AECOM (ACM) 2016 Q3 法說會逐字稿

Good morning, and welcome to the AECOM third-quarter 2016 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 Investor section at www.aecom.com. Later, we will conduct a question-and-answer session, (Operator Instructions).

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

Thank you, operator. Before reviewing our results, I would like to direct you to the Safe Harbor statement on page 1 of today's presentation. Today's discussion contains forward-looking statements about future growth and financial outcomes. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties. Please refer to our press release, page 1 of our earnings presentation, and a report filed with the SEC, for more information on our risk factors.

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.

Our discussion of financial results excludes the impact of acquisition and integration-related expenses, financing charges, the amortization of intangible assets, and financial impacts associated with expected and actual dispositions of non-core businesses and assets unless otherwise noted. Today's discussion of organic growth represents the year-on-year change for the entire Company on a constant currency basis.

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

Thank you, Will. Welcome, everyone. 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 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.

Please turn to slide 3. Our third-quarter results included several noteworthy accomplishments. Organic growth in Americas Design accelerated to 4.1%, and our confidence in further growth is increasing. In Building Construction, revenue increased 14%, marking the eighth consecutive quarter of double-digit growth. And in Management Services, we delivered another solid quarter of profitability and further added to our already strong pipeline.

I am also pleased to report a book-to-burn ratio greater than 1, the result of nearly $1.1 billion of contracts for new gas-fired power plants and contributions across our diverse business. Importantly, our momentum has carried into the fourth quarter. Our joint venture was selected by the NFL Rams to build their new, world-class stadium in Los Angeles, which highlights our role in an iconic development in our home city. And we have had several other key wins across our business that position us well for 2017 and beyond.

Finally, our cash flow performance remains strong. We generated $191 million of free cash flow, and we have now paid down over $1 billion in debt since closing the URS transaction nearly two years ago.

Please turn to slide 4 for a discussion of our business trends. Beginning in North America, momentum is building across our markets with improved public sector spending and continued strong private sector demand. In addition, adoption of alternative delivery is growing, and our design, build, finance and operate capabilities position us to lead this trend.

In transportation, our largest market, the FAST Act and improved state and local funding are creating significant new opportunities. Our backlog has increased 12% this year and our pipeline of pursuits is up 35%. Importantly, our clients are planning and executing larger, more transformative projects.

The average size of our transportation wins has grown over the past few months, and we expect decisions on several large pursuits in the coming months. This plays directly to our strengths as the design market leader, a position affirmed by our 14th consecutive number one ranking in ENR this quarter.

Turning to oil and gas, the impact of lower prices is having varied impacts on our business. Our oil and gas construction business continues to be negatively impacted by general market weakness and the fires in Fort McMurray. We have streamlined to address lower levels of activity, which has limited the impact to our results, but energy prices remain low and will continue to challenge the market.

Conversely, low gas prices have created demand in the power sector. We've already mentioned the $1.1 billion of wins for new gas-fired power plants and we are pursuing others that will reach a decision point in the coming months. In addition, our power business was also successful in a large O&M re-compete in the quarter. These wins are noteworthy in that our strong client relationships and expanded capabilities combined to create a key competitive advantage. We are truly benefiting from our diverse platform.

In our building and stadium construction business, we made further progress on our effort to diversify into new markets and geographies. The selection of our joint venture to build the Rams Stadium in Los Angeles builds on this trend and affirms our leading position in the $25 billion stadia construction market.

We are also energized by the expanded size of our pipeline in Management Services. We were selected for $400 million of new work after the quarter closed, have submitted $15 billion of bids for client evaluation, and anticipate submitting another $10 billion of bids over the coming months. This pipeline reflects our leading capabilities in existing markets and a growing set of pursuits in new markets, such as intelligence.

We are also leveraging our scale and expertise to pursue more opportunities as a prime contractor. When compared to our current $8.1 billion backlog, the opportunity for growth over the next 12 to 18 months is clearly substantial.

Pivoting to Europe, Middle East and Africa, in the UK, revenue grew by 6.3%, and our backlog remains solid with continued demand to maintain and modernize infrastructure assets. The Brexit referendum has created some uncertainty, and the full impact to the market and our business remains unclear. However, the swift government transition should add stability to the market. In addition, we are well-positioned for the government's National Infrastructure Plan, which includes $400 billion of investments on major infrastructure projects over the next five years.

In the Middle East, our solid profitability is a testament to our focus on execution, a disciplined bidding strategy and a vast backlog of large civil infrastructure projects. However, sustained low oil prices are negatively impacting client budgets, which resulted in fewer new business opportunities.

Importantly, we are actively diversifying in the Middle East. Heightened security demands and events like the World Cup and Dubai EXPO are creating opportunities well-suited to leverage our strong local presence, leading defense and intelligence capabilities, and expanding Construction Services platform.

Finishing in Asia-Pacific, we delivered a 1.6 book-to-burn ratio with contributions across the region. In Hong Kong, our backlog increased by 12% sequentially, benefiting from our historically high win rate on large pursuits. Continued land reclamation and development are also creating opportunities where we excel.

In Australia, organic growth was positive for the first time since 2012, and backlog has increased by 10% this year. These improvements have been driven by a recovery in our transportation business, which is benefiting from the government's $50 billion commitment to fund critical infrastructure investments through 2020.

Importantly, across all of our markets, we are encouraged by the growing adoption of integrated project delivery. This year, nine US states have passed legislation to enable design-build delivery, and we are positioned to play a leading role due to our unique design, build, finance and operate capabilities.

We already have several successes in this respect. Earlier this year, we were selected for a large design build highway project in the US, and we anticipate submitting bids on nearly two times as many design-build and P3 transportation projects in 2017.

In the water market, we have won several large design-build projects this year, and are pursuing a nearly $20 billion pipeline of similar opportunities. And we are leveraging all of our capabilities to pursue large nuclear decommissioning work.

With our history of execution, favorable market trends, and growing momentum in our backlog and pipeline, we remain confident in our ability to capitalize on the strong foundation we have built at AECOM.

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

Thanks, Mike. Please turn to slide 6. Overall, our third-quarter results were consistent with our expectations. We are encouraged by the accelerating growth in our Americas Design business, continued strength in Building Construction and momentum in our backlog and pipeline of pursuits. However, lower oil and gas prices continue to impact our oil and gas construction businesses as well as petrodollar-funded markets in the Middle East.

Earnings-per-share was $0.81, an increase of 10%. This includes the benefit of a lower-than-planned tax rate resulting from the release of a deferred tax asset valuation allowance, which contributed $0.13 to our earnings. Excluding this benefit, our EPS matched the guidance we provided on our last call despite the noted headwinds from lower oil and gas prices.

We ended the quarter with nearly $40 billion of backlog, which includes the $1.1 billion of power contracts Mike detailed, and stronger activity in our largest markets. When you look across our pipeline of pursuits, the opportunity to grow our backlog over the next year has never been greater. We expect several decisions on large projects in the fourth quarter and into 2017.

These opportunities are diverse by end market, service type, and geography. And we are increasingly pursuing projects that leverage the full strength of our design, build, finance and operate capabilities.

Please turn to slide 7. DCS revenue was $1.92 billion. Growth in the Americas accelerated to 4.1%, with contributions across our end markets led by transportation. Internationally, UK grew 6.3%, which was offset by declines in our Asia-Pacific and Middle East markets.

The third-quarter operating margin was 7.8% compared to 7.3% last year. This improvement is from our synergy savings and strong project performance. In addition, revenue growth in our largest market, the Americas, is allowing us to more efficiently leverage our fixed costs.

Please turn to slide 8. Revenue in Construction Services was $1.7 billion, with varied performance across our markets. The operating margin increased from 0.6% to 1.4%. In Building Construction, we delivered 14% growth. And contracted backlog increased by 25%, providing strong visibility for the next several years.

Revenue in our energy and industrial construction business grew 8% sequentially, with strength in both the power and industrial markets. Based on our recent wins, we expect growth will accelerate from here.

In oil and gas, revenue declined by 44%, due to the Fort McMurray fires and general market weakness. We are optimistic for a return to growth in this business, and we have continued to reduce overhead costs to better position us for an upturn in activity.

Please turn to slide 9. In Management Services, revenue declined by 5.5%. The operating margin declined to 9.3% from 10.9% last year, but remains above our long-term expectations of approximately 8%. This margin performance is driven by large incentive-based contracts where we have a strong history of execution.

Please turn to slide 10. Our cash flow and capital allocation priorities are consistent with the commitments we made at the time of the URS acquisition. Free cash flow increased 27% to $191 million, and we remain on track with our full-year free cash flow guidance of $600 million to $800 million.

Our third-quarter cash flow represents 27% of our full-year guidance, above our average third-quarter phasing of 23%. No single item was responsible for this outperformance. We operate a diverse portfolio of projects and incentivize our people to collect cash. We have generated over $2 billion of free cash flow since 2012.

We also continued to deliver on our debt reduction priorities, with net leverage now at 3.5 times. We have paid down over $1 billion of debt since the URS transaction, which closed nearly two years ago, and we are on track to achieve greater financial flexibility as a result.

Going forward, our capital allocation priorities are unchanged. We continue to evaluate the returns associated with debt reduction, share repurchases, and M&A. In the near-term, we will continue to prioritize debt reduction. But we always consider all options, keeping shareholder value-creation as our top priority.

I will now turn the call over to Steve to discuss our financial guidance.

Thanks, Troy. Please turn to slide 12. We have built tremendous momentum, and are proud of our performance on a wide range of items, including cost synergies and project execution, and our outperformance in areas like tax and benefits. However, we have also faced headwinds. Lower oil and gas prices negatively impacted both our oil and gas construction business and the Middle East markets. Additionally, we now anticipate interest expense to be higher than we planned, and the US dollar has strengthened following the Brexit referendum, which creates a translation headwind to our results.

Taken as a whole, we are confident in reiterating our full-year adjusted EPS guidance of $3.00 to $3.40. Our wide range of EPS guidance is primarily attributable to the timing of our first AECOM Capital monetization, which has the potential to close in either this fiscal year or next. With a nearly $40 billion backlog and growing pipeline, we are highly confident in the trajectory of our business.

Now we will turn the call over for Q&A. Operator, we are now ready for questions.

(Operator Instructions). Steven Fisher, UBS.

Mike, you mentioned increasing confidence in growth in the Americas Design business, and it's had a nice acceleration here. Are you thinking we could see double-digit growth there over the next year or so? And what would have to happen to achieve that kind of growth? I know you mentioned several prospects in the near-term. How many of those do you think you need to convert? And what would have to happen to get that kind of growth?

Steve, first of all, I don't want to give revenue guidance for next year just yet, so I want to try and stay away from that question at this point. But the bottom line is, we have been very focused on restructuring our business in the Americas Design that we have done and completed over the past year. We saw the organic growth two quarters ago start to come back. We saw very nice organic growth this year.

We talked about the positive momentum that we are seeing in the pipeline; transportation is the biggest segment there, and presents some of the biggest opportunities. That backlog was up 12% in the quarter. So, the momentum is clearly there. We are feeling good about it.

We are seeing momentum at the federal level with the FAST Act. We are hearing -- both presidential candidates are both talking about infrastructure, and we are seeing a number of municipalities around the country that are putting in place specific tax measures. So, all the right indicators are there that would cause us to feel fairly bullish about the prospects for the Americas, but I'm not ready to give revenue guidance just yet.

Okay. And in terms of cash flow, how much of that $300 million-plus that you need in Q4 is really just normal scope collection versus any specific change orders or the AECOM Capital timing, or other big lumpy project-related items that there is a higher degree of uncertainty on the timing?

Steve, it's Troy. Across the business, each quarter we collect over $4 billion of cash flow. And in that -- in those collections, there is no single item that stands out in particular. It is just collecting on all of our projects, so across a diverse portfolio.

Okay, so nothing -- just regular flow of business for the fourth quarter?

That's correct.

Okay. All right, thanks a lot.

Andrew Kaplowitz, Citigroup.

If we analyze DCS adjusted operating margin in 3Q, it appears to be the best it has been since you bought URS. Now that's despite revenue pretty flattish over the last several quarters. Obviously, you talked, I think, a little bit about positive mix here from Americas Design, but is this the URS cost in review really taking hold now in this business? And can margin continue to go higher here in DCS, even if revenue does stay relatively flat?

Well, you are clearly seeing margin improvements based on how we are running the business. I'd put that in two categories of performance, Andy. One is the cost synergies that we are taking out that are -- the DCS Americas and DCS in general has benefited more than the other businesses because of the size of it and the overlap.

And, second, is general project execution that is improving our margins as well. And then I hesitate to comment on expectations of what margins would do in a flat environment, because we are expecting and are more bullish on growth for the following year.

Okay, that's fine. Thanks, Steve. So, let me ask Steve's question in a different way. DCS contracted and awarded backlog is down in the quarter sequentially, while within DCS Americas Design backlog appears to be up. So, how do we think about this trade-off if this kind of trend continues?

In other words, if we do have continued declines in the Middle East, maybe stagnation in the UK, can you still grow DCS to related earnings based on the strength of the Americas Design as we go into 2017?

If I understand your question right, you're basing it on a declining backlog in DCS. And if you adjust for FX as well as non-core asset disposals during the year and during the quarter, our backlog in DCS is about flat. And you can't really look year-over-year or quarter-over-quarter at backlog growth. It's -- it can be lumpy.

So, our expectation is not to have a declining DCS business. We have a growing America's DCS business. That's our biggest engine. And the opportunities that we see in EMEA and APAC are coming back. And, in fact, I think we said it on the call, we have now seen growth coming out of Australia for the first time in many quarters. And the opportunities that we see in Asia and in the UK, for instance, are enough that we would be bullish on overall DCS growth despite any drawbacks or continued low oil prices in the Middle East.

Okay, and that's great, Steve. Then just one clarification. Can you give us a little more color as to what happened in the quarter in oil and gas? I know you talk about the revenue decline. How much did the wild fires impact your business?

You talked last quarter about (technical difficulty) breakeven contribution margin for the year. What does that look like now? And then, ultimately, how are you thinking about the business as we go into 2017? Can you give your confidence level that it will stop being a drag on performance?

So, Andy, first of all, the fires in Fort McMurray did have a significant impact in the quarter. I mean, our biggest oil and gas -- biggest portion of our oil and gas business outside of the environmental engineering is in Canada, and that business was entirely shut down for a good part of the quarter. So, it was significant.

And we feel pretty good about the future of that business. It's -- we know what's happening with oil prices. We expect that, over time, they will recover and will bring back some reasonable growth to that sector. But clearly, in the quarter, it was a pressure on the business headwind.

You did have a second part of that question?

It's profitability. And we do expect to make money in that business mainly through our cost reductions up in Canada and in the US oil and gas business.

And going forward, the prospects that we see out of some of the majors in our significant clients off of our new cost basis, we would expect that business will be incrementally positive in FY17.

Okay, thanks, guys.

Chad Dillard, Deutsche Bank.

So, I just wanted to go back to your comments on Management Services, the projects under bid and about to be bid. How should we think about the timing for awards and the revenue recognition? I mean, is this something that we should contemplate will hit in the latter half of 2017? Just trying to get a sense for the cadence there?

Yes. You should expect that those decisions will be made in the latter half. As you have heard that we have about $15 billion in bids under consideration right now with a big part of those -- I'm sorry we have $20 billion of bids under consideration; $16 billion of that will be in Q3 of 2017 alone, expected decisions in that quarter. So, a big part of that will be decided throughout 2017, but it's much later in 2017.

Got it. And then just moving over to Construction Services, so despite the Fort McMurray fires, margins at least to me seems a little bit better than expected. So, just looking towards the fourth quarter as well as into 2017, how should we think about segment margins? I mean, is it reasonable to see them get to the low to the mid-2s, particularly that you will have higher margin stadium work there?

Yes, I don't know if it would be completely attributable to higher-margin stadium work, but just the general mix and the fact that we won't have the significant headwinds from the Fort McMurray fires dragging down the oil and gas business, which is rolled up in that CS business. So, I can see us definitely improving from where we were in third quarter. I don't know if we would get quite as high as 2.5%, but it's possible.

Great, thank you.

Jamie Cook, Credit Suisse.

I guess a couple of questions. Mike, you guys had some nice wins, I guess, this quarter on the power side too. Can you talk about sort of the timeline of those projects? I am assuming they would be pretty meaningful contributors to 2017. Were the projects fixed-price? And if so, your comfort level with the risk -- because that would be not a type of business I would think AECOM we do historically. I guess that's my first question.

And then my second question -- as we're thinking -- and I know you guys don't want to answer questions on 2017, but as we're thinking about where -- I guess, Mike, where you are now with integration of URS, you guys obviously have -- are exceeding or doing better than you originally thought with sort of the cost savings associated with the transaction. When we think to 2017, should we start to think about clean numbers, i.e., there is not going to be any additional restructuring in 2017 associated with the acquisition?

So, let me take the latter part of that first and then just Steve will take you into a little more details on the two power projects. First of all, we are ahead of schedule on the synergy plan that we had laid out from the beginning. As you know, we have twice increased our expected synergies from the transaction over the past two years.

We are on track to exceed those heightened numbers that we have provided. All of that is going very well. Going into 2017, we are doing our planning for that right now. There may be a small amount of cost to restructure the business, but they would be very small. So, for the most part, you're going to be seeing clean numbers in 2017, but we are finalizing that. We will give you much more specific guidance on that during our next earnings call.

But further to that, we talk a lot about the cost take-out, but I think we should note that what we are excited about is the revenue synergy opportunities that you hear us talking about. We continue to see bigger projects. We continue to see projects where we are bidding as the prime contractor, where historically, we would have bid as a joint venture contractor, so we're getting a larger share of the pie of the larger projects.

We are pursuing projects in areas that we previously would not have, but with the combined capabilities of the organization, we are positioned much better for these projects. What you are seeing certainly in the Management Services segment, where we are bidding on much bigger projects than we ever have, our pipeline of bids is bigger than it's ever been.

Our pipeline of opportunities that we are preparing to bid is bigger than it's ever been. And some of these power projects that you just mentioned are a great example of the combined capabilities allowing us to take on these bigger projects.

So -- but I will let Steve comment specifically on the price risk and execution.

Yes. And that's right, Jamie. The power projects weren't historically AECOM type of work, but they were squarely in the sweet spot of URS type of work. In fact, one of the wins is for a long-term client where the same team, very experienced team, is delivering the project. So, subject to a pretty good risk process within the old EIC business and the current AECOM EIC business, combined with AECOM risk process, we are very confident that we're going to deliver those projects on budget.

And it is also worth noting that our hard bid construction within the overall AECOM is still only about 4% of our backlog. So, we do manage our overall mix of risk within that backlog.

But, so, the projects were fixed-price, just to be clear? And did you get any advance payment on the project if they were fixed-price that helped the cash flow in the quarter?

The terms are fairly complex, but we do expect within the first quarter of delivering the projects, to be cash flow positive on those projects. But no advanced payments.

And, sorry, they are fixed-price?

They are fixed-price, yes.

Okay. And I guess the second question just related to that, I mean, can you talk -- are there additional opportunities, Mike, when you are thinking about the back-half of 2016 and 2017 on the gas-fired power side, if you could speak to just the number of projects that you're bidding on? Because that mark does seem to be one area where most of your peers are seeing green shoots as well.

Yes, it is. I mean, you know, it's the flip side of our oil business. With oil and gas prices down, it has hampered our oil and gas business, like everybody else, but cheap gas is providing a lot of opportunity and a lot of green shoots for gas-fired cogen facilities.

And so, we do see a lot of opportunities, and I think this is just the start of it. So we're excited about that business. And it is one of the things, Jamie, that we continue to point out is the diversity of our business. It is a business that has served us really well. When pieces are down, there is other pieces that are up, and this is a great example.

Oil business is down, but gas-fired cogen is up. And that's the kind of business that we have sought to build here that has diversity of geography and diversity of sector and diversity of commodity risk.

Okay, thanks. I will get back in queue.

Thanks, Jamie.

Tahira Afzal, KeyBanc Capital Markets.

So, I guess first question is, it's great to see these synergies you are hoping for finally starting to unfold positively. Can you talk a bit about the inherent risk profile of these opportunities, if it really differs from what you guys are really focused on right now, which is more cost plus?

Well, Tahira, first of all, as Steve just mentioned, only 4% of our backlog is fixed-price risk, and this is not something that is new to us. We have done small amounts of fixed-price risk over the years, and it will continue to be a small piece of our business. But where there are opportunities and where it is a project that we are comfortable with, where we have great depth of expertise and high confidence of delivering it on budget, we will take that fixed-price risk.

We're not going to shy away from it. But it is a small single-digit percent of our business that is really hard bid pricing.

Got it. And Mike, does that go for the combined cycle plants as well? Because typically, they are fixed-price, and if these are cost plus, are there opportunities you're looking at also cost plus?

No, these -- the combined cycle ones, the two that we were talking about in the quarter, are not cost plus. They are fixed-price projects. But it is technology, GE technology, that we are very familiar with. It is not first-in-kind technology. It's -- there is a proven track record of building plants exactly like this.

Got it. And second question really is on -- you know, last call, Mike, you talked a bit about smart cities, sort of technology really sort of entering and trickling into your space and the opportunities there. We've started to see some of your peers talk about that now as well. Could you sort of update us on where that opportunity stands for yourselves?

Yes, you know, Tahira, cities are at the core of our strategy. We see the major urbanization trends of the world continuing as well as accelerating. And so we see the outsized growth opportunities in the major cities of the world, and we do believe that, given our combined expertise across the entire design-build sector, we are not just doing transportation; we are involved in transportation, water, energy, both generation and distribution and housing.

So, we really cover the whole landscape. And we think we're better positioned to deal with smart cities than anyone else. And in fact, we are participating in a number of the big smart cities in India. I will be traveling to India at the end of the month to meet with Prime Minister Modi. And I will be leading a forum on smart cities in India, where we see some of the biggest opportunities where we have got large-scale greenfield smart city developments. So, we expect to be a leader in that end market around the world.

Got it. And, Mike, just a quick follow-up to that. As you know, India just announced a fairly transformative tax reform. Seems like it is going to lead to a fairly notable uptick in the GDP going forward. Is it too early to really comment on opportunities arising from there?

There is no question the new GST tax regime across India -- I have seen the same predictions that you have, that it will contribute 1% to 2% to GDP growth -- is very good for us. One of the challenges that we have had is -- on the large-scale cross-country transportation, is the historical tax regimes that were broken down by the states made it difficult to do anything to cut across the whole country.

And, so, now, as Modi moves to a more national tax regime and a national regulatory regime, it will allow them to put in place the broadscale infrastructure that they need. And we are as well-positioned as anyone to help them with that.

Thanks, Mike.

Andy Wittmann, Robert W. Baird.

Thanks for taking my questions. I want to dig into the MS segment a little bit more, and just talk about, I guess, the pace of awards, and particularly not just contracts, but task orders and the velocity of task orders that you are seeing out of the federal government today. Could you just give us a flavor of kind of the dynamics you are seeing there?

Has the lifting of sequestration actually tangibly helped the pace of actual dollars being spent? Or are we still bidding on contracts which are still a little sluggish coming out?

So, as we've talked about, we've seen a 25% increase in our bids under evaluation. Last quarter, we announced that we had $12 billion of bids under evaluation. This quarter, that increased 25% to $15 billion of bids under evaluation. We have another $10 billion of bids that we will be submitting in the coming months, and all of that compares to our current $8 billion of backlog.

So, the amount of opportunities that we are pursuing is greater than it has ever been. But much of that is attributable to the fact that we now have a combined expertise that is significantly greater than it was when we were two standalone companies.

A lot of that opportunity is being generated by our positioning versus suggesting that the lifting of sequestration or anything else has accelerated the pace in Washington. I don't see any macro indicators that are causing the pace to accelerate, but it is simply that we now have combined capabilities and scale to pursue new opportunities that we previously weren't qualified for, or to pursue opportunities where we can be the prime contractor instead of having to joint venture with the bigger contractors.

Great, that's a helpful answer. Thank you for that. I guess my last question, my follow-up question would be -- maybe if you could just walk us through by your segments, just talk about the win rates that you are seeing, Mike, in the various businesses. It is always a competitive environment, but just seeing how you guys feel like you are faring against your competition in those segments; I think that would be helpful.

Yes, so, our win rates are probably a little higher historically than they have been in the MS segment. And just anecdotally, the win rates across our other segments are -- have not really changed in DCS. I think our win rates anecdotally feel about the same.

In the Construction Services segment, I feel that our win rates are -- again, anecdotally, I don't have the number at my fingertip, but given that we have had eight consecutive quarters of double-digit organic growth rate, our win rates there, we seem to be winning just about everything we go after in a meaningful way in the Construction Services segment.

If you carve out the oil and gas piece of it, which is just clearly an exception, our backlog -- or our growth in the Construction Services segment was up 8%, excluding oil and gas. Building Construction -- again, eight consecutive quarters of double-digit growth. So, our win rates are strong there.

MS, I think I mentioned a few quarters ago that we had a greater than 50% hit rate in the MS segment. And what that caused us to do is to start bidding more contracts. Because that is -- that means, on the positive side, you could say that's an extraordinary win rate, you are doing really well; on the negative side, you could say you're not bidding enough work.

So, we started bidding more work. And we think, over time, you get more towards a traditional win rate, which, in that sector, should be somewhere around 1-and-3, somewhere around the 33% range. So, anecdotally, we feel pretty good about our win rates.

Thank you very much.

Sure.

John Rogers, D.A. Davidson.

I just want to follow up a little bit on the margin profile. Mike, you talked about 8% long-term margins in Management Services. How much work is left that is substantially above that at this point?

I will let Steve jump in there.

I think that the 8% is the run rate, MS margin without success fees and award fees. So, I think there will always be opportunity, especially the way our MS team performs to earn above that. So, our long-term guidance is more about the base run rate.

Okay, thanks for that clarification. And then, Steve, in terms of the power business, and as that flows into construction, I assume that the margin opportunities there -- and I know you don't want to talk about specific projects -- but are substantially better than your conventional cost-plus construction services. And I was wondering if you could talk about that? And also relative to the pipeline that you have talked about, especially with the stadium work and some of those things, that I assume is more low-single-digit-margin-type opportunities?

Yes, well, the power is definitely above the current combined CS margins, which obviously are impacted by oil and gas, but also have the Building Construction business in it that has fairly low margins, but almost no working capital associated with it. So it's a very high-return business for us from a capital standpoint. But in the power segment itself, the margins can run upwards of 5% for these types of projects.

Okay. And in terms of the market opportunities that you are seeing out there, I mean, given that mix of projects that you are targeting, how should we think about the margin potential for that construction business within AECOM?

Well, we have guided 2% to 4%.

Right.

The issue there is the terms by which we signed for a particular project can impact our margins pretty significantly. When we are in a JV, for instance, where we don't have a majority, you wouldn't see any revenue associated with it, and you'd just see equity earnings, which should improve our margins.

Right.

So, it is hard to narrow down much more than that, given the terms of the projects.

Okay. Thank you.

You're welcome.

And our final question comes from Chase Jacobson from William Blair. Please go ahead.

Thanks for taking my question. I just wanted to follow up on AECOM Capital. I know it is difficult to predict the timing of closing these deals, but you were pretty confident for most of the year that would get done. Is there anything more specific than just timing that may cause it to get pushed to next year?

And with that, does it have any -- does it alter at all your plans or the timing of your plans to start raising external funds for AECOM Capital?

So, Chase, first of all, it's nothing more than timing. The project that we intend to sell is -- we have completed the construction of it. It is a 38-story apartment building. It is over 90% leased. It is leased well ahead of the schedule. It is leased at lease rates well ahead of the numbers we used when we underwrote the deal.

So, there is no question in our mind that the value that has been created is still sitting there today. And whether that transaction happens this year or next year doesn't change the fact that the value is created and exists on our balance sheet.

So, moving to the second part of your question, the raising of money has started. We are not ready to publicly announce who our partners are yet on that, but we are in the process of preparing the offering memorandum to go out and raise money right now. We have a private equity partner that will partner with us on one of the funds.

We are also in discussions with one of the larger pension funds in the world on establishing another infrastructure fund. So we are not just starting a second fund. We are in the process of starting a second, third and fourth fund, with the objective being to facilitate the deployment of external capital outside of our balance sheet, so that we can bring the entire integrated solution to our clients.

Okay, and -- that's helpful. And then on the US infrastructure, obviously a lot of excitement around that, and it is clearly starting to show in your results. So, not questioning it here, but as we look forward, Mike, I mean, what is the biggest external risk, in AECOM's view, of the trajectory of that US infrastructure market continuing to get better?

Our business is driven by GDP growth, right? We need GDP growth to fund much of what we do. And so, in my view, of course there will be minor economic skirmishes around the world, so to speak, that we deal with, given the diversity of our business, but none of those are of the magnitude that really keep us up at night.

The big issue is, do we continue global GDP growth that serves as a macro engine for our business? But that's the biggest concern is, if you ask me, number one concern would be global recession.

Okay, but on -- specific to the US infrastructure side, though, I mean, is there state funding? Or does that still stand?

No, I guess the risk would be that everything -- all the directional indicators that are giving us momentum turn on their head, right? So, the things like the momentum of the FAST Act -- that's done and in place. That's not going to change.

You have got momentum in Washington. The FAST Act was the first significant bill we saw go through Congress with bipartisan support, so, there is support in Washington for infrastructure. There is support in Washington now for a $10 billion water bill that is in the works. That's double the last water bill that was $5 billion.

We are seeing the presidential -- both presidential candidates talking about it, so I don't see support for infrastructure changing. And we are tracking dozens of specific tax measures in municipalities around the country that are expected to fund infrastructure. So, I don't really -- I don't see any of those really turning on their head that would cause me great worry.

Appreciate it. Thank you.

Great. Thanks, Chase. Okay, so, if there is no further questions, thank you, operator.

I wanted to touch on one additional topic before we close here. I just wanted to advise everyone that, along with our usual Form 10-Q filing that we will make tomorrow, we will also file an amendment to our Form 10-K for fiscal 2015 related to events in fiscal 2015.

But I want to be clear -- this amendment does not change the financial results reported in fiscal 2015. But in that filing, you will see that we identified a material weakness in an internal control back in 2015. We have already taken decisive steps to fully remediate that issue. But again, there is no impact to our previously reported financial statements for fiscal 2015.

But should you have any further follow-up questions about any of the details of this amendment, please contact our Investor Relations Department, and Will would be happy to walk you through more details about that.

But, again, thank you all for participating today. Thank you for your support of AECOM, and I look forward to speaking with all of you again next quarter. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may now disconnect.