Q1 2020 Earnings Call

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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 enough. Please contact the company's corporate office at six to 6351 for 664.

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

This call is being recorded at the request as 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 results 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 upside.

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 San Backtrack. Please go ahead Mr. backtrack.

Thank you very much Michelle and good morning.

You're welcome for fiscal year, 2021st quarter earnings Conference call.

We had an excellent first quarter and start to our 2020 fiscal year with double digit growth in net revenue earnings per share in backlog in a broad based strength across our business in fact, our international us federal work, even exceeded my own expectations for the quarter.

Our backlog grew to $3.17 billion up sequentially did year on year to a new record high providing us with excellent visibility for our fiscal year 2020.

See strong demand across our end markets and water environment and sustainable infrastructure services, and our leading with science approach and advanced analytic solutions are very well aligned with our clients needs.

In addition, our recent acquisition of W. why GE in the United Kingdom.

As providing us with new opportunities to offer our water and environmental services throughout the region.

Ill begin todays presentation with an overview of our first quarter results in 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 first quarter setting new records for first quarter performance across multiple metrics included net revenue, our adjusted earnings per share and backlog.

Our net revenue was $614 million up 11% from the prior year, a new first quarter high for us.

We generated an adjusted earnings per share of 84 cents for the quarter up 20% from last year also a first quarter high and our backlog best indicator for future growth was up 13% year over year, increasing to $3.17 billion, an all time high for the company.

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

In the first quarter, our growth was driven by strong performance across our business, especially for international and us federal clients.

Our international net revenue was up 25% year over year, driven by growth in multiple geographies, including water environment in energy related work in Canada, and Australia, and our expanded United Kingdom business from the acquisition of WHA last year.

Worked for US federal clients was up 12% year over year and represented 28% of our net revenue in the quarter.

The increase in our US federal work was driven by our consulting work for the department of defense.

Civilian agencies and for the US State Department.

Our us commercial net revenue was up 5% and comprise 24% of our overall business in the quarter commercial growth was driven by strong performance and sustainable high performance building design environmental restoration and renewable energy services.

Our state and local revenues for municipal water infrastructure and planning services grew at 10% year over year this quarter.

However, this growth was offset by having less disaster response work in the first quarter of 2020 than we had in 2019 as a result, our overall state and local revenues reduced by 7% on a year on year comparison.

This effect this offset of reduced disaster response work will even be more pronounced in youth in quarters, two three and four which is already incorporated into our guidance.

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

Our Gs Gi and CHG segments. Both grew in the first quarter as a result of broad based demand for our high end services.

The GST segment was up 9% with strong growth and broad based water and environmental government services.

GST, excluding the disaster response.

Grew at a very strong rate at 14% year over year.

Our GSP margins were in line with our expectations at 12.8% for the quarter, which is up 50 basis points from last year.

Our CHG, which is our commercial and international group.

Segment grew by 14% year over year and delivered a 10.8% margin in the quarter.

Our CSG segment exclusive of the WG acquisition delivered to 12% margin up about 100 basis points from last year.

This is a direct result of strong performance with our us commercial clients as well as our operations into Canadian Asia Pacific and South American markets.

As I mentioned earlier, the integration of Wi GE is going very well they've already improved their current margin contribution to the low single digits through this initial transition and they are on plan to achieve a 10% margin on a run rate by the end of the fourth quarter of this year.

For backlog.

Backlog was up 13% year on year end up sequentially also resulting in an all time high for the company.

The first quarter, we won new programs and task orders for 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 high end analytical and water related services. An example is the new recent award we had with United States Environmental Protection Agency for ecological Human Health studies and advanced analytics.

We're also awarded a new contract for international work with US Army Corps of engineers with the Middle East District, and we are award grid multiple task orders with US Army to provide environmental and engineering design services.

This broad based backlog provides us with excellent visibility throughout fiscal year 2020.

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

Okay. Thank you Dan So as Dan just highlighted our revenue operating income earnings per share and backlog for the first quarter 2020 were the best first quarter results in the history of Tetra Tech.

On a GAAP basis, the fiscal 2021st quarter revenue of $798 million increased 11% when compared to the revenue of 770 million in the first quarter first quarter of fiscal 2019.

Likewise, the fiscal 2021st quarter net revenue of $614 million increased 11% when compared to the net revenue of $553 million in the first quarter fiscal 2019.

Overall these revenue increases resulted primarily from our us commercial environmental and water engineering and consulting work.

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

And the continued growth of our U.S. government business, especially our high end technology services with our civilian agency clients.

On a GAAP basis, our operating income and earnings per share increased at a higher percentage than our topline revenue increases.

Our operating income for the first quarter of 2020 was $63 million compared to $56 million last year and our earnings per share was 85 cents compared to 75 cents last year.

On an on an adjusted basis, we generated 20% increase in our quarterly EPS year over year and this increase was driven not only by revenue growth, but also by our hardware higher margin fronting consulting and engineering services.

I do want to point out that due to our decision in the fourth quarter fiscal 2018 to divest our Canadian pipeline construction business. We did sell a portion of our assets, which resulted in a gain of about one cents vps, which is the reconciling difference between our GAAP and adjusted EPS result.

We do expect to have further asset sales over the remainder of fiscal 2020, which we believe will benefit our cash position the rest of this year.

Now related to cash was used in operations for the first quarter.

For the first quarter those totaled $18 million the first quarter operating cash is typically negative due to normal seasonality.

And in fiscal 2020, we we anticipate generating positive cash flows from operations, which are expected to exceed our net income.

Our net debt is $224 million and our net debt to EBITDA settled at about <unk> 0.8 times.

Due to our continued strong annualized cash flows from operations.

And lastly, our days sales outstanding decreased to 73 days as of the first quarter. This is an improvement of 10 days from last year and four days from the last quarter. Furthermore, our DSO has not been this low since the fourth quarter of 2010.

And as we continue to refine and improve our business outlook. We anticipate we could further improve our best in class DSO.

Our long term capital allocation strategy calls for balance of investing in the growth of our business managing the balance sheet and returning cash to our shareholders.

Our continued strong annualized operating cash flow allows us to do just that.

We've been able to invest in strategic areas, while growing the top and bottom lines and we have a strong pipeline of strategic M&A opportunities, which which can can.

Contribute further to an expanded geographic presence.

Hi, and technical capabilities and new customers in client service opportunities.

Regarding our dividend program, we paid out $8.2 million in the first quarter.

I'm happy to report that our board of directors approved our 20 threerd consecutive dividend, which will be paid in the month of February at a rate of 15 cents per share.

And since we started our dividend program, we have increased the amount each year and we will revisit we will revisit the mountain next quarter and provide an update at that time.

Furthermore, our board of directors approved an additional $200 million stock in stock buybacks.

To supplement the previously approved program, which has the $104 million remaining.

This gives us.

A $304 million of capacity under the approved stock buyback programs.

I'm very pleased to share these outstanding financial results for the first quarter and I want to thank you for your time today, and I will hand, the call back over to Dan.

Thank you very much Steve.

I'd now like to turn to our outlook for the 2020 fiscal year.

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

In fiscal year 2020, we expect Tetra Tech's international revenue to grow at a 7% to 12% rates, our international growth will be driven by water and environmental planning and consulting and engineering work, particularly in Canada, Australia, and our new UK based operations.

We expect our U.S federal work to be almost 30% 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 across our civilian department of defense and International development service lines.

Our us commercial work is expected to grow at a 3% to 8% rate with increased revenue expected for environmental restoration.

Global energy and sustainable high performance building design.

We expect our us state and local work for municipal water programs to continue to be growth market for us with the growth rate of 10% to 15%.

Many of the large municipal markets that we serve include major cities in California, Texas, and Florida and have strong demand for our services and increases in their funding that'll continue to drive growth.

I would like to highlight for you to areas, we believe to have significant growth opportunities for us in 2020.

One is the us federal government and the second is sustainable high performance buildings.

The us federal government is our largest client and it's been our primary clients since the very founding of the company.

We built a portfolio of $18 billion in current contract capacity that we can access to support the federal government and rapidly address their priority programs.

Our current contract capacity supports water and environmental agencies. The department of Defense USAA Agency for International development in the Department of state.

And most recently, we've added new contract capacity to facilitate the delivery of our high end advanced analytics and federal IP services.

Just a month ago.

More than 1.4 trillion dollars in fiscal 2020 spending bills were approved by the us Federal government.

The final budgeting includes increases in department of defense civilian agencies in international development spending all core markets for us here at Tetra Tech.

Now today without the delays in shutdowns and Sequestrations that we've seen in prior years and the budget already in place. We're very optimistic that this will result in increased federal government revenues for us this year.

Another high growth area for US is the design of sustainable high performance buildings.

We're seeing demand for high and sustainable buildings continue to increase and this is for buildings that generate more power than they use buildings at capture recycled water and buildings at minimize waste.

We've been investing and growing a high performance buildings practice into our global operation now for the last few years and we today have a practice with $250 million in annual revenues that operate worldwide.

Our goal pretty simple is to double this again to $500 million through a combination of organic and acquisitive growth. We're now expanding when this market for both global clients and for regional markets in the United States, Canada, Asia Pacific and the United Kingdom.

Sustainable building designs is an excellent application of our high end design capabilities and innovation of leading with science as an approach.

Working with our clients were advancing the state of the art in city infrastructure with some with different facilities that are better to live in and to work in while reducing their impact to the environment.

I'd now like to present, our guidance for Q2.

And for all of fiscal year 2020, our guidance is as follows for Q2 net revenue.

We are providing guidance of $580 million to $630 million range within associated adjusted diluted earnings per share of 73 cents to 78 cents.

For the entire year, our revenue guidance remains the same at a 2.4 billion to 2.6 billion of net revenues with and associated updated adjusted earnings per share of $3.40 to $3.55, which includes a raise of the lower end by five cents based on the pro.

Forms that we.

Produced this first quarter.

If you're following along on the webcast you can see the assumptions that are included it does assume that we have 14 cents per share of intangible amortization and that's a noncash charge that an effective tax rate for the remainder of the year of 23% 55, and a half million average diluted shares outstanding and as in the path.

Most of this guidance does not include any contributions from future acquisitions that may occur during the year.

In summary, we had an excellent first quarter and start the fiscal year 2020, setting first quarter records for revenue net revenue income and earnings per share. Our backlog reached another all time high for services that are aligned with our long term growth strategy that provides us with excellent visibility throughout the region.

Under the year and as we begin fiscal year 2020, we're seeing increased opportunities and demand for our leading with science approach in advanced analytic solutions reaffirming our strategy to focus on these high end services in water.

Environment and sustainable infrastructure.

With that now Michelle I'd like to open the call up 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 questions. Please remember to mute the audio function on your computer before you speak if you're using a speakerphone. Please pick up the handset before passing any numbers. If he would like to ask a question. Please press star one on your Touchtone phone. The first question comes from the line of Sean Eastman with key.

Bank capital markets. Please proceed with your question.

Hi, Tim Thanks for taking my question.

First one for me as if we look at the corridor relative to our expectations I'd say, probably cie margins and the underlying strength in the commercial business were kind of the positive surprises.

Just hoping we could get a little more color on.

The underlying drivers for the commercial business.

And how sustainable they are as we move through 20.

Great question Sean.

I would say that CGS margins was actually one of the the bright spots, particularly bright spots in the quarter I think that when you adjust to the.

Margin performance of CNG for the Wy. GE addition, as we begin to increase their margins of CNG was about 12%, which actually brings them within about one percentage point of TSG. So that increase is very promising.

It was driven really in two areas of the topline growth, which you saw up at 14%.

We saw a really strong growth both in us commercial and international Canada across the board has been very strong for us.

With respect to us commercial to give you a little bit of insight looking forward. If you followed along on the webcast you'd see we actually called out the task orders are incremental on new orders. We received in the quarter are the biggest the one sector that stood out a bit more on our backlog growth in the quarter was actually us commercial with a book to Bill.

We'll have just about 1.2 that we grew our backlog book to bill in all areas, but us commercial was the strongest which gives us more confidence in.

Additional work flow through and typically our us commercial work has higher margins than some of the other sectors, such as state and local or U.S. government and so I think thats a good indicator that we're going to continue to see expansion and the C.G. margins as we move through fiscal year 2020.

Hi, Thanks line, then and maybe we could just kind of quick update on.

How the Wi G integration process is tracking relative to expectations I know thats kind of an important margin swing factor as we move through the year as well.

Yes that is this two parts about WG, one I would talk about.

The progress, we're making with respect to margin expansion from what was essentially a breakeven business to a 10% run rate I would say, we're tracking exactly on what our expectations would be we don't really see it is either front end or back end loaded, but a very linear increase across the year, we read about a couple of percent.

Say roughly 2% margin here in the first quarter, which is right on.

Right in line with what our expectations are financially I expect that through Q2 will move up to probably a 4% probably a six in Q3 and then in Q4, we'll actually see it increase with the end of Q4 being at 10%.

We do have the ability I would think to increase that as far as progress to be a little bit faster, but the other portion of integration is really synergies both culturally and end markets with respect to our other operations in the company and I would say in that area.

Operationally, it's actually exceeding our expectations and what I mean by that is we've seen multinational clients that we have in the us in Canada that have ongoing operations in the United Kingdom have actually given us work and our program managers and technical staff now actually represent that we have the on the ground local.

Capability to support it for permitting and other technical resources in country and that's translated into work already for our commercial clients and we've actually submitted a significant number of proposals to many of the different major water utilities in the United Kingdom in Northern Ireland that we expect to be very competitive with that would have never been submitted.

With WG as a standalone, so actually the cultural embracing embrace mint of Wi G by our Canadians.

Our Americans uneven Australians has far exceeded my expectations in the number portfolios that have gone out.

Our real good indicator that we should be at the top end of revenue synergies as we move through the year.

Excellent and last one from me higher level.

And you guys talked about strategically growing.

In advanced analytics.

Business I was just curious if you could break out roughly what the mix of in advanced analytics is today and where do you think that could go in say the next three years.

Well I will tell you is while it's a smaller has the company.

And we spoke of this in the previous quarter that we believe it's all.

And advanced data analytics is a bit under 10% of the company's revenue currently the fastest growing area for us in the federal government has actually our IP and data analytics.

I would say that I would want to differentiated from general It services that you may find other professional services, providing the 80 data analytics that we're focused on our highly domain or technical and client focused. So for example that I spoke of in the prepared remarks for the EPA, where guarding advanced analytics that.

We are doing for ecological evaluations will be an example.

For the U.S. State Department were using data analytics.

More and more for the monitoring and evaluation work, that's being done allows them to more effectively evaluate the progress being made for the state department expenditures that are being put in place and so these are highly intertwined between the domain expertise, which tetra tech as a market leader on the environment the water sustainable design engineers.

As the cross integration of the advanced analytics, it's a different way to approach the market.

It's a much less competition and is really creates a different platform for competing because it's not how many people you have as how capable and what type of expertise to have in these end market domain and how can it actually be automated through.

Artificial intelligence and advanced analytics, and Thats, where were making great progress and it actually could.

Be the very front end of a new wave that will transform even that business for us. So.

I think I hope that helps with respect to what the dollar amount is how quickly it's growing in how we see it fitting.

Very helpful really appreciate it thank you.

Great. Thank you very much on.

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

Hi, Thanks, and congratulations on a good corner.

Thank you Paul.

So first I was just hoping you could comment a bit on the acquisition pipeline, what you're seeing and the market and on if you could just touch on your capital allocation strategy I know it so it's been pretty balanced, but if there any sort of flight preferences as it stands right now on in terms of M&A versus the repurchase et cetera.

Yes, good questions of the pipeline for acquisitions continues to be.

Very robust it very full.

The one thing that we're very encouraged here our identification of partners that would join Tetra Tech.

To use the word that that would merged with us because we actually like them to come onboard and actually lead their technical disciplined for the corporation.

They are generally sourced from our 20000 technical staff that we have in the company and I'll tell you that there is no shortage of opportunities.

We do have specific areas that we're looking for so we've added our own filter to this with respect to priorities.

One area that I, just spoke of that as a higher growth area for us in fact, the fastest growing.

With the us federal government Ms advanced analytics.

That's an area that we're looking at and we have many opportunities again for folks to come join us and actually help lead that practice for the corporation, which is a different practice than just a monetization by affirm looking to sell a high performance buildings, we have certain geographies that we think that high performance building design is a.

Fast growing area.

And we have many opportunities there to actually round out and moves to a market leading position.

And then there's a water opportunities in the UK that we would actually like to add additional water consulting.

Capability in the UK. So we have more folks on the ground there and municipal work in Australia, So there's plenty of different areas that.

We have openings for and that would fit well with the company and there's no shortage in the pipeline.

With respect to capital allocation.

Number one.

Priority is we want to use our balance sheet to bring in the best partners possible to increase our competitive position not to make tetra tech bigger, but to make tetra tech better to actually bring in new thought leaders, new technical leaders and so that has a number one priority for our balance sheet and the areas that we're focused and I just and just spoke to.

However, we also were committed to and we're supportive of of our stock we think that theres more upside with respect to valuation of the company. We think the best is still yet to come for us and so we're committed to a relatively consistent disciplined.

Repurchase program that you've seen for the past many years.

The company the board of Directors did approve a 200 million dollar addition to the buyback.

That should not be seen as a.

Signal that we're changing our buyback program or our disciplined approach to being in the market, but just giving more visibility and flexibility into the future. So you did see this last quarter. We've been about 25 million were 21 million. This last quarter, which is a matter of timing and so I would say both on acquisitions I just shared where we're looking.

But as far as disciplined approach on the financial side, we expect that those acquisitions will be accretive on a GAAP basis in year, one and on a buyback we're looking for it to be.

On a very regular disciplined manner, but if there is something that is larger.

And that we would want to put a priority to weaken actually take action on all of those fronts as I'd indicated for acquisitions, and we would use buyback as a lever to deemphasize in order to move aggressively.

To add the right partners to the company.

Hi, Thanks, that's very helpful. On second just given that it is an election year.

And I know that generally Tetra tech has fared pretty well on no matter, what the administration, but.

Could you just speak to what extent election years tend to cause disrupt short term disruption.

On the versus the programs that where you feel.

Well just kind of continue and.

The the spending levels should sustain through through the election I'd be helpful. Thanks.

Yes. It is interesting Noelle I would say that.

Youre right, so tetra tech's been.

In existence for roughly getting close to 55 years, we've seen move from Republicans and Democrats Democratic back to Republicans and we've not seen in particular.

Change in our.

Our revenue from the federal government. However, I will say, we've generally seen a pickup in election years and the reason is neither side of the I'll wants to be someone to provide fiscal constraints to the budget. So I will say included on the.

Presentation slides, we've seen increases in budget in defense, so a fewer.

Hawkish, you've seen increases we've also seen increases in fact, some of the largest budgets that EPA has seen in.

In the decade, and so EPA is up we even saw the state Department, which then USAID agency for International development is a component their budget is actually up slightly. So this is really budgets up across the board and this is really nobody wanting to create a negative environment moving into an election.

In cycles, so for fiscal year for our fiscal year 2020, which concludes at the end of September before the election.

We actually see.

Full funding and spending and.

We think it will be robust.

Throughout this year after the election, we'll see what actually transpire, that's another matter, but certainly well through our fiscal 2020, we see very strong less spending if both of these clients.

Great. Thanks, one last quick question.

Q1 are you given.

A lot of these natural disasters that have been occurring are you seeing more opportunity around larger multi year sort of avoidance or given mitigation programs and then quick bookkeeping question could you give us that backlog contribution from company wide JV in the quarter.

Yes, I can give you both of those so with respect to more opportunities for natural disaster mitigation.

We actually saw significant funding come out of the federal government for disasters that took place and 2017 and prior.

As measured well in excess of $10 billion and it includes with the call community development block grants and with this is is grants to communities for mitigation.

And this is right up the Ali for Tetra Tech mitigation means flood protection Floodwalls moving of infrastructure to areas that would be more protective from low lying.

Events in the case of Waterfloods.

Our offsets and other mitigation efforts in the case a fire.

Instances, where it would be for earthquakes additional structural and seismic improvements all of this is the front end consulting prioritization and even moving into engineering and so we actually have seen movement and there was a commitment to our percentage of all disaster dollars being put to up.

Front.

Preparedness and mitigation, so, let's do something to mitigate it before it hits. So these are all things that are exactly where we'd be huge advocates and fit to.

To our market.

Okay.

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

Great. Thanks.

I think most of my kind of bigger picture question someone asked and answered, but I thought it would be worth clarifying here. Since you are calling out your state and local business, excluding the storm or the disaster response work specifically, noting that.

Excuse me the last three quarters of the year have notable headwinds if you could quantify those headwinds just so that we got our models kind of baseline correctly and our expectations set correctly as those quarters unfold.

Yes.

Absolutely in the us as a good question and just to to complete.

With the answer to the to know wells, a Wi GE essentially contributed nothing to our backlog growth. They contributed $35 million of revenue in the quarter and they contributed about 30 536 million an order. So when you take the orders minus the revenue it was about a push so WGN and itself did not.

Contributed to the increase in the quarter for us.

For backlog and as the WG UK operation.

With respect to the headwinds.

We see about.

Make sure I get the precise numbers here.

In the first quarter, we saw a reduction of around $15 million of year over year in the response work, which is the quarter that just happened and that was a number that we used to.

Bob.

Two presents some of the adjusted numbers without the.

Response work on the number does get bigger Q2 s about 25.

So the quarter coming up we see about 25 million Q3 35.

In Q4 about 30.

So those are the numbers that.

And those in numbers that we'll see as headwinds with respect to the overall state and local but when you actually adjust for those out that's what I was referring to this 10% to 15% municipal growth in our state local activities and by the way those numbers because those are in the future for Q2, three and four that's assuming.

That there are no events. So if there are any type events are we mobilized our we actually respond to anything that would offset these numbers accordingly.

Okay Super that's helpful. And then I guess kind of the obligatory question here is you guys beat your midpoint by seven cents yet.

The midpoint of the annual guidance only went up two and a half sense I was wondering Dan if you could just give us some perspective is behind that thought process and why didn't flow through the the full seven cents that you'd be to the mid point.

Yes, Thats a good question Thats a really good question no. We had a we had a very good first quarter, you're right. We did beat by seven cents.

And that.

We looked at it it's called prudently or soberly.

Were 90 days into the into the fiscal year, we're one quarter in.

And actually as of this both phone call. This phone call her conference call from one quarter and one month then.

We've got another.

Update on both our performance on Q2, once we hit mid year, and we'll look to update that but it just felt that it was so early in the year that we wouldn't make a move on either our revenue where the top end of our earnings but no doubt with a seven cents beat we did move our bottom end up five cents and covered most of all of that so.

I would say there should be nothing read into that with respect to cautionary.

Not the intent it was just being prudent or appropriate given.

Being so early in the fiscal year.

Great. Thank you that's all I have for today.

Great. Thank you very much Andy.

Thank you. Our next question comes from the line of Ryan Connors with Boenning and Scattergood. Please proceed with your question.

Thank you good morning.

Wanted to just actually stick with that last theme right there on guidance and just looking actually at the revenue guidance.

The mid and the higher end look certainly healthy, but the low end to 2.4 really implies minimal growth at all year over year in revenue. So I'm just curious what the the different variables are that gets you to the high and low end of that guidance.

That leads you to keep that low end in place given the backlog dynamics, you've talked about everything looking looking pretty strong.

Yes, so thats a good question and.

So let me share with you how we're looking at.

The numbers for guidance both at the low in the high and of course, the imputed midpoint.

Last year, we were at $2.4 billion and I do understand that the low end for this year of our guidance range on net revenues 2.4 billion, but.

Last year in that 2.4 billion. There were two revenue contributions that currently don't exist and that we actually would adjust what we see last year. So the two items our number one our Canadian midstream construction practice, where we were doing turn key activities contributed contributed $70 million of net revenue.

That is not in.

Our revenue stream.

And the disaster response work was $100 million and I just gave the details of the breakdown of that by quarter by the way. We were tried to be very open and very transparent on the contribution of that through this last year, because we knew this year on year comparison would be.

In place so if you take.

2.4 from last year, if you take out.

$170 million, which is 100 from disaster in 70 from our midst Scream Canadian pipeline work that would say last years numbers really two to three zero. If you compare to 230 to the midpoint of our guidance for this year at two five that's a 12% increase just at the midpoint.

And that is a better way and at the low end.

That you'd mentioned at our 2.4.

That would represent an 8% increase obvious I can use the high end it into moves us well into the upper double digits. So really our range moves from sort of at 8% to 18% with the midpoint add 12 ish. If you actually look at what our ongoing operations are producing what our guidance represents.

Got it okay apples to apples good.

Now the other my other question was you mentioned you called out a few.

Kind of.

Opportunities here like the sustainable buildings.

Federal side, but one thing you Didnt talk about that you've talked about in the past is emerging contaminants.

On the water side is specifically P. foster.

You just give us an update there what's what you're seeing how that markets developing for you.

You know, it's we have spoken past quarters about the P. Foster PFS, which are for those that are less familiar with the the acronym nuts.

And so chemical components of fire fighting a fire retardancy that are used primarily add to defense facilities, where there had been practicing.

Or employing firefighting.

Chemical uses or even add.

We're fighting stations or airports, where other activities have taken place.

It actually is.

It is one of the big drivers on the environmental portion primarily the groundwater work that we're doing most of the work. We're doing right now is for the department of defense and.

Thats, a really for all three branches Army Navy.

And the Air Force and the work is a first for identification of the presence of these chemicals and what fits very well for Tetra Tech and we're one of the leaders in this which is modeling for fade and transport fate is what it may actually convert to over time as it moves through the geology, and then of course transport Where's it going and how fast it.

What impact the surrounding municipal water, which we've not only had success in the us and I would say, it's it's growing quickly with respect to percentage of the environmental work that we're doing for DMD, but we're also doing this work in Australia for their department of Defense and we're just beginning to do this with Modi the Ministry of defense in the UK.

Okay. So those are the three.

The three defense agencies that we're working in.

We have not seen we although we've done one demonstration pilot program self performed for.

Treat ability with respect to what you actually do with it to treat it once has been identified.

But this is very early is growing very fast. It's one of the most frequent topics that we are discussing contracting for with our clients and of course the surrounding communities are very interested and this is very early because there are no enforceable action levels for P. Foster yet that have come out either at the state level or the federal.

Level, which is environmental protection agency here in the United States in so I would say this is.

The old proverbial, where are we in the nine innings.

Maybe the bottom of the first store the top of the second but were very early in this got it.

Got it Okay, and then what I did have one last one Dan.

I know this is a topic, we haven't heard about in awhile, but in terms of the hunters point. It seems like the new looking at some of the news flow Tetra Tech continues to get vindicated.

I guess I was just another study last week out, saying that there's not as much.

If an issue there and radiation as some of the Alarmists had said in the lawsuit and so forth.

But but in terms of process and it was not much you can say about the legal process, but are there certain milestones or a timetable where we can kind of get where we'll get to closure on that.

Anything anything you can share with us on on how that kind of plays out.

Well.

I would see us what to look for and we we can do a better job. Although we tried to remain because of the legal nature of the of the topic. We've tried to remain.

Quite on this matter and let the legal process feet.

Play out you've certainly seen that we vehemently Stan deny.

These as salacious.

Allegations in standby the work that one of our divisions performed but we've had a number of these.

Susi civil suits dismissed with prejudice and so they are gone and so we can perhaps make those a bit more visible, but a number of them have been dismissed with prejudice others have withdrawn on their own and so the number has moved you want to say in our favor and we'll we'll attempt to make that visible to the investment community, but I would say there.

Most of it is just a.

Legal process that takes time and will.

Take its own life.

We feel with.

I hate even call it favorable with.

Actual recognition of what.

The status is which is.

That the work was done was completely in accordance with the work we were contracted for and met or exceeded all contractual components that to.

That we performed.

Well, it's good to hear we'll look for that and.

Thanks, Thanks, a lot for your time this morning.

Absolutely right.

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

Hey, good morning.

Furthermore.

So we've covered quite a bit this morning lot of my.

Original questions already answered, but the one area. We havent gone all grew a little bit as wondering if you could give a bit of an update as to what thoughts around capex needs.

And maybe some areas that may need to be worked on whether it be office space or investment will.

So many things that we might be looking at whether it's something that you already have into your model for this fiscal year with maybe some things we should be thinking about for for the thank you.

Mark I'll talk about the with the strategy and sort of the overarching approach I'll, let Steve than actually follow up with some specific numbers to put it in context of where we're trending too, but actually as we continued to shape the portfolio to more and more front end work that requirement for.

Any type of self performance activities that would be.

Less field trucks less.

That type of activity will drop our.

Our pp near property plant equipment, which that goes into depreciation so from capex on that side, we become less and less in later in lighter capital intensive.

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The the.

Capex that we do have is actually focused on professional service items, such as the computers and another analytic tools necessary, we have actually dropped our capex requirements with respect to our back office 80 requirements, because we have gone as a corporation largely to the cloud and in fact, we're moving our goal.

As to move essentially a 100% of the cloud so even eliminates the IP.

Purchases of hardware than continues to decrease our.

Depreciation numbers and gives us high reliability faster.

Faster turnaround in speed.

But with respect to with respect to numbers, where we have trended over the past couple of years among our focuses.

For this year, Steve can give you a few numbers sure so.

I think over the last couple of years and into this year.

Our capex needs.

Two about.

5% of revenue.

And if if you were following Tetra tech.

For a number of years prior to.

Getting out of the RCM business as that that Capex requirement was well above 1% of revenue. So we've we've brought that down and it's.

Quite appropriate for for where we're headed in the future one thing I'd like Mark is and we're very focused here at Tetra Tech on EBIT or operating income and D. as far as unconcerned depreciation of work, we're purchasing something that we need that's part of what our business requires and so I actually im very encouraged to watch our.

EBIT.

Our earnings before interest and taxes become very similar almost identical to our EBIT deed with depreciation. So those two should converge to be essentially the same and it's probably 50 basis points or even less right now difference between those two which is a really good indication of what the operating.

Earnings power is of the business.

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

Hi, Thanks. Thank you off a couple of follow up on not the high performance building and thanks for the detail on that and I know you've mentioned the 200 the target to double the revenue on that business. Just the 250 million current annual run rate is that so is there.

Similar rate of subcontractor revenue in that or is that can I looked that is a net revenue number if you can share. Please.

On that it actually has less subcontractor most of it a self performance.

Because the high performance does building design the work that we're focused on primarily as MVP. So some mechanical electrical and the the water hydraulics for water delivery and fire suppression work and so that's the work we're focused on we do essentially almost all of that in house, whereas other investigative and study and research work.

We may have.

Third party laboratories or maybe even.

Marine vessels that we subcontract to collect data and thats the for the most part not the case with respect to our high performance building, So I would say the.

The net revenue of that number's, probably 90%.

So it has a much higher sell performance component than other revenues across the company them yet.

Thank you and how can you remind me how long has it been that you've had this target maybe it's been two quarters and did something change in the competitive landscape that that gives you that confidence to double that are Amin is that your international scale. Now can you comment on that please yes been last couple of quarters. I think you saw the first the first time, we came out with this in.

Actually identified it as an area that we were going to invest in C. C that it was more material contributor was in 2019. The reason we identified it as a key driver is it definitely fits in with the environmental sustainable focus of the company. It has with respect to its end clients.

Many of the.

Many of our investors have have recognized that it represents a big E of DSG.

Without without doubt and on the environment side and with respect to what has given us more.

Confidence with respect to the progress will make.

We're seeing and grow at.

Probably a.

At a double digit rate organically and with the addition of W. wide GE in the UK.

Did bring a high performance building on the government side.

Thats, given us much better visibility and opportunities in a new marketplace that we had had before and so I think it's really having a good foothold in the presence in Australia with our.

Primary location for the buildings practice in Melbourne is growing well us we have both east and West Coast and then of course with.

Now we knew footprint in the UK is allowing us to service the global clients that we were primarily limited to went back a couple of years ago. Just the use so we feel the marketplace is much bigger for us we think our footprint actually.

Represents where our clients have facilities and the opportunities and that's allowed us to come out with.

Stated goal of where we'd like to take this business, which is doubling it.

Thank you Dan and on WG real quick on a follow up is on do you mentioned the current margin did you see I I know what it was public before you bought it but I thought you mentioned something about single digits or low single digits low single digits on the first quarter, we're probably about 2%.

And the very first quarter. It was essentially a breakeven which would have been the fourth quarter, which was a quarter that they joined US. So we have moved it up but in Q1, they were about a 2% contribution for the revenues.

Okay and last me you mentioned Muni program growth in California, Texas, and Florida was that our water utility Capex announcement your stake or can you would say an anecdotal or just customer feedback.

No thats actually the numbers that were seeing internally with Tetra Tech's revenues growth and those are the areas that are primarily driving the topline growth.

So the numbers at Tetra Tech is seeing in our municipal water.

Revenue growth is about 10% I'd call that both our state city and county work. So I saw that collectively our municipal work and we're seeing began to 10% year over year growth. We have seen in the past we've seen even faster growth we've seen actually through too much of 2019 were in the 20%.

This is the 10% to 15% that we've stated and if you'd asked where are we seeing the biggest contribution toward that growth, So thats, where the California, Texas, and Florida, and we see large.

Initiatives in funds and bonds that have been put in place in all three of those that give good visibility to their funding levels to keep that moving forward throughout 2020.

Okay. Thank you very much that's that's all from me.

Good day.

Thank you. This this concludes the another question answer session I'd like to turn the conference back over to Mr., Dan batch at the conclusion.

Great. Thank you very much Michelle and thank all of you for being on this call for your very insightful questions and your interest in Tetra Tech.

Look forward to another strong quarter performance, particularly building on a record first quarter performance that we just finished and I really look forward to speaking with all of you again next quarter I Hope you have a great rest of the weak and have a good day. Thank you bye.

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.

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Good morning, Thank you for joining the Tetra Tech earnings call by now you should have received a copy of the press release. If you have not 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 Dot com.

This call is being recorded at the request attach attack 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 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 the risks described and Tetra Tech's periodic reports filed with the FCC, except as required by law Petrotec tests.

Patient to update as forward looking statements.

In addition, since management will be presenting some non-GAAP financial measures as reference as the appropriate GAAP financial reconciliations are posted on the investor section of Tetra Tech's upside.

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, what that I would like to turn the call over to stand by truck. Please go ahead Mr. backtrack.

Great. Thank you very much Michelle and good morning.

Welcome to our fiscal year, 2021st quarter earnings Conference call.

We had an excellent first quarter and start to our 2020 fiscal year with double digit growth in net revenue earnings per share in backlog in a broad based strength across our business in fact, our international U.S. spend to work even exceeded my own expectations for the quarter.

Backlog grew to $3.17 billion up sequentially and year on year to a new record high providing us with excellent visibility for our fiscal year 2020.

See strong demand across our end markets and water environment and sustainable infrastructure services, and our leaving with science approach in advanced analytic solutions are very well aligned with our clients needs.

In addition, our recent acquisition of Wu way GE in the United Kingdom, [laughter], providing us with new opportunities to offer our water and environmental services throughout the region.

I'll begin today's presentation with an overview of our first quarter results in our business outlook, well, Steve Burdick, Our Chief Financial Officer will provide additional details.

The answer performance and our capital allocation.

We had a very strong first quarter setting new records for first quarter performance across multiple metrics, including net revenue our adjusted earnings per share and backlog.

Our net revenue was $614 million up 11% from the prior year he knew first quarter high for us.

We generated an adjusted earnings per share of 84 cents for the quarter up 20% from last year also first quarter high and our backlog best indicator for future growth was up 13% year over year, increasing to $3.17 billion, an all time high for the company.

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

In the first quarter, our growth was driven by strong performance across our business, especially for international and us federal clients.

Our international net revenue was up 25% year over year, driven by growth in multiple geographies, including water environment and energy related work in Canada, and Australia, and our expanded the United Kingdom business from the acquisition WHA last year.

Worked for US federal clients was up 12% year over year and represented 28% of our net revenue in the quarter.

The increase in our US federal work was driven by our consulting work for the department of defense.

Civilian agencies and for the U.S. State Department.

Our us commercial that revenue was up 5% comprise 24% of our overall business in the quarter commercial growth was driven by strong performance and sustainable high performance building design environmental restoration and renewable energy services.

[laughter] or state and local revenues for municipal water infrastructure and planning services grew at 10% year over year this quarter.

However, this growth was offset by having less disaster response work in the first quarter of 2020 than we had in 2019 as a result, our overall state and local revenues reduced by 7% on a year on year comparison.

This effect this offset of reduced disaster response work will even be more pronounced venue in quarters, two three and four which is already incorporated into our guidance.

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

Our TSG and CNG segments. Both grew in the first quarter as a result broad based demand for our high end services.

The GSP segment was up 9% with strong growth and broad based water and environmental government services.

GST, excluding the disaster response.

Grew at a very strong rate at 14% year over year.

Our GSP margins were in line with our expectations at 12.8% for the quarter, which is up 50 basis points from last year.

Our CHG, which is our commercial and international group.

Segment grew by 14% year over year and delivered a 10.8% margin in the quarter.

Our CSG segment exclusive of the Wi GE acquisition delivered to 12% margin up about 100 basis points from last year.

This is a direct result of strong performance with our us commercial clients as well as our operations in the Canadian Asia Pacific and South American markets.

As I've mentioned earlier, the integration of W. White GE is going very well.

I've already improved their current margin contribution to the low single digits through this initial transition and they are on plan to achieve a 10% margin on a run rate by the end of the fourth quarter of this year.

For backlog.

Backlog was up 13% year on year and up sequentially also resulting in an all time high for the company.

The first quarter, we won new programs and task orders for 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 high end analytical and water related services than example is the New recent award we had with United States Environmental Protection Agency for ecological Human Health studies and advanced analytics.

We're also awarded a new contract for international work with US Army Corps of engineers with the Middle East District, and we're award with multiple task orders with US Army to provide environmental and engineering design services.

This broad base backlog provides us with excellent visibility throughout fiscal year 2020.

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

Okay. Thank you Dan.

As Dan just highlighted our revenue operating income earnings per share backlog for the first quarter 2020 were the best first quarter results in the history of Tetra Tech.

GAAP basis, the fiscal 2021st quarter revenue of $798 million increased 11% when compared to the revenue of 770 million in the first quarter first quarter of fiscal 2019.

Likewise, the fiscal 2021st quarter net revenue of $614 million increased 11% when compared to the net revenue of $553 million in the first quarter fiscal 2019.

Overall these revenue increases resulted primarily from our us commercial environmental and water engineering and consulting work.

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

And the continued growth of our U.S. government business, especially our high end technology services with our civilian agency clients.

On a GAAP basis, our operating income in earnings per share increased at a higher percentage than our topline revenue increases.

Our operating income for the first quarter of 2020 was $63 million compared to $56 million last year and our earnings per share was 85 cents compared to 75 cents last year.

On an on an adjusted basis, we generated 20% increase in our quarterly EPS year over year and this increase was driven not only by revenue growth, but also by our hardware higher margin printing consulting and engineering services.

I do want to point out that due to our decision in the fourth quarter fiscal 2018 to divest our Canadian pipeline construction business. We did sell a portion of our assets, which resulted in a gain of about one cents vps, which is the reconciling difference between our GAAP and adjusted EPS result.

We do expect to have further asset sales over the remainder of fiscal 2020, which we will benefit our cash position the rest of this year.

Now related to cash was used in operations for the first quarter.

For the first quarter those totaled $18 million the first quarter operating cash is typically negative due to normal seasonality.

In fiscal 2020, we anticipate generating positive cash flows from operations, which are expected to exceed our net income.

Our net debt is $224 million and our net debt to EBITDA settled at about <unk> 0.8 times.

Due to our continued strong annualized cash flows from operations.

And lastly, our day sales outstanding decreased to 73 days as of the first quarter. This is an improvement of 10 days from last year and four days from the last quarter.

Furthermore, our DSO has not been this low since the fourth quarter of 2010.

And as we continue to refine and improve our business outlook. We anticipate we could further improve our best in class DSO.

Our long term capital allocation strategy calls for balance of investing in the growth of our business managing the balance sheet and returning cash to our shareholders.

Our continued strong annualized operating cash flow allows us to do just that.

We've been able to invest in strategic areas, while growing the top and bottom lines and we have a strong pipeline of strategic M&A opportunities, which which can can.

Contribute further to an expanded geographic presence.

Hi, and technical capabilities and new customers in client service opportunities.

Regarding our dividend program, we paid up $8.2 million in the first quarter.

Im happy to report that our board of directors approved our 20 threerd consecutive dividend, which will be paid in the month to February at a rate of 15 cents per share.

Since we started our dividend program, we have increased the amount each year and we will revisit we will revisit the amount next quarter and provide an update at that time.

Furthermore, our board of directors approved an additional $200 million stock in stock buybacks.

To supplement the previously approved program, which has $104 million remaining.

This gives us a $304 million of capacity under the approved stock buyback programs.

I'm very pleased to share these outstanding financial results for the first quarter and I want to thank you for your time today, and I will hand, the call back over to Dan.

Great. Thanks, very much the.

I'd now like turn to our outlook for the 2020 fiscal year.

As we enter fiscal year 2020.

The strong growth across all four of our major customer 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 and consulting and engineering work, particularly in Canada, Australia, and our new UK based operations.

We expect our us federal work to be almost 30% 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 across our civilian department of defense and International development service levels.

For us commercial work is expected to grow at a 3% to 8% rate with increased revenue expected for environmental restoration.

Noble energy and sustainable high performance building design.

We expect our us state and local work for municipal water programs to continue to be growth market for us with the growth rate of 10% to 15%.

Many of the large municipal markets that we serve include major cities in California, Texas, and Florida and have strong demand for our services and increases in their funding they'll continue to drive growth.

I would like to highlight for you to areas, we believe to have significant growth opportunities for us in 2020.

One is the U.S federal government and the second is sustainable high performance buildings.

The U.S Federal government is our largest client and that's been our primary clients since the very founding of the company.

We've built a portfolio of $18 billion in current contract capacity that we can access to support the federal government and rapidly address their priority programs.

Our current contract capacity supports water and environmental agencies. The department of Defense US Agency for International development and the department of state.

Most recently, we've added new contract capacity to facilitate the delivery of our high end advanced analytics and federal IP services.

Just a month ago.

More than 1.4 trillion dollars in fiscal 2020 spending bills were approved by the us Federal government.

The final budgeting includes increases and department of defense civilian agencies and international development spending all core markets for us here at Tetra Tech.

Now today without the delays and shutdowns and Sequestrations that we've seen in prior years and the budget already in place. We're very optimistic that this will result in increased federal government revenues for us this year.

Another high growth area for US is the design of sustainable high performance buildings.

We're seeing demand for high and sustainable buildings continue to increase and this is for buildings that generate more power than they use buildings at capture recycled water and buildings at minimize waste.

We've been investing and growing a high performance buildings practice into our global operation now could last few years and we today have a practice with $250 million in annual revenues that operate worldwide.

Our goal pretty simple is to double this again to $500 million through a combination of organic and acquisitive growth. We're now expanding on this market for both global clients and for regional markets in the United States, Canada, Asia Pacific and the United Kingdom.

Sustainable building designs is an excellent application of our high end design capabilities and innovation of leading with science as an approach.

Working with our clients were advancing to state of the art in city infrastructure with some with different facilities that are better to live in and to work in while reducing their impact to the environment.

I'd now like to present, our guidance for Q2.

And for all of fiscal year 2020, our guidance is as follows for Q2 net revenue.

We're providing guidance of $580 million to $630 million range with an associated adjusted diluted earnings per share of 73 cents to 78 cents.

For the entire year, our revenue guidance remains the same met a 2.4 billion to $2.6 billion of net revenues with and associated updated adjusted earnings per share.

$3.40 to $3.55, which includes a race of the lower end by five cents based on the performance that we.

Produced this first quarter.

If you're following along on the webcast you can see the assumptions that are included it does assume that we have 14 cents per share of intangible amortization, that's a noncash charge that an effective tax rate for the remainder of the year up 23% 55, and a half million average diluted shares outstanding and as in the path.

Most of this guidance does not include any contributions from future acquisitions that may occur during the year.

In summary, we had an excellent first quarter and start to fiscal year 2020, setting first quarter records for revenue net revenue income and earnings per share. Our backlog reached another all time high for services that are aligned with our long term growth strategy that provides us with excellent visibility throughout through.

Andrew to the year and as we begin fiscal year 2020, we're seeing increased opportunities in demand for our leading with science approach in advanced analytic solutions reaffirming our strategy to focus on these high end services in water.

Environment and sustainable infrastructure.

With that now Michelle I'd like to open the call up 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 questions. Please remember to mute the audio function on your computer before you speak if you're using a speakerphone. Please pick up the handset before pressing any numbers. If you would like to ask a question. Please press star one on your Touchtone phone. The first question comes from the line of Sean Eastman with key.

Bank capital markets. Please proceed with your question.

Hi, Tim Thanks for taking my question.

First one for me as we look at the corner relative to our expectations I'd tell you probably see I'd margins and the underlying strength in the commercial business were kind of the positive surprises.

Just hoping we could get a little more color on.

The underlying drivers for the commercial business.

And how sustainable are they are as we move through 20.

Great question Sean.

I would say that CGS margins was actually one of the the bright spots, particularly bright spots in the quarter I think that when you adjust the.

Margin performance of CNG for the Wy. GE addition, as we begin to increase their margins CHG was about 12%, which actually brings them within about one percentage point of TSG. So that increase is very promising it was driven really in two areas the topline growth.

To stop at 14%, we saw a really strong growth both in us commercial and international Canada across the board has been very strong for us.

With respect to us commercial to give you a little bit of insight looking forward. If you followed along on the webcast you'd see we actually called out the task orders are incremental new orders, we received in the quarter. The biggest the one sector that stood out a bit more on our backlog growth in the quarter was actually us commercial with a book to Bill.

We'll have just about 1.2 that we grew our backlog book to bill in all areas, but us commercial was the strongest which gives us more confidence in.

Additional work flow through and typically our us commercial work has higher margins than some of the other sectors such as state local or us government and so I think thats a good indicator that we're going to continue to see expansion in the C.G. margins as we move through fiscal year 2020.

Thats excellent and maybe we could just kind of quick update.

How the Wi G integration process is tracking relative to expectations I know thats kind of an important margins swing factor as we move through the year as well.

Yes that is this two parts about WG, one I would talk about.

The progress, we're making with respect to margin expansion from what was essentially a breakeven business to a 10% run rate I would say, we're tracking exactly on what our expectations would be we don't really see it is either front end or back end loaded, but a very linear increase across the year, we read about a couple of percent.

Roughly 2% margin here in the first quarter, which was right on.

Right in line with what our expectations are financially I expect that through Q2 will move up to probably a 4% probably a six in Q3 and then in Q4, we'll actually see it increase with the end of Q4 being at 10%.

We do have the ability I would think to increase that as far as progress to be a little bit faster, but the other portion of integration is really synergies both culturally and end markets with respect to our other operations in the company and I would say in that area.

Operationally, it's actually exceeding our expectations and what I mean by that is we've seen multinational clients that we have in the us in Canada that have ongoing operations in the United Kingdom have actually given us work in our program managers and technical staff now actually represent that we have the on the ground local.

Capability to support at Fort permitting and other technical resources in country and that's translated into work already for our commercial clients and we've actually submitted a significant number of proposals to many of the different major water utilities in the United Kingdom in Northern Ireland that we expect to be very competitive with that would have never been submitted.

But WG as a standalone, so actually the cultural embracing embrace mint of Wi G by our Canadians.

Our Americans and even Australians has far exceeded my expectations and the number portfolios that have gone out.

Our real good indicator that we should be at the top end up revenue synergies as we move through the year.

Excellent and then last one for me at higher level.

You guys talk about strategically growing.

And advanced analytics.

Business I was just curious if you could break out roughly what the mix of.

And advanced analytics is today and where do you think that could go in say the next three years.

Well I'll tell you its while it's a smaller is the company.

And we spoke of this in the previous quarter that we believe it's all.

And advanced data analytics is a bit under 10% of the company's revenue currently the fastest growing area for us in the federal government is actually our IP and data analytics.

I would say that I would want to differentiated from general IP services that you may find other professional services, providing the data analytics that we're focused on our highly domain or technical end client focused. So for example that I spoke of in the prepared remarks for the EPA, where guarding advanced analytics.

We are doing for ecological evaluations would be an example.

For the US State Department were using data analytics.

More and more for the monitoring and evaluation work, that's being done allows them to more effectively evaluate the progress being made for the state department expenditures that are being put in place and so these are highly intertwined between the domain expertise, which tetra tech as a market leader on the environment the water sustainable design engineers.

As the cross integration of the advanced analytics, it's a different way to approach the market.

It's a much less competition and is really creates a different platform for competing because it's not how many people you have it's how capable and what type of expertise to have in these end market domain and how can it actually be automated through.

Artificial intelligence and advanced analytics, and Thats, where were making great progress and it actually could.

Be the very front end of a new wave that will transform even that business for us. So.

I think I hope that helps with respect to what the dollar amount as how quickly it's growing and how we see it fitting.

Very helpful really appreciate it thank you.

Great. Thank you very much on.

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

Hi, Thanks, and congratulations on a good quarter.

Thank you Tom.

So first I was just hoping you can comment a bit on the acquisition pipeline, what you're seeing and the market and.

If you could just touch on your capital allocation strategy I know it so it's been pretty balanced, but if there any sort of play preferences as it stands right now on in terms of M&A versus repurchase et cetera.

Yes, good questions of the pipeline for acquisitions continues to be.

Very robust very full.

The one thing that we're very encouraged here our identification of.

Partners that would join Tetra Tech.

We'd like to use the word that would merged with us because we actually like them to come onboard and actually lead their technical disciplined for the corporation.

Generally sourced from our 20000 technical staff that we have in the company and I'll tell you that there's no shortage of opportunities.

We do have specific areas that we're looking for so we've added our own filter to this with respect to priorities.

One area that I, just spoke of that as a higher growth area for us in fact, the fastest growing.

With the US Federal government has advanced analytics.

And.

That's an area that we're looking at and we have many opportunities again for folks to come join us and actually help lead that practice for the corporation, which is a different practice that just a monetization by from looking to sell high performance buildings, we have certain geographies that we think that high performance building design is a fast growing area.

And we have many opportunities there to actually round out and move into a market leading position.

And then there's water opportunities in the UK that we would actually like to add additional water consulting.

Capability in the UK. So we have more folks on the ground there and municipal work in Australia, So there's plenty of different areas that.

We have openings for and that would fit well with the company and there's no shortage in the pipeline.

With respect to capital allocation.

Number one.

Priority is we want to use our balance sheet to bring in the best partners possible to increase our competitive position not to make tetra tech bigger, but to make tetra tech better to actually bring in new thought leaders, new technical leaders and so that has a number one priority for our balance sheet and the areas that we're focused and I just and just spoke to.

However, we also are committed to and we are supportive of of our stock we think that theres more upside with respect to valuation of the company. We think the best is still yet to come for us and so we're committed to a relatively consistent disciplined.

Repurchase program that you've seen for the past many years.

The company the board of Directors did approve a 200 million dollar addition to the buyback.

That should not be seen as a.

Signal that we're changing our buyback program or our disciplined approach to being in the market, but just giving more visibility and flexibility into the future. So you didn't see this last quarter. We've been about 25 million were 21 million. This last quarter, which is a matter of timing and so I would say both on acquisitions, just shared where we're looking.

But as far as disciplined approach on the financial side, we expect that those acquisitions will be accretive on a GAAP basis in year, one and on a buyback we're looking for it to be.

On a very regular disciplined manner, but if there is something that is larger.

And that we would want to put a priority to weaken actually take action on all of those front. So that indicated for acquisitions and we would use buyback as a lever to deemphasize in order to move aggressively.

To add the right partners of the company.

Hi, Thanks, that's very helpful.

Okay, just given that it is an election year.

And I know that generally tetra tech effect pretty well no matter, what the administration, but.

Could you just speak to what extent election years tend to cause disrupt short term disruption on the versus the programs that you where you feel.

Well just kind of continue and.

That does the spending level should sustain through through the election helpful. Thanks.

Yes. It is interesting Noelle I would say that.

You're right.

Thanks Ben.

And assistance for roughly getting close to 55 years, we've seen move from Republicans and Democrats Democratic backed Republicans and we've not seen a particular.

Change in our.

Our revenue from the federal government. However, I will say, we've generally seen a pickup in election years and the reason is neither side of the I'll wants to be someone to provide fiscal constraints to the budget. So I will say included on the.

Presentation slides, we've seen increases and budget in defense. So if you are.

Hawkish, you've seen increases we've also seen increases in fact, some of the largest budgets that EPA has seen in.

In the decade, and so EPA is up we even saw the state Department, which then USAID agency for International development is a component their budget is actually up slightly. So this is really budgets up across the board and this has really nobody wanting to create a negative environment moving into an election.

Cycle, so for fiscal year for our fiscal year 2020, which concludes at the end of September before the election.

We actually see.

Full funding and spending and.

We think it'll be robust.

Without this year after the election, we'll see what actually transpired thats another matter, but certainly well through our fiscal 2020, we see very strong less spending if both of these clients.

Great. Thanks, one last quick question.

I guess Q1 are you given.

A lot of these natural disasters that have been occurring are you seeing more opportunity around.

Larger multi year sort of avoidance, our or given mitigation programs and then quick bookkeeping question could you give us that backlog contribution from company wide JV in the quarter.

Yes, I can give you both of those so with respect to more opportunities for natural disaster mitigation.

I actually saw significant funding come out of the federal government for disasters that took place in 2017 and prior.

This was measured well in excess of $10 billion and it includes with the call community development block grants and with this is is grants to communities for mitigation.

And this is right up the Ali for Tetra Tech mitigation means flood protection Floodwalls moving of infrastructure to areas that would be more protective from low lying.

Events in the case of Waterfloods.

Our offsets and other mitigation efforts indicates a fire.

Instances, where it would be for quakes additional structural and seismic improvements all of this is the front end consulting prioritization and even moving into engineering and so we actually have seen movement and there was a commitment to our percentage of all disaster dollars being put to up.

Front.

Preparedness and mitigation, so, let's do something to mitigate it before it hits. So these are all things that are exactly where we'd be huge advocates and spit too.

To our market.

Okay.

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

Great. Thanks.

I think most of my kind of bigger picture question someone asked and answered, but I thought it would be worth clarifying here. Since you are calling out your state and local business, excluding the storm or the disaster response work specifically, noting that.

The last three quarters of the year have notable headwinds if you could quantify those headwinds just so that we got our models kind of baseline correctly.

Our expectations set correctly.

As those quarters unfold.

Yes.

Fully in the us as a good question and just to complete.

With the answer to the tune the wells a Wi GE essentially contributed nothing to our backlog growth. They contributed $35 million of revenue in the quarter and they contributed about 30 $536 million an order. So when you take the orders minus the revenue it was about a push so WGN in of itself did not.

Attribute to the increase in the quarter for.

For backlog and Thats, the WMG UK operation.

With respect to the headwinds.

We see about.

Make sure I get the precise numbers here.

As the.

First quarter, we saw a reduction of around $15 million of year over year and the response work, which is the quarter that just happened and that was the number that we use to.

[music].

To present some of the adjusted numbers without the.

Response work of the number does get bigger Q2 s about 25.

So the quarter coming up we see about 25 million Q3 35.

In Q4 about 30.

So those are the numbers that.

And those in numbers that we'll see as headwinds with respect to the overall state and local but when you actually adjust for those out that's what I was referring to this 10% to 15% municipal growth in our state local activities and by the way those numbers because those are in the future for Q2, three and four that's assuming.

That there are no offense. So if there are any type events are we mobilizer, we actually respond to anything that would offset these numbers accordingly.

Okay Super that's helpful. And then I guess kind of the obligatory question here is you guys beat your midpoint by seven cents yet.

The midpoint of the annual guidance only went up two and a half sense I was wondering Dan if you could just give us some perspectives behind that thought process and why didnt flow through the full seven cents that you'd be to the midpoint.

Yes, that's a good question Thats a really good question no. We had a we had a very good first quarter, you're right. We did beat by seven cents.

And that.

We looked at it felt prudently or soberly.

Were 90 days into the into the fiscal year, we're one quarter in.

And actually as of this phone call. This phone call her conference call from one quarter and one month then.

We've got another.

Update on both our performance on Q2, once we hit mid year, and we'll look to update that but it just felt that it was so early in the year that we wouldn't make a move on either our revenue where the top end of our earnings but no doubt with a seven scent bead. We did move our bottom end up five cents and covered most of all of that so.

I would say there should be nothing read into that with respect to cautionary.

Not be intent it was just being prudent or appropriate given.

Being so early in the fiscal year.

Great. Thank you that's all I have for today.

Great. Thank you very much Andy.

Thank you. Our next question comes from the line of Ryan Connors with Boenning and Scattergood. Please proceed with your question.

Thank you good morning.

Wanted to just actually stick with that last steam right there on guidance and just looking to actually at the revenue guidance.

The mid and the higher end look certainly healthy, but the low end to 2.4 really implies minimal growth at all year over year in revenue. So im just curious what the the different variables are that gets you to the high and low end to that guidance.

That leads you to keep that low end in place given the backlog dynamics, you've talked about everything looking looking pretty strong.

Yeah, that's so thats a good question and.

So let me share with you how we're looking at.

The numbers for guidance both at the low in the high and then of course, the imputed midpoint.

Last year, we were at $2.4 billion and I do understand that the low end for this year of our guidance range on net revenues $2.4 billion, but.

Last year in that 2.4 billion. There were two revenue contributions that currently don't exist and that we actually would adjust what we see last year. So the two items our number one our Canadian midstream construction practice, where we were doing turn key activities contributed contributed $70 million of net revenue.

That is not in.

Our revenue stream.

The disaster response work was $100 million and I just gave the details of the breakdown of that by quarter.

By the way we were.

Tried to be very open and very transparent on the contribution of that through this last year, because we knew this year on year comparison would be.

In place so if you take.

2.4 from last year, if you take out.

$170 million, which is 100 from disaster in 70 from our midst Scream Canadian pipeline work that would say last years numbers really two to three zero. If you compare to 230 to the midpoint of our guidance for this year at two five that's a 12% increase just at the midpoint.

And that is a better way and at the low end.

That you'd mentioned at our 2.4.

Would represent an 8% increase obviously I can use the high end it moves us well into the upper double digits. So really our range moves from sort of 8% to 18% with the midpoint at 12 ish.

If you actually look at what our ongoing operations are producing what our guidance represents.

Got it okay apples to apples good.

Now the other my other question was you mentioned you called out a few.

Kind of.

Opportunities here like the sustainable buildings.

Federal side, but one thing you Didnt talk about that you've talked about in the past is emerging contaminants.

On the water side, specifically P. foster.

You just give us an update there what's what you're seeing how that markets developing for you.

Yes, you know, it's we have spoken past quarters about the P. Foster PFS, which are for those that are less familiar with the the acronym minutes.

So chemical components of fire fighting a fire retardancy that are used primarily to defense facilities, where there had been practicing.

Or employing firefighting.

Chemical uses or even add.

We're fighting stations are airports, where other activities have taken place.

It actually is.

It is one of the big drivers on the environmental portion primarily the ground water work that we're doing most of the work. We're doing right now is for the department of defense and.

Thats, a really for all three branches Army Navy.

And the Air Force and the work is first for identification of the presence of these chemicals and what fits very well for Tetra Tech and we're one of the leaders in this which is modeling for fade and transport fate is what it may actually convert to over time as it moves through the geology and of course transport Where's it going and how fast it.

What impact the surrounding municipal waterways, we've not only had success in the us and I would say, it's it's growing quickly with respect to percentage of the environmental work that we're doing per diodati, but we're also doing this work in Australia for their department of Defense and we're just beginning to do this with Modi the Ministry of defense in the UK.

So those are the three.

The three defense agencies that we're working in.

We have not seen we although we've done one demonstration pilot program self performed for.

Treat ability with respect to what you actually do with it to treat at once has been identified.

But this is very early is growing very fast is one of the most frequent topics that we are discussing and contracting for with our clients and of course the surrounding communities are very interested and this is very early because there are no enforceable action levels for P. Foster yet that have come out either at the state level or the federal.

Level, which is environmental protection agency here in the United States and so I would say this is.

The old proverbial, where are we in the nine innings.

Maybe the bottom of the first are the top of the second but were very early in this got it.

Got it Okay, and then I did have one last one Dan.

I know this is a topic, we haven't heard about in awhile, but in terms of the hunters point. It seems like the new looking at some of the news flow Tetra Tech continues to get vindicated.

I guess, so as just another study last week out, saying that theres not as much.

If an issue there and radiation as some of the alarmist had said in the lawsuit and so forth.

But but in terms of process I know, there's not much you can say about the legal process, but are there certain milestones or a timetable where we can kind of get where we'll get to closure on that.

Anything anything you could share with us on on how that kind of plays out.

Well.

I would say, yes, what to look for and we we can do a better job. Although we tried to remain because of the legal nature of the of the topic. We've tried to remain.

Quite on this matter and let the legal process.

Play out you've certainly seen that we.

Currently stand deny.

These as salacious.

Obligations and stand by the work that one of our divisions performed but we've had a number of these.

Susi civil suits dismissed with prejudice and so they are gone and so we can perhaps make those a bit more visible, but a number of them have been dismissed with prejudice others have withdrawn on their own and so the number has moved to want to say in our favor and we'll we'll attempt to make that visible to the investment community, but I would say.

The rest of it is just a.

Legal process that takes time of will.

Taken salt life, and we feel with.

Hey, Steven call at favorable with.

Actual recognition of what.

The status is which is that the work was done was completely in accordance with the work we were contracted for and met or exceeded all contractual components that to.

That we performed.

Well, it's good to hear we'll look for that and.

Thanks, Thanks, a lot for your time this morning.

Absolutely right.

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

Hi, good morning.

Furthermore.

So we've covered quite a bit this morning lot of Matt.

Original question is already answered, but the one area. We haven't gone all grew a little bit as wonder if you could give a bit of an update as to what thoughts around capex needs.

And maybe some areas that may need to be worked on whether it be office space or investment or.

Some of the things that we might be looking at whether it's something that you already have into your model for this fiscal year with maybe some days we should be thinking.

For the years. Thank you.

Yeah, Mark I'll talk about the what the strategy and sort of the overarching approach I'll, let Steve than actually follow up with some specific numbers to put it in context of where we're trending too, but actually as we continue to shape the portfolio to more and more front end work that requirement for.

Any type of self performance activities that would be.

Less field trucks less.

That type of activity will drop our.

Our peony or property plant equipment, which that goes into depreciation so from capex on that side, we become less and less and lighter and lighter capital intensive.

The.

The Capex that we do have is actually focused on professional service items, such as the computers and another analytic tools necessary, we have actually dropped our capex requirements with respect to our back office 80 requirements, because we have gone as a corporation largely to the cloud and in fact, we're moving our goal.

As to move essentially 100% of the cloud so it even eliminates the tea.

Purchases of hardware than continues to decrease our.

Depreciation numbers gives us high reliability faster.

Faster turnaround in speed.

But with respect to with respect to numbers, where we have trended over the past couple of years and what our focuses.

For this year, Steve can give you a few numbers sure so.

I think over the last couple of years and into this year.

Our capex needs.

Two about.

5% of revenue.

And if if you were following Tetra tech.

For a number of years prior to.

Getting out of the RCM business as that that Capex requirement was well above 1% of revenue. So we've we've brought that down and it's.

You know quite appropriate for for where we're headed in the future one thing I'd like markets and we're very focused.

Okay.

Uh huh.

And Steve.

Okay.

Beginning.

Our in store.

Encouraged by our.

Her for AXT has become very rural Nicole to our EBIT the with the depreciation so those two should converge to be essentially the same and it's probably 50 basis points.

And less right now difference between those two which is a really good indication of what the operating.

Earnings power as of the business.

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

Hi, Thanks. Thank you off a couple of follow up on not the high performance building and thanks for the detail on that and I know you've mentioned the 200 the target to double the revenue on that business just the $250 million current annual run rate.

Is that so is there similar rate of subcontractor revenue in that or is that can I look that as a net revenue number if you can share. Please.

On that it actually has less subcontractor most of it as self performance.

Because the high performance.

Building design the work that we're focused on primarily as MVP. So some mechanical electrical and the the water hydraulics for water delivery and fire suppression work and so that's where we're focused on we do essentially almost all of that in house, whereas other investigative and study and research work we may have.

Third party laboratories or maybe even.

Marine vessels that we subcontract to collect data thats the for the most part not the case with respect to our high performance building, So I would say the.

The net revenue of that number's, probably 90%.

So it has a much higher sell performance component than other revenues across the company them.

Thank you and can you remind me how long has it been that you've had this target maybe it's been two quarters and did something change in the competitive landscape that that gives you that confidence to double that are I mean is that your international scale now can you comment on that.

Yes, it's been last couple of quarters I think you saw the first the first time, we came out with this in actually identified it as an area that we were going to invest in C. C that it was more material contributor was in 2019. The reason we identified it as a key driver is it definitely fits in with the environmental sustainable.

Because of the company it has with respect to its end clients.

Many of the.

Many of our investors have.

Recognize that it represents a big E SG.

Without without doubt.

On the environment side, and with respect to what has given us more.

Confidence with respect to the progress will make.

We're seeing and grow at.

Probably a.

At a double digit rate organically and with the addition of Wi Gi and the UK.

We did bring a high performance building on the government side.

Thats, given us much better visibility and opportunities in a new marketplace that we had had before and so I think it's really having a good foothold in the presence in Australia with our primary location for the of buildings practice in Melbourne is growing well us we have both east and West Coast and then of course with.

Now we knew footprint in the UK is allowing us to service the global clients that we were primarily limited to went back a couple of years ago. Just the use so we feel the marketplace as much bigger for US we think our footprint actually.

Represents where our clients have facilities and the opportunities and thats allowed us to come out with.

Stated goal of where we'd like to take this business, which is doubling it.

Thank you Dan and on WG real quick on a follow up is on do you mentioned the current margin did you see I I know, it's it was public before you bought it but I thought you mentioned something about single digits or low single digits low single digit so the first quarter, we're probably about 2%.

Looking ahead at the very first quarter. It was essentially a breakeven which would have been the fourth quarter, which was a quarter that they joined US. So we have moved it up but in Q1, they were about a 2% contribution for the revenues.

Okay and last for me you mentioned Muni program growth in California, Texas, and Florida was that our water utility Capex announcement, you're sick or can you would say an anecdotal or just customer feedback.

No thats actually the numbers that were seeing internally with Tetra Tech's revenues growth and those are the areas that are primarily driving the topline growth. So the numbers at Tetra Tech is seeing and our municipal water.

Revenue growth is about 10% I'd call that both our state city and county work. So I saw that collectively our municipal work and we're seeing the again the 10% year over year growth, we have seen in the past we've seen even faster growth we've seen actually through too much of 2019 were in the 20%.

This is the 10% to 15% that we've stated and if you'd asked where are we seeing the biggest contribution toward that growth, So thats, where the California, Texas, and Florida, and we see large.

Initiatives in funds and bonds that have been put in place in all three of those that give good visibility to their funding levels to keep that moving forward throughout 2020.

Okay. Thank you very much that's all from me.

Thank you Dave.

Thank you. This this concludes the another question answer session I'd like to turn the conference back over to Mr., Dan that truck to conclude.

Great. Thank you very much Michelle and thank all of you for being on this call for your very insightful questions and your interest in Tetra Tech.

We look forward to another strong quarter performance, particularly building on a record first quarter performance that we just finished and I really look forward to speaking with all of you again next quarter I Hope you have a great rest of the weak and have a good day. Thank you bye.

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.