Unidentified Speaker:

Mike, if I listen to your commentary and listen to your view of the current environment and your outlook, it doesn’t really match the performance of your stock. So what do you think that the market is missing or not fully appreciating in your growth prospects or opportunities.


Mike Burke:

Yes. So, I'd say the first and foremost is not appreciating the free cash flow yield. We've been talking about this for quite some time. We have enormously outperformed our sector on free cash flow and I think when people look at the sector, the sector has not done well in fresh cash flow. And so I think most people if they're looking for a free cash flow yield investment, they don’t immediately jump to the E&C sector.
But nevertheless, you look at the past five years we have been the number one performer in our sector and free cash flow and as we've given our expectations and guidance for the next five years, we expect to generate $3.5 billion of free cash flow. That's an incredible free cash flow yield on our market cap.
And so I don’t think they're fully appreciating that. But then they look to the leverage and, again, leverage is disfavored in our sector historically. I think that's appropriate if you're a single industry, single sector provider but we are not -- we are widely diversified both geographically and byend markets, as well as diversified between design and construction. And so we have a diversification model that supports a higher leverage model but I think there's a discount for that. And then the last point is the sector has historically had challenging growth and part of that is because so many of our competitors planned oil and gas space and so there's some lingering effects of a declining market from that but putting that aside, we still have a little bit of a small 5% or so of our business from the oil patch if that turns up, great, but we're not counting on that but the rest of the indicators that I've pointed out, I think the market must be missing the opportunities that we're seeing for growth in the end markets that I highlighted.

AECOM has generated almost 80% of its annual FCF in the second-half in the past five years. We expect free cash flow (FCF) of $700M in 2017 and $725M in 2018E, with FCF conversion of 1.6x in 2017E and 1.4x in 2018E. Debt retirement remains the top priority use for free cash during 2017. We estimate $1.0 billion pay down through FY2018).

Aecom downgraded to Neutral from Outperform at Credit Suisse Credit Suisse analyst Jamie Cook downgraded Aecom to Neutral and lowered its price target to $37 from $44 due to valuation and full expectations, and said the restructuring story has played out. Cook said the Trump infrastructure story has been pushed out and the Street is given Aecom full credit for its longer-term earnings growth goal of 10%, which provides little room for upside.

So, we're sitting here today with $48 billion of backlog, that feels pretty darn good. Our backlog is up 17% from a year ago, including Shimmick, 13% without the Shimmick backlog. More importantly, when you look at the buildup of that backlog, the fastest growing components are the higher margin segments of our business. So, our Power business higher-margin growing faster than normal. Our MS business with higher margins than average is growing faster than normal.

So, we're seeing all that moving in the right direction. And then, the funding momentum that I mentioned earlier on the core civil infrastructure side for our DCS business feels pretty good. And so, we look – we're looking at 2018 and feeling like we're starting to get the winds at our back here on a number of fronts. And so, we feel, we're not ready to give guidance obviously for 2018, but we feel pretty good about our five-year commitment to 5% CAGR on the revenue side and 10% CAGR on the EPS side. But, I'll let Troy talk about some of the puts and takes that might help your model.

Yeah. I definitely feel much better than I have. I think, there has always been this hesitancy well – are we really going to get an infrastructure bill out of Washington. And I think the point to recognize there is 77% of the core infrastructure funding for transportation and water, 77% is delivered from state and municipal governments, not from the federal government. So if the federal government comes along with something, that will be a great additional catalyst, but it's not as important as the state level where we've seen 20 some states increase their fuel tax to focus on transportation and there is $200 billion plus of individual state and city measures that have come about in the past year. So, if you look at those, again LA, Seattle, Atlanta and San Francisco in Q2 of this year, there were zero projects that were procured from those monies in the market, zero. Then, you looked at Q3, the quarter we just ended, it was a couple of hundred million. And, as I mentioned earlier, by Q1 of FY 2018, we expect in just those four markets alone from these tax measures $4 billion of projects will be procured in the marketplace, and we'll stay on that $4 billion per quarter run rate for a few quarters ramping up to $12 billion being procured by the fourth quarter of 2019. And, so we schedule all these out, we have schedule that shows us when we expect the projects to be procured in the marketplace, because we're developing our bid strategy is obviously two years in advance on these. But, if you look at that schedule, procurements in just those four markets, it's going from almost zero in Q2 to $12 billion just in the fourth quarter of 2019 alone. So, I think that gives you a sense for what we're positioning for.

Pres. Trump signs an executive order to speed approvals of permits for highways, bridges and other major building efforts as part of his proposal to spend $1T to fix aging U.S. infrastructure.

The move revokes a previous order by former Pres. Obama that, among other things, required strict building standards for government-funded projects to reduce exposure to increased flooding from sea level rise and other consequences of climate change.