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AECOM (ACM)

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AECOM Technology Corporation (ACM)

Q4 2018 Earnings Conference Call

November 12, 2018 12:00 PM ET

Executives

Will Gabrielski – Vice President-Investor Relations

Mike Burke – Chairman and Chief Executive Officer

Troy Rudd – Chief Financial Officer

Randy Wotring – Chief Operating Officer

Analysts

Alan Fleming – Citi

Jamie Cook – Credit Suisse

Andrew Wittmann – Baird

Steven Fisher – UBS

Tahira Afzal – KeyBanc

Chad Dillard – Deutsche Bank

Michael Dudas – Vertical Research

Anna Kaminskaya – Bank of America

Presentation

Operator

Good morning, and welcome to the AECOM Fourth Quarter 2018 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. [Operator Instructions]

I would like to turn the call over to Will Gabrielski, Vice President, Investor Relations.

Will Gabrielski

Thank you, operator. I would like to direct your attention to the safe harbor statement on Page 1 of today’s presentation. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we take no obligation to update our forward-looking statements.

We are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation, which is posted on our website. Please note that all percentages refer to year-over-year progress, except as noted. Our discussion of earnings results and guidance is adjusted for noncore business and asset dispositions, gains and loss on disposals and assets held for sale, acquisition and integration-related items, financing charges in interest expense, amortization of intangible assets, the revaluation of deferred taxes, and tax effects and discrete tax items associated with the U.S. tax reform, unless otherwise noted. Today’s discussion of organic growth is on a year-over-year and constant-currency basis and is adjusted to exclude impacts of noncore businesses.

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

Mike Burke

Thank you, Will. Welcome everyone. Joining me today are Troy Rudd, our Chief Financial Officer; and Randy Wotring, our Chief Operating Officer. I will begin with an overview of AECOM’s results and discuss the trends across our business. Then, Troy will review our financial performance and outlook in greater detail, before turning the call over for a question-and-answer session.

Please turn to Slide 3. We delivered record revenue, wins winds and backlog in fiscal 2018, which position as well for continued growth in 2019 and beyond. Organic growth accelerated in the second half of the year, led by 17% and 12% growth respectively in our higher margin Americas design and MS businesses. As a result, we set a new high for annual revenue at over $20 billion, and we expect to deliver another year of growth in 2019. Full year wins of more than $28 billion, represent a 23% increase over the prior year, resulting in a record $54 billion backlog.

Fourth quarter wins increased by 25% to $6.1 billion. Our momentum continued into the first quarter with more than $7 billion of large CS and MS project wins in October. We also delivered a quarterly record of $511 million of free cash flow in the fourth quarter, which contributed to a fourth straight year of greater than $600 million of free cash flow. As a result, we continue to pay down debt and we executed $150 million accelerated share repurchase under our $1 billion authorization, which reduced our shares outstanding by approximately 3%.

However, EBITDA was below our expectations due to three factors including: execution challenges on a handful of projects in the CS segment, a timing related shortfall in AECOM Capital and volume related underperformance in the UK. These items mask the underlying strength of our performance across most other areas of the business, specifically, the Americas design business exceeded our growth and profit expectations for the year and the MS segment delivered another solid performance.

Importantly, to maximize the profitability of our record $54 billion backlog, we are executing three strategic actions. First, following a review of our cost structure, we are implementing a plan to reduce our annual G&A by $225 million with most of the actions taking place in the first half of the fiscal year. The G&A savings will primarily benefit the DCS segment where we expect the adjusted operating margin to exceed 7% in fiscal 2019 with further improvements in 2020 and beyond. Importantly, all of our segments will benefit from a more efficient cost structure as we compete for work and deliver our backlog.

Second, we have changed the leadership in our CS segment. Though the vast majority of our projects have met or exceeded our expectations and more broadly, our execution track record remained stellar. The issues that impacted fiscal 2018 were avoidable and unacceptable. In addition to the leadership change, we have conducted a thorough portfolio review and identified the root causes of the challenges we encountered to ensure we execute with greater certainty in the future.

Finally, we are currently evaluating a plan to exit more than 30 countries. This is part of an ongoing review of our geographic exposure with a focus on prioritizing our investments and attention towards our largest and highest growth markets where our competitive advantages are greatest. All of these actions hone our focus on our most profitable end markets, reduce our risk profile and enhanced the consistency of our financial performance, including our industry leading cash flow.

Read the rest of this transcript on seekingalpha.com