AECOM (ACM) Michael S. Burke on Q1 2016 Results - Earnings Call Transcript

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AECOM (NYSE:ACM)

Q1 2016 Earnings Call

February 09, 2016 12:00 pm ET

Executives

Will J. Gabrielski - Vice President, Investor Relations

Michael S. Burke - Chairman & Chief Executive Officer

W. Troy Rudd - Chief Financial Officer & Executive Vice President

Stephen M. Kadenacy - President

Analysts

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Jamie L. Cook - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Steven Michael Fisher - UBS Securities LLC

Chase A. Jacobson - William Blair & Co. LLC

Tahira Afzal - KeyBanc Capital Markets, Inc.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Adam Robert Thalhimer - BB&T Capital Markets

Sameer Rathod - Macquarie Capital (USA), Inc.

Michael S. Dudas - Sterne Agee CRT

Operator

Good morning and welcome to AECOM's first quarter 2016 earnings conference call.

I would like to inform all participants. This call is being recorded at the request of AECOM. This broadcast is the copyrighted property of AECOM. Any rebroadcast of this information in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. Later, we will conduct a question-and-answer session.

I'd now like to turn the call over to Will Gabrielski, Vice President of Investor Relations.

Will J. Gabrielski - Vice President, Investor Relations

Thank you, operator.

Before reviewing our results, I would like to direct you to the Safe Harbor statement on page 2 of today's presentation. Today's discussion contains forward-looking statements about growth and profitability, as well as risks and uncertainties. Actual results may differ significantly from those projected in today's forward-looking statements. Please refer to our press release, page two of our earnings presentation, and our reports filed with the SEC for more information on the risk factors that could cause our results to differ materially from projections. Except as required by law, we take no obligation to update our forward-looking statements.

We are using certain non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our press release, which is posted on our website. Please also note that all percentages refer to year-over-year progress except where otherwise noted.

Our discussion of financial results excludes the impact of acquisition and integration-related expenses, the amortization of intangible assets and financial impact associated with expected and actual dispositions of non-core businesses and assets unless otherwise noted.

Today's discussion of organic growth represents the year-on-year change for the entire company on a constant currency basis.

Please turn to slide 3. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer. Mike?

Michael S. Burke - Chairman & Chief Executive Officer

Thank you, Will. Welcome, everyone. Joining me today is Steve Kadenacy, our President; and Troy Rudd, our Chief Financial Officer. I will begin with an overview of AECOM's results and discuss the trends across our diverse business. Then, Troy will review our financial performance in greater detail. Steve will conclude with financial guidance before turning the call over for question-and-answer session.

Please turn to slide 4. We're off to a strong start in 2016 with most of our businesses performing as we anticipated. Our EPS of $0.68 reflects solid execution and underscores the value of our diverse portfolio of end markets, clients and geographies.

We had a book-to-burn ratio in excess of 1 times in the first quarter and our backlog held steady at $40.2 billion. We have now delivered a book-to-burn ratio in excess of 1 times in every quarter since closing the URS transaction. Importantly, contracted backlog of key revenue growth indicator increased by 12%, led by 43% growth in building construction and 6% growth in Management Services.

We also delivered on our cash flow and debt reduction commitments. We have reduced our debt by over $800 million since closing the URS acquisition last year, and we remain committed to our capital allocation priorities.

Please turn to slide 5 for a discussion of the segments. Beginning with the DCS segment. Recent milestones in the domestic transportation market provide us with additional confidence in the recovery of our Americas Design business. At the federal level, the passage of a five-year transportation bill known as the FAST Act provides critical visibility to our clients. We are tracking more than $60 billion of projects that we expect we'll proceed in part because of this added funding visibility. And this list it's heavily weighted to large scale transit projects, which is an area where we excel.

Additionally, trends within a number of states are improving. Lower fuel costs and the resulting increase in vehicle miles traveled is leading to higher gas tax revenues in many states which is a key funding source for transportation investment.

We are also encouraged by trends in our water and environment markets, which account for 45% of our Americas revenue. Clients in both of these markets are increasingly looking to alternative delivery solutions to address challenges related to climate change, resiliency and regulatory requirements.

Our integrated design, build, finance, and operate capabilities position us to benefit from this trend. The path to recovery in the Americas hasn't been smooth or as fast as we would have wanted. However, we are energized by the momentum in our pipeline. We have built the most complete portfolio of infrastructure services in our industry which positions us to drive performance as our markets recover.

Now let's turn to our international design markets. We delivered solid performance in the UK, our largest market in the EMEA region. Following last year's election and a review of fiscal priorities, we remain confident in trends across the rail, highway, and water markets that we serve.

In the Middle East, we continue to grow and our clients are committed to delivering important infrastructure improvements. Despite the price of oil, we are pursuing new revenue streams across the region including a growing list of defense pursuits to fully leverage our entire suite of capabilities.

Now let's turn to our Asia-Pacific markets. The economic slowdown in Mainland China has become more pronounced over the past few months. However, this represents only a small segment of our exposure in the region. In Hong Kong, our largest market in Asia, our leadership position has resulted in a high win rate over the past year consistent with our track record in this market.

Going forward, we are confident that we will maintain our leading role on the iconic projects that define the region. Finally, we're leveraging our large regional presence to diversify into new markets. This is especially true in Southeast Asia where demographic and urbanization trends are creating strong demands for our services. While still a small contributor to our results today, the region is attracting substantial funding to support long-term growth.

Turning to our Construction Services segment. In building construction, organic revenue growth accelerated to 42% and our contacted backlog has increased 85% over the past five quarters. Office and residential vacancy rates are low and our clients are investing to meet demand. Our backlog is defined by a portfolio of high profile projects in core metro markets including New York and Los Angeles. We are also benefiting from our strong relationships with key project developers and foreign direct investment partners, which has opened up opportunities in new markets, including London and San Francisco. As a result, we expect strong growth to continue.

Let's shift to our energy and industrial construction business. We delivered positive organic growth in the quarter, which is a significant achievement following several years of declines. In addition, we're off to a strong start in the second quarter with substantial wins on the horizon, which adds confidence to our outlook.

Shifting to oil and gas, clients remain under significant pressure to reduce spending. However, we accomplished our goal of maintaining profitability, which is due to the tremendous effort put forth over the past year to lower our costs and exit non-core businesses. Today, over 80% of our oil and gas construction revenue is from short cycle operations and maintenance and sustaining capital work, where client spending has fared much better. We have also diversified our exposure to oil and gas clients by winning large environmental projects in our DCS segment.

In some of our cyclical markets, it is incumbent upon us to capitalize on upside and to manage the business through downturns. We've accomplished this through the resources cycle of Australia and through the reduction of military support activity in Afghanistan years ago and we have successfully employed this discipline to the oil and gas business over the past year.

Finishing with Management Services. Our leading position in markets with high barriers to entry such as environmental remediation, nuclear decommissioning and cyber security competitively differentiate AECOM and contributed to a strong quarter. In the U.S., the passage of the $1.2 trillion omnibus spending bill has two positive impacts on our business. First, it removes a risk from our larger defensive energy department programs, which are now funded for the remainder of the fiscal year. Second, our clients are beginning to make awards at a faster pace. Our win rate is high and we are pursuing a sizable pipeline including over $9 billion of opportunities where we anticipate submitting bids in the coming months. We are also making progress on our international growth strategy, which is a core objective of our MS business. We believe the international defense market will be a key long-term growth driver.

I will now turn the call over Troy to provide greater detail on our financial results.

W. Troy Rudd - Chief Financial Officer & Executive Vice President

Thanks, Mike. Please turn to slide six. Overall, we are very pleased with our performance this quarter. Total revenue grew by 2% from the prior year to $4.3 billion and we are on track with our financial objectives for the year. It is noteworthy that after adjusting for the declines in oil and gas and chem demil, our organic revenue increased by 3% at constant currency.

Please turn to slide seven. We ended the quarter with $40.2 billion in backlog. Excluding currency impacts, our backlog is unchanged. Our book-to-burn in the quarter was over 1, led by 1.7 in our building construction business. The MS segment book to burn was below 1. However, based on a healthy pipeline of pursuits Mike discussed, we're highly confident that our backlog will grow in the coming months. Importantly, the quality and margin profile of our backlog remains strong and is representative of our broadly diversified services and clients.

Please turn to slide eight. DCS revenue was $1.9 billion in the first quarter. Organic revenue declined 5%. The Americas declined by 6%, which was a little bit lower than we'd anticipated and is due to slower project ramps on the wins that we drove in this – in backlog in the second half of last year. However, the activity on these programs is now increasing and the FAST Act is a positive development that we anticipate will drive additional activity later this year and into 2017.

The first quarter operating margin was 6.5%. This is a 130 basis point improvement from the prior year and it's is primarily due to our synergy savings.

Please turn to slide nine. Organic growth in Construction Services was 6% and was highlighted by the continued strong performance in building construction, which grew 42%, and by positive growth in our energy and industrial construction business. The operating margin was 1.9% and was consistent with our expectations. Recall that our prior year margin included a benefit from project closeouts and we didn't expect that to repeat this year.

Please turn to slide 10. In Management Services, first quarter organic revenue declined 19% due primarily to lower overseas contingency activities and reduced chem demil revenue. Both of these drivers were contemplated in our guidance. The operating margin increased 20 basis points to 13.2% which reflects strong execution across to our vast portfolio and the positive resolution of acquisition related project and legal matters. We still anticipate a full-year margin in the low 8% range.

Please turn to slide 11. Our first quarter cash flow and capital allocation was consistent with the commitments we've made to our shareholders. We delivered free cash flow of $77 million. Subsequent to closing the URS acquisition last year, we have generated total free cash flow of $772 million, which underscores the predictability of our diverse portfolio. We continue to deploy cash to reduce our debt. We paid down $84 million of debt in the quarter, which brings our total debt reduction to over $800 million since last October.

In addition to our free cash flow, non-core business divestitures generated $38 million of cash during the first quarter. Our planned divestitures are now substantially complete. Going forward our capita allocation priorities are unchanged. We will evaluate the returns associated with debt reduction, share repurchases and M&A. In the near-term, we will continue to prioritize debt reduction, but we always consider all options keeping shareholder value creation as our top priority.

I will now turn this call over to Steve to discuss our guidance for fiscal 2016.

Stephen M. Kadenacy - President

Thanks, Troy.

Please turn to the slide 12. Our start to the year is a testament to our diversification and our emphasis on execution delivering on our financial and capital allocation commitments to our shareholders is our top priority. And we are confident that we're on track for another year of strong and consistent performance against our targets.

With that, we are reiterating our fiscal 2016 adjusted EPS guidance of $3 to $3.40. Our strong first quarter EPS performance provides us with additional confidence in our guidance range. We are also on track to deliver free cash flow within our $600 million to $800 million range. Unlike last year, we expect our cash flow to follow historical phasing. Recall that last year's first-quarter cash flow benefited from a number of items, including the final chem demil incentive payment.

Finally, we are progressing well in our pursuit of synergies. We're on track to achieve $325 million run rate savings in 2017 and exit 2016 at a $275 million run rate.

Now, I'll turn the call over to Q&A. Operator, we're now ready for questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Andrew Kaplowitz from Citigroup. Andrew, please go ahead.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Hey. Good morning, guys.

W. Troy Rudd - Chief Financial Officer & Executive Vice President

Good morning.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

So solid quarter in a tough environment. I did want to ask you about DCS organic revenue. It was down 5% in 4Q. It was down 5%, but it is better than 4Q's, down 11%, and still little worse than last year's 4% organic decline. So, what I'm getting at is, I know we ask you this question every quarter. We understand the total backlog is up, but given contracted backlog is still down high single-digits. What conviction can we have that DCS organic revenue can turn more positive in 2016? Have you seen any change in the U.S. infrastructure markets after the passage of the U.S. transportation bill or is it just too early for that?

Stephen M. Kadenacy - President

Hey Andy, it's Steve. No, we're absolutely seeing a change. Our pipeline is looking good. And obviously, our wins are quite good and our book-to-burn has been positive for the last three quarters. So, overall, we're seeing increased optimism in the business particularly in the Americas. But the pudding obviously comes when you convert that into revenue and where the FAST Act comes in for larger infrastructure projects, those don't convert right away. So we're in a process right now of booking those in the contracted and they will start to convert for the remaining of the year.

The FAST Act is a positive for us because it unleashes those larger projects, but the larger the project, the slower the booking. But we are positive for the full year. We're seeing a lot of good things in the business and we think hopefully by the end of the year, we'll start to turn towards positive organic growth.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful, Steve. And then just shifting to international markets, I think Mike mentioned Middle East, Hong Kong, obviously, it's a question that comes up to. And given the oil volatility and the volatility in China and Hong Kong, have you seen – you have mentioned, good wins, good market share in Hong Kong, but as you guys know Hong Kong and Southeast Asia have been good growth markets for you over time. Do you still think these businesses can be growth businesses for you in the current environment?

Michael S. Burke - Chairman & Chief Executive Officer

Yeah. Andy, it's Mike. We absolutely do. I think the concerns that you've seen in that region have been primarily focused on the PRC, and PRC is less than 1% of our revenue, less than 2% of our EBITDA, but 88% of our head count across the Asia-Pacific region are outside of the PRC. And so, when we look at Hong Kong and South East Asia, we still feel pretty good about those markets. They're still significant market for us, they are still significant infrastructure investments and we're positive on those markets.

As it relates to the Middle East, I just got back from the Middle East last week and those markets are still doing quite well. Those markets grew in the quarter, and there's still a lot of infrastructure money being spent in that region. As you know, our business in that region is not in the oil sector. Now, we recognized that those governments are petrodollar funded governments, but those governments, at least the countries in which we're operating, have significant national reserves that are funding current budget deficits due to the price of oil. So, those markets are still positive for us.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful, Mike. And then just a clean-up item, Steve or Troy. I might have missed this, but did you disclose how much AECOM capital gains you had in the first quarter and can you talk about cadence if possible for the rest of the year. I know you said you'll have some. But any more clarity on that?

Michael S. Burke - Chairman & Chief Executive Officer

Andy, its Mike. We did not have any capital gains in the quarter from AECOM Capital, but as we've said last quarter, due to the investments that we've made over the past three years there, we have significant gains, built-in gains, in that portfolio and we expect to trigger those gains over the coming years and we expect to have at least a portion of those gains realized during this year. But we have not – we have not pinpointed a specific quarter in which we will trigger those gains.

Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker)

Okay. Thanks, guys.

Michael S. Burke - Chairman & Chief Executive Officer

Sure.

Operator

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

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Hi. Good morning. A couple of questions, one, within in the Management Services division, you noted $35 billion of pursuits, which I think $9 billion you said could be coming over in the next couple of months. So can you give a little more color on what you would think your expected win rate is? How quickly these could contribute your earnings, just the profile of these contracts?

And then my second question, I think during your prepared remarks within construction, you talked about within the Americas specifically, that some wins that you had last year had been – you'd been slower to recognize revenues or those projects were taking longer to start. Can you just give more color on the types of projects and what was causing the delays and when you expect that to recover? Thanks.

Michael S. Burke - Chairman & Chief Executive Officer

Sure. Jamie, let me take the first half of that question, I'll let Steve take the second half of it. The MS pipeline is more robust right now for us than we've seen in a long, long time. I mentioned $35 billion in qualified pipeline. Our win rates generally in that segment are in the 35% range. So generally we're winning one in three projects that we go after. Now of course those projects are fairly lumpy. In fact, there's two projects that we are currently bidding on, one for $5 billion and one for $3 billion. So, a win or loss on those heavily influence the dollar – the total dollars on the win rate. But generally, that's the kind of win rate we expect. Our win rate frankly over the past 12 months has been significantly higher than that 35% that I just mentioned. But we believe that's a bit of an anomaly. The win rate over the past year has been closer to 50%; that is abnormal. Generally a 33%, 35% rate is what we target. And many of those projects, especially when you start talking about the $5 billion or a $3 billion project, those are five-year contracts. And so, you tend to see that revenue spread over a longer period of time. And as far as when does that start hitting revenue, if you win them in the next quarter or so, you start picking up a little bit late in this fiscal year, but you really don't get up to full speed until FY 2017 on those.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Okay. And just in terms of my second question, I just want to make sure. The one thing I didn't include in that comment was I think, well, you talked about delays in some of the projects in the U.S. starting. I think last quarter when you gave guidance, you did talk about larger rewards that were booked in 2015, we wouldn't see that revenue recognition until the second half of 2016. So, I guess just to preface it, that's why I'm asking the question. Does that create concern or less confidence in maybe hitting the high end of your guidance because of the slowdown in some of these projects that you booked last year? Thanks.

Michael S. Burke - Chairman & Chief Executive Officer

So, Jamie, the punch line to that question is that we have stronger confidence in our overall guidance range for the year. So, one of the moving pieces among many obviously is Americas DCS. And so your question, particularly on that, was we did have some very significant wins in the second half. We had 1.5 book to burn in the last two quarters of FY 2015, and some of those are very large projects; they're very tangible. They're so tangible that we can track them on a task order basis to track exactly how it's converting. And it's started to convert in the quarter, but it didn't convert at a level to impact our revenue growth. But we have confidence that it will, going forward. And overall, we still grew our backlog year-over-year by 11% in the Americas and sequentially we grew as well. So our confidence remains strong and our confidence on a macro range, our overall earnings range, is stronger just given our performance in the quarter.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

Okay. So would that imply the mid to high end is more likely as you sit here today just given your confidence level?

Michael S. Burke - Chairman & Chief Executive Officer

Yeah, we're not prepared to give guidance within the range, but our overall confidence is stronger.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker)

All right. Thanks. I'll get back in queue.

Operator

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

Steven Michael Fisher - UBS Securities LLC

Thanks. Good morning.

Michael S. Burke - Chairman & Chief Executive Officer

Good morning.

Steven Michael Fisher - UBS Securities LLC

I wonder if you could talk about where do you think we are in the cycle in North American building construction? And then, how might you manage a transition broadly for the company from an organic growth perspective if that overall building construction growth turns to decline?

Michael S. Burke - Chairman & Chief Executive Officer

So – let me try and answer that, where do we – where are we in that cycle. It's difficult to predict exactly where we are in the cycle, but I'll tell you, we still see continued growth in that sector. We had wins in Q1 of $1.9 billion. We've got $13.6 billion of wins – I'm sorry, in backlog in that sector – so we're continuing to win new work in that sector broadly across all of our metro markets. So, we're still seeing momentum in that sector where we see continued growth like we did this quarter. 42% growth is not something we're going to continue to repeat quarter in, quarter out. But we do have a lot of visibility out through 2020 in that sector, so the good thing about that sector is they're long lead-time projects, so we get good visibility for a while. But right now if you look across our entire business, two-thirds of our business is growing and the third of it is not, so overall that's still a positive trend for us.

Steven Michael Fisher - UBS Securities LLC

And do you anticipate that given the tough comps that are coming up that you'll still be able to achieve organic growth in overall building construction in 2016 as the year progresses? And I guess maybe I'll tie this to my second question, which is sort of asking Andy's question a little more broadly. So I think last quarter, you said you expect modest organic growth in 2016. I think you've called out 3% growth for the first quarter ex-chem demil, so I'm not sure if that's on the same basis. So I guess I'm curious how Q1 played out relative to your expectation for growth for the whole year, so those two parts of those questions, if I could? Thanks.

Michael S. Burke - Chairman & Chief Executive Officer

So, you're talking about both the building construction and the overall business, correct.

Steven Michael Fisher - UBS Securities LLC

Yeah. First part was building construction, second part is overall company.

Michael S. Burke - Chairman & Chief Executive Officer

So, let me start with the building construction piece. We feel very confident that we'll have double digit growth throughout the entirety of FY 2016 because of the recent big wins that will now start ramping up. So we feel good about organic growth in building construction. And overall, I think it's important to carve up the business just a little bit, right? So we know what happened in chem demil; we understand that contract and we create a lot of transparency on that over the past year. So put the chem demil to the side and we know what's happening in oil and gas, but that to decide. So you take out those two components of the business and organically, our business grew 3% in the quarter.

Steven Michael Fisher - UBS Securities LLC

Right. And so, I think last quarter you said modest organic growth overall in 2016, is that at the same basis and does the first quarter at plus 3% put you on track for the modest growth for the full year?

Michael S. Burke - Chairman & Chief Executive Officer

I think for full year, we expect the business to trend to organic growth. And so, relative to our expectations is we would've liked to do a little bit better, given how much we have in the backlog in DCS and the slowness of it converting, which we believe it will. So, we think organic growth will ramp during the year, particularly ex-chem demil.

Steven Michael Fisher - UBS Securities LLC

Okay. Thanks a lot.

Operator

Your next question comes from Chase Jacobson from William Blair. Chase, please go ahead.

Chase A. Jacobson - William Blair & Co. LLC

Hi. Good afternoon.

Michael S. Burke - Chairman & Chief Executive Officer

Good afternoon.

Chase A. Jacobson - William Blair & Co. LLC

So, I wanted to ask about the Construction Services margin there. I know you're coming of a tough comp from last year and oil and gas is still a headwind, but that business is growing and you've talked about and I think just to Steve's question, you said that you expect continued double-digit growth in the building. So, how low is the building construction margin in that business and with that growing, are you going to be able to break out of this kind of 1% to 2% adjusted range?

Michael S. Burke - Chairman & Chief Executive Officer

No. I believe overall for a long – kind of a macro forecast for Construction Services would be about 2%. The building construction margin is extremely low. But it also requires almost no working capital associated with it. So, the return on invested capital is extremely high. And that is because we put up the buildings and our subcontractors are on a pay when paid basis. So, we don't deploy a lot of working capital associated with it. So, we're happy for that margin to be low as long as that business model is the same. Why – but there is upside obviously in my 2% forecast for that business and that's because the rest of our construction business tends to run a bit higher margin, and our pipeline in the rest of the construction business is quite strong. In fact, we would expect to post significant growth in non-building construction and Construction Services backlog in Q2.

Chase A. Jacobson - William Blair & Co. LLC

Okay. That's helpful. And then, just a couple of housekeeping items. Did you say exactly what the non-core assets were in the quarter, and what are the recognized synergies today out of the $325?

Stephen M. Kadenacy - President

So the non-core assets in the quarter related to our oil and gas business. So there were some businesses that did meet with the overall design, build, operate, finance and with the core competencies of the business. So, those were the assets in the businesses that we disposed off during the first quarter.

Chase A. Jacobson - William Blair & Co. LLC

And are there more of those?

Stephen M. Kadenacy - President

There are some assets that will be disposed off in the second quarter, they've been reflected in that number. But we have them ongoing to option in the second quarter. And so, we'll see the impact of that.

Chase A. Jacobson - William Blair & Co. LLC

Okay. And then just what's the progress on the synergies out of the total?

Michael S. Burke - Chairman & Chief Executive Officer

We're right on track for synergies. Our run rate is now around $200 million. And the real estate program continues to drive the significant portion of that. And that's on track. And the increase that we added to, at the end of our Q4 to take our synergies up from $275 million to $325 million is still well within sight.

Chase A. Jacobson - William Blair & Co. LLC

Great. Thank you.

Michael S. Burke - Chairman & Chief Executive Officer

You're welcome.

Operator

And our next question comes from Tahira Afzal from KeyBanc. Tahira, please go ahead.

Tahira Afzal - KeyBanc Capital Markets, Inc.

Thank you. Congrats on the good quarter.

Michael S. Burke - Chairman & Chief Executive Officer

Thank you.

Tahira Afzal - KeyBanc Capital Markets, Inc.

First question is, as the transportation business gets projects circulating again, can you talk a bit about how your joint sort of proposition now that you have URS in the mix. It's been really received by the DOTs and customers out there, and how that's really going to influence your market share, off this cycles hopefully as it transpose?

Michael S. Burke - Chairman & Chief Executive Officer

Well, we're certainly seeing an increase in alternative delivery methodologies coming out from the Department of Transportations and other agencies. So, we're quite optimistic that over time, our strategy of being fully integrated will pay off. I think, it's early days for that. I will say that the FAST Act, however, is starting to move large projects into the forefront, in terms of our bidding pipeline, now I mean, some in your neighborhood there in New York or been discussed and coming out to bid as high as $16 billion in value. And without the FAST Act and the visibility for a five-year funding from the Federal Government and 15% growth, during that five years, I don't think that you'd have as many of these significant projects that we're now tracking in the pipeline.

And then, more and more we're seeing those come out from traditional agencies that were all within the design bid methodology coming out and looking for fully-integrated delivery. So, I think, it's early days to hear it, but we're very confident that our strategy is the right one to be able to capitalize that when it's required and when they're coming out in more traditional bidding methodologies to also be able to satisfy client demand on that end.

Tahira Afzal - KeyBanc Capital Markets, Inc.

Got it, okay. And your divestment client model as you've said has helped you clearly weather all the volatility so far. Now as we look forward, it seems like maybe defense spending and transportation pickup, you've had a nice run on the private commercial side, and at some point the momentum will at least fade to some degree. Do you feel you have enough legs of growth from a two- to three-year timeframe right now given all the businesses that are yet to really pick up?

Michael S. Burke - Chairman & Chief Executive Officer

Tahira, we certainly do and we see it in a number of ways. We've talked about the growth in the construction business earlier. We've talked about the infrastructure momentum in the U.S. due to the FAST Act, but you also mentioned defense. And defense here in the U.S., due to the passage of the omnibus bill gives us a lot more clarity to defense spending here in the U.S. and I talked about the bidding that we have in our pipeline, which if we hit just our normal win rate on those bids, we'll have very significant growth in that market. But more importantly, we're taking these areas of expertise that we have now put together in this combined organization and taking them to other market. So, defense spending is one we've long been a big player in the defense market here in the U.S., but we have now taken those capabilities and we've expanded it into the UK where we have a significant business there now on the defense side and significant pipeline there. I mentioned that I just returned from the Middle East where we just won our first defense contract in the Middle East and we are bidding on a number of other complex design build opportunities for the defense sector there. We are performing defense sector work now in Australia. We've stood up a book defense business, as well as a Construction Services business across Asia-Pacific. So we see a lot of growth coming just from taking the expertise that we have acquired through the URS acquisition of pushing it out through our global platform, and all of that we believe will contribute to growth over the coming years within this organization. But yeah – this diversification that we've undertaken is also driving significant cash. And especially when we look at our business today and look at where our current stock prices, we're still looking at a current almost 20% cash ROE in this business and this diversification is going to continue to drive that kind of cash flow.

Tahira Afzal - KeyBanc Capital Markets, Inc.

Got it. That was actually pretty helpful. And last question is, you know – I know you just sat down your energy exposure. You know at some point energy is going to come back, oil and gas is what I mean. Is there a point and where to start look at that again because there are a lot of valuations that might be looking more attractive now from an M&A standpoint?

Michael S. Burke - Chairman & Chief Executive Officer

Yes, so – listen, today oil and gas we've about 9% of our exposures in the oil and gas sector today and the good part about that is, as Steve mentioned earlier, we had a profitable quarter in the oil and gas sector and that today 80% of our exposures OpEx and sustaining capital work and O&M type work in that sector, and a very little of it is applicable to cap to new capital works projects. But should capital expenditures comes back to that sector. We have the expertise, we have the track record and we see that as entirely upside to that sector from here. But whether we will look at M&A opportunities in that space, we're always looking at opportunities that are priced right that fit our strategic direction, and I think your observation is correct that the prices are beaten down in that sector right now and energy is here for the long term and there could be opportunities there, but nothing that we're prepared to talk about today.

Tahira Afzal - KeyBanc Capital Markets, Inc.

Okay. Thanks, Mike.

Michael S. Burke - Chairman & Chief Executive Officer

Sure.

Operator

And our next question comes from Justin Hauke from Robert W. Baird. Justin, please go ahead.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Thank you and good morning, guys. I guess maybe let me start with a quick housekeeping and then I'll ask a broader question. But just, I believe this is the last quarter that you were going to have the significant chem demil headwind. So just – I don't know for posterity's sake – maybe just can you help us quantify what the year-over-year impact was and then also confirm that we shouldn't have that magnitude of year-over-year hit going forward?

Michael S. Burke - Chairman & Chief Executive Officer

Yeah. Justin, you're correct. This is the last quarter that we'll have the significant chem demil headwind and the impact in the prior quarter was about $0.15 or $33 million.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you. And then, I guess the second question just on the guidance, I'm trying to understand maybe the magnitude of the weakening in the Americas business because it seems like the Americas and then a little bit in Asia-Pacific, those are the only two areas that kind of deviated from plan. So, is it fair to think of the flowthrough from the gains on the legal settlements, the $0.07, is that approximately offsetting what would have otherwise been your view for those other business lines, so that keeps it flat or would that be too far of an extension?

Michael S. Burke - Chairman & Chief Executive Officer

I'm not sure I understand the question, Justin.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

I guess I'm just trying to understand that the $0.07 gain that you had this quarter is in the guidance, correct?

Michael S. Burke - Chairman & Chief Executive Officer

Well, there's lots of moving pieces in the guidance, but that $0.07 was an outperformance against our balance sheet, correct.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Right. And so, I guess I'm trying to understand the reason for keeping the guidance unchanged.

Michael S. Burke - Chairman & Chief Executive Officer

I got that.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Is it – is that offsetting what would have otherwise been slightly weaker versus expectation in the Americas?

Michael S. Burke - Chairman & Chief Executive Officer

No, we're still – we don't really – I mean, we feel that the quarter for Americas was weaker than we expected, but we don't think that business has weakened. In fact, we think that the outlook for that business has still improved quarter-over-quarter just based on our wins. So, overall there's a lot of moving pieces. The $0.07 obviously helps in the year and we will – we have a stronger view on our outlook – but at this point, we weren't ready to take it up.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Got it. And then maybe my last question. Just historically in an election year, how does that impact the pace of awards and how quickly some of the task orders get issued there? Does that have any impact? Is it a positive or how do we think about that?

Michael S. Burke - Chairman & Chief Executive Officer

It has no impact. I don't think you should think about it in terms of awards. It may have longer-term impacts, depending on who wins the election, on whether there's more defense spending or more infrastructure spending and you could take different points of view on that, depending on if it's a Republican or Democratic win. But we tend to benefit on either side of that equation. But I don't think you should think about any impact on awards during FY 2016.

Justin P. Hauke - Robert W. Baird & Co., Inc. (Broker)

Thank you very much. Appreciate it.

Michael S. Burke - Chairman & Chief Executive Officer

Sure.

Operator

And our next question comes from Adam Thalhimer from BB&T Capital Markets. Adam, please go ahead.

Adam Robert Thalhimer - BB&T Capital Markets

Hey. Good morning, guys.

Stephen M. Kadenacy - President

Good morning.

Michael S. Burke - Chairman & Chief Executive Officer

Good morning.

Adam Robert Thalhimer - BB&T Capital Markets

I wanted to ask about just kind of a general level of competition out there. There are some very large oil and gas players who also play in infrastructure. I'm just curious if those – are you're seeing those companies be more aggressive going after infrastructure projects?

Michael S. Burke - Chairman & Chief Executive Officer

Not necessarily. The competition set is similar to the competition set that we've always dealt with. And so, we don't see any different levels of competition; it's a tough marketplace to compete in as it always has been and always will be. But we don't see the competitor set changing at all during these times.

Adam Robert Thalhimer - BB&T Capital Markets

Okay. And then, I wanted to ask about on the capital allocation side. I felt – maybe I read you wrong, but I felt like you – or maybe opened up a little bit more to share repurchases, which given what the stock is doing might make sense, I just wonder – give some additional color on that?

Michael S. Burke - Chairman & Chief Executive Officer

Yeah. Listen, we constantly analyze our capital allocation strategies and stock buybacks is one of those triggers that we look at. But we are analyzing all of those options on a regular basis and we haven't made any firm decisions that we're prepared to disclose at this point in time. But clearly, stock buybacks are something that do become more attractive at certain price points of our stock.

Adam Robert Thalhimer - BB&T Capital Markets

Okay. Thank you.

Operator

And our next question comes from Sameer Rathod from Macquarie. Sameer, please go ahead.

Sameer Rathod - Macquarie Capital (USA), Inc.

Good morning. Just a couple of quick housekeeping questions. Maybe I missed this, but Sellafield, I think, is supposed to be a headwind for the next three quarters since I think their contract's supposed to end this quarter. Did you guys quantify that or is that the correct understanding or what kind of impact that's going to have for rest of the year?

Michael S. Burke - Chairman & Chief Executive Officer

We didn't quantify – I mean we've quantified it in the past where it was approximately $20 million of EBITDA for the full year – and that is going down obviously as the structure of that project has changed. But we'll still be competing on a go-forward basis for a work on there, and we'll have ongoing work there for what – for people that are already there that we anticipate to stay on, but we haven't quantified exactly how much that ongoing revenue will be.

Sameer Rathod - Macquarie Capital (USA), Inc.

Right. My next question is on goodwill impairment. I know obviously you tested in the fourth quarter, but given the decline in share price, I think one of the triggers is the market cap is below book value, is that an accurate understanding or how should we think about that here in the second quarter?

Michael S. Burke - Chairman & Chief Executive Officer

So, there is an accurate understanding, we go through doing a valuation each of the quarters and during the year to what understand whether there is an impact on goodwill, but, we typically – we typically do that in the fourth quarter, but again we evaluate that throughout the year, and where we sit today, we don't see ourselves being impacted. But nevertheless as we look forward, given the long range – the long-term price of oil, there's always a possibility that something can happen, but where we sit today, it's not a concern.

Sameer Rathod - Macquarie Capital (USA), Inc.

Okay. So, you're not necessarily forced to take any type of impairment despite the share prices? So you have to go back and relocate your assumptions?

Michael S. Burke - Chairman & Chief Executive Officer

There are some complicated triggers in there, but a sustained decrease in your market cap might have one, but that's something that would need to proved over time, right, and there's arguments that can go both ways, but you always test in the fourth quarter or we do.

Sameer Rathod - Macquarie Capital (USA), Inc.

Okay. Perfect. I guess my last question is, how do you guys feel about the U.S. private non-residential markets? I'm not sure if I heard specific comments on that inside of what you've already said? And that's my last question. Thank you.

Michael S. Burke - Chairman & Chief Executive Officer

So, it depends on what you mean by private non-residential, if you're talking about commercial high-rise construction or industrial construction?

Sameer Rathod - Macquarie Capital (USA), Inc.

I was more related to commercial – commercial construction and high rises.

Michael S. Burke - Chairman & Chief Executive Officer

Yeah so, as we mentioned, we feel pretty good about it, having just had $1.9 billion of wins in the last quarter and had 43% organic growth in that sector. Most of that work is non-resi construction. So, we feel pretty good about that. It's been a hot market for us and this quarter was another indicator of a very strong quarter and strong growth in that sector.

Sameer Rathod - Macquarie Capital (USA), Inc.

Okay. Thanks. Have a great day.

Michael S. Burke - Chairman & Chief Executive Officer

Sure.

Operator

Again our final question comes from Michael Dudas from Sterne Agee. Michael, please go ahead.

Michael S. Dudas - Sterne Agee CRT

Good morning. Thanks for taking the question. Mike, just need to follow on, on the private side. Thoughts on power and where do you guys stand relative to maybe when you were planning out 2016 and how the outlook looks today for the new business?

Michael S. Burke - Chairman & Chief Executive Officer

Yes. So, the power sector has been a real positive for us. That's been a challenged market for a number of years, but we returned to organic growth in the quarter in the power and industrial sector and we see a lot of opportunities in front of us right now, and we are expecting this, the Q2, to be a real good quarter for us in wins because we handicap the bids that we have outstanding and there's a few decisions that are going to made this quarter that are very encouraging to us. So, power is attractive to us, the coal ash opportunities due to new regulatory environments is attractive to us. And so, overall, we returned to growth and there's more opportunities in front of us currently than we've seen in the past.

Michael S. Dudas - Sterne Agee CRT

Thanks. I'll leave with that. Thanks, gentlemen.

Michael S. Burke - Chairman & Chief Executive Officer

Thank you.

Stephen M. Kadenacy - President

Thank you.

Operator

Thank you. I will now turn the call back over to Mike Burke for closing remarks.

Michael S. Burke - Chairman & Chief Executive Officer

Great. Thank you, operator. Well, thank you everyone for participating today and as hopefully you gathered from this call, we feel pretty good about this past quarter with our margins increasing which is evidenced that the synergies that we've been talking about are currently being realized. We feel good about the pipeline of opportunities and the wins in the quarter. And we continuing to deliver on the commitments that we've made to all of you over the past year. And now that we're delivering on those commitments, it's increasing our flexibility to consider our capital allocation strategies that we've talked about. And so, all of this leads us to a position where given today's current stock price, we have a 20% cash return on equity. And so, we're going to continue to execute against our strategy, continue to collect our cash, continue to extract our synergies, and continue to produce the high returns on our equity that we expect our over time will translate into an improved stock price. And so, thank you again for participating today and we look forward to updating you again at the end of next quarter. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's quarter one 2016 AECOM earnings conference call. Thank you for participating. You may now disconnect.

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