ACM
#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 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.
Please turn to slide 3.
Beginning today's presentation is <UNK> <UNK>, AECOM's Chairman and Chief Executive Officer.
<UNK>.
Thank you, <UNK>.
Welcome everyone.
Joining me today is <UNK> <UNK>, our President, and <UNK> <UNK>, our Chief Financial Officer.
I will begin with an overview of AECOM\
Thanks, <UNK>.
Please turn to slide 13.
We are pleased with the progress of our business, particularly the swing to organic growth in the Americas DCS business with strong margin improvement in overall DCS and in MS and the enhanced pipeline of opportunities across our diverse end markets.
These positives are enough to offset the weakness in oil and gas and the short-term negative impact of the Fort McMurray fires.
As a result, we are reiterating our fiscal 2016 guidance of $3 to $3.40.
Our confidence in the range remains high and is supported by the underlying improvements across our end markets.
We anticipate our third-quarter EPS will be similar to the first quarter due mostly to the ongoing weakness in the oil and gas market and our anticipated AECOM Capital realization in the fourth quarter.
Finally, we are progressing well and capturing synergies and on track to achieve $325 million in run rate synergies during 2017 and to exit 2016 at a run rate of $275 million.
Now I will turn the call over to Q&A.
Operator, we are now ready for questions.
Thanks, <UNK>.
Oil and gas is definitely a headwind.
We were predicting that it would be off about 30% for the year.
Through the first half we're down about 50% on the top side.
So we're just fighting a very difficult market but I think we're holding our own.
We haven't cut to the bone and we think that once the prices rebound a bit we're well-positioned both in Canada and the heavy oil sands and the US to recover.
And we're actually making some investments in that arena and quite frankly our downturn has not been quite as bad as some of our competitors that we're seeing.
So I think that it's still something that we view as upside that's just a challenge in the future.
And we're fortunate enough to have been managing the rest of the business to offset what we view ---+ what we know is going to be a hole for us for the full year relative to our original guidance.
So for the second half we're forecasting relative to our overall guidance to be in the $0.15 to $0.20 headwind from that which we've been able to make up to still get back within our guidance range, actually well within our guidance range because our confidence is still quite high.
The Fort McMurray fires are really just a temporary thing, <UNK>.
Our folks have moved out but they will move back in and they will be part of the recovery and the rebuild of what's gone up there.
They haven't lost too much in terms of oil output.
But there will be repairs and maintenance that we will help with and in the long term hopefully will be a tailwind for us.
I think that from a contribution standpoint it's probably still true from relative to where we thought it was going to be.
We thought it would swing to a profit in the year.
It was breakeven last year if you recall.
So it's a headwind relative to what we thought it was going to do but on a contribution margin line is not going to be a negative.
<UNK>, it's <UNK>.
Listen, we had been talking about this since the beginning of the year that we felt fairly confident that organic growth would come back to the business in the latter half of the year based on what we're seeing in the market, based on wins, based on backlog.
And for this quarter it came back to a positive growth in the quarter even though we weren't expecting that to come until the second half of the year.
But the bottom line is we do feel that the second half of the year is going to be much stronger on the organic line.
I'm not prepared to predict organic growth exactly by quarter but everything that we were predicting in the first half of the year is starting to pan out.
We're seeing a robust market.
We're seeing robust wins and your question about whether the organic growth, whether it will match the backlog growth inevitably it does over time.
But trying to predict which quarter that happens in is a little difficult.
But we feel really good about the US business.
It's taken a while to get us through the integration efforts.
We're through that now.
We're focused on growth again.
The market has given us a little tailwind and we should expect to see that both in the second half of the year organic growth numbers as well as even more so in 2017.
The market is very strong.
I think you've heard us talk about the pipeline moving from $35 billion to $40 billion of projects in the pipeline that we're pursuing.
The bids under evaluation, which are bids that we're not just pursuing but we've actually submitted our bids, were in client evaluation, jumped from $5 billion last quarter to $12 billion this quarter.
So real needle moving numbers there.
And I think when you look at this business, the size of the contracts are so significant that you can't look at just backlog on a quarter-to-quarter basis because of the size of the numbers.
So it's helpful to look at what we're pursuing, what we're qualified to pursue.
Because of the capabilities that we brought together from URS and AECOM legacy government services, we have more capabilities to pursue more projects.
We have the size and scale that allows us to pursue bigger projects that we historically may have partnered with someone on.
So the dynamics for us in the marketplace have changed quite a bit and we're very confident you're going to see that as these bids that are in evaluation get decided upon in the coming year.
Okay so let me take the first part of the question and I will let <UNK> take the second part of the question.
The pipeline as well as the business that are in evaluation are a combination of recompetes and new business.
So I can tell you just off the top of my head I know two of those projects are comprised of $8 billion is two projects.
Of that $8 billion, $5 billion of it is a recompete and $3 billion of it is new business.
But the important differentiator, which is a great segue from the comment I made earlier, is the $5 billion that is a recompete, <UNK>, is a business where we were a sub previously and we're going at this one as a prime.
Because of new capabilities and size and scale of our organization we can compete as a prime instead of going at it for a sub.
So of just $8 billion of those $12 billion under evaluation, $8 billion of the $12 billion, $5 billion of the $8 billion is a recompete.
But we're going as a prime instead of as a sub and $3 billion is entirely new business.
Listen, it's a competitive market and it has been for a while.
But our win rates in that market are as good as they've ever been.
We think our capabilities given our new size and scale are differentiated in the market and there is a high barrier to entry in the markets that we're talking about here.
This isn't old-style log cap work where just about anybody can do it.
We're talking about work that is very highly qualified work with technical capabilities for intelligence community or defense that has enormous barriers to entry.
So you're not going to see people moving over from the low level price competitive work to move into our space if they are not already there.
On the guidance, <UNK> I think it's a good question.
Obviously the $0.14 was not, well, there was a piece of it probably that we would've collected during the year but that $0.14 would've come over a long period of time which we're now going to accelerate into FY16 and FY17.
And then we've got the headwind from oil and gas and if you just do the math you kind of get something, if you're starting from the midpoint of the range, something higher than the midpoint of the range.
But when you're trying to land a company of this size at the end of this year, having some contingency in there for other unexpected items, some of which are known to us now, some of which are not known is prudent from our perspective.
Hi <UNK>, this is <UNK> <UNK>.
I guess first of all we're right on track with where we expected to be in the first half of the year.
If you look historically the business produces about 20% of its cash flow in the first half of the year and 80% in the back half of the year.
Just as a couple of data points, in the first half of the year we spend a little more than $100 million on variable comp and some tax related to our equity programs that we don't have in the second half of the year.
So that's sort of the most significant item that influences the timing of the cash flow beyond what we see in just the normal run rate and earnings in our business.
Our business does ramp up in the second half of the year and that also influences cash flow.
So where we sit today we have great confidence in our ability to hit that full-year guidance number.
Our CapEx in the second half is ramped up a little bit because of our real estate consolidation.
If you recall we're still going through the program of consolidating real estate related to the acquisition.
So we do see that ramping up a little bit in the second half of the year.
Yes, that $0.14 item not only affects the bottom line but it also affects the revenue and the MS business.
So it comes through both elements of the P&L.
The second quarter, again on the bottom line it's about $45 million of revenue at the top line.
I think there's a number of contributors there.
First of all, the overall power business in the United States is fairly strong and we know there's a whole host of conversions that are being considered across the country.
But I think the biggest influencer here is that the business that we acquired from URS has been in the power business, the Washington Group, Morrison-Knudsen has a legacy of some of the most iconic power projects here in the United States and around the world.
So it's an incredibly strong franchise.
But under the URS leadership they were underinvested and they weren't focused on growth.
When we acquired that company we quickly identified the talent that exists in that group that has really put together some great projects over the years.
And we invested in them to grow that business and they went out and really took charge of the market, added $1 billion of backlog to that business in the quarter alone.
In Q3 they will have a 3X book-to-burn ratio in Q3 alone.
So it's a combination of a strong market.
It's a combination of bringing together a great franchise with great expertise and a great team and investing in them to grow that's producing this.
So we feel pretty good about our capabilities in the market coming together and continued growth in that end market.
Absolutely.
That's been part of our strategy.
We over the years we acquire companies that have a great expertise and great resume weight and we take them onto our platform and mesh them together with our political contacts, our market contacts in various cities around the world.
And as I mentioned earlier in my prepared remarks when we thought Tishman Construction it was a New York focused business.
90% of its business was in New York and now that has dramatically changed.
And we're taking that expertise.
We've taken it into the London market.
You've heard us talk about our new two high-rise wins in London.
We're proposing another billion dollars of projects that are in evaluation in London alone in the high-rise market.
We have nine building construction projects in the state of California alone when we had zero two years ago, just taking that expertise and capability and meshing it together with our presence in these other markets.
So that has been a part of our strategy for the past few years.
It's working well.
Our leadership, our Construction Services leadership team in the past year has set up a presence in Hong Kong, Singapore and Australia.
We're growing that business with our capabilities and our resume weight from the US business also.
So it's part of our strategy.
We're doing it in building construction, we're doing it in energy and power as I just talked about.
We're doing it in Management Services where we're taking those capabilities that we have performed for the US government and bringing it to the UK government, to the Australian government, the Middle East and Singapore and India right now.
There's a whole host of markets that are very active right now.
We're tracking at least a dozen ballot measures this fall.
A few of them that I'm really familiar with.
The biggest one is right here in our hometown in Los Angeles, Measure R2.
You'll remember that Measure R1 produced a $40 billion fund entirely dedicated to transportation infrastructure.
Measure R2 that will be on the ballot in fall of this year will produce $120 billion program, will be the largest public works program in the United States.
And right now the initial polling that I've seen is showing that that will pass.
So what we're seeing is many states and cities from Seattle to Denver to San Francisco where you've got the taxpayers in those cities are very comfortable with increasing tax measures if they are wholly dedicated to transportation.
There is not a lot of people voting for tax increases when they are going into a general fund that they think will be misspent.
But when they are coming into wholly dedicated transportation infrastructure funds overwhelmingly the taxpayers are voting for it.
And we think that will be a big boom for our business coupled with the $305 billion FAST Act that was passed in December.
And then you add on top of that the private sector money that's coming into the market in public-private partnerships.
We're seeing it with Penn Station in New York.
We're seeing it with the $5 billion LAX airport modernization program.
So you couple all of it together with private money, with federal money and with state and local ballot measures gives us a lot of optimism for civil infrastructure markets.
Great question, <UNK>.
First of all, we keep reading the same press that you're reading that New York is going to slow down at some point.
But last quarter we had the 1 Vanderbilt project we won in New York, a $1.4 billion project in New York, so every time we hear news that it may start to slow down we win another project.
So we had 25% organic growth in that building construction end market this past quarter.
But your question if it slows, because listen we know real estate moves in cycles, but one of the things that we have seen is we have a backlog in building construction that we can see out a few years.
And we have built up such a robust backlog in that space it will carry us through the next few years.
So you don't see buildings, especially the kind of buildings that we're building, they don't stop halfway through construction and shut them down.
That doesn't happen here in the US in any major market.
So we don't see that having an impact on our EPS.
Even if there were a slowdown in building construction it wouldn't happen for years and we could look back to the last few cycles.
This isn't our first cycle we been through.
We've seen it before and we've got a lot of visibility out for the next three years in that cycle.
<UNK>, this is <UNK>.
I'll take that question.
First of all, when we evaluate the goodwill we don't have a concern at this point.
That testing if you remember is based on the long-term view.
And what we think we're experiencing now in Q2 and in Q3 is really the short-term impact of lower oil and gas price.
With respect to our covenants there is no impact on our covenants if there ever was to be a goodwill impairment.
So you know, we're tracking numerous milestones.
But the increase in backlog that we've been experiencing and the pipeline of projects that we have underway we continue to monitor that when we have every expectation the backlog will continue to grow based on the pipeline of activity we have now.
But we feel very good about the other milestone on cash flow and debt paydown.
As <UNK> mentioned we feel very confident on that throughout the year.
So we feel like we're on track for everything, all the milestones that we've set out for us returning to organic growth in the Americas, continuing that growth in the second half of the year would be a great milestone, hitting our cash flow numbers which we expect to do will be a great milestone, continuing to add to the backlog, continuing to diversify our business.
We're through our synergy program for the most part.
We're 90%-plus executed on that and we've exceeded all expectations on that and our margins continue to improve as we said they would.
And we expect that to continue to be a milestone that we watch also.
So there's a wide variety of milestones we're watching every day and they all look pretty darn good.
That would be an organic growth number, yes.
<UNK>, what I believe I said was that we thought it would be breakeven from a contribution standpoint or contribute on the margin.
But the headwind is really against what we expected oil and gas to do for us for the full year.
So listen, that piece of business now is fairly inconsequential to our earnings.
In fact, it's pretty much adjusted out of our forecast for the year.
So we don't have a lot of exposure on it.
And I would feel confident in saying that we don't believe that the size of that business and the overhead associated with it is significant enough to be a headwind where it would create a loss for us.
Let me take part of that and I will hand it over to <UNK> and <UNK> for the other part of it.
I think the important point is that our overall backlog is up 8% in Americas DCS.
Transportation backlog where we're the most significant player in that space is up 9%.
So we're seeing all of the results of what we have been talking about.
In the first quarter we talked about what we were seeing in terms of activity in the marketplace where clients were starting to think about spending significant amounts of money.
So that's the first clue that we gave to you about what we were seeing.
Then we started realizing it in terms of an increase in backlog.
Then we started seeing in the quarter we had a big Colorado Department of Transportation win I-470, which is a big joint venture design build win for us with our partner.
So we're seeing the results of what we expected.
Then by the way, we returned to positive organic growth in the quarter.
So you start walking this down the path, we talked about the opportunities we were seeing and we started winning it and we showed you that and then we showed you the positive organic growth.
So it's moving exactly in the direction that we had expected.
From a margin standpoint our margins are continue to be strong in DCS.
They are probably getting better in CS because of the headwind from oil and gas kind of alleviating as time goes on.
MS we have very significant margins in that sector but our second half will probably exceed our expectations relative to what we had thought about MS in the second half because we viewed their margins over the long term returning to the 8% to 10% range.
And we think we'll exceed that.
So we're in a competitive market.
Price is very important.
But we're getting better continuously on execution to drive the project margins.
And you can tell from the bottom-line margins that we're bringing those synergies through the P&L which helps us be more competitive but also is falling to our bottom line as predicted.
From a pure cost standpoint in terms of driving those synergies, there's still more to come.
We exited the quarter at 230 of run rate synergies.
The year will be $275 million and FY17 will be at least $325 million.
What <UNK> mentioned, so there's still more synergies to come, what <UNK> mentioned in terms of being mostly done is the emotional and kind of inward facing restructuring from an organizational standpoint which we're basically done.
We'll always be tweaking our teams and our leadership teams but the actual integration is over from that perspective.
So we've got execution to do on the real estate and we have a track record of executing quite well.
We've taken out 205 locations and consolidated them to get our people together.
We've removed 3 million square feet of space and brought our people together.
And ultimately the run rate for real estate alone will be almost $85 million in savings.
So there's more of that to come.
There's some big, big consolidations.
We just did a big one in Denver which is one of our largest offices that are now operating about 1,400 people in one location.
But to us that's not so much integration related to an acquisition because we were, if you recall, before the acquisition we were taking out about $40 million of real estate, so we had a pretty good program in place anyway.
But from our leadership team, and I think it really trickles down to our folks, is the integration with URS is over.
And we're turning our attention towards the external markets.
So as we've said all along that we expect this to be a big part of our business but not a big part of our balance sheet.
The first $200 million that we deployed to this was entirely off our balance sheet and our next two funds that we're focused on raising will be a combination of our capital and outside capital but almost entirely outside capital.
A very small amount of our capital dedicated to it because to produce the size and scale of the projects we want to get involved in we don't think that's going to entirely come off of our balance sheet.
So we're in the process right now.
We've got a number of discussions with outside funders that will contribute to those the second and third funds.
I don't think we're prepared to start giving guidance on 2017 at this point.
But we certainly we talked about how we feel about the end markets that we're in and how bullish we are on all those end markets around the world.
But we're not prepared to start giving guidance on 2017 just yet.
We absolutely see it picking up and we have been saying that for a while and now we're starting to see that momentum.
We're seeing it in our pipeline of activity.
Now we're seeing it in the backlog, now we're seeing it in organic growth.
And I mentioned earlier there is a dozen programs that we are tracking that are very significant.
Toronto has got a $50 billion program they are pursuing.
Florida has got a $9 billion program that's very, very focused on transportation.
$120 billion in Los Angeles, there's a big numbers from Atlanta to Seattle, Denver, Phoenix, New York City, San Francisco, one after another where the country is finally turning their attention to closing this enormous deficit that we have in infrastructure spending over the past 20 years.
So when I bring together the significant broad-based grassroots support at the municipality level for tax increases, the federal transportation bill the first time in 10 years that we've had a long-term bill and then the private sector that is very anxiously looking to deploy more money into the P3 market, you bring all those together I think we're about to move into a period of prosperity for civil infrastructure.
And I don't think there's a firm in the United States or in the world that's better positioned than us to take advantage of that updraft in the market.
So the biggest growth is in the intelligence community, frankly, and it's the area that has the highest barriers to entry and so it's a market that we feel very good about.
DoD is still a big market for us.
We have a number of very significant bids in proposal at DoD.
They are all in the continental United States which is different than where we were four years ago, five years ago where most of our business was OCONUS or outside the continental US and we know that that market deteriorated quickly.
So what we feel good about is the markets that we're pursuing have high barriers to entry.
They are in the continental United States, so not as much driven by the war theater.
But we're also seeing that MS business expanding significantly outside the US.
We've taken our capabilities that we've delivered historically for the US government and as I mentioned earlier, we now have a very significant presence in the UK doing work for the nuclear end markets there, doing it for the Defense Department there.
We've won our first project for the Qatari Navy.
We have significant projects now in Australia.
The large naval port on the eastern seaboard of India.
So we're seeing the governments outside the US being very receptive to the capabilities that we have in the US.
Everybody looks to the US for expertise in global defense.
And so it gives us a real leg up in those markets.
Sure.
We spend a lot of time thinking about new technology disruptors to traditional infrastructure.
And just last week I moderated a panel at the Milken Global Conference where we brought together ---+ we had the mayor of Los Angeles who is thinking about how these new disruptive technologies affect his city.
But we also had on the panel representatives from Uber, from Hyperloop Technologies, from WeWorks talking about how do we embed the thinking into the infrastructure of cities as it's influenced by the shared economy or new technologies like Hyperloop which is a client of ours, we're designing their test track right now to move passengers and freight at 800 miles an hour at a magnetic levitation vacuum tube.
We're in discussions with them on how to do that both here in the US as well as in other parts of the world like the Middle East.
Relative to smart cities we're working with the US Commerce Department to bring smart cities to other parts of the world.
We were awarded two projects in India.
As you know Prime Minister Modi has a plan to design 50 smart cities across India.
We won the master planning work for the city of Dholera which is Prime Minister Modi's home state as well as for the new smart city of Vizag which is the short name, I can't say the long name for it.
But some really exciting stuff around the world and we're participating in all of that bringing together new technologies and traditional infrastructure.
I think it's a real competitive advantage that we have.
That's right.
No, I don't think so other than AECOM Capital.
We do think that MS is probably a little bit better than we had anticipated but they've been exceeding our expectations every quarter for the last two years.
And Q3 is really just impacted by some of the short-term slowness in oil and gas and some of the impact that we have because of the recent, the natural disaster.
When you say the problems historically, there's a couple of problems historically.
One has been where people bought greenfield I'm sorry bought brownfield existing assets and overpaid for them.
So put that aside because those projects are people overpaid in the market.
We're not involved with those.
We're involved with only greenfield development.
The second piece of the puzzle is the ones that haven't been successful have been revenue-based structures.
So toll roads that were entirely based on revenue whereas the kind of P3s that we're generally dealing with here are non-revenue based.
They are a fixed stream of what we call availability payments.
So if you look at the automatic people mover system at LAX that's going to be put in place it's a approximately $2 billion program where somebody will design, build, finance and operate it for a period of 30 years in exchange for a revenue stream or the equivalent of a lease payment from the LAX ---+ the LA World Airports Authority.
So they are very comfortable once they understand the details of how it will be operated and what the performance requirements are going to be, they don't have to worry about the revenue side of it, it's just a fixed payment.
So those are the types of projects in the P3 market that we think will be most popular going forward and the type of projects we're pursuing now.
So those two are not hydro.
They are gas-fired, combined cycle plants and they are in the process of finalizing the EPC contract right now.
So let me answer a couple of your questions.
The harvesting of gains will be an ongoing process over the next three years let's say.
Some of those projects are completed now.
One is set to be completed later this year.
Some are breaking ground right now so you've got a three-year cycle yet in front of us.
So it's over the next I'd say, I said three years, I probably should say more like three to four years but we'll have continuous harvesting over that period of time.
With regard to the size of the next two funds, I don't have a predetermined size yet.
We're in various discussions but I can easily see three different funds that we've talked about.
One is the continued real estate development that we have underway.
The second is what I will call private infrastructure that is like the investment we already talked about that we made in the Ohio River hydroelectric project, the more energy focused projects.
And we could see a few hundred million dollars fund there easily.
Then the third fund would be for private P3 type projects like LAX that we're bidding on right now that would be we're partnered with someone else on that on the capital side.
But I could see easily three funds totaling over $1 billion in aggregate.
We would participate in that through providing design and construction services.
We would participate in that through management fees under a traditional private equity P3 model and we would participate in the carry interest by sharing in the profitability of those projects over a certain threshold return.
Yes, we will give you updates as we evolve.
We've just started our discussions with investors that want to participate in that based on the success of our first fund.
We have a number of people that are very interested in participating in future funds with us.
Great, thank you, operator.
I hope that what you heard today was a sense of increased confidence in what the future holds for AECOM.
And hopefully it's quite evident to you that we have turned the corner and we are participating in some markets that are very interesting to us.
We had significant wins in the power business.
You're starting to see momentum in the DCS Americas.
Our UK business is stronger than ever and I'd say we've never been as confident about our ability now to grow as a business, to generate cash and drive shareholder value and execute against our vision of bringing together a fully integrated firm that has the ability to design, build, finance and operate infrastructure assets around the world.
So thank you for listening today.
Thank you for your confidence in AECOM and we look forward to talking to you on our future calls about our progress and our continued success.
Thank you.
