Aecom (ACM) Q2 2012 Earnings Report, Transcript and Summary

The Second Quarter 2012 AECOM Earnings Conference Call. [Operator Instructions] As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Cyril, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Please turn to Slide 2. As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we see it today and as such, does include risks and uncertainties. As you know, our actual results might differ materially from those projected in these forward-looking statements. Please refer to our press release or Slide 2 of our earnings presentation and to our reports filed with the SEC for more information on the specific risk factors that could cause actual results to differ materially. Important information about our earnings is also posted on our investor website, investors.aecom.com. We have posted our earnings release and updated financial statements on the site for anyone who still needs access. Note that we are using some non-GAAP financial measures as referenced in the presentation. The appropriate GAAP financial reconciliations are posted on our website as well. Finally, a replay of today's call will be posted to the website at around noon Eastern and will remain there for approximately 2 weeks. Beginning today's presentation is John M. Dionisio, Chairman and Chief Executive Officer. John, please go ahead.

Well, thank you, Paul. Good morning, everyone, and thank you for joining our call. With me today are Mike Burke, President; Steve Kadenacy, our Chief Financial Officer; and Jane Chmielinski, our Chief Operating Officer. As you know, we announced our second quarter results in our press release today. Although we achieved our second quarter guidance, we lowered our full year guidance to $2.30 to $2.45 due to setbacks in our MSS segment, which we will discuss later in the call. Our objective for today's call is to highlight 3 key aspects of our performance in the quarter and our future outlook. First is to highlight the measurable and sustainable progress we've made against our strategic initiatives. Second is to examine the underlying health of our business trajectory. And lastly is to illustrate how our results reaffirm that our strategy is on track, positioning us well for future growth and enhanced profitability. After Steve takes you through the financials, Mike will discuss our MSS segment, our full year outlook and our M&A strategy. I will review the strategies that drive our operating performance. Collectively, these initiatives support our overarching goals to drive improved shareholder returns over time. I will discuss this matter later in the call. With that, I'll turn the call over to Steve. Please go ahead, Steve.

Thanks, John. Please turn to the next slide. Consistent with our comments on the last call, we delivered $0.43 in earnings per share for the quarter. Our results were driven by organic growth in several key end markets and regions, better leverage in our cost structure and improved returns on strategic investments offset by underperformance in Management Support Services. At a high level, gross revenue was up 4% year-over-year with net service revenue roughly flat, but showing a sequential increase of 5%. The sequential improvement was largely driven by our PTS segment, which makes up 90% of our net service revenue. In the quarter, emerging and natural resource-rich markets accounted for over 40% of our net service revenue and posted 8% percent year-over-year growth. Operating and net income were down 16% and 15%, respectively, driven by the MSS segment, which we will discuss in greater detail later in the call. Please turn to the next slide. Looking at the segments, PTS delivered a 9% increase in gross revenue and 2% increase in net service revenue. Organic net service revenue grew by 1%, an improvement over the previous quarter. Operating income declined 1% and operating margins were down 20 basis points. Sequentially, operating income was up 4%. U.S. backlog conversion remains slow despite a healthy new award environment. This was partially offset by an improvement in European performance as the business benefits from the restructuring actions taken in the fourth quarter of 2011. We also saw an acceleration in key high growth markets of Latin America, Asia and Australia, which all posted double-digit gains. Looking by sector, we had strong growth in the private arena led by power, energy, mining and environmental management. MSS posted a 28% decline in gross revenue with a 15% decline in net service revenue. Operating income was down 90%. Because of the significance of the shortfall in MSS, Mike will elaborate on this segment's performance a bit later. Please turn to the next slide. Moving on to the rest of our financial performance, EBITDA margin for the quarter was 7.9%, down 96 basis points year-over-year. The setback in our margin was due almost entirely to the MSS segment. PTS gross margin and operating margins were essentially flat to the prior year and quarter. Better cost controls across the organization helped offset some of the impacts of the MSS issues. Looking ahead, we will continue to leverage our scale to improve margins, and we are committed to achieving 12% EBITDA margins by 2015. Our results in the quarter were also aided by strong returns at our infrastructure fund investments. Now turning to cash flow and the balance sheet. Cash flow from operations was $11 million in the quarter, an $18 million improvement sequentially. Our outlook for the full year remains strong and we are confident in producing free cash flow greater than net income for fiscal year '12. DSOs increased by 3 days sequentially, but we believe this is temporary and was largely driven by a slower than excepted ramp-up in revenue. It is also notable that despite the challenges in MSS, we saw a 7-day sequential improvement in DSOs in MSS. Our long-term goal is to manage our overall business to 80 days and we still believe this is achievable. Cash and cash equivalents increased 15% to $466 million, and our untapped borrowing capacity was $807 million at the end of the quarter, providing us with significant financial flexibility to execute on our strategic imperatives. Before I turn the call over to Mike, let me wrap up by saying our underlying financial platform is strong and we are well positioned for the opportunities in front of us. Now, let me turn it over to Mike. Mike?

Thanks, Steve. Please turn to the next slide. I will begin with a discussion of our performance in the MSS segment. Two key factors negatively impacted results. First, the Iraq withdrawal happened faster than we could adjust our cost structure in the quarter and backfill revenue; second, and more important, we had unusually poor project execution on several projects in the MSS segment. We have since restructured our cost base to better match the overhead rates on our federal contracts, and we have adjusted our project and management teams to address these issues. Based on our performance year-to-date and expectations for the rest of the year, we are adjusting our EPS guidance range to $2.30 to $2.45, as we announced in our press release earlier today. As you know, our MSS segment is comprised of very large contracts. Beginning the year, we had anticipated an Iraq withdrawal in late 2012, with a parallel ramp-up in Afghanistan. Unfortunately, the rapid drawdown of Iraq in late 2011 caught us and many others by surprise. However, we continue to ramp up our activities in Afghanistan as we begin the hiring of 2,000 additional employees to support the efforts of the U.S. government in Afghanistan. This ramp-up is progressing, but not at the same speed we anticipated. We believe the Afghan projects have long-term viability based on the 12-year strategic partnership agreement signed by the President this week with the Government of Afghanistan. While we are not pleased with the MSS performance in the quarter, we are confident the difficulties are temporary, and the backlog and solid prospects will return the segment to the performance levels that we have experienced over its history. And turning to the future, we are encouraged by the $300 million in wins in the second quarter, driving total backlog up 4% to $2.2 billion in the MSS segment. We have a strong second half pursuit pipeline, which would benefit growth in FY '13 and beyond. There are positive underlying fundamentals that we expect to contribute to sequential earnings growth: First, continued improvement in our European business, building on the 230 basis point sequential improvement in margins in the second quarter; better project execution in both MSS and PTS; normal seasonality in our PTS business as we have higher utilization and additional workdays in the back half of the year; increased earnings leverage from our share repurchase program and record backlog of $16 billion. Please turn to the next slide. As you know, the amount of business won in the quarter, the strength of our backlog and our book-to-burn ratio are all critical indicators of the health of our underlying business. I'm pleased to report all 3 of these metrics improved in the second quarter. We won $2.4 billion of business in the quarter, up 10% sequentially. This marks the highest level since last June. Our backlog also grew 1% sequentially and 4% year-over-year to a record $16 billion, as I mentioned a moment ago. And our book-to-burn ratio was 1.2. Looking deeper within these numbers, the year-over-year backlog growth was driven by a balanced demand in both our private and public sector businesses. In addition to our consolidated backlog, we have a robust pipeline of opportunities from over 100 IDIQ vehicles and unconsolidated joint ventures, which on a factored basis equate to an estimated $14 billion in additional opportunities. And beyond our existing book of business, we have seen encouraging trends in our active pursuits. For example, in almost all of our markets, the value of our proposals outstanding and awaiting client decision are up significantly versus 2 quarters ago. Please turn to the next slide. Now let me turn to our capital allocation strategy with a focus on how we balance between investments on organic growth, M&A opportunities and share repurchases to drive improved shareholder returns over time. Share repurchases complement our strategy of balanced growth and create shareholder value by allowing us to purchase our shares in what we believe is a significant discount to their intrinsic value. Consistent with this, during the second quarter, we repurchased 2.9 million shares, and in April, we completed the final tranche of our $200 million share repurchase authorization. We will continue to evaluate opportunities for future stock buybacks. M&A remains a critical part of our overarching strategy and our M&A criteria are straightforward, focusing on complementary geographies and end markets, where we expect rapid growth, higher margins and the need to quickly build a presence and/or capabilities. As Steve said earlier, our emerging and natural resource markets grew 8% in the quarter. Our M&A strategy is focused on deploying capital in these markets. One example of how M&A allows us to quickly establish critical mass in markets with strong fundamentals is our Canadian hydropower acquisition. The addition of this firm transformed AECOM into a top competitor in the global hydropower market, which attracts over $40 billion in annual CapEx. Hydropower is an example of an end market capability that we can extend across our global platform. Today, we are working on several new hydropower projects ranging from Africa to North America. Looking ahead, our current M&A pipeline is focused on the emerging markets of Africa, Brazil and Asia, as well as oil and gas and mining sectors, where we expect a disproportionate amount of CapEx to be spent over the next 10 years. As you can see, we remain committed to a consistent investment program across all economic cycles, as we believe this is the best way to create growth and shareholder returns. Now let me hand the call over to John, who will discuss our market opportunities and organic investment priorities. John, please go ahead.

Thank you, Mike. Please turn to Slide 11. I'm sure most of you are familiar with this slide, which represents the diversity of our business across end markets and geographies. Next week, we reach an important milestone, 5 years as a public company. Over this time, our revenue has increased over 130% to $8 billion. We expanded margins by 200 basis points, and our backlog has grown from $3 billion to $16 billion. Along the way, we have extended the business into new geographies and market sectors, and enhanced our service offering. Back in 2007, our power, energy and mining business only made up 3% of our overall portfolio, and has more than tripled to 12% today. We expanded our footprint into Africa, Latin America, increasing our business outside of the United States to roughly 60% from 45% in 2007. In addition, we have established an integrated service offering that we have successively leveraged on some of the world's most iconic projects. Today, we are active in over 130 countries, and AECOM is a partner of choice for clients with complex infrastructure needs. Now with that as a backdrop, I want to discuss conditions in our markets and how we are repositioned to capitalize on the opportunities ahead. Let me begin with our Asia business, where growth remains strong, up over 20% year-over-year. Governments across Asia are investing in large infrastructure projects that will fuel the next generation of growth. Both China and India have embarked on 5-year plans, which are forecasting to bring $1 trillion in infrastructure investments. In addition, China recently announced plans for additional infrastructure stimulus. This funding will be directed to critical infrastructure such as hospitals, airports, railways -- areas that fit well into the portfolio of integrated services that AECOM offers. For example, in Malaysia, we are providing planning and conceptual engineering services on the country's $15 billion mass rap [ph] system. With this project, we are leveraging our global platform by bringing together our top transportation engineers from the U.K. and Australia, supported by facilities' expertise from across the Asia-Pacific region. Rounding out Asia, I would like to point out that we closed on an acquisition of a premiere environmental consultancy firm in Taiwan, which was announced in January. Now moving to India. Our strategy is twofold [ph]: First, is to focus on complex urban developments such as our work on the $90 billion Delhi, Mumbai industrial corridor, which spans over 900 miles and links India's political and business capitals. Second is working with Indian multinational companies to deliver global infrastructure solutions, especially in mining. Business remains strong in Australia, and there is a large pent-up investment demand in the natural resources sector, driving an increase in our mining business. In addition, the pace of activity in rail, port and renewable energy is driving our business forward, and total wins increased by 80% in the quarter. Beyond the robust local market, Australia has become a gateway to mining projects in Africa and Asia, where our local relationships and global platform are brought to bear. For example, we are supporting the mining infrastructure needs of a long-term Australian client on a project in Africa, for whom we are delivering by leveraging teams based on 4 continents. In the Middle East, our business momentum is accelerating in Saudi Arabia and Qatar in particular. As Qatar gets closer to implementing its $150 billion infrastructure investment program, we expect the pace and size of new awards to grow. Saudi Arabia is investing roughly $400 billion in infrastructure over the next few years. As we build out our capabilities in the Kingdom, we are successfully leveraging our global resources to deliver world-class services on local infrastructure projects. We have been operating in Qatar and Saudi Arabia for over 30 years, and have over 2,000 professionals on the ground, providing us a distinct competitive advantage to bring global expertise to service the local client base. In Africa, we see strong opportunities driven by foreign direct investments from both the oil and mining majors across all our end markets, with particular areas of focus in rail and port work. We began our expansion on the continent in South Africa starting in 2010 and now operate in over 30 countries. During the second quarter, we made further progress winning 2 assignments in Mozambique, one for a healthcare project, and the other, a port assignment. In Europe, which has been one of our most challenging markets, performance and outlook are improving, supported by leaner cost structure and a significant increase in wins. We are experiencing an improvement in awarded business and seeing more opportunities in transportation and energy. Our strategic shift to the oil-rich economies in the East has positioned us well for several sizable opportunities from Azerbaijan to Russia and Turkey, all of which have economic -- enormous infrastructure needs. While still early, we are seeing good traction in our increased emphasis on Eastern Europe, where we experienced 40% year-over-year growth in the second quarter. In North America, architecture [ph] business once again recorded strong revenue growth led by oil and gas and mining work. In Western Canada, the vibrant market is being fueled by significant oil and gas investments. In Eastern Canada, mining activity has created multiple prospects to aid income. In the United States, we are seeing significant oil and gas opportunities, helping our private sector business accelerate in the second quarter and increasing wins 19% sequentially. Looking ahead, we are increasing our investments in domestic natural resources and recently added new capabilities to expand our shale business, an area where we expect upwards of $30 billion of capital expenditure. In addition, commercial construction activity continues to improve in recent mixed use in high-rise residential projects. We have seen an acceleration in social infrastructure areas such as healthcare, technology and education. One recent example is Cornell's 2 million square-foot technology campus on Roosevelt Island in New York. We are working as preconstruction managers on this transformative project. Turning to the public sector. In Canada, we are seeing increased activity in social infrastructure and transportation, which are supported by a strong public-private partnership market. All told, our public sector wins rose over 50% sequentially in the second quarter. Although the United States public sector expenditures remain challenged, we have solid visibility with over $2 billion in backlog supporting our civil infrastructure business in the United States. In addition, we are also well-positioned to benefit from the growth in alternative delivery and user-fee funding. We are actively pursuing several transportation and social infrastructure P3 opportunities, which would have total capital expenditures of approximately $20 billion. In addition, user fees continue to gain traction. Last month, the Southern California Metropolitan District, the largest water utility in the United States, raised the water rates by 5% annually for the next 2 years. These types of dedicated funding sources are driving multiple major pursuits, which we expect to be awarded in the next few quarters. In rounding out the Americas, Latin America continues to exhibit strong momentum, and our business there grew over 50% in the quarter. Latin America presents strong market opportunities, and we are pursuing both organic and M&A investments. Before we turn to Q&A, I want to reiterate that AECOM is well positioned for the future. We have the right platform, the right footprint and the right team in place to deliver improving returns and growth. With that, I'd like to open the line for questions. Operator, please open the line, and thank you very much.

[Operator Instructions] And gentlemen, your first question today comes from the line of John Rogers with D.A. Davidson. John Rogers - D.A. Davidson & Co., Research Division: Could we just go back to the MSS segment a second and just try to -- maybe I'm just not getting it. But I'd assume that this business was a little bit more stable and we wouldn't see this sort of volatility given the visibility you had with these large projects. And so I'm wondering about your confidence in presumably some improvement going forward and what we can rely on to get there.

Sure. John, let me try and take that. A number of angles. First of all, let me to try explain what happened, and then I'll address the second part of the question, which is what can we expect going forward. So listen, the impact in MSS segment this quarter was a combination of a few different things: First of all, the drawdown of activities in Iraq; secondly, the inability to allocate that overhead across a larger revenue base; and then third, the slower than expected ramp-up in Afghanistan. So first of all, on Iraq, we had expected, and our client, the U.S. government, had expected that, that would not ramp down until the end of 2012. It surprised us and many others in the industry at the end of 2011, when it ramped down very precipitously. Secondly, we were expecting our Afghanistan work to ramp up more quickly than it has to offset some of that revenue decline. Those 2 missing elements caused us to have a lower revenue base, which we then could not allocate all of our overhead across that revenue base under our federal rate structure. So those few things, in addition to a few project performance issues that we mentioned, contributed to that -- the poor performance in the quarter. Now moving forward, this MSS segment has had a great track record of capturing market share and great execution across many projects for a long period of time. We've had -- we have 200 projects in that sector that we've worked on over the past 2 years and we've executed very well on almost all of them. A few of them have caught us by surprise, unfortunately. But looking forward, we did have $300 million of wins in the quarter and $2.2 billion of backlog in the MSS segment alone. The Afghan project is starting to ramp up now. You saw the President sign the long-term support agreement through 2024, that will require us to staff up another 2,000 employees throughout this year. And the pipeline of new opportunities that we're bidding on is as good or better than it ever has been. John Rogers - D.A. Davidson & Co., Research Division: So Mike, the difference in terms of outlook relative to what we were talking about 3 months ago is the pacing in Afghanistan primarily?

Well, it's not just Afghanistan. It's the rapid downturn in Iraq, a slower than expected ramp-up in Afghanistan and the pipeline of opportunities that we're pursuing. Some of them, we expected to come to fruition a little more quickly than they have, but the pipeline is still there.

Your next question comes from the line of Tahira Afzal with KeyBanc.

This is Saagar Parikh on for Tahira. Just a few quick questions. The one thing that you guys had done last quarter was you gave a pretty nice breakdown of, year-over-year, where the differences came on an EPS basis. Is there any way you guys could do something like that this quarter? Or give us a little bit more guidance on that?

In comparison to what? Which items in particular are you looking for year-over-year changes in?

Yes, I mean, the prior -- last quarter, you guys gave examples of, there's a $0.04 impact from this thing, a $0.02 impact from Western Europe, a $0.04 impact related to MSS projects. Is there anything like that, that you could give us to give us a little bit more idea?

Yes, I think the bottom line for this quarter is fairly straightforward. The entire miss relative to full year outlook is attributable to the MSS segment. And you could see that fairly clearly in the financial statements that were attached to our earnings release. And so if you're looking for what's the year-over-year impact here or the impact relative to our overall full year guidance, it is that MSS segment item that I just talked about.

Okay. And then second question, you mentioned that your backlog conversion is a little bit slower than what you guys were anticipating. Is there anything going on there or is it just clients, clients that have been slow with converting there? Is there anything to look into in that area?

Well, let me try to present the entire picture regarding our backlog wins. Our book-to-burn for the second quarter was 1.2 compared to 1.1 in Q1. Q2, we won about $2.4 billion in new projects compared to $2.2 billion in Q1. Our backlog overall was up 4%. But the difference is that the awarded backlog was up 12% and our contracted backlog was 2%. So what's happening is that there are delays, clients have -- are awarding projects, but it's taking longer to sign these projects up into contracted backlog, which has an impact in terms of additional SG&A for indirect labor because we have people who are waiting to go on, on projects. Again, the -- and this, I think, is just a significant issue that the recession has caused some significant headwinds in several of our geographies, especially in the Americas and in Europe. It's not a matter of projects that are out there and opportunities, we're winning those. It's really the slowness of our clients to make that step to convert them into -- from wins into backlog.

Your next question is from the line of Steven Fisher with UBS.

Just to dig into the MSS a little bit more. I mean, the bad contracts, were those different ones than you had last quarter? And then how much of those issues are the projects in the legacy business versus McNeil and SSI?

Steven, first of all, one of the projects was a follow-on task order to one of the projects we discussed last quarter. The remaining projects were not related to last quarter projects. Related to the second part of your question, there were projects in both the legacy business, as well as our National Security Programs business. But more of the problem projects were in the National Security Program business versus the historical legacy defense business.

Okay. So given that we've now had a second quarter in a row with some new troubled projects, what is your confidence that those issues are now contained to this quarter and there won't be further ones in the back half of the year?

Yes, we are confident that we have addressed the problem projects, that we have adjusted the project teams to ensure that we don't have execution issues going forward. And we are confident in the project performance part of the second half of the year, and we are confident that our income from operations from this segment will improve over the second half of the year relative to the first half.

But let me just add that we don't want to represent that we will be making up that lost revenue from the Iraq projects in the second half, there may -- by the escalation of Afghanistan. We still will have a bit of a shortfall on the revenue side because Afghanistan is, even though it's growing and it's a very nice contract, it's not going to replace all that revenue right in the next 5 months. It'll take a little bit longer.

So I guess on that point, just wondering how to think about the second half of the year in terms of gross profit versus your equity income. I know you just said that the operating income would be up, which I assume is after you factor in the equity income. So are you assuming that the gross profit is going to be positive in the next 2 quarters?

So listen, how we look at that segment is we look at all of our business. Whether the income comes from a JV or directly is somewhat irrelevant because if we own 51% of the JV, all of it comes in, and then you back out the minority interest, if we're a 49% owner, we only take the JV income in. So we look at EBIT from -- the way we manage the business is looking at the total EBIT from that segment. And we are expecting that our total EBIT from that segment or income from operations inclusive of the JV portion will be equal to or better than the performance in the first half in that segment.

Okay. I guess just maybe a little bit more color on what types of customers and projects in the Americas where you're seeing the lower conversion from awarded into contracted in revenues?

Okay. The segments in the United States that are, I guess, a little bit slower are on the water side because of the lack of funding that we experience. Our water customers are mostly municipal agencies and they don't have the funding. So it's make investments, so it was a little -- so in the ones that do, it's just slower in the conversion. And also, we're still waiting to get the Reauthorization Bill passed through Congress. I think this is the 9th continuance that we have. Now, the funds are at a constant level of about $50 million a year, so it's not a matter of the funding. It's a matter of that clients are not making major decisions on major program -- are not making decisions on major programs because they don't have the visibility in terms of what their fundings are going to be long term. Now we've been fortunate that in contracted backlog, we have several large projects that go on for several years. And in our transportation business, in the United States, we have a strong market. A matter of fact, year-over-year, we will see about a 3% growth. But the new projects are taking longer to come on board, where we anticipated that they would be in backlog and we'd be working on them at this time. It's just taking longer. Something that might have taken 6 months to convert to backlog is taking 9 months to a year now.

So I guess just a last follow-up then is, when you still have a pretty significant ramp-up to hit the back half of the year, it sounds like there'll be some -- you're expecting some improvement in the MSS profitability. But what has to happen on the PTS side? And are you assuming that this conversion picks up?

We always have a better second half than the first half, as Mike mentioned. It's because of the number of days, because of the amount of -- number of days, working days. The fieldwork goes into high gear with overtime throughout the last 4 months of the fiscal year. We also see growth continuing, I mean, the growth that we have, the 20% organic growth in Asia-Pacific. And that keeps -- that's going to continue to escalate. We also are looking at an escalation of activities in the Middle East. Europe, which was not much strong at all last year, has shown signs of recovery and will do better in the second half than they did last year or in the first half. So there are a lot of things that we have going on for us, and as well as in the United States. I mean, in the United States, a couple of months ago, the FAA finally, after 23 tries, have passed a bill, a 4-year bill, which will spend $16 billion a year. And many of the projects we are waiting to start are going to be starting in terms of new airports and airport rehabilitation. So it's -- we have -- with the guidance that we gave of $2.30 or $2.45, we have a high degree of confidence that we will be able to achieve our guidance and come in, in the midpoint of that range.

Your next question comes from the line of Avi Fisher with BMO Capital Markets.

I think you probably could anticipate my first question since I think I ask it every quarter. But are there -- what changes are you doing internally to support your guidance for free cash flow generation in line with net income?

Well, Avi, this is Steve. And yes, we could expect that question. And we have continued to focus on it as a company and the culture is there to achieve it. We really have a great deal of confidence in achieving free cash flow greater than net income for the year. There's puts and takes in the quarter. Our AR was up about 1.6% this quarter, but our NSR was up 4.8%. And we're still on target over the long term to manage it, as an overall company, down to 80 days. We've talked in the past about the incentives at all levels in the company we can -- to drive cash flow, and that will continue. And it is paying off underlying it, underlying the overall DSO in the results this quarter. You see the U.S. infrastructure down 2 DSOs, and the MSS down 7 days. So we're starting to see some things underneath the data here that are boding well for the full year.

And with some of the incentives we discussed, has there been any changes to that? Because John pointed out you've been public for 5 years. And over those 5 years, EBITDA has grown 20% CAGR. And if we just take your average 5-year free cash flow, it's grown 1% CAGR.

Yes, well, I mean our incentive programs have changed. If you look at the proxy, almost every senior executive in the company is guided by cash at some level in their formulaic incentive programs, and we drive those all the way down to people in the field collecting cash. So I think we've made major changes in how we incent people, and I think you'll see it paying off.

In regards to incentive comp, do you guys do guaranteed bonuses or compensation either to -- when you acquire companies or to -- acquire employees?

Very rarely. Certainly, none of the senior people in the organization have guaranteed comp at any level. But moving down to new hires, occasionally, somebody has a guaranteed compensation for one year.

The reason I asked this because there are some issues that some professional services companies here in New York that had -- that offered those, so I was just kind of curious. On to pricing, could you talk a little bit about kind of what you're seeing in the pricing market and just going through the big end markets, if at all possible? I know it's pretty broad, but in infrastructure engineering and facilities and buildings, talk a little bit about the bill pay spread. Because from my understanding, from what we heard from other companies, a lot of the cost reimbursable engineering firms, it's hard for them to get margin expansion in a sort of tight -- weak pricing environment.

Yes. Generally, the pricing, of course, is difficult to generalize because we are so diverse across geographies and across business lines. So without going into every single one of them in detail, I could tell you, generally speaking, that pricing has held steady in markets. It might be a little up in the strongest market, a tiny bit down in the weaker markets, but generally, the pricing is holding steady. The challenge is more on delivering it because of the slowness of the conversion, as John mentioned, from the wins to revenue-generating contracts. And so that's where you're seeing some margin challenges. But otherwise, the rate per hour, so to speak, or the cost that the client is willing to bear is somewhat steady around the world.

Okay. And does it -- I mean, how does it compare -- I mean, is it still a little light relative to, say, 4 or 5 years ago?

Yes.

And just finally, quickly, I noticed an 8-K was filed, if not -- late last week, or earlier this week, that I think the head of your Asian-Pacific group, Nigel, is leaving.

Nigel Robinson.

Yes. I mean that's been one of the bright spots for the company. I was wondering if you could provide some color on who's replacing him. It's an important part for the company, so I wanted to get a little more color on that.

Okay. What we're going to be doing -- Nigel had been responsible for all our non-North America work that included Europe, Middle East, Africa, Asia and Australia. He's retiring at the end of this year. What we've done is we have broken that, the global space, up into 2 regions. EMEA, which is Europe, Middle East and Africa, and we've appointed Fred Werner, who is the President of our global business lines and strategic group, to run the Middle East. And in Asia-Pacific, we have Tony Shum, who is our Chairman of Asia, to run that. Then Tony is basically has been running the Asian market for the last 10 years. And so, we feel -- we felt that even though that Nigel has done a nice job, it was too big of a region for one person. And we're now looking at the world in those 3 mega geographies: the Americas, EMEA, and ASPAC.

And who is running the Americas?

Jim Jaska.

Your next question is from the line of Andy Kaplowitz with Barclays Capital.

Maybe if I could ask the MSS questions in a different way. Before last quarter, you were averaging close to $20 million in operating income in MSS, and you were down to $2 million this quarter. Mike or Steve, can you tell us how much of the impact approximately was execution versus just the excess overhead and all that kind of stuff? Is that possible? And then the obvious question to ask is, is the government being more difficult with AECOM given the tighter budgets that are out there? Is it just more difficult to deal with the federal government right now? And is that some of the problem? And then maybe just finally, you're moving to more self-perform in MSS. You've talked about that for a while. Does that have anything to do at all with execution issues?

No, the self-perform issue doesn't have anything to do with it. The difficulties in dealing with the federal government is really not the issue. But getting back to the first part of your question, the majority of the impact is due to overhead. And specifically, what I mean by that is that when you have a downturn in revenues, you have projects that precipitously come to an end or projects that don't ramp up as quickly, you have a certain overhead base. And that federal business, the MSS business, you have a federal overhead pool that gets allocated across your revenue base. And if that revenue base contracts quickly or by surprise or doesn't ramp up as quickly, you have excess overhead that cannot be absorbed under the federal rate structure. So it's difficult to pin it on overheads or lost projects because those 2 are inextricably linked to one another.

Okay, I understand. That's fine. Maybe if I could shift gears and ask you guys about the U.K. market, which has been another difficult market for you guys. You mentioned Europe getting better. The Olympics are upon us, which was a source of pretty good project work, I would say, for most companies. What do you see in that market past the Olympics? Is it sort of stable or is it improving? Is it going to get worse? What do you guys think?

Well, when we look at Europe -- I mean, I think as you referred to, we have the U.K. and we have then, Continental Europe. The U.K. market remains a challenge. I mean, the U.K. just slid into recession this past few weeks. What we -- we are seeing that there is activity and much improvement on the water side. And we're doing well on the water side of the business. And there's this bubbling of activity on the infrastructure side, the environmental, as well as in transportation. But it's going to be a long time for that market to come back. Where we're seeing the growth opportunities is in Eastern Europe, where I'd mentioned Turkey, Russia, where we're getting work on the -- with the oil and gas, minerals and natural resource markets, as well as transportation, environment and the water side. It's going to be a slow go for Europe. The growth -- I mean, the growth will be -- it'll take some time. What we are doing though, the real significant opportunities when you look at EMEA is in the Middle East, in Qatar and in Saudi Arabia. And this idea of combining Europe and the Middle East works well because we have, in Europe, an excess number of available people. And in the Middle East, we need people. So the combination of the 2 will do several things. It will generate additional revenue, it will help us control our resources and our overhead, and we'll be able to perform and staff the projects better. So rather than just waiting for Europe to come back with -- we want to be proactive in utilizing the resources we have to do work in the Middle East. And also, we're setting up a design center, a low-cost design center in Spain. It's amazing the delta in salaries between the Middle East and Spain. So much of the work that we have in the Middle East, we're able to do it out of our offices in Madrid and Barcelona.

John, that's very helpful. Just one other question on, now that you're becoming much more focused on power, energy and mining, what kind of visibility do you have in that market? We were getting the question over the last couple of months on a slowing China and what kind of effect that has on mining CapEx going forward. What are your customers telling you? Are you taking share in that market? And how do you look at that market going forward?

We look very bullish at the mining market. It's -- I mean, we definitely are taking market share because we came from no place a couple of years ago to get the numbers of what percentage of our business is in mining. But as I mentioned in my talk, we're working for a client, an Australian client, with his project in Africa. And we're doing the work, as we said, in 4 continents, in Europe, United States, as well as Australia and in Asia. We're working for -- in Canada, we're working for Tata in terms of developing a facility for them, for mining. So we are getting exposure with some of the major mining companies around the world. And what fits well for us in terms of providing them services is though they may be located in India or they may be located in Africa or Australia, their facilities are all over the world. And our global footprint is the thing that they like. And also, we can provide fully integrated services, from planning right through to construction management and operation and maintenance. Over the past year, our mining business has grown 50%.

Your next question is from the line of Chase Jacobson with William Blair. Chase Jacobson - William Blair & Company L.L.C., Research Division: Just another question here on the MSS segment. For the projects where there is the execution issues, can you give us any color as to how much related to those are left in backlog and when those projects are expected to be complete?

Well, it's really not relevant to the backlog. These were projects where we simply incurred costs that were not recoverable under the contract terms. And so when we talk about project execution risk, those costs were incurred, those losses were recognized in the quarter, and those projects will not have future execution issues. We will not incur those costs above the contract caps going forward. So there's no work in the backlog that have a built-in forward execution risk, if that's your question. Chase Jacobson - William Blair & Company L.L.C., Research Division: Okay. So, well, I guess other than the revenue headwinds from the Iraq drawdown, the profitability should pretty quickly get back to that mid-single-digit?

Yes. So if you're talking -- now you've asked a different question, I just want to make sure you're understanding the difference between -- the execution risk is simply incurring costs that are not recaptured under the terms of the federal contract. Now if you're talking about overall margins for the sector, you still -- now you move to an overhead issue. And if the overhead -- if the revenue doesn't ramp up as -- quick enough, you still have some overall margin compression because of the overhead rates. And so what we said specifically is that we are -- we have the wins, we have the backlog, it's starting to ramp up, Afghanistan is starting to ramp up, but it will not ramp up, as John clarified earlier, it will not ramp up rapidly enough to entirely get back to the numbers of a year ago. But again, to be more specific, we do expect our overall operating income for that segment in the second half of the year to be better than the overall operating income that we recognized in the first half of the year. Chase Jacobson - William Blair & Company L.L.C., Research Division: Okay, that was helpful. Just another question on, I guess, on the long-term margin targets. You gave us some color around some of the initiatives you're taking. When you talk about the change in mix towards higher margin businesses, is that mostly from adding higher-margin businesses or maybe divesting lower margin businesses? Or is it a combination of both?

It's a combination of both. The -- as we have been talking about for quite some time, we have been moving from where we were 5 years ago to predominantly a design firm. We have moved into much more program management, much more construction management and much more integrated delivery. Those last 3 service offerings all bring higher margins to the table. And as we've been increasing the portion of our business from those activities, we continue to increase our overall margins. And so that is the faster growing segment of our business, and we are deploying our capital into those service offerings. And that change in mix will contribute to the higher margins that you heard Steve talk about earlier. Chase Jacobson - William Blair & Company L.L.C., Research Division: Okay. And just lastly, did you say what the organic revenue growth was for the total company? And what was the reason for the higher other income in the quarter?

Okay, so I'll take the first one. Our overall organic revenue growth in the quarter was 1%. That is about a 5% organic growth for our non-U.S. business and a minus 4% for the U.S. business in the PTS segment, exclusive of MSS. So -- and the second part of your question? Chase Jacobson - William Blair & Company L.L.C., Research Division: What was the organic growth for the total company?

Minus 1%, including MSS and PTS together. Chase Jacobson - William Blair & Company L.L.C., Research Division: Okay. And then the other -- just why the -- was there anything, I mean, driving the other income in the quarter?

Right. Yes, there was. Other income was $4.4 million in the quarter. The biggest piece of that was about $3.5 million from our infrastructure investment fund. We are a, as you know, minority owner. We own 30% of an infrastructure fund that we have for quite some time. And so that included both our underlying management fees, as well as returns on those infrastructure investments.

Your next question is from the line of Andy Wittmann with Robert W. Baird. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Steve, just to dig in a little bit more on the DSOs. I just was looking for a little bit more color, and you've got this goal of 80 days. And can you just help us understand what that might look like, the timeframe at which you feel like 80 days is achievable? Just to give us a better sense on that.

Yes, we're targeting to get down to an average 80 days over 2 years is what we've said in the past, and we're still confident in that target. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: And just in terms of the near-term targets, is there anything materially better or worse so far in this quarter, given a slight step-back last quarter? I mean, it just seems like when you look at it, is '13 also implying that cash flow collections will be in excess of net income, just to get to that point in to 80 days?

To your first question, we believe that underlying the DSO days, things are getting materially better. We're still showing improvement, as I mentioned, MSS is coming down where we've seen some long-term issues as we've talked about in the past. And then where we have significant, thousands of contracts in the U.S. infrastructure business, we're seeing DSOs come down as well. So we're still confident. In terms of FY '13, we're very confident in FY '12 and FY '13. And then, obviously, as growth comes back into the business, you start to use cash for growth, and we'll reassess at that point and revise our guidance.

And gentlemen, we have time for one final question, and it is from the line of Joseph Ritchie with Goldman Sachs.

Just a follow-on question for Mike. Mike, you mentioned on the MSS issues specific to the contract, did the owner initiate any change to contract terms? Or did you just -- was it an overrun on the way you had originally priced the scope of work?

It was not a change. It was an execution issue where we were focused -- our team is very focused on delivering to the client's expectations, and we incurred labor costs to continue to perform exceptionally well on that contract for that client, which was the U.S. federal government. So they're very focused on, in meeting the client's needs and satisfying the client, and they overspent the labor to achieve that mission. And that's the simple explanation to it.

Okay. Thank you, all. Before we close, let me describe what I think are the most important takeaways about our performance this quarter. Despite the poor performance in MSS, as we discussed through this call, AECOM delivered measurable and sustainable progress against our key strategic initiatives, as we described in terms of the opportunities we have in India, the Middle East, as well as in the mining and oil and gas industries. Despite the challenging growth in certain areas, the underlying trajectory of our business remains healthy, again, as indicated by our growth in backlog and the number of wins and growth in wins from quarter 1 to quarter 2. And our strategy is on track, leaving us well-positioned for future growth. So I want to thank you all for joining the call today and for your continued interest in AECOM. We look forward to our next earnings call in 3 months. Thank you, all.

Ladies and gentlemen, thank you so much for your participation in today's presentation. This does conclude the broadcast and you may now disconnect. Have a great day.