funding some A&I in our free cash flow as well and that will peel off as the year goes on and FY16 of course will have only 20% of the total A&I cash expenditures so going forward it will be a little bit of a tailwind from that from a comparative standpoint.

But there is nothing specific that I can point to.

It is just our typical execution and we are a very cash oriented business.

Almost every senior executive in the Company has cash as 50% of their incentive-based compensation either in cash or in their long-term equity compensation so it is kind of part of the fundamentals of the culture here.

Okay.

And then, Mike, on the oil and gas business, it is weak and you mentioned that you are significantly reducing the cost structure there.

Is that part of the acquisition and integration or are there incremental cost savings that you are going after in that business?

It is clearly incremental.

The first look at cost synergies was related to the acquisition but of course in the past six months as the demand for oil and gas activity came down as we do with all of our businesses, we reduced our cost structure to support the expectations of revenue from that market.

But the good thing about that market is there is a flip side to it which is there are a whole host of industries that benefit from low oil and gas feedstock and those industries are picking up quite a bit whether it be auto, aerospace or other petrochemical markets, we see more activity in those markets than we have seen in quite some time.

Now the switch doesn't turn over night.

You don't see a decline in oil and gas business where CapEx freezes up and it doesn't move immediately the next day to an increasing CapEx and the industries to benefit from the low oil and gas feedstock.

But clearly that is the upside or the flip side of this downturn in oil prices and we are well poised to participate in that market.

Okay.

Lastly, you mentioned that you are pursuing several large projects in power that you expect to book in the second half of the year.

Can you expand on what types of projects those are?

Are they gas-fired plants, are they environmental, renewable?

Any color there would be great.

Thanks.

Given that we are in competitive pursuits on these, I probably don't want to get into the details of those right at this point in time.

Okay, thank you.

John Rogers, D.A. Davidson.

Good morning.

Just a little follow-up.

First of all, in terms of the URS business, can you give us a sense of what sort of year-over-year growth you saw there?

So year-over-year growth I will try and give you anecdotally.

I think if you look at it by their segments clearly the URS Federal Services business is down largely due to peel off of Chem Demil.

That was expected but that business is performing very well.

Oil and gas, the former Flint business is down significantly and in terms of our full-year outlook it is immaterial to our EPS guidance range because we are restructuring that business and assuming that things don't get better in FY15.

And then [EC] overall is down a bit although in general I would say you could describe it as just slightly down.

Okay.

I'm just trying to contrast it with the strong organic growth that you reported, 10%.

I mean is that just the end market exposure there?

Obviously the oil and gas (multiple speakers)

That is entirely it, John, is end markets because you think about where are we seeing organic growth, we are seeing it in Asian markets, we are seeing it in Middle Eastern markets and we are seeing it in the private sector vertical construction markets.

Those are all markets which URS had virtually no presence in.

The markets where they had a bigger presence is the oil and gas which we all know is down and Federal Services although we both had a presence in that, we knew the chemical -- Chem Demil business was in a scale down mode.

So we feel good about the rest of the URS Federal business.

We had planned on Chem Demil to come down and then their I&E business, their civil infrastructure business was predominantly US and we know the US market is challenged.

They are experiencing a very similar market reaction that we are seeing.

Okay, thanks.

That is helpful.

And then just I mean it seems as if the progress on integration and cost synergies -- I don't know, it seems like it is a little bit ahead of schedule.

Is that true from your point of view and do we see then more benefits sooner especially in 2016?

Let me comment on the first part of that and I will let Steve comment on the second part of it.

Overall I would tell you we feel very good about the integration.

Integration is often a challenging period.

We have been through the hardest part of that and we feel that culturally we are coming together very well.

We have the entire new organization is in place.

This week we are pressing go on the most significant part of the systems integration.

So we feel like culturally the integration has gone better than we expected.

From a cost synergy perspective, we feel that we are ahead of our plans.

As Steve mentioned, we have accelerated some of the decisions that come together.

And so all in all, we feel very good about the merger integration, where we have been year to date and where we will be through the rest of the year.

But I will let Steve comment on the specific timing of those synergy flows.

I'm not ready to quantify FY16 but the answer to your question is yes, FY16 will benefit from the schedule that we are on because we are accelerating synergies, we are pulling some of those costs to achieve them into FY15 and FY16 will benefit from the lower costs and the acceleration of those synergies relative to the three year period that we originally guided.

Okay, great.

Thank you very much.

Andy Wittmann, Robert W. Baird.

Steve, I wanted to dig a little bit in the margin fair value liability, benefits for the quarter.

Was there any particular projects that those are associated with predominantly or that drives those?

It looks like it is a little heavier in the DCS segment.

But I guess just understanding the project health and how long this could be lasting through the P&L, I know you gave us a some comments earlier but just some color on the types of projects that these are associated with so I think would give us some context.

It is hundreds of projects, Andy.

We look at every single project as part of the evaluation analysis that we have hired a Big 4 firm to help us with and they look at every single project and make some sort of judgment.

Now I mean this is a very unique accounting formality here that is non-cash and relatively non-impacting to our GAAP earnings.

So for us it is very much a valuation exercise, it is not material to the fundamentals of the business.

It passes right through on GAAP so it does affect adjusted GAAP or adjusted EPS which is why we changed at the adjusted guidance level.

Okay, that is helpful.

And then just you mentioned Chem Demil in Libya combined -- I guess that was on a sequential basis that it was a $0.12 hit.

Can you quantify what the benefit was from Libya?

Libya was in the order of payroll tax liability, we reversed it was $0.03.

Okay, that is helpful.

And then just -- so in the past you have framed your context about your long run potential for free cash flow in the context of as it relates to net income having it be greater than net income.

I guess just as it relates to the non-cash fair value liability, is that still a relevant discussion or will that mostly gone by the time you -- you are getting outsized cash flow this year, you have guided to that clearly.

It will well above net income this year based on your guidance but in the out years, is that relationship still hold and how does that relate relative to the noncontrolling interest charge.

Is that still hold after you would subtract the noncontrolling interest from your cash flow?

That was a guidance that we gave as a standalone Company AECOM prior to the acquisition.

It certainly doesn't hold now given the level of amortization that we have in the system which as you are right, normal profit exacerbates that issue.

When we get out past 2016, amortization will normalize, normal margin will normalize.

I think we will revisit, it will be certainly closer at that point but I would be hesitant to give cash guidance three years out at this point.

I think that is fair enough.

Okay, and then just final question was you just mentioned that there's a couple of cancellations, Mike, in the backlog.

Can you just talk about the nature of what those were and if there is anything to be reading into the end market health from those?

No, not at all.

It is normal, you have projects that move in and out of backlog.

I think the important thing is that apples to apples it is up 6% on a constant currency basis.

Okay, thank you very much.

Sameer Rathod, Macquarie.

Good morning.

Thanks for taking my questions.

I guess other than what has been mentioned, have there been any other notable changes on the purchase price allocation passing because we don't have the Q yet?

No, the big ones were what I mentioned was the normalized profit and the other is the change in the backlog intangible.

Okay, great.

I guess more a conceptual question, how do we think about the tax rate?

Is this the tax you would have paid if you added all the adjustments back, is it somehow connected to the actual tax rate or cash tax rate?

Just trying to figure out the tax rate guidance.

That is a good question.

It is meant to be an estimate of what a normal tax rate would be given the fact that we have all of these costs flowing through in losses in the first quarter.

The GAAP tax rate can look very unusual so we put together something that is a bit more normalized and the uptick in the quarter is really just relative to the rolloff of the R&D credits and the WOTC credits that expired in Q1.

Right, right.

Last question, more housekeeping, what were the net distributions to noncontrolling interests in the quarter?

I know there are like $35 million in the first quarter, how much was it in the second quarter?

I believe $20 million.

Okay.

Is there any way of estimating this number as we put our cash flow estimates together?

Well, I think that was the P&L that I just gave you.

It is difficult to estimate -- you are looking for cash?

Yes, I am looking on the cash flow from financing portion because obviously these are kind of required payments, just wondering how to (multiple speakers)?

It is difficult to go quarter by quarter because you don't know how much cash is going to be flowing through those but over time it will approximate net income on the cash side.

Okay, perfect.

Thanks.

We have no further questions at this time.

I will now turn the call over to Mike Burke for closing remarks.

Thank you, operator.

I hope that from today's call you got a sense for our enthusiasm and passion for the future.

We really believe that we are only starting to scratch the surface of the total capabilities of this combined organization and some of the best days are certainly in front of us.

As I said earlier, we are very happy with the merger integration, how it has gone, both culturally, both combining the opportunities and capabilities of the two organizations.

We are happy about the synergies and our progress there and we participate in challenged markets and we also participate in some very positive markets and we are excited about the private sector markets outside of oil and gas and we are excited about the opportunities and pipeline in front of us in the US civil infrastructure market.

And that is the one where we think we have some of the best days in front of us.

So hopefully you got a sense of all of that from today's discussion.

Thank you for participating today and we will look forward to talking to you in the next quarter.

Have a great day.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.