Will J. Gabrielski - Vice President, Investor Relations Michael S. Burke - Chief Executive Officer & Director Stephen M. Kadenacy - President & Chief Financial Officer.

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Steven M. Fisher - UBS Securities LLC Anna Kaminskaya - Bank of America Merrill Lynch Adam Robert Thalhimer - BB&T Capital Markets Chase A. Jacobson - William Blair & Co. LLC John Bergstrom Rogers - D.A. Davidson & Co. Andrew John Wittmann - Robert W. Baird & Co., Inc.

(Broker) Sameer Rathod - Macquarie Capital (USA), Inc..

Good morning, and welcome to AECOM Second Quarter 2015 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 would like to turn the call over to Will Gabrielski, Vice President, Investor Relations..

Thank you, operator. Before reviewing our fiscal 2015 second quarter 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 based on the environment as we currently see it. These items may include projections of growth and future profitability.

This outlook includes risks and uncertainties. Actual results may differ significantly from those projected in today's forward-looking statements.

Please refer to our press release, page 2 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 to the extent required by applicable law, we take no obligation to update any of our forward-looking statements.

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

Additionally, we may refer to certain metrics on a constant currency basis. In addition, our discussion of financial results and our outlook will exclude the impact of acquisition and integration-related expenses, financing charges in interest expense, and the amortization of intangible assets unless otherwise noted. Please turn to slide three.

Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer.

Mike?.

Thank you, Will. Welcome, everyone, to our fiscal second quarter earnings call. Joining me today is Steve Kadenacy, President and Chief Financial Officer. I will begin with an overview of AECOM's results for the quarter. Then Steve will review our financial performance in greater detail and provide an update on our full-year outlook.

I will conclude with additional remarks on the trends across our diverse business. Please turn to slide four. Our second quarter financial results beat our expectations and the forecast we provided last quarter, and we are on track for the full year. Organic revenue grew nearly 10% at constant currency, marking our highest growth rate since 2009.

The result was driven by 62% growth in our Construction Services segment and a return to growth in DCS. We delivered $4.6 billion of wins, and our backlog grew to nearly $41 billion. We also delivered on our commitment to pay down debt with our strong cash generation. Uneven global economic activity creates both opportunities and challenges.

However, our diversification allows us to deliver consistent financial performance, as evidenced by our solid second quarter results. We are particularly proud of this quarter, considering the enormous integration efforts underway. We are also pleased with the progress of our integration and cost synergy efforts.

I will now turn the call over to Steve, who will discuss the quarter's financial performance in greater detail..

Thanks, Mike. Please turn to slide five. I want to remind everyone that my comments today speak to our adjusted results, unless otherwise noted. Before beginning, I'd like to provide some additional background on the impact to our financial results from acquisition and integration-related accounting items.

For the full year, we expect these items to benefit our EPS by $0.30. As required under GAAP, our first quarter results have been retrospectively adjusted higher by $0.09. These items do not substantially impact our second quarter results. The increase to our adjusted EPS guidance for full-year 2015 reflects the total anticipated impact.

Turning back to our results; across our diversified portfolio of businesses, a couple of trends are emerging. First, organic revenue growth is improving. Second, we are increasingly confident in our cash flow targets for the year. Third, we are delivering on our integration priorities.

Our second quarter revenue was $4.5 billion, which is a 141% increase from last year and was driven by both organic and acquired growth. We had overall organic revenue growth of 10% and we are encouraged by the return to positive organic growth in the DCS segment, which was driven by our international markets and improving trends in the Americas.

Additionally, building construction revenue growth accelerated from the first quarter and our Management Services segment delivered solid financial performance. Our second quarter EPS was $0.58 which was better than the outlook we provided last quarter. Please turn to slide 6, as Mike noted, we ended the period with nearly $41 billion of backlog.

This is a slight increase from the first quarter and reflects our sixth straight quarter with a book-to-burn ratio over one. Excluding the impact of FX, organic backlog increased 6% and was driven by growth in APAC, the Middle East, and our private construction markets.

In the past quarter, our Management Services segment contracted backlog increased 20% from the nearly $800 million extension to our Savannah River contract. We are confident that our pipeline supports continued growth. Please turn to slide 7. Revenue in our DCS segment was $2 billion.

The operating margin was 5.3%, which compares to 6.2% in the year ago period and 5.2% in the first quarter. While we are pleased with our return to organic growth in DCS, room exists for further improvement in our Americas design business. Backlog in the Americas improved slightly and our pipeline is strong.

As this backlog converts to revenue, we expect better cost leverage and margins. Ultimately, our larger revenue base will support improved profitability and allow for additional investment in growth. Please turn to slide 8. We delivered 62% organic revenue growth in our Construction Services segment.

We benefited from a robust backlog and continued investment by our residential and non-residential clients. The operating margin in the quarter was 1.6%, which was down sequentially due to the favorable items we mentioned last quarter.

The margin is also being challenged by weaker oil and gas revenues, and slow decision-making by private sector power and industrial clients. Many of our private sector clients that benefit from lower energy prices are planning new expansion projects.

However, the transition to growth resulting from low energy prices will take time to offset the weakness in our oil and gas operations. Also, while beneficial to our bottom-line, the growth in our building construction business comes at a lower margin due to the mix of pass-through revenue.

This lower margin profile is offset by our higher return on invested capital and more favorable cash terms. Please turn to slide 9. In the Management Services segment, revenue was $829 million. Organic revenue declined due to the lower overseas contingency operations activity in Afghanistan and Africa.

The operating margin increased from 5.2% to 12.7% due to a better mix from our combined operations. Earnings from chem demil declined as expected. This decline was partially offset by a benefit from the release of the Libyan payroll tax liability. These two items netted to a negative $0.12 impact on our EPS as compared to the first quarter.

Please turn to slide 10. Turning to the balance sheet and capital allocation; we are pleased with the progress we have made against our cash flow and capital allocation commitments. During the quarter, we generated $19 million of free cash flow, bringing our first half free cash flow to $277 million.

We are on track to achieve our $600 million to $800 million annual free cash flow target. We used $52 million of cash for acquisition- and integration-related items. This was down from $235 million in the first quarter. We are on track to complete nearly 80% of our total A&I cash outlays this year.

This forecast remains consistent with the guidance we provided in our December Investor Day. We paid down more than $100 million of debt in the second quarter and ended with no drawn balance on our revolving credit facility. Since closing the combination in October, we have repaid more than $450 million in debt.

Please turn to slide 11 for our financial outlook. We increased our fiscal 2015 EPS guidance range to $3.15 to $3.55. The increase reflects the $0.30 of acquisition-related accounting adjustments I discussed earlier and confidence in our operating outlook.

Our guidance is based on approximately $110 million of realized synergy savings, interest expense of approximately $220 million, and a 30% adjusted tax rate. We reduced our full year capital expenditure guidance by $10 million to approximately $160 million.

This reduction reflects lower spending in our oil and gas business and higher than expected disposals in the first half of the year. Our expectation for depreciation of approximately $210 million for the year is unchanged. While not included in our adjusted results, we have revised our expectations for amortization and A&I expenses for the year.

We now expect amortization of approximately $410 million, which compares to $220 million previously, and we expect approximately $400 million of A&I expenses, up from $340 million previously. The increase in our A&I expense is mostly non-cash and relates to some acceleration of real estate and IT synergies.

These synergy benefits will have a favorable impact in the coming years. Before turning the call back to Mike, I will provide an update to our integration activities. Our IT integration is tracking to our initial schedule. And by the end of this month, we will complete both the Americas Design and Management Services ERP consolidations.

Moving to real estate, we completed 90 office consolidations, resulting in nearly 1.3 million square feet of reduced space. The efficient use of our 16 million square feet of global office space is a key component of our overall cost synergy plan. We are also seeing improved pricing on procured items.

We expect that our increased size will create meaningful savings opportunities over time. I will now turn the call back over to Mike for an overview of the operations and end market trends.

Mike?.

Thanks, Steve. Please turn to slide 12. As Steve discussed, we are confident in our fiscal 2015 outlook. The growth in our international design, building construction, and management service markets is offsetting challenges in the oil and gas and civil infrastructure markets.

Taken together, our diversified business is proving resilient, and the long-term outlook for our services is strong. Projected global infrastructure investment through 2030 is expected to exceed $50 trillion. This includes an estimated investment of $23 trillion in transportation, $12 trillion in power, and $11 trillion in water infrastructure.

Through our fully integrated delivery model, we are strategically positioned to play a leading role in these markets. Let me now turn to a discussion of our segments, beginning with DCS. In the Americas, economic growth rates and underlying trends continued to improve, which contributed to the slight increase in our organic backlog.

State and local tax revenues are above pre-recession levels, and leading indicators remain positive. However, uncertainty around transportation funding and this month's expiration of the current highway bill are resulting in uneven performance across our Americas business.

Importantly, the nation's infrastructure is the backbone of our competitive economy. Both parties are clearly aware of the need for reliable funding sources to ensure this backbone remains strong. There have been several ambitious proposals from both sides of the aisle.

Whether funding is secured through the taxation of repatriated earnings, an increase to the gas tax, or innovative financing tools, any resolution would improve our visibility. In the domestic private sector, activity continues to improve.

Lower oil and gas prices create new opportunities in power, industrial, and chemicals; end markets where we now have significant expertise and experience. In addition, we are now able to package many services, ranging from consulting and design to construction and O&M into a single offering.

This capability differentiates us as clients are more willing to engage at the front end of a project and want us to take a larger role through completion. Pivoting to our international markets and beginning in EMEA. We delivered top line growth across the region.

The United Kingdom, our largest European market, is benefiting from stable economic activity, low inflation and continued infrastructure investment. The recent election results are positive for infrastructure spending, and we expect continued support for the nearly $75 billion in planned rail and highway spending.

Our leadership role in the UK and early work on some large proposed projects has us positioned to fully benefit from this growth. In the Middle East, we delivered double-digit growth. Our clients are making investments in critical infrastructure to keep pace with population and urbanization trends.

These clients have substantial financial resources to mitigate their declining oil revenue and our backlog provides us with a good amount of visibility. However, we are beginning to see some signs that our recent growth may moderate. Our pipeline is not refilling as quickly as in prior years and our clients are taking longer to make awards.

Offsetting the risk of a slowdown in the Middle East is the opportunity to meaningfully expand our role on larger projects. In my recent meetings with several key leaders and clients in the region, it was apparent that we are better positioned today for large integrated projects because of our expanding capabilities and scale.

Clients in the region value these traits when determining who they want managing large developments. Turning to Asia Pacific, we delivered another quarter of solid growth with double-digit gains across Southeast Asia and steady activity in Hong Kong. Economic growth and urbanization across the region continues to create opportunities.

This is particularly true within Southeast Asia where AECOM is poised to deliver meaningful growth in the coming years. This expansion across the region will be helped by initiatives that include the $50 billion Asian Infrastructure Investment Bank.

In addition, the recently announced cooperation between the bank and the Asia Development Bank is a remarkable step towards global cooperation and allows for additional funding sources to fill the estimated $8 trillion regional infrastructure gap.

As we position for growth in the region, our reputation and full suite of design, build, finance, and operate capabilities distinguish AECOM and position us as a partner of choice in large pursuits. In Australia, the outlook for our business is better than it's been in a while.

But in the short run, momentum has slowed due to delays and market uncertainty following the elections in New South Wales. However, our pipeline remains strong, and we are pursuing several transportation projects that are set to be awarded in the second half of the year.

In addition, we generated consistent profitability in the first half of the year due to the aggressive restructuring we undertook when commodity-related spending declined. This is a prime example of how our DCS business adapts to a dynamic global economy.

Moving to our Construction Services segment; our building construction business delivered another solid quarter, highlighted by double-digit organic revenue and backlog growth. Our pipeline is robust. We have several large pursuits in our core New York and Los Angeles markets.

At the same time, our client relationships are expanding to match our broader geographic capabilities. Our growing pipeline of international pursuit stems from the relationships built with our U.S. clients and reflects the strength of our global brand and reputation.

We are confident that we will continue to deliver growth in building construction into 2016. Turning to our industrial and oil and gas markets, trends are varied. Beginning with oil and gas, we continue to be negatively impacted by low energy prices and reduced client spending. We are responding to this market weakness in two ways.

First, we have completed a comprehensive review of the recently acquired oil and gas business, and we're in the process of significantly reducing our cost structure. Second, we are actively expanding our key client relationships both in the oil sands and other oil producing regions where both our design and Construction Services can be utilized.

We are making inroads with clients who now see greater value in our expanded capabilities. As we execute through the challenges in oil and gas, we are repositioning towards markets that benefit from lower energy feedstock costs, which is reflected in our growing pipeline.

In the chemical and petrochemical markets, clients are expanding capacity to take advantage of lower natural gas prices and to build derivative plants to complement increased domestic ethylene capacity.

We are seeing increased CapEx from our auto, industrial, and aerospace sectors and we are pursuing several power projects that we are expecting to book in the second half of the year. Across all of these markets, we see opportunities to leverage our design, design build, and construction capabilities.

Abundant energy supply and lower prices will create long-term advantages for our domestic business which accounts for nearly two-thirds of our company. However, it will take time to convert our changing mix of pursuits to backlog and revenue, and therefore the benefits will be enjoyed via our business in the long term.

I will finish my comments today on our Management Services segment. Our longstanding strategy to replace our overseas contingency operations work with higher margin business is working.

Despite the expected organic revenue decline, profitability improved, resulting from our intelligence and cyber security contracts and the mix shift to higher margin work. In the first half of the year, client decision-making has been somewhat slower than anticipated, but our win rate remains at high levels consistent with our historical performance.

All told, we have more than $5 billion of bids under evaluation by our clients and nearly $30 billion of potential pursuits. We are pursuing new opportunities that would combine cyber security, intelligence, and operations management capabilities with our design and construction disciplines to meet the demand for integrated services.

For instance, clients that want us to design and build new sports arenas are also turning to us for leading-edge security services for their facilities. We can provide these services in a single offering. Before opening the lines for your questions, let me reiterate our commitment to delivering on the priorities we have set out to achieve.

We are on track with our synergy plans. We are delivering on our cash flow and debt reduction targets. And we are actively pursuing opportunities that leverage AECOM's leading capabilities in the markets we serve. Operator, we are now ready for questions..

Thank you. We will now begin the question-and-answer session. And our first question comes from Jamie Cook from Credit Suisse. Please go ahead..

Hi. Good morning. I guess just a couple questions. One, with regard to the free cash flow, the free cash flow is weaker in the second quarter versus the first quarter, which was expected, but a little weaker than I thought.

So, can you talk about – I mean, do you think the lower end of your free cash flow is more likely than higher end, and is it more – is it evenly distributed throughout the second half or more fourth quarter-weighted? And then, I guess, my second question relates to the guidance.

On an EPS basis, while you raised the midpoint – I mean, while you raised the midpoint, you implied it's just the $0.30 you're getting from acquisitions. So, can you just – is that just the Flint, or oil and gas business, and can you give us an update on how the cost synergies should flow in the back half of the year? Thanks..

Hey, Jamie. It's Steve. So, on the cash, cash is lumpy. Typically, AECOM historically burn cash in the first half, so we're pretty happy with the $277 million in free cash flow in the first quarter.

But any one quarter can be lumpy just because if you collect it on the last day of the quarter or the first day of the quarter can make a huge difference to the quarter. So we're still very comfortable with our range of $600 million to $800 million. We're not ready to guide within that, just given the lumpiness of it, but we're not coming off of that.

In fact, we're quite bullish on our cash forecast for the three year period..

And – but should it be more – is it like a fourth quarter event, or should it be more evenly distributed in the back half just with the URS – I don't know how to....

I mean, that's my point, Jamie. It's very difficult to guide free cash flow on a quarter-by-quarter basis because of the issue of collections and/or payables on (22:43) contracts can impact each single quarter.

So, for the overall year, I would stick with the $600 million to $800 million, but I'm not comfortable yet giving guidance within that on a quarter-by-quarter basis..

Okay..

On the $0.30 increase, it wasn't related to acquisition earnings. It's related – that's adjusted EPS, it's related to the normalized profit effect on our full year. So, that's associated primarily with the URS acquisition, and a very tiny amount from Hunt, and that's a adjusted EPS impact.

The way we've accounted for normalized profit, of course, increases the value of the backlog intangible and the associated backlog amortization. So, on a GAAP basis, there's hardly any effect, but because of the adjusted – because we add back amortization, it does have a $0.30 tailwind for the full year.

So, we just added it to the guidance just to maintain as much transparency on that topic as we could..

Okay. And sorry, last, the cost synergies, did you get any in the second quarter and then – and how do we think about that in the back half, and then I'll get back in queue..

Yeah. We did. We're exiting the quarter at about $70 million run rate.

We're fully expecting to get the $110 million realized for the full year and the $180 million exit in the fourth quarter, so we're continuing to ramp as we go and we're – for the FY 2016 we'll give further guidance as we go, but we're able to accelerate some of our synergies particularly on the real estate side.

We're finding that we're able to execute on our real estate strategy faster than we ever thought. As I mentioned in my prepared remarks, we consolidated 90 offices since we closed the transaction, is pretty significant. And we're finding opportunities as we go, and we'll keep you updated on that..

All right. Thanks. I'll get back... sorry..

Jamie. You did raise a question about oil and gas, and just to be clear on that, we are experiencing headwind in the oil and gas market as you're seeing across the entire peer set. But clearly, we expected this in our EPS guidance for the quarter. So, it was within our expectations.

So, we reset our expectations near the beginning of the fiscal year for the oil and gas sector..

And sorry, Mike, just one on that – have you seen – I understand we've seen a dramatic decline since the beginning of the year, but have you seen any stabilization at low levels or no?.

I'd say stabilization, in the past quarter, I would call it stabilization. In the past 90 days or so, it hasn't gotten worse..

Okay..

It's about what we expected..

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

Thanks..

And our next question comes from Steven Fisher with UBS..

Thanks. Good morning. And sorry for the background noise here. Wondering if you guys could just clarify the organic growth rate in the quarter, constant currency and excluding acquisitions.

Was that the 9.7% number?.

Yes..

Okay..

Yes, that is organic constant currency, entirely exclusive of acquisitions..

Okay.

And is that – similar question for Construction Services, the 62%, is that on the same basis?.

Yes..

Ex-acquisitions and ex-currency?.

That's correct..

Okay.

So can you just talk a little bit about what specifically – there must have been some pretty significant projects driving that 62%, what it was, and then how we should think about what you've assumed in your guidance for overall company and for Construction Services for the rest of the year?.

So, first of all, the 62%, what's driving it is a very strong vertical commercial real estate market in the major metropolitan areas of United States, as well as other parts of the world.

We're seeing a boom in tall vertical construction like we haven't seen since 2008, so – and that's right in the sweet spot of our legacy Tishman business, as well as our new Hunt business..

Okay. And sort of how should we think about, say, that 9.7% for the balance of the year? I'm assuming that's probably a little better than what you're expecting, so far, year-to-date.

So, how should we think about sort of what you'd expect for the rest of the year?.

Yeah. Listen, it was a little better than we expected for sure. But for the rest of the year, the important thing with regard to organic revenue is the DCS business. The DCS business on a constant currency basis returned to organic growth of 1%. It's our best organic growth in six years. And that is the big wheel within the machine here, right.

If we can turn around the organic growth rate in that segment, that's what's going to generate the real growth of the organization. So, that's what we're focused on is getting the organic growth turned around within DCS and that 1% organic growth rate for the quarter was an encouraging step in the right direction..

Okay. And then, you sort of raised a bit of a signal on the slowdown in the Middle East, but it sounds like you potentially have some bigger programs that could mitigate that.

How material an impact do you think we're going to start to see in organic growth as a result of the slowdown of the Middle East or do you think the timing of some of the bigger programs will really kind of make that dynamic not that material overall?.

You know, it's – I mentioned it because I think it's something that's – is bit of a wild card, right. First of all, we did have a double-digit organic growth in revenue and the backlog in the quarter in the Middle East. So, I want to make sure I put it in the right context. But we are seeing a couple of projects that did stop.

We had one stop in the quarter in Saudi Arabia and although the revenues weren't overly material, it's the demobilization cost that really hurt you. You bear all those demob costs in the quarter. So, we had one big project that stopped. There are a lot of large-scale infrastructure projects that are still on the horizon, but there's uncertainty.

There's political volatility. There's concerns around defense, which is exactly what we are focused on there, where we think there's going to be a lot of money spent in the Middle East is around regional defense.

And I just returned from a trip to the Middle East last month where we spent a lot of time talking to our clients and government officials there about the amount of money that they are going to be spending for regional defense is expected to greatly increase and the capabilities that we have to be able to design, build and operate those assets for the governments of Saudi Arabia and UAE in particular is something that's very encouraging to us.

Now, whether that'll happen in the next two quarters or whether that's a 2016 issue, that remains to be seen. But we're watching that region very carefully and remaining very agile on the projects..

Okay. Thanks very much..

Sure..

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

Hi. Morning, guys. I just wanted to go quickly back to the adjustment to the outlook. I'm just thinking about it as a non-cash charge. Why not just exclude it from the EPS outlook and the reported numbers, seems like it will provide less noise, for instance.

Why was it in the first quarter and not in the second quarter, and how will you reflect it by segment? Is it on a particular – in one particular business, or will it be spread across three segments?.

We'll just take those in order, and if I forget one of the three, just remind me, but we didn't change our definition of adjusted EPS because we don't want to change it from quarter to quarter. So, we thought it was easily transparent just to add it to the overall outlook and quantify it for everyone.

It's spread between all of the segments, and it impacts them differently depending on the quarter. The reason it had an impact in Q1 versus Q2 is there were multiple – we finalized all of our valuation in Q2, or not finalized, but we're predominantly farther along with our purchase price allocation in Q2, and there are multiple adjustments.

We had the increase in normalized margin. We also had the increase in the backlog intangible, which affected the amortization increase, and then there was also an overhead rate adjustment that impacted going the other way, so that – in the Q2, that was a offset.

For the overall year, it's $0.30, and we thought it was just as clear just to add it to the earnings guidance..

And how should we think about the charge into 2016, 2017? Is it at the same pace, or will it be coming down over the next couple of years?.

It will come down. The benefit will come down. I think, it's about $0.30 this year, probably cut in half next year..

Okay. And then you provided some more positive commentary on the fact that America is improving in the quarter in your DC segment. Would you be able to quantify it? Is it the number of inquiries? Is it your backlog is finally growing in North American U.S.

design business, and where are you seeing the strength? Particularly, are you seeing any improvement in civil infrastructure, any impact from the highway bill uncertainty into June quarter?.

Well, certainly we're seeing the activity in pipeline picking up in the Americas and we're hopeful that the highway bill issues will bring a little more certainty to the civil infrastructure market.

We are seeing bipartisan support to push forward with some creative ideas that would further fund infrastructure such as the repatriation of untaxed foreign earnings and so we're starting to see not only activity in the marketplace, but we're seeing some bipartisan support in Washington for more dollars to support infrastructure.

We're also seeing a continued increase in sales tax revenues across the states. So there's a lot of leading indicators that are pointing in the right direction..

But would you be able to quantify and maybe, I don't know, percentage growth in your inquiries second quarter versus what you saw last quarter. Is it accelerating, is it converting into firm backlog in the U.S. just for overall U.S. design business..

I don't think I'd want to be able to guess on the number of inquiries increase. I could tell you anecdotally, it – we feel there's a lot more activity in the market but I really can't give you a specific number..

Great. Thank you very much..

Thanks..

And our next question comes from Tahira Afzal with KeyBanc Capital Markets..

Good afternoon, gentlemen. This is Shawn (34:58) on for Tahira for today. So, in the prepared remarks, you guys commented on some customer spending nuances in the power market among others.

So we are just wondering with the potential scope reductions on the power gen side, have you guys increased the amount of construction risk you're willing to take on versus, say, this time last year? So any change on your construction risk appetite there would be helpful..

No, we have not changed our construction risk appetite. As I think, you know, we're fairly low-risk business model. We always have been. We have – less than 2% of our business is hard-bid contract types, 22% of our business is fixed price contracts. So we're a fairly low risk business model, and we don't see that changing..

That's good color. Thanks very much.

And secondly, on the M&A side and with the oil and gas valuations potentially coming down, are you guys sort of staying on the sidelines there or are you considering some of these acquisitions in the space?.

We are not considering any significant acquisitions at this point. We're focused on successfully integrating the transaction we did last year.

We think there's just a lot of opportunity to bring this organization together and capitalize on those markets and we think we can do that without undertaking a significant acquisition at least in the short term..

Okay. That's helpful. I appreciate your time, gents. Take care..

Thank you..

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

Hi. Good morning, guys. Nice job in the quarter..

Thank you..

Thank you..

Mike, I'm just trying to parse through your comments as you went around the world, I mean does it feel to you like backlog is kind of leveling out here at this current level?.

No, it doesn't feel like that. It feels like our backlog, although it appears level from quarter to quarter, we did have a couple subtractions from that and we also had a foreign currency adjustment, so even though it's flat quarter-to-quarter, we did have a 6% impact from foreign currency.

So, it would have been up 6% on an organic basis if you took out the currency. So, the growth in backlog feels pretty good to us..

Okay.

But you're not overly concerned about lack of the highway bill in the U.S., what you're seeing in the Middle East, the near-term headwinds in Australia, there's offsets to that?.

Listen, one of the great benefits of our business is we are very diverse, and so we participate in a lot of strong growth markets. But the other – so the flip side of that diversity is we are also have challenging markets at any given point in time. And so we take the good with the bad, and generally we feel more positive than negative.

So, yeah, we do have some challenged markets. Oil and gas is challenged. Australia is a little bit challenged. But we think that we're at the bottom of that cycle. China continues to grow. Middle East, I said, it grew in the quarter, but we're watching issues on the horizon, and we're dealing with that all around the world.

But on balance, we feel more positive than we have in a while..

Okay. Perfect.

And then, just lastly, on the A&I expenses, Steve, how should we think about those in 2016?.

We're going to burn about 80% of the cash expense in 2015 that's how I'd look at it. So, the majority of the spend comes this year and we start reaping the benefits..

So should that bring down 2016 because you pulled some forward to 2015 or just leave – wherever it was before just leave it there?.

Well, we could probably work with you offline on the models. I'm not sure how much you have, so I don't want to guide you to bring it down, and let's say, add a little more accuracy. But overall, our expectations haven't significantly changed. We did increase $60 million for the current year. The vast majority of that was timing. And just to give you....

Got it..

– an example on that, the real estate transaction, we did accelerate $20 million of real estate into this year. Those are mostly non-cash write-offs of TIs as we bring offices together. And then there were some acceleration of severance-type expenses that we thought we were going to take in 2016 that we pulled forward as well..

Okay. Thank you..

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

Hey, guys. Good afternoon or good morning to you..

Hi, Chase..

First question, Steve, on the cash flow.

I know you're not going to give specific guidance, and I don't expect you to, but can you maybe talk about, when we look into the second half of the year, the improvement from here? How much of it is – how much of it are things that are in AECOM's control versus things that are more market-related, to new awards or just ongoing operations?.

Well, on cash, most of the things are in our control other than clients just cutting off payment. I don't see anything specific to that. I mean, I've not seen slowdowns in payments. In fact, our DSOs are down.

Historically, as I mentioned, we burn cash in the first half, and historically, that's – we produce about 80% of our cash in the second half, and we're doing better at modulating that on a more even basis throughout the quarters.

So, the other – obviously, we've been funding some A&I in our free cash flow as well and that would peel off as the year goes on and the FY 2016, of course, will have only 20% of the total A&I cash expenditures. So, going forward, it will be a little bit of a tailwind from that, from a comparative standpoint.

But there's nothing specific that I can point to, it's just our typical execution and we're a very cash-oriented business. Almost every senior executive in the company has cash as 50% of their incentive base compensation, either in cash or in their long-term equity compensation. So it's kind of part of the fundamentals of the culture here..

Okay. And then, Mike, on the oil and gas business, it's weak and you mentioned that you're significantly reducing the cost structure there.

Is that part of the acquisition and integration or are there incremental cost savings that you're going after in that business?.

It's clearly incremental. And there's – the first look at cost synergies was related to the acquisition. But, of course, in the past six months, as the demand for oil and gas activity came down, we – as we do with all of our businesses, we reduced our cost structure to support the expectations of revenue from that market.

But yeah, the good thing about that market is there's a flipside to it which is there are a whole host of industries that benefit from low oil and gas feedstock and those industries are picking up quite a bit and whether it be auto, aerospace or other petrochemical markets, we see more activity in those markets than we've seen in quite some time.

Now, you don't see – it doesn't – the switch doesn't turn over night. You don't see a decline in oil and gas business where CapEx freezes up and it doesn't move immediately the next day to an increase in CapEx in the industries that benefit from the low oil and gas feedstock.

But clearly, that is the upside of this – or the flipside of this downturn in oil prices and we are well poised to participate in that market..

Okay. And then lastly, you mentioned that you're pursuing several large projects in power that you expect to book in the second half of the year. Can you expand on what types of projects those are, are they gas-fired plants, are they environmental or renewable? Any color there would be great. Thanks..

Given that we are in competitive pursuits on these, I probably don't want to get into the details of those right at this point in time..

Okay. Thank you..

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

Hi. Good morning. Just a little follow-up.

First of all, in terms of the URS business, can you give us a sense of what sort of year-over-year growth you saw there?.

So, year-over-year growth, so I'll just try and give you anecdotally..

Yeah..

If I think you look at it by their segments. I mean, clearly, the URS federal services business is down largely due to the peel off of chem demil, that was expected, but that business is performing very well.

Oil and gas, the former Flint business is down significantly and in terms of our full year outlook, it's immaterial to our EPS guidance range because we're restructuring that business and assuming that things don't get better in FY 2015. And then EC overall is down a bit, although, in general, I would say you could describe it as just slightly down..

Okay. I'm just trying to contrast it with the strong organic growth that you reported, 10%. I mean, is that just the end markets exposure there? I mean, obviously, the oil and gas....

That's entirely it, John, is end market because you think about where are we seeing organic growth. We're seeing it in Asian markets, we're seeing it in Middle Eastern markets, and we're seeing it in the private sector vertical construction markets. Those are all markets which URS had virtually no presence in.

The markets where they had a bigger presence is the oil and gas, which we all know is down, and federal services, although we both had a presence in that. We knew the chemical – the chem demil business was in a scale-down mode. So we feel good about the rest of the URS federal business. We had planned on chem demil to come down.

And then their I&E business, their civil infrastructure business, was predominantly U.S., and we know the U.S. market is challenged. They're experiencing a very similar market reaction that we're seeing..

Okay. Thanks. That's helpful. And then just – I mean, it seems as if the progress on integration and cost synergies, I don't know, seems like it's a little bit ahead of schedule.

Is that true from your point of view? I mean, do we see, then more benefits sooner, especially in 2016?.

So let me comment on the first part of that, and I'll let....

Yeah..

– Steve comment on the second part of it. Overall, I would tell you we feel very good about the integration. Integration is often a challenging period. We have been through the hardest part of that and we feel that culturally, we're coming together very well. We have – the entire new organization is in place.

This week we are pressing a go on the most significant part of the systems integration. So we feel like the – culturally, the integration has gone better than we expected. From a cost synergy perspective, we feel that we are ahead of our plans. As Steve mentioned, we have accelerated some of the decisions to come together.

And so, all in all, we feel very good about the merger integration, where we've been year-to-date and where we'll be through the rest of the year, but I'll let Steve comment on the specific timing of those synergy flows..

Yeah. I'm not ready to quantify FY 2016, but the answer to your question is yes, FY 2016 will benefit from the schedule that we're on because we are accelerating synergies.

We're pulling some of those costs to achieve them into FY 2015 and FY 2016 will benefit from the lower costs and the acceleration of the synergies relative to the three-year period that we originally guided..

Okay. Great. Thank you very much..

Welcome..

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

Hi, guys. Steve, I wanted to dig a little bit in the margin fair value liability benefits for the quarter. Was there any particular projects that those are associated with predominantly that drive those, it looks like it's a little heavier in the DCS segment.

But I guess, just understanding the project health and how those could – how long those could be lasting to the P&L, I know, you gave us some comments earlier. But just some color on the types of projects that these are associated with, I think, should give us some context..

It's hundreds of projects, Andy. We look at every single project and it's part of the valuation analysis that we hire the big four firms to help us with. And they look at every single project and make some sort of judgment. Now, I mean, this is a very unique accounting formality here that is non-cash and relatively non-impacting to our GAAP earnings.

So for us, it's very much a valuation exercise, it's not material to the fundamentals of the business. It passes right through on GAAP. So, it doesn't affect adjusted GAAP or adjusted EPS which is why we changed it at the adjusted guidance level..

Yeah. Okay. That's helpful. And then just you mentioned chem demil and Libya combined, I guess that was on a sequential basis, that it was a $0.12 hit.

Can you quantify what the benefit was from Libya?.

Libya was – there was a payroll tax liability that we reversed. It was $0.03..

Okay. That's helpful. And then just – so in the past, you've framed your context about your long-run potential for free cash flow in the context of – as it relates to net income – having it be greater than net income.

And I guess just as it relates to the non-cash fair value liability, is that still a relevant discussion or will that be mostly gone by the time you're – I mean, you're getting outside cash flow this year? You've guided to that. Clearly, you'll be well above net income this year based on your guidance.

But in the out years, does that relationship still hold? And how does that relates relative to the non-controlling interest charge? Does that still hold after you would subtract the non-controlling interest from your cash flow?.

Yeah. I mean, that was a guidance that we gave as a stand-alone company, AECOM, prior to the acquisition. It certainly doesn't hold now given the level of amortization that we have in the system, which as you're right, normal profit exacerbates that issue. When we get out past 2016, amortization will normalize. Normal margin will normalize.

I think, we'll revisit – it'll certainly be closer at that point, but I'd be hesitant to give cash guidance three years out at this point..

I think that's fair enough. Okay. And then just final question was you just mentioned that there was a couple of cancellations like in the backlog.

Can you just talk about the nature of what those were and if there's anything to be reading into the end market health from those?.

No, not at all. That's normal. You have projects that move in and out of backlog. I think, the important thing is that, apples-to-apples, it's up 6% on a constant currency basis..

Okay. Thank you very much..

Thanks..

And our next question comes from Sameer Rathod with Macquarie. Please go ahead..

Hi. Good morning. Thanks for taking my questions. I guess other than what's been mentioned, have there been any other notable changes in the purchase price allocation? I'm asking because we don't have the Q yet..

No. The big ones were – what I mentioned was the normalized profit, and the other one is the change in the backlog intangible..

Okay. Great. I guess more a conceptual question, how do we think about the tax rate? Is this the tax you would have paid if you added all the adjustments back? Is it somehow connected to actual tax rate or cash tax rate? Just trying to figure out the tax rate guidance..

No, it's a good question. It's meant to be a estimate of what a normal tax rate would be given the fact that we have all of these costs flowing through and losses in the first quarter. The GAAP tax rate can look very unusual. So, we put together something that's a bit more normalized.

And the uptick in the quarter is really just relative to the roll off of the R&D credits and the WOTC credits that expired in Q1..

Right. Right. Last question, more housekeeping. What were the net distributions to non-controlling interests in the quarter? I know, they were like $35 million in the first quarter.

How much was it in the second quarter?.

I believe, $20 million..

Okay.

Is there any way of estimating this number as we put our cash flow estimates together?.

It's – well, I think that was the P&L that I just gave you. It's difficult to estimate.

You're looking for cash?.

Yeah, I'm looking for on the cash flow some financing portion because obviously these are kind of required payments..

Yeah..

I'm just wondering how to (54:29)..

It's difficult to go quarter-by-quarter because you don't know how much cash is going to be flowing through those, but over time, it will approximate net income on the cash side..

Okay. Perfect. Thanks..

And we have no further questions at this time. I will now turn the call over the Mike Burke for closing remarks..

Thank you, operator. I hope that from today's call you got a sense for our enthusiasm and passion for the future. We really believe that we're only starting to scratch the surface of the total capabilities of this combined organization and some of the best days are certainly in front of us.

We – as I said earlier, we are very happy with the merger integration, how it's gone both culturally, both combining the opportunities and capabilities of the two organizations. We're happy about the synergies and our progress there.

And we participate in challenged markets and we also participate in some very positive markets, and we're excited about the private sector markets outside of oil and gas. And we're excited about the opportunities and pipeline in front of us in the U.S.

civil infrastructure market and that's the one where we think we have some of the best days in front us. So, hopefully, you got a sense of all that from today's discussion. So thank you for participating today and we look forward to talking to you in the next quarter. Have a great day..

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