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Executives

John M. Dionisio - President and Chief Executive Officer

Michael S. Burke - Chief Financial Officer and Chief Corporate Officer

Paul J. Gennaro - Vice President Investor Relation

Analysts

Steven Fisher - UBS Securities

Avi Fisher - BMO Capital Markets

John Rogers - D. A. Davidson

Joseph Foresi - Janney Montgomery Scott

Tom Carvey - Polen Capital Management

Masco - Colony Group

AECOM Technology Corporation (ACM) F4Q08 Earnings Call November 12, 2008 11:00 AM ET

Operator

Good morning ladies and gentlemen, thank you so much for standing by. Welcome to the AECOM fourth quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) As a reminder, this conference is being recorded today on Wednesday, November 12, 2008.

I will now turn the conference over to Mr. Paul Gennaro, Vice President of Investor Relations; please go ahead, sir.

Paul Gennaro

Thank you Michael and welcome everyone to AECOM’s fourth quarter and fiscal 2008 earnings conference call. Please go to slide two. As we begin let me remind everyone that today’s discussion contains forward-looking statements based on the environment as we see it today and as such does include risks and uncertainties. As you know our actual results might differ materially from those projected in these forward-looking statements.

Please refer to our press release or slide two of the earnings presentation and to our reports filed with the Securities and Exchange Commission for more information on the specific risk factors that could cause actual results to differ materially. As we begin our call, let me remind you of some of the important information about our earnings that are posted on the Investor website, www.investors.aecom.com.

First, we posted our earnings release and updated financial statements on the site for anyone who still needs access. Second, a replay of today’s call will be posted there at around noon time Eastern and will remain there for approximately two weeks. Please go to next slide three and lastly, since we are using some non-GAAP financial measures and references, the appropriate GAAP financial reconciliations are posted on our website as well.

Presenting today will be John M. Dioniso, President and Chief Executive Officer; and Michael S. Burke, Executive Vice President, Chief Corporate Officer and Chief Financial Officer. John, please go ahead.

John Dionisio

Thank you, Paul. Good morning everyone and welcome to AECOM’s fourth quarter and fiscal year end earnings call. To begin our call, Mike will take you through our 2008 financial results including the review of our balance sheet, liquidity position and backlog. We’ll then wrap up with a discussion of our 2009 guidance.

Following Mike, I will discuss our strategic priorities and action planes as we enter 2009 including the business trends we are seeing and why AECOM is well position for success in the current economic environment. We will then open the call up to your question.

Now, I’d like to turn the call over to Mike. Mike, go ahead.

Michael Burke

Thank you, John. Please turn to slide five. First of all we are please with our strong fourth quarter results and our continuing momentum in this challenging business environment. I’ll provide more details on our fourth quarter performance in a moment, but I will first highlight our key performance metrics, all of which were significantly of in the fourth quarter.

Net income from continuing operations was $42.4 million, up 44% year-over-year. Earnings per share from continuing operations were $0.40 per share, up 38% year-over-year. Backlog increased 43% to $8.6 billion and we close the quarter with $271 million in cash and marketable securities. Please turn to the next slide.

During the fourth quarter we continue to generate solid top line growth and we increased our gross revenue by 46% to a recorded $1.6 billion. Our net service revenue was up 51% to $1 billion. As you know net service revenue reflects the true earnings power of our business since gross revenue includes a significant amount of pass-through costs that do not generate material margin.

During the quarter gross revenue grew 22% organically and net service revenue grew 24% organically. Strong revenue growth and continued margin improvements in and outside of the United States drove our operating income from continuing operations to $71 million, a 68% increase over last years fourth quarter.

Fourth quarter net income from continuing operations was $42 million, an increase of 44% over the last year. This led to earnings per share from continuing operations of $0.40 a 38% increase over last year.

Note that the net income and EPS from continuing operations excludes earnings from discontinued operations for the fourth quarter of $1 million or $0.01 per share that resulted from non-strategic assets required as part of the July 2008 Earth Tech acquisition. Overall these results reflect a successful execution of the strategies we have put in place and position as well for continued growth. Please turn to the next slide.

We reported our financial results in two segments; professional technical services and management support services. The PTS segment accounted for 85% of our fourth quarter gross revenue. We generated strong growth on our PTS segment during the quarter with gross revenues increasing 51% to $1.4 billion and net service revenues also increasing 51% to $964 million.

Operating income for our PTS segment increased 71% over the fourth quarter of last year to $91 million. This rapid growth in our operating income is attributable to better leverage of our overhead costs across the organizations. Our PTS net service revenue reflects a 22% organic growth rate mainly driven by large multi-year projects across diverse business lines with strong showing across all our regions. Please continue to the next slide.

We are also pleased with the fourth quarter performance of our management supports services segment which represents 15% of our gross revenue in the quarter. MSS revenue for the quarter was $247 million up 25% over last year and entirely due to organic growth. MSS operating income decreased slightly to $6.1 million.

In the fourth quarter we increased our reserves for a pending contract modification in accordance with government and cost accounting standards amounting to $3.5 million. As we have done in the past, we take a conservative position on contract modifications and reserve these amounts until final settlement with the U.S. Government. Looking ahead the future of the MSS segment looks healthy due to several recent trends which John will discuss later. Please turn to the next slide.

As noted in our recent 8-K filing, AECOM has adopted a common accounting practice for our sector and we have reclassified certain overhead costs in our cost of revenue thereby reducing our previously reported general and administrative expenses. This treatment is consistent with industry practices and has no impact on our profitability. It does however change our reported gross margin.

EBITDA margin improved 144 basis point year-over-year due to our ongoing cost containment and cost reduction efforts and operating leverage resulting from our increased scale. As we have continued to grow, we have gain operating leverage and marketing, share services and other areas. In fiscal year 2009 we will continue to focus on reducing cost and driving operating efficiencies. Please turn to the next slide.

In the current economic environment, more than ever, we appreciate the need to have a strong balance sheet with a solid cash position and access to credit. We closed the year with $271 million in cash and marketable securities and debt of $391 million. Our marketable securities at year-end included $81 million of auction rate securities which we sold at par value during the month of November. Our cash position reflects better than anticipated cash flow from operations which increased 15% over last year to $158 million.

As of September 30 we had $650 million in committed bank facilities led by large highly rated and well capitalized banks and over $300 million in unused credit capacity. Our $600 million revolving credit facility does not expire until August 2012. Our net debt to EBITDA ratio was 0.4 at year end, which is well below our target range of 1.5 to 2 times EBITDA. On an FY09 basis, the ratio is even lower.

We have closely managed our working capital in FY08. We increased our working capital by 16%, while our revenue grew by 23%. The bottom line is that we continue to generate strong cash flow from operations, we are in a comfortable cash position and we have an excess of $300 million of available borrowing capacity under our credit facility. This liquidity position, will allow us to opportunistically invest in organic growth initiatives as well as strategic acquisitions. Please turn to the next slide.

Before I provide backlog numbers, let me reiterate our definition of backlog. We have two categories of backlog: awarded backlog and contracted backlog. Contracted backlog, represents the amount of work for which we have assigned contract and in the case of a public client where the project has been funded. Awarded backlog, represents the amount of work for which we have been awarded, but where the contractual agreement has not been completed. Neither of these measures includes any IDIQ dollars, option years or ad-hoc.

On a seasonal basis, the fourth quarter is typically slower in terms of project wins, but this year we gave momentum and closed the year with backlog of $8.6 billion, a 43% increase over the last year and a 21% increase over the third quarter of FY08. Thus far we have not seen any material project cancellations or delays and do not expect the current economic climate to have a material impact on our backlog. We believe our strong backlog provides clear visibility into our future revenue streams. Please turn to the next page.

Before I turn to our 2009 outlook, I will provide a brief recap of our performance metrics for the full year 2008. We grow our revenues 23% to a record of $5.2 billion. Net service revenue was up 37% to $3.3 billion. Reflected in this figure is a 20% organic growth rate; more importantly operating income increased 53% to $139 million. Please turn to the next slide.

Now I’d like to discus our outlook for fiscal 2009. We expect diluted earnings per share to be within the range of $1.60 million to $1.70 million for the full-year 2009. This guidance assumes the following; $38 million in total amortization expense related to acquired intangible assets, a modest level of M&A for FY ’09 which we expect to contribute $4 million to the amortization expense, a tax rate of 33% which has decreased due to our global business mix and tax planning opportunities, a diluted share account of a 107.2 million shares for FY ’09, a steady foreign currency exchange rate but if the US dollar depreciates we will see an upside to our results.

With that, I’d like to now turn the call over to John, who will discuss our strategic priorities. John, please go ahead.

John Dionisio

Thank you, Mike for a very nice report. Please turn to slide 14. In today’s call, we hope to give you a sense for what the current financial prices means to AECOM. There are a number of factors that give us confidence that AECOM is well positioned for continued growth, even in this challenging economic environment. I will spend more time today than I have done during past earnings call discussing the details of AECOM’s market, backlog and opportunities.

As you know, our business model has been one of combined organic and acquisitive growth guided by a diversification of end-markets, funding sources and geographies. This business model has served us well since 1990 and positions us well during past financial cycles. Going forward diversification will continue to be a core component of AECOM’s strategic and business model.

AECOM is a global company, but this implies it’s having a broad geographic footprint and strong local ties in communities we work and to be identified and thought of as a local company providing global technical expertise and experience. Approximately 80% of our work is with these clients.

Going forward, we will continue to build market share in our existing geographies and end-markets by leveraging our existing client relationships to win new projects. We will continue to drive strong organic growth as there continues to be a strong pipeline of well funded projects. As a matter of fact not only is the pipeline full; the sizes of the projects continue to grow and we have a successful track record at wining these mega projects. We are confident this trend will continue and mega projects will be a key component of our project mix and growth strategy in the future.

Strategic acquisitions have been a key element of our growth and diversification. We continue to target those opportunities that expand our existing market share or provide access to new markets. Most of our near term business line acquisition targets include energy and power and government services companies and geographic targets include Europe including Eastern Europe and Russia, India and China.

We have some excellent opportunities in our pipeline and we believe that in the current economic climate there will be an even greater number of good companies at attractive valuations. As we have successfully done in the past, AECOM will continue to focus on driving operational efficiencies. We have a long history of seamlessly integrating acquisitions and going forward, we see opportunities for even tighter integration that will result in additional cost saving synergies.

Cash remains king and we continue to focus on our liquidity and maintaining a strong balance sheet. In the next few slides, I’m going to talk more about the specific details of our strategies and how they will fuel our continued success, even in today’s challenging economic climate. Please turn to slide 15.

In fiscal year 2009 we expect to continue to see solid growth opportunities in our key markets around the world. Let me take you around the globe to discuss each of our geographic markets. In North America we have not seen any material impact from the current economic situation and in fact our backlog in the United States and Canada has grown significantly.

We anticipate that this strong grown backlog including several multi-year mega projects will sustain us through any near-term economic slowdown. The November 4, U.S. elections also produced good news of AECOM, as voters approved over $54 billon of state and local fund issues and over $60 billion of tax measures. Also this money will fund infrastructure projects in transportation, some of these healthcare facilities and environmental work, in key markets and geographies in which we have established long-term presence.

This is good news for AECOM, since we are positioned well on a number of these programs including the $10 billion California High-Speed Rail bond issue and two sales tax measures, we fund the $40 billion Los Angeles County transportation program and the $17 billion Seattle, Sound Transit projects. These three programs total approximately, $70 billion in infrastructure spend.

Then our support for infrastructure also remains strong and AECOM stands to benefit from the proposed $250 billion to $300 billion economic surplus package currently under review by Congress. This package could include up to $75 billion for infrastructure programs.

We all know exactly what this means for AECOM, but we expect it will be heavily weighed towards transportation projects in major cities around the world. In addition, there are $18.4 billion of projects waiting funding on the transportation ready to go. We believe these projects maybe the first to be funded on the government surplus package.

AECOM has a particularly strong position in nine of the top ten states on the list, which account for approximately $9.4 billion in potentially new projects; by the way, none of these stimulus packages have been included in our FY ‘09 outlook. Virginia market remained strong, especially in infrastructure and energy.

The government intends to continue its capital spending through the current slowdown and is proposing some $60 billion plus in infrastructure stimulus programs. For AECOM our Canadian transportation, water, energy and power business remains strong. The stimulus program will provide continued long-term growth opportunities for AECOM.

In the U.K. construction activity in the private sector has been affected by the economic crisis. While public sector investment accounts for more than 60% of our business, U.K. remained strong, particularly in the health, education and environmental sectors.

We are working on several major infrastructure programs in the U.K. including the 2012 Olympics. In recent months, we have shifted work to the U.K. and temporarily reassigned some of the U.K. staff to the Middle East and North Africa projects. This load shifting strategy is working well and has eliminated our excess capacity.

Outside of the work we performed for the U.S. Federal Government in Afghanistan, Kuwait and Iraq, our key markets in the Middle East include Saudi Arabia, Abu Dhabi and Dubai and Qatar. This region remains strongly committed to nearly $1 trillion in the infrastructure projects as part of its economic diversification strategy. In addition the Gulf economies continue to enjoy budget surpluses.

Recently, we won a $210 million contract to provide development management services for the Saadiyat Island Cultural District in Abu Dhabi and just as we announced a $150 million contract to buy program management work will Qatar’s new $7 billion Doha Port. Other work currently underway includes Saudi Arabia’s new $8 billion financial sector.

While, business remains strong in Dubai, the general expectation is that the market will moderate from its current hyper-growth projector, but just to be clear, the market for us is expected to remain robust. Overall, we believe the Middle East will continue to be a strong growth market rate down.

We have spoken in the past of our Libya infrastructure project. This project will generate over $500 million in fees over the next five years for AECOM. We have been mobilizing staff to Libya over the past six months and will continue to increase our staff in fiscal year 2009 and into 2010. The outlook for the Chinese economy remains strong; analyst our forecasting 2009 growth of approximately 9%; the companies buy large scale infrastructure investments.

China is large market with many untapped opportunities for AECOM and our recent Cinemark acquisition gives us the necessary design licensees and local expertise to expand our operations in this market. We plan to expand our presence in China by growing market share and pursing additional acquisition opportunities. This past Sunday, Chinese government announced a $586 billion stimulus program. Approximately, $18 billion of this program will be spent in the last quarter of calendar 2008.

Over the past year in Hong Kong, we have captured significant market share by winning five of nine key trends and projects awarded by the government. We are also proud of our recent appointment by the airport authority of Hong Kong to develop the airports 20/30 master plan. Looking forward the Hong Kong Government has also announced, 10 new infrastructure projects valued had approximately $32 billion for 2009 and 2010. We are well positioned to win our fair share of this work

Now, looking at Australia, our business remains strong particularly in water mining and transportation. The economic pump is being prime by $15 billion build Australia funds, which plans to deliver exactly that kind of work we do, transportation by MSO and facilities.

To summarize AECOM has leadership positions in many large long-term growth markets. In each of the markets, we have a local presence and strong client relationships and our diversified global footprint and broad capabilities enabled us to move quickly to capitalize on opportunities by going where the projects are and the money is at any point in time. Please go to the next slide, slide 16.

Throughout FY ’08, AECOM has been very successful in winning new work. Our total wins exceeded $6.3 billion, a 20% increase year-over-year. Bookings were up 32% and our book-to-burn ratio is 1.2%. AECOM entered fiscal 2009, with 170% of its 2008 revenue and backlog. Of our backlog and booking perspective we entered 2009, in a much stronger position than we did in 2008.

This slide presents some of the global multi-year key mega projects we won in 2008. Combined each project alone, will generate over $2 billion in revenue over the next five to seven years before any potential add-ons. The program shown here are well funded and long-term projects. Many of these clients are repeat customers with whom we have long-term business relationships and established our reputation for quality and comprehensive service. As I previously mentioned 80% of our revenue is derived from repeat clients.

Projects have trended over the past several years to become larger. Clients are looking at firms such as AECOM to provide them with fully integrated services rather than passing the work among several firms. To respond to this market opportunity, AECOM has evolved its marketing strategy by increasing our focus on mega projects which provide lone-term annuity over several years, but at the same time we continue to pursue modest size projects. This has resulted in a good mix of business that we believe will allow us to sustain our strong financial performance in the coming years in spite of the weak financial cycle that may occur.

This strategy and financial model was a key success factor for our continuing growth during the financial slowdowns of 2002 to 2004. You can see Q4 was a particularly strong quarter for mega project wins across multiple business lines and geographies; including program management work for the San Francisco Public Utilities Commission, the Doha Port in Qatar which I previously mention, and the Guam base expansion project for the U.S. Federal Government. Today with many such projects sustaining our growth, we expect our expanded scale and presence will allow us to continue to win such mega multiyear projects around the world while maintaining below risk profile.

Please turn to slide 17. While we had strong organic growth of about 20% in 2008, acquisitions also played an important part of AECOM’s overall growth. As we look at potential acquisition opportunities, we evaluate the marketplace and consider companies that would provide us expanded capabilities and expand our market share and geographic presence. On this slide, you can see how for FY ’08 acquisitions advanced our end-markets and geographic diversification and growth.

In 2008, five of our acquisitions expanded our facilities end-market in Asia and North America. Three acquisitions including [inaudible] strengthened both our environmental and transportation positions in North America. We also acquired a Canadian firm, which gave us significant hydroelectric expertise that we will expand globally. We continue to have several good acquisition opportunities in our pipeline and we are looking to identify good targets at attractive valuations throughout this period of economic slowdown.

Please turn to slide 18. On this slide I’d like to give you some specifics about how we are diversified by end-markets, funding sources and geographies. Looking at our end-markets, you’ll see that our transportation environmental track is now comprised of 28% and 22% of our business respectively. AECOM benefited from a particularly strong transportation market in 2008. In addition, we made solid headwind in growing market share in energy and power.

Turning to our funding sources, you will note that we are well diversified across state, local, federal, non-U.S. government and private sources. In 2008, 64% of our revenue came from governments funding and 23% of that was from the U.S. Federal Government; a very stable source of infrastructure funding. As I said earlier, support for infrastructure funding is strong and it could stronger when the stimulus packages are put into place. We will continue to see an increase in projects being funded by public-private partnerships and we expect that private sector will play a significant role in funding global infrastructure projects in the future.

Finally in 2008, we continue to advance our geographic diversification. Our revenues were evenly split between the U.S. and the non-U.S. regions. In a response to the financial crisis there are globally close to $1 trillion of stimulus packages being prepared excluding the United States $700 billion financial sector bail out plan. As we look to the future we see significant opportunities will continue to profitably grow our business. In conclusion our business model and strategies have resulted in solid performance over the past 13 years. We have grown our revenue by over 20% annually half this has been result of organic growth and half of its come from strategic acquisitions.

With that I would now like to open the call up to your questions. Operator you can please poll the audience of questions. Thank you very much.

Question and Answer Session

(Operator Instructions) Your first question comes from Steven Fisher - UBS Securities.

Steven Fisher - UBS Securities

I was wondering if you could just talk about of the guidance for fiscal ’09 in terms of what kind of U.S. and global macro assumptions do you having there? Did you assume your GDP growth weakens from here?

Michael Burke

Steve, as we have said for quite sometime, our long range assumptions are that we will produce a 15% compound annual growth rate in our EPS. Clearly most of the economic data that we look at is looking at a slowing GDP, but our plans are much more based on micro data, infrastructure spending data, stimulus package data and so the global GDP numbers are not as relevant to our plans to build up from base level economic data around infrastructure which we expect to continue to grow with the economic stimulus packages that you heard John mentioned earlier. The $1 trillion of economic stimulus packages that are presented around the globe will continue to fuel growth and infrastructure spending.

Steven Fisher - UBS Securities

But you did say that you don’t specifically have those infrastructure stimulus packages in the numbers, is that right?

Michael Burke

That’s correct.

Steven Fisher - UBS Securities

And has anything changed with respect to the Earth Tech accretion, I think you said it will be $0.04 to $0.05 on a GAAP basis for ’09?

Michael Burke

We are still comfortable with the numbers, at least that amount for ’09 relative to Earth Tech.

Steven Fisher - UBS Securities

And then you mentioned, John that general expectations in the market was slowing in certain parts of the Middle East. I was wondering if you could just kind of put your exposure in various countries in the region in context. What’s the outlook for the specific types of work you might pursue and I guess specifically with regard to infrastructure, what are the opportunities there for you?

John Dionisio

In the Middle East we see the market as very optimistic. I mean it’s continuing to grow. Our focus right now is on Qatar, United Arab Emirates, which is Dubai and Abu Dhabi and in Saudi Arabia. As I mentioned on the call, we just won a major program management of port facility in Doha, Qatar and we see that country also having extensive amount of infrastructure programs going forward, in Abu Dhabi and Dubai also the same thing.

As I mentioned on the call, we read that Dubai is slowing down, but it’s gone from red hot to hot and in Abu Dhabi, we’re currently involved in the Saadiyat Island program Cultural center which is the program management of the Island of Saadiyat. The total island construction’s about $50 billion, the cultural center is about 20 and recently there was an article that came out that indicated that there was slowing down, but really I think it’s a miss perception. If anything its continuing to grow; our clients have asked us to do more work and what’s happening is reprioritization.

The side is going to be a side of several world class museums, [inaudible] and what has happened in the first couple of hours of the selling of the land and the houses, they sold more out. So the client is now refocusing its phasing to schedule some of the revenue producing, more revenue producing investments to go ahead and that’s what happening.

In the Middle East there is a significant opportunity for mass transit, like rail systems, subway systems, because place with like Abu Dhabi and Dubai is being congested with traffic and the same thing is going to happen in product. So, overall it remains a very, very hot market, it’s a great place for AECOM and the type of work we do, which is facilities at transportation as well as environmental.

Operator

Your next question comes from Avi Fisher - BMO Capital Markets.

Avi Fisher - BMO Capital Markets

I apologize, first of all. I missed the PTS organic growth number that you have gave. I wonder if you could repeat that.

Michael Burke

The PTS organic growth is 22% for the quarter year-over-year.

Avi Fisher - BMO Capital Markets

Okay and that is NSR or gross?

Michael Burke

That is NSR that I just gave you.

Avi Fisher - BMO Capital Markets

In terms of the EBITDA margin expansion, it was plus 20 basis points year-over-year. I wonder, how far this can go and where do you start pumping up against more difficult expansion opportunities?

Michael Burke

Yes Avi, first of all the expansion was 144 basis points in the EBITDA margins year-over-year. The 20 basis point’s is just our projection of what we believe we can continue to do on an annual basis going forward.

Avi Fisher - BMO Capital Markets

Okay, I apologize a 140 basis points year-over-year and is that 20 basis points in light of the fact you did a 140 basis points this year. Is that conservative, I mean and/or where do you start bumping up against problems there?

Michael Burke

For sometime now, for at least a year and half we have been projecting that we would improve our EBITDA margins by 20 basis points annually and obviously we have out perform that by significant margin. So in high-insights those were very conservative predictions, but it is not an endless opportunity. I don’t know where the top is in terms of margin expansion, but we continue to see opportunities to take cost out of our system, we see continued opportunities to create shared service centers. It will allow us to leverage the platform that we have as we continue to grow our top-line. So, we see that 20 basis point improvement continuing for the foreseeable future.

Avi Fisher - BMO Capital Markets

In terms of one of your other end-markets in the wind farm space, I think you’re doing like the 2,000 megawatts for the Power Company of Wyoming in light of some other change in other mega projects. Do you see that going forward any changes to that?

Michael Burke

At this point time there hasn’t been any change, in terms of the wind farms. Now that the entire wind, renewable energy market is one that we feel that we need to watch going forward to see what happens as the price of oil goes down, but again it is not a significant market for AECOM at this time.

Avi Fisher - BMO Capital Markets

Okay and are there other sort of end-markets especially with Earth Tech. I know that they have named on several projects that I’ve seen infrastructure projects, your big dollar infrastructure highway issue projects; any that are held up because of credit issues, any earnings materially?

John M. Dionisio

No as a matter of fact just the opposite. Before this call I received an email that one of the Earth Tech projects which is now an AECOM project it’s a public-private partnership in Florida 595, where we are partnered with Regados; we won the project. So, just the opposite is happening. It looks like private funding is coming to the market and states like Florida, which may have some difficulties and experience some difficulties and are moving towards the public-private partnership market, which is a very good for us.

Avi Fisher - BMO Capital Markets

Do you have any color or insight into a potential infrastructure investment bank, reinvestment bank that Obama has talked about? Is that anything that’s on your radar that you have any color on?

John Dionisio

I mean it’s just something that we are watching to see if it comes to fruition. I think the President elect is on the right track, if historically in this country and in our business, anytime there’s been an economic slowdown, the one that thing that you could do to really stimulate the economy is infrastructure spending. As I mentioned on some other calls, to every billion dollars of construction, it generates 18,000 to 20,000 jobs. So, something like an infrastructure bank, a stimulus package for infrastructure is I think a key component to our recovery program for the United States.

Operator

Your next question comes from John Rogers - D. A. Davidson.

John Rogers - D. A. Davidson

In terms of your outlook for 2009, how much of that are you expecting contributions from acquisitions like Earth Tech, you completed in ’08 and how much is acquisitions that haven’t been completed yet?

John M. Dionisio

John, first of all as we stated in the past, we are estimating this approximately $0.05 accretion included in that guidance relative to Earth Tech. We don’t give detailed guidance on all the smaller acquisitions we’ve done, but I think it’s helpful to reiterate that what we have said for quite sometime. We always expect that our growth will be a healthy balance of both organic growth and acquisitive growth and we expect that to continue for the foreseeable future.

In terms of new M&A in ‘09, we have estimated a modest amount of M&A activity during ’09; at least compared to the very significant M&A activity we had in ‘08, but you should note that to the extent we identify new M&A candidates and we add them during ‘09, we do not expect them to be accretive in year one due to the FAS 141 intangible asset amortization. Typically the EBIT that’s added from year one is typically erased by the year one amortization which tends to fairly large due to the nature of the acquired backlog.

John Rogers - D. A. Davidson

I just want to make sure that if everything is in place now, for this kind of growth?

Michael Burke

That’s right. There is no accretive effect in ‘09 expected from acquisitions that have not taken place.

John Rogers - D. A. Davidson

And along that same thing, what do you see in terms of acquisition pricing? Has the private market reacted to the public market change in the public market values?

Michael Burke

Yes, it has. I think pricing expectations across the board have been recalibrated given the overall downturn in the sector as well as the market more broadly and as well as the tightening credit markets. There’s not as many buyers there at the table with available cash right now. So, our access to capital and our cash on our balance sheet gives us a distinctive advantage in the M&A markets going forward.

John Dionisio

But also just to add, we haven’t done any deals that were dilutive and going forward we will continue with that position and so if the evaluations that we believe appropriate, don’t match the evaluation of the M&A opportunity well you were just not in a good field.

John Rogers - D. A. Davidson

And then along that same range then, in terms of the end market any areas have particular focus for you.

John Dionisio

As I mentioned we are still looking at the power and energy side because we are not a big player in that; we have about 7% of our revenue. The others is in the government services, despite what you might hear about the Federal Governments budgets; I mean they’re still a very, very strong market and the other end markets we are looking at more geographies is Europe and Eastern Europe and India.

Operator

Your next question comes from Joseph Foresi - Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

I was wondering if you could just talk really briefly. I’m just curious about the re-categorizations of the cost side of things. Any particular reason, why we are doing that at this point?

Michael Burke

There are no particular reasons, why with this quarter other than its common industry practice and our auditors suggested that that was a better way to present our gross margin. It has no impact obviously on profitability, it’s just a financial statement presentation this year.

Joseph Foresi - Janney Montgomery Scott

Okay and then just you’ve given obviously kind of a little bit of a large range here, on the EPS side? I wonder, if you could talk about first, what scenario gets us to the high-end of the range and then conversely what gets us at the low-end?

Michael Burke

Well, the high-end of the range would be based on the stimulus packages that we talked about. There is a lot of opportunity for upside and infrastructure spending around the globe. It depends on how quickly that money gets pushed into the market. We mentioned earlier that $1 trillion of stimulus packages, John mentioned that the so cost ready to go list that has been published by many of the industry trade groups, that could be put to work very quickly. So, it really matters how much of that stimulus package ultimately comes through and how quickly it gets into marketplace to could push us over the high-end of that range.

As far as on the low side, there is noting that we see on horizon that would push us to the low side of that range, but the economic growth around the world is something that we keep a close watch on, but there’s nothing particular right now that we see that will push us to low end.

Joseph Foresi - Janney Montgomery Scott

So, just to paraphrase then, the low-end of the range would be minus and any of these stimulus packages in the high-end of the range would be assuming a good number or a good past?

Michael Burke

Yes, let’s say, if everything gets past that we’ve been talking about, we feel very comfortable that you’d be past that high-end of the range.

Joseph Foresi - Janney Montgomery Scott

And just I guess kind of staying with the same theme, there’s not a lot of talk about the second stimulus package. I was wondering if you could give us some idea of how important the passage is to your domestic transportation business and conversely I think a lot of people correlate the price of oil with the Middle East work. I wonder, if you could give us some idea of how important each of those particular gauged art type of work?

John Dionisio

I think in terms of the stimulus package, for us they would mean that 2010 would become a strong year. Right now we feel very comfortable as I mentioned in ’09, without the stimulus packages. On the projects we have, the funding is in place, we scrubbed all the projects, we had a backlog to make sure the funding was in place, the funding is secure. The issue is, what will happen if the economy continually deteriorates and there is no stimulus package and it’s really more of a 2010, 2011 issue.

Joseph Foresi - Janney Montgomery Scott

Okay and then just the relationship of oil to the work in the Middle East. I know you talked about the renewable energy, but I wonder if the price of oil continues to come down, so you think demand will tell off in that region?

John Dionisio

Well, I think that from what we’ve heard from our clients and the people we speak to in the Middle East, the projects; first of all the money is already in the bank in terms of the projects that they are going after, that they are putting out on the street, but in general these projects have been priced at about $50 or $45 a barrel. So I think if the price of oil goes down below $50 to $40 a barrel, we might see some softening of the marketplace.

Joseph Foresi - Janney Montgomery Scott

Okay and then just lastly, you talked a number of times of the debt ratio of about 1.5. I was just wondering, given the fact that cash is king these days, is that really the ratio that you are looking to run the business at, given all the turmoil with credit etc or are you less likely or less aggressive in your stance on what kind of debt load you want to take on?

John Dionisio

Given the capital markets today, we would not want to be in that 1.5 range. If the capital markets settle out over the coming year and liquidity comes back to the market, we would consider being in that 1.5 to 2X range again, but if you’re asking the question as of today, where we sit right now, we probably would not want to go to the high end of that range.

Joseph Foresi - Janney Montgomery Scott

And just to double check, the credit facility is LIBOR plus correct?

John Dionisio

That’s right, it’s a LIBOR plus credit facility. We renewed last year a $600 million revolver over the five year terms, so it expires in August of 2012, but it is a LIBOR based.

Operator

Your next question comes from Steven Fisher - UBS Securities

Steven Fisher - UBS Securities

In terms of pricing and margins, what kind of expectations you have for the pricing environment for contracts over the next year? Would you typically expect to see some softening in the margin pressure as you go into a recessionary period?

John Dionisio

No, frankly, it is something that we have talked about in the good times that because we have 70% of our business is with governmental clients, governmental clients tend to pay the same profit multipliers in good times and in bad times and it’s something we’ve talking about for a while here, that although the demand is for our strip supply in our sector over the past few years, we haven’t been able to expand our gross margins and if we look back to our history over the past down cycles, we have not had a contraction in gross margin either. So on the public sector side, you just don’t see that to be the case.

Steven Fisher - UBS Securities

Okay and then are you expecting to be adding headcount next year?

John Dionisio

Absolutely.

Operator

(Operator Instructions) Your next question comes from Joseph Foresi - Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

I was curious about the highway bill, which is I guess its expiring sometime in ’09, any thoughts you have over the expiration of that bill and maybe potential effects and how quickly anyone gets passed?

Michael Burke

That’s a $64 million question.

Joseph Foresi - Janney Montgomery Scott

Well I don’t know how much it is.

Michael Burke

Well, yes hopefully it’s much more than that.

Joseph Foresi - Janney Montgomery Scott

Hopefully it’s a $300 billion question.

Michael Burke

But, the last bill took a couple of years to get through Congress and we are hopping that it could be accelerated now in light of the issues we face. Although clearly the reauthorization bill is important to the continuing of the highway and transit improvement programs here in the United States; I think that will go hand in glove with the stimulus packages. It’s key and I would think that Congress and the new administration would be on the same page and it wouldn’t take as long to get passed.

Operator

Your next question comes from [Tom Carvey] – Polen Capital Management.

Tom Carvey - Polen Capital Management

You haven’t talked about looking into the alternative energy spaces in these acquisitions; I’m just wondering when you look at your renewable energy, are there any types of energy in particular that you favor, be it solar or wind as you look to make those acquisitions?

John Dionisio

We’ve always been and still remain interested in the solar and wind, but the one acquisition we made in January of this year was company out of Quebec that’s very heavily into the hydroelectric business and done major hydroelectric facilities in Canada as well as in Africa and in Europe. That’s something that we see and it’s a longer-term solution to our energy problems and it’s easier to build the wind farms and solar farms, but hydro is something that we feel that there will be a market for globally and where we feel that it’s something we want to continue to grow in.

Tom Carvey - Polen Capital Management

You mentioned that obviously you are looking to expand through acquisitions and looking into geographic diversification. As the company transitions and you look towards more of these mega projects, do you anticipate possibly shedding any of your historic assets?

John Dionisio

No, not at this point in time. I mean if anything we’re still in an additive mode.

Michael Burke

We began and I’d say that with the caveat is that we are still in the process of divesting some of the assets that we bought when we acquired Earth Tech, but just a small number and we had mention to the street when we did the Earth Tech acquisition that we were divesting of those assets and everything with the operation side of the water business.

Operator

Your next question comes from [Masco] – Colony Group.

Masco – Colony Group

I have just a follow-up on the reserve taken on the MSS side of $3.5 million, any color that can be provided there and then secondly, is just my focus of Afghanistan from Iraq; what’s the impact for your operations in that region?

Michael Burke

Sure, the reserve that we took in the MSS segment was due to a notification by the Federal Government that they had questions on the calculation of the award fee on a modification to that contract and as we have historically done when skipped those notifications we reserved the amount right away and we had a similar reserve that we put up in Q4 of ’07 last year and we resolved that with the government, I think within 90 days later and we received the full amount from them. So, we’re fairly conservative on reserving those amounts when we get the notice of initial dispute of the calculation, but our historical perspective or some historical experience has been that we generally resolve those favorably.

With regard to the second part of your question, the type of work that we are doing for the department of defense in the Middle East is primarily logistical support work and it’s primarily work done outside of Iraq. So, it’s done in Afghanistan and Kuwait at the air force bases and the army bases in that region and should there be an acceleration of the troops from Iraq, the logistical support to relocate those assets will actually increase because those assets will be moving out of Iraq and will probably be moved to some other location in that part of the world and the logistical support required to relocate those assets will actually increase.

Operator

I think management there are no further questions at this time. Please continue with any closing comments.

John Dionisio

Yes, first I’d like to thank everyone for taking this call and I would like to say a couple of things. To close today’s call I like to recap the reasons why we are confident in our positive outlook for 2009 and beyond. First, we have a long track record of leveraging our diversified business model, to drive growth in good times and in bad. Today we are far more diversified by end markets, geographies and funding sources, than we were in the past and so we feel that were in a much better position.

We continue to leverage our leadership position in large and growing markets around the world to win new work. That has resulted in a strong backlog, including numerous mega-projects, many of which have been already funded. The outlook for infrastructure funding is robust. Following the recent elections which I mentioned, we expect funding for infrastructure projects to increase dramatically. The recent bond issues and tax measures are an example of how this stimulus package will work and the increase in the infrastructure spend.

AECOM generates strong cash flow from its operations and the combination of its strong cash flow and the strong backlog, with a solid balance sheet will give us the liquidity to fund our business plan going forward. So, we’re very confident in our business model which has served us well over the last 18 years and we are confident in the strength of the infrastructure market on a global basis as we go forward.

So, with that as a conclusion, I’d like to thank everyone for your continued interest in AECOM and please if you have any questions feel free to call us and we will be happy to discuss them with you. Thank you and I’ll see you in three months.

Operator

Thank you. Ladies and gentlemen this does conclude the AECOM fourth quarter 2008 earning conference call. If you would like to listen to a replay of today’s conference you may do so by dialing 1800-405-2236 or 303-590-3000 and put the access code 11122006. Those numbers again; 800-405-2236 or 303-590-3000 and put the access code 11122006. ACT would like to thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your day.

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Source: AECOM Technology Corporation F4Q08 (Qtr End 10/31/08) Earnings Call Transcript
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