Cliff Eby
Transcription
Cliff Eby
INVESTOR DAY 2015 CLIFF EBY, PRESIDENT, TRANSPORTATION AND INFRASTRUCTURE, U.S. JUNE 10, 2015 2 INVESTOR DAY 2015 JUNE 10, 2015 CLIFF EBY, PRESIDENT, INFRASTRUCTURE AND TRANSPORTATION, U.S. Male: Greg and Isabelle, thank you. Good morning. So as transportation centers grow, there's a huge need -- I'm sorry, as urban centers grow, there's a huge need for transportation and it's not surprising that most of that growth you will see is in the sun belt. And in terms of what we're looking for, significant growth is in Florida, in Georgia, the Texas area, and primarily California in the West. But the markets remain flat over the past couple years and there -- is looking to remain flat due to a broken federal funding model. So what I'd like to do is spend a little bit of time talking about how transportation projects are funded in the U.S. and what that implies for our business. For the most part there's two sources of funding for transportation, the federal gas tax and the state gas tax. That's supplemented by tolls on one side and also by local bonding -- bonding initiatives that occur and tax referendums. And I'll talk about those in a little bit. On the federal side the funding for transportation is an 18.4 percent gas tax. That gas tax hasn't increased since 1993. In effect it hasn't had a raise since 1993. If many in you in the room hadn't had a raise since 1993, you'd be looking pretty shabby 3 right now too. On the state side it varies. It varies anywhere to 15 cents to about 25 cents, but centers on that 18.3 percent. If I look at the history of how these projects were funded, a hundred years ago the federal government decided first to get -- to provide a funding for transportation projects. And 50 years ago for the Highway Trust Fund it created the federal gas tax. Twenty-five -- for the past 25 years we've been on six-year reauthorizations of -- of the Highway Trust Fund. And in the past 12 years we've had problems with those, those reauthorizations. And we've had 33 extensions, short-term extensions, typically two to three months at most, to the authorization. And that's created a real problem in transportation. A problem from a predictability standpoint. That owners, state (EOTs), transit agencies in particular, can't predict the funding that'll be coming in. And you've heard that the Highway Trust Fund is bankrupt. And in fact for the past five years we've been outspending the revenues that are coming in to that Highway Trust Fund. A number of reasons. One is the fact that it hasn't had an increase and, two, cars are becoming more efficient. Mileage is down so less and less funding is coming in, as those needs continue to increase. But so many states have taken kind of matters into their own hands. And they're, you know, creating new revenue sources for that. So this is a map of the states that have considered state legislation for 4 transportation revenue or have enacted it. And this is both state and local tax initiatives. So you'll have a tax referendum in a city that'll add a penny or two to their local sales tax in order to fund specific transportation projects. What's important here from a -- from an infrastructure standpoint and WSP Parsons Brinkerhoff is that in those locations where they have these local tax referendums our success rate is much better. We participate very early on in those initiatives, work with the owners and the clients in order to promote those, identify the appropriate projects. And so when those tax referendums are approved, we're on those in the top list to be selected for those projects. And so we really focus on where across the country we have these local and state referendums. Whoops. OK and, despite the flat market, our pipeline has increased year over year. Now this is the pipeline of projects that we have, that we're pursuing. Approximately $4 billion right now. Some of that is due to the delays that, you know, we will talk about later and you've heard before today of these projects in the pipeline. And so to some extent the pipeline is getting bigger because projects are getting delayed and these are continuing to increase without a funding source. You see in this map before Greg explained that the larger circles are offices of over 200. The smaller circles are those 25 to 100 for the most part. 5 Infrastructure has about 4,500 employees in 70, 70 offices. We, from an efficiency standpoint, we're trying to reduce the number of offices that we have. You've heard of the consolidation as we bring offices together to reduce that footprint. Next the labor real estate is our next biggest expense, and -and trying to reduce this to the footprint is very important. Fighting that is the demand by most of our clients to be local. Even in many states they're expecting a local office in each of the transportation districts that the state has. And for example in the Washington, D.C., area we have offices very close to each other. One in Virginia, one in Washington, D.C., and one in Maryland. And that's a result of the client requiring the people to be located in those states. We represent about 80 percent of the U.S. market in transportation and infrastructure. So every year Road and Bridges magazine does a survey of owners from a DOT standpoint and transit agency standpoint. And they ask "Who is the go-to firm in a number of sectors?" And for the past five years since they've done this survey Parsons Brinkerhoff has remained number one in these four categories. Everybody wants to be number one, but -- but this is a great example, a good reminder, of our commitment to the client and -- and what it takes to establish that relationship with our clients. So that to be recognized as the number one firm by all of our clients in these four categories really is a discriminator for Parsons Brinkerhoff. 6 These are our major competitors, a good mix of public, private and ESOP firms. These are the large firms that we'll see on any project $5 million and above and a design build project $250 million in construction value and above. We will always see these firms. We do compete locally on smaller projects with a number of mid-tier firms and then also you'll have a lot of regional firms that we participate or compete against. Let me talk a little bit about our business model. And for the most part we're in a highly-regulated business from a pricing standpoint. The Federal Acquisition Regulation at the federal level drives the pricing that we see in an awful lot of our business. Our clients' (inaudible) delivery model is the full life cycle, as Greg mentioned. I often refer to it as dust to dust. From the early conceptual institutional development-type projects, you know, all the way through construction services and asset management. Our sales model is based on qualification-based selections. It's typically referred to as QBS. In the U.S. we come under the Brooks Act which is enacted by Congress that said engineers have to be selected on a qualifications basis. After the selection then you go to negotiations for the price -- the price side of it. On our alternative delivery projects we typically see best value, where it's a combination score of a technical score and a price. And then we typically are a prime and we like to lead joint ventures. We rarely -- we're rarely a sub-consultant 7 to other competitors and where we are a subconsultant it's on the design build job we're a subcontractor to the contractor for just design services. On the revenue model most of our work is cost reimbursable. Cost plus fixed fee or cost plus multiplier model. Again it's the FAR or derivative of the Federal Acquisition Regulation, those audits that drive the rates that we can charge. Even when you get to billing rates, those billing rates are often, very often based on the FAR. And some of our alternative delivery projects we use a target price model where as long as we're within the target we get a certain fee. When we get outside of that band there's some risk sharing on the upside and the downside. And then we do have about -and I'll get to the percentage of a lump sum or fixed price work. We do very little what I refer to as G max or guaranteed max work where we take scope risk. In most cases, if the scope increases we negotiate a supplemental for that work. In terms of the services we provide, about 50 is design, about 33 percent in construction management and program management, and the remainder in some of the upfront work. We have some (OMN) work that we do for E4-70 and the Florida Turnpike Enterprise where we're doing the backroom servicing for their toll operations. And from the type of work that we do we're about 60 percent highways in our business. We're known in 8 the marketplace in most places as a rail and transit firm, even thought that represents 22 percent of our work. Due to our history in New York, our history in San Francisco, our history in Atlanta, our history on high-speed rail, we're clearly the market leader in those areas and often recognized as a rail and transit business. But closet to 60 percent of our work comes in highways. Then Greg talked a little bit about the aviation and the airports business, a market that has grown for us since which established this initiative about three years ago, and expected to continue to grow. And then water and the other categories is ports and marine. Some of our strategic consulting work gets assigned to the other category. You've seen this slide before. Twenty-two percent right now of our expected work is in alternative delivery, combination of design build and P3. Expectation is that will grow to about 30 percent. That's where over the next five to 10 years I expect it to kind of max out. And our business remains a significant growth opportunity in the market place. A list of our top 20 clients. You can probably get a look -- you look at those logos and it's every growth market in the United States. And it represents about 45 percent of our revenue, for those 20 clients. Net revenues again in Canadian dollars increasing year over year in what I describe as a flat market for infrastructure. And our mix by client type, 82 percent of our business is public and 18 percent is 9 private. Most of those on the private side is the contractors' side of our organization. And 83 percent cost reimbursable with 17 percent fixed fee lump sum. A backlog, this I guess is not to scale. But maybe if we put the baseline at around $500 million. But the important point here is the backlog is growing and in 2015 we continue that growth in backlog year to date. And it represents about 11 months of revenue for us. So Greg mentioned some of the revenue synergies and you see some of the project that he talked about. We're particularly focused on terminals and hubs as a unique opportunity that we think going forward has a great growth for repurposing those facilities as transportation needs have changed. And we -- what we're looking at just the natural synergies of sharing clients on a regular basis. But where I see the real opportunity is creating the future. And we're establishing a leadership role in automated vehicles and connected vehicles. John Porcari, my colleague in the back who runs the strategic consulting group is heading that initiative, a real passion (inaudible). And it doesn't take a whole lot of imagination to see as we move to these automated and connected vehicles the need for parking in major metropolitan cities is going to change drastically. And repurposing those -- the buildings, the parking lots, the side streets, to use that real estate more effectively is a tremendous 10 opportunity for WSP Parsons Brinkerhoff to come together and be a leader in that marketplace. We're looking at a number of underserved markets. We are a mature business, a leader in most of the transportation areas that we focus on. But we do have some underserved markets. Texas is one of those that we're focused on. Southern California, particularly from a construction services piece. We're looking at that very hard. The aviation strategic initiation that we created three years ago has been a tremendous success. You know, Greg mentioned our most recent win at Atlanta Hartsfield, LAX, San Francisco, New Orleans, and La Guardia, and we see that continuing as an opportunity to both organic and acquisitive growth. So let me talk about a couple of projects. You heard about -- you heard about this one earlier. You know, tremendous, tremendous news that we were selected on this and recommended by the authority to the board and the board has approved signing this contract. Seven hundred million dollars over seven years. But this is one of several. We have a role in every high-speed rail program in the United States. We're the program manager for Illinois High Speed Rail. We're the program manager for parts of Texas High Speed Rail. And we're the program manager for the NET Futures Project, which is the improvement of the northeast corridor, the work in developing an environmental impact statement to allow future improvements on 11 the northeast corridor. We've dominated that space since President Obama introduced high speed rail six and a half years ago, and expect to continue to do that, not only in the U.S., but across the globe. This is our mid-town tunnel project. What you're looking at are immerse tubes. These were built in a shipbuilding facility. They've been completed at this point. The ends have been capped and they've been floated to the top of the shipbuilding facility. You see six segments there. This is the second litter of segments. They're 300 feet long, about 60 feet wide, and about 40 feet high. You know, the concrete thickness from the base is about four feet thick. And they're floated down the Chesapeake Bay from Baltimore. This is Sparrows Point in Baltimore that you're looking at. Floated down the Chesapeake Bay, and then Norfolk, Virginia, where they're immersed and tied back together, opened up, and that'll be the tunnel. A very interesting video on our website, if you want to see the construction process on how these are put together. The busiest port in the United States, L.A. Long Beach. We're the program manager and construction manager for the Gerald Desmond Bridge. This is the first cable stayed bridge to be constructed in California. Now I mentioned before we're the program manager on Atlanta Hartfield. This project is just getting 12 started with fees of $20 million. We unseated the incumbent that had been there for a number of years and quite proud of the business development success we've had in this in the aviation space. And I won't steal Greg's -- Greg's thunder for this afternoon. You'll be looking at parts of this project this afternoon, but the number seven extension from a transportation standpoint has been a project that Parsons Brinkerhoff was fundamental in developing the concept very early on, meeting with the MTA, New York City Transit, and others in developing this project, and then became the engineers for the project as it moved through. So with that I have a few minutes here for questions. Female: Hi. Mona (Nisiair), (Levention) Bank. So it seems, just from you and Greg before, that that Parsons has been a very well-established company with a lot of history behind it. And earlier, you know, it was pointed towards a relation-based nature of the business. You knew of the La Guardia terminal project early on and you put together a team for that. You also spoke about a change in funding and more shift towards P3. I'm just wondering, has there been a change in contracts are being awarded and has there been any disruption in the industry? So because funding's tight, for example, you know, is it -- are you seeing governments awarding contracts to a company in China 'cause it's cheaper? 13 Male: A good question. A number of changes that we're seeing. First is the (lumpiness) that we talked about before. The projects are awarded and they're large projects that come quickly. From our traditional work that we do, they're typically with large general engineering consultant-type contracts or program management, construction management-type contracts that were being let. What we're seeing now is more and more task order type contracts. So we don't have the certainty that that project will last seven years, eight years, nine years. California is unique in that area these days. Typically the task order contracts have large (upset) limits, but no authorization to proceed beyond the specific task. With respect to a changing client, we -- we always want to stay close to the owners, irrespective of whether they are our direct client or not. We think that provides a tremendous benefit to the team, understanding what the owner wants, and being able to relate that to the contractor. Knowing that we can get permitting approvals through the state DOTs of the owners on a certain basis is a big value to our contractors, reduces risk there. But we do have a new set of clients, and those are the contractors and in some cases the (STVs) on a P3 basis. And we make a concerted effort to establish the same of relationship with those large contractors. And our feeling is work with a small number of 14 contractors where we have strong relationships where they understand us, we understand them, we understand how we work together and become more efficient. Rather than a scattered approach of trying to work with every contractor in the United States. Yes? (Off-Mike) Male: OK, the wait is over. Michael (Dudas) from (Sternagia). Two questions. First, what is it going to take for the P3 model to get more prevalent in the United States? What are some of the cultural, political, legal things that need to get done for something that the rest of the world has caught on much earlier, and how it's going to flow in the U.S.? Male: I think time is helpful, success on these projects. You know there's a political risk to these as the owner in moving forward. And we see that across the world. E407 is -- is a good example where the government was criticized for giving so much -giving so much away to the developer. As that model becomes more established in the U.S., understanding those risks from a political standpoint I think greatly helps. The other piece of it is understanding and the certainty of where are we headed with the Highway Trust Fund from a federal standpoint. Is the General Fund going to continue to subsidize the Highway Trust Fund in supporting transportation, for transportation projects? And then what is the role of 15 tolls and local bond initiatives and referendums in terms of that funding? So I think -- I think it's a matter of time more than anything else that says this is a successful model. We've been, we've been at it for 25 plus years from a P3 standpoint, going, you know, all the way back to the Dulles Greenway, which is outside of Washington, D.C., from a transportation project, and awful lot of projects have been looked at this way, and we're seeing projects that they start out as either unsolicited, start out as P3s, and then political decision to now move them back to either design build or traditional. But, as Greg pointed out, when the need's there, the project will get built. What we're seeing in the pipeline is just the delaying of those projects and due to the lack of uncertainty. Male: And my (co-worker) kind of touched on one of your answers. Is there any sense from Parsons and their government lobbyists or yourself in particular about the prospect of a highway reauthorization in this current Congress or what may happen in 2016? Because from the other companies that I talked to, it's sorely needed in this extreme frustration level from the companies that need to get that certainty. So any sense of…? Male: Well we all sit around and speculate and we're all optimistic because we're in this market, hoping that the next short-term reauthorization for two months 16 or three months will be the signal to say let's get something done. But I -- I certainly don't have a crystal ball in that area and, if history is any indication, we're continuing down this path of shortterm reauthorizations until something crucial happens in the U.S., and I can't even fathom what that might be. John might have some perspective on that. John was the former Deputy Secretary of the Department of Transportation, dealt with it on a daily basis, and tried to deal with Congress. John Porcari: I'd like to be more optimistic than you are, but I tend to (inaudible) with you. We just had our thirty-third extension, which is for 60 days. The rules that Congress operates under now, which require an offset, really work against anything other than a very short term extension. Everyone understands the need and the opportunity cost if pretty apparent, but the will is not yet there. Male: John just wrote a very interesting editorial blog about how we're spending our parents' money and not keeping our assets up, you know, up to standard in this country. And we're just living of their investments in infrastructure and not investing ourselves. Yes. (Paul Legend): Hi, (Paul Legend) from (CIPC). You talk about your number one position in transportation so I just wondered a few things about that. What is that measured on? Is that market share? Can you talk a little bit how you got, why you think you're still number one, and what's your opportunity to actually 17 grow market share? How do you actually improve upon that position? Male: From the slide that I had up there in the number one position was a Road and Bridges survey that they do asking clients and owners who is the go-to firm in these areas. We are not necessarily number one from a net revenue standpoint on all four of those, but we're recognized as client as the go-to firm. I think it's very important, you know, value in the marketplace to do that and it reinforces the fact of our strategy to maintain those strong, strong client relationships. In terms of increasing, increasing market share, we have a strategy in place to identify opportunities in the market due to consolidations that are in the market, disruptions that are in the market. To improve that market share and, so far today, this year has been quite successful in identifying where those opportunities are and winning more than our share of work on increasing that. But, you know, as a leader in the marketplace, in our traditional markets, we are constrained very often where the state DOT has a tendency to share the work. Male: (inaudible) Male: I don't have a number. The industry does not kind of publish that and has never been able to really capture that data. And it's because the market is so broad with large firms, mid-size firms, regional firms, and even your one and two person firms that are out 18 there. The other part that's very hard to determine is as Greg showed on the one slide, a lot of our competitors are on the EPC, have a joint venture role on the construction side of things, and how do you disaggregate that to say here's the pure play professional services market share? Christopher (inaudible): Thanks. Christopher (inaudible), (Core) Capital. You made the -- you made the comment that you thought alternative delivery would move from roughly 22 percent today to about 30 percent, but then plateau. Why is you think it will plateau? Is it a function of type of projects? Is it the financing limitations? Just any thoughts around that. Male: Primarily the financing limitations. You now, the transportation in this country is subsidized and you can only go so far with the P3 models before there has to be some type of assistance and additional funding by the owners and by the clients. So, on their own, these projects need support from the state and local governments and the federal government, and just kind of where we are in the process, the political will to move some of these forward. I just look at the next five to 10 years as 30 percent about the limit of what to expect there. If something critical happens, something changes that, it could change, it could increase from there. But I don't have data on other countries and I'm not really sure how it compares to what -- what many (inaudible) 19 are seeing in Canada and across the globe. Female: Hi. Wondering if you can talk about your average contract size in the transportation infrastructure group? And is there a goal to grow the project's size through P3s or otherwise? And also wondering how much room do you have to grow in project size before you run into EPC contractors as pure competitors and your cutoff from (inaudible)? Male: Let me answer the last one first. In the transportation market we aren't seeing the EPC contractors coming together as an integrated program delivery project delivery fashion. We have the contractors and the engineers, and there's very few that have looked at the market and said, you know, we going to -- we're going to have both under one roof, and we're going to serve everybody with best in class across our entire spectrum. Most of your heavy civil contractors, have a small engineering component, but they don't want to be the engineer of record. They don't want to do the design work that we typically provide. So in the transportation space, I don't think we run into that in the near term in any way. From a project size, we're really not -- our major clients produce 45 percent of our work and our big projects are probably, you now, 50 percent of our revenue. We're not necessarily focused on project size. One of the things we bring to the market place is the full spectrum of services. And that's unique 20 compared to our competitors. We want to have a leadership role in every one of those segments. Yes. I'm not smart enough to predict, you know, which segment is going to get hot and when. And don't want to have to pick and choose. And from our standpoint the ability to have a -establish a leadership position, whether its connected vehicles that I spoke about, transit-oriented development, sustainability, all these niche market areas -- it's important to us to have a leadership role and very often, as those projects are starting, they're very small contracts. They're $100,000 contracts that are starting up. And we find them from a margin standpoint to be, you know, reasonable -- almost as profitable as the larger, the larger projects. We certainly don't view them as a lost leader in any way. They are making margin contribution across the board. Michael (inaudible): Michael (inaudible) (inaudible) Securities. Greg talked about aviation as an area that you're interested in expanding from an acquisition perspective. I notice you're already number one in airport design according to the survey. What is it that you're missing then? And then a second part is can you talk about the organic growth outlook for the aviation sector? Male: I'm sorry. The organic --? Michael (inaudible): The organic growth outlook for the aviation 21 sector. Male: Yes. In terms of what we're missing is really scale. We just don't have the size of some of our competitors across the board. We're recognized as the go-to firm. We're focusing on all three areas, the strategic consulting area of aviation, the upfront work, the planning work, the CM, the design work, both from a roadside and a landside -- I'm sorry, a landside and an air side piece of the business, and then the CM PM, construction management project management piece of it. Many of our competitors are focused in one of those areas and don't do it across the board. We're looking at all three areas. In terms of the balance between organic and acquisitive growth, I would say about an even balance. And we tend to be opportunistic in terms of what's coming on, what we're seeing from an acquisition side. And an awful lot of the growth that we see in the marketplace, you know, is going to be dependent on our success in going after these projects. We're, you know, the big piece from the organic side is the investment in people, bringing on leaders in the regions where these airports are and that they have the relationships and have done work in those airports before. And so that's the strategy that we use in terms of the organic growth. Mark Neville: Hi. Good morning. Mark Neville from Scotiabank. This is going back to the funding issues. You know, 22 when you're working on projects or bidding on projects that require funding from the Highway Trust Fund, just curious from the client's side sort of what their expectations are or, you know, sort of in these short-term extensions for years now so they sort of feel like the funding will be there. Just sort of how much that uncertainty actually poisons you, how these proceed, or how they think about it. Male: Yes. Well I talked a little bit about the task order contracts that we see. That's one mechanism that the states particularly use in order to reduce their risk, reduce the fact that they can't make the outlay at the beginning. The other is multi-year funding where in the past we would have a six-year program management job in our backlog, they're breaking it into annual reauthorization funding types. So it -once that money is designated and obligated, you know, by the states, it's pretty certain that it will remain there. There are unique cancellations, typically they're politically driven where a new governor comes in, takes a look at the project and says, this isn't the direction I want to go. Those projects tend to go on whole. So the need is tremendous. You know, it's eventually going to come. It's a question of timing. Nolan (Heck): Nolan (Heck), 1919 Investment Council. By implication your California high speed rail, about ten percent of the total value is going to be (WSP BD). Would that be the same for La Guardia, village (with forever) tunnel, other projects? 23 Male: I'm not sure I… Nolan (Heck): Well you said $700 million out of the $7 billion project, that's about 10 percent. Male: No, the project in total, the official estimate right now is $63 billion. Now that's the -- you now, a -you know, even that's a segment of the original thinking of the project. That's basically from the L.A. basin to San Francisco Bay area, is a $63 billion project. But that's -- that's to be built over a number of years and our contract is over a sevenyear period. So I'm not sure… If I said $7 billion on something, I misspoke. I apologize. Nolan (Heck): But the La Guardia project, roughly what percent of the overall (inaudible) do you feel is likely to be (WSP BD) revenues? Male: Because it's all four segments coming together, I don't have that off the top of my head. Greg? Greg: (inaudible) Male: And then we, you know, we have subcontractors that participate, so the net revenue piece is something smaller than that. Most of the projects that we do from a public standpoint have a large (MBE DB) component in that, ranging anywhere from five percent to 30 percent of the project is required. Male: Given the contracting model in this space, what's the opportunity to improve the operating margins or the EBITDA margins in the business. 24 Male: You know one is the efficiency side of things, you know, eliminating -- eliminating rework, eliminating any erosion that we have, and we're focused very, very much on making sure that we're more, you know, more efficient in this space. On the fixed price work, you know, again anything you do that's reduces your cost is important. On the cost reimbursable work, there's a regulated model that have to, you know, you accept the margins on that cost base. But in the short term, not all of those projects, even if they're cost reimbursable or what we refer to as provisional where that rate changes on a regular basis, we often have a fixed rate that we go in to the projects on. So it's limited in a regulated market, but there is always the opportunity to do better on the efficiency side. Male: Thank you. Male: Hi. Just regarding acqui…