Q3 2020 Tetra Tech Inc 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 poor 664.
As a reminder, Tetra Tech is also simulcasting. This presentation with flights in the Investor section of its website at Www Dot Tetra Tech dotcom.
This call is being recorded at the request 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 Petrotec take.
Nation 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 on the Investor section of Tetra Tech's web site.
At this time I'd like to inform you that all participants are in listen only mode. At the request of the company. We will open up the conference for questions and answers after the presentation with that I would like to turn the call over at the end Backtrack. Please go ahead Mr. backtrack.
Thank you very much Michelle and good morning.
Welcome to our fiscal year, 2023rd quarter earnings Conference call.
I'm pleased to report that in the third quarter, our business delivered solid results in line with our recently released guidance and projected performance.
Overall, our efficiency increased as a result of our ability to leverage high and virtual and remote worsening technologies.
Or staffs utilization is up.
And our indirect spending is down resulting in higher margins in a strong cash generation.
And demand for our leading with science services continued unabated for this quarter, resulting in our backlog increasing both year on year and sequentially.
[noise] given our results today and outlook, we are increasing or earnings per share guidance for fiscal year, 2020, and I'll speak to the details of that fit later in this call.
I'll begin with an overview of our performance in customers well, Steve Burdick, Our Chief Financial Officer will provide an overview of our financial results in capital allocation.
Will then address our customer outlooks and market assessment.
We had a strong third quarter across multiple performance measures.
Total revenue for the quarter was $710 million Internet revenue was $560 million at the upper end of the guidance we provided.
Slightly exceeding our expectations as result of outperformance NRC AG segment.
We generated in earnings per share from operations of 78 cents for the quarter and 83 cents. When we include proceeds from equipment sales associated with the wind down of our Canadian oil and gas turnkey operations.
Our backlog the best indicator for future growth.
It was up 8% year over year end up 2.6% sequentially increasing to $3.070 billion.
This increase was driven by broad base orders across all of our in clients and though it's a few more details about that just few moments.
I'd now like to provide an overview of our customer of our performance by customer in the third quarter, we had solid performance across our customers inline with our expectations.
Worked for US federal clients represented 31% of our net revenues in the quarter.
During the quarter, we saw a 10% growth and the work that we do for the department of defense and 5% growth for civilian agencies.
Unfortunately travel restrictions impacted our ability to provide onsite services for some of our international development projects offsetting the growth that we saw in these other.
Client groups with the federal government, resulting in an overall flat revenues on a year on year basis for us federal work.
Excluding last year's disaster response contribution our state and local revenues grew 5% year on year, we saw no project delays or cancellations and project bid opportunities increased in the quarter.
Although revenue growth was slightly lower than expected, we anticipate that our state and local revenues will return to double digit growth in the fourth quarter.
Our us commercial revenues comprised 25% of our business it was down 7% year on year.
We saw steady performance for regulatory driven programs, which represent about half of our us commercial revenues. However, we did see a reduction in oil and gas commercial buildings work and some discretionary industrial manufacturing programs.
Our international net revenues, representing 30% of our business grew 3% on a year on year basis, Our international government services were stable, while some of the discretionary commercial services were down.
Our United Kingdom operations did see some project delays due to regional travel restrictions in field access constraints.
Okay.
I'd now like to present, our performance by segment.
Our two business segments include first segments. The government services group, which is primarily focused on public sector clients and the second segment, which is the commercial international group, which includes our US commercial practice in our international operations, primarily based in Canada, the United Kingdom in Australia.
As expected the G.S.G. segment with its strong public sector base was up 3% driven by government consulting services and advanced analytics for water and environmental programs.
The GST group also delivered 13 in half percent margin for the quarter, which was slightly ahead of our expectations.
The CSG segment delivered a double digit margin of 10.1% increasing their margin from last year.
The strong margin performance was the result of disciplined management and project delivery, which is especially significant in light of this quarter slowdown in revenue, particularly in that group.
For the quarter, our backlog was up 8% year on year in 2.6% sequentially, increasing its had mentioned a bit earlier, two $3 billion $70 million.
The sequential backlog increase was broad based.
With a positive book to Bill in all four of our major client sectors.
This increase in our contract and authorized work is the best indicator of the stability in improving outlook for our business as we go forward into the fourth quarter.
In addition, we continued to expand our contract capacity with the US Federal government with awards with the Department of Defense.
The Army Corps of Engineers Environmental Protection Agency.
USAID and the department of state.
These contracts and are more than $18 billion in capacity across the us federal agencies provide the essential framework for us to quickly respond to future stimulus programs and government initiatives.
For example, it just in this third quarter, we were awarded the Environmental Protection Agency Superfund Technical assessment and response team contract for the mid Atlantic coastal regions of the United States.
Under the single award contract will will assist the environmental protection agency and protecting human health and the environment in response to manmade and natural emergencies and disasters.
Now I'd like to turn the presentation over to Steve Burdick, Our Chief financial Officer to present, the details of our financials, Steve Hey, Thank you Dan.
I'd like to now review the financial results for the third quarter fiscal 2020, as well as our financial condition as of the ended the third quarter.
Overall, our revenue net revenue came in inbound as expected.
Fiscal 2023rd quarter revenue was $710 million in the third quarter net revenue amounted to 560 million. It was in line with our guidance range of 540 million to $560 million.
Our revenue net revenue growth rate was impacted by the completion of large disaster response projects in 2019 as well as our decision last year to dispose of or can you do turnkey pipeline business. Excluding these two impacts our net revenue would have been in line with the prior year.
Well, our revenues were down year over year, our operating margin and earnings per share improved to release toward revenue.
We managed the business remained disciplined by controlling our cost structure to be in line with our revenue as a result, our adjusted earnings per share of 78 cents came in better than the top end of our Q3 guidance range of 72 to 75 cents.
In the improvement in our operating margin was partially driven by the increase in the CSG segment, which relates to margin of 10.1%.
For those of you following on slide presentation on page eight I'd like to summarize the gap in reconciliation adjustments.
First we realized gains on the non core equipment dispositions and due to our decision in Q4 19 to divest or Canadian pipeline construction management business. We continue to sell the equipment in the third quarter, which resulted in a gain of about $5 million were six cents per share.
Secondly, we reported a non operating loss relative to our earn out liability and this amount represents a small true up of the total estimated.
Earn out liability.
Even as the global economic outlook is uncertain in many ways.
Tetra Tech remains fiscally disciplined focus on generating positive cash flows in excess of our net income and proactively strengthening the balance sheet to ensure more than adequate liquidity.
Cash flows generated from operations for the third quarter totaled $111 million.
This cash flow from operation amounts to about $2.03 of cash per share for the quarter.
On a year to date basis, we generated $195 million in cash flow, which is a 72% improvement over the first nine months of fiscal 2018.
And just as important as these recent periods over the longer term when we look back at our trailing 12 months, we generated cash from operations and rate, 30% higher compared to the previous trailing 12 months.
Our focus on working capital cash flows is also resulted in our day sales outstanding or DSO decreased to 70 days as the third quarter.
This is an improvement of 10 days from last year and sequential improvement from last quarter.
Our net debt amounts to $136 million, which is a 40% decrease from last year and our net debt to EBITDA came in at 0.5 times, which has sequentially west in the leverage of 0.8 times in the second quarter.
Our long term capital allocation strategy calls for balance of investing in the growth of our business managing the balance sheet and return in providing returns to our shareholders.
Over the last trailing 12 months, we've generated $290 million and cash from operation.
And during the third quarter, we continued to benefit from this cash position by providing significant returns to our shareholders through dividends and share buybacks.
Regarding our dividend program during the past quarter, Weve $9.2 million and dividends and I want to announce that are board of directors approved or 25th consecutive dividend, which will be paid in the month of December of September and rate of 17 cents per share, which is a 13% increase over last year.
Furthermore, we utilized $21 million into the third quarter on our stock buyback program on a combined basis remaining under both of our previously approved stock buyback programs.
And just as important to successfully implementing our capital allocation strategy is ensuring we have a strong balance sheet and ample in terms of our balance sheet at the end of Q3 and available liquidity of over $800 million in the 400 cash on hand and funds available under our credit agreements.
As a result Tetra tech is in a financial position such that we will continue to provide significant returns to shareholders, while investing in strategic growth areas, both organically and through acquisitions, the Dan will discuss a bit later in the presentation.
Im pleased to surely financial results for the third quarter one of the thank you all for your support and I'll hand, the call back over to Dan.
Great. Thank you very much Steve.
I'd now like to discuss our differentiated growth strategy in advanced analytics.
As you know Tetra Tech has a rich reputation for high end services in water and environmental consulting.
One of the reasons for our success is the ability of our experts to leverage advanced analytics in the delivery of solutions for our clients.
Some of the recent applications of advanced analytics for our commercial clients employ autonomous technologies and artificial intelligence with both increase the speed in the volume of interpretation of that data.
We are applying these high end technologies on land in the air and at Sea to address a wide range of environmental programs for our clients.
First state and local clients.
Were left operate water treatment facilities to you as you can digital twins.
So often optimize water operations.
Exports to enable adaptive management.
Okay.
In the federal market.
We're leveraging our artificial intelligence and cloud to analyze in dynamically display information to address our government's clients rapidly expanding information management needs.
It is these interpreter.
Positive analytics.
Applied by our experts in collaboration with our clients that are differentiating us in the marketplace today.
Over the past four years, we have significantly expanded to federal portion of our advanced analytics practice.
Since 2016 for industry, leading technology firms have joined us each bringing new capabilities in client relationships in the fiber market.
Over the past four years, our revenues has quadrupled to a run rate of $200 million that we will see this year.
These revenues are result of.
Acquisitions, Andy 20% organic growth rate.
Today, our federal admitted and has over $8 billion in contract capacity for the us Federal government.
We have prioritized.
We continued growth in this practice with a goal to more than doubled revenues to $500 million a year on a run rate by the year 2023.
I'd now like to present, our guidance for the fourth quarter and for all of fiscal year 2020.
As we had.
Our fourth quarter, we see each of our one the us federal government.
Who are us state and local clients.
Three our us commercial client hands and for our international up sequentially from the third quarter.
However, the global pandemic has continued to impact select areas of our business results.
Looking and delays for projects that we've been awarded.
Most notably travel restrictions have impacted our international development revenues.
Incorporating these delays our guidance is as follows.
The fourth quarter fiscal year 2020, our net revenue guidance is for revenue to 600 million with an associated diluted earnings per share of 78 cents to 83 cents.
For the entire year, our updated fiscal year 2020 net revenue guidance.
Billion $320 million to $2.360 billion within associated to it.
Diluted earnings per share of $3.13 to $3 and 18 sets.
Okay.
Thanks.
In summary throughout the ongoing disruption associated with the global pandemic, we're seeing continued demand for our leading with science approach in advanced analytic solutions. This time of change we are providing solutions apt and support their long term objectives.
Our broad based increase in backlog is for work that is approved and authorized by our clients and provides us with additional visibility as we begin the fourth quarter.
As Steve has covered Tetra tech's strong balance sheet and access to capital as a result of our disciplined approach to financial management and capital allocation.
And we're looking forward to solving the world's most complex challenges in water.
Environment and the effects of climate change.
And Michelle.
Now I'd like to open the call.
Thank you the question and answer Thanks, Dan.
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The first question comes from the line ascend Ethernet with Keybanc capital markets. Please proceed with your question.
Hi, Tim Thanks for taking my questions.
Just like the started on the on the backlog I think it's pretty notable that all sectors and client types dirt drove that sequential increase I. Just wonder did you expect that dynamic this quarter.
Do you think that can continue and how would you characterize tetra tech's visibility into fiscal 2001 at this point in time.
Well great question.
It was one of the areas that was a positive surprise.
Prize.
For us in the quarter.
It was not expected that we would have increased across all four areas. In fact, we did think we would have increases with us federal government.
Which was up.
We did expect we would have increases in state local which is also quite predictable and.
Which was up but we were highly and sure and unclear what was going to be the case with both our commercial and much of our international work.
I do I do want to reiterate that we did see increases in all four client sectors with our backlog growth because coming into the quarter and even at the time, we provided guidance in early June we expected that our U.S federal government and state and local would carry the most for the majority of our backlog and that we would be challenged in commercial.
Actual and international and that was not the case with respect to visibility.
It was an interesting quarter with respect to the buildup and our orders.
To review the slide presentation, you would notice that we have bundled a number of categories because what we saw in the quarter from the buildup of our backlog was close to a record number of individual orders that we received as close to an all time high that we've received from different clients different programs all across the globe in our.
Global operation.
I will say that they came in with respect to smaller in size, but greater in number I would say our visibility is particularly in the commercial and international is slightly less we received more orders, but they were typically provided.
Shorter periods. So we are funded for two months three months, where we typically would be funded for six months or seven or eight months.
This is logical to us ads.
I think that in this time of uncertainty some some of their clients are being a bit conservative with respect to how much they commit out into the future, but I'm quite encouraged and we collectively are feeling very good that so many of our differ from programs in so many different areas and in clients are moving forward. So.
That's a quick overview of what we saw and how it changed from what we anticipated coming into the.
Into the quarter.
Very helpful and the next one from is it just concerns around the state and local budgets.
Our really front of mind for the investment community. These days. So can you just sort of level set for us on what the reality is for Tetra Tech basically.
What you're seeing today, what are the really important swing factors there we have to launch.
Think about.
As we look at them the trajectory of Tetra Tech state and local business over the next year or two.
But to answer this a really good question I would say that the probably the largest departure between what we're hearing and what we're seeing as with our state and local clients in a state and local work.
What we're hearing is that budgets are under pressure that there are pullbacks with respect to.
Reductions in staffing and other items at the state local level, but what we're seeing here at Tetra Tech as we've actually not seen our revenues pullback yet.
We've actually seen the revenues and the cadence of the work in the projects moving forward.
Relatively uninterrupted from what we saw.
Prior to the global pandemic.
With respect to looking forward.
We're looking at the number of solicitations or request for proposals or.
Different submittals to declines in response to it.
Inquiries that they've requested that number actually this past quarter has gone up.
Now we haven't seen the increase in our proposal submittals, our responses to our clients translate into an increase.
An unusual increase in awards, what we've seen as the awards and the.
The projects that have been delivered to us have continued at a steady pace that we would have seen before.
These projects are not being awarded to others. We've actually seen what appears to be is that they're being.
Had this discussion with a number of our project managers and technical staff.
One.
Observation is it appears that these maybe.
Being collected or being prepared so that they could respond quite quickly to stimulus or other types of funding that may come into the cities in the states. The counties. So they can move quite quickly I.
I do we do notice that I did note that back into 2008 2009 global financial crisis, when the federal stimulus came forward the each for shovel ready projects, they're just weren't that many projects that have been designed are ready to go. So I do think that perhaps our clients have taken a lesson from the previous financial crisis.
Yes, and are becoming more prepared unable to move quickly and no doubt this would portend well for us with contracts standing with over 400 different state local and county clients and we'd be prepared to move quite quickly. So.
What we're seeing again to summarize we are seeing revenues move forward relatively unabated, a bidding opportunities up things do look.
Stable moving forward and I will note and this isn't just tremendous this.
Financial crisis, or the global financial crisis, but if you go back there's no doubt that at the state and local clients.
Typically in the work that we provide for them under the water environment and sustainable infrastructure are lagging indicators, so typically when the financial impacts hit.
In the 2008 nine timeframe. It took almost three years before we saw the financial impact in the orders in the work progressing. This of course is a much steeper production, but it's still.
We would expect to be a lagging indicator and if nothing has provided to support the state and local clients in may and be an impact in a year from now or something for this type of work or something even farther out of course, we're not resigned to that inevitability. We think that Congress is.
Speaking, while we're on this call today, they're negotiating at this time for different stimulus programs that will help support local agencies governmental entities and so it's possible with the right type of stimulus programs.
It could actually see these revenues go up even further.
Okay Super helpful I'm going to sneak one more guys just clearly cash flow Tetra Tech's financial position as a bright spot here.
But just thinking about how you guys would be putting that to work.
You know any update on the acquisition pipeline are there more sort of w. ideas and copies coming up.
In the pipeline and just given this backdrop we're in.
Any kind of color on.
How what should we should expect from a capital deployment perspective in the immediate term would be great.
Well, we really are focused.
On fulfilling the strategies that Weve identified both on this call in previous calls by a building out our advanced data analytics in the federal sector that Weve presented other areas in the water sectors.
The pipeline is actually.
Robust it is quite full there are number of drivers not everyone has been has fiscally conservative and been a successful is ourselves. So certainly that has created additional opportunities. So I'd say, that's one of the certainly are many.
Many that have a concern regarding the tax.
Regimen may change.
After this calendar year, and so others have look too.
To explore transactions so.
Our goal is not too.
Two completely not put our balance sheet to work we are looking for the best in class to come join us there's plenty of opportunities and so yes.
There are other opportunities such as those that we've had great success in Australia, the UK and I would point back to my comments earlier, the for technology, leading firms that joined US over these past few years, including one just this past February.
In segue that was just an excellent.
Contribution to the company. So I would expect our our sequence of having the best and brightest joined us to continue.
Got it I really appreciate the time and insights.
Great. Thank you Sean.
Thank you. Our next question comes from the line of note Bill with Stifel. Please proceed with your question.
Hi, guys, Hi, good morning, and congrats on operating Ron have environment.
No.
So a couple of margin questions, Dan I know.
In the past you talked about this idea that over time, we could see kind of.
Convergence are coming together.
Gee and GFC.
Margins, just kind of curious how you're thinking about that but at this point and kind of how we should think about that.
Longer term margin goals for upgrade to the division.
Well.
I'm actually glad you asked that.
Had been off on my prediction on timing Im not going I'm not willing to acknowledge that I'm off with respect to destination.
Because I do think that are CHG or commercial international group will close the gap. My goal was originally that it would take place by the end of this fiscal year. So it's roughly 60 days from now I do believe that the pandemic or do recognize that the pandemic has pushed this back but I think it's pushed it back maybe one quarter maybe.
Orders, but.
With respect to longer term goals I think that under normal operating environments. I think our government services group is between 12 and 13% I do recognize that they've operated above that level.
On a pretty consistent basis, that's just excellent operation, we are 13 and a half this last quarter, but I would say if im satisfied and I think is actually good.
Operation in management, if they run around 13%. So I'd say on average shifts at 13% TSG is running well again that range is pretty narrow 12 to 13. So it shows the low volatility I do think that are the CIA GE business can be at 13% and I think.
The range May go in a challenging environment may be as low as 11 or 12, but in a strong environments something up to 15 inherently the government services businesses are so the.
Commercial business is more volatile they make changes more quickly based on economic conditions. So thats why the range is wider.
And as far as timing for a CHG group to achieve numbers similar to our government services groups for the 12 to 13 I think that within the next two quarters, we should be able to achieve that.
Great. That's very helpful and then sorry, if I missed that.
But just going back to last quarter, you kind of talked about.
You know kind of starting to get some clarity when we start to see state and municipal budgets get released on sort of giving you some.
Ability to us that that they're going to be any pockets of weakness or areas that may be impacted by some of that current abarth pressure.
On state local government.
Again, if we could get kind of an update there on how you're thinking about that as.
While I understand a lot of that market by long term measures are.
It seems like that are there any areas, where you might be a little bit more concerned on the state local side.
Well again, just headline risk with respect to challenges that our clients are having leaves me sensitive and highly.
[music].
Yeah attune to that.
I will say that.
Our project staff working with their counterparts at our clients have not seen these projects actually pull back at this time.
We do know that the budgets came out essentially on July 1st for the states for their next 2021 fiscal year.
Well some of them may be forecasting reductions and in fact may be significant reductions the part that we're focused on our the programs on the water supply wastewater treatment a flood control.
And environmental.
Restoration and stewardship those do not appear to have been reduced at least from our counterparts and so those programs are going forward we have asked.
Quite directly how do you reconcile that our programs are moving forward when there is potentially challenges.
With respect other parts of the budget and generally the response. We've had is it's not clear that thats going to actually happen, there's a number of modeling assumptions.
Tax receipts from properties actually will be reduced later, if their valuations change and that there will be updates mid year or late year, if theyre actually are big changes to their programs, but for now.
We've not seen those from our counterparts at our clients at the state and local level.
Very helpful. Thank you.
Great. Thanks, very much at all.
Thank you. Our next question comes from the line ups and England with Baron Burke. Please proceed with your question.
Hi, guys. Just couple from me Thats, one you touched on the growth in some of the technology focus businesses, you've acquired could you give us more color around the cross selling opportunities that they create I'm way you state and accelerating growth in any of your legacy business areas.
Well I think thats, a great great opportunity for us and so the federal.
Advanced data analytics, and IP services carry their own book of business with modernization data presentation, a dashboard development.
And so all of this work, but what we've been offering to our long term legacy clients are those services that have been.
Paid for or develop or where we've developed a best in class through these other programs that we can actually take and lend that too and translate it to a zero learning curve for other clients I didnt speak much today.
On our commercial and international application of advanced data analytics, but we do believe that the technologies in the lessons learned can be cross sold and broad at a huge savings add to our commercial and international clients and really do it on the lessons learned for where the cutting edge work had been done.
By the national governments and state and local clients. So.
So we do think that that's an area that helps differentiate tetra tech and that we can take those lessons learned and investments that had been made by the government and actually translate that to our commercial and international clients. So it is one of the big areas that we think.
Cross selling opportunities exist and it should be a much higher margin work. So not only will drive revenue so topline synergies it should generate higher margins and actually contribute to CHG closing that gap and hopefully actually exceeding our GST margins.
Okay, great. Thanks, very much and then you talked about how travel restrictions have impacted you on the international side I think given that the likelihood of longer time travel restrictions you have any opportunities to change Skype does any of those contracts and do them completely remotely or Jason white travel restrictions come off to date.
Well, we're actually taking components of the scopes of work we have that can be done remotely and maybe re sequencing. The work that we're performing in taking those items that can be performed here in the us developing some of the data platforms and some of the methodologies and some of the guidance documents, we can do here, but much of that work for international device.
Element or actually done in country in developing locations that.
The recipients of the benefit of these are these developing countries. So.
I would say, yes, we can do a fair amount of good remotely.
Let me add a few numbers to this and see if I can quantify it just a little bit.
The reduction that we've seen in our international development work with revenues because of travel restrictions has been in the range of 10% to 15%. So let me use the upper end of that range, 15%.
If you flip that over that you would have been recognized that 85% of the work that we have which is for one of the leading practices in the world providing consulting engineering.
Water and environment and sustainable infrastructure.
Support for developing countries is still proceeding.
So while I do recognize being.
Down 10% to 15% is not preferable.
The glass half full as still 85% full and when the travel restrictions are lifted I believe will close that gap and.
And move forward these projects I've not been.
Cancel they've not been reprogrammed, they've not been contractually delayed it's just a matter of some of this work can be done if you can't get to these countries.
Great. Thanks, very much Ali to that.
Great. Thank you Sam.
Thank you our next question.
Andrew Wittmann with Baird. Please proceed with your question.
Great. Thanks for taking my question I wanted to dig a little bit more into the margins as well and if the top of your remarks, Dan you talked about how your utilization rates were very good you mentioned that the your efficiency.
Lack of travel entertainment expenses also benefited the margins. Obviously you guys wake up every day trying to maximize these things, but the cobot situation here makes it takes it out of your hands and people are taking less vacation, presumably I would imagine and obviously kit travel and entertainment that used to so I was hoping you could cause.
It wasn't just the lack of vacation or was it was the lack of vacation a contributor to the utilization in could you help us understand this better by quantifying the benefit of lack of vacation or travel expenses.
On the business because presumably these are going to carry into.
Your fourth quarter, and then I want to understand how this could affect the year over year margin performance as you look into into 21.
Well, there's no doubt that.
Couple of components to that but so let me start with did did reduce vacations contribute to higher utilization or margin increase not particularly.
Because there was.
Our next that were put on hold or delayed.
We had people take indication so in lieu of furloughs people took vacation.
So so that.
We didnt see vacation in of itself be a material contributor to.
Or lack of vacation converting to utilization that's not the case, we did see an increasing utilization associated with a significant reduction in indirect time.
For travel for conferences for.
Conventions for seminars for all these different things that take place.
Including going out and.
Meeting collaboratively it different events, so we did see that reduce and that translate over too.
Increase utilization, we do think thats going to.
Continue at a higher level.
I would say, though that the savings that we had for not spending for airplane tickets and meals and hotels and all of these types of things.
It was noteworthy it was.
More than de Minimis, but we also spent money on the company that wasn't programs that essentially offset this to increase our t. services.
We actually spent more money for setting up monitors and and all the different things that could increase the.
Efficiency and productivity of our staff at the remote working locations now we would hope we don't want to do that on a future basis. Once you provide new monitors and new.
Chairs and new.
Technologies in connections to the Vps and others, we hopefully won't have to replicate that so these savings on.
Revenue entertainment should become more of a contributor as we as we go forward. So.
Vacation did not contribute travel and entertainment did contribute but was offset by investments that we made in the quarter to have our remote working staff more effective with respect to IP investments.
Super Helpful answer and then just it's kind of taking a step back from that one but all along the same vein I guess.
You are getting to the end of your fiscal year here and presumably budgeting for 21, I know you haven't given guidance I could ask for guidance, but if you. If you think about 21 I was hoping you could just run us through some of the puts and takes that you see into 21 in terms of either comparisons that you realize tiered 20, obviously there is some notable comparison from nights.
That affected 20 pretty significantly, but I, just as you're thinking about building your own budget. What are some of the key factors that are or the swing factors in either your revenue were marching forward with that that we should be aware of as we put out her own 20, Onest with you for your guidance.
Well.
Some of the swing factors I think will be the timing with respect to.
Haiti's word normalization, but lets referred to it as relaxation of some of the restrictions with respect to travel additional health and safety.
So as it relax is we will move back to.
More efficient and more field work will actually moved two locations, where we've been restricted or that are existing in the United Kingdom, and Australia, right now and certainly here in some of the state's here in the United States. So for US I think it's actually a function that we're looking at right now which is a little one that is one of the more complicated X.
Your size as we've done in.
Maybe ever with respect to planning our 2021, because what I hear from our project managers and engineers are what type of restrictions will I have before I can go out onto a given river or a lake for a sediment remediation project are there going to be restrictions that are going to become more constrained.
Thing or less and that actually does make a difference for us so thats I hate to say, it's an honorable but it's one that we're watching very closely so thats one item.
I also think a big swing item and we should know this here in the next.
Week or two weeks will be the the role of the federal government with respect to stepping in for stimulus in providing additional funding for state local or even other programs that would give confidence for on our commercial sectors and the other way that's not just here in the United States. We just saw Europe passed a stimulus program.
Just under a trillion dollars, which is quite significant and well provide benefit.
For that marketplace.
Geography, we're seeing similar discussions in the UK in Australia. So I think that these can actually be pretty big swing factors and for the most part.
All on a positive side because the dollars are often highly focused and aligned with infrastructure programs that will help the overall economy, putting people back to work having lasting benefits for these various economies. So those are few things that we're looking at very very carefully and then there's some small.
All items.
That may seem.
Not that big that we're looking at right now and one is actually the construct of what Tetra tech looks like with its offices.
And we are clearly going to move to a hybrid model and the hybrid model will be less office space.
Maybe 20% to 30% less office space.
It will be a hybrid model, which will have the benefits that we've actually realized of working in a virtual global collaboration platform that we have now we're actually collaborating more today significantly more today across our global platform than we did before the pandemic. What we are working just in offices, but at the.
The same time, we are going to returns. So again, if you flip it over 25% less office that means 75% may come back.
Which will give us the benefits of collaboration in the offices and the mentoring and the perpetuating in developing the of the culture that we have here at the company. So we think we can have both and.
Reduction of 25% of our office space I won't all hit our bottom line as a country contribution in the first year it'll take roughly three years for that to fully bacon, but we think we have 20 or $30 million of contribution to the bottom line from reduced office space in the in in three years from now.
Could represent or at least based on what we're producing today, that's a 10% increase in our earnings just on that office reduction.
So those are some of the moving pieces that we're looking at.
And working with as we move through the fourth quarter and I'm really looking forward sharing with you our guidance for 2021.
Based on.
Revaluation of these and other factors.
Cool that's really helpful. Thanks.
Great. Thank you very much ending.
Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.
Good morning, gentlemen, thanks for taking my call.
Wanted to talk about margins I know several questions have come up on it already but I want to take a little bit of a different tack on different look obviously you highlighted the analytics.
Both strategy 200 million today to 500 million when you look at that business does that carry a higher margin than some of the historical tetra tech or Gs GRC.
Yes.
It could this be a margin enhancer as we go forward either by.
Utilization enhancer for just a higher price ticket type margin item.
So the answer is yes, yes, and yes. So yes. It does carry a higher margin, yes, it is driven by higher utilization.
One thing that we're aware of here is that in the case of advanced analytics.
Most all of the revenue is net revenue so quite often we carry.
20% subcontract 20, 25% of the revenues, we havent subcontracted for our field investigative activities and that includes laboratories and field surveying and drilling that subcontracted.
And we generally get low in many instances no margin on the subcontracted work on the advanced analytics, it's actually performed internally and so it's our professional staff that performance. So we carry margin on all of the revenue and so you'll actually see it be enhanced the revenue will be greater for a given dollar the.
Margin itself is higher because it's actually highly specialized and it really is very high demand and supply and demand very high demand relatively small supply, especially at the high end analytics that are linked with our domain experts. So utilizations up more of the revenue carries margin and it has mark Mark.
And in itself and we haven't fully modeled out exactly what the increase in the GE has achieved margins would be as a result of taking is from two to 500, but we think that could move it up a 100 or 200 basis points. So the 13 could move to a 14 or even a higher once we get to a bit larger scale with our if any.
Analytics set the federal.
At the federal level.
Got it that that's helpful. And then I just wanted to just quick question.
Talking about international development, obviously travel has been delayed this is create a backlog opportunity of work that needs to be done once.
As you said relaxation.
Restrictions come into play.
Yes, it does but I know that there are a couple of different ways of looking at a backlog there is a.
One one school of thought is that they will then be a big rush of work to be complete and so that revenues will flow at a higher level in order to get up what we see more often is since the work still has a finite throughput that can be completed its generally pushed at the right. So it the project.
Please don't become larger any given quarter to to keep the original schedule. So if the work that was to be done was originally scheduled to be done and completed by the end of 2021, a six month delay actually moves it too we ought to be done.
Midyear of 2021, so I think things moved to the right not simply pile up and get back to the original schedule.
Got it but at the end of a day that revenue does eventually come through yes, yes. It does yes. It does and then just one quick follow up obviously tetra Tech's financial position is.
Very good there was a comment about acquisition.
And just being better position for that but.
Taking a little bit of a step further does your financial position.
Drive additional revenue opportunities versus competition that maybe smaller questionable.
In terms of leverage or anything like that.
Well I think it does in a different light.
So we do not like to use our balance sheet is a differentiator with respect to putting it on the table. So our goal is not because we can that we want to put up a letter of credit and LLC or a bond or something else. Our goal is it because we have it we want to put at risk that's not our goal and in fact, the reason that we have a very strong balance sheet and a very.
Low leverage and great cash generation is because we are fiscally prudent and don't do that.
But I will say that many of our large commercial clients and say, even a bit even in the state local and federal side are looking for larger fiscally stable companies because what they don't want to do and we saw this during the global financial crisis, we saw some of our largest clients across all of our sectors go to some of the more stable larger firms.
Because what they want as they want their consultants and engineers to be around for the life of their program and beyond So I think it does give a natural.
Tendency in priority to those that are most stable and by the way scale in of itself is not the answer because we know a lot of very large firms.
In different sectors that just because they're large.
They weren't safe they went away so those that carry high leverage those that have leverage multiples.
Two three or higher you may be large, but you may not be long for this world. So I think we're in an excellent position to have both.
Low leverage access to plenty of capital stable workforce.
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And the predictability of deliverance across any of these economic changes.
Great I appreciate it that's it from me and congrats on a nice quarter. Thank you.
Great. Thank you Gerry.
Thank you. This will conclude the question and answer session I'll now turn the conference back over to Dan Backtrack to conclude.
Great. Thank you very much Michelle and thank you all very much for your insight your questions and mostly for your support of Tetra Tech.
On behalf of myself and the 20000 employees at Tetra Tech, we are committed to leading with science promoting sustainability by the services, we provide and supporting our clients with solutions in water environment and infrastructure services.
And I really look forward to our next call, where I will share with you not only how we performed in the third quarter and all of fiscal year 2020 by giving you our forecasting guidance for fiscal year 2021.
And thank you very much and have a great rest of today and a great rest of the summer and be safe. Thank you.
Thank you ladies and gentlemen, this concludes our conference for today. Thank you offer for participating and have a nice day all parties may now disconnect.
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