AECOM : Value Transformation Conference Call Transcript 291.1 KB

Corrected Transcript

14-Oct-2019

AECOM (ACM)

Management Services Segment Divestment Update Call

	Total Pages: 16
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AECOM (ACM)	Corrected Transcript
Management Services Segment Divestment Update Call	14-Oct-2019

CORPORATE PARTICIPANTS

William J. Gabrielski	W. Troy Rudd
Vice President, Investor Relations, AECOM	Chief Financial Officer, AECOM
Michael S. Burke
Chairman & Chief Executive Officer, AECOM

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OTHER PARTICIPANTS

Andy Li	Jamie L. Cook
Analyst, Citigroup Global Markets Asia Ltd.	Analyst, Credit Suisse Securities (USA) LLC
Michael S. Dudas	Andrew J. Wittmann
Analyst, Vertical Research Partners LLC	Analyst, Robert W. Baird & Co., Inc.
Sean D. Eastman	Michael Feniger
Analyst, KeyBanc Capital Markets, Inc.	Analyst, Bank of America Merrill Lynch

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning my name is Kristina, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. I would also like to inform all participants that this broadcast is copyrighted property of AECOM, and rebroadcast of this information in whole or part without 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. All lines have been placed on mute to prevent a background noise. After the speakers remarks, there will be a question and answer session. [Operator Instructions]

Thank you. I would now like to turn the call over to Will Gabrielski, Vice President-Investor Relations. Please go ahead.

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William J. Gabrielski

Vice President, Investor Relations, AECOM

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 undertake 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 where available, which is posted on our website.

We will refer to pro forma adjusted EBITDA in our presentation. Pro forma adjusted EBITDA is comprised of the company's Design & Consulting Services, Construction Management, and AECOM Capital businesses, and assumes all stranded costs associated with planned separations and divestitures are eliminated. Reconciliations

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AECOM (ACM)	Corrected Transcript
Management Services Segment Divestment Update Call	14-Oct-2019

of pro forma adjusted EBITDA for fiscal 2020 to the most directly comparable GAAP measure is not available without unreasonable effort, because the company cannot predict with sufficient certainty all of the components required to provide such a reconciliation at this time.

We believe pro forma adjusted EBITDA provides additional insight into the estimated impact of the proposed transaction and other strategic initiatives on the company's future financial performance. However, such estimates are forward-looking statements and are inherently uncertain. As such, you should not place undue reliance on such statements as actual results may differ materially.

Today's announcement relates to a transaction that has not yet been completed and includes potential risks and uncertainties such as the possibility that the transaction does not close or that closing may be delayed. Beginning today's presentation is Mike Burke, AECOM's Chairman and Chief Executive Officer. Mike?

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Michael S. Burke

Chairman & Chief Executive Officer, AECOM

Thank you, Will. Joining me today are Randy Wotring, our Chief Operating Officer and Troy Rudd, our Chief Financial Officer.

I will begin with an overview of the strategic and financial benefits of today's announcement. I will also review our long-term strategy and fiscal 2020 financial guidance. Troy will provide additional financial details on today's announcement, before turning the call over for our question-and-answer session.

Please turn to slide 3. This morning we announced the definitive agreement to sell the Management Services business for a purchase price of $2.405 billion, which is 11.6 times expected fiscal 2019 adjusted EBITDA. This transaction reflects a premium valuation and is expected to generate substantial cash proceeds that we will use to reduce debt and to repurchase stock. Importantly, with the sale, we will unlock value sooner than anticipated under our prior plan to spin-off the business.

The successful separation of the MS business was amongst the largest opportunities to unlock value that we have been pursuing and adds to the successful strategic initiatives we have been executing over the past two years. These actions include de-risking and simplifying our operating structure, enhancing our margins to capitalize on strong growth trends, and deploying industry leading cash flow for debt reduction and stock repurchases.

The transaction marks the completion of a robust and thorough evaluation process that began with our June 17 separation announcement. As you may recall our decision to separate MS was motivated by our belief that the MS business is undervalued within AECOM. A significant buyer interest and the premium valuation announced today validate our view.

I also want to acknowledge the contributions of the MS team. Today's outcome is also a testament to the high caliber leadership and employees within the MS business and as the result of AECOM's commitment to enhancing value.

Please turn to slide 4. With today's announcement, we will generate substantial net proceeds that will accelerate debt reduction and enable us to more quickly seize upon the tremendous value creation opportunity, we expect to realize by allocating capital to share repurchases. Based on Friday's closing stock price, our industry leading professional service franchises trade at a significant discount to peers in the broader market.

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AECOM (ACM)	Corrected Transcript
Management Services Segment Divestment Update Call	14-Oct-2019

In fact, including expected record fiscal fourth quarter cash flow and deal proceeds our stock is trading at approximately 8 times fiscal 2020 pro forma adjusted EBITDA guidance. This represents a substantial opportunity to enhance value through continued stock repurchases. As such, upon closing the MS sale, we intend to allocate capital towards debt reduction and then to share repurchases with the goal of maintaining a long-term net leverage target of between 2 times and 2.5 times and substantially reducing our share count over time.

Please turn to slide 5. We are committed to value creation. Over the past two years, we have taken a series of deliberate actions in close consultation with our board and strategic advisors to transform our portfolio into a higher returning, lower risk professional services company.

We are extracting ourselves from riskier geographies and businesses by executing on our plan to exit more than 30 countries, and we'll continue our review of how to best optimize our geographic footprint. In addition, we intend to exit nearly all at-riskself-perform construction businesses. We have substantially increased our margins through ongoing restructuring activities.

To this point, adjusted operating margins in the DCS segment have increased by a 100 basis points to the first three quarters of fiscal 2019 and we expect another at least a 100 basis point increase in fiscal 2020 as part of a plan to deliver a 200 basis point improvement from 2018 levels. And as today's announcement confirms, we have moved quickly to unlock value by announcing a sale at a premium valuation.

Importantly, we remain deeply engaged with our board and key advisors to identify additional opportunities to create value. Recently, we enhanced our engagement with Bain and are now evaluating areas for further margin upside, including expanded use of best cost shared service centers and global design centers.

In addition, we expect to eliminate all stranded costs related to this transaction to ensure no long-term earnings dilution. All of these initiatives provide a benefit to employees, our clients, and as a result, our stockholders. For AECOM, we are more profitable and competitive. Our employees benefit from more focused, streamlined organization that is better positioned to invest in advancing our capabilities and growth. Our clients benefit from more efficient project delivery while continuing to access our network of unparalleled expertise.

Please turn to slide 6.In addition to today's announcement, we also announced that we closed fiscal 2019 with significant momentum and strong performance across our business. We expect fiscal 2019 adjusted EBITDA and adjusted EPS to approximate the midpoint of our prior guidance ranges, including achieving our guidance for 12% adjusted EBITDA growth for the year. We also expect to deliver record free cash flow in the fourth quarter and to hit our full year free cash flow guidance.

Turning to fiscal 2020. Strong end market trends and the anticipated benefits from our value creation actions underscore our expectation for pro forma adjusted EBITDA growth of 17% at the midpoint of the range, including continued margin improvement. Troy will provide a more detailed financial review of today's transactions and 2020 financial guidance shortly.

In closing, the board and our management team have been on a very deliberate path to create value. And I'm energized by the progress we have made to transform the company into a higher returning and lower risk business. The expected proceeds from this transaction will strengthen our balance sheet and create increased flexibility to repurchase shares in an attractive valuation, which provides additional benefit to all stakeholders.

With that I will turn the call over to Troy.
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AECOM (ACM)	Corrected Transcript
Management Services Segment Divestment Update Call	14-Oct-2019

W. Troy Rudd

Chief Financial Officer, AECOM

Thanks, Mike. Please turn to slide 8. Today's announcement marks a significant milestone. We are delivering on our commitments including a strong finish to fiscal 2019 and our expectation for 17% pro forma adjusted EBITDA growth in fiscal 2020.

The agreement to sell MS is a great achievement for the organization. And the transaction meets all the criteria and objectives that we set forth when we announced the MS separation in June. First, we are realizing a premium valuation that confirms our view that the MS business is undervalued within AECOM. Second, we expect the transaction will generate substantial cash proceeds that strengthen our financial profile and will enable share repurchases.

Third, it creates certainty for our stakeholders including an attractive valuation for our stockholders and certainty on the direction of the business for our employees. And finally, it furthers our focus on our higher returning and lower risk professional services business, allowing us to concentrate management time and investment dollars in areas that we believe will generate the strongest long term returns.

We expect net cash proceeds of approximately $2.35 billion. This is inclusive of approximately $150 million of contingent purchase price. The transaction is expected to close in the first half of fiscal 2020 and is subject to customary closing conditions. We expect to eliminate all stranded costs resulting from this transaction, which is consistent with our prior expectations.

Please turn to slide 9. We expect to report our fourth quarter and full year financial results on November 12. On a preliminary basis, as Mike noted, we expect our adjusted EBITDA and EPS for fiscal 2019 to approximate the mid-points of our prior guidance ranges. We expect to deliver record free cash flow in the fourth quarter and achieve our guidance for at least $600 million of free cash flow for the year. As a result, we expect to report substantially lower debt in the fourth quarter.

We're also introducing financial guidance for fiscal 2020. For the entire company, we are guiding to adjusted EBITDA of $1.050 billion to $1.070 billion. This would mark 13% growth and a second consecutive year of double- digit growth. We're also providing guidance on pro forma adjusted EBITDA which excludes the adjusted EBITDA associated with our Management Services business and our at-risk,self-perform construction activities, which includes our professional services, capabilities across the design, construction management and AECOM Capital businesses. On this basis, we are guiding to $720 million to $760 million for fiscal 2020, which would represent approximately 17% year-on-year growth at the mid-point.

The expected growth in our professional services business is higher than the enterprise growth in fiscal 2020. This is largely driven by continued margin expansion in the DCS segment. Resulting from the restructuring actions, we have already taken and we'll continue to take towards our goal of achieving industry-leading margins over time. Our forecast includes continued momentum in our DCS margins, consistent with our plan to deliver a greater than 8% adjusted operating margin in fiscal 2020.

This translates to approximately 11.5% on a net service revenue basis, which is consistent with peers. In order to provide investors with the best understanding of our underlying pro forma financial performance, stranded costs are excluded from our fiscal 2020 adjusted pro forma EBITDA guidance.

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