Q4 2019 Earnings Call

November 14, 2019

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Good morning, and thank you for joining the Tetra Tech earnings call by now you Should've received a copy of the press release, if you have not please contact the company's corporate office at six to 6351 for 664.

As a reminder, Tetra Tech is also simulcasting. This presentation with flights in the Investor section of its website at Www Dot Tetra Tech dotcom.

This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.

With us today from management, our Dan Backtrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer.

They will provide a brief overview of the result, and we'll open up the call for questions.

I'd like to direct your attention to the Safe Harbor statement in today's presentation. Today's discussion contains forward looking statements about future growth 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 and Tetra Tech's periodic.

Reports filed with the FCC, except as required by law Tetra Tech takes no obligation to update as forward looking statements. In addition, since management will be presenting some non-GAAP financial measures as references the appropriate GAAP financial reconciliations are posted in the Investor section of Tetra Tech's web site.

At this time I'd like to inform you that all participants are in listen only mode. At the request of the company. We will open up the conference for questions and answers after the presentation with that I would like to turn the call over at the end Backtrack. Please go ahead Mr. backtrack.

Great. Thank you very much Michelle and good morning, and welcome to our fourth quarter in fiscal year 2018 earnings Conference call.

Fiscal year 2019 was an extraordinary year for us here at Tetra Tech, we grew at double digit rates across multiple metrics, resulting in record highs for revenue net revenue earnings per share and our cash generation.

We ended the year with our backlog exceeding $3 billion for the first time and Tetra Tech's history, providing us with excellent visibility visibility and momentum as we enter fiscal year 2020.

As we entered this new decade, we see increased global demand for our differentiated water and environmental services and our high end, leading with science approach.

I'll begin today's presentation with an overview of our quarterly and annual results and our business outlook, while Steve Burdick, Our Chief Financial Officer will provide additional details on our financial performance and our capital allocation.

We had a very strong fourth quarter led by our revenue earnings per share and backlog growth.

Our net revenue of $640 million was up 14% from the prior year.

Our fourth quarter adjusted earnings per share of 88 cents was up 17% from last year and our backlog was up 16% year over year, finishing at just under $3.1 billion the highest in the history of the company.

In the fourth quarter.

We ended the from White young green or W. wide G, providing us with a new United Kingdom platform.

And I'm pleased to see that our initial integration is going extremely well our collaboration on operations and business develop has already yielded very positive results.

I'd now like to provide an overview of our performance by our customer.

And our fourth quarter, we had growth across all of our end markets, especially for the United States State and local and international sectors.

State and local revenues were very strong this quarter with an organic net revenue growth of 31% year over year.

This fourth this is the fourth consecutive year of double digit growth first state and local business.

This growth is a direct result of municipal water infrastructure work in the metropolitan areas of California, Texas, and Florida and for continuing disaster response, and recovery services for past fires and floods.

Worked for US federal clients was 28% of our net revenue in the quarter and it was up 8% year over year. The increase in US Federal work was driven by our consulting work for the department of defense.

Various civilian agencies and for the U.S. State Department.

Our us commercial net revenue was 23% of our business and up 1% year over year, our environmental permitting and the renewable energy consulting and design services were up well some of our larger environmental restoration programs ramping down on the court.

And finally, our international net revenue was up 21% year over year, driven by local water and environmental work in Canada, and Australia and with the addition of WG in the United Kingdom during the quarter.

I'd now like to present, our performance by our business segments.

Our GST NRC AG segments, both grew at double digit rates in the fourth quarter.

The GST segment was up 15% with strong growth in broad based water and environmental programs disaster response, and our longer term recovery services.

The GST segment continued to deliver excellent margins at 14.1% for the quarter.

Our CSG segment grew by 12% year over year and delivered over a 10% margin up 280 basis points from the same quarter last year, and 40 basis points up from the very prior quarter.

For the full fiscal year of 2019, we achieved all time record highs in net revenue operating income and earnings per share.

Tetra Tech's full year for net revenue was $2.406 billion, which is 9% up compared to last year.

Our operating income was $241 million up 11% from the prior year and earnings per share was over $3 for the first time in the company's history with an earnings per share of $3 to 17 cents up 20% from the prior year.

Tetra Tech's backlog was up 16% year on year on strong orders in the quarter with a large increase occurring in just this fourth quarter of the year.

Last quarter of the fiscal years typically our strongest quarter. However, we were also pleased to see a number of long term pursuits come out with favorable outcomes in the quarter.

We ended the quarter with $3.090 billion in backlog has had mentioned earlier for the first time over $3 billion in the company.

Strong orders in the quarter also resulted in a sequential 9.1% increase in our backlog from the quarter and in the fourth quarter, we won new programs and task orders for our differentiated water and environmental services across a very broad base of our clients both in the United States and internationally.

We continue to expand our contract capacity for global analytic and water related services.

We were also awarded a new contract for a water program in Mongolia that will leverage our analytical water planning in engineering expertise in providing safe water supplies.

In addition, we were awarded multiple task orders for water management flood protection and damn restoration in United States, continuing our long term technical support for key federal agencies, including the US Army Corps of engineers.

Now I'd like to turn the presentation over to Steve Burdick, Our Chief financial Officer to present, the details of our financials from the quarter in the year Steve. Okay. Thank you Dan So as Dan just highlighted our adjusted revenue net revenue operating income in earnings per share for the fourth quarter of 2019 were among the best quarterly results in the history of Tetra Tech.

Now on a GAAP basis to fiscal 2019 fourth quarter revenue of 842 million increased 14% when compared to the revenue of 739 million in the fourth quarter fiscal 2018.

And likewise, the fiscal 2018 fourth quarter net revenue of 628 million increased 14% when compared to the net revenue of 553 million in the fourth quarter fiscal 2018.

So overall these revenue increases resulted primarily from our us focused environmental and water engineering and consulting work.

Our international renewable energy and sustainable infrastructure efforts, especially those in Canada and now also in the UK.

And the disaster response recovery planning activities that we have continued into the fourth quarter.

Also on a GAAP basis, our operating income in the fourth quarter 2019 was $21 million compared to 43 million last year and earnings per share was 21 cents compared to 51 cents last year now on an adjusted basis, we generated a 5% increase in our quarterly operating in.

Year over year in a 17% increase in EPS.

This increase in operating income and EPS was driven by revenue growth and by our continued focus on front end consulting and engineering services.

And so for those of you following along on the webcast presentation I'd like to walk you through a reconciliation of our GAAP results to our adjusted net revenue operating income and earnings per share.

So first in the fourth quarter, we made the decision to exit our Canadian turnkey pipeline business.

And as we've discussed in the past this part of our business was contributing on revenue, but with little or no margin.

And as we continue to grow our high end consulting business. This was no longer core to our long term strategy.

Now, although we expect this decision to have cash flow positive impact on fiscal 2020 as a result of this disposition. We did recognize Q4 charges totaling $19 million for goodwill of goodwill impairment of about 8 million.

And severance in asset valuation impairments of about $11 million.

Ultimately, we expect to realize longer term improvement in our operating margins are working capital and our cash flow, while bringing down the risk in our operations.

Also during the fourth quarter as we've previously discussed on the third quarter call.

We completed the acquisition of Wkrg.

The acquisition of WMG provides tetra tech a solid platform in the UK, whereby we can further grow our consulting and engineering services for both governmental and commercial clients.

And as part of this acquisition, we did incur charges totaling about $10.4 million during the fourth quarter.

These were for transaction cost and fees of about 3.3 million and onetime integration costs about 7.1 million for severance asset valuation issues and leased impairments.

And finally subsequent to our fiscal year end and in fact, just last week, we received an arbitration decision in our favor for contractual dispute on a project, which was contracted for under RCM back in 2008.

Although we won the legal arbitration the amount awarded to us was less than our estimated recovery.

And as such we reduced our revenue and thus recognized an additional noncash charge of $13.7 million in the fourth quarter.

This does resolve one of the less large historical claims.

Now turning to working capital and our balance sheet.

Cash flow generated from operations in fiscal 2019 totaled $209 million.

This compares favorably to the prior year cash flow of $186 million by about 23 million or an increase of about 12%.

This excellent cash flow was a result for continued focus on collections of accounts receivable and management of our working capital.

Among the many benefits of this cash improvement was the management of our debt.

Our debt increased only slightly from 131 million last year at this time to 156 million and our net debt to EBITDA settled below 1.0 factor at about <unk> 0.6 times due to our continued strong cash flows in operations.

And lastly, our days sales outstanding decreased to 77.6 days as of the fourth quarter. This is an improvement of almost eight days from last year.

But we expect to do better in fiscal 2020 with a target DSO of 75 days, which currently we are lot closer to now than we were last year.

I'd like to go through our long terms.

Long term capital allocation strategy, which calls for a balance of investing in the growth of the business managing the balance sheet and returning cash to shareholders.

Our continued strong annualized operating cash flows and especially the 209 million of operating cash flow for the year allows us to continue to do just that.

We've been able to invest in strategic areas, while growing the top and bottom line.

And to that end in the fourth quarter, we closed the acquisition acquisition of WMG.

Moreover, we paid out $8.2 million and dividends in the fourth quarter and in all of fiscal 2019, we've paid out about $29.7 million in dividends.

And just last week, our board of directors approved our 22nd consecutive dividend, which will be paid in the month of December at a rate of 15 cents per share.

In addition to the dividend payments to our shareholders, we completed $25 million in share repurchases in the fourth quarter and a totaled $100 million in all of fiscal 2019.

Going forward, we look to continuing to quarterly dividend program and utilizing the $125 million remaining under the approved stock buyback program.

So I'm very pleased to share these outstanding financial results for the fourth quarter and all fiscal 2019. Thank you for your time today and I will now hand, the call back over to Dan.

Great.

Thank you Steve.

I'd now like to turn to our outlook for.

The 22000 fiscal year.

We're starting a new fiscal year that as the first of a new decade.

And we're entering this new decade with a company that's been built on leading with science since our founding if the company over 50 years ago.

So it's quite impressive held the first of the kind research that we've done over the years has resulted in the differentiated water and environmental services that we offer our clients today.

And past decades, we led the way in water modeling and simulation deployed telemetry and extreme environments designed large scale river sediment restoration programs and most recently applied our real time cloud based systems to address the unprecedented disaster recovery needs here in the United States.

As Tetra Tech has expanded to new geographies in markets, we scaled our technology to efficiently and effectively address our clients' needs with a talent force of over 20000 staff worldwide.

It's this success that has resulted in our number one industry, leading rankings with engineering news record.

Today, Tetra Tech's high end services are and more demand and more relevant than ever before.

As our clients address the extremes of climate the needs for resiliency in the infrastructure.

The technology driven transformation of our cities in the sustainability management of our resources.

Hi Tech.

We've been combining our domain knowledge with technology thats embedded in the delivery of our services across the over 70000 projects, we perform any year.

We call our technology that Tetra Tech Delta the tools that differentiate us.

These are the technologies that we've developed for our project work such as specialized software data collection and sensor solutions with numerous patents and proprietary solutions that we have here in the company.

The Tetra Tech Delta include software solutions to assess watersheds in coastal regions techniques to apply real time control for water management and tools to help our clients manage their capital plans at assets.

We help our clients monitor and assessed in real time.

We decipher the acoustics associated with air traffic and even autonomy, mostly assess infrastructure conditions at high speeds.

Our proprietary Threed design apps are also used to augment our high end design services.

As we've grown we've also developed the internal systems to scale, our technology across a global operation.

We have innovation hubs for collaboration with our clients.

And innovators program to identify and develop patents submissions and the technology transfer very program that shares the Tetra Tech Delta information worldwide across all of our associates.

In 2020 in above and beyond we see the Tetra Tech Delta as a significant competitive advantage that brings our world class solutions to bear on addressing the increasing global focus on climate.

Resiliency.

And sustainability.

I'd now like to highlight our outlook on the water and environment markets.

Since our founding Tetra Tech is focused on solving water related problems for our clients.

Our long term focus on success in this market has resulted in Tetra Tech's number one ranking with the NR and water for 16 years in a row.

Our water related services address the full water cycle for managing storm water to protecting our lakes and oceans.

Petrotec Delta that we provide allows us to design the most cost effective and sustainable water solutions for our clients.

The water market has seen an increase in attention and funding spurred by concerns associated with extreme events such as C level rise.

The cost for upgrading the shoreline protection in the United States alone is estimated at approximately $400 billion over the next 20 years roughly equivalent to the cost.

A building the Interstate highway system, all across the United States.

Funding is also increasing for resiliency and sustainability.

The us Federal Emergency management agency or FEMA has now established at 6% of this disaster funding will be spent on pre disaster mitigation.

Our market leader disaster recovery planning and mitigation design capabilities are well matched to this funding.

We also see the green tech market, continuing to expand with more than $25 billion being invested by 2024.

For us this market include supporting renewable energies, such as offshore and onshore wind and solar and high performance Green building design.

Another emerging area is ocean stewardship, and plastics reduction that is resulting in significant new funding globally. We were just awarded a first of its kind $48 million contract with the US agency for international development to assess and develop plastic reductions and mitigation strategies for ocean freight.

Section.

As we enter fiscal year 2020, we see a strong growth outlook across all four of our major customers sectors.

In fiscal year 2020, we expect Tetra Tech's international revenue to grow at a 7% to 12% rate.

Our international growth will be driven by water and environmental planning consulting and engineering work in the United Kingdom, Canada and Australia.

We expect our us federal work to be almost a third of our business and grow at a 5% to 10% rate for the year. This increase in federal work is supported by our current backlog, which will convert to revenue for our civilian department of defense and international development related services.

We expect are you a state and local work to continue to be a growth market for us with municipal water and planning services and longer term disaster recovery work growing at a 10% to 15% rate continuing our industry leading performance in this market.

This growth rate does exclude the more episodic disaster response services for year to year comparisons.

I would like to note that we have more than 400 clients and establish contracts in these areas in the coastal regions of the United States that we can rapidly respond when a storm event does occur.

And finally, our US commercial work is expected to grow at a 3% to 8% rate with increases in revenues expected environmental permitting renewable energy in Green building design.

I'd now like to present, our guidance for the first quarter of fiscal year 2020, and for the entire year of fiscal year 2020, our guidance is as follows.

For Q1 fiscal year 20, our net revenue as the guidance range of 600 million to $640 million.

With that associated adjusted diluted earnings per share of 75 cents to 80 cents.

For the entire year of fiscal year 2020, our net revenue guidance ranges from 2.4 billion to 2.6 billion with an associated adjusted diluted earnings per share of $3.35 to $3.55. Now this earnings guidance does include.

Intangible amortization or noncash gain.

Charges of 14 cents per share for the year, we do anticipate a 23% effective tax rate for fiscal year 2020.

We do anticipate an average of 55.5 million shares outstanding and this revenue guidance does exclude the contributions of any acquisitions that would be completed during the year.

In summary, we had an excellent fourth quarter and all the fiscal year 2019, setting New records for revenue net revenue income in earnings per share for our shareholders.

Our backlog reached an all time high for services at aligned with long term growth trends and priorities, providing us excellent visibility as we enter into fiscal year 2020.

And as we begin this new decade, our differentiated water and environmental services and leading with science approach is well differentiated and in very high demand and making things very exciting for us and our shareholders with new benefits to our clients as we enter fiscal year 2020.

And with that Michelle I'd like to open the call for questions.

Thank you the question and answer session will begin now please be aware that there'll be a 32nd pause and our webcast to allow for buffering. At this time audio participants are invited to submit their question. Please remember to mute the audio function on your computer before you speak if you're using a speakerphone. Please pick up your handset before pressing any.

Numbers, if you'd like to ask a question. Please press star one on your Touchtone phone. The first question comes from the line.

Sean Eastman with Keybanc capital markets. Please proceed with your question.

Hi, Tim Thanks for taking my question.

First question for me is just on the state and local business. So my understanding is the fytwenty outlook reflects a 10% to 15% growth rate in that business when neutralizing the fact that you're not building in any.

Episodic storm response work.

The the 10% to 15% just seems like are really high number for that type of end market. So maybe you could just speak to whether.

Got it and market share gain elements still happening there for Tetra Tech.

And maybe how your outlook compares to the underlying growth rate in that end market.

Great. Thank you very much on for the question and our state and local market as I had.

I've referenced in my prepared remarks has been the strongest end market for us in the last four years and in fact I think if in the last four years, we've seen double digit growth organic growth and state and local work.

And each of the last four years and I'm saving in the prior year. It was the fastest growing of our end.

Clients and thats, not including episodic growth rates, which had pushed us to 30, 40, and 50% of growth rates year over year for giving quarters.

Some of it is we are taking some market share, but I will say, we've really been focused on new emerging focuses of investment by our clients that didn't exist before and to be there first to be their best into actually set the technology and to set the pace in those areas and those include over the past several years areas of new way.

Water supply in the southwest So for instance, water reuse as part of part of capturing wastewater treating it to a very high level, and then actually creating it as a new water supplies in California and other areas.

Actually treating contaminants and desalination, where the largest desalination designer in the United States in the South East, where there's actually a water quality issues from.

Salt water intrusion into different a wells and other areas and actually.

Desalination another areas in Texas, which is in the east where there's too much water and actually.

Devilishly new technologies for.

Mitigating it and protecting it from floods and in the far west actually new desalination for new water supplies that didn't exist before so we consider all of this sort of new ground, new funding that isn't taking it from someone else or capturing market share, but actually being the first there to solve problems. So thats been part of the state and local and the other.

Exclusive of responding to individual disaster events, we're actually working with our clients now to build a planning and recovery practice.

And also I would add mitigation such that you could get ahead of the impacts of a floods fires or other events and this has been a new area, that's higher priority and new funding. So I would say some of it is taking market share, but most of it is in moving into new emerging markets that in fact, just didnt exist a few years ago.

Got it very helpful and next one more for Steve I'm, just curious if you could speak to the free cash flow outlook for fiscal 20.

Perhaps relative to the earnings guidance you provided.

It sounds like still some work to be done on the Dsos after making a lot of progress and 19.

But are there any other moving parts there we should think about as it relates to that net income to free cash conversion.

Yes, so when we when we look at our first our net income our goal is first to.

Generate cash from operations that exceeds our net income first and foremost we've been doing that.

Thank the other thing that that is going to be helpful. As you pointed out is that.

We are working towards and getting closer to that goal of 75 days in our DSO in so that will also be be helpful. And then as we've moved to a very much a high in consulting.

Model.

We have very very little need for a lot of capex, so our free cash flow.

He is pretty close to our operating cash flow in them I think you'll you'll see an improvement next year over what we did this year.

Excellent thanks, very much I'll turn it over.

Thank you. Our next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Okay. Great. This is a great I had a couple of questions I just wanted to clarify just maybe for modeling purposes, then we'll talk a little bit more strategically, but but I guess Steve.

I think we estimated around $70 million of net revenue headwind from the shutting down of.

The pipeline business in that would be in the CIA juice segment and then.

I think the.

The net revenue headwind for disaster restoration in response.

It was about $100 million of net revenue in Gs G are those the are those the right level to be thinking about as we put our model models together in terms of the headwinds that you'll face in 2020 over 2019.

Yes, those are those the rate numbers to use in your model.

Okay.

Thanks, and then just as it relates to the disaster for emergency response, I guess it sounds like you don't have.

A lot in there for 2020, but.

Can you just talk about.

I mean, there are still our disastrous happening, including some in your neck of the woods are is that it's just too early to to assume them. Because these these factors are so recent or just what's the opportunity do you think.

The discussions happening and from your legacy.

Projects that you've been on that might give you some visibility just haven't booked at yet. So you haven't been comfortable guiding to that I'm, just trying to get a sense on how much upside potential there could be.

As you sit here today Dan.

Hi, This is good question.

Andy that as you just to indicated we had $100 million in fiscal 2019 of incremental or revenues associated with disaster response activities. I will tell you that that came very quickly and in fact that allowed us to increase our revenue guidance. During 2019, so it's not something that we forecast and event.

One or two quarters in advance of there have been some fires out here and in fact, there and just putting them out now and so it's quite early for that our guidance at the midpoint did not include any contribution from disaster response activities.

I went to the what would drive it to the higher end of our guidance would be some modest amount of response activities, but if anything similar to what took place in 2019 in fact occurred it would drive us not only to the upper end, but probably well past the at the top end of our guidance range. So we are all we are undergoing not only negotiating we are actually growing the.

Other portion, which we think is provides multiyear visibility and.

Predictability and we can included have included in our.

Our guidance, which is actually the longer turned planning and recovery activity. We're in the which includes a designing alternatives mitigation.

Restoration, and identifying which is which are the priority items that would then move to longer term design and implementation of the.

Remedies that we'd be put in place that are in fact, even longer programs. So I think the more predictable activities are growing the growing broadly across the country. There generally a little bit smaller but have much longer tails and in total dollars are probably equivalent for the response, but it's over multiple years not just a single season or just.

Several quarters.

Okay. That's helpful. I guess I just have one last one for now and has to do with kind of some comments you made earlier this year about trying to achieve a 13% net EBITDA margin.

At some point in the future and it looks like just from back of the envelope math here that somewhere around 12% is probably implicit around that midpoint of guidance for this year I was wondering.

What some of the puts and takes our as you look at that 13 to get your from 12 to 13 of the next year can you talk about some of the either things that you're seeing in the market that will allow that and afford that where some of the actions that you've you will be taken or have already taken to this point that will help you get to that 13% margin goal.

So thats a good question, we're very focused on that and we have the two segments. Our government services group and then our commercial and International group I would say that we have been at the 13% EBITDA margin in fact, we've been a little bit higher than that in our government services group I think for this year. We if you actually do the calculation and you'll see.

But in coming quarters, where we're anticipating roughly about a 13% margin energy SG group. This year so were there.

In that segment of the company, which then allows me to turn to the CIA GE or the commercial international the step we took too.

To wind down to close out our turnkey Canadian pipeline business.

Will actually help quite a bit.

The numbers that were provided earlier.

By yourself, just a moment ago 70 million in Canada actually didn't produce any income at all in fact, it was actually a loss.

Of four or $5 million for the year. So just structurally the things we're doing internally to shed that business will actually move the HSA margin up.

I think for this year at the overall number is about 11%, but I would say that while we did shed this structural impediment to growing the margin within CTG. We did take on Wi G, who I believe will actually moved to a double digit a run rate margin by the end of fiscal year 2020.

Yeah, certainly were a public company in their financials are quite quite visible and they were a low to no margin business, but that is changing really quite quickly I do believe by the end of the year they'll be contributing at a number above double digits above 10%. So for this year, we have an 11%.

Margin for SA. If you actually then calculate a 120 million dollar UK business that does not even include growth, which I think we will actually be seeing this year and you move it to.

To contribute at contribute at a higher level I would think that and it seems like a long way away fiscal year 2021, but we're halfway through Q1 fiscal year 2020 already so it's really not very far away, but I would expect in 2021, we'll have a PSA up at the GSD margins.

And you'll see it progressed during this year, both with the structural changes we've made.

With that type of business, we have and the increase in the margins for some of the international activities that have joined.

Cool.

Helpful answer I'll leave it there thank you very much.

Great. Thanks, Andy. Thank thank you. Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi, Thanks, congratulations on the nice quarter.

Thanks for those comments on the CIA GE margin I was hoping that you could also comment on how you're thinking about G.S.G.S.G. It it sounds like.

Given your expectations around CHG that add during your guidance assumes a bit of margin compression ngs g. So could you talk about the factors that are playing into that.

As you look forward.

Yes, absolutely Noel.

Well, we have and has been very pleased with the GST margins have been running around 14% I will say the last two three years, we have had each and every one of these shares a material amount of response work from Hurricanes.

Tornadoes from fires from ice storms.

Has turned from a.

Once every several years or once or twice a decade into an annual event and what's happened is it has kept our our staff quite highly utilized within the GST, which has driven our margins even in some quarterly periods up to 16, and even 17% as you all have seen.

Since these events actually are not underway for us at this time, we've actually been prudent.

Some might say conservative, but I would say appropriate and not including we're embedding this higher utilization that within yield a higher margin I do believe a.

A good run rate for our government services between 13 and 14% we're in that range at this time for guidance and as.

Revenues pickup in that disaster response area that increases utilization that then translates into more margin, we would look to update our forecast for the year for Geos gene. So it does it I would say well it doesn't look to be compression or lowering it from its 14 to 13 I would say, it's simply taken into account at.

The midpoint.

Of our guidance.

The lack of inclusion at this time of any response activities for disaster activities.

Thanks, Thanks for that and then could you just in the past you've talked about your that you still have some capacity to support incremental revenue with your current.

Staff any thoughts on where you stand today in terms of potentially needing to invest or add folks.

And the to meet demand.

And curious if you could also comment just on general generally the availability of.

We've scaled.

They are looking higher.

Yes. The answer those are two topics that we're focused on here just on an ongoing basis I would even say on a quarterly basis, just on an ongoing daily basis, we take a look at as we submit proposals how much additional revenue or work could we handle with existing workforce that we have now and we think it's probably approaching 10% additional revenue with.

In theory, no additional headcount now it's not perfect that way because if the 10% increase all came in one segment or one particular market area. We may be stressed and have to identify more resources, but if you looked at it broadly we could handle probably at 10% increase in revenue without adding additional resources.

Which then of course much of that would drop right too.

Our margin and incoming and earnings for our shareholders.

I would say that it is very.

Market dependent on the availability of staff. Some some markets there is actually quite high demand and it is.

That folks in this industry like to use the word war for talent in some of the statements. They use I would say these are in advanced analytics. These are in areas of very high end technology differentiation for the most part we grow those internally, we don't go out and recruit and bring them in although they do join us mostly through.

Through acquisitions of collective entities.

And that did happen just this last year at the high end advanced data analytics with the global Tech and others that we then have joined US so how we've addressed the.

The shortfall or the high demand of actually had collective entities join us.

But right now we could handle a pretty significant increase in revenues with the staffing levels, we have within the company.

Thanks, One last question on.

You've talked about this a bit in the past that could you just to remind us as the key bucket that will drive the margin improvement at Wy G kind of how you're moving from that.

Essentially breakeven level today up to the double digits.

Yes, absolutely I think one is we have change the.

I'd call. It the back office organization structure at Tetra Tech and all of our different divisions. We are highly focused on a seller newer model with the as senior principles in the management roles are practitioners and that goes all the way up from the I would say from my role all the way down through the organization. It does leave Tetra Tech.

With a very thin extremely knowledgeable group of executives that are also practitioners that are leading by example.

I think that to there have been a number of acquisitions that WG put together and had created a bit more of a administrative.

Back office, which we are working with them in fact, we initiated it even during due diligence discussing with them the philosophical approach, where what we do when we come to work is we're not focused on how we manage our staff. We're focused on how we solve the problems for our clients from the top all the way to the bottom and that process is already.

Ben.

Put in place I believe that will fundamentally change the the I guess you'd call. It the SGN, a but I think it also embedded in the overhead cost embedded in the execution of the operations and that all falls to the bottom line.

It also happens to have the benefit of putting our best technical people closer to our clients and also makes us much more nimble able to make decisions quickly effectively and based on what we see at the front line and the number of layers that has to go through the organization and eliminates it to a very very direct communication. So all of that's being put in play.

Yes, we've also immediately taken our best in class experts within Tetra Tech and actually link them up with our colleagues and have submitted proposals and in fact have already won some programs.

In the first 90 days of their joining us so the ultimate proof for folks joining us is more clients more projects more success and growth and increased margins and thats wed expect to see this year with WMG.

Thanks very much.

Thank you Noel.

Thank you. Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.

Hi, good morning.

Good morning, Mark.

I wondered if you could spend a little time talking about maybe what your views are currently as far as acquisition pipeline given the.

The opportunity that W., a wide is presented and that platform being added just wondering if it will maybe what the platform may look like for you and to that extent, maybe how much time, you're spending looking at those type opportunities. Maybe this time of year versus year ago were two years ago.

Well I think that having to be wide g. I join us is actually a big move for us because it really really felt important to actually set a best in class platform across all of the UK with.

A presence in Europe in order to access at collective market and that is what WG brought to us.

With exception of the financial performance I would tell you. They look a lot like petrotec they are.

Technical leaders in planning work and environmental work in infrastructure design work supporting the environmental and planning activities within the nuclear industry.

A lot of work with respect to local municipal planning support the one area that I Didnt mention just now is actually the area that is the ultimate hallmark for Tetra Tech, which has water and so now with WG president presence as a platform and actually we think it'd be best in class, It's our intent.

To both bring in our technical experts, what Weve initiated already bringing the Tetra Tech Delta a tools of they have the differentiation to the UK and we would look to expand now in the UK, our water practice and I think that would include through acquisitions of people that are best in class in that sector thought leaders and best.

Technical engineers and consultants. So what are we looking in that we'd like to expand that part of our business in the UK.

And we think that that's that's a high priority for us and we feel more bold and to do that now that we have a platform that we could habit enjoying here in the US we're very much focused on technical leaders and advanced analytics that can take their tools and expertise and actually help augment the we referred to it as domain, but technical experts that we.

We have within the various disciplines of water environment sustainability program management, so that advanced analytics here in the us.

Water in.

In the UK will be a big a big contributor and then I would say other areas that would actually help us access different client sets that we can actually offer our water and environmental sustainable design services.

Okay Thats great. Thank you for for that clarity and I wanted to talk a little bit about.

Maybe what you're seeing with.

Commercial customers and there.

Level of activity receptivity, maybe some of the comments the conversations that you're having with them and get a sense of there's certainly seems to be a willingness to act, but I was wondering if you were getting a sense.

All of that increasing or if theres any opportunity for.

Maybe a little bit of a pullback concerned with the with potential upcoming economic slowdown.

Yes, those types of conversations.

Yes, yes, it's as it is a great question, Mark because certainly theres a lot of concern or apprehension that a economic slowdown even as far as going to recession could be on the horizon I will tell you. We're looking at the very closely but it hasn't yet come visited us. So I'll give you just as a.

We haven't seen that yet the areas that are particularly strong for us our high performance Green building designs. These are buildings that actually make a better workplace for the occupants. It reduces the carbon footprint print drastically and our definition of drastically is they would actually be a net zero or a zero.

Emitter of greenhouse gases or actual use of energy that we generate as much energy as a.

As they actually consume and the same is true with water for a complete the 100% self contained water and waste as the other component so that business has actually gotten very busy.

It has been busy and it continues to grow at among our fastest rates and as high margin and renewable energy has also been very very busy for us, particularly on the planning side and the upfront permitting side offshore wind. We believe is at the very beginning so the amount of of energy produced offshore when his minuscule right now.

Now, but the actual.

Offtakes are in very high demand. So we see that increasing and then our other base business, which has consulting on environmental for sort of our fortune 100 clients that we've seen to be very stable at this point I will say a lot of the work we do on the environmental side and the water with respect to compliance is a little less susceptible.

To an economic downturn, because there are regulatory drivers for compliance and completion of cleaning. These that are under regulatory directive, so while things might slow down they still have deadlines and commitments to.

To achieve.

That's very helpful. Thank you very much.

Thank you Mark.

Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Thank you just a couple of follow up.

First on Stephen on the exit of the Canadian through key business.

Is that a is that is similar run off or would you call. It RCM process or is that divest actual divestments to another company what is that process going to look like.

Yes, it's a pretty quick run off here.

In early 2020 with a.

Really selling the assets with the company disposing of it through a liquidation.

Okay. So different from so the projects will and faster than what you are seeing projects.

Yes, okay.

Okay.

Great and then.

On the model and then that will help your receivables as opposed to our scale.

A little bit on the projects and the arbitrage.

No more remaining arbitrage just a couple left on the.

There is theres no more backlog left in RCM scroll the projects are complete.

Okay. Thank you and the Dan just following up quickly comical.

And then well signaling that on predictable actual disaster related work, how many use the multiyear disaster recovery work fee.

All as well I think the the planning work typically will go from two to five years and Thats, just the program management and coming up with the Master plan for recovery prioritizing what the infrastructure should we replaced how it should be replaced and then and so typically what we looked at this is 12 to 18 months is the.

Response activity they want that on quick so that you can actually get to the planning planning starts right around a year and moves out for anywhere from very small events would be a couple of years of planning larger ones might be five years or more and then you moved to the actually implementation, which is the the design of the.

Of the infrastructure and the case of Katrina.

Tetra addicted several hundred millions of dollars of work.

Both in the late planting and the actual infrastructure design work and that took out from five to 10 five to 10 years out. So the time from an event taking place to the time. The infrastructure has been designed and largely put in place is sort of a decade long.

Window and and much of this we're just in the upfront.

In front of activities on this so thats sort of a timeframe and for each of these phases. They do get larger so the design and implementation of.

A large.

Seawall or a lock in damn system is a very large both in total installed cost, but also the design the permitting activities for those structures. So.

That's generally the timeframes.

Okay. Thank you and last for me is exiting the Canadian pipeline business are you still.

Oil and gas.

Mark.

Oil and gas exposure is it fair to say less than 5% now after the exit of the count Canada business.

Yes. So overall it is less than 5% what had happened before and I characterize this over the past.

Five years that in the US we have always been exclusively consulting and design activity. So consulting for permitting monitoring environmental assessments of biological monitoring.

And then to design the actual design for the Lennar corridors. We continue to do that work that is a good business for US there is demand for that in fact theres insufficient.

Pipeline capacity to take the the availability of resource of oil and gas to to markets continues to be a good business for us we do that we do.

Some of that type of consulting work in Canada, Although we had seen in Canada that to do that work you also needed in many instances to do the full turnkey business. So we do oil and gas work on consulting.

But it's much smaller in Canada, and collectively USA, and Canada would be less than 5% of our oil and gas exposure.

Total it's okay.

Thank you very much.

Okay.

Thank you take.

Thank you. This concludes our question and answer session I'd like to turn the conference back over to Dan that tracks to conclude.

Great. Thank you very much Michelle and.

Thank all of you for your questions your insight and your interest in Tetra Tech.

Again, we here at Tetra Tech think we had a great.

2019, but we feel even better about 2020, we think we are better poised. We think the markets are coming our way. We don't think that we have to build a company to be situated or capable of responding to these significant trends and priorities in the marketplace.

We in a large extent we've been here solving these problems before they become recently a higher priority for funding. So we're looking for a great 2020, a very good first quarter and I look forward to talking to you all to report the results of our first quarter fiscal year 2020, and I Hope you have a great rest of the we thank.

Okay.

Thank you ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.

Good morning, and thank you for joining the Tetra Tech earnings call by now you Should've received a copy of the press release. If you have enough. Please contact the company's corporate office <unk> six to 6351 for sex acts for.

As a reminder, Tetra Tech is also Simulcasting. This presentation slides in the Investor section of its website at Www Dot Tetra Tech dotcom.

That's today from management, our Dan Backtrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer.

They will provide a brief overview of the result, and will open up the call for questions.

I'd like to direct your attention to the Safe Harbor statement in today's presentation.

Today's discussion contains forward looking statements about future growth and financial expectations actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including their risks described and Tetra Tech's periodic reports filed with the FCC, except as required by law Tetra Tech team.

Patient to update as far as looking statements. In addition, since management will be presenting some non-GAAP financial measures as references the appropriate GAAP financial reconciliations are posted on the investor section of Tetra Tech's upside.

At this time I'd like to inform you that all participants are in listen only mode at the request that the company. We will open up the conference for questions and answers after the presentation, what that I would like to turn the call over its Dan Backtrack. Please go ahead Mr. backtrack.

Great. Thank you very much Michelle and good morning, and welcome to our fourth quarter in fiscal year 2019 earnings Conference call.

We ended the year with her backlog exceeding $3 billion for the first time and Tetra Tech's history, providing us with excellent visibility visibility and momentum as we enter fiscal year 2020.

As we entered this new decades, we see increased global demand for our differentiated water and environmental services and are high and leading with science approach.

I'll begin today's presentation with an overview of our quarterly and annual results and our business outlook well, Steve Burdick, Our Chief Financial Officer will provide additional details on our financial performance and our capital allocation.

We had a very strong fourth quarter led by our revenue earnings per share and backlog growth.

Our net revenue of $640 million was up 14% from the prior year.

In the fourth quarter.

We ended the from White young green or W. wide G, providing us with a new United Kingdom platform.

And I'm pleased to say that our initial integration is going extremely well our collaboration on operations and business develop has already yielded very positive results.

[noise] I know it to provide an overview of our performance by our customer.

And our fourth quarter, we had growth across all of our end markets, especially for the United States State and local and international sectors.

State local revenues were very strong this quarter with an organic net revenue growth of 31% year over year.

As for this is the fourth consecutive year of double digit growth for our state and local business.

This growth is a direct result of municipal water infrastructure work and the metropolitan areas of California, Texas, and Florida and for continuing disaster response, and recovery services for pacifiers and floods.

Worked for US federal clients was 28% of our net revenue in the quarter and it was up 8% year over year. The increase in U.S. Federal work was driven by our consulting work for the department of defense.

Various civilian agencies and for the U.S. State Department.

Our U.S. commercial net revenue was 23% of our business and up 1% year over year, our environmental permitting and the renewable energy consulting a design services were up well some of our larger environmental restoration programs ramping down on the court.

And finally, our international net revenue was up 21% year over year, driven by local water and environmental work in Canada and Australia.

And with the addition of WG in the United Kingdom during the quarter.

I'd now like to present, our performance by our business segments.

Our Gs Gi and our CHG segments, both grew at double digit rates in the fourth quarter.

The GST segment was up 15% with strong growth in broad based water and environmental programs disaster response, and our longer term recovery services.

The GST segment continued to deliver excellent margins at 14.1% for the quarter.

Our CSG segment grew by 12% year over year and deliberate over a 10% margin up 280 basis points from the same quarter last year, and 40 basis points up from the very prior quarter.

For the full fiscal year 2019, we achieved all time record highs and net revenue operating income in earnings per share.

Tetra Tech's full year for net revenue was $2.406 billion, which is 9% up compared to last year.

Operating income was $241 million up 11% from the prior year and earnings per share was over $3 for the first time of the company's history with an earnings per share of $3 to 17 cents up 20% from the prior year.

Okay.

Tetra Tech's backlog was up 16% year on year on strong orders in the quarter with a large increase occurring in just this fourth quarter of the year.

Last quarter of the fiscal years typically our strongest quarter. However, we were also pleased to see a number of long term pursues come out with favorable outcomes in the quarter.

We ended the quarter with $3.090 billion some backlog as I've mentioned earlier for the first time over $3 billion in the company.

Strong orders in the quarter also resulted in a sequential 9.1% increase in our backlog from the quarter and then the fourth quarter, we won new programs and task orders for our differentiated water and environmental services across a very broad base of our clients both in the United States and internationally.

We continue to expand our contract capacity for global analytic and water related services.

We were also awarded a new contract for water program in Mongolia that will leverage our analytical water planning in engineering expertise and providing safe water supplies.

In addition, we're awarded multiple task orders for water management flood protection and Dan restoration in United States, continuing our long term technical support for key federal agencies, including the US Army Corps of engineers.

Now I'd like to turn the presentation over to Steve Burdick, Our Chief financial Officer to present, the details of our financials from the quarter in here Steve.

Got you Dan So as Dan just highlighted our adjusted revenue net revenue operating income in earnings per share for the fourth quarter of 2019 were among the best quarterly results in the history of Tetra Tech.

Now on a GAAP basis to fiscal 2019 fourth quarter revenue of 842 million increased 14% when compared to the revenue of 739 million in the fourth quarter fiscal 2018.

And likewise, the fiscal 2019 fourth quarter net revenue of $628 million increased 14% when compared to net revenue of 553 million in the fourth quarter fiscal 2018.

So overall these revenue increases resulted primarily from our us focused environmental and water engineering and consulting work.

Our international renewable energy and sustainable infrastructure efforts, especially those in Canada and now also in the UK.

And the disaster response recovery planning activities that we have continued into the fourth quarter.

Year over year in a 17% increasing EPS.

This increase in operating income EPS was driven by revenue growth and.

Continued focus on print and consulting and engineering services.

And so for those of you following along on the webcast presentation I'd like to walk you through a reconciliation of our GAAP results to our adjusted net revenue up operating income in earnings per share.

So first in the fourth quarter, we made the decision to exit our Canadian turnkey pipeline business.

And as we've discussed in the past this part of our business was contributing on revenue, but with little or no margin.

And as we continue to grow our high end consulting business. This was no longer core to our long term strategy.

Now, although we expect this decision to have cash flow positive impact on fiscal 2020 as a result. This disposition. We did recognize Q4 charges totaling $19 million for goodwill goodwill impairment of about 8 million.

And severance and asset valuation impairments of about $11 million.

Ultimately, we expect to realize longer term improvement in our operating margins are working capital and our cash flow, while bringing down the risk in our operations.

Also during the fourth quarter as we previously discussed on the third quarter call.

We completed the acquisition of Wkrg.

The acquisition of WHA provides tetra tech a solid platform in the UK, whereby we can further grow our consulting and engineering services for both governmental and commercial clients.

And as part of this acquisition, we did incur charges totaling about $10.4 million during the fourth quarter.

These were for transaction cost and fees of about 3.3 million.

And onetime integration costs about 7.1 million for severance asset valuation issues and leased impairments.

Although we won the legal arbitration be Mount awarded to US was less than our estimated recovery.

And as such we reduced our revenue and thus recognized in additional noncash charge of $13.7 million in the fourth quarter.

This does resolve one of the less large with Oracle claims.

Now turning to working capital and our balance sheet.

Cash flow generated from operations in fiscal 2019 totaled $209 million.

This compares favorably to the prior year cash flow of $186 million by about 23 million or an increase of about 12%.

This excellent cash flow was the result of our continued focus on collections of accounts receivable and management of our working capital.

Among the many benefits of this cash improvement was the management of our debt.

And lastly, our day sales outstanding decreased to 77.6 days as of the fourth quarter. This is an improvement of almost eight days from last year.

But we expect to do better in fiscal 2020 with a target DSO of 75 days, which currently we are a lot closer to now than we were last year.

I'd like to go through our long terms.

Long term capital allocation strategy, which calls for a balance of investing in the growth of the business managing the balance sheet and returning cash to shareholders.

Our continued strong annualized operating cash flows and especially the 209 million of operating cash flow for the year allows us to continue to do just that.

We've been able to invest in strategic areas, while growing the top and bottom line.

And to that end in the fourth quarter, we closed the acquisition acquisition of WMG.

Moreover, we paid out $8.2 million and dividends in the fourth quarter and in all of fiscal 2019, we've paid out about $29.7 million in dividends.

And just last week, our board of directors approved our 22nd consecutive dividend, which will be paid in the month of December at a rate of 15 cents per share.

In addition to the dividend payments to our shareholders, we completed $25 million in share repurchases in the fourth quarter and a totaled $100 million and all of fiscal 2019.

Going forward, we look to continuing to quarterly dividend program and utilizing the $125 million remaining under the approved stock buyback program.

So I'm very pleased to share these outstanding financial results for the fourth quarter and all fiscal 2019. Thank you for your time today and I will now hand, the call back over to Dan.

Great.

Thank you Steve.

I'd now like to turn to our outlook for.

The 2020 fiscal year.

We're starting a new fiscal year that as the first of a new decade.

And we're entering this new decade with a company that's been built on leading with science since our founding at the company over 50 years ago.

It's quite impressive held the first of the kind research that we've done over the years has resulted in the differentiated water and environmental services that we offer our clients today.

And past decades, we led the way in water modeling and simulation deployed telemetry and extreme environments design large scale River settlement restoration programs and most recently applied our real time cloud based systems to address the unprecedented disaster recovery needs here in the United States.

As Tetra Tech has expanded to new geography, some markets, we scaled our technology to efficiently and effectively address our clients' needs with a talent force of over 20000 staff worldwide.

This success that has resulted in our number one industry, leading rankings with the engineering news record.

Today, Tetra Tech's high end services art, and more demand and more relevant than ever before.

As our clients address the extremes of climate that needs for resiliency in the infrastructure.

The technology, driven transformation of our cities and the sustainability management.

Of our resources.

Hi Tech.

We've been combining our domain knowledge with technology thats embedded in the delivery of our services across the over 70000 projects we performance here.

We call our technology that Tetra Tech Delta the tools that differentiate us.

The Tetra Tech Delta include software solutions to assess watersheds and coastal regions techniques to apply real time control for water management and tools to help our clients manage their capital plans at assets.

We help our clients monitor and assessed in real time.

We decipher the acoustics associated with air traffic and even a ton of mostly assess infrastructure conditions at high speeds.

Our proprietary Threed design apps are also used to augment our high end design services.

As we've grown we've also developed the internal systems to scale, our technology across our global operation.

We have innovation hubs for collaboration with our clients.

And innovators program to identify and develop patents submissions and the technology transfer very program that shares the Tetra Tech Delta information worldwide across all of our associates.

In 2020 and above and beyond we see the Tetra Tech Delta as a significant competitive advantage that brings our world class solutions to bear on addressing the increasing global focus on climate.

Resiliency.

And sustainability.

I'd now like to highlight our outlook on the water and environment markets.

Since our founding Tetra Tech is focused on solving water related problems for our clients.

Our long term focus on success in this market has resulted in Tetra Tech's number one ranking with the NR and water for 16 years in a row.

Our water related services address the full water cycle for managing storm water to protecting our lakes and oceans.

Petrotec Delta that we provide allows us to design the most cost effective and sustainable water solutions for our clients.

The water market has seen an increase in attention and funding spurred by concerns associated with extreme events such as C level rise.

The cost for upgrading the shoreline protection in the United States alone is estimated at approximately $400 billion over the next 20 years roughly equivalent to the cost.

Building the Interstate highway system, all across the United States.

Funding is also increasing for resiliency and sustainability.

The us Federal Emergency management agency or FEMA has now established that 6% of this disaster funding will be spent on pre disaster mitigation.

Our market leader disaster recovery planning and mitigation design capabilities are well matched to this funding.

We also see the green tech market, continuing to expand with more than $25 billion being invested by 2024.

For us this market include supporting renewable energy, such as offshore and onshore wind and solar and high performance Green building design.

Another emerging area is ocean stewardship, and plastics reduction that is resulting in significant new funding globally. We were just awarded a first of its kind $48 million contract with the USA agency for international development to assess and develop plastic reductions in mitigation strategies for ocean freight.

Action.

As we enter fiscal year 2020, we see a strong growth outlook across all four of our major customers sectors.

In fiscal year 2020, we expect Tetra Tech's international revenue to grow at a 7% to 12% rate.

Our international growth will be driven by water and environmental planning consulting and engineering work in the United Kingdom, Canada and Australia.

This growth rate does exclude the more episodic disaster response services for year to year comparisons.

I would like to note that we have more than 400 clients and establish contracts in these areas in the coastal regions of United States that we can rapidly respond when a storm event does occur.

And finally, our US commercial work is expected to grow at a 3% to 8% rate with increases in revenues expected environmental permitting renewable energy in Green building design.

I'd now like to present, our guidance for the first quarter.

Fiscal year 2020, and for the entire year fiscal year 2020, our guidance is as follows for Q1 fiscal year 20, our net revenue has the guidance range of 600 million to $640 million with and associated adjusted diluted earnings per share of 75 cents to 80 cents.

Intangible amortization or noncash.

Barges at 14 cents per share for the year, we do anticipate a 23% effective tax rate for fiscal year 2020.

We do anticipate an average of 55.5 million shares outstanding and this revenue guidance does exclude the contributions of any acquisitions that would be completed during the year.

In summary, we had an excellent fourth quarter and all the fiscal year 2019, setting New records for revenue net revenue income and earnings per share for our shareholders.

Our backlog reached an all time high for services at aligned with long term growth trends and priorities, providing us excellent visibility as we enter into fiscal year 2020.

And as we begin this new decades, our differentiated water and environmental services and leading with science approach is well differentiated and in very high demand and making things very exciting for us and our shareholders with new benefits to our clients as we enter fiscal year 2020.

And with that Michelle I'd like to open the call for questions.

Numbers, if you'd like to ask a question. Please press star one on your Touchtone phone. The first question comes from the line.

Sean Eastman with Keybanc capital markets. Please proceed with your question.

Hi, Tim Thanks for taking my question.

First question for me is just on the state and local business. So my understanding is the at Fytwenty outlook reflects.

10% to 15% growth rate in that business when neutralizing the fact that youre not building in any.

Episodic storm response work.

The the 10% to 15% just seems like are really high number for that type of end market. So maybe you could just speak to whether.

Got it and market share gain elements still happening there for Tetra Tech.

And maybe how your outlook compares to the underlying growth rate in that end market.

Great. Thank you very much on for the question and our state and local market as I had.

Referenced in my prepared remarks has been the strongest end market for us in the last four years and in fact I think if in the last four years, we've seen double digit growth organic growth and state and local work.

And each of the last four years and I would say even in the prior year. It was the fastest growing of our and.

Clients and thats, not including episodic growth rates, which had pushed us to 30, 40, and 50% growth rates year over year for giving quarters.

Some of it is we are taking some market share, but I'd say, we've really been focused on new emerging focuses of investment by our clients that didn't exist before and to be there first to be their best into actually set the technology and to set the pace in those areas and those include over the past several years areas of new water.

Supply in the southwest So for instance, water reuse as part part of capturing wastewater treating it to a very high level, and then actually creating it as a new water supplies in California and other areas.

Actually treating contaminants and desalination, where the largest desalination designer in the United States in the South East, where there is extra water quality issues from.

Salt water intrusion into different the wells in other areas and actually desalination another areas in Texas, which is in the east where there's too much water and actually establishing new technologies for.

Mitigating and protecting us from floods and in the far west actually new desalination for new water supplies that didn't exist before so we consider all of this sort of new ground, new funding that isn't taking it from someone else or capturing market share, but actually being the first there to solve problems. So that's that's been part of the state and local and the other.

Exclusive of responding to individual disaster events, we're actually working with our clients now to build a planning and recovery practice.

And also I would add mitigation such that you could get ahead of the impacts of a floods fires or other events and this has been a new whereas thats higher priority and new funding. So I would say some of it is taking market share, but most of it is in moving into new emerging markets that in fact, just didnt exist a few years ago.

Got it very helpful and next one more for Steve I'm, just curious if you could speak to free cash flow outlook for fiscal 20.

Perhaps relative to the earnings guidance you provided.

It sounds like still some work to be done on the Dsos after making a lot of progress and 19.

But are there any other moving parts or we should think about as it relates to that net income to free cash conversion.

Yes, so when we when we look at our first our net income our goal is first to.

Generate cash from operations that exceeds our net income first and foremost we've been doing that.

Thank the other thing that that is going to be hopeful as you pointed out is that.

We are working towards and getting closer to that goal of 75 days and our DSO and so that will also be be helpful. And then as we moved to a very much a high end consulting.

Model.

We have very very little need for a lot of capex, so our free cash flow.

Is pretty close to our operating cash flow in them I think you'll you'll see an improvement next year over what we did this year.

Excellent thanks, very much I'll turn it over.

Thank you. Our next question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Okay. Great. This is a great I had a couple of questions I just wanted to clarify just maybe for modeling purposes, then we'll talk a little bit more strategically, but but I guess Steve.

I think we estimated around $70 million of net revenue headwind from the shutting down of.

The pipeline business in that would be in the C.G. segment and then.

I think the.

The net revenue headwind for disaster restoration in response.

Yes, those are those the right numbers to use in your model. Okay. Cool. Thanks, and then just as it relates to the disaster for emergency response, I guess it sounds like you don't have.

A lot in there for 2020, but.

Can you just talk about.

I mean, there are still our disasters happening, including some in your neck of the woods.

Is that it's just too early to to assume them because.

These factors are so recent or just what's the opportunity do you think.

The discussions happening in some of your legacy.

Projects that you've been on that might give you some visibility just havent booked at yet so you haven't been comfortable guiding to that I'm, just trying to get a sense on how much upside potential there could be.

As you sit here today Dan.

Hi. This is good question Andy that as you just indicated we had $100 million in fiscal 2019 of incremental or revenues associated with disaster response activities. I will tell you that that came very quickly and in fact that allowed us to increase our revenue guidance. During 2019, so it's not something that we forecast.

And event.

One or two quarters and advance there have been some fires out here and effect, there and just putting them out now and so it's quite early for that our guidance at the midpoint did not include any contribution from disaster response activities.

If you went to the what would drive it to the higher end of our guidance would be.

Some modest amount of response activities, but if anything similar to what took place in 2019 in fact occurred it would drive us not only to the upper end, but probably well past the the top end of our guidance range. So.

We are all we are negotiating not only negotiating we are actually growing the other portion, which we think is provides multiyear visibility and predictability and we can included have included in our.

Our guidance, which is actually the longer term planning and recovery activity. We're in the which includes a designing alternatives mitigation.

Restoration, and identifying which is which are the priority items that would then move to longer term design and implementation of the.

Remedies that would be put in place that are in fact, even longer programs. So I think the more predictable activities are growing the growing broadly across the country. There generally a little bit smaller but have much longer tails and in total dollars are probably equivalent for the response, but it's over multiple years not just a single season or just.

Several quarters.

Okay. That's helpful. I guess I just have one last one for now it has to do with kind of some comments you made earlier this year about trying to achieve a 13% net EBITDA margin.

At some point in the future and it looks like just from back of the envelope math here that.

Somewhere around 12% is probably implicit around that midpoint of guidance for this year I was wondering.

What some of the puts and takes our as you look at that 13 to get shift from 12 to 13 in the next year can you talk about some of the either things that you're seeing in the market that will allow that and afford that or some of the actions that you've you will be taken or have already taken to this point that will help you get to that 13% margin goal.

And in coming quarters, where we're anticipating roughly about a 13% margin energy SG group. This year so were there.

In that segment of the company, which then allows me to turn to the GE or the commercial international the step we took too.

To wind down to close out our turnkey Canadian pipeline business.

Will actually help quite a bit.

The numbers that were provided earlier.

By yourself, just a moment ago 70 million in Canada actually didn't produce any income at all in fact, it was actually in loss.

Of four or $5 million for the year. So just structurally that things were doing internally to shed that business will actually move the HSA margin up.

Thank you for this year, the overall numbers about 11%, but I would say that while we did shed this structural impediment to growing the margin within CTG. We did take on Wi G, who I believe will actually moved to a double digit a run rate margin by the end of fiscal year 2020.

Yeah, certainly were a public company on their financials are quite quite visible and they were a low to no margin business, but that is changing really quite quickly I do believe by the end of the year they'll be contributing at a number above double digits above 10%. So for this year, we have an 11%.

Margin for SA. If you actually then calculate a $120 million UK business that does not even include growth, which I think we will actually be seeing this year and you move it to.

And you'll see it progressed during this year, both with the structural changes we've made.

With that type of business, we have and the increase in the margins for some of the international activities that have joined.

Cool.

Helpful answer I'll leave it there thank you very much.

Great. Thanks, Andy.

Thank you. Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi, Thanks, congratulations on the next quarter.

Thanks for those comments on the CIA GE margin I was hoping that you could also comment on how you're thinking about G.S.G. I see it sounds like.

Given your expectations around CHG that add Gary your guidance assumes a bit of margin compression ngs g. So could you talk about the factors that are playing into that.

As we look forward.

Yes, absolutely Noel.

Well, we have and been very pleased with the GST margins they've been running.

Around 14% I will say the last two three years, we have had each and every one of these shares a material amount of response work from Hurricanes.

Tornadoes from fires from ice storms.

Has turned from a.

Once every several years or once or twice a decade into an annual event and whats happened as it has kept our our staff quite highly utilized within the GST, which has driven our margins even in some quarterly periods up to 16, and even 17% as you all have seen.

Since these events actually are not underway for us at this time, we've actually been prudent.

Some might say conservative, but I would say appropriate and not including we're embedding this higher utilization that within yield a higher margin I do believe a.

A good run rate for our government services between 13 and 14% we're in that range at this time for guidance and as.

Revenues pickup in that disaster response area that increases utilization that then translates into more margin, we would look to update our forecast for the year for Geos gene. So it does it I would say well it does it look to be compression or lowering it from its 14 to 13 I would say, it's simply taking into account at.

The midpoint.

Of our guidance.

The lack of inclusion at this time of any response activities for disaster activities.

Thanks, Thanks for that and then could you just in the past you've talked about your that you still have some capacity to support incremental revenue with your current.

Staff any thoughts on where you stand today in terms of potentially needing to invest or add folks.

And the to meet demand.

And Im curious if you could also comment Jeff.

General generally the availability of.

We've scaled.

They are looking higher.

Yes. This are those are two topics that we're focused on here just on an ongoing basis I would even say on a quarterly basis, just on an ongoing daily basis, we take a look at as we submit proposals how much additional revenue or work could we handle with existing workforce that we have now and we think it's probably approaching 10% additional revenue with.

Which then of course much of that would drop right too.

Our margin and incoming than earnings for our shareholders.

I would say that it is very.

Market dependent on the availability of staff. Some some markets there is actually quite high demand and it is.

Through acquisitions up collective entities.

And that did happen just this last year at the high end advanced data analytics with the global Tech and others that Weve that have joined us So how we've addressed the.

The shortfall or the high demand of actually had collective entities join us.

But right now we could handle a pretty significant increase in revenues with the staffing levels, we have within the company.

Thanks, One last question.

You've talked about this a bit in the past, but could you just remind us as the key bucket that will drive the margin improvement at W.G. kind of how you're moving from that.

Essentially breakeven level today up to the double digits.

Yes, absolutely I think one is we have change the.

I would call at the back office organization structure at Tetra Tech and all of our different divisions. We are highly focused on a seller newer model with the senior principles and the management roles are practitioners and that goes all the way up from the I would say from my role all the way down through the organization. It does leave Tetra Tech.

With a very thin extremely knowledgeable group of executives that are also practitioners that are leading by example.

I think that to there have been a number of acquisitions that WG put together and had created a bit more of a administrative.

Back office, which we're working with them in fact, we initiated it even during due diligence discussing with them the philosophical approach, where what we do when we come to work is we're not focused on how we manage our staff. We're focused on how we solve the problems for our clients from the top all the way to the bottom and that process is already.

Ben.

Put in place.

I believe that will fundamentally change the the I guess you'd called the SGN, a but I think it also embedded in the overhead cost embedded in the execution of the operations and that all falls to the bottom line.

Very direct communication, so all of Thats being put in place. We've also immediately taken our best in class experts within Tetra Tech and actually link them up with our colleagues and have submitted proposals and in fact have already won some programs.

Thanks very much.

Thank you Noel.

Thank you. Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.

Hi, good morning.

RT Mart.

I wondered if you could spend a little time talking about maybe what your views are currently as far as acquisition pipeline given the.

The opportunity that W. Wide is presented and that platform being added just wondering if.

Maybe what the platform may look like for you and to that extent, maybe how much time, you're spending looking at those type.

Opportunities, maybe this time of year versus a year ago or two years ago.

Well I think that having to be white g. I join us is actually a big move for us because it really we really felt important to actually set a best in class platform across all of the UK with.

A presence in Europe in order to access at collective market and that is what WG brought to us.

With exception of the financial performance I would tell you. They look a lot like petrotec they are.

Technical leaders in planning work and environmental work in infrastructure design work supporting the environmental and planning activities within the nuclear industry.

A lot of work with respect to local municipal a planning support the one area that I Didnt mention just now is actually the area that is the ultimate hallmark for Tetra Tech, which has water and so now with WG president presence as a platform and actually we think it would be best in class.

Our intent to both bring in our technical experts what weve initiated already.

Bringing up the Tetra Tech Delta a tools of they have the differentiation to the UK and we would look to expand now in the UK, our water practice and I think that would include through acquisitions of people that are best in class in that sector thought leaders and best Technical engineers and consultants. So what are we looking in.

We'd like to expand that part of our business in the UK.

We have within the various disciplines of water environment sustainability program management, so that advanced analytics here in the us.

Water in.

In the UK will be a big big contributor and then I would say other areas that would actually help us access different clients sets that we can actually offer our water and environmental sustainable design services.

Okay. That's great. Thank you for for that clarity and I wanted to talk a little bit about.

Maybe what you're seeing with commercial customers and there.

Level of activity receptivity, maybe some of the comments the conversations you're having with them and get a sense of the certainly seems to be a willingness to act, but I was wondering if you were getting a sense.

All of that increasing or if theres any opportunity for.

Maybe a little bit of a pullback concerned with the with potential upcoming economic slowdown.

Yes, those types of conversations.

Yes, yes, it's a great question, Mark because certainly theres, a lot of concern or apprehension that a economic slowdown even as far as going to recession could be on the horizon I will tell you. We were looking at the very closely but it hasn't yet come visited us. So I'll give you just as a.

An observation from the front line, we haven't seen a pullback and in fact on the commercial side, which I do agree will be the first ones that will make a move and we'll see a change in their funding we havent seen that yet the areas that are particularly strong for us our high performance Green building designs. These are buildings that actually make a better workplace.

For the occupants it reduces the carbon footprint print drastically and our definition of drastically is they would actually be a net zero or a zero.

Emitter of greenhouse gases or actual use of energy that we generate as much energy as a.

As they actually consume and the same is true with water for a complete the 100% self contained a water and waste as the other component so that business has actually gotten very busy.

Now, but the actual.

Offtakes are in very high demand. So we see that increasing and then our other base business, which has consulting on environmental for sort of a fortune 100 clients that we've seen to be very stable at this point I will say a lot of the work we do on the environmental side and the water with respect to compliance is a little less.

Bolt on economic downturn, because there are regulatory drivers for compliance and completion of cleaning. These that are under regulatory directive, so while things might slowdown.

Still have deadlines and commitments to.

To achieve.

That's very helpful. Thank you very much.

Thank you Mark.

Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Hi, Thank you just a couple of follow up on first on Stephen on the exit of the Canadian through key business is not a is that a similar run off or would you call. It RCN process or is that to divest actual let's move to another company what does that process.

Yes, it's a pretty quick run off here in early 2020 with a.

Really selling the assets with the company disposing of it through a liquidation.

Okay. So different from so the projects will end faster than.

In the RCM projects.

Yes.

Okay.

Great and then.

On the model and then that will help your receivables as opposed to ourselves.

Take a little bit on the projects in the arbitrage can you say RCM no more remaining arbitrage.

11.

Theres Theres no more backlog left in RCM scroll the projects are complete.

Okay. Thank you and then Dan just following up good comments on the GLC margins.

Ignoring the unpredictable actual disaster related work how many years.

Disaster recovery work.

Oh, well I think the the planning work typically will go from two to five years and that's just the program management and coming up with the Master plan for recovery prioritizing what the infrastructure should we replaced how it should be replaced and then and so typically where we've looked at this is 12 to 18 months.

As the response activity they want that done quick so that you can actually get to the planning planning starts right around a year and moves out for anywhere from very small events would be a couple of years of planning larger ones might be five years or more and then you move to the actually implementation, which is the the design of the.

Of the infrastructure and the case of Katrina.

Tetra addicted several hundred millions of dollars of work.

Both in the late planning and the actual infrastructure design work and that took out from five to 10 five to 10 years out. So the time from an event taking place to the time. The infrastructure has been designed and largely put in place is sort of a decade long.

Window and and much of this we're just in the upfront.

In front of activities on this so thats sort of a timeframe and for each of these spaces. They do get larger so the design and implementation of.

A large.

Seawall or a lock in damn system is a very large both in total installed cost, but also the designing the permitting activities for those structures. So.

Thats generally the time frames.

Okay. Thank you and last for me is out.

Excluding the Canadian pipeline business are you still.

Oil and gas positive Mark.

All oil and gas exposure as a fair to say less than five per cent now after the exit of account Canada business.

Yes. So overall it is less than 5% what had happened before and I'd characterize this over the past.

Five years that in the US we have always been exclusively consulting and design activity. So consulting for permitting monitoring environmental assessments of biological monitoring.

And then to design the actual designed for linear corridors. We continue to do that work that is a good business for US there is demand for that in fact, there is insufficient.

Pipeline capacity to take the the availability of resource of oil and gas to to market continues to be a good business for us we do that we do.

Some of that type of consulting worked in Canada, Although we had seen in Canada that to do that work you also needed in many instances to do the full turnkey business. So we do oil and gas work on consulting.

But it's much smaller in Canada, and collectively us in Canada would be less than 5% of our oil and gas exposure.

Total it's okay.

Thank you very much.

Okay.

Thank you take.

Thank you. This concludes our question and answer session I'd like to turn the conference back over to Dan that tracks to conclude.

Great. Thank you very much Michelle and.

Thank all of you for your questions your insight and your interest in Tetra Tech.

Again, we here at Tetra Tech think we had a great.

2019.

We feel even better about 2020, we think we are better poised we think the markets are coming our way. We don't think that we have to build a company to be situated or capable of responding to these significant trends and priorities in the marketplace.

Thank you ladies and gentlemen, this concludes our conference for today. Thank you all for participating and.

By now you should have received a copy of the press release, if you have not please contact the company's corporate office at six to 6351 for 664.

As a reminder, Tetra Tech is also Simulcasting was presentation with slides in the Investor section of its website at Www Dot Tetra Tech dotcom.

With us today from management, our Dan Bad track, Chairman, and Chief Executive Officer, and Steve Burdick, Chief Financial Officer.

They will provide a brief overview of the result, and we'll open up the call for questions.

Reports filed with the FCC, except as required by law Petrotec takes no obligation to update as forward looking statements. In addition, since management will be presenting some non-GAAP financial measures as references the appropriate GAAP financial reconciliations are posted in the Investor section of Tetra Tech's web site.

At this time I'd like to inform you that all participants are in listen only mode. At the request of the company. We will open up the conference for questions and answers after the presentation with that I would like to turn the call over to the end Backtrack. Please go ahead Mr. backtrack.

Great. Thank you very much Michelle and good morning, and welcome to our fourth quarter in fiscal year 2018 earnings Conference call.

We ended the year with our backlog exceeding $3 billion for the first time and Tetra Tech's history, providing us with excellent visibility visibility and momentum as we enter fiscal year 2020.

As we enter this new decade, we see increased global demand for our differentiated water and environmental services and our high end, leading with science approach.

We had a very strong fourth quarter led by our revenue earnings per share and backlog growth.

Our net revenue of $640 million was up 14% from the prior year.

In the fourth quarter.

We ended the from White young green or W., why G, providing us with a new United Kingdom platform.

And I'm pleased to see that our initial integration is going extremely well our collaboration on operations and business develop has already yielded very positive results.

I'd now like to provide an overview of our performance by our customer.

And our fourth quarter, we had growth across all of our end markets, especially for the United States State and local and international sectors.

State local revenues were very strong this quarter with an organic net revenue growth of 31% year over year.

This fourth this is the fourth consecutive year of double digit growth first state and local business.

Worked for US federal clients was 28% of our net revenue in the quarter and was up 8% year over year. The increase in US Federal work was driven by our consulting work for the department of defense.

Various civilian agencies and for the US State Department.

And finally, our international net revenue was up 21% year over year, driven by local water and environmental work in Canada and Australia.

And with the addition of WG in the United Kingdom during the quarter.

I'd now like to present, our performance by our business segments.

Our GST and our CHG segments, both grew at double digit rates in the fourth quarter.