Q2 2020 Earnings Call
Good morning, and thank you for joining the Tetra Tech earnings call by now you Should've received a copy of the press release. If you have enough. Please contact the company's corporate office <unk> six to 6351 for sex acts for.
As a reminder, Tetra Tech is also Simulcasting. This presentation slides in the Investor section of its website at Www Dot Tetra Tech Dot com.
This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.
With us today for 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 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 Doris described and Tetra Tech's periodic reports filed with the FCC, except as required by law for such.
Patients to update as far as 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 not 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 sand Backtrack. Please go ahead Mr. backtrack.
Great. Thank you very much Stacey and good morning, and welcome to our fiscal year, 2022nd quarter earnings Conference call.
Looking forward to giving you an overview of what we are seeing across our business.
Oh, what Tetra Tech's recent responses a band and the key areas that we're focused on for the remainder of this fiscal year 2020 and into next fiscal year.
We started the second quarter on pace for another very strong quarter.
In March we saw the onset of the impacts associated with the cobot 19, pandemic, which I'll discuss on the next slot.
I'd like to highlight upfront that the strength of Tetra Tech's resilient and diversified business model has never been more confident than today.
Our central water environment.
Infrastructure services have generated a very robust backlog of $3 billion.
Our long term commitment to financial discipline has resulted in a low debt to earnings ratio of 0.8.
With high liquidity and very strong continuing cash flow.
We're entering these uncertain times with a very strong company and business model, which allows us to focus our efforts on seamlessly supporting our clients today and into the future.
For this call due to the unusual recent circumstances brought on by global pandemic I'll begin with an overview of our cope at 19 response and actions and that'll have Steve Burdick, Our Chief Financial Officer provide an overview of our financial performance and our capital allocation.
Will then address our cost structure outlook and our market assessment.
[music].
Early in March Tetra Tech implemented and this was prior to the stay at home orders coming out we implemented a company wide enhanced hygiene program.
We implemented social distancing practices encouraged remote working wherever it was possible for ourselves.
The goal the response to the coping 19 quickly expanded to widespread government stay at home orders Exempting essential services, which included most of what Tetra Tech does.
These defense happens essentially concurrently with the precipitous oil and gas price drop which resulted in some project cancellations as some of our clients responded to the unanticipated downturn of their business.
But at the same time.
We saw most of the essential work, we do for our clients continue uninterrupted.
Our team here within Tetra Tech, which I'm actually quite proud of moved very quickly we moved to 95% remote working throughout our operations, we implemented social distancing practices for our field operations and negotiated short term adjustments to our current activities, where they were needed with our clients.
We coordinate with our clients to add new Cobot, 19 services and expand our scope of services and work, we provide where appropriate to include pandemic business continuity consulting health and safety plan preparation and even emergency medical facility design.
Throughout this time and as of today, all 450 Tetra Tech offices are fully operational or project work continues and bidding on new work is very active and our high end workforce is proving to be very effective in the remote working environment.
[noise] Tetra Tech's resilience has been demonstrated through many recessionary cycles over our more than 50 year history, and almost 30 year performance as a publicly traded company.
Or high end, leaving with science approach has adapted quickly to changes in our clients' needs.
And our focus on critical water and environmental services means our work because even more relevant today and will likely be even more so in the future.
Our high end consulting a design services employee advanced analytics, which are well adapted to supporting our clients as they have increased needs to manage their systems remotely.
It's through this time, our strong financial position inconsistent performance provides us the balance sheet needed to navigate through this disruption in the global economy.
I'd like to now turn the call over to Steve Burdick, Our Chief Financial Officer to review the financial details of our second quarter and provide an overview of an overview of our cash in our liquidity positions. So a steep no yeah. Thanks, Dan So as Dan said I'd like to now review the financial results for the second quarter.
Fiscal 2020, as well as our financial condition at the end of the second quarter.
So overall, we had growth across most of our end markets. However.
Growth rate was impacted by the completion of large disaster recovery projects in 2019, and or decision last year to dispose of our Canadian turnkey pipeline business.
So if we excluded these two impacts our revenue would have been up about 14% and net revenue would have been up about by a 13%.
On an adjusted basis or the fiscal 2022nd quarter revenue of 740 million increased 2% when compared to the revenue of 727 million in the second quarter fiscal 2019, and the second quarter net revenue of 590 million is comparable to the prior year and in line with our guidance range.
We are providing.
Our earnings per share increased at a higher percentage than or topline revenue increase and the adjusted earnings per share was also in line with guidance and up by 4%. That's 73 cents compared to 70 cents last year.
And on a constant currency basis backlog increased by 9% over the prior year to over $3 billion.
So for those of you that are following the slide presentation and on page six I'd like to summarize the non-GAAP and reconciling adjustments.
First we realized gains on the non core equipment dispositions and as we discussed previously due to our decision in the fourth quarter of 2019 to divest our Canadian pipeline construction business, we continue to sell the equipment in the second quarter, which resulted in a gain of about three cents per share.
Secondly, we recorded a non operating gain relative to our earn out liabilities. The net amount represents a small true up of less than a probably less than 2% of the total estimated liability.
In addition to these nonoperating gains.
We did take actions, resulting from the impacts related to the disruption or end markets created by the cobot 19 endemic towards the end of the second quarter.
These timely actions aimed to align our cost structure consistent with the decrease in revenues, where we anticipated longer term project delays and cancellations.
The aggregate of these charges amounted to about $8 million or 11 cents per share.
The worsening macroeconomic situation in March also resulted in the weakening in the weakening of foreign currencies in countries outside of the U.S., where we do business, which negatively impacted our revenue and net revenue by $6 million and our EPS by about one set.
The FX rate variance is also impacted the total backlog by about $73 million in Q2.
So even as the current out the current economic outlook remains uncertain in many ways Tetra Tech is focused on generating positive cash flows next thus far net income and proactively protecting the balance sheet to ensure more than adequate liquidity.
So I want to review, our second quarter Caf results and report on our balance sheet position.
Cash flow generated from operations for the second quarter totaled $101 million.
This cash flow from operations amounted to about $1.82 cents on a per share basis in the second quarter and over the longer term when we look back over the trailing 12 months, we generated cash from operations at 133% compared to our net income over that same trailing 12 month period.
Our focus on working capital and cash flows also resulted in our day sales outstanding decreasing to 71 days in the second quarter.
This is an improvement of seven days from last year and sequential improvement of two days from last quarter.
Our net debt stands at about $211 million and during the second quarter, we utilize close to $100 million in cash for acquisitions stock buybacks and dividend payments to our shareholders and even with these activities are net debt to EBITDA settled in at about <unk> 0.8 times, which remains.
Less than our target of one to two times.
On our long term capital allocation strategy calls for balance of investing in the growth of our business.
Managing our balance sheet and returning cash for shareholders.
During the second quarter, we completed the acquisition of segue, which expands our client base and our federal life He business.
Regarding our dividend program I want to announce that are board of directors approved or 24th consecutive dividend, which will be paid in the month of me at a rate of 17 cents per share, which is a 13% increase over last year's dividend.
Since we started this dividend program six years ago, we've increased the annual dividend paid each year.
And during the second quarter, we paid up 15 cents per share or the $8.2 million in dividends.
Furthermore, we utilize $60 million than the second quarter on or stock buyback program.
On a combined basis, we have $243 million remaining under both of our previously approved stock buyback programs.
And during these difficult times, just as important to successfully implementing our capital allocation strategy.
Is ensuring we have a strong balance sheet and ample liquidity.
We have both in terms of our balance sheet at the end of Q2 and be available liquidity in the form of cash on hand, amounting to $135 million as well as funds available under our credit facility amounting to $639 million for a total of $774 million at the end of the second quarter.
I'm very I'm very pleased to out to people Shirley's a financial results with you for the second quarter.
Thank you for your time today, and I will now hand, the call back over to Dan.
Hey.
Thank you very much Steve.
I would now like to discuss Tetra Tech's leading positions in the critical water and environmental sectors.
Fundamental services that Tetra Tech provides our clients in water renewable energy government services and emergency response are essential.
Relevant and represent long term needs for our clients and the communities at large.
We hold the number one ranking in water.
Damson reservoirs environmental management in seven additional categories as published by the Engineering News record.
And we see water related services for water supply.
Wastewater treatment.
Watershed management and flood protection is having continued demand throughout this crisis.
The large macro trends a critical water supplies the risks associated with climate change and diversification of water sources are unchanged and we see them continuing unabated.
Renewable energy that we support in permitting and other aspects.
Demand in the movement of states and utilities to diversify and modernize their power generation are also continuing trends that will benefit Tetra tech.
And then every recessionary cycle.
Fettered the federal government spending has increased in order to stimulate the economy.
To address fundamental modernization needs and support local governments.
Tetra Tech has $18 billion in contract capacity built on a 50 year track record supporting the U.S Federal government.
Our relationship said experience across a broad base of government clients, both civilian in defense related position us well to support both existing and new programs that will be coming up.
[noise] our experienced emergency Rosset response teams are even more essential today.
We maintain over 400 standing contracts with municipalities across the United States to help them plan.
Prepare respond and recover from disasters.
Currently we are supporting response to recent tornadoes and Tennessee, well last year, we were mobilized for the California fire recovery.
I'd now like to provide you with our customer outlook.
In the first and second quarters, our growth was driven by strong performance across all of our business, but especially for our international and federal clients.
As we entered the third quarter and evaluate the early indications for for customer sectors, we see a range of impacts ranging from minimal to more significant.
The us federal government is where we expect to see the least impact we have a large broad federal client base across both civilian in defense programs.
Longer term government stimulus programs typically create additional opportunities and funding increases so likely built into our fiscal year 2021.
State and local that's been an excellent growth market for us due to our broad coverage with large to mid sized municipalities for both the central water and disaster response services.
We expect impacts here to be low to medium.
Currently the work in the state local market is really quite stable with very active bidding opportunities and new programs taking place.
Archer municipalities quickly moved to virtualize meetings, saying they are contracting systems.
However, while we don't see it today, we would expect that in the future to see pressures on state and local budgets, which may be offset by federal government stimulus funding later in the year or even into next year.
The international sector for Us is primarily our Canadian.
The Kingdom and Australian clients.
Here, we saw some immediate impacts for the commodity related businesses associated with oil and gas and some of our mining claims.
We expect the public sector portion of our international client base, which is about half of that revenue to remain stable or increases each geography moves to recover and initiated stimulus programs for its own geography.
And finally, we expect our us commercial clients to be the most impacted.
Our work with oil and gas customers for upgrades are discretionary work, that's almost a motor immediately affected due to the financial disruption in the sector.
The commercial work that is regulatory driven such as our environmental permitting and restoration services has been less impacted and it's moving forward right now.
Okay.
As we have assessed the changes in our markets. During the last six weeks has become quite apparent that a number of uncertainties exist that we have just not seen before as a company.
The covert 19 pandemic impact on our business will largely be dependent on the duration of stay at home orders and resulting macroeconomic conditions.
Tetra Tech's financial results for the second half of fiscal 2020 cannot be estimated at least at this time with enough precision to be reliable.
So accordingly, Tetra Tech us withdrawing our previously provided fiscal.
2020 guidance for net revenue and earnings per share.
But I will say it is our intent to provide guidance prior to the end of the third quarter fiscal 2020. If there is some proved clarity on our end markets and client.
In summary.
In spite of this near term disruption at the global pandemic, we're seeing continued demand for our leading with science approach in advanced analytic solutions as our clients focus increase certainly an efficient sleep and rapidly adapting to changes in their capital spending.
Heightened concern over health and environment in places such as inside our buildings and associated with the cleanup of contaminated sites and the.
Presence of improved our quality reaffirms the importance of are essential services in water environment and sustainable infrastructure.
Our backlog of $3 billion in work is approved and authorized and provides a stability during this time of uncertainty.
Tetra Tech's strong balance sheet and access to capital as a result of our disciplined approach to financial management and capital allocation. This has prepared us well for the current disruption and the post cobot peak recovery period, that's coming up.
And with that summary.
Stacy I'd like to open the call up to questions.
The question answer session will begin now please be aware that there'll be a 32nd pause, but our webcast to allow for buffering. At this time audio participants are invited to submit their question.
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[noise] [noise]. Our first question comes from Andrew with Robert W. Baird. Please go ahead.
Great. Thanks for taking my question guys I think I have to.
With that come up with a follow up here during the course of this but then I wanted to start out a little bit on your customer outlook updates here.
I heard your commentary on this obviously by customer type.
And your low medium and high are helpful directional indicators.
I was just wonder if you put a little bit more meat on that bone and just talk about what low means is low me like.
Zero to slow mean.
I've, 10% hit medium high anything just to kind of grown this with what's your thinking today around that would be a little bit helpful. Given that everything is changing so quickly for everyone here.
Sure Andy first of all with respect to what those.
Indicators are referring to.
So low medium and high are what we expect the impact to be of what we see our business going on a forward basis. So this would be.
And I'll move right to low so low we typically would think that it would be something less than 5% to no impact at all so as in the case at the federal government, we'd have to expected that it would grow from 5% to 10%.
It was our previous guidance when we say we are seeing very low impact here, we would think that it would be less than 5% of perhaps no impact at all so low is say.
5% or less from what we had previously indicated on a go forward basis I.
A medium is sort of a broad range of anywhere from something more than 5% to perhaps up to 15%. So medium impact would be sort of in that range and again that would be on a go forward basis.
Hi would be something in excess of 15%. So those are sort of general numbers are ranges of numbers that we would associated with those qualitative scriptures of forward outlook for our clients.
Okay great.
Helpful well, given given that commentary obviously here your commercial businesses is clearly the most impacted.
I wanted to talk what the CNG segment in particular.
And try to just understand how things have trended during the quarter I understand there's there's a number of moving parts that you articulated earlier in your conference call about.
For instance, the shutting down or winding down of your pipeline business.
Certainly wy GE is been more material in the commercial segment as well.
I was hoping you could kind of take us really walk us through the revenue line.
To understand what kind of underlying organic trend was for that segment for the quarter and how it progressed through the quarter January February and then into March work I have to match in the <unk> the impact for more significant although I didn't know in an idea to try to understand where it's trading here as we move into Threeq.
Beyond.
That's a good question, Andy and I invite you pointed out.
He is an area that.
Could use a bit more explanation. If you just took a look at the the headline number it would appear that our commercial and international group.
Had actually shrunk by and what we reported in.
That revenue numbers.
Gross revenue and total revenue were about minus 4%, but this doesn't take into account for a couple items that were actually meaningful in the quarter number one we.
Actually adjusted our revenue.
For FX, if adjusted for ex FX or foreign exchange than we saw actually quite a reduction in valuation in exchange rates between primarily Canada, and Australia, a little bit in the UK, but if you simply adjusted our 2020 Q2 for FX that would take a minus 4% to 2%, but the way.
One item, we tried to communicate and were very transparent even a year ago, starting a year ago is at parkland typing or a midstream piping turnkey activity, we have in Canada.
Actually contributed a year ago about 34 $35 million that we have successfully wound that down as Steve Burdick has talked about earlier in the reconciliation about liquidation of some of the.
Equipment that actually contributed to our cash and we actually normalized earnings for that but if you adjust our revenue for the Canadian turnkey pipeline activities and put that backend you would see that our net revenue actually increased at a 11% year over year rate when just adjusted for the FX.
Which accounted for a couple of percent and the rest of it associated with the year on year comparisons of a business that we elected to wind down and exit so I hope that helps with respect to a better insight into how.
How the group performed on a year over year basis at the.
11% and I will say to your second part of the question is how did it trend over the quarter.
We were going quite well during.
January and February and really we saw quite a reduction in the month of March and some of that was because of the oil and gas in heavy industry that associated with the energy market.
Where we saw the work stopped.
But the rest of it was really transitioning and this is internationally transitioning our folks from working in the office to at home and we took 95% up 20000 people and we move them home that actually did have a a bit of a temporal impact we actually have not seen that impact.
Act in April because that all took place in mid March and so it's not something that represents an ongoing impact but that did impact us CHG.
Internationally, a bit more than the U.S., because our international operations have not been on our platform quite as long as our American or us operations and so that accounted for another portion of it of the impact in March.
Okay, Great. That's helpful I might chime in a little bit more with another question later, but I'll leave it there for now thank you.
Great. Thank you Andy.
Our next question comes from Sean East with Keybanc capital markets. Please go ahead.
Hi, Tim Thanks for taking my question.
I just wanted to get a sense for.
You know potential kind of green shoots here on.
It could come out of this hotel tech could look on the other side of this.
Whether from across cost structure perspective market share perspective, or just new opportunity sets.
Coming out just trying to understand.
You know how nimble you guys are and and how quickly we can kind of get back onto the earnings growth trajectory.
Well has a great question, Sean I would say that.
Well certainly the the impact to local human health and lives says quite tragic and the short term impact of moving our work force to a working remotely what's a bit disruptive in late March it is certainly possible and we see coming out of this a stay.
Longer Tetra Tech a more flexible tetra tech and.
Likely even higher profitability of the company.
This has given us a new perspective on the amount of a commercial real estate that we actually need to support our workforce 20000 individuals.
We've actually.
Had this plan for number of years, we had the great advantage of having moved to a enterprise wide ERP system.
We've moved our storage to the cloud we've moved our computing to the cloud and so academically. We always felt this should work, but when do you get a chance to take 95% of your staff and move them home and give it a real life test. So we've we've actually done that and for those that have.
Let's spend some time with me over the years, you know I hold myself and the company to extremely high standards. So to stay that it's exceeded my expectations is really saying something and so I am just we'd like to.
Thank the Tetra tech folks in individuals who put the platforms together that made us quite efficient through that so I think we could come out of the the out of this.
Pandemic with a more efficient a lower cost structured company than we had before and the investments that we made into our federal I T practice that has been growing quite well have actually served us.
Well with respect to new orders, we've seen our federal clients and that's actually move to our state and local clients with respect to a cyber security systems, we were putting in place for our water systems, we've actually seen as demand climb very very quickly to expand that just from cyber security and protection of critical.
Structure to actually, allowing our clients to monitor and operate the systems remotely in the event that there was another shutdown or distancing from accessing these facilities. So those two items that were seeing grow as opportunities even right now through this period of uncertainties. So I I think bill.
Could come out of this.
Even stronger.
With more revenue opportunities in new markets, we hadn't seen before and with a more efficient cost base than we had going into this and so it could actually result in margins, even better than what we had coming yet.
Interesting stuff and I think maybe the other question I had is just trying to get a little bit more color on the decision to withdraw guidance and maybe just understanding exactly where the uncertainty lies right now and you know what sort of.
Yes.
Events or things you're watching out for here and the next month or so that.
Good.
Got you guys comfortable with.
Putting those goalpost back out there for fiscal 20.
I'm glad you asked that question because it's the one item that is certainly unprecedented for ourselves and I think many of the publicly listed firms, but for Tetra tech to withdraw guidance or not provided for the next quarter. After having next year will be 30 years as a public company has never happened before and it wasn't.
Taken lightly here, we certainly gave some thought to widening out until we could have clarity, but what we what we're looking for it that would give us the clarity is actually our clients returning to work and getting a bit more clarity on their budgets as we move through the quarter, it's not moving our 95% of staff back to the office that we conduct.
We continue for an extended period of time and to certain extend a component of that will probably remain in perpetuity for the corporation, but seeing our clients actually come back and get a bit more clarity as to their budgets their priorities. Their funding. The last thing. We wanted to do was to provide guidance without any insight at all of what would happen during the mill.
All of this quarter and lead only to come back and revise it it.
As difficult to.
Suggest to our shareholders that we would like just a little bit of time and I think that that many of the stay at home restrictions are being lifted though others have them over the next roughly 30 days I believe that if you go out to roughly June 1st that encompasses most of the jurisdictions.
So I think that over this next month, we'll get much more visibility not on how we're performing on the work, but how our clients see the priorities and how the move forward and that'll allow us to.
To provide guidance, that's something that's actually meaningful with an appropriate range that you can evaluate what we see in the marketplace and our performance would be so I do believe that we will be able to provide updated guidance prior to the end of the third quarter.
But that is.
Steve had mentioned and I did with respect uncertainty is largely driven by our clients getting back to work in getting better insight into their priorities and timing of programs moving forward.
Okay, Great and just last one from me in terms of their work, where you're seeing an immediate impact.
And you know the portions of the business that are more economically sensitive. Thank you guys called that oil and gas and heavy industry specifically.
Just trying to get a sense or what.
That pressure means for Tetra Tech's overall margins.
Well, we have a very flexible.
Cost base because portion is labor second is it's our real estate.
We do as Weve spoken centrally inception that the company, we're very focused on keeping.
At the staff in our overall cost structure, including corporate and the rest of our indirect support inline with the amount of work that we have from our clients and the programs. So.
The actual dollar amount impacted on a revenue is relatively small we only had probably around 4% of our revenues, where when the oil and gas and related fields of our commercial work that we do overall about half of it matter of fact more than half of it is for regulatory mandated programs that have regulatory drivers compare.
Clients requirements consent decrees or other items that have specific dates and times. So I expect that to go forward uninterrupted.
And so I think it's a smaller portion and.
We'll be able to provide specific numbers and our updated guidance, but I would.
I would anticipate that it would be very modest.
Impact to our commercial margins because that's really the field, we're talking about with respect to where there could be some variability.
But I think it should be relatively modest because of the flexible nature of our cost structure. So we don't need to carry costs.
That are supporting revenue that's not there.
Very helpful. I appreciate the time thanks, guys.
Thank you Sean.
Our next question comes from Noelle Dilts with Stifel. Please go ahead.
Hi, guys good morning.
So no.
So.
First question I wanted to ask kind of ties into that comment you made.
When I think about Petrotec, you know I think repeatedly over the years you've talked about how your people are the best asset.
And.
And also recently you've seen very good utilization for example, its yet.
So when we think about the margin impact here over the next few quarters.
How do we think about that utilization element my sense is that.
Even though they're saying you had that the.
Ability to reduce cost and not not hold capacity, what where maybe you don't need at the same time, if you're expecting a rebound that would think that you'd probably hold onto those folks. So how do we think about how do we think about that utilization element.
We look at the business model.
Oh, that's a good question first of all we are first move in every instance is that when we see a change in one of our end clients or markets of what with first move every time is to redeploy the staff to other areas, where we have more work we have more backlog and we can actually employ that sums our first move so we saw the downturn and.
Portions of the commercial we have a civil engineer or electrical engineer, who is working and I'll go right to oil and gas and they're in.
And there are technical background would allow them to work on a municipal project or federal project, we move them over so the first goal is to move to staff to retain as much of our.
[music].
Of our capability as possible. However, there are groups or.
Portions that are highly focused on a market in the case of oil and gas. If we believe that into the market is going away and it is going away and won't return for more than.
Quarter, or two and sometimes it's a judgment call between those two but if it's going to not return in what we would call the relatively near future will actually make appropriate adjustments and so thats what we did.
With respect to utilization I will say and this was something we didnt.
Anticipate immediately in March, but our utilization across the company has actually gone up slightly through this.
Through this moving to remote working.
And what Weve attributed it to we've looked very carefully to see so what has caused it to go up.
Our staff for spending less time and airplanes are spending less time traveling to and from airports, they're actually going to fewer conferences like virtual ones only.
There are actually doing a little bit less training add remote locations.
And meetings have actually taken place online instead of moving to one of our offices or locations, where we are travel. So we're moving all of that off of what would typically be indirect time.
It's actually caused our utilization to go up a little bit now at first glance, we'd say goods, great. Our revenues going to go up a head count hasn't changed much other than the small reduction from markets. We don't think are coming back. So how is utilization faired, it's up but the one thing we're being very careful in this actually contributed too.
One of the.
Aspect, so not providing guidance, we really would like to see this increase utilization flow through our books and flow through our billing cycles to ensure that the quality of the utilization is as high as it was when they were back in the office. So that 10 hours of working on a technical evaluation is complete.
It is much work or is just as billable and payable as it was back while they were working in the office. So assuming we have the same level of efficiency or quality of utilization.
We could actually see increased performance across our.
Our company.
So I hope that addresses what we do with staff and how we keep them and what we've seen at least in the short term with respect to utilization.
Oh, yes, that's very helpful.
The second topic and I know you're talking about this the bet on the call, but when you think about state and local by Jets I think the general signs are going to be under a lot of pressure. When we think about more critical infrastructure buckets that you are tied to I know that in recent years, you've seen a bit more funding coming from long term bond measures. So we can help us.
Our stand how you're thinking about sort of the vulnerability of on the state the state and local budget in terms of where you have exposure and how that might compared to past cycle.
Yes.
That's something that we've looked at here immediately.
Fortunately this is not the first recessionary period that we've seen as a management team or as a company.
Probably the biggest previous financial disruption or recession. We saw was the 2008 global financial crisis. We did go back and take a look at that while 2008 in some respects seems a long time ago. Another respects. It seems like just yesterday, what we saw there. It was while the 2008, we saw at the very first impacts like we're seeing.
Now with our commercial clients they move quick they move fast.
They get conservative.
With respect to their budgets until they have a little bit more clarity on what their availability of funds are.
Much hate to use the word slower but late cycle, we didnt see in the global financial crisis.
The bottomed at of our state and local spending until about 2012, so about three and a half four years later so in the short term.
We saw very little disruption and it actually was a few years later.
In some statistics some say it's typically two years I can just speak to what we saw based on the portions of the market. We're in it was really much closer to four years. So.
We we don't see that as an immediate issue, although we're not naive to believe it's not going to take place.
There are certain things a little bit different potentially this time every.
Every financial crisis does have its own for guarantees.
It is possible that the federal government stepping in with unprecedented size of.
A financial.
Contributions to many different areas has the potential that they would.
Backstop all of this uncertainty I've heard as many different takes on that as there are.
Commentaries, but but with respect to timing and impact in the near term, we expect it to be.
Low we did put to low to medium.
The presentation, but the medium was to be to be very transparent to very clear on this the medium was based on an estimated or a anticipated impact in the future periods and potentially that's even years. The reality of what we're seeing now is low to no impact and in fact, our municipal business.
Has actually had the highest level of bidding activities and proposals being submitted of anything right now.
Thanks very much.
Thank you know.
Our next question comes from Ryan Connors with betting and Scattergood. Please go ahead.
Great. Good morning, Thanks for taking my question so.
My question has to do with.
Then you the leader in a very fragmented industry. Many of your competitors are much smaller.
Players they kind of sometimes serving smaller regional market. So the good news is you've got greater resources on the other hand larger companies are suddenly out of favor in terms of any <unk>.
Financial support the government's making available and obviously that creates the potential for.
You know.
Unintended distortions lets say so one of the ramifications of that I mean, if you go back to the prior question on keeping.
Staff around in some of these more challenged.
Yeah verticals is there a chance that there could be some kind of irrational main and main maintaining of capacity and some of those markets as some of those.
Staff reductions don't take place at smaller competitors and things like that and also thinking about M&A that might have been available that won't I mean, one of the ramifications of.
Any of your competitors, maybe being able to access this PPP money, while while the larger players will not.
You know Weve census discussion here at Tetra tech over the years, because while we are a public company, we have a bit more scale than many of the fragmented participants no doubt that's true or the one thing and certainly we've been very acquisitive and one of the discussions we have with these smaller private companies are.
Our I'm concerned about joining a public company because you have a quarterly reporting requirement and you may.
You know you aren't thinking about the long term and I'm wondering choir as to what that means as they say well theres a downturn, we would keep all of our staff, which you just alluded to.
We would be committed to these items, whereas you may not and my response to that share. This with you all his tetra Tech I've been with the company, while we were public back in the seventies. When we were part of a larger conglomerate. We were a private company for a number of years and back public and all of the decisions I would make and I had been council done at mentored over Mike.
Career are we would make the same decisions we make the best decisions, what's best for our clients, what's best for their programs and what's best for the keep for the key individuals that are running those and so.
The I was on a conference call. The other day, where there was a smaller firms that was asked this very question are you committed to keep all of your employees and the answer was yes.
He said he is your revenue down yes.
How long will you keep that indefinitely, we're going to get PPP money. He said when the PPP monies out then what are you going to do.
And the answer was.
I don't believe that will happen I don't have a plan for that so whether or not you have.
Stimulus money I think making the right decisions with respect to what the right.
Actions are for your clients for their programs and for your staff has left Tetra Tech and very well said, we I won't say we wouldnt.
The way we've been.
Disciplined I don't want to say conservative because I just call it disciplined with respect to how we run our business and how we manage our balance sheet has held us in good stead through.
The 1987 financial.
Problems, the the dot com drops and other items in 2000 through the.
Global financial crisis through our election to exit.
Construction.
Six years ago, and through several mining commodity moves and oil and gas and even this pandemic and I believe is the fundamental underlying decisions that we will make that will leave us with the best staff the best clients and the best performance on their projects and so I actually believe people who are committed.
Two.
Making one decision to not affect their workforce whatsoever, regardless of what happens.
It's not good for them and ultimately will be good for us.
Okay, I mean, I guess, what I'm driving at more as presuming you're not exiting those markets altogether that are going to be challenged what could be the pricing impact in those markets. I mean, if there are play at their players who are irrationally keeping people on because of PPP money when the business is drying.
And then presumably they're going to be a.
A bidding.
At breakeven or worse in terms of trying to just keep those people busy.
And that could complicate pricing matters, even for folks like yourself, who are doing the right thing that kind of rightsizing. The business. So what could be the you know that kind of industry wide impact of that have that issue.
I don't believe that's that's the case that I would say I won't say all of the work we have but most of the work. We have is based on technical selection and technical capability. The work we get through the federal government is Brooks Bill which is.
Highest technical ranking is selected for initial negotiation. So it's not we are not in Tetra Tech does not participate in the commodity engineering business with how low will you go to get the work and in fact, we have a very very.
Keen focus on the Differentiators why you get selected we get selected because of technical innovation that doesn't exist in the market, we get selected because of patents and intellectual property that nobody else homes, we get selected because of history and institutional knowledge.
That doesn't exist that goes back 2030, 40 years with our clients and if a client is going to select their engineer based strictly on low price or primarily a low price that's actually not the right client for us we expect to be best value not low price and so on many of these technical solicitations they opened up.
Vince up based on technical ranking from one to 10.
And then they will open up the the price and Dell rank them from lowest the highest from one to 10 and you'll have the two numbers and if we can be technically ranked number one every single time.
Don't have to be the lowest price and so those that will actually sell their staff at below their price point.
That is not a long term a winning solution based on how we run our company.
Got it okay. That's that's that is actually good a good good color now last one for me is just on keeping on the theme of kind of pricing you know as we look at the potential evolution of infrastructure spending still gonna be there I think whats the big question as to what extent the that wallet share goes from the state and local to federal.
Okay, and vice versa out of that involves can you talk about the different margin in pricing dynamics with a different types of.
Government customers you deal with front from the federal to the state all the way down of the smaller county in local I mean, what are the different.
Margin dynamics as we look for that mix to shift.
Well, it's less so on clients that's more so on contract type, although I will say that there is some linkage between the two so we've spoken to this before Andre contract type of cost plus fixed fee RC PFF, that's typically contract issued with the federal government where items.
Can't be as Definitized, they pay our direct salaries are indirects employed fringe benefits overhead gionee and other items and negotiate fees those typically would be.
I don't know.
4% to 8% so cost plus a sort of in that type of range that represents about 15% of our revenue a lot of that is a first of its kind research that we do.
First of its kind assessment that we do so for instance, the federal Aviation administration space based navigation program first of its kind doesn't exist globally.
We worked that program and so that's a cost plus program the international development work, which by its very nature isn't remote locations has uncertain to it that's cost plus so the margins are sort of in that range, sometimes a little bit higher generally not lower.
Time, and materials, where we'll negotiate a rate for a given engineers lets say civil engineer with three to five years is $100 an hour.
That represents about half of the work, we have which is sort of standard time and materials.
Margins on that depending on the staff that we put on a program would probably be 8% to 12% sort of in that range and then firm fixed price, where we actually would take some of the risk of completing the job.
Under a number that we've identified our goal because there is inherent risk associated with the fixed price projects is to run it north of that 12%. So would be typically I would say, even 15 or greater.
So we're taking on risks with respect to that but I will say on the fixed price, which is around 35% of our margins.
35% of our revenues.
We're not doing construction, our construction at risk or construction management.
We've taken this work on a fixed price to do.
Work plans for technical designs that we've done before so we're not impacted by commodity prices on labor strikes or materials or weather, because we're doing that work internally. So the very risk nature of the fixed price work is quite different than you might see and other.
In other companies even in this this business.
Got it okay. That's very helpful. Thanks for your time.
Great. Thank you rank.
This will conclude that today's session I would now I'll turn the conference over to Dan that tracks to conclude.
Thank you very much Stacy and I want to thank all of you on the phone for your insight your questions and most importantly, your supportive Tetra Tech I hope that you all are staying very safe whatever location, you happened to be residing and I would like to say that on behalf of the 20000 employees of Tetra Tech we are absolutely come.
Wanted to leading by example in safety promoting sustainability by the services that we provide and supporting our clients and essential water environment and essential infrastructure services and I really do look forward to speaking again with you.
Later this quarter.
With a little bit of clarity will be speaking with you prior to the end of the quarter with an update on our current status and guidance and the things are not clear uncertain speak with you at our next quarterly call. So well. Thank you very much in stay safe stay safe by.
Ladies and gentlemen, this concludes our conference for today. Thank you all for your for participating and have a nice day all parties may now disconnect.