AECOM Technology Corporation (NYSE:ACM)
Shareholder Analyst Call
December 4, 2012, 06:30 pm ET
Lynn Tyson - Head of IR
John Dionisio - Chairman and CEO
Jane Chmielinski - COO
Fred Werner - President, EMEA
Mike Burke - President
Steve Kadenacy - CFO
Andrew Wittmann- Robert W. Baird
Andy Kaplowitz - Barclays
John Rogers - D. A. Davidson
Adam Thalhimer - BB&T Capital Markets
Welcome everybody. Hope you have been enjoying your dinner. I'm Lynn Tyson, Head of Investor Relations for AECOM. What I would like to do is share with you our very detailed Safe Harbor language, and also point you to the back of our presentation for our Reg G reconciliation. All of you here in the room have USCs that are completely loaded with our Q4 documents. The decorum today as well as the press release that we issued and other collateral materials that you've seen out in the hallway and you've also received in email with a soft copy in the events here on your tablet right now. And the deck is actually posted on the website right now. There are passcodes for the wireless here. So we've given you every opportunity to look at the deck as we go along.
So with that what I would like to do is turn the podium over to John Dionisio, our Chairman and Chief Executive Officer.
Well welcome everyone and Lynn thank you very much. What I want to extend a special welcome to those of you who are joining us on the webcast, give you a little bit of background you folks on the webcast. Here we are in Manhattan and we have about 40 analysts on evenly distributed on the sell and buy side and we also have about 12 AECOM executives representing various global businesses around the world.
For those of you here in the room, we hope you enjoy the opportunity to look at some of the projects that AECOM is working on around the world and some of the exciting things that we are doing. I understand many of you went to the Barclays Center, and I heard from people that went there you excited about it and enjoyed the trip that you went to see Jay-Z’s 40/40 Club and his vault and some of the other things.
So we are very proud of the work that we did. We were brought in to pick up the project that Frank Gehry was asked to leave, and so we had to do some catch up. But from what you've seen and how we feel the one the project is well received is becoming a fantastic venue here in New York, even though they call it Brooklyn there. And also it’s significant because arenas are becoming a very important part of AECOM’s business around the globe. And I didn't realize how much CapEx is being spent on facility, sports facilities for the World Cup games, for the Olympics, for venues in universities and professional sports. So it really is a good representation of the type of work that we are doing.
What we thought we would do tonight is try to do something different. We always get together on our earnings call once a quarter, we go to investor meetings. But I said lets try to do something different, and our goal was for you folks, not just to listen to me and the speakers, but to get a chance to interact with some of the leaders that we have brought here together to sit down and chat with you. You might have met them at the reception, and afterwards hopefully you get an opportunity to chat with them and ask them some of the questions that might interest you about what AECOM is doing in different parts of the world.
So please, please go out and reach out to them, some of them are sitting at the tables you are at, and they know probably more about the business than I do. So please check with them and see if they give you the same answers that I gave you during our discussions.
With me tonight, we have as part of a prepared script, Jane Chmielinski, who is a Chief Operating Officer. I have Fred Werner, who is President of EMEA, which is Europe, Middle East and Africa. I have Mike Burke, who is the President and also who is leading up our construction services and our government services business, and we have Steve Kadenacy, our CFO.
Sitting amongst you, maybe if you could stand up and just say a wave. We have Michael Della Rocca, who is incharge of the Americas business; we have Bill Hanway, who is in charge of our Americas Buildings and places facilities. He is the one, who designed the Barclays Center and also Bill was the person who led the design, massive planning for the London Olympics and currently he is doing the Brazil Olympics.
Excuse me, Bill left. So I am sorry that you didn’t get a chance to see him. Dan McQuade, who leads our Construction Services division; Vahid Ownjazayeri, who is leading our Global Infrastructure business. Vahid is looking at me because he didn’t think I could pronounce his last name. I have the honor of having with me tonight is Dick Newman, who is our Chairman, Emeritus. Dick Newman was the brain behind creating AECOM.
And then we have Alan Krusi, who has had a strategic development and has been leading our M&A strategy, taking over from Dick, and I know many of you are interested in what we're thinking about in terms of M&A and please speak to Alan because he can get you up to speed. And in addition we have [Geoff Rush] who is in charge of (inaudible) all our healthcare, so if you are interest in what we are doing in King Khalid and throughout Saudi Arabia and in the United States, Jeff is the right person to speak to.
Our prepared remarks will walk through several significant opportunities that we have an AECOM and that we see ahead of us and which will be the driving forces behind our profitable growth, returns in our business and maximize our shareholder value. Our discussion tonight is going to focus on three areas, organic growth, balance capital allocation and disciplined financial management.
I will lead off with a review of an overview of AECOM our global footprint, and how that positions us well to capitalized on a track of long term trends in our business. Jane, will touch on how we are using our organizational structure to drive organic growth and improve client experienced. Fred will share some very specific example of the projects that we are undertaking and how our organizational structure enables us; one, to win these projects as well as to implement them profitably and successfully.
Michael will then follow on and may present our balance capital allocation strategy. He will discuss our alternative delivery system as one element of it being AECOM Capital, and then he will also discuss in some detail share repurchasing strategy. And then Steve, will cover the actions that we are taking to improve profitability cash conversion as well as discuss our outlook for 2013.
I will then come back and wrap up the presentation. As you saw from the short video, AECOM is truly a global company, back in 1990 when [Dick] put together AECOM we were made up of many different operating entities and our goal was to be a global enterprise.
Today, truly AECOM is a global enterprise with more than 50% of our work being done outside of the United States, and its spans multiple markets business sectors and geographies. We are the number one global design firm in the world. We service, our services span five end markets in over a 130 countries around the world.
This slide here indicates how all these market sectors roll up on the two reporting segments, professional technical services and management support services.
Under professional technical services is what you normally think of what we do. Its planning, design, program management, construction management, architecture and engineering operation and maintenance for facilities, environment, transportation, powered energy and then our MSS business which is approximately a $1 billion, a little bit over $1 billion is focused in on cyber support information management, logistics and operation and maintenance.
This slide indicates the balance diversified business model is built upon as I mentioned geographies, end markets and funding sources and you could see that the balance that we have in terms of our end markets when you look at the facilities, transportation and environmental side.
And our funding sources right now with primarily, right now it was 65%, about 65% public and a 35% private and our move is to become more evenly mixed over the next five years. You know what differentiates AECOM from some of our competitors or what we like to believe differentiates us from some of our competitors is the ability to leverage our local presence around the world in those 130 countries.
And then to overlay that with our global expertise which gives us the ability of providing our clients both on the public side and private side that added value with many companies can only provide the local expertise and they do not have the ability to provide that global expertise.
So if there is a major program, major project in the Middle East where we may not have the capabilities, the technical capabilities to win say a major transit project or a sports arena or a major hospital city, we bring in talent from the United States, Canada, from Hong Kong or Asia as well as the UK.
So when you think of AECOM you need to think of it in terms of our market sectors where we leverage those market sectors on a global basis. And what this will also gives us as I mentioned before, it gives us multiple access, okay, locally the public clients you need to be there to win work with public clients. So the diversification helps.
For private clients, our diversifications in terms of geographies and business lines and market sector is a help because we now can work for multinational clients around the world. We can work for Shell, BP, GE, Exxon Mobil and we can service them throughout the facilities they have throughout the world.
So, this diversification is an enabling force for us to doing work in a public arena and as we see the economy changing and more work is being done from the private side, it's a huge advantage for us to capture a larger piece of the private market.
And the third thing that I believe differentiates us is that our offerings of fully integrated services. So as you see from this slide, we go right from planning to all the way to logistics. So we can get in with a client right early in the project process and then we can go right to the end and clients these days are looking for that one source of opportunity where you go from the planning, engineering, construction, management into the operation list.
Early this year we shared with our board, our goals and objectives as we look forward over the next three years. We used to think of strategic plans as being five-year look outs but right now where everyone realizes that it’s difficult to plans for three years out not to look out at five years.
So we are tending to change our strategic outlook for the, looking at three years out and these are six things that we identify in terms of what our goals and objectives would be. You can take this six and you can boil them down in to three categories, shareholder value, market and geographic expansion and increased margins and profitability.
The first is to increase shareholder value through balanced capital allocation and financial discipline and you have seen us do this past six months, one thing that’s evident is true repurchasing program.
Second is to increase our margin with the type of work that we are going after, higher margin projects and construction management higher margin projects say in the private sector in the oil and gas industry.
Third, to aggressively advance our organic growth. When Mike speaks about our capital allocation, he’ll speak about two things, he’ll speak about organic growth and opportunities and where we are making investments as well as what we are doing in terms of our share repurchase.
Then the fourth is the increased mix as I mentioned in the private sector. Clearly, when we look at, if you just look here in the United States with the limited amount of funds that state and local governments have, the federal government had, but more and more work is being done on the private side, that goes to what we are doing in terms of alternative delivery with Meridian where invest is on public private partnerships and the creation of AECOM capital where we have our own capital to go after the projects in the facilities or business.
And the fifth item is to increase our penetration on top private and multinational clients which I mentioned, and our diversification really enables us to be a desired partner with private side.
And lastly, which we will speak about a little bit is to increase our revenue and profit in emerging markets and emerging markets that we are looking at are Africa, when we recently had a small M&A in South Africa, which will expand our infrastructure, in China, India, the Middle East, Eastern Europe and Latin America. In Latin America, clearly we are not investing as much as we are in some of the other places. But again Latin America is a place that we want to have some significant expansion as we look forward over the next three years.
During the presentation Jane and Fred, Mike and Steve will touch on each of these and go into more detail, what this means and what is the how. Okay, this might be the goals and objectives we have a strategy, but then what is the implementation to achieve that strategy and achieve the goals and objectives. Here are some of the strong industry fundamentals and you've heard us speak about this on our earnings call.
Sometimes we look at and try to analyze our business from a macroeconomic perspective, which is good, that's a good indicator. But again our business is predicated on local economics on where the money is being spent. But if you look at the drivers, the first being urbanization around the globe; right now more than 50% of the population is in urban areas; and as we look forward by 2050 70% of the population, 3 billion people will be in urban areas. Already the urban areas have a major issue in terms of civil and social infrastructure; the roads, the transportation and water, the environment, schools and hospitals.
So as you think with more people moving into the city, think about the pressure that's going to be placed upon them. I mean for us people who live in New York think about it. Look at the pressure being placed upon places like Manhattan where more and more people are moving into Manhattan, and just look at what happened last month with the infrastructure that we have and the social infrastructure, power, water, transportation all impacted because of needs that we have built up in the system.
The emerging markets are going to represent 54% of the world’s over the next five years. The emerging markets are going to represent 54% of the world’s GDP. It’s going to create an expanding middle class driving demands from everything from water, transportation facilities, all the things I mentioned. The key markets that we see combination of urbanization and emerging markets will drive a continuous demand for the things that AECOM does and you can categorize it in terms of infrastructure, social and civil infrastructure, resources and industry, the oil and gas markets, the power market as well as the facility side, healthcare, sports.
And then lastly, but in the mature markets, they are grappling with an infrastructure that's in need of repair. I mentioned the New York for instance, but think here in the United States, look at the infrastructure systems and the needs for infrastructure. The trillions of dollars needed to get the infrastructure here and the same condition in places like Canada looking at places like Hong Kong.
So there is a real need and AECOM I believe is (inaudible). Here is a slide which depicts the world based upon our super geographies. Someone asked me how should I think of AECOM, and I said, I think you should AECOM in these three major geographies, the Americas, EMEA, Asia Pacific, but also what you need to be thinking of is AECOM has made up the business market and end market sectors. The transportation needs. As I said, we have a global infrastructure capability. Vahid is leading that which is able to move resources around the globe to answer the needs in each of these super geographies and we're doing the same thing in facilities and environment.
And in each one of these geographies there are a different situation. Here a look at the Americas. No matter what the report say, we will see nominal growth in the Americas in 2013. So (inaudible) Asian business are probably oil and gas business as well as our facilities business. We’ll see it increase in the environmental side as well as the infrastructure side working on multi national clients.
EMEA, after a [gospel] of about 2.5 to 3 years, we're finally seeing some glimmers of growth in Europe. I wouldn’t open a champagne bottle as I mentioned outside. We opened a champagne bottles just yet, but we could take off our flat jackets because things are improving. Eastern Europe is bouncing back; we see a lot of opportunities in Russia. We are not looking at seeing any opportunities in Western Europe, Spain, France, Italy, Greece. Middle East strong market, they are spending of billions of dollars. I spend probably around a third of my time in the Middle East both Qatar, Saudi Arabia, the UAE they are spending billions on civil infrastructure and social infrastructure. I mean its just amazing the amount of work that's developing.
And then Africa right, I mentioned the opportunities we see in South Africa. And then we have the Asia pacific, Asia, Hong Kong, I mean Hong Kong, China, South East Asia are strong. India, I went to a meeting with the US Chamber and there was someone who was an expert on the Asian market and he said India is unbelievable it never fails to disappoint, and the problem is it’s pent up demand but it’s very difficult to get it implemented.
But so with the growth that we expected to see in India isn't there, but it’s still growing and there is still opportunity. The one market that we may have mentioned on the earnings call that this year is a bit of a soft spot in Australia, and that's primarily due to the slowdown in the mining market. But again after the several years of 20% growth we are finding out that, so now its going to have some nominal growth maybe of 10%. So it’s a short fall from what we had last year, but again it’s the market that's still growing to be growing.
Okay. So with that [helpfully] set the stage, I would like to turn it over to Jane who can probably more flesh on the skeleton that I described as AECOM and give you a better idea of how we do the work and exactly what our strategy is. Okay, thank you.
Thank you, John. As John discussed, he discussed our long-term goals and objectives and in order to achieve the organic growth required we need to leverage AECOM’s operational excellence to our competitive advantage. So really I would like to walk you through our organization, try to get you to better understand how we are organized within AECOM.
We have achieved this through our operational priorities and by getting our project delivery goals, we have realized better margins, integrated risk management approach that matches our capabilities to deliver more complex higher return projects and remain focused on strong performance and developed a succession plan that grooms the next level of exceptional leaders and project manager at AECOM.
The reason this is incredibly important, you saw a lot of our projects and you spoke to our people tonight; some of our projects are annuities if you will. They go eight, 10, 12 some 20 years. Our clients are demanding that they know we have the bench strength to deliver for them.
So this is incredibly important not just for the leadership that you see here tonight but how we actually service our clients. I get asked the question quite a bit why is AECOM different? I believe that our integrated delivery model is the differentiator.
Our people get to work in the greatest projects in the world. For marketing, architectural engineering for the King Khalid Medical Center which we will speak to a little bit later to rebuilding the World Trade Center in New York, to developing the master plan for the 2016 Rio Olympics Games where we will host 15 Olympics sports competition and 11 Paralympics contests.
Our credibility in delivering mega projects has been established based on our track record of performance on the most complex and challenging projects in the world and hopefully tonight we've been able to demonstrate that. Our global business lines enabled us to take global expertise that could only be acquired from working on the world’s most demanding projects and delivering it locally where our clients need us.
I think John touched upon that and we will all probably touch upon somewhat that our global business lines really are a differentiator that being able to be in every one of these regions is important but that global business line, that expertise is the conduit an excellent organization the size of AECOM.
We have a tremendous depth of technical expertise which we harness in our technical practice networks, the AECOM’s central network where we capture innovative ideas and then tie them to project delivery. Again, incredibly important when you look at the maps that you've seen and all the work that you've seen us do, figuring out how to share those ideas across the entire enterprise is very important for that delivery.
We get asked that quite a bit how do you do it. How do you get 45,000 people or professionals to talk and share and collaborate? We have solid client relationships. Right now, approximately 80% of our work is repeat business and I think all of us in the room are business people, all of us have clients and that's a very good track record.
We are known in the industry leaders. We have very strong leaders and a deep bench. Again, this is the strength that assures we can consistently provide the best talent to our clients around the world. When you sort of think about an organization you might not really think much about it as being a driver for growth and improved client experience but that's what our clients sees, that’s what drives that growth and as you heard from John, we have more than 45,000 employees serving clients in over 130 countries around the world.
Our organization is a driver of growth and is structured to provide our clients with the best experience but we continue to evolve the organization to meet our growth demand. We've truly come a long way since July of 2008 when we first announced our intent to organize our operations to metrics structure balance in geographies and capabilities across the enterprise including our government and construction services.
Despite our success today, we continue to advance some metrics promoting information sharing, encouraging employee mobility and enabling all of AECOM’s present our best phase at every opportunity. Since speed and accuracy in decision making is a differentiator, it's important that we have clear roles. There is a lot of velocity and change in our space and we need to be able to respond quickly and effectively. So this isn’t just about getting the speed in the decision making, is making sure that we make the right decisions as well.
We have integrated our services with the focus on end markets. This provides our clients with a single point of entry they demand. In an organization of this size, nobody wants to have to call 20 people to get any answer at AECOM. So they would like to know where they can get into the organization which is the best way to do it and we continue to enhance collaboration. It is the only way to assure successful wins, pricing and execution across the enterprise and we continuously work to simply work streams which benefits our employees and clients.
We talked a little bit about the global business lines and this is just really to lay out what the global business lines priorities are. Going forward, our business is going to continue to execute on AECOM’s growth strategy in a uniform manner that is responsive to the market conditions but is also consistent with delivery.
One of things we need to be equipped, we need to be agile, but we also need to deliver in a consistent manner. We are also going to not only increase, not only increased our focused on indentifying hiring and retaining the best and brightest in our field but to really, really make that a key priority.
We are a people business; we are as good as the people we sell. Our business is also place an emphasis on positioning our services emerging geographies and develops their thought leaders to give us a competitive advantage.
Finally, the business and service the conduit that ensures that we will deliver world class solutions and talent globally for making sure we have strong professionals in each geography and region.
As we move on sort of looking at how we leverage this global network is by creating centers of excellence to fully leverage those best practices and high quality solutions. An example that appears that 80% of our hydro work is done in Canada, yet it is actually the service across the entire organization. So again, having those centers of excellence we can be more competitive and more consistent.
We also had similar successes leveraging our global platform on projects such as the Cross Rail London and other transport jobs like the (inaudible) Highway in (inaudible) and then when we look at the Singapore MRT and other projects across the globe, in those central centers of excellence are critical.
It is important that you don't put one, you can't duplicate everything everywhere, it’s an efficient, it’s an effective and by doing our centers of excellence, we are seeing very, very good success.
Finally, I would like to ramp up really with how we had this good success and focused on the King Khalid Medical Center in Saudi. Our services for the project include architecture, engineering design and production services from space around the world. So while our center of excellence for healthcares in America, we have leveraged our challenge from around the globe. What this also does, it allows us to be able to service our client 24 hours a day; if that's what the client needs. So it’s a very interesting thing in a way we can move. You don't have to move the project. You just have to move the work and we have the ability to do that, and also we are assuring we do bring to bear those world class solutions and innovation that they demand.
At this time I would like to turn it over to Fred, who will further expand upon the [Atlantic] growth investments and opportunities. Thank you.
As John talked about in the early part of presentation what I'm going to do is kind of take you a little bit in depth around how we think about organic growth from two areas. We always think of organic growth from both our end markets, end market expansion and we always think about organic growth in terms of geographic expansion. So I'm going to give you an example of both and hopefully give you an insight about some of our thinking on that.
So the first one as John alluded to, one of our four goals is really to increase our revenue take from the private sector, and we think of it in terms of multinational clients. And when we think of multinational clients for AECOM, we are really targeting the three sectors that you have up above, you have the oil & gas, you have the industrials and the mining.
What we like about this set of clients is that they are all looking for a couple of common characteristics that we think will end well for AECOM to grow into. One is speak to market. Second is they want consistent delivery along a global platform, and the third part is they are looking to outsource and turnkey over the delivery for them, and we think we have the acquisitions and as we've grown we think we have a solution set that puts us in a good place for it. So talking about just breaking it down a little bit more you talk about oil & gas, it’s a big market, its in the press all the time.
For us, we drill it down, for instance into places where AECOM is strong in North America. So the oil & gas spend in North America over the next five years targeting the shale, targeting getting the gas and the oil out of the shales and all throughout the US is about a $250 billion CapEx. We look at that market, there’s a lot of mature players in the market, but about 30% of that CapEx is around infrastructure and infrastructure in the America is about delivering the product to market, getting all the infrastructure in place and so we think that's a great market for AECOM to go after.
When you talk to Mike and others we have a large work force in the Americas. So its just a matter of turning our face towards this market and we think it’s a great area that is a direct application of AECOM’s skills. The industrial market a little bit differently, we are looking at a client set like GE, Rolls-Royce and why we look at those clients is because they want to build production facilities and manufacturing facilities closer to their clients in emerging markets where AECOM is, and so for instance for GE we are designing and building a manufacturing facility in Saudi Arabia.
We are working for Rolls-Royce in Brazil and so we are starting to pick up a focus around delivering these $150 million to $250 million facilities that are in emerging markets where AECOM has a strong presence, and there's not a lot of other competitors in the market space. And then finally mining is obviously a hot topic these days, and we think it’s a long term growth area for AECOM. We have a great global footprint built around Canada, Australia, now Africa, and although the market is in turmoil today a lot of projects are deferred we think it’s a significant long term investment. So these three areas are our core to increasing our penetration in to the private sector.
And then finally, switching now to geography; I would look at Qatar and Saudi Arabia as really key growth markets for AECOM, and AECOM, as some people have been in to Abu Dhabi, knows that AECOM always had a strong presence in Middle East. Markets went through turmoil a few years ago, but what has emerged from that is an incredibly strong business in Saudi Arabia and Qatar.
AECOM is really well positioned for; we have all the 4,000 people in the region today. We’ve had a 30-year track record of working in Saudi Arabia, and we have had 17 year track record of working in Qatar. So what we've taken, which was a market in turmoil around Dubai and Abu Dhabi and turned that in to a growth area for us by a large footprint and bringing in our strong technical expertise.
And so in summary it's an area where we see the growth. When you look at a place like Saudi Arabia, we have the King Khalid Medical Center out there, the CapEx spend has been increased as a number of factors. Population has grown from 28. It's going to double over the next five years. There is a concern about the Arab Spring and keeping people focused on the investment that are going on, and so Saudi Arabia is a place that we will invest in what is AECOM’s core market around. Transportation, infrastructure, hospitals, schools and water and so we are, as you see, we've begun to win significant work in there and I think it's a tremendous growth potential for us. So just little bit of insight in to the way we think about to the market.
Okay, so we heard from Jane and Fred about how we earn the money. Now we're going to move towards how we spend the money. So capital allocation has been something that we spend a lot of time talking about with many of you in the room over the past year, and what we would like to do is dig a little deeper into that, tell you about the type of the size of the cash flow that we are generating and then how we think about allocating that towards strategic investments and return to our shareholder.
So first of all you see the headline here that over the next five years, we expect to generate at least $1 billion of cash flow, and I emphasize at least, we believe this is a conservative estimate of the cash flow that we will generate over the next five years, and I can assure you that our internal goals are much higher than that.
Steve Kadenacy’s goal in particular are much higher than that for collecting this cash, and its because Steve and his team has done such a great job of the past year of generating a very, very good cash flow from the business and of course success like that just cause us to set our goals just a little bit higher. So now let's talk about how will, we think about spending that cash over this period of time.
Well first of all we will continue to pursue organic investments to further our strategy and present attractive long term opportunities, and you heard Fred and John and Jane mentioning lot of those and we will dig a little deeper in a minute into those areas and particular and then of course we will always maintain a liquidity and the strong balance sheet.
You heard as talk overtime, that our target leverage ratio are somewhere in the 1.5 the 2 times EBITDA range, right now, we are well below that but we are very comfortable in that range, but we will always be an organization that maintains a very strong balance sheet with ample liquidity, we will deleverage when appropriate and then of course our share repurchases and I will talk more about that in particular.
So that's fairly straightforward way to think about it. As we then think about investing either organically or through acquisitions, we start with some of the key fundamental drivers of our strategic plans and a key fundamental drivers of our business and some of this is a rehash of what John talked about but I want to assure putting in the right context here when we think about those organic investments they are going to fall in these categories.
So first of all, what are some of the macro economic trends that are driving the way we make our capital allocation decisions around organic investments and [liquidity] investments? First of all, the basic fundamental as (inaudible) just mentioned time and time again is that we believe the outlook for emerging markets both for GDP growth and more importantly infrastructure growth will continue to outpace the growth that we expect in the mature markets. That doesn't mean that we won't continue to invest in mature markets but you will see us making investments in the emerging markets, and coming slide here I will give you a better sense for the markets in particular we are focused on.
Secondly, you heard John mention the urbanization of the world with these enormous shifts of rural population into urban environments and what that means with the demand on the services that we have a particular area of expertise in, transportation, water, social infrastructure, all of those demands driven by the urbanization of the globe.
Third is US federal spending, I had a lot of questions at the cocktail hour about what are we expecting in the federal government area. This is something that is obviously a keen interest of ours so we are happy to take questions during the Q&A on this but that is something that we are faced with and changing better US federal government budget and we think we are well prepared to address those changes as they are coming across the (inaudible) over the next few months.
Next client procurement practices. Again, some questions I had to break about why do we need to get into construction? Why do we need to take on design build activity? We need to do that because our clients are asking us for it. John showed you the continuum of our services from early planning through design through delivery through operations.
We are seeing an increasing number of clients ask for an integrated delivery. One of the examples that I often use is you will get a water business if you go back 10 years ago almost all the work that we were doing in the water business was traditional design engineering work. It was procured under the design bid build model where we design and the clients bided out for someone else to build.
Now more than half of our business in that space is coming from design builds. That is the way the clients are asking for an integrated delivery in that area and so we are investing in capabilities to address that changing market and we are seeing as we move into the private sector you heard John mention about our desires to increase our private sector spend in the private sector they traditionally procure the services under an EPC or an EPCM model where they are looking for an entire integrated delivery.
The next is risk sharing and capital deployment. We are continuing to see clients wanting to shift more of the risk into the E&C sector providers and we have been comfortably moving along that risk continuum for some time as we start to move into the delivery area primarily with the acquisition of Tishman a few years ago now. We started moving into that delivery side and along with that risk continuum shifts brings higher margins.
So moving on to the next point here about a little more detail about alternate delivery and bringing capital to the table. So if you go back to 2006, we had our very first foray into this market through the formation of Meridian Capital. Meridian Capital was formed together with Credit Agricole and the management team from AECOM. That external fund of which we owned 30% went out to the marketplace and fully invested their first fund of Euros 600 million. It's a fully committed fund at this point and it was at the forefront of developing P3 marketplace.
Now as P3 marketplace is developing more rapidly, here in the US now we have 35 states that have enabling legislation for public private partnerships. We're starting to move much more rapidly into that place and we think we have more expertise in that space than any one of our competitors.
So in that space, you are seeing the need for alternative delivery. Why is alternative delivery important? It is important because our clients are moving in that direction. Not just clients here in the United States but if you look at the, for instance the water infrastructure in the UK, the vast majority of the awards in that space are done under the design build integrated delivery offering and we're starting to see that trend here in the United States, both in the transportation sector as well as in the social infrastructure and water row space.
From a capital deployment perspective, we're looking to bring, when I say an integrated solution, previously we refer to an integrated solution as being having the ability to both design and construct a project. Now we take a little broader picture when we talk about integrated delivery, its can we design it, can we build it and can we finance it, not necessarily with our own money but what is the client need, they need the designer and builder and they need money, and so what we are developing is the ability to bring the entire solution to the table and we are finding as when we can bring capital to the table.
In addition to the work we have historically provided, we have a very unique value proposition and a significant differentiator from our competitors and that is of course what we are and to do is to differentiate ourselves from our competitors on a day-to-day basis.
Now Meridian the fund that I mentioned earlier, we are 30% owner of the general partner, I mentioned the first fund, the second fund has the $1 billion in it and the third fund as the billion Euros, again all focused on OECD countries in the infrastructure space.
And so the ability for us to bring capital to our clients through either small portions of our own money or external capital will differentiate us. We also form this year AECOM Capital, it is an internal fund that we have seeded with the $150 million that we expect to invest over the next five years, again to win work that we would not otherwise. I’ll give you an example; here in the New York metro area there is a developer about to build the 38 story residential a project, it’s almost a $200 million project, for developer that we have never done work for before.
We have entered into finishing the due diligence phase and we are about to invest in that project with the developer in a way that will allow us to win all of that construction work that we would not have won, had we not been a co-developer and had we not contribute equity to that project. So we will build up a track record in that overtime such that we will be facilitator for outside capital to bring to bear on our clients.
Next is the acquisition arena, the M&A arena and I know over the past year we've had many questions from our investors on this? So I want to be little more specific about our intentions in this area. Let me put it in perspective, over the past year we have slowed down our M&A activity. We have focused on M&A activity that does one of two things. Either provide a niche technical expertise that we can deliver through our global platform or it provides a new geographic platform, through which we can deliver the rest of our services.
So we are looking for one of those two synergies that give the footprint that we push through the rest of our services or it gives us a service that we push through the rest of our footprint. In some examples we achieve both. A good example of both is an acquisition that we recently completed in South Africa called BKS. BKS has 880 employees in South Africa, a few other employees spread around the African continent, but mostly centered in South Africa.
So this is a company that gives us a very strong geographic footprint of the second largest engineering firm in South Africa, and gives us a strong geographic footprint not only to take advantage of that growing market but to serve our global multinational mining companies that are in that market, but also during the due diligence process we discovered they had a very particular area of expertise that we could export out of South Africa. It just so happens that two years ago a year ago as you know the FIFA World Cup was in South Africa and BKS had designed many of the stadia for the FIFA World Cup.
Now when a few of us were in Doha, Qatar a few weeks ago, we had the South African team that designed the stadia come Doha and getting ready for 2022 World Cup in Doha. So we have particular expertise in building FIFA stadiums that we could then export. So that was a perfect example of a strategic, a small niche acquisition that gave us a geographic footprint, but also gave us the technical expertise that we can export to another part of the world.
I think as I mentioned the deals that we had done in 2012 we only had done four deals in 2012, niche deals in aggregate all four of those deals added up to a little over $80 million. So it gives you a sense for how much we can accomplish with small amounts of the money in the M&A side. We still are focused on the countries you see on the slide here, Africa, China, India, the Middle East, Eastern Europe and Latin America and natural resource rich markets. So those are still a very attractive markets for us to the extent we find niche acquisitions.
Next on share repurchases, it goes without saying I will repeat it again, share repurchases remain a priority of ours. It has been a priority for quite some time. You remember in late ’11 early ’12 we completed our first $200 million share repurchase authorization. We reauthorized again in August for another $300 million. As of our earnings call a few weeks ago we had executed on a $160 million of that $300 million authorization and we are still an active buyer in the market.
We are on track when we complete this current authorization to have retired 20% of the shares of the company over this period of time and that is all supported by the industry leading free cash flow yield that we have had in 15% (inaudible). So that exceptional cash flow that we’ve had has allowed us to invest in the four deals that I mentioned, has allowed us to deleverage, and has allowed us to significantly return cash to our shareholders through the share buyback program and you see here that in FY ‘13 on a pro-forma basis, we're returning 92% of our cash flow to our shareholders and you see the percentages there for the previous two years.
So then to wrap up here before I turn it over to Steve. Our strategy, this is nothing unique here that we haven't discussed previously. But we're focused on leveraging our unique value proposition, and that value proposition is taking advantage of our global footprint and building out that global footprint so that we can deliver our services wherever they might be needed around the world for the multinational clients that Fred talked about a little bit ago.
We’ve talked about the higher growth markets, the emerging markets as well as some of the commodity end markets that are a focus of ours and I talked about alternative delivery and bringing capital to the market and then of course capital allocation. So this is a slide that we work off quite a bit internally. Obviously the ones that we have a little more detail on it, but this is a general parameters around which we focused our day-to-day activities as well as our longer-term strategies.
So with that, I'll turn it over to Steve. Thank you.
Thanks Mike and good evening everyone. So first I want to start, with just a little bit of brief replay of our track record on this slide as you can see over the period between 2006 and 2012, we grew the top line 16%. We had EBITDA margin improvement of 280 basis points, EPS and growth of 21% all the while growing backlog 22%. I want to spend too much time on that, but against this bankrupt that we are not laying out our new goals which I am going to talk you through that how we are going to get over the next few pages.
Primarily the biggest growth in (inaudible) margin is 12% EBITDA margin and to drive free cash flow over the short for the next few years equal or greater then net income. Mike, talks about $1 billion over three years, we think that's more than achievable. Over the next few slides the question is how are we going to drive that? Folks in the room here have been asking lots of questions about the levers that we controlled in the business to make that those KPIs come true, and I am going to spend some time on it.
The first is the cost optimization which I spent a lot of time talking about in the past, we talked about on the earnings calls, but I think its worth revisiting again. We are going to very rigorously drive hard cost containment within the business, and we are going to focused that by looking at our headcount and making sure our headcount is efficiently matched up to the realities of the market that were in.
Some of our markets are growing very fast, one of the positions to take advantage of those markets where our markets are growing very slowly, we are going to match our headcount and very closely monitor our headcount, because we realize a significant portion of our headcount or our SG&A is indirect time that people are spending on projects. If we get ahead of our sales on headcount, our SG&A grows very fast. And by SG&A for those in the room who are familiar with industry or unfamiliar with industry, I am talking about SG&A the way we look at as a company, which includes indirect time. For GAAP purposes we have re-class indirect time up in the cost of labor, of cost of sales.
But it’s clearly from our perspective and managing the business an SG&A cost because a lot of it is business development. So the first head count. Second our real estate costs. We grew over the period of time since 1990s through a lot of acquisitions we've had a lot of offices. We've consolidated a significant portion of those offices over time.
We are going to continue to focus on that. And then we are going to continue our rigorous controls on procurement, travel and other things that we buy at anytime to drive our savings. We've made significant progress on these things in the past. We are going to continue to do in the future, one of the most significant of which is our real estate costs which we have a commitment reduce by another 20% over the next three years which is roughly a $40 million savings. That's one lever of driving our margin to 12%.
The second lever and this is very key to our business is where project management business is performing on our projects to drive project gross margin. It’s absolutely critical and is another key lever to reaching our targets here.
To this end, we focus on investing in a number of areas that ensure that we are managing those projects respectively so that we are not having to redo work for instance and also keeping our clients happy, customer client satisfaction is very key, not just from gross margin standpoint but also driving a very efficient working capital cycle because happy clients tend to pay their bills on time.
So to this end, we have a very rigorous income, project management accreditation program. We have online project and management tools for our people who are out in the field. We have significant KPIs and we rigorously watch these KPIs so that we can measure who is performing in the field and give them instantaneous feedback and then really treating our project managers and making sure that we create career pathways that they understand how they can progress through AECOM as a project manager and have a successful career here. That's one way we drive project margins.
The other way is managing the cost within those projects very efficiently and we are very focused on high value design centers to arbitrage low cast labor into our projects so that we can deliver them more efficiently and we can compete better in the marketplace.
And this slide graphically illustrates that, as you can see the for instance our building engineering excellence center in India is roughly one-seventh of the cost of building engineering talent in North America. And if we can leverage those talented folks in India in the projects for instance in the Middle East or other places then we will drive our project margins as well.
Now right sizing of headcounts that I mentioned, the project management tools that I mentioned, the high value design centers, all of those things drive our utilization which is a significant lever for us as I mentioned. The higher, the more time that our people spend on projects delivering work, the less indirect time we have business development or training or other things, the higher our margins will be on the EBITDA margin side.
You can see we have a 300 basis point improvement since 2009. We will continue to push this. We are now pushing on the margins but we think there's more room here to drive our profits. And just to give you an idea of magnitude a 100 basis point improvement on utilization drives roughly $50 million of EBITDA. This is the segway; it’s a good segway to the 12% that we have spoken so much about.
There are multiple levers to get there which is what I have been trying to identify for you. There is project margins, there is utilization, there is hard cost reductions. The other factor that I haven't mentioned is the macroeconomic economy. Obviously, the rapid growth enables you to leverage off of your existing G&A base and drop more money to the bottom line faster.
So what I am trying to do here is outline a few different scenarios on how we might get the 12% and then tell you how I think we're probably going to get there given the macroeconomic factors.
The first is just an illustration. Assume no growth that we have no growth to get to the 12% EBITDA from where we were in 2012, roughly the 9.6% EBITDA margin, 248 basis point improvement would require a $120 million of costs taken out of the system. There are two places we could probably take that cost out of the system.
The first is drive utilization, drive indirect time up into projects and we can reduce headcount as a result, let’s just say we took $60 million from there, we have to take another $60 million from hard G&A costs. Both those things are achievable. It's a hard [ground] to take it. It's possible but it would take time.
Second and more unlikely scenario is rapid growth returns to the macroeconomic environment and we're able to scale on 5% to 7% NSR growth, it gets to 12% just by kind of keeping our G&A flat. That’s unlikely, what’s more likely is the last scenario which is modest NSR growth 1% to 2% say and then leverage our business into higher margin services, construction management more at risk that Mike spoke about.
Let’s say we did 70 basis points of improvement in our gross margin. It's roughly $140 million and scale of our existing G&A. We would grow into that revenue which means we have more indirect time, more headcount but still drive the cost savings that we have spoken about and keep our total SG&A flat, and that would get us to 12% over three years.
Now, the reason we speak about these and go forward there I can’t go back but in terms of scenarios is, we would like to reserve the right, if we saw an opportunity to grow into a higher margin service, we would deploy business development dollars in that direction expecting that the lower utilization that would result will be more than offset by higher gross margins. So, another scenario more than likely since we can't predict the exact future, we will get there in one of those ways, which I will all get more questions about.
Just moving onto cash flow. We keep the (inaudible) quite a bit, just to show you the progress we have made from 2010. We pulled the lot of levers, we will continue pulling these levers, driving capital improvement, (inaudible) the clients, upgrading our technology, getting our businesses onto the same system, using our business intelligence systems to monitor to get bills out faster and monitor our collections and then perhaps the most important is driving the compensation systems and 50% focused on cash for all performance based contribution metrics both cash bonuses and performance based equity programs. We will continue these and we are still committed to producing free cash flow greater than net income.
Before I get back to John, I just wanted to end on reaffirming our outlook in the range of $2.42 and $2.50. This is an assumed share count of $106 million which was same as our share count through the last earning call November 9 I think was the date, and obviously we've still been in the market as Mike mentioned buying back stock since then. We've continued to drive free cash flow, as I mentioned, we are standing by our goal of 80 DSOs by the end of the year. It’s very aggressive targets, it’s a challenging target but we think it’s achievable. And with that I will turn it back to John.
Thanks Steve, Mike, Fred and Jane. Before I close up, I made a misstatement and I don't want to let it go. Jane pointed it out to me that I made this misstatement. I’ve said that Australia was going to grow by 10%, but the misstatement was that APAC, Australia and Asia Pacific was going to grow 10%. So I just wanted to set the table straight.
Before the Q&A I just wanted to just briefly mention some takeaways. One, we have strong fundamentals which drive our markets, and AECOM as you heard is well positioned to take advantage of it. Two, we have a balanced allocation strategy. We are investing in growth organic growth opportunities, as well as significant investments in share repurchases. We anticipate returning over 90% of our free cash flow to our shareholders this year. And last, we continue to focus on financial efficiencies, which we believe will expand our profit margins over as Steve just mentioned 200 basis points enable us to generate significant amount of cash flow over the next five years. The bottom line, as we go into the Q&A is that we are focused on growing the business profitably, increasing our returns on investment and maximizing value for our shareholders.
With that I want to thank you all for your attention and I will open it up to Q&A. Please feel free to address any questions you have to any people on the panel or to any of the other executives we have in the audience. Thank you.
Andrew Wittmann- Robert W. Baird
Andrew Wittmann, Robert Baird. I guess maybe for Mike and/or John, can you talk about the business mix, you mentioned reducing your public exposure, something more balanced maybe that means 50-50. You also talked about margin mix as being part of the way you get to 12%. Can you talk about divestitures as the strategy to change your public private mix as well as your margin mix and if that's a part of the equation or something that could be potentially on the table here today.
Right now Mike it’s a follow-up. Right now we are not looking at any significant divestitures in our business. As I mentioned in my [report], I believe that by diversification model, geographies and market sectors works well both in the public side, but again since the public side funding is an issue that same diversification of the geographies and end markets works very, very well with multinational clients, because if we could be doing a project for GE in the United States, doing a project for GE in Africa or in China, they feel that they have maintained the same quality because (inaudible) working for them around the world. So that we believe is the key factor in enabling us to grow in the private sector, looking at getting 100 multinational clients that we’ve become that go-to-design construction management company.
Just real quickly on, I agree with John’s point. We don’t have any plans for divestitures, but we should note that in the past year, we’ve had three divestitures. We divested small pieces of our business that were not quarter (inaudible) business that were a nuisance frankly, but one of them is Australia, one of them was is in Australia, a small piece of the business and two of them here in the United States. So we're always looking at small pieces but nothing of significance on the divestiture side.
Andrew Wittmann- Robert W. Baird
And then if I can just do one quick follow up, maybe for Jane, again getting kind of the margin; you talked a lot about the metrics structure. I think this industry kind of broadly speaking; at least for medium or smaller sized companies has been a seller-doer type model for most companies. I think seller-doer has a level of accountability in it. You talk about the pluses and minuses that you have with your business model versus some of your competition being metrics and how that affords you or does that afford your margin expansion potential from here or maybe is it away from your margins. Thanks.
I mean one of the things we see with the seller-doer model, it works very well with some of our businesses. I would say some of our environmental businesses and in your planning business, that’s a terrific model. As we start to emerge involved in these big old projects, the seller-doer model is just not that effective. What I do think is unique about any comps is that we have the ability in many ways to deal with both of those entities and I think that is something that is really discriminative for us versus our competition. But I would say that the seller-doer model really is a better stick for smaller projects.
But as we move to these higher and more complex projects, the matrix really is what affords the stateability. So while [matrix] is very difficult to define, we have to talk a lot about and you never can communicate enough about them. I think that is really one of the fundamental moves that will help us the key what we say with our margin improvement.
Andy Kaplowitz - Barclays
Hey, guys, Andy Kaplowitz from Barclays. Can you talk about MSS business, you know maybe a little more focused on. It’s improved a lot this year; the margins have gone up a lot, but at the same time you are facing, the known issues that we know about. So how have you improved it, and when you look forward what does the growth potential look like? Do you expect it to grow over the next two years in a sort of government neutral environment, how should we look at the MSS business if we are forecasting it today?
I will take that question. The past several years in that business, has primarily been built up through the war effort. If you look at our business in the past several years, it has taken advantage of a ramp up in Iraq and a ramp up in Afghanistan, and then as Iraq withdrew we had some challenges early in the year. What we have been spending our time on is, refocusing our efforts into other divisions of US government other than DOD. I think everybody expects the DOD budgets to start to come down and we hit an all time high of $750 billion, most people believe it to probably return to a more normalized stage in the $450 billion $500 billion range. So that's clearly going to come down. It will hurt the hardware manufacturers more than it will hurt us but our efforts have been focused on moving into other areas of the government where we can deploy similar resources.
And I will give you an example; we have done O&M for the DOD around the world. Right now, the TSA is outsourcing its O&M work at many airports around the world, US I should say, the biggest one being San Francisco that was outsourced, we serve at the outsourced TSA provider for Rochester Airport right now and we are bidding on the Kansas City Airport.
So it’s the same service offering that we would have been offering in the DOD world. We are now moving into DOE, the Department of State, Homeland Security etcetera. So a lot of our efforts have been taking the skill sets and moving it into other areas.
The US federal budget is still $3.7 trillion. There's still a lot of money there for the largest client in the world for anyone and we just have to refocus our efforts outside of DOD. And that's what we've been doing. So I think we will grow this year over last year and of course we are mindful of what's going to happen in Washington in January.
Andy Kaplowitz - Barclays
But maybe I could ask you one unrelated question about Meridian because it’s becoming, you are talking about it more, you are talking about financing more so as you do this model, EMC has been a pretty successful but at the same time it also makes me think maybe it’s a little more risky to financing yourself. So how should we look at that? Why shouldn't we worry that you are doing something that's sort of the non-core to you in the past and this is more a part of your business now?
It’s a great question. I'm glad you asked it. I want to be clear that we do not have the capital structure to be a major player of deploying our own capital to projects and what I said or I hope I said was that we want to be able to bring any capital to our clients.
Our clients are not concerned about where the capital comes from. So Meridian has $3 billion of capital, a very, very small piece of it is our capital. So that type of capital that we could bring to our clients is what will differentiate us and our expectation is that we will be doing that with other people’s capital, not just our own. We have put some of our [few] capital in. We've put few capital into Meridian five years ago and when I see few capital small numbers, $10 million back in 2006 and we have a 30% interest in that GP now so that's our model.
Andy Kaplowitz - Barclays
Page 21 you have percentage of free cash flow return to shareholders and you can see its somewhere between 40% to 50% and 90%. So over the next five years what should the number be?
So Andrew we've been asked that question almost daily I think and give us a very specific number on what you will return to shareholders and…
Andy Kaplowitz - Barclays
Well, of the $1 billion that you are purchasing.
Yeah, so what I could say is right now it’s our priority. I also mentioned that we have interest in small strategic niche acquisitions. And we will continue down that path but I don't think we are prepared to commit to an exact amount of that $1 billion over the next five years and not because we are being evasive on the point but we are looking constantly at strategic acquisitions again not of the size and scale that we had in the recent past done but more of size and scale of that we've done in the past year but we will continue to evaluate that based on our stock price, based on other opportunities we have to invest and based on our ability to deleverage.
Andy Kaplowitz - Barclays
But I mean I guess what I am asking not trying to get an exact number, you know, ballpark is more towards, more towards 50, more towards 90. I mean, just roughly where it should be you know, along the spectrum, where should we expect?
Yeah, Andrew, I don't think I can be that specific. I can say it's not, we don’t expect to be in the 90% range. We don’t expect that to be in the 10% range and we're somewhere between that.
Andy Kaplowitz - Barclays
Just in terms of what's happening in Washington, what's your best, you know, you guys are closed to it, very important to you. What's your best guess as to the most likely outcome that we are going to see in January?
I think I could win the, make a lot of (inaudible) answer that question. I mean, really, no one is expecting it to everyone to go up the cliff but what we're hearing, we hear from the Goldman Sachs, (inaudible) they don’t believe it's going to happen but based upon what you read in the paper and see what's happening capital, I mean it's tough to figure out.
What we’ve heard is they have kick the can down the road around several months. With modest cuts, Andrew but if it gets you, may be part of your question is, we have a contingency planning team that’s been working on this for several months from various disciplines of our organization and we spend a lot of time doing some scenario planning and what you find when you go through that exercise, it's very difficult to place probability on what actions will happen by the politicians, when it really comes down to lead in January, when it comes down to the end of the wire.
So our approach has been to understand every single budget line item and how it translates into our revenue. So as we are watching it, I hate to say, we have to be ready to react, but you can't try to think ahead of what will happen on this moment in Washington, but what you can do it, we are very prepared that our moments notice as soon as you can see which line items to the budgets are going to be cut.
We already and prepared to translate that individually to our contracts and translate it individually to the headcount and G&A that were hold again deliver on those contracts. So we know what movements we need to make, what actions we need to take based on their actions. So the chess board is ready, we wait for them to make the move, when they make the move; I think we are very well prepared to defend.
Great, question for Steve, in terms of your cost structure. How far you think you are from your competitors that have the most efficient cost structure today, I know you have done any benchmarking on that and with the plans you have over the next three years does that take you to where those competitors are today and where you think it will be three years from now?
To be honest with you, when I look at our competitors; there is no competitor perfectly matches up to AECOM. What I can say is that our goal is to be best in class in all fronts, free cash flow generation and margin. We believe that the 12% target that we have will get us there, and we intend to manage our costs on the levers that I mentioned during my discussion, in a way that free cash flow and generation over the last 12 months, we were best in class. So every year is a different year but our goal is never to be second best.
So do you think in the government business, you think your cost structure will be that no one can basically beat you on price because of your cost structure when you get to that point, I guess that's what I'm most curious about.
Someone can hold the (inaudible) on the price and deliver the work at a loss. You know there's, you can't control that. Our government sector business is primarily cost plus, it’s moving a little bit in certain areas more towards fixed price but the actions that we take in our government sector business over the last 12 months have made us feel very comfortable about the profitability going forward.
John Rogers - D. A. Davidson
John Rogers back here. I was just curious with the push towards - it sounds like more private sector work more than (inaudible) resource work. I don't know whether its fixed price but also with some of our investment, is your business going to get more volatile quarter-to-quarter. It has been of late, I mean is that something that we should be thinking about or can you alleviate.
I think we are seeing that the more we get into the construction side of the business okay, and we are looking at some private markets like mining. They turn the projects on and off much quicker than you could say in the public side. We will see an increase in the volatility. Now again the construction side of our business will remain a relatively small piece of our business. The larger piece will be the PTS business and let’s say transportation side design, planning, program management. So John I think the observations are correct that there will be some of the increase in the volatility.
But we will not have the volatility say of what a contractor would have. And we still you know would maintain a consistent business like we have in the past, but again there will be a little bit more risk and which we need to manage as the projects get larger and we are looking at alternative deliveries, and there will be a little bit more of volatility. But we have recognized this going in and we are managing our risk profile accordingly.
John Rogers - D. A. Davidson
Just as a follow-up, relative to your investments for capital in projects, what are you looking for in terms of a rate of return on that capital as opposed to outside of the project?
Yeah, so the if you look at just the infrastructure of funds that you are investing in core infrastructure, their targeted rate of return is about 12% now. That's the big funds that do this and have a good track record that's the target. If you look at the private sector markets, I would say high rise residential rental space in the metropolitan area, you are looking at target rates in the 16% range but that would be what your typical investor will be looking for.
Hi. First of all thank you for the great tour this afternoon. Jay-Z’s gold plated champagne bottle was definitely eye catching.
Someone said that one of those bottles were missing.
Have it right here. So first question is really if you look at you know your greater focus on cash collection and improving and standardizing operational efficiencies, can you talk about bit about how that has influenced your acquisition prospects as you look at them. Have you started filtering some out because they don’t really mesh with that mix?
This is a question, now has our cash question effected our decision to make M&A or affected the M&A targets that we’ve selected?
The M&A target going forward. As you look at the prospect, has it narrowed then, have you filtered some out, are you still just focusing on those two priorities and thinking wanted to buy something, you can quickly assimilate your new focus?
I don't think it changed our strategy. Our strategy lets step back, our capital allocation strategy has changed, and right now we’d like stock buybacks a lot and we like it especially at today’s stock price. And so we are an active buyer. We're buying today, and we will continue to buy at these levels and upward. So that is a priority right now.
But with regard to our M&A selection, of the money that we are allocating, the smaller amounts of money that we're allocating to M&A, we are still looking for a similar returns that we have always looked at, in M&A. We're still looking for companies that will generate cash. So it's not different than we have and it's not a different analysis that we conducted in the past, but we have become much more rigorous on the types of investments we're willing to make because we have made such a commitment to stock buybacks which we expect to continue.
Thanks a lot. That’s all I have.
Adam Thalhimer - BB&T Capital Markets
Thanks Adam Thalhimer, BB&T. It's clear from your commentary that you feel better about most of the geographies that you are in, and I am just curious when that might translate in to an acceleration and organic backlog growth? Well, really the question is about organic backlog growth, when you feel better some of your geographies when might we see that in backlog?
Well, we closed FY ‘13 what $16 billion in backlog which was a record number, so that's one other things that make us feel a little bit better about ‘13 and ‘12, I can't say too much about the first quarter but we haven't changed our opinion about ’13, predicated on the two months we have seen in ‘14. So there is lot of activity going out and I mentioned the markets here in the United States to get the opportunities that we were successful in the latter part of ‘12 in the UK, Middle East is strong, Asia remains strong. So again like, just predicated on $16 billion again higher than it was before so.
Adam Thalhimer - BB&T Capital Markets
I guess one for Steve, or Mike, I guess on the free cash flow guidance of the $1 billion at least. Just doing some simple math, obviously you got some outside receivables that you got goals to lower and that you bring in this year and maybe in the next year excess cash in the $22 million a day in the $200 million range or so? Right. That gives you $800 million for the balance of five years on a run rate basis versus the implied guidance of $250 million or so of net income that this year’s goal.
I guess the implication there is that on a kind of clean basis outside the DSO reduction you are looking at collecting somewhere around 60% maybe 70% of net income as cash. I guess the question is if that's the right way to think about this business model in a no growth environment or slow growth environment that we are experiencing today.
We are committed in the near-term of things at least a 100% and if you do the math obviously you get to a much higher number than the $1 billion over five years and by the way I'm correcting myself from the slip up over three years during my prepared remarks but that at least $1 billion is a conservative number. There's a possibility that we will receive that and we would exceed that by producing net income every year for that five year period which in a no-growth environment we think is the right number plus giving us another $220 million or so from DSO reductions, we get you to a number much higher than that.
But also it would be our hope to the (inaudible) question earlier that in the latter half of that five year cycle organic growth comes back. Right now you've heard us talk about lower very modest organic growth in the very short-term in the next 12 months or so but we don't think that's going to be the case in the next five years and so when you start getting to the latter half of that year we would like to think that you are using some of that cash to grow your working capital to grow organically.
Any other questions? Okay if not we are going to reconvene outside and please if you have any questions to Mike, (inaudible) or Jane regarding construction, construction industry here in New York, anything about Sandy, what we are doing, please feel free to speak to and anyone here that made a presentation. Please feel free to come on us and let us chat.
Again thank you very much for attending and we look forward to meeting you again.
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