AECOM (ACM) 2015 Q4 法說會逐字稿

Good morning and welcome to the AECOM fourth-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 part without the 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.

(Operator Instructions).

I will now turn the call over to Will Gabrielski, Vice President of Investor Relations.

Please go ahead.

Thank you, operator.

Before reviewing our 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 about growth and profitability as well as risks 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 as required by law we take no obligation to update our forward-looking statements.

We are using certain non-GAAP financial measures in our presentation.

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

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

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

Our discussion of financial results excludes the impact of acquisition and integration related expenses and the amortization of intangible assets unless otherwise noted.

Please turn to slide 3. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer.

Mike.

Thank you, Will.

Welcome, everyone, to our earnings call.

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

I will begin with an overview of AECOM's results and discuss the trends across our diverse business.

Then Troy will review our financial performance in greater detail.

Steve will conclude with financial guidance before turning the call over for a question-and-answer session.

Before we begin I want to comment on the appointment of Troy Rudd as our Chief Financial Officer.

Troy joined AECOM in 2009 and has led a number of key finance and operating functions throughout the years which will serve him well in his new role.

Steve Kadenacy will continue in his role as President and will take on much broader operational responsibility.

Steve and Troy have built a very capable finance group which allowed for a seamless transition period for them and their respective organizations.

Please turn to slide 4. 2015 was a remarkable year for AECOM with several notable accomplishments.

We closed the largest combination in our industry's history.

We executed an enormous integration that called on all of our employees to contribute beyond their normal activities.

And we delivered on the commitments we made to our shareholders one year ago.

Let me begin with a few financial highlights.

Organic revenue increased 5% on a constant currency basis driven by the strength in Construction Services.

Free cash flow of $695 million was at the midpoint of our annual $600 million to $800 million target.

This strong cash performance supported $720 million of debt reduction.

We also executed well on our synergy program.

And today we are increasing our estimated synergy savings to $325 million from $275 million.

However, 2015 was not without challenges.

We confronted several external forces from low oil prices, a stronger US dollar and slower economic growth in Asia, which impacted our operating performance and resulted in earnings per share at the lower end of our guidance range.

However, we are energized by the momentum we have built for 2016.

We expect better revenue performance in our America's design business where we delivered a 1.4 times book-to-burn ratio in the second half of 2015.

We also expect our building construction and Management Services backlog to produce strong results.

We continue to take cost out of our oil and gas business which will contribute to better operating performance going forward.

And we expect to begin realizing gains in our AECOM Capital real estate fund during the year.

Please turn to slide 5 for a discussion of the segments.

Beginning with the DCS segment, we haven't been this confident in the momentum of our America's design business in several years.

We delivered strong wins for the year and our contracted backlog increased in the fourth quarter.

Our wins were broad based, but the 2 times book-to-burn ratio in our environmental business in the second half of the year stands out with two large wins in the oil and gas sector.

These wins are for multinational integrated oil companies who are turning to AECOM because of our leadership position in environmental services and because we can now provide our services throughout our global platform.

We are also seeing better trends in the transportation market.

Last week the House passed a multi-year highway bill and will now negotiate with the Senate to prepare a final bill for the President to sign into law.

Transportation is our largest business in the Americas and the lack of a long-term bill has been a significant headwind to our performance for several years.

A multi-year bill would drive large projects that play to our strengths.

We are also pursuing an increased amount of alternative delivery opportunities that fully leverage our design, build, finance and operate capabilities.

In addition to improving domestic trends, the recently elected Canadian Prime Minister is pledging to spend $46 billion on infrastructure projects over the next decade with an emphasis on transportation.

We are well positioned in this market.

We are extremely focused on driving growth in the Americas in fiscal 2016.

Our improving wins and backlog and the potential for a federal funding resolution are key leading indicators that we are on the right track.

Now let's turn to our international design markets.

In the UK, which is our largest market in Europe, backlog improved.

The recent election results have created stability and continuity in our core rail, highway and water markets.

The Middle East is being impacted by low oil prices; however, our backlog and revenue performance has been stable.

The civil markets that we serve are proving to be more resilient to lower energy prices than many had anticipated.

In addition, we are focused on leveraging our capabilities in defense and construction which is resulting in a growing list of integrated delivery opportunities.

Across EMEA we have a strong pipeline that includes nearly $10 billion of bids where we have been shortlisted and are waiting for a client decision.

Many of these opportunities are a reflection of our integrated capabilities, especially in the defense market.

Now let's turn to our Asia-Pacific markets.

The economic slowdown in mainland China has impacted our growth.

However, our direct exposure to this market remains limited.

Activity in Hong Kong, our largest market in Asia, remains strong, backlog was up and major infrastructure programs continue to move forward.

As we look at the growth prospects of the region, Southeast Asia and India are two markets that are small contributors today that we expect will become larger over time.

An estimated 270 million people are expected to move to cities over the next two decades and demand for modern infrastructure is growing.

Turning to our Construction Services segment.

We delivered 34% organic growth in fiscal 2015 reflecting continued strength in the domestic construction market.

In addition, our contracted backlog increased by 13% in the fourth quarter and 76% for the year.

We are benefiting from our geographic diversification strategy.

We won three construction projects in the UK in the second half of 2015 and more than 60% of our wins over the past year were outside of the New York Metro market.

In addition, construction spending in our core New York market is expected to reach another record in 2016 and we have several large pursuits and negotiations taking place.

Let's shift to our energy and industrial construction markets.

As was the case throughout the year, lower commodity prices are creating both risks and opportunities.

Oil and gas CapEx declined further in the fourth quarter, a trend expected to continue in 2016 due to unprecedented CapEx declines.

We have addressed the slowdown in two ways.

First, we have already announced and delivered significant cost reductions.

These actions have meaningfully improved our cost structure.

Second, we expect to execute non-core divestitures to lower our fixed costs.

As a result we expect improved profitability in 2016.

Contracted backlog improved in our power, civil and industrial markets increasing 20% in the quarter due to the signing of a contract to build a large air-quality-control project in Arizona.

We continue to pursue sizable programs in coal ash and nuclear decommissioning.

Both markets represent significant long-term growth opportunities.

Finishing with Management Services.

We performed ahead of our plan in Management Services in 2015.

Despite the anticipated wind down of major chem demil programs last year we are confident that 2016 is set for another strong year.

Contracted backlog increased 10% sequentially and we added several key programs during the year.

This performance is even more impressive against the backdrop of the budget uncertainty.

But it is not a coincidence that our business can perform well even in less certain times.

We have a stable base of long-term contracts in markets where we are competitively differentiated.

We are also diversifying our client and geographic mix.

Our high-end cyber, intelligence and surveillance capabilities are growing into new markets and are adding to our differentiation across the Company.

We are pursuing sizable growth opportunities in the commercial sector.

And friendly foreign governments across the globe are increasing their procurement of US military hardware, providing the opportunity for us to supply our services in new markets.

I will now turn the call over to Troy to provide greater detail on our financial results.

Thanks, Mike.

Please turn to slide 6. I want to remind everyone that my comments today speak to our adjusted results unless otherwise noted.

As a reminder, our fiscal 2014 period had 53 weeks.

I will speak to growth rates excluding the impact of the extra week to provide the most comparable metrics.

Actual results are available in our press release and our SEC filings.

We delivered adjusted EPS of $0.95 and $3.08 in the fourth quarter and full year respectively.

Please turn to slide 7. We ended the quarter with $40.2 billion of backlog.

We had a 1.0 book to burn in the fourth quarter highlighted by a 1.4 book to burn in the Americas design market.

For the full year our book to burn was 1.04.

Our contracted backlog increased 8%, which we view as the best leading indicator for our future revenue.

Based on the current mix and constitution we view the quality and margin profile of our backlog today as significantly improved from the beginning of the year.

Please turn to slide 8. DCS revenue was $2 billion for the fourth quarter and $8 billion for the year.

Organic revenue declined 3.5% in the fourth quarter and 2.4% for the year.

The rate of decline in the Americas improved in the fourth quarter.

As Mike already mentioned, we are confident in 2016 driven by our strong wins during the year.

Fourth-quarter operating margin was 7.5%, this was a 20 basis point increase from the third quarter.

Better volumes contributed to improved performance across the Americas, Asia Pacific and EMEA regions.

Please turn to slide 9. We had a great year with 34% organic revenue growth in Construction Services and we entered 2016 in a very strong position.

The operating margin improved to 2.3% in the fourth quarter, up from 0.6% in the third quarter.

A combination of strong organic performance and better contribution from our industrial construction businesses more than offset the weakness in our oil-and-gas construction business.

Please turn to slide 10.

In the Management Services segment fourth-quarter and full-year revenue were $885 million and $3.4 billion respectively.

Margins increased 200 basis points in the fourth quarter to 12.9% which resulted in a full-year operating margin of 12.4%.

This performance is indicative of our strong execution across the vast portfolio of projects.

Please turn to slide 11.

We delivered free cash flow of $268 million in the quarter and $695 million for the year.

We reduced our total debt by $720 million for the year including $166 million in the fourth quarter.

Our diverse geographic, end market and client mix has helped to produce $1.7 billion of free cash flow over the past four years.

We are reiterating our $600-million to $800-million annual free cash flow guidance for fiscal 2016 and fiscal 2017.

Going forward our capital allocation priorities are unchanged.

We always evaluate the returns associated with debt reduction, share repurchases and M&A.

In the near term we are prioritizing debt reduction.

But we will continue to evaluate our options keeping shareholder value creation as our top priority.

I also want to comment on divestiture and asset disposal activity.

During the fourth quarter we sold our interest in Meridiam's European funds.

We're also evaluating sales and disposals of non-core oil-and-gas businesses and assets.

The potential P&L impacts associated with assets being disposed of are excluded from our adjusted EPS guidance.

I will now turn the call over to Steve to discuss our guidance for fiscal 2016.

Thanks, Troy.

Please turn to slide 12 for a discussion of our financial guidance.

I couldn't be more excited about the opportunities in front of us.

Today we are a company of nearly 100,000 people, we have operations in over 150 countries and we have clients in nearly 50 market sectors.

The consistency and predictability afforded by our broadly diversified model has resulted in strong cash flow over the past four years and underpins our fiscal 2016 financial expectations.

With that we are initiating fiscal 2016 adjusted EPS guidance of $3.00 to $3.40.

We expect to deliver free cash flow within our $600-million to $800-million range.

We expect to incur approximately $200 million in acquisition and integration related costs this year and we are increasing the total synergy target to $325 million accordingly.

The additional savings, primarily from real estate, will benefit our 2017 results.

In total the payback on our synergy program is under two years and the improved efficiency of our operations will drive long-term benefits into the organization.

Now I will turn the call over to Q&A.

Operator, we are now ready for questions.

(Operator Instructions).

Jamie Cook, Credit Suisse.

Hi, good afternoon.

This is Jamie Anderson on for Jamie Cook.

So we were curious in the guide, are you guys assuming any revenue synergies from the URS deal included in the 2016 forecast?

And if so how much?

And then just kind of looking at the pro forma company, where are you guys seeing the biggest areas of opportunity as you kind of look out at your prospect list?

So, Jamie, thanks for that question, it's Mike.

We have spent the first year, as we have talked about in the past, the first year focused on the integration.

And now with the hard work of integration behind us, we are now focused on extracting the revenue synergies which was a fundamental strategic rationale for our transaction.

And so we do have modest organic revenue growth in our FY16 numbers.

And we haven't carved that out how much is synergy -- revenue synergy and how much is legacy because it gets a little muddy from here.

But we really believe that coming into FY16 we are now going to focus our energies on the external markets to take advantage of the strategic rationale.

We have about two-thirds of our business that is growing and we have about one-third that is either slightly down or flat.

And the slightly down or flat portion is the energy, power and oil-and-gas business.

The rest of our business is growing.

And then the second part of your question was where do we see the big opportunities.

The big opportunities in front of us, putting aside all the great value that we have created from the cost-saving synergies, the strategic rationale of this transaction was how do we bring together all of the expertise of the combined organization to be able to deliver the full suite of services of design, build, finance and operate.

And we are doing that around the globe now.

So, if it is taking our construction capabilities that we now have here in the US, we have already started over the past year delivering those services into Europe and Middle East.

It is our fastest-growing segment in the Middle East and Europe is our Construction Services group.

We are now focused on taking that combined construction capability and delivering it into the Asia Pacific market in FY16.

So, it's an example of where we are taking the combined capabilities of the new organization and driving it through our global platform.

We are also doing that for our Management Services business which was historically a primarily US government business.

We are now either delivering that service or have major proposals in front of a wide range of countries, from the UK to Saudi to Australia to Singapore and India, taking that US government capability and delivering it across the platform.

So, we are excited about getting the integration behind us and now starting to focus on extracting those revenue synergies.

Okay, great, thanks so much.

I will hop back in queue.

Michael Dudas, Sterne Agee.

A lot of accomplishments this year of course.

First surrounding, Mike, maybe a little bit more insight on the highway bill.

How you are positioned, has the company had to position differently as this has started to move forward through Congress?

Is it maybe taking some people by surprise the potential positive news that comes out of Washington?

And in your plan are we going to see any of the benefit?

Is it too early for 2016 or is it much more a 2017 or 2018 opportunity for the array of AECOM Services?

Yes, so, Jeff, obviously we are excited about the recent developments of that bill having moved through the Senate and the House and now we have got to reconcile it.

But in our DCS business, 20% of our DCS business is transportation.

It is our largest single segment within DCS, and so obviously any highway bill would serve us very well.

But whether that is something that comes across in FY16 is going to depend how quickly first of all it gets through the House -- or I'm sorry, gets through the reconciliation and get signed by the President.

But it will likely add to our backlog in FY16, but more likely to our earnings in FY17.

I appreciate it.

And my follow-up is maybe when you're talking about the pursuits here in New York City, as someone who works and commutes in the city, it is pretty crazy getting around with all the construction.

Maybe you could talk a little bit about some milestones or timing and maybe the size of what is upcoming for extended or new projects for you guys here in the city the next 12 months?

We typically don't comment on existing pursuits, Mike.

But the transportation business domestically has been robust in terms of wins for us in the last two quarters.

I think we mentioned last quarter our book to burn was 1.5 and in the second half we were at 1.4.

So, that is for all of Americas design, but transportation is a big part of that.

Okay, that is fair enough, Steve.

Thank you.

Jeff Volshteyn, JPMorgan.

You mentioned the win in the oil and gas industry.

Can you give us a little bit of color of sort of what segment of oil and gas industry did you benefit from?

And then really the general tone of what you're hearing from your customers as far as capital investment in oil and gas and related industries?

So, we don't want to disclose a specific name on that, but I'll tell you that we did win a $700-million contract for one of the top-five oil and gas companies and the work is -- that project alone is entirely environmental engineering work.

And so one of the things that is helpful to understand about our oil and gas business is that historically the Flint business that we acquired through URS was half and half special projects or new CapEx projects and the other maintenance-type projects.

So now when we look at that business, the capital expenditure -- new CapEx projects, have come off a bit and now it is 80% of it is operations and maintenance, sustaining works programs, and only 20% of it capital.

The environmental business, the environmental engineering business, which is our other very large business that we won in the contract that I just referred to, that work is -- about 80% of it is dealing with the operations, maintenance and regulatory type work.

So it is not dependent on CapEx.

So, where we see our oil and gas business today, we believe it is at a sustainable level right now, but it is primarily due to the fact that the work we are performing is not new CapEx, it is existing O&M and regulatory work and decommissioning work.

And so, we also believe that we are well-prepared for a potential rebound.

If there is a rebound in the CapEx cycle we will be prepared to realize the upside from that.

That is helpful.

Last quarter you mentioned relatively weaker performance related to oil and gas.

Has that stabilized for you guys?

This is Steve.

Oil and gas is still turning down.

We have been focused largely on restructuring that business, taking out over $100 million of cost from that Canadian and US kind of oilfield services business, the former Flint.

So we are continuing to see a decline on the revenue side.

But we were still able to structure it so that it contributed on the margin side.

But it is clearly a disappointment because we expected much more at the beginning of the year from that business.

However, in FY16 we expect that it will contribute and be a tailwind from the bottom line even though we will continue to decrease on the top line because of our cost-reduction efforts.

That is helpful.

Last sort of maintenance question for me.

What is the organic revenue decline for DCS on a same-week basis?

So this is Troy.

The organic decline in DCS adjusting for the 52-week period in fiscal 2014 was 2.4% for the year.

Okay, thank you very much.

Steven Fisher, UBS.

It is actually Eric Crawford on for Steve this morning.

So I appreciate the color on the highway bill and the opportunity there for fiscal 2017, but just to follow up on Mike's earlier question.

It is earlier, but I am curious if you have had any preliminary discussions with your state agency customers to what extent they have a list of pent-up projects ready to go?

We have regular continuous systematic dialogue with hundreds and hundreds of state agencies on this on a regular basis.

They are all waiting and have been waiting for the long-term visibility of a long-term transportation bill.

So, to the extent we get a long-term bill it will allow them to engage in some larger project planning that they have not had the opportunity to do in the past because they didn't have that long-term visibility.

That plays right into our sweet spot.

If you look at the type of transportation work we do, we are generally at the higher end of that food chain with large complex projects and those large complex projects typically demand long-term funding.

If you are doing curb and gutter work you can fund that on a quarter-by-quarter basis.

So, the dialogue that we've been having with these various agencies is going to only increase as we get that long-term visibility and we are very well-positioned for that.

Okay, great.

Thanks for that.

And then switching over to Europe.

We have been hearing some mixed data points, some positive and some less positive.

How are you seeing end market activity there?

And any color you have would be helpful.

Well, Europe for us -- we operate that as a combined business of Europe, Middle East, Africa and India.

And the Europe business is very tightly coordinated with our Middle East practice because the Middle East's large infrastructure projects are still drawing on expertise from the West.

But our overall EMEA practice has grown from a backlog standpoint year-over-year.

We are gaining market share in the UK and transportation particularly, significant market share gains as best we can tell.

Continental Europe is stable and strong.

We are starting to win Construction Services business in the expansion of our CS business in Europe, and the Middle East is stable.

We are not hiding our head in the sand in terms of the fact that large infrastructure projects in the Middle East are fueled by petro dollars, but we are not seeing a dramatic change in what we are seeing in the pipeline.

In fact, we are seeing opportunity in the Middle East to expand our business on the Management Services side as friendly Middle Eastern governments are starting to invest in their own military and protection.

Excellent.

Thanks for the color.

Anna Kaminskaya, Bank of America.

First I just wanted to touch with on synergies, if you could provide us an update on your savings run rate coming out of 2015, how much have been realized?

And also $50 million seems like a pretty sizable amount.

Was it just because your initial forecast was conservative or maybe volumes are coming a little bit lighter than expected so you can cut more cost out?

Any color about -- I mean obviously we want to get more synergies down the line than even $50 million upside.

But any color around where you manage to realize more synergies by 2017.

Sure.

Well, I don't know if we were conservative on the outset, Anna, but certainly as we went through our integration process we learned a lot more and were able to find more synergies.

So we realized $110 million in the year, we are exiting at a run rate of $180 million.

We expect to exit 2016 at a run rate of $275 million.

And what we found -- the increase is largely real estate.

We were able to consolidate 166 locations this year, 2.2 million square feet of space.

And during that process you are going city by city, we found significantly increased opportunities in that space and a few other spaces, but real estate is the big one.

So we are adding that A&I spend for 2016 of $200 million, only less than half of that is cash A&I, and we are increasing our synergy target by $50 million, so it is a two-year payback.

Great.

Your employees might have -- must have pretty tight cubes.

But just wanted to quickly switch to cash redeployment.

I think you said that near-term you're still focused on debt repayment.

But I am just a little bit surprised that your overall interest expense is not really moving down materially with all the debt pay down.

Like how are you thinking at which point of leverage you will be more comfortable rethinking maybe some initial buyback over debt payoff?

I mean interest expense is coming down.

I think a few things to realize is that within our FY15 interest expense we were reducing debt costs all along the way.

So there was a fair amount of that $750 million in debt pay down that we benefited from in 2015.

In 2016 we also carried two extra weeks of debt, which is a fair sum given the debt load.

And then there is certain expectations within our interest rate stack in terms of what the interest rates will be.

But overall we are managing that down.

And is there a leverage target at which you would rethink the balance of debt pay down versus maybe initiating some of the incremental buy back?

Anna, we think about all of those things on a regular basis here.

The team is always looking at all of the options that we have in front of us from debt pay down to buybacks to strategic acquisitions.

And I can't say that there is a perfect target, but right now we are focused on debt pay down.

Great, and can I sneak one quickly on just quarterly cadence of EPS next year?

Anything unusual about 1Q as a percentage of total year that you could provide?

Well, our historical average is around 20% for the first quarter.

I would expect it to be a bit less than that in Q1 this year largely because of the significant ramp in our wins in the second half of FY15.

But nothing other than that would be significantly unusual, just the cadence of our wins in the back half of 2015.

Thank you very much.

Good quarter.

Adam Thalhimer, BB&T Capital Markets.

Hi, guys, congrats on a good quarter.

The headwinds that you said you are facing this year and one of the reasons that you trended towards the lower end of guidance -- lower oil prices, slower Asian growth and strong dollar.

I mean, if those stay headwinds does that push you a little bit more towards the low end of the range for 2016 as well?

Only if those headwinds change the velocity, right.

I mean right now we have -- we are assuming that oil stays where it is.

If that -- we are not expecting more headwinds, we are expecting a steady state with oil right now.

We are expecting that foreign currency is where it is today, if the dollar gets stronger from here that is a headwind, but -- so for right now we are not assuming a further headwind.

We built into our plans an oil and gas business that is already lower than it was last year.

So from here we feel like we have got visibility within that range.

Okay.

And you made a comment that margin within backlog and the quality of backlog has significantly improved from the beginning of the year.

It seems like a significant statement, just curious if you can comment additionally on that.

Yes, I think we are seeing the wins trending from a mix standpoint in projects where we tend to -- or sectors and services where we tend to earn a higher margin.

So it is -- not only are we seeing an increase -- or a book to burn well above 1, but we are seeing margin within there as better.

Having said that, there is a lot of puts and takes in our margins in any given year within the segments.

So I don't know that you can necessarily drive that straight to the bottom line in any given quarter.

And we are also highly seasonal within quarters.

Okay.

And lastly, you gave some color on what you expect in New York next year in terms of activity.

For US non-res outside of New York I mean how does the environment feel today?

We talked about the transportation bill, that is the single biggest boost that we need in the non-resi space.

But it depends on what you are talking about and which component of non-resi, right--?

Commercial construction.

So commercial construction, if it is high-rise, vertical, office-type space, the inbound investment from China continues to be a big mover in that space for us.

So that market looks good.

We talked about oil and gas being down, the power sector seems to be flattish, industrial petrochemical seems to be doing well, so we feel good about that.

But overall civil construction is going to depend on that transportation bill.

Okay, thank you.

Tahira Afzal, KeyBank.

First question is, Mike, you talked a bit about the opportunity in India.

As I look at China and how much leverage you had there in mainland China, why is India different from yourself -- for yourselves?

I am not sure what you mean by why is it different.

Different in what respect?

Well, I mean if China has seen a huge build out, right, in terms of urbanization over the last 10 years, I am wondering why India is a bigger opportunity for yourselves given how small China is a part of your revenue mix.

So the big difference is in China the state-owned enterprises do much of the heavy civil infrastructure work.

So when I look at -- and when I talk about China we think about it in three different pieces.

We think about Hong Kong, Taiwan and PRC.

In Hong Kong -- we have a very, very strong position in Hong Kong, we always have, we have a nice position in Taiwan.

But in the PRC we did not participate in civil infrastructure buildout because the state-owned enterprises commanded that market.

The work that we did in mainland China was heavily private-sector commercial development and that has been the fastest-slowing segment of PRC.

The big difference is and you go to India, they don't have state-owned enterprises in the civil infrastructure business.

And so, when you start to look at the buildout required of the infrastructure in India, whether it be the Delhi-to-Mumbai industrial rail corridor that we are working on or the six different metro subway systems that we are working on across India, we don't have to compete with the state-owned enterprise.

And so, that is why we are more bullish on India with regard to civil infrastructure than we ever were in mainland China.

Is that helpful?

Got it.

Oh, yes, it definitely is.

And, Mike, in that regard I assume you can do a lot of this organically?

In India?

Yes.

Yes, yes.

We have done a few small acquisitions in the past in India, but we believe we can do that organically.

We have the capabilities in Hong Kong to service the transportation market and we have extensive capabilities in the Middle East that is servicing that market also.

So we can get the expertise and talent there and there is plenty of very-well-educated engineers in India to hire.

Got it, okay.

And the second question is really in regards to the gross margin.

In the past you have talked about 6% type of range.

And if I look at your fourth quarter we're kind of hitting that type of a range.

I know that your year is back-end loaded, but is there any update on the outlook there given your pretty upbeat commentary on what is in the backlog?

The outlook for Q1, was that your question?

Margins.

Oh, for margins.

No, just generally on the margin side.

And it is not in regard to a quarter, but just qualitatively directionally are we at a point when we can be looking beyond the 6% range?

Yes.

I mean I think it is different by segment, but I would look in the low 7%s for DCS, CS probably in the low 2%s, both of those with upside into future years.

And MS, MS is a tough one to forecast given the lumpiness of extraordinary gains that they tend to have when they close out projects and we do not forecast for that.

Without those you can put them in the low 8%s.

Got it.

Okay, thank you.

That was very helpful.

Chase Jacobson, William Blair.

First question, can you give any more color as it relates to the monetization of the AECOM Capital investments?

I know you are not going to -- you're probably not going to give us a size.

But how is that recorded?

And as we go forward are those going to be regular?

Like every quarter or is it going to be once or twice a year?

Any color you can give there?

Sure, we don't want to give guidance on a sub-segment level, but we -- and those transactions will be difficult to predict by quarter or even by year.

But we fully expect that we will have a couple monetizations per year for the foreseeable future.

We have 14 individual investments that we are in the process with right now within AECOM Capital.

We have a much longer pipeline of potential investments beyond that.

And so, we will have monetizations this year, but given that we are in the midst of negotiating some of those monetizations, we don't want to get too specific on it.

But it will be a regular part of our business going forward.

The objective is to invest in these projects, deliver the design service and construction revenue along with it and then when the project is complete we want to recycle the capital and do it all over again.

So it will be a regular part of our business and it will be a part of our core earnings.

Okay.

And then I guess when I take into consideration some of the metrics that you provided for guidance in fiscal 2016 and you kind of take into consideration where you are on the synergies and where you are going to, why isn't there more margin expansion next year with some revenue growth and from what it sounds like better mix?

Thanks.

Well, I think that the margins -- well, we have had margin improvement during the year.

We are also facing a few headwinds in our overall margins if you are looking on a consolidated basis.

Remember normal margin is coming down year-over-year by $0.12.

Chem demil is rolling off.

As you know, we had significant Q1 profits from chem demil, we had some one-time gains in the quarter.

But underlying the segment results there is margin improvement from a fundamental standpoint.

Okay.

And I guess just last.

Can you give us any detail about the moving parts of working capital this quarter?

I didn't see anything in the presentation.

Working capital came down in the quarter.

But the cash flow was $695 million, as Troy mentioned.

And DSOs -- Troy, what did DSOs do?

DSOs were at 82 days for the year.

So we had five days of improvement over the full course of the year.

Okay, thank you.

Samir Rathod, Macquarie.

It sounds like you have several factors going in your favor into next year synergies, both cost and revenue, organic growth declines and interest expense, highway bill.

But then I look at your guidance -- and I guess this kind of expands on Chase's question.

You guys did $3.08 this year and the midpoint next year is $3.20.

Is this all Sellafield and chem demil or are there other moving pieces we should consider?

Well, I meant the same ones that affect margin will affect the growth.

So if you adjust for the things that I mentioned on margin, normal margin, chem demil, the one-time gains in EC, FX -- FX is another headwind for us.

You add back in the synergies and you are looking at a 10% improvement from a base EPS this year if you adjust for those one-time things.

Okay, got it.

Thanks.

Andy Wittmann, Robert Baird.

So, I guess I would ask Chase's question a little bit different way because I know gains are hard to predict.

But can you give us a sense of what the guidance for next year looks like just on operations of the business excluding the gains?

We really don't want to give sub-segment guidance.

I mean that is just one component of DCS.

And so, that is why we have a range, right.

We have a wide range of our guidance and we are in negotiations now, as I said earlier, on what that might look like.

And so, I don't want to in any way influence those negotiations that we are in the midst of right now, literally right now.

So we have given a range of guidance and, depending on how those profits come out, it could put us in one end or the other of that guidance.

So, Steve, in your comments you said the P&L impacts from possible dispositions are excluded I guess that is referring to the business dispositions rather than these like private equity stakes, which are I guess a different bucket?

Yes, Steve was referring to the disposition of the non-core assets of the oil and gas business, it is fluid hauling business, things of that sort.

But the AECOM Capital gains, we have 14 investments today, we will continue to be making investments and regularly designing them, building them, financing them and then completing them and selling them to recycle that cash all over again.

So it will be a regular part of our business going forward and you will see a few of these transactions a year every year.

Yes, okay, but the dispositions then, there was no mark on them at the year end.

But those are probably -- is it fair to assume that those are more likely to be a loss than a gain?

Or how should we be thinking about what to expect when those are monetized?

Which assets are you talking about now?

The fluid hauling and the stuff in Flint that you are looking at the are nonstrategic.

That is right.

For the real kind of small non-core Flint assets there would more likely be a non-cash loss with those than a gain.

And the reason for that is we marked those to market when we did our purchase accounting at the acquisition a year ago.

And so, the overall oil and gas world is depressed in that one year period of time.

And so naturally there would be a slight decline there -- non-cash.

Yes, yes, totally.

So, then just on -- last quarter you guys commented on the URS businesses kind of separately.

You said they were not that dissimilar from the trends you had seen in the organic trends.

Is that still the case here in fourth quarter?

Or just your updated thoughts on that would be helpful.

I mean the organic trends in the URS business that were similar to the AECOM businesses were very, very similar.

In the businesses that we're not in of course they are different.

Oil and gas we didn't have that business and of course it was disappointing to say the least.

Yes.

And then just maybe final question here on the cash flow expectations, thank you for updating your view on that one.

I guess when you think about the two times leverage bogie by the end of 2017, I guess that basically means that you're probably working toward the high end of that $600 million to $800 million range.

I guess maybe the question is are there any other things in the cash flow in terms of maybe taking working capital out of the business or otherwise that are going to help you get to the 2.0 level?

Your thoughts on that, I think, Steve, would be helpful.

So, Andy, this is Troy.

Just in terms of our guidance for 2016 and 2017.

We are not anticipating or in building up that guidance any working capital improvement.

That is just based on our buildup from it business by business to get to a cash flow range.

So, in terms of the 2.0 guidance, if we just simply deliver on our cash flow over the coming two years we will push ourselves down into the mid-to-low 3s in the period of time.

The 2.0 is not necessarily a bogey, Andy.

We just said if we deployed all of our cash towards that we would start approaching 2 by the end of 2017.

But we are constantly looking at capital allocation priorities.

Yes, that makes sense.

Sorry, final question then.

On the cash flow it looks -- if $600 million to $800 million -- I mean it looks like the net income -- we always think of E&C companies, in particular engineering heavy companies like yourselves, cash flows pretty close to net income.

I guess after these next couple of years should we expect the net income to the free cash flow range being more applicable to your business than what looks like it was a little bit elevated over the near-term?

Yes.

Yes.

Andy, that makes sense.

Okay, I just wanted to make sure nothing has changed on that.

Thank you.

We have no further questions at this time.

I will now turn the call back over for final comments.

Okay, thank you, operator.

So listen, a few closing comments here.

We entered fiscal 2015 as an $8-billion company about to embark on a real transformational combination, the biggest in our industry's history.

And today here we are as an $18-billion company with integrated delivery capabilities across just about every major market and geography.

And we had -- the real hard work is behind us, the hard work of integration.

Anybody that has been through this knows that the real heavy lift has occurred over the past 12 months and I couldn't be more proud of our leadership team and all of our employees that had to work two jobs over the course of this year getting that integration behind us.

But now we stand on the cusp of really realizing the full potential of our vision to become the world's leading fully integrated infrastructure services firm.

And we feel very good about the future that lies in front of us and very good about realizing our full potential.

So, thank you all for your continued interest in AECOM and we hope that you will join us in December at our annual Investor Day meeting where we will discuss more detail about all of these milestones and, most importantly, our vision for the future.

So, thank you and have a great day.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.