Aecom (ACM) Q3 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal 2008 AECOM Earnings Conference Call. My name is Michael. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Paul Gennaro, Vice President of Investor Relations. Please proceed sir.

Thank you, Michael, and welcome everyone the AECOM's third quarter fiscal 2008 earnings conference call. As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see today, and as such, does include risks and uncertainties. As you know our actual results might differ materially from those projects in these forward-looking statements. Please refer to our press release or slide two of the earnings presentations to our reports filed with the Securities and Exchange Commission for more information on the specific risk factors that could cause actual results to differ materially. As we begin our call, let me remind you of some of the important information about our earnings that are posted to the Investor website, investors.aecom.com. First, we posted our earnings release and updated financial statements on the site for anyone who still need to access. Second, a replay of today's call will be posted there at around noon Eastern Time and will remain there for approximately two weeks. Please go to slide three. And lastly, since we are using some non-GAAP financial measures and references, the appropriate GAAP financial reconciliations are posted to our website as well. Now I would like to turn it over to AECOM President and Chief Executive Officer, John M. Dionisio.

Thank you, Paul. Good morning, everyone, and welcome to AECOM's third quarter earnings call. During today's call, I will provide you with an overview of our third quarter performance, the business trends we are seeing and an update of the Earth Tech acquisition. Following that, Mike will take you through the financial results and our revised guidance and then we will open the call up to your questions. Please turn to next slide. I'd like to give you an overview of what we are seeing in our markets and its impact on AECOM today and in the future. First the fundamentals of the engineering construction business remains strong. Substantial capital investments across all end markets is driving growth. We expect that emerging markets will use their new economic strength to fuel continued growth. In addition, ongoing urbanization around the world including high growth areas such as China and India is expected to continue to drive the need for our new infrastructure. While there is no debate over the need for infrastructure investments, governments around the world are still sorting out how to best meet this demand. Here in the United States, much credit has been focused on budget deficits of state and local governments. From our market perspective; however, the infrastructure investment picture remains strong. Bond fundings remain vital and private investment is on the rise. In the first half of the year, there were $226 billion of municipal bonds issued. This was the second highest volume of bond issues since 2000. We estimate that more than 75% of these bonds relate to infrastructure projects. And there is a steady flow of new and sizeable bond proposals on the table such as California's recent $9 billion proposed water bond issue. We're also starting to see an increase in projects being funded by public private partnerships. A total of $35 million excuse me, $35 billion of private infrastructure funds were raised in 2007, up from $7 billion in 2005. So far in 2008, $13 billion has been raised and 71 funds are aiming to raise $91 billion globally. Our public private partnerships are nothing new. These funds are now shifting from raising money to making investments. We are encouraged to see a number of PPP projects in our pipeline moving forward. In fact, in the United States alone, we are actively pursuing 13 opportunities whose total capital expenditures exceed $23 billion. These ongoing developments underscore our confidence in the infrastructure market going forward. We expect the private sector will continue to play a significant role in funding global infrastructure in the future. When we put together the universal need, emerging market demand, on funding and PPP, these trends are creating a solid pipeline of diverse, large global projects. The foundation of AECOM's business model has been diversification. Diversification in terms of our geographies and market, services, clients and funding sources, this model has served us well and we remain confident that we will continue to fuel our growth for the long term. Please turn your attention to slide six. While Mike is going to provide an in-depth review of our third quarter numbers shortly, I like to provide a brief overview of our progress today. Year-to-date, we have had strong growth in both revenue and earnings. We've also had a steady flow of new wins both in the United States and abroad and that momentum continues. In fact, over the past few weeks, we have had a number of important new contract wins. We've won a three-year $113 million contract from the US Customs and Border Protection Service to develop the San Ysidro port in San Diego, the largest land crossing port of entry in the United States. We also won a six-year contract to provide program management services for the development of Qatar's new $7 billion Doha port, currently the largest greenfield port development project in the world. In July, we were awarded an assignment to provide design services for a new $8 billion financial center in Saudi Arabia and our team was also awarded to provide architecture and engineering services for the renovation and modernization of the Eisenhower Executive Office Building within the Light House Complex in Washington, D.C. We also continue to win worth our major projects funded by state and local governments as which as the project program management and construction management contract for the $1.3 billion Sacramento International Airport improvement program. And recently we were appointed by the Airport Authority of Hong Kong to develop the airport's 2030 Master Plan. Finally, management support services, we recently won two U.S. federal government contracts for the Air force and the Navy. Richard, which I will discuss in more detail later. We are very proud of these new assignments, which represented only a fraction of our total wins and we've viewed this as a clear evidence of AECOM's solid reputation around the world and our ability to continue to win high profile, global and long-term assignments. Finally, we continue to advance our strategic acquisition plan with a closing of the Earth Tech transaction, which I will discuss in a moment. Please turn to slide seven. This slide presents a breakdown of our professional technical services core markets, which comprised approximately 83% of our business during the third quarter. Starting with the right hand side of the pie chart, you'll see our facilities and market made up 31% of our third quarter revenue, a significant portion of our work in the facility segment, it is in high growth market outside of the United States. Among the key projects in this end market is our work with the Libyan Housing and Infrastructure Board with whom we are helping manage a $50 billion capital infrastructure program. Within the United States, we continue to see strength in this market, including our ongoing work at all three medical centers, the Pentagon, and the World Trade Center site in New York City. Moving on to transportation, this end market comprised 34% of our PTS revenue. In our transportation business, we provide planning, design, program management, and construction management for large complex transportation facilities from highways and bridges to tunnels, airports, and marine facilities. Recent wins in this market include the design of the Craney Island port interchange for the Virginia DOT and construction management services with the Maryland MTA. Our next market is environmental, which includes water resources, drinking water, wastewater, storm water, as well as hazardous material. Year-to-date, we have increased our market share with the acquisition of Boyle and Earth Tech. The last market on the slide is energy and power. Our work here is in three areas, sustainability or demand side management, renewal energy and power transmission and distribution, and planning, permitting, and remediation for oil and gas clients. Our key third quarter wins in this area included a $20 million contract for this design of a 270 megawatt hydroelectric plant for Hydro-Quebec, as well as services related to a proposed 2,000 megawatt wind energy project for the Power Company of Wyoming. We also signed a master services agreement with BP Alternative Energy, which plans to invest $8 billion in solo win, hydrogen and natural gas power during the next ten years. Through continuing investments in FY '08 and FY '09, we plan growth in the sector to become 20% of our revenue. On slide eight, I like to discuss our Management Support Services segment, which comprised 17% of our revenue in the third quarter. Our MSS business generates approximately $1 billion of revenue providing logistical support services to the U.S. federal government agencies and facilities around the world. The Department of Defense, Energy and Homeland Security are our key clients. We recently won several new contracts. For the air force, we will be participating in the $10 billion [inaudible] program, and for the Navy, we will be supporting the $20 billion Guam expansion program. Please turn to the slide nine. We are delivering solid growth both in and outside of the United States. During the third quarter, our U.S. business grew at a rate of 13% while our non-U.S. business grew at 54% resulting in 45% of our net service revenue being generated in the U.S. and 55% outside of the U.S. Please go to slide ten, we have a well diversified mix of clients and funding sources and we continue to execute on our strategy of maintaining a well diversified balance of federal, state and local government clients as well as private clients. Turn to slide 11 please, we closed the Earth Tech acquisition in July... on July 25th, we have sold or carved out assets in China, Mexico and the United States. The total value of the sales carve out and price adjustments totaled $175 million of the $510 million transaction value. Additionally, we have identified buyers to purchase an additional $50 million to $60 million of assets over the next three to six months. Looking forward, we will continue to advance our strategic acquisition plan by focusing on opportunities in the following areas, energy and power, environmental, federal government, Europe, India, China and the Middle East. I'd like now to turn the call over to Mike for a review of our financials. Mike, please go ahead.

Thank you, John. Please turn to slide 12. First of all, we are very pleased with our strong third quarter results and our continued momentum. All of our key performance metrics reached record levels in the third quarter. We continued our top line growth and increased our gross revenue by 20% to $1.3 billion. Our net service revenue was up 33% to $853 million. As you know, net service revenue reflects the true earnings power of our business since gross revenue includes a significant amount of pass through costs that do not generate margin. Strong revenue growth and continued margin improvements drove our operating income through a record $64.2 million, a 40% increase over the last year's third quarter. Third quarter net income was $38.5 million, an increase of 59% over last year. This led to earnings per share of $0.37, a 42% increase over last year. Finally, our total backlog increased 15% to $7.1 billion and our net service revenue backlog grew at an even faster rate. These results point the strength in our business that positions us well for continued growth. Please turn to the next slide. As you know, we report our financial results in two segments, Professional Technical Services and Management Support Services. In the third quarter, PTS accounted for 83% of our gross revenue. Our PTS segment performed very well during the quarter. Gross revenue increased 21% and net service revenue increased by 32% to $810 million. Growth in our net service revenue reflects 19% organic growth and 13% acquisitive growth. The organic growth was driven by strong demand in Asia-Pacific, Canada and the Middle East in addition to steady growth in the U.S. in transportation, environmental planning and urban planning. Operating income for our PTS segment increased 44% over the third quarter of last year to $71 million and we continue to improve our margins, primarily due to operating leverage. As our business has continued to grow, we have benefited from spreading our fixed cost over a larger revenue base. Total backlog for our PTS segment was $6.1 billion, a 26% increase over last year. This growth reflects a nice balance of organic and acquired backlog. Please continue to the next slide. We are pleased with the strong performance of our Management Support Services segment, which represented 17% of our total revenue in the third quarter. MSS revenue for the quarter was $224 million, up 14% over last year. This improvement is primarily the result of strong activity on the Taji National Depot in Iraq and equipment repair contracts in the U.S. Army. Since we have not done any acquisitions in this segment, our growth is entirely organic. MSS operating income also increased 15% to $10.6 million. Please turn to the next slide. Our total consolidated revenue increased by 20% and our net service revenue increased 33% over the third quarter of last year. As we have said before we strive for a healthy mix of organic and acquisitive growth. During the quarter, our net service revenue was comprised of 20% organic growth and 13% acquisitive growth. Operating income grew 40% to $64.2 million significantly outpacing revenue growth in the quarter. This reflects an improvement in both our gross margins and our operating margins, which I will discuss in a moment. Our net income increased 59% over last year to 38.5 million, meanwhile our tax rate was 36% in the third quarter, which was above our structural tax rate of 34% due to one-time adjustments in the quarter, and finally our earnings per share increased 42% to $0.37. This reflects a share count increase of 14% over last year due to our IPO in the third quarter of 2007. Please turn to the next slide. During the third quarter our gross margins increased 28 basis points compared to last year's third quarter. The year-over-year improvement is due to better project performance in PTS and our mix of revenues in the MSS segment. EBITDA margins increased 87 basis points year-over-year and 60 basis points compared to last quarter. These results were due to our ongoing cost containment efforts and operational scaling. Please go to the next slide. Slide 17 is a snapshot of our balance sheet. Our balance sheet remains healthy. We closed the quarter with cash and cash equivalents of 173 million and debt of 89 million. Concurrent with the close of the Earth Tech transaction in July, we completed assets sales, carve-outs and purchase price reductions of $175 million. We also expected to sell additional assets with an estimated value of $50 million to $60 million pending the receipt of governmental concerns and final closing documents. On a pro forma basis with the Earth Tech acquisition at June 30, 2008, we had a cash balance of $156 million and more than $250 million available under our bank revolver. Once all the asset sales are complete, we expect to have a net debt to EBITDA ratio of approximately 0.5, which is well below our target range of 1.5 to two times EBITDA. Working capital net of cash decreased $40 million in the quarter due to the growth in our accrued expenses and advanced billings, which contributed to a more efficient working capital structure overall, and finally cash flow from operations was $89 million in the quarter due primarily to strong operational performance. Please turn to the next slide. We closed the third quarter with backlog of $7.1 billion, a 15% increase over last year. It is important note that these backlog numbers do not include many of the recent wins that John mentioned earlier, including the Hong Kong Airport, the Doha airport, Guam or any of the recently announced IDIQ contracts in our MSS segment. As we said before, backlog can be a lumpy measure and that is certainly the case with MSS this quarter. Third quarter MSS backlog was down 26% from last year, primarily due to the winding down of some of our work for the U.S. Army and the timing of a contract modification, which we expect to be completed in Q1 or Q2 of our 2009 fiscal year. Looking forward, we are in a good position to win meaningful work with a robust pipeline of activity. While we do not include IDIQ contracts in our backlog, they certainly give us a clear view of expected backlog. Under the current contract field teams, IDIQ contracts, we're one of seven new awardees for this roughly $1.2 billion annual budget program and with regard to the biological threat reduction contract, that's been discussed in the past, our client has combined several other programs with this award increasing the entire port available funds from $4 billion to $8 billion. With regard to both of these contracts, we had been selected for the short list of providers and are positioned well to be awarded our fair share of this work. Now moving on to the next slide, our previous EPS guidance, was in the range of $1.30 to $1.34. We have increased our EPS estimates for the full year to $1.34 to $1.37. The increase is based on the continued strong performance of our business in the third quarter and a visibility that we now have with the rest of the year. Our revised guidance also reflects $0.01 of EPS dilution related to our recent Earth Tech acquisition. We will also be filing an 8-K in the next 65 days containing additional financial information related to Earth Tech. At the mid-point of the range, our updated guidance implies a pro forma EPS growth rate of 27% excluding the impacts of last year's IPO. Our revised 2008 guidance also takes into account the following. $27 million of EBITA from M&A deals closing in FY '08, including Earth Tech, $17 million of amortization of acquired intangible assets, including $14 million from FY '08 acquisitions, which includes Earth Tech, a diluted share count for the full year of 104.2 million shares and 105.6 million shares in the fourth quarter, and a 34% structural tax rate for the full year and a 32% tax rate for the fourth quarter due to the settlement of some tax audit. Lastly, we'll be providing our outlook and guidance for fiscal 2009 on our fourth quarter earnings call. With that I'd now like to turn the call over to the operator for a question-and-answer session. Operator, please go ahead. Question and Answer

All right, thank you. Ladies and gentlemen, this time we'll begin our question-and-answer session. [Operator Instructions]. And our first question is from the line of Vance Edelson with Morgan Stanley. Please go ahead with your question.

Hi, thanks a lot. You mentioned that the bond issuance in the PPPs are supporting, funding for infrastructure right now. Could you provide a little more granularity on what the state governments are thinking right now when you talk to them and therefore what the prospects are for project cancellations or postponements as we go in out of calendar '08 into '09, what's the vibe that you get from customers right now? Thanks.

In terms of project delays and cancellations, we're not seeing any of that in any of the U.S. markets that we're in and remember the U.S. market in the state and local governments is about 13% of our total volume. So, it's relatively small size. We're... what we do, what we are seeing is just the opposite that we're being awarded new contracts in states California, we've just won a project, say in Florida, in Virginia, in New Jersey. So we are not seeing the states in terms of infrastructure spending, going back if anything they are continuing their spending on those critical projects, which are needed for public safety in terms of highway repair work, which repair work improving capacity.

Okay. That's helpful, and in terms of transportation, in that portion of your business, could you comment on the approximate portion of that that would be characterizes... characterized as mass transit versus building highways and bridges and so forth?

In the U.S. market, in terms of transportation, it's probably around... so I would say 40% transit and maybe 60% highway and bridge.

Okay, great, and one last question, if I could. Could you just update us on your views for what the November election might mean either positive or negative if there is a republican or a democrat in the White House, any implications there? Thanks.

Not to have a political commercial vehicle, but I believe with either candidate, they both have strong views on infrastructure spending going forward. Obama has proposed a $60 billion infrastructure bank to fund various infrastructure projects. McCain has proposed utilization of Public Private Partnership. I believe it's... no matter, if the democrats or the republicans win, it will be a... we will see an increase in the spend and also developing range of coming up with funding to accommodate the needs going forward.

Okay. I appreciate the color. Thanks.

Thank you.

Thanks, Vance.

All right, thank you. Our next question is from the line of Steve Fisher with UBS. Please go ahead.

Hi, good morning. First on Earth Tech, you mentioned the $0.01 of dilution in your guidance for fiscal '08, is that the way we should think about it roughly $0.01 to $0.02 per quarter of dilution for the next... the first 12 months of ownership?

No. The $0.01 to $0.02 of dilution in this tough period is not reflected over a 12-month period. As we've said in the past, first of all, Earth Tech will be accretive on a cash basis in '08, as well as '09. In '08, it will be approximately $0.01 dilutive. In '09, for the full fiscal year of '09, we would expect that that would be accretive on a cash basis, as well as accretive on a GAAP basis, and we would expect that accretion to be at least $0.04 to $0.05 EPS for the full fiscal year '09.

Okay, great. And is that assuming that you complete the sales in three to six months?

Yes. We have... as you know, we have already completed a significant portion of the sales or we have memorandums of understanding signed for just about all the assets we want to sell except for another $50 million or so that we're working on. So, we expect that these will be completed fairly quickly and we'll not have an impact or we will not have a material impact on EPS.

Well, let me also explain the divestitures are not losing any operations. Okay. So in terms of the fact that if we do not sell them in 30... 60 to 90 days and we need to keep them 120 days, they will not be a drain in terms of our net earnings.

Okay, and that's fine. And can you just talk about how geographic mix of your environmental business changes before and after Earth Tech?

Okay. Let me... Earth Tech had a strong environmental practice in both Canada and the United States. It will bolster our environmental practice in Canada, significantly increasing its capabilities there. And it will provides us more diversification here within the United States complementing us again in different regions. In addition... in addition to the geographic diversification, what Earth Tech provides us it is with a very strong federal practice in terms of environmental management, which we will primarily, in the private sector environmental managements to the market. So the combination with Earth Tech, we enhance our geographic diversification, as well as our client mix.

Okay. In terms of the international piece of your business, can you just talk about what changes on the margin you are seeing over the last few months in terms of robustness of opportunities, growth outlook, any changes you are seeing there either positive or negative?

Well, clearly the international markets have been growing at a very rapid pace for quite sometime now, in fact this quarter, our growth rate even accelerated even further in the international markets. The margins are relatively constant, I should say the gross margins are relatively constant outside the United States. We are seeing a rapid increase in labor cost in some markets, which have put a little bit of pressure on gross margins, but our net margins outside the U.S., as well as inside the U.S. are improving.

Okay, great. And then moving on to the infrastructure side of things, when you look at the funding available for infrastructure projects, how does the outlook look basically for either domestic or water compared to transportation, are there any difference really?

I think it's... the transportation... the transportation market in terms of the state and local spending is more focused on and federal spending is more focused on the transportation side of the infrastructure. On the water, wastewater side, clearly the federal side of the federal funding is not where the transportation side is, but there is significant amount of activity in the water side, in the Public Private Partnership arena, which will continue to support the water, wastewater side of the U.S. business.

Additionally, the bond market has picked up quite a bit as you know. In the first half of this year, we have experienced the second highest volume in muni bond issues since 2000, and about 75% of those bond issues relate to the type of work that we do. So with... we have now seen a significant pickup in bond issues and some of the bond measures that have reposed, you've... I'm sure you've seen that California has proposed a ballot measure for the fall for a $9 billion bond issue for water facilities in the state of California. So, we really start to see the pickup on all fronts.

Okay. Great and then lastly, when you look at your exposure in, I guess both the transportation and the water markets in the U.S., you're outside of California and New York, can just give us a sense of what your as far as five largest states are?

We have significant activity and we're continuing to grow our backlog in Florida, New Jersey, Virginia, California, as you mentioned the Midwest, Illinois, Minnesota. So we are seeing, we are seeing significant activity in growth in our infrastructure markets in the United States. In states which have it, have not been impacted say by the... the revenue decline, as well as those states that have been, so it's, as I mentioned earlier on this call, we continue to see a robust transportation in water market because the projects that we work on once that are necessary, it did not nice to have their critical type projects.

Okay, great. Thanks a lot not. Nice quarter.

Thank you.

Thank you.

All right. Thank you. Our next question is from the line of Avi Fisher with BMO Capital Markets. Please go ahead with your question.

Hi, thanks for taking the questions. Just to clarify something, you had said '09 accretion from Earth Tech of at least $0.04 to $0.05, is that on a GAAP basis or cash basis?

That's on a GAAP basis and of course the cash accretion would be even greater.

Right, of course. And also prior question, you had asked, someone asked but the transportation makes between transit and highway is at 40/60, does that include Earth Tech?

No, that's type, that doesn't include Earth Tech.

And what does it work with Earth Tech?

With Earth Tech, it's primarily in air transportation businesses, the large piece of their business is environmental and facilities. Their transportation business would primarily be highway and bridge. I don't know the numbers but I just eventually guess, probably it's 80/20.

So it would shift more towards highway bridge away from air transit?

That's correct. I said it's not a significant piece.

Right, not significantly, but it doesn't, it changes the shift directionally it keeps the shift and mix directionally and where it is now.

Yes.

And I guess related to that.

We will still have probably a mix of highway and bridge to transit of about 40 to 60, but once we add Earth Tech in.

Okay, with 40 transit and 60 bridge?

Avi, just to make sure we are clear on this. The transportation portion of Earth Tech is a very small of their business relative to their environmental and facilities business.

Correct, absolutely, but they are bidding on some PPP projects related to highway.

Sure, sure, sure.

You said 13 in general and it sounded like one in Florida, that you just won.

That was the one in Florida, we just won, it was not Earth Tech.

Okay, got you. Circling back, you mentioned projects that you recently won that are not included in backlog I think you highlighted Guam and Doha, is it possibly you could tell us what backlog would be including those?

I wouldn't want to speculate on those at this point, because we would be giving you the full picture obviously if we just added three projects to backlog is numerous projects that we won in the past 40 days since the end of the fiscal year. So, I don't think it would be meaningful to talk about backlog and a couple of projects.

Okay. Can you talk a little bit there or a little more color on the Doha Port Project, what it might be worth?

Yeah, I could tell you that Doha Port Project, first of all, it was a great project, a great collaboration of our best resources around the globe, the CapEx budget for that project is about $8 billion CapEx.

B with the, billion with a B.

B with the B. That's the CapEx budget for that project, and we have not received permission from the client to disclose [inaudible] relative to that, but suffice it to say, it's one of the larger projects if not the largest port projects we've ever done in the history of the company.

Okay. Moving on you mentioned the shifts towards energy driven by Hydro-Quebec, also some wind farm work. Can you talk a little about the opportunities in both of those end markets, your exposure to any future elephant projects or big clients, major clients?

Okay. We just [inaudible] our energy market focus is on in three areas, sustainability of what's land site management, where we assist and work with governments and public agencies to lower their energy usage. So that's a piece of our business and then the other is in remediation work for oil and gas companies that we included in our power and energy. But going to the point that you had mentioned in terms of renewable, energy and power distribution, the transmission and distribution, we do planning and designing in wind farms, solar farms, hydroelectric. The hydroelectric market, which is a growing market throughout the world, we've entered that in a big way with the recent acquisition of Tecsult, a firm out of Quebec, which we closed in the second quarter. And they've... through AECOM's global footprint and their capabilities were taking at that work and we are leveraging it throughout our global markets, looking at opportunities in Africa, there will be an opportunities in Asia, as well as of developing a renewal of this hydroelectric market in the United States.

Okay. And could you talk a little about the opportunities in wind, you said you had a 2,000 megawatt wind farm project?

Yeah, the wind is a market which is gaining steam, it's gaining momentum, we've won this wind farm project in Wyoming. We are looking at projects for... on the Long Island off the coast. So, there are many areas throughout the United States. We are seeing a lot of activity, as well as opportunities in the UK.

And what's the scope of the kind of work you're doing for a wind?

We do the planning of the wind farm, we look at the transmission and distribution and we do also the program management and construction management.

I got you. It sounds like, there is some... I'm guessing some competition among some several firms to enter, what they think is fast growing markets. Could you talk a little bit about acquisition, pricing and acquisition multiples, where you're seeing, then you've talked about not wanted to pay... pay between seven and eight times, are things still in your ballpark?

Yeah. We've completed a number of acquisitions as you know, all within or below the ranges that you just mentioned. So, we're still seeing favorable pricing in a consolidating market. We of course the private equity firms that don't have access to that much debt, as they did have dropped out of the bidding, so we've less competition of bidding for some of the acquisitions we are trying to undertake. Our pipeline is more full than it has ever been of opportunities around the globe and the pricing is all within the range, we're better than the pricing we've seen historically.

Got you. Thank you. I guess, I've one more question. And it should have been my first question, but your margins have dramatically improved year-over-year for the second quarter in a row, your aim is for the second quarter in a row, you've seen year-over-year improvement and you've seen sort of mid-sevens, mid-to-high sevens margins. Has there been a shift in the company? Is there something that would indicate that this is sustainable that you're in a... that you're a 7% range EBIT margin company now with Earth Tech?

Clearly it's sustainable. I don't think there is a question in my mind whether it's sustainable, it's... my mind is how much hard work, we have ahead of us to continue on the same margin of improvement path. As we've been saying for quite sometime, we really strongly believe that there is... that there is a significant operating leverage in this business. And as we continue to grow the size and the scale of the company, we keep extracting better margins through operating leverage and we're seeing that in all aspects of our organization and we expect that to continue to improve for the foreseeable future.

And how much of that operating leverage is driven by, just the international exposure and the contract structures overseas versus U.S.?

I'm not sure how to answer that because our operating leverage is indifferent to where the profits come from. Right, so when we talk about spreading our fixed-cost over a larger base, it's indifferent whether that profit comes from the U.S. or non-U.S. markets, but clearly the U.S. markets have been growing at a very healthy pace and non-U.S. markets are growing at a even faster pace in contributing a bigger share of our profits.

Well, thanks for the answers and a great quarter.

Great, thank you, Avi.

All right, thank you. [Operator Instructions]. Our next question is from the line of John Rogers with D.A. Davidson & Company. Please go ahead. John Rogers - D.A. Davidson & Co.: Hi, good morning. Congratulations on the quarter, I guess first of all, Mike or John, in terms of Earth Tech, should we think about the margins as similar to what you're doing in your existing business? Is there any notable structural difference we should be aware of?

Yeah, the margins on the Earth Tech and the other recently acquired businesses are at least as good as our margins if not better. John Rogers - D.A. Davidson & Co.: Okay. And backlog, I mean the visibility of their business similar sort of metrics?

Yes, very similar business if we compare obviously, we have different durations in backlog, in the transportation business to an environmental business and their backlog follow the same basic common attributes that are as follows. John Rogers - D.A. Davidson & Co.: Okay.

So, it's a healthy backlog. John Rogers - D.A. Davidson & Co.: Okay. Great, and then John, I'm curious I mean you've been in this business long time and been through some downturns in the past, I assume and while you are not seeing any sign of real deterioration here, I'm curious about what other things you worry about in terms of that could deteriorate or affect this market and sort of warning sign that you think about?

Well, John, if over the years, I've seen the cyclical nature of our business and the reason for the model that we have of diversification is one that with the lessons learnt, the last... the last cyclical downturn we have... we have was after 09/11 in terms of the industry. We weren't heard as badly as some companies we did well because of our diversification. But we realized that we needed to diversify more and say in a global arena, and so since 2001, 2002, I mean we've moved our business from probably 35% global non-U.S. and 65% U.S. to where we are now, which is a 55 global, 45 U.S. and we've diversified and expanded our environmental market. We are in the power and energy markets. We are in the environmental management markets we weren't in. So from the lessons learnt, the model that we've developed and we've successfully implemented through organic growth as well as M&As was to just make sure that we were not going to be held hostage in any one market or any one client. And you can see that from some of the pie charts that I had up there, where you see the mix of our client base and funding. So, it's well distributed, and even now there are some difficulties that we are seeing in the economy in the United States or in the UK, we hadn't been heard and in fact, we still maintain a very healthy growth rate here in United States. John Rogers - D.A. Davidson & Co.: And are there any sectors in that broader pie chart that are weaker at this point?

Overall from a microscopic point of view I'd say no. When you look at it and if we looked and peeled the onion and looked at different geographies, I'd say, yes we weren't [inaudible] to land development. So that there are some difficulties in people who are in the land development business of if you are in the residential housing, which we weren't. But overall, in each of our market sectors, we continued to show growth. It may not be the growth that we would have liked, but the offset is that it's being counter balanced by significant growth activities in the Middle East, Australia and Asia. John Rogers - D.A. Davidson & Co.: Okay. Thank you. Congratulations.

Thank you.

All right, thank you. There are no further questions at this time. Management, please continue with any closing comments.

Okay. I would like to thank everyone for joining us on our call today and for your continued interest in AECOM. We look forward to see many of you at the upcoming D.A. Davidson Conference in mid September, and if you have any additional questions, please feel free to contact us. With that, I would like to thank you again. With that, I'd like to thank you again. [inaudible].

All right, thank you, ladies and gentlemen. This concludes the third quarter fiscal 2008 AECOM conference call. If you would like to listen to a replay of today's conference in its entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000 and put the access code 11117481. Once again those numbers, 1-800-405-2236 or 303-590-3000 and put the access code 11117481. Again, I'd like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.