Q2 2021 Tetra Tech Inc Earnings Call
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As a reminder, Tetra Tech is also simulcast me in this presentation with slides from the investors 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 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 are 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 in Tetra Tech's periodic reports filed with the SEC, except as required by law Tetra Tech takes no obligation.
To update its forward looking statements. In addition, since management will be presenting some non-GAAP financial measures as references the appropriate GAAP financial reconciliations are posted in the investors section of Tetra Tech's website.
At this time I would like to inform you that all participants are in a listen only mode at the request of the company. We will open up the conference for questions and answers after the presentation with that I would like to turn the call over to Dan <unk>. Please go ahead Mr. <unk>.
Great. Thank you very much Melissa and good morning, and welcome to our fiscal year 2021 second quarter earnings Conference call.
I'd like to start with sharing with you that we had a strong second quarter delivering results ahead of our guidance for both revenue and earnings.
Our leading with science approach focused on water.
The environment.
<unk> infrastructure and renewable energy is well aligned with the priorities of our clients worldwide.
In the United States, the New administration is proceeding with implementing its policies from priorities associated with addressing climate change environmental stewardship, and the use of international development to support its foreign policy.
Currently the Baidu administrations from the process of filling 4000 government appointed positions 200 of which require Senate approval.
And all of these appointments are being put in place to implement and administer these priorities across all government agencies.
These appointments are put into place, we expect opportunities to increase for us to leverage our contract capacity and industry leading.
Expertise.
I'll now begin with an overview of our performance and customers followed by Steve Burdick, Our Chief Financial Officer, who will provide a more detailed review of our financial and capital allocation.
I will then address our customer outlook and earnings guidance for the third quarter and for all of fiscal year 2021.
We had a strong second quarter.
For 2021 exceeding.
Exceeding our guidance for both revenue and earnings per share.
Our operations generated a record second quarter earnings per share of <unk> 83.
Which was up 26% from last year.
Our net revenue was also an all time high for a second quarter for the company at $600 million.
<unk>, 3% from last year and that is comparing this year's pandemic affected quarter to last year's non pandemic affected quarter.
And our backlog ended the quarter at $3 billion $150 million up 5%.
From last year.
I'd now like to provide an overview of our performance by our end customers.
Our U S federal government and state and local revenues were both up year on year.
State and local revenues were up organically, 32% year on year, driven by continued growth across our municipal water and our disaster response programs.
When adjusted for episodic disaster response work that we performed in the quarter, we still had a very strong 19% year on year growth rate for municipal infrastructure programs.
Work for our U S. Federal clients was 31% of our net revenue in the quarter and was up 6% year over year.
Growth was led by double digit increases in work for our U S civilian agencies and the department of Defense. However, as we've spoken over the past several quarters. We've continued to see delays in our USA projects due to travel restrictions associated with the pandemic globally.
Our international net revenue was also 31% of our overall business down 5% from last year.
Some of our Canadian and our United Kingdom, and Australia, and government work continuing to strengthen and saw additional growth in renewable energy work for Canadian regional utilities. However.
However growth in these areas was offset by a slower recovery and work for our international commercial clients.
For our U S commercial net revenue.
It represented 21% of our business in the quarter and was down 7% from the prior year impacted by very difficult comparisons with strong pre pandemic revenues that we had a year ago in fiscal year 2020.
While our regulatory driven programs in renewable energy revenues continued to grow we saw a slower recovery and discretionary work for our industrial clients and our high performance buildings practice.
I'd now like to present, our performance by segment reported two segments.
In the second quarter, both of our segments contributed to an expansion of our operating margin the.
The government services group or the <unk> segment was up 180 basis points year over year, delivering 13, 3% margin for the quarter.
The margin increase was driven by high end high value data analytics and design services and significant municipal growth that drove strong utilization across the <unk> operations.
The commercial international group or the <unk> segment was up 50 basis points year over year, resulting in a 10, 4% margin for the quarter.
This is particularly notable in the quarter that is impacted by the seasonal winter slowdowns in our Canadian operations, which very much limit their contribution to margin performance in the second quarter of each year. During the months of January February and March deep winter months up north.
Overall <unk> high end consulting continue to perform very well, especially for our environmental and renewable energy services work.
Our backlog.
Backlog for the quarter was up 5% year on year, ending the quarter at 315 billion.
In the United States. This quarter was marked by the transition of the U S. Federal government's new administration and the initial steps towards new alignment of procurement to the administration's priorities climate.
Water environment and international development.
Holding contract capacity that aligns with the administration's priority programs is essential to funding our future work. This quarter, we added strategic contracts for the U S. Army Corps of engineers for Dan safety, and flood risk reduction, providing almost $100 million.
And contract capacity for our high end services to analyze Dan.
Managed flood risk and address climate change mitigation.
The one single award contracts that added $51 million in contract capacity for international development work that will support the transition of countries to lower carbon and higher efficiency renewable energy economies.
We wanted a new Air Force program for Engineering design services with a $2 billion ceiling that provides a vehicle for our delivery of high end sustainable and resilient defense infrastructure designs.
And we received new task orders from the federal government to support critical programs for some of our key clients with the United States Environmental Protection Agency Federal Aviation administration, and many of the international development agencies.
And at this point I would now like to turn the presentation over to Steve Burdick to present, the details of our financials for the quarter capacity.
Hey, Thank you Dan.
Yes, I'd like to now review the GAAP financial results for the second quarter of fiscal 2021, as well as our financial condition.
First half of the year.
Overall, our revenue and net revenue came in better than expected when compared to our second quarter guidance.
The fiscal 2021 second quarter revenue was $755 million in the second quarter net revenue amounted to $600 million.
It was in excess of the top end of our guidance range of 565 million to $595 million.
Both our revenue and net revenue were up 3% over last year.
So when we compare our second our second quarter of this year the second quarter of last year, our revenue and net revenue was positively impacted by the water and environmental services provided to our federal and state and local clients, partially offset by the impact to our commercial and international activity from COVID-19 restrictions.
Similarly, our operating margin and earnings per share improved.
Our earnings per share of <unk> 83 came in better than the top end of our Q2 guidance range of <unk> 73 to 78.
And better than the second quarter of last year.
The higher EPS was due to the improvement in operating income, which came in at $61 million this quarter.
Our higher operating income was driven by an increase in our margin over last year by 114 basis points.
And this operating income was a result of improvements from both our <unk> segment, which realized a higher margin of 10, 4% and GST, which realized an even better margin of 13, 3%.
So while the revenue operating income and EPS have improved we also remained focused on generating positive cash flows.
Cash flows from generated.
From operations for the second quarter totaled $124 million.
This is a $23 million improvement over last year, driven by both higher net income and continued working.
The continued improvement in our working capital this year.
This working capital improvement also benefited from a decrease in our day sales outstanding or DSO.
Our DSO decreased to 65 days as of the second quarter and this is an improvement of six days from last year and a sequential improvement of two days from last quarter.
Our net debt amounts to $42 million.
This is an improvement of $169 million compared to last year, even as we used cash for strategic acquisitions stock.
Stock buybacks over the last 12 months of about $66 million.
And dividends over the last 12 months of about $37 million.
Our our long term capital allocation strategy calls for a balance of investing in the growth of our business.
Managing the balance sheet and providing returns to our shareholders.
And over the last trailing 12 months cash from operations generated $337 million.
Which is over $6 per share.
During the second quarter, we continued to benefit from this cash position by providing significant returns for shareholders.
Dividends and share buybacks.
Regarding the dividend program.
During the last this past quarter, we paid out $9 2 million from dividends.
And I want to announce that our board of directors approved our 28th consecutive dividend, which will be paid in the month of may at a rate of <unk> 20 per share.
This is a <unk> increase and an 18% increase from last year.
Furthermore, we utilized $15 million in the quarter under stock buyback program.
So as of the end of the second quarter, we have about $178 million remaining under our previously approved stock buyback program.
And just as important is successfully implementing our capital allocation cash.
Little 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 with the current leverage of two times and an available liquidity of over 800 million from the form of cash on hand, and funds available under our credit facilities.
As a result, Tetra tech has been a very good financial position such that we will continue to provide returns to our shareholders, while investing in technical capabilities and strategic growth areas, both organically and through acquisitions with top tier firms such as Quanta and <unk> group joined the company and that Dan will discuss later in this.
Presentation.
I'm pleased to share these financial results for the second quarter, one and thank you for your support and I'll now hand, the call back over to Dan.
Great. Thank you very much Steve.
I would now like to provide our outlook and growth projections for our four client sectors for the second half of fiscal year 2021.
We see strong growth rates across the board.
At about 10% collectively with strengthening business outlook and favorable comparisons with the pandemic effects impacts on the second half of last year.
In the United States, our federal state and local markets are expected to grow at a 10% rate driven by robust budgets for our differentiated services.
We expect growth to be led by the need for sustainable water supplies environmental restoration programs in high end data analytics and digital transformation for our federal and local clients.
Our ability to leverage our more than $20 billion in federal contract capacity as well as contracts with more than 500 different municipalities is key to our ability to grow as these clients allocate their unprecedented levels of funding.
We expect our U S commercial work to grow at about a 7% year on year rate driven by our differentiated services in renewable energy and our environmental program supports.
We expect our renewable energy revenues to grow at a double digit rate primarily for the emerging offshore wind programs and other high end renewable energy transformation services.
And finally, our international work is expected to grow at the fastest rate among our four and client sectors at about 12% year over year we.
We expect broad based growth across Canada, the United Kingdom, and Australia for both the commercial and government sectors.
All three regions have strengthening economic conditions, and we see work beginning to increase their various infrastructure stimulus programs are being put into place.
Overall.
The United States Federal government is beginning to adjust priorities to align with the new administration, including goals to mitigate climate change.
Port water programs protect the environment and advance the adoption of renewable energy.
The administration with the support of the Democratic Congress recently signed just last month.
The one nine trillion.
American Rescue Plan Act.
The AARP includes $350 billion for state and local governments that'll be distributed across the country to support COVID-19 related relief.
And as included in the act water and sewer programs.
We have highlighted in our presentation. Some of these allocations to key sunbelt regions totaling over $50 billion in support for just the states of Florida, Texas and California.
With wide latitude on how to spend these funds state and local governments now have the ability to accelerate water related capital spending.
Dress previously unfunded water priority programs.
And initiate a transition to a digital and higher efficiency water infrastructure throughout the regions.
This additional funding could prove to be a long term catalyst for the differentiated water services, we provide across our client base of over 500 municipalities in the United States.
Okay.
To support our future growth and to deliver high end services for our clients I'm very pleased to welcome two new firms to the company since our last quarterly call and both of these firms exemplified leading with science and bring additional world class talent and technical resources to the company.
First kolenda brings high end expertise and computational fluid dynamics, providing our commercial clients with a unique ability to partner with us to conceptualize model and test new designs.
<unk> brings to Tetra Tech additional high end digital water transformation experts and additional tools that expand our tetra Tech Delta.
For a complete suite of technical tool.
Tools to solve problems for our clients.
This expertise is in high demand and collective team can now address some of the most complex digital water transformation efforts with industry leading solutions.
Since joining the company. These firms technical experts have rapidly engage with the broader tetra tech community to provide their expertise to our clients worldwide.
Just a week ago in fact, a week ago today on April 20, <unk> was Earth day.
And we here at Tetra Tech released our sustainability program report this.
This year, we reported both on the past decade of progress that we've made and we announced our new goals for the next decade.
Since the inception of our program back in 2010, we achieved two different goals, many well beyond our original aspirations, including.
The reduction of GHT of greenhouse gas emissions from our operations by 78%.
And we very proudly announced our new goal for the next decade.
As a company to be climate positive and carbon negative.
We initiated new reporting to quantify the environmental social and governance impact of Tetra Tech project work not just what we do within the company, but actually impact of the projects we perform all around the world.
As part of this reporting will now track our project metrics associated with greenhouse gas emissions.
Water savings renewable energy and habitat and our goal to improve the lives of 1 billion people around the world.
And finally, we are committed to applying our leading with science approach to create the processes procedures and solutions that will become the new standards in our industry and advanced climate positive actions worldwide.
I would now like to present, our guidance for the third quarter and for all of fiscal year 2021.
Our guidance is as follows.
For the third quarter, our guidance range is from $600 million $600 million to $650 million for net revenue.
With an associated earnings per share of <unk> 85 to.
<unk> thousand 90 <unk>.
For the entire year, we're raising our guidance for both revenue and for earnings per share with an updated guidance for revenue of $2 45 billion to $2 55 billion.
With an associated earnings per share of $3 60.
To $3 70.
As in the past some of the assumptions for our guidance both for the quarter and for the entire fiscal year do include the intangible amortization that has not been included it's embedded in our guidance. It does include a 26% effective tax rate for the remainder of the year and that would be our estimated.
Tax rate for Q3 and Q4.
We do have outstanding an estimate of $54 6 million.
Diluted shares and as in the past.
This guidance does not include any contributions that we would complete from here forward through the end of the year.
In summary, we had a strong second quarter setting new records for our second quarter revenues operating income earnings per share and cash generation.
Our high end water environment, and sustainable infrastructure, and renewable energy services, and our leading with science approach is in high demand globally, and well aligned with the new U S administration's priorities.
We're continuing to advance our high end science and digital transformation services with the recent addition of two excellent companies and a result of all of this that's taken place through the first half of the year, including our performance in Q1, and Q2 and the outlook for the remainder of the year I am pleased to share with you that we are raising our annual guidance.
<unk> for both revenue and earnings per share.
And with that Melissa I would like to open the call up for questions.
Thank you the question and answer session will begin now please be aware that there will be a 32nd pause in our webcast to allow for buffering. At this time audio participants are invited to submit a question. Please remember the function the audio functions on your computer before you speak.
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Our first question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Tim Thanks for taking my questions.
First one from me.
I was just curious when we look at the back half outlook.
The weighted average.
Growth outlook across all the end markets.
In the double digits with all of them contributing positively.
And I would just be great to get a sense for.
How much of that is sort of.
The comps versus the prior year.
And what is really sustainable.
Going into the outer years.
If you could help flesh that out a little bit that would be helpful.
Yes, Thats a good question, let me, let me start with where the easy comps or so where the.
Hill has been so steep.
I'd say that if you looked at what took place from really the third quarter because of our first and second or the first calendar quarter of the year.
Took us through March with really low or no impact from the pandemic with our operations, but I will say the second half which has begun here in the third quarter.
Comps get much easier for our U S. Commercial work, where we saw reductions quite quickly a year ago and we also saw internationally, where many of the travel restrictions and commercial work had been impacted quite significantly so I would say in those two areas.
The comps actually are.
More favorable I think you can begin to look sequentially, though and it's building back from the impact of the third quarter of our last year and they are building and sequentially I see them actually strengthening and have a really long.
Our positive outlook for continued growth. So I think we do have at least for the next two quarters and the rest of this fiscal year a contribution from easier comps in both international which of course is a 12% year on year growth estimate.
Our commercial.
However, I would say that our state and local in our U S. Government, we saw very little impact and in fact, if you followed our financials you saw that we grew both year on year and sequentially.
And state and local and federal government, and so theres not easier comp and in fact I would.
I would suggest that because of the strong growth we've had over the past several years and state and local the comps are quite difficult and so when you see a 30% growth in state and local off of a all time high and our state and local it actually makes it that much more impressive and robust with respect to not only on our performance.
But where we're going with this business I do see those all of these end markets funding actually increasing certainly.
It's self evident with respect to government both at the national federal levels, and the local levels, where it's coming from but the additional investments.
From a strengthening economy have really affected most all of our end markets on our commercial and international work. So I do see them in the out years continuing.
Upward trend in and being strong so.
Easier comps on U S commercial and some international but difficult comps and still double digit forecast on federal and state and local.
Yes, that's really helpful and that makes sense.
And maybe as we look out into fiscal 'twenty two.
Would the growth rates outlined around that second half half outlook change at all I mean do you foresee.
The biggest growth drivers or the highest growth rates.
By reported end market shifts.
Yeah.
Well, we Henry really.
Staying away from commenting specifically in 2022.
Got a lot of different moving pieces here not only the one nine trillion dollars.
Plan that was just passed here a month ago, but there is much discussion on infrastructure stimulus and many other items.
So I think we'll provide indications for 2022 as we get closer to that but certainly the trend would indicate that direction.
From what we're seeing at this point, but we will provide more specifics and quantify that as we get towards the end of the share.
Thanks, very much Dan nice quarter.
Thank you very much John.
Okay.
Thank you. Our next question comes from the line of Sam England with Bloomberg. Please proceed with your question.
Hey, guys. Thanks for taking the questions and the first line just given where the TSV margins is moving to.
Is it making you reconsider any it gets somewhat longer time sustainable margin might be for that segment.
Well, it's a good question, we did increase our what we considered our longer term meaningful I should say shorter to mid term sheets.
Margins for GST.
<unk> previously, we've said, 12%, 13% operating income with the growth of our data analytics and our it transformation.
<unk>, we increased that from 12 to 13 to 12, 5% to 13, five we think that as that grows in scale. It will continue to grow and so I do think there is additional upside in margins will trend higher.
Of course, you take a we took a look at this quarter, which is the winter quarter typically our softest quarter on margins and we were approaching mid <unk>. So question certainly may be how is it that even in your most difficult quarter youre at the top end of this we will have outperformance based on quarterly contribution of higher revenue than we might normally see.
Strives utilization, so while I would like to see the company increase in the <unk> group increased to 180 basis points per quarter sequentially from now until till we hit the much much higher number about half of that increase was attributable to higher utilization. So if you back part of that out it puts us right about.
Puts us still ahead of what we had estimated.
So I don't want to indicate we're going to go up.
By 180 basis points, each quarter year over year, as a new benchmark, but I do think that overall DSG will trend up from even the numbers that we provided is a range is coming into this year.
Great. Thanks, guys really correct.
And then the next one could you talk a bit about how can you administration's plans are affecting rfps and new project starts at state and local level is there are low.
Renewed confidence amongst the decline so you can see that.
Yes, there is we've seen <unk>.
<unk>.
More confidence and by the way competencies and just on speculation or anticipation of what will happen. There is a component of that but.
As outlined in my prepared remarks, and that included on one of the slides on the prepared presentation.
The states are actually receiving real dollars and are receiving it right now and there has been a very very wide latitude as to where those dollars can be applied to.
So for instance, COVID-19 relief also includes sanitation line clean water and treatment of wastewater on sanitation site and many of the different areas and including studies with respect to.
Hygiene and in industrial.
That protection, so theres a lot of things that gives those states latitude for funds that are receiving right. Now now of course, there's forecast of significant additional funding that would move them to unprecedented levels and thats of course, providing them even additional.
Positive outlook with respect to planning for new programs, we have seen more rfps, but I wouldn't say at this point it has been directly related to the funding Thats been released because this leg like many government agencies things don't move instantly and so there's positive build is really been taken for an extended.
The amount of time I think that this is additional building that we'll see in out quarters and out years.
Great. Thanks, very much all profit.
Okay. Thank you Sam.
Thank you. Our next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.
Okay, great. Thanks for taking my questions. This morning, I guess.
So let's start I guess from the U S. Eight business Dan. Obviously this has been challenging area you've mentioned it can't get out to the site COVID-19, keeping kind of homebound, a little bit more than wed like to be.
Condoms are starting to reopen within the U S and some of these international areas too.
Have to think that maybe or maybe I guess the question is is there planning about getting back in the field what does that timing look like and what are you hearing from your customer here.
So I think it's a couple of things, but one and most central you've just mentioned, which is the actual physical restrictions of not being able to travel to many of these local locations Youre right. We are seeing it easing I think there is going to be a tipping point, where it's not going to be just a linear incremental improvement I think it will improve in <unk>.
He will move much more quickly to open up their economies and their travel and others. So we do think that that and of course. This is just a.
This is just our best estimate, but we think it will get better as we move toward our fourth quarter I'd call. It the fall.
Or toward the end of the year, but the other thing we feel very positive about is the.
The current administration just passed.
And is putting in the USAID administrator. So many of the policies and many of the priorities of the current administration, which is to add international development as.
A key.
Tool for foreign policy, which has actually improved the lives of the local citizens in order to address immigration.
This administration is it's not higher walls, it's creating more of a magnet in their home countries to make them want to states and that is an absolute center piece for USAID and certainly is one of the largest and we believe the largest with respect to sustainability climate change on our resiliency engineering advisory work governance work.
We think that we can be of great assistance and helping further the policies for the U S administration in this area. So yes travel.
Restrictions easing is willing to help we think thats, probably a bit later in the calendar year, maybe towards the fall, but we think the actual timing and issuing of additional projects and contracts and others is going to be accelerated with an administrator, who is extremely experienced and our role in supporting the government. So it's not a person.
New to this role as we've seen perhaps.
During the previous administration.
Is that.
Is that outlook on USA is that what's baked into guidance or is it somewhat different from that.
Its actually different from that we have a very tepid.
Inclusion of the increase in USA and in fact, we've seen our USAID as a headwind we think it's going to move more with.
Year on year comps to something flattish, but if you took the USAID out of our.
Out of the calculation of our calculus for our federal government growth and really focused on our civilian agencies and defense. We really would focus we really predict second half would be closer to probably 12%, 13% or more growth right. So ex internationally our U.
U S. Federal government work is actually growing quicker and I think as we get to the end of this year and certainly into 2022.
We think that will not become a headwind it will not become neutral as we see it towards the end of the share that it'll become a contributor.
Yes for sure. Okay. That's helpful. And then just a quick one here for you Steve.
Kind of.
<unk> had earlier that there is some disaster work in the quarter and you said kind of ex disaster. So can you just give us the total dollar amount of disaster restoration work this quarter versus the prior.
The prior year quarter, just switches can understand the exact impact there as we put our models together.
Yes.
$14 million in the quarter.
And were there anything last year.
It was about $4 million last year, so about a $10 million differential.
Okay Super helpful. Thanks, guys have a good day.
Thank you thanks line.
Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Alright, Thank you going back Dan to your comments on U S commercial outlook.
The second half you expected, 7% and what was the growth on the renewable energy what was the growth rate that you mentioned that you highlighted offshore wind.
Sure.
Set us well into the double digits. So the areas that have been very strong has been renewable energy and for us.
The biggest portion of our renewable energy is focused around wind and most of that is actually offshore wind, which brings into play a lot of our marine work our offshore water quality issues.
Issues with respect to marine mammals.
And so bottom profiling all of the things that would be required in advance to get the permits and evaluate the environmental impacts of potential development offshore so renewed.
Renewable in general is.
Well over double digits.
And the primary or the largest driver for us as well.
Wind and specifically offshore wind.
Okay. Thank you.
Well into the double digits comment.
I think historically, you've talked when you talked about advanced data analytics work.
<unk> highlighted some of the organic growth outlook. In addition to the acquisitions or have you or is it mostly acquisition led growth in that space can you talk a little about.
Please.
Yes.
<unk> advanced data analytics and it transformation digital transformation practice.
It has been growing at about 2020, we called out a 20% organic growth rate.
And of course is a much bigger practice and we're pushing a bigger.
Bigger business NTT, there, we're still in the mid to.
Mid teens, so sort of 15, 16% organic growth rate and then thats been augmented by acquisitions that we have been have we have brought on and were so continues to be one of the key areas that we're looking to continue.
Continue to invest in both internally for organic growth, but also.
For acquisitions to bring an excellent partners that could utilize our access to additional federal government agencies to utilize master contract vehicles, we have with all of our clients commercial clients state and local all of the municipalities and the federal government. So is it growing organically from its actually the fastest.
<unk> organic area, we have in our company.
Thank you very much.
Thanks, Dave.
Thank you. Our next question comes from the line of day.