Aecom (ACM) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the AECOM fourth Quarter and Fiscal Year-end 2016 Earnings Conference Call. I'd like to inform all participants this call is being recorded at the request of AECOM. This broadcast is the copyrighted property of AECOM. Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. Later, we will conduct a question-and-answer session. [Operator Instructions] I would like to turn the call over to Will Gabrielski, Vice President, Investor Relations. Please go ahead sir.

Thank you, operator. Before reviewing our results, I would like to direct you to the Safe Harbor statement on page one of today's presentation. Today's discussion contains forward-looking statements about future growth and financial outcomes. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties. Please refer to our press release, page one 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. I also point out that we have revised our backlog definition to reflect the changing nature of the work we are pursuing and winning. Our backlog now includes the proportionate value of equity method contracts, references to backlog growth and trends are on a like-for-like basis for consistent and comparability. Today's discussion of organic growth represents the year over year change on a constant currency basis. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer. Mike?

Thank you, will. Welcome everyone. Joining me today are Steve Kadenacy, our President and Chief Operating Officer, and Troy Rudd, our Chief Financial Officer. I will begin with an overview of AECOM’s results and discuss the trends across our business. Then Troy will review our financial performance in greater detail. Steve will conclude with financial guidance before turning the call over for a question-and-answer session. Please turn to slide 3. We delivered results within our guidance for fiscal 2016. Both the management services and building construction business outperformed our expectations. And we achieved numerous positive strategic and financial objectives that position us well for the future. However, we are also experiencing unanticipated weakness in a few markets, which resulted in operating performance that was below our expectations. Let me take you through the details. First, low energy prices continued to place a heavy strain on clients that are dependent on oil and gas revenues. While we have managed the cost side of our business effectively, lower demand in the market impacted our results. Second, we delivered positive growth in the Americas design business for the second half of the year. But the recovery remains choppy with uneven client spending which drove results below our expectations. And third, we had double digit backlog growth in our power and industrial construction businesses, but many of these wins materialized later in the year which limited the benefit to our fiscal 2016 earnings. Despite this volatility, we had a number of important accomplishments that reflect the strength of our diverse business. We delivered $677 million of free cash flow due to the priority we placed on driving cash collection across the enterprise. We have now paid down $1.2 billion of debt since closing the US transaction two years ago which gave us credibility to opportunistically refinance our bank debt during the fourth quarter. We further advanced our design, build, finance and operate strategy. Recent successes such as the large contract to provide infrastructure services for Shell validate that a growing number of clients are turning to integrated delivery for efficiency and cost savings which is where AECOM excels. Finally, we had record wins in the fourth quarter, driven by the greater than $1 billion contract to build the NFL Rams new stadium, successes in the Americas design market to large O&M contracts in the oil and gas sector and continued strength in our industrial and building construction business. As a result, our total backlog increased by 4% over the prior quarter and we are confident that the fundamentals of our business are gaining momentum as we enter fiscal 2017. Please turn to Slide 4 for a discussion of the trends across our business. Beginning with the DCS segment in the Americas, client spending has been choppy but our competitive position is stronger than ever. Our backlog increased by 7% over the prior quarter driven by a 1.6 book to burn ratio, the highest in recent history. We had successes across the transportation, water and environment markets. Importantly, the long-term market tailwind supporting our confidence are firmly intact. Our transportation pipeline has increased by double digits in the year with a combination of the $300 billion FAST Act and growing state and local transportation specific funding initiatives creating momentum. The backdrop has been further enhanced by the over $200 billion of transportation initiatives approved by voters in last week's elections highlighted by the $120 billion Measure M in Los Angeles and numerous other significant measures including those in Seattle, Atlanta and San Francisco. In addition, states continue to diversify and enhance their revenue streams. New Jersey last month joint 20 other states that have recently implemented gas tax increases to support transportation investments. We are also encouraged by growing demand for integrated delivery. Our transportation design build pipeline has increased by more than 40% from last year and we are pursuing a nearly $20 billion alternative delivery pipeline in the water market. These trends play directly to our strengths as the leading infrastructure design firm in the US. Turning to our international markets, performance in the Europe, Middle East and Africa region was mixed. Revenue grew slightly driven by continued strong performance in the UK, our largest market. While Brexit headlines continue to create some uncertainty, we delivered 3% growth for the fourth quarter and 5% for the full year. In addition, there are other encouraging indicators including the government's recent decision to proceed with the nearly $20 billion runway expansion at Heathrow where we are pursuing opportunities. In the Asia Pacific region, we delivered growth of nearly 10% in Hong Kong, our largest market. Our continued solid execution and leading market share resulted in steady demand for our services. Results in Southeast Asia were mixed with weaker macro trends balanced against the need to integrate the region with improved transit systems and address rapid urbanization. And infrastructure driven recovery in Australia continues to build strength which we anticipate will contribute to improved growth and profitability in fiscal 2017. Turning to construction services, we delivered another year of double-digit revenue growth in our building construction business and continued to diversify outside of the New York metro market. This was no more evident than in the selection of our joint venture to build a new state of the art NFL Rams Stadium in Los Angeles. This win not only underscores our position as a stadia construction leader but also showcases AECOM’s role as a key partner in defining skylines in urban landscapes. We also exited the year with significant momentum in our power, industrial and oil and gas markets. We recently broke ground on Alliant’s 700 megawatt gas power plant in Wisconsin and were awarded over $700 million of oil and gas O&M contracts. These wins reflect continued market share gains as well as our clients' confidence in AECOM to take on larger and more critical assignments. In management services, over the past two years, we have repositioned the business towards growth through expanded business development efforts which are bearing fruit. We submitted bids on an additional $10 billion of pursuits in the quarter and now have $25 billion of bids under client evaluation. We are pursuing larger work as a prime contractor and have an over $3 billion of pipeline of pursuits with friendly foreign governments compared to only a few hundred million dollars of such projects currently in backlog. And we are focused on growing in areas where we have competitive advantages such as cyber, intelligence critical infrastructure protection, and O&M services. With the elections now behind us, we expect key decisions on over $20 billion of our bids in the coming year, which positions fiscal 2017 to be a transformational year for backlog growth. Further, our momentum on our DBFO Vision has continued into this year with a significant number of material wins since the beginning of the fiscal year. And we are pursuing another $7 billion of projects led by our construction services segment alone that include capabilities across our three segments. Finally, AECOM capital continues to serve as a competitive differentiator and key enabler of our DBFO Vision. We are on track to begin realizing gains on our first $200 million fund in fiscal 2017 and we are exploring opportunities to expand the size and scope of AECOM capital into new market sectors. During the year, we made our first investment in the power sector which resulted in $100 EPC contract for hydroelectric power projects in Ohio. I'd like to reemphasize how much progress we have made over the past two years and how well positioned we are to fully capitalize on the opportunities in front of us. We're coming off a quarter with record wins. We are winning larger projects with more complexity than ever before, we are bringing more services into new markets, we are leveraging our scale and investments in people and technology to change how we deliver work for our clients and we are focused on delivering growth and value for shareholders. I will now turn the call over Troy to provide greater detail on our financial results.

Thanks Mike. Please turn to Slide 6. Overall, our financial results fell within our guidance ranges. Fourth quarter earnings per share was $0.65. Full-year earnings per share was $3. Free flow was $677 million. We had outperformance in the management services and building construction businesses. We are also pleased with several elements of our performance including strong cash flow, continued debt reduction and strong backlog growth. In addition, we had better performance on tax and we favorably resolved a number of project and legal matters. However, we are disappointed that some end markets experienced softness which more than offset these benefits. Importantly, as Mike noted, we ended the year with nearly $43 billion of backlog and total wins of 6.3 billion in the fourth quarter resulting in a book to burn ratio of 1.4. Please turn to Slide 7. DCS revenue was $1.9 billion for the fourth quarter and $7.7 billion for the year. The Americas design business returned to growth for the second half of the year and we're encouraged by the strength of our backlog. But the market recovery remains choppy and revenue declined by 3% in the fourth quarter. The fourth quarter operating margin declined 5.4% due to lower volume and continued investments in growth, which was evident in our 1.6 book to burn ratio in the Americas. For the full year, the operating margin was 6.7%, up 40 basis points from 2015. Please turn a Slide 8. Revenue in construction services was $1.6 billion for the fourth quarter and $6.5 billion for the full year. Our building construction business continued to deliver strong performance but revenue on our energy and industrial construction business declined in the fourth quarter. Our recent wins positioned us for better growth in margins in fiscal 2017. Our oil and gas business continues to be challenged by ongoing pressure on client budgets. We have broad capabilities in this market, but our exposure today is concentrated in the on O&M services where we were recently awarded two sizable long-term contracts Mike discussed earlier. The operating margin was 1.4% and 1.5% for the fourth quarter and the full year respectively. Excluding the negative impact from oil and gas market weakness, our full-year operating margin was 2.2%. Please turn to Slide 9. Management Services revenue declined by 3% in the fourth quarter mainly due to continued reduction in the lower margin contracts in Afghanistan. The operating margin in the fourth quarter was 10.5%. We benefited from a $27 million project incentive award and approximately $20 million of favorable project and legal resolutions. I want to provide a bit more detail on our fiscal 2017 margin expectations for the management services segment. We anticipate margins of approximately 7%. The large number of items that benefited our fiscal 2016 margin performance are unlikely to repeat in fiscal 2017. Further we are pursuing and winning more work as prime contractor which results in consolidating the entire joint ventures revenue as opposed to just recognizing our share of earnings. Nevertheless, the profitability of our backlog and pipeline of pursuits continues to benefit from our industry leading capabilities on mission critical work for our clients. Please turn to Slide 10. I'm pleased to report there our strong cash for fiscal 2016 which included $326 million in the fourth quarter and $677 million for the full year. The strength and consistency of this cash performance allowed us to opportunistically refinance our bank debt on very favorable terms. We successfully lowered our borrowing cost providing additional flexibility to execute our strategy. Our fiscal 2017 interest expense guidance reflects the benefits of these lower costs and our commitment to continue cash deployment for debt reduction. While reducing our debt remains are near-term capital allocation priority, we always consider all options keeping stockholder value creation as our top priority. I’ll now turn the call over to Steve to discuss our financial guidance.

Thanks, Troy. Please turn to slide 11. Our accomplishments over the past year have established a strong foundation for fiscal 2017 and beyond. Underpinning our confidence is the continued recovery in the Americas where our efforts to drive growth resulted in a 7% quarterly increase in our backlog for the fourth quarter. In addition, we expect another strong year’s performance in the building construction business, with double digit revenue growth driven by the 15% increase in our contracted backlog in fiscal 2016. We're also anticipating improved performance in our power, energy and industrial construction businesses. In addition to the backlog momentum, the business is now fully integrated into our systems and going to market with a full force of our combined capabilities. Finally, our substantial pipeline and management services creates a significant positive inflection point for backlog growth and is creating more prime contractor opportunities for AECOM. Accordingly, we are initiating fiscal 2017 adjusted EPS guidance of $2.70 to $3.10. This guidance assumes approximately $0.20 of earnings per share from AECOM capital realizations at the midpoint. We also expect full-year tax rate to be consistent with the fiscal 2016 rate at approximately 20%. In addition, we expect the full-year share count to be approximately 159 million shares, interest expense of approximately $190 million and amortization of intangible assets of approximately $95 million. Importantly, reflecting the strength of our diverse business, we continue to project free cash flow to be within our $600 million to $800 million guidance range, which will drive additional debt reduction as we work towards achieving greater capital allocation flexibility. With that I'd like to turn the call over for Q&A. Operator, we're now ready for questions.

[Operator Instructions] And our first question comes from Andrew Kaplowitz from Citigroup. Please go ahead.

So, Steve maybe if we step back and look at your EPS guidance, it seems that at the midpoint you are assuming modest organic revenue decline and modestly declining margins, you did talk about MS margin of 7%. I think your recorded 12% adjusted in FY ‘16, but if I remember a year ago you would guide to 8% margin in that MS business. Can you talk about the probability of positive performance enhancement fees in ‘17, I know you said it's not going to be like ‘16, but it’s that sort of conservatism given the chunkiness of these types of fees.

Well, actually MS is fairly predictable in terms of planning. There's not a lot of performance large wins or work fees that we're anticipating in the year. They could happen, but the run rate has always been in the 7% to 8% range and we're planning for about 7%.

Andy, if I can add one comment on that, one of the things that's important to note from the MS business is that we significantly ramped up our business development efforts in that space. And so, we currently have an $8 billion backlog in the MS segment. We have been working now and we will be working on it through a good part of FY ‘17 that $25 billion of bids that are currently under client evaluation. We have invested significantly in that and all the costs of that business development activity of course run through the P&L. So if we even come somewhat close to our historical win rate on that $25 billion of backlog - $25 billion of bids that are currently in evaluation relative to $8 billion of current backlog. It's a significant uptick but you have to understand the impact on the margin of that enormous bid development work that's been undertaken.

Maybe you can talk about the state of the Americas design business, in other words you mentioned the $200 billion in [indiscernible] measurements that were approved, I mean that seems like a pretty good number. Can you give us perspective on when that kind of spend starts to hit, obviously you have Trump out there talking and we all have our views on that. But how do we look at DCS business, specifically America’s design as we go into ‘17 and then maybe you can also talk about the margin. I know that Steve has talked about a 7% margin that business as a target, margin was pretty low in 4Q is that just underutilization.

So let me take all those, I'll start with the micro and then I'll go to the macro. So the micro relative to the margins in the quarter, the same comment that I just made about MS applies to DCS. During the quarter, we invested heavily in business development activity which produced extraordinary results. We had a 1.6 book to burn ratio in DCS Americas in the quarter. That's the highest we've ever had in the history of the company in DCS Americas. And you don't go out and win that much work without significant business development activity. So that has contributed to a lower than normal margin in the quarter, but that will produce higher than normal margins going forward. So that's on the micro, but getting to your big question on the macro. I’ll tell you, I don't think we've ever been more bullish on the future of infrastructure in North America then we are right now. The $200 billion of ballot measures that came through and we were tracking about $230 billion of ballot measures across the United States, $200 billion of them passed. And of course led by one of the largest here that we had a significant involvement in which is $120 billion measure in Los Angeles, our home city where we have an incredibly strong position to take advantage of that spend. But we also have seen in recent history here 20 states that have increased gas taxes, most recently in New Jersey. Again a state where we have a significant presence, so we're seeing a recent increase in gas taxes, we saw the $300 billion plus Fast Act passed in the past twelve months, we saw $200 billion of ballot measures and now of course the advertised trillion dollar investment by the Trump administration over the next ten years that gives us a lot of opportunity. We're likely to see a change in direction on the Keystone pipeline, where our environmental business will have opportunities, our oil and gas business will have opportunities and then you're likely to see a change in overall energy policy across the country that will be a little more friendly towards capital development. So I kind of tell you, with all those together I don't think we could be more enthusiastic about what lays in front of us.

Just a cleanup question around tax. Troy or Steve, 20% tax rate in two years. We shouldn’t think that’s structural though, your tax rate historically has been more high 20s. So how do we think about it for a longer term tax guide beyond ‘17?

Andy, it's Troy. So, in the current year, we had the impact of evaluation allowance reserve in the UK, which brought the rate down to 20. So we also benefited from just having our mix of income driver rate down. Looking at the next year, we expected to be about the same driven by mix of income again and also driven by the anticipated reversal of another valuation allowance as part of our overseas business returns to greater profitability. As we move forward, I think it's difficult to say what the future will look like just given the recent political developments. But I think it's fair to say that the rates around the world are always progressing to be lower and so I would see our overall rate guidance trending down based on the general trends around the world.

And our next question comes from Chad Dillard from Deutsche Bank. Please go ahead.

So you have about $7 billion in construction bids, $25 billion in MS bids, outstanding. How much of that work do you need to win to hit the 2017 earnings guidance? Can you remind us what your win rates are on both those businesses? And then lastly, what percentage of your backlog that you have right now will be recognized as revenue in 2017?

So on the last part of the question, Troy, do you have that number, I don't have it off the top of my head. Obviously that's comprised of 50,000 different projects so I don't have a rule of thumb for you on that.

So again, they again, they vary business by business. Our DCS business given the nature of it has something that's in the win rate of - think about in the 30% to 50% range, our MS business has a win rate that's something that's a little bit lower not given the nature and the size of the projects. And our construction business, I don't have the number off-hand. But I don't think it would look dissimilar.

But I think the important answer - part of that answer is how much of this do we need to win to hit our guidance in ‘17 and it's important to note that these wins are long-term in nature. We don't need to win many of these to really produce the results in FY ‘17. So for instance, in the MS sector this $25 billion, the big chunk of those won't be decided until the May timeframe and later. So these decisions - these are long-term projects, we’re heavily investing in them. Those decisions will be made later in ‘17. So those projects will start producing real revenue in ‘18. And so, the important part is, we don't need to win even a small percentage of those projects that impact ‘17. On the construction services side, those projects again, they are long dated in nature and we are typically when we win work, it doesn't produce any impact in the first year. So this is all - we're good for fiscal ‘17. What we're really banking now is incredible growth for ‘18 and beyond.

And then just moving into cash flow, can you just help us bridge your 2017 implied net income guidance of about $460 million versus the midpoint of free cash flow about $700 million. Like what are you guys counting on from a working capital perspective versus any one-time items that we should be aware of this year.

So, not dissimilar from this past year, you couldn't simply start with our midpoint of EPS guide, which is about $460 million approximately of earnings. And then we have some tailwinds, we have some stock-based compensation, depreciation in the year projected to be greater than our CapEx spend. And then we also some non - some tax liability that's typically non-cash. So that all gets us to a point that puts us firmly within the range. But then we of course will be focused on as we always do managing working capital. So we'll be driving to a higher number but I just point to the fact that consistently for the last number of years we've been able to across a business to convert the earnings into cash flow and to drive working capital improvement and we don't see that outcome changing this year.

And our next question comes from Jamie Cook from Credit Suisse. Please go ahead.

I guess a couple quick questions, Mike, I thought it was interesting the comments you made about the level of spend that AECOM is related to the bids on management services as well as DCS. Is there any way you could help us clarify how much you're spending on that because obviously that's a headwind to earnings that we probably are under appreciating. And then I guess my second question is, I don't think you really ever answered Andy's question on how to think about DCS revenues and profitability for 2017 what you're assuming. Just because that business has been so choppy and as we think to ‘17, I would think margins and profitability should be a little more normalized now that some of the noise is going away. So I guess I'll start there.

So I'll let - Steve will answer the part on DCS guidance and margins and I'll try the first part of your question and trying to quantify the spend on these. It's difficult, Jamie, but I’ll tell you generally over the past year we've spent a $0.5 billion on bid and development costs, $0.5 billion, $500 million on bid and development costs and that's been increasing, it's been increasing because of the size and scale of the projects that we're pursuing. Our profile has changed quite a bit over the past two years. We went from a smaller project company to a much larger project company and where we are incurring more of the bid cost but that also means we are going to realize a greater share of the probability from the project. So where we have projects where we were a subcontractor and management services is a good example, we would have been a subcontractor to some of the big defense prime contractors. We are now bidding these projects and pursuing them as the prime and so we’re incurring a bigger share of the business development costs. And we will also realize a bigger share of the profitability as we go forward. So it's difficult for me to give you much more detail than that other than $0.5 billion of cid and development costs that we’d incur during the course of the past 12 months.

I guess one follow-up question and then you guys can answer the DCS modeling question. I guess, Mike, just strategically, as we - ‘17 looks to be the trough, ‘18 if everything goes off like we think you could have some real positive growth probably that we haven't seen before. So I guess how comfortable are you with the growth trajectory that's out here given that we you know integrated your ads, you're going to be bidding on projects differently than you have in previous cycles and if there a level of in ‘17 numbers or just longer term investment that's needed. What I mean outside of the bid and proposal cost just ensure that we execute on these projects appropriately. I'm just trying to understand how you're thinking about the growth balance with risk I guess.

Jamie, I think we have made the investment over the past two years. Over the past two years, we have spent an incredible amount of time and effort integrating these two companies in a way that positioned us for the growth that we are now starting to see. You saw incredible book to burn ratio in the business, incredible uptick in the number of pursuits in the MS sector as well as the construction sector. And so we have made those investments, we've integrated the organization, we're going to create all the IT systems, we've incurred all that cost, we've brought the organizations together that gives us a platform that is so exponentially better than it was prior to the integration. But the past two years, we've also spent a lot of time internally focused as we brought these organizations together. And during ‘16, we started transitioning from an organization that was focused on integrations, because we have to get that right to an organization that's going through a transformation to bid on projects that we never thought were possible two years ago. And so I am incredibly confident because I think your question was how confident am I that 2018 will be a big uptick in growth for us. I am incredibly confident of that and I'm incredibly confident of ‘17 as we just gave you direction on.

Okay. Thanks. And then just a follow-up on ‘17, DCS revenues and margins, thanks.

Yeah. Steve will take that.

Yeah. I think that DCS Americas for ‘17 will kind of mirror what Mike just said. As you’re looking at our backlog and ‘16 is up 6% year-over-year and if I interpret the question is when will that actually materialize in terms of gross revenue, organic growth and we're planning for something less than that. And we intend to ramp into that 6% growth as we go forward and there is no indication that we can tell that we won’t continue to see that kind of backlog growth throughout the year, because as Mike said, we are seeing playing field in the pipeline of opportunities up significantly relative to what we've seen in the past six years quite frankly. And that's true for MS and CS as well, particularly outside the building construction space where we haven't seen the growth in power and industrial for instance. We're now seeing that growth and you've seen that backlog change significantly. And if I go back to a couple of questions where the win rate was the question, what do we need to win, we just need to win our fair share at our normal run rate and our backlog in MS will transform during the year, it will continue to grow at organic 6%, 7% on the Americas DCS and CS will continue to grow as well.

And sorry DCS margins?

Well, the margins will improve as that organic growth comes back. You can't look quarter by quarter. So we were up slightly quarter-over-quarter, down year-over-year, but we didn't take our foot off the pedal in terms of investing in the business development because we see the opportunities.

And our next question comes from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hi, gentlemen. This is Sean on for Tahira today. Just to continue on a similar topic that Jamie was wondering about, just looking at margins in backlog, could you comment on sort of where the margins are in backlog at this point versus maybe this time last year and so we can kind of get a better sense for how margins are looking outside of these investments and some of these kind of timing nuances?

Margins in backlog are looking strong. It varies by business line, but if you go within each segment, within each market sector, the backlog that we're winning is no different. Our mix from that standpoint is up particularly in CS where we’re winning more in the power and industrial sector, which has a higher margin than building construction and DCS continues to win in the higher margin businesses as well. And of course the synergies that we've seen brought to are going to fall to the bottom line as we grow the top line.

Okay, thanks. And then in terms of the larger power and industrial projects that you guys called that as having a more pushed out timeline than you had previously thought, could you just comment on how those projects ramp up through fiscal ‘17 and what kind of average duration of those projects is?

Those projects can be anywhere from 2 to 4 year build ramp up within ‘16 - within ‘17. They’re probably improving into the second half.

Okay, thanks. And then just one last one for me. I was just curious what you guys are thinking about in guidance in terms of some of the more challenged markets like oil and gas in the Middle East for example?

We have muted expectations for oil and gas as a whole. However we did have, as we mentioned earlier, some big wins in the O&M side of oil and gas in Q4. So that feels pretty good. And then as I mentioned earlier that if we see some of these regulatory changes on the Keystone pipeline and others, we could see a resurgence in capital expenditures in the oil and gas sector in ‘17 and forward.

And our next question comes from Steven Fisher from UBS. Please go ahead.

Thanks. Good morning. Can you - just to continue the discussion on the organic growth, can you just give us a sense for what you have assumed for the overall organic growth of the company in 2017. Is it positive year-over-year?

Yes.

At the midpoint, it's positive growth year-over-year.

Yes. Correct.

Okay. And then I guess in terms of your - how granular is your understanding of what drove the weakness in the Americas design, I guess maybe at kind of the key project levels that you have in your prospect sites or in your backlog and what's the confidence that you'll see that accelerate in to fiscal ‘17?

There's nothing at the granular level that we would need to call out as not a result of a project having a hit during the quarter or anything like that. It was merely volume driven. You can’t expect volume quarter-over-quarter, every three months to be completely predictable. And then we did change even though we weren't seeing the volume side from a spending standpoint, we were seeing it in the pipeline and we dedicated ourselves to winning those projects as is indicated by the 1.6 book to burn in the quarter. So when you're spending on a robust pipeline and current quarter volume is not high, you're going to see that impact on the margin.

Okay. And how do you think the year is going to play out in terms of the number and timing of AECOM capital realizations embedded in that $0.20 a share?

So, we don't have a specific date on the calendar for when that will sell other than in FY ‘17. We are positioned quite well for that sale as we've talked about before we expected to sell sometime in FY ‘17, but we don't have a date yet.

Okay. So is it just one project this point?

Well, it's one large project and two smaller transactions.

Okay, great. Just lastly, could you just clarify again the 7% margins and you talked about business development cost, but have those all been expended in fiscal ‘16 as those bids are now in with the customer or is there still more of a drag from those costs in fiscal ‘17 or is that just sort of a normal 7% to 8% like you said without assumed any incentive fees or anything in fiscal ‘17?

So let me put it this way, it depends on which group you’re talking about. If you’re talking about the Management Services Group, the lion's share of the money spent on that was spent in 2016. However there is ongoing work that needs to be done on those bids because the clients are coming back to you with additional information, but we will continue to invest in growing the business every single year. So it's not like we turn off the spec it on investing in BD, but the big ramp up in spend was in 2016. But to the extent we see more opportunities, we're not going to slow down in chasing them.

And our next question comes from Andrew Wittmann from Robert W. Baird. Please go ahead.

Great. Thanks. Troy, you mentioned that the year is going to benefit from a valuation allowance. I guess the 20% you mentioned is for this year, it compares to something like 27% or 28%. So is it - is the guidance benefiting from the valuation allowance to the tune of like $0.30, is that the right number to be thinking about?

Yes. That’s right.

Okay. And just as that relates, certainly, this is the fact that your cash tax has been under your GAAP taxes, an important point. You committed earlier in the conversation that ‘17 is another year where the 6 to 8 makes a lot of sense. All else equal, assuming no growth going forward from that, I mean that's a level of cash flow, it's like 1.5 times your net income if you strip out the gain, which would be some return of capital and some operating cash flow, but you're well over one times free cash flow, which has been the commitment from the company to deliver cash flow and net income. So how do we think beyond this, how sustainable are these exceptionally high levels of cash flow versus the net income that you're reporting and can you just give us some thoughts on that?

So one thing to keep in mind again is there are some non-cash items like as I said, stock-based comp and depreciation on CapEx, which contributes to that cash performance. We expect in the long term, our cash to be equal to our net income. So that would be a long term guide for ‘17. Again, we will be consistent somewhere between $600 million to $800 million range.

Got you. And then just, maybe Mike, can you talk about DCS with the margins, I understand the big costs were up, maybe give us some context for how much that was a factor in the margins on a year-over-year basis and then maybe just talk a little bit about that all important utilization metric that you guys talk about with, I guess, the reason why I'm asking is with organic growth decelerating again there in DCS, do you need to be looking at some level of adjustment to spruce up those margins all else equal.

Well, I’ll let Steve jump into the more detail on that, but just let me be clear. We do not, if your question is do we need to improve our utilization and cut back headcount, absolutely not. In fact we need to grow that headcount significantly. When you have a 1.6 book to burn ratio in the quarter and you're looking at a market in front of us with $200 billion of bond measures GAAP taxes increasing fast act, moving into play and $1 trillion investment in infrastructure, we need to hire more people, certainly not cut back on our cost structure as it relates to the revenue producing people in the organization.

I think that's right. Our margin - DCS year-over-year is up 40 basis points. We're pretty happy with how we structure that business. We have a firm foundation to grow it. We're having good execution. We're not having project blows, highly predictable. You're looking at a volume issue in one quarter and I know it's tempting to read into one quarter's results, but if you look at on a broader basis, that business is performing pretty well.

And our next question comes from Anna Kaminskaya from Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. So first, I just wanted to follow up on the CS segment. Just sequentially revenue declined and I thought historically was supposed to be seasonally stronger quarter. So how much of that is just oil and gas, ongoing oil and gas weakness or how much of that is just commercial construction, maybe decelerating and if you could just remind us how big is oil and gas business within that segment for this year and also kind of how should we think about potential risk of commercial constructions flowing down? Are you seeing it in your pipeline of projects?

I mean so first of all, the commercial construction, what we call our building construction group had its second year of double-digit organic growth in FY ‘16. So the commercial construction is not coming off. So the commercial construction is a little different than it was going back a couple of years ago. We've diversified away from the high rise construction and we're moving into a whole host of different types of construction as you heard us mention the NFL Rams stadium and that’s a $2.5 billion project, we’re a 50-50 joint venture on it. So we're seeing a lot more opportunities on that side. The big drop-off as you pointed out Anna is the oil and gas business. That business is down 40%.

For the year or for the quarter.

For the year, so clearly that market dropped off, but we're starting to see growth opportunities in the energy side of it. You heard us last quarter talk about the billion dollars of wins that those wins happened in FY ‘16 and will start to ramp up in ‘17. So you’ll start to see the growth coming back to that business in FY ‘17.

And is it fair that you're losing money in oil and gas for it, fiscal year ‘16?

No. It’s not fair to say. We did not lose money in oil and gas.

Okay. So it’s more like breakeven?

Closer to breakeven.

Okay. And then just try to make sure - I'm trying to make sure I understand your methodology for the new awards disclosure with the change to backlog. So the over 6 billion of awards, does it include some equity awards as well as part of the JV. So how does it compare to kind of how you previously reported new wins and also kind of book to burn, how you previously reported as apples-to-apples or is there some benefit from, I guess, the fact that you’ve changed the methodology.

So, Anna, it’s Troy. First of all, just think about the perfect example, which is the Rams win. So we have a win that's in a unconsolidated joint venture. We are now reporting our proportionate share of that win in our backlog. And in the results that we're reporting, we're reporting it on an apples-to-apples basis. So we have the proportion share of backlog in the prior period as well. So you're seeing an apples-to-apples comparison and it is up quarter-over-quarter.

Okay. And then just finally, just going back to your cash position, I don't know if you can update us on how much of that is internationally and if there are any tax reforms, does it provide an opportunity for you to bring some of the cash back or kind of how do you think about kind of cash utilization or do you need over 600 million on your books?

So about 25% of our cash is typically outside of the United States. I would say that it's a little premature to predict what the outcome might be, but if there is some favorable impact of some US tax legislation, it would be to our benefit. We typically deploy cash to run the business, but we don't need to deploy 25% of the cash outside the United States. There is also again I think, this feeds into what Mike's been talking about, which is the repatriation opportunity would help us, but more significantly it would help our clients and would increase the cash available for infrastructure spend in the US. So I think that’s the greater opportunity.

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

Hi, guys. Good afternoon or good morning to you. Just given the consistency and the robustness of the cash flow, over the last couple years and your expectations going forward, are you changing at all what you think the appropriate debt level is for the business and is there any, I know that debt reduction is the top priority, but if anything else moving up the list or out beyond that?

Chase, as we've said all along, we look at all of the levers for capital deployment across the entire spectrum. Today as it was yesterday, still our number one priority is debt paydown, but we are always constantly looking at opportunities for investment in organic growth, for investment in smaller scale M&As that give us expertise that we might need in niche markets. But right now, the number one priority is debt paydown.

Okay. And is there a change in the - where you view the appropriate debt level to be or?

No, no, right now, we're continuing to deploy our capital to pay down debt, so we will continue to do that. We don't have any change in our views of what the ideal debt level is. We're comfortable with our debt level is right now and we would be happy for it to continue to decline as we deploy that cast to pay down that debt.

Okay. And just another question on the bid pipeline, appreciate all the color that you’ve given so far, the win rates and everything. Trying to get a sense of the visibility into that. I guess, maybe we can just focus on the MSS business, so 25 billion, you talked about most of it likely to be awarded in the second half of your fiscal year. Can you give us any color, even from a high level as it relates to the mix of that as in terms of size of opportunity, competitive intensity, are those opportunities funded yet, any color as to that will be really helpful? Thank you.

So a few things, first of all, it is almost all of it is domestic versus related to contingency office or war effort outside the US. There are some components that are [indiscernible] stuff outside the US, but the vast majority of it is domestic. So we feel good about that especially in light of the incoming administration’s focus on retracting the horns from the battlefield and focusing it more domestically, so that's good. Secondly, the opportunities we're pursuing are in our sweet spot of Department of Energy and Department of Defense. So it's two of the agencies that we have a broad and deep experience within. So, our win rates should be at the normal rates that we've experienced over the course of the past few years. I’ll tell you a couple of things and this is more generally, part of it's our massive part of it is other part of the organization is we haven't talked about is the momentum of wins from FY ‘16 into FY ‘17. I could tell you today that here we are five or so weeks into our fiscal year at ‘17 and we have had an increase in our win rate in that first five weeks. Just an effort five weeks we've had 3.3 billion of wins in the last five weeks alone across the organization, not just MS, across the organization. So an incredible ramp-up in wins again in just five weeks here. So you're seeing a ramp up from ‘16 to ‘17. So I feel pretty confident to try and give you a sense exactly what the win rate will be on that 25 billion, I can't, but I can tell you we're positioned better than we've ever been, the depth and breadth of our capabilities from the combined organization of URS and AECOM is second to none. Our win rates have been very strong and they're both within agencies that we have broad and deep experience within and a great track record.

And our next question comes from John Rogers from D.A. Davidson. Please go ahead.

Hi, good morning. Just a couple of follow-up things. First of all, on the AECOM Capital, when the sale of one project was pushed out of fiscal ‘16, I guess I was under the impression that you expect that transaction to close in the current quarter, but that's not the case anymore?

No. That that will not close in Q1.

Okay. And Mike, there was a whole set of these I thought projects were ready to monetize over the course of the year. Has the market just been pushed out a little or is there just reassessing?

No. So let me give you a little more color on that. I’ll give you two examples. So the one that we talked about pushing it out, we own half the project and our partner owns half the project. That's our typical structure. Under the agreement, we had the ability to sell half of our interest. Our partner didn't want to sell, but we could have sold half. When you're going into the market and you're trying to sell half of a 40-story building, you have a limited group of buyers compared to when you want to sell 100% of it. Our rights under the agreement allow us to force a 100% sale, but only after we have had three consecutive months of greater than 90% occupancy and we've given our partner the right to first offer. So we could have sold half of it. We believe there's opening it up to a much wider group of potential buyers when we get past 90% occupancy for three consecutive months, which we now have done. We are 95 plus percent occupied for that three month period, that will expire just in a couple weeks here. And so that will allow us to tap into a much broader group of potential buyers and when you have a broader group of buyers, it tends to drive up price. So we're not in a rush to sell it, if we believe that we could open it up to that broader group. So that's on that asset. The other very large asset that we have, we have sold, it was a project that had both office condo and residential condo. That project is just capping out right now. We have sold 95 plus percent of all of the condos in that building already. We have had 100% return on our basis in that project. And anything that happens from here is the sale of the retail and all the associated assets will produce the profits from that. So we've had 100% return of our basis in that project already. So again, it's an incredible wild success but you get your basis first on those type of projects.

That helps. And t hen a couple of other just quick things, in terms of the, I'm just saying about the timing of the benefits from increased infrastructure spend. Have you seen a material impact yet from the fast act?

No, we have not seen a material impact in terms of producing revenue, but what we are seeing is a significant increase in the amount of activity around projects that we're starting to bid on, but not unlike the rest of our competitors, our peer group has had the same experience through FY ‘16, it's not producing revenue just yet, but these are long-term projects that take a while to get started up and so I think you'll see a slow ramp on that type of activity.

Okay. And then lastly the potential for changes, I mean, I know it's speculation, but environmental regulations, does that help your power business?

Certainly, on their quality side. They have a strong resume and in terms of providing retrofits for coal fired. There's obviously more gas projects as well.

I think the increase in environmental work will have a bigger impact if you start seeing changes in shale gas opportunities and pipeline opportunities. We do a lot of environmental permitting work in that space.

And our next question comes from Michael Dudas from Vertical Research. Please go ahead.

Hello, everybody. Two questions from me. First, maybe you can expand on when you just talk about on AECOM capital, what do we expect to see over the next year or two there, you said there would be some interesting things going on. Is that set up given all the private money that's required for the simple structure, can that be a much more powerful driver of business growth and eventually earnings for the company in the next 3 to 5 years?

Michael, that's certainly our expectation. We started off investing in real estate development projects. We expanded it this past year into hydroelectric with our first project in, on the Muskingum River in Ohio, developing low head hydro projects where we're design build financing and operating those assets. We are bidding on P3 projects right now, which we see increasing and certainly our incoming administration is talking a lot about bringing the public sector and the private sector together to create a mechanism that will increase the flow of private money into infrastructure that would present a lot of opportunities for us and we are currently bidding on more P3 projects than we ever have in the history of the company. So we do expect that any kind of capital will continue to be an increasingly important part of our organization and again consistent with our vision of being able to offer the fully integrated offering to our clients, to be able to design, build, finance and operate infrastructure assets and capital is a big part of it. Now we don't expect to be funding these projects entirely off of our balance sheet. We expect to be bringing external capital to these projects and facilitating the flow of capital. But we've got our upcoming Analyst Day on December 13 in New York City. And during that meeting, we’ll have an opportunity to give you a lot more detail on the long-term outlook for not just any kind of capital, but for the entirety of the business.

Excellent. Thank you, Michael. Just one quick follow up on - congrats on [indiscernible], is there anything we should look for or is that something that's going to start to kick into gear in the next 12 to 18 months, something sooner and what kind of maybe news flow can we see from that pretty enormous outlook?

Yeah, we are just trying to start think about how we go about that. We have the city of Los Angeles has reached out to us and asked us to start giving some thought to ways to accelerate the expenditure of that money and we're in the process of doing that right now, but that is something that will start - we’ll be working on over the course of this year, but you're not going to see revenue growth in ‘17 from that. That will be an ‘18 and forward opportunity for us, but we are really excited about it, given the size and scale of that, it's the largest infrastructure program in the history of the United States, $120 billion in Los Angeles alone. And it's great to see that kind of infrastructure in our hometown where we have the best capabilities and the best relationships among any of our competitors.

Thank you. This concludes the question-and-answer session. I will now turn the call back over to Mike Burke for closing remarks.

Great. Thank you, operator and thank you everyone for participating today. As you've heard, obviously, you've heard us say a number of times today we feel more bullish about the future than we ever have. We feel that we have spent the past two years putting together two great companies from our sector and building a foundation that is second to none that can capitalize on these new growth opportunities. We've been doing that for the past two years and now we feel that we also have some external wins at our back at the federal level, at the state level, at the municipal level as well as internationally, we didn't get a chance to talk about the big infrastructure expenditures that are expected in Canada and across the UK. But we feel better about the markets than we have in quite some time and obviously we feel really good about the foundation that we've built here at AECOM to capitalize on those opportunities that are now in front of us. We do look forward to the Analyst Day on December 13 and giving you a lot more detailed insight into what we're seeing in the market today and what our prospects for the future might hold. So thank you again and we'll see you in December. Bye now.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.