Q2 2022 Tetra Tech Inc Earnings Call
Second quarter last year.
Now excluding the extraordinary contributions from disaster response work that we had in the quarter our state and local work still grew at a double digit rate with continued strength in municipal water business all across the U S.
Our U S. Commercial net revenue was 21% of our business up 14% from last year, which is about double the 7% growth rate that we saw last quarter.
Our services and sustainability, which include environmental permitting high performance buildings design and clean energy services, all contributed to our growth in this sector.
And our fourth client sector work for the U S. Federal government was 27% of our net revenue in the quarter and was stable from the same quarter last year.
Now excluding the one time impact for the Afghanistan wind down of our U S. International development work, our federal work was up 7% on a year on year comparison, driven by growth in both our civilian and department of Defense Agency services.
I'd now like to present, our performance by segment, where each of our two segments. The.
The commercial International group are we referred to it as <unk> grew by 25% year on year, while also increasing its margin by 50 basis points.
From last year.
This strong growth was across both the international and commercial markets within this business segment.
The 50 basis point margin expansion is in line with our margin expansion goals and improves on the seasonally lower margins generated during the Canadian winter season, which aligns with our second quarter.
We expect <unk> margins to continue to expand as we move into the second half of our year, which will be both the spring and summer months and many of the northern latitude locations for this group.
The base business for our government services group or the PSG segment also expanded by approximately 50 basis points.
With the benefit of extraordinary disaster response work and favorable project Closeouts DSG delivered overall, a 150 basis points increase resulting in a 14, 9% margin for the quarter.
Overall, the <unk> segment grew its net revenue by 9% in the quarter.
Backlog backlog was also a very good indicator for us as we came out of the quarter, our backlog was up 15% year over year and up 5% sequentially on strong broad based orders, resulting in a one two book to bill for the quarter and an ending.
And an all time high of $3 six $1 billion of contracted funded and authorized work for the company.
The strong growth in backlog is particularly notable in the quarter with record revenue for the company. We had to cover both the amount of revenue we expended during the company and also increased the backlog by more than $100 million.
In the second quarter, we won new programs and task orders across our global business that leveraged our more than $20 billion in federal contract capacity and expanded our long term relationships with our key clients.
We also won new programs with the U S Army and added new water programs with USAID and Mozambique.
Our work for Australia is international Development Agency, the Department of Foreign Affairs, and trade or <unk> also continued to expand with the addition of new programs in Indonesia.
At this point I would now like to turn the presentation over to Steve Burdick to present, the details of our financials Steve.
Thank you Dan So I'd like to now review the GAAP financial results for the second quarter of 2022.
Overall as Dan noted earlier, we had strong Q2 results and revenue for revenue and earnings the strong performance from operations resulted in top line growth with second quarter revenue of $853 million.
Net revenue amounted to $700 million, which was above the upper end of our guidance range, which was $620 million to $607 million.
Overall, our revenue and net revenue were both up 13% and 17% respectively.
Over last year with strong growth from international state local and commercial end markets.
Our operating profit and earnings per share for the second quarter improved over last year GAAP EPS came in at 98% from the second quarter, which is an increase of 18% over last year.
Our GAAP EPS of <unk> 98.
Came in better than the top end of our guidance range, which was <unk> 86 to 91.
This higher EPS was due to the improvement in reported operating income which came in at $75 million this quarter up 23% over last year.
Our improved operating income for the second quarter was largely driven by a 31% growth in our <unk>.
Segment operating income and a 21% growth in our <unk> segment operating income.
The <unk> margin of 14, 9% was an improvement of 150 basis points over last year and.
And the resulting margin of 11, 2% is an improvement of 50 basis points over last year.
On a consolidated basis. These improvements resulted in an EBITDA margin of 11, 6%.
Which is 60 basis points over the second quarter of last year.
Further regarding the year over year EPS I would like to note that our tax rate. This year of 25, 7% is higher than last year's tax rate of 21, 5%, which equates to about a <unk> <unk> headwind in this year's current quarter.
Now cash flows generated from operations for the second quarter totaled $95 million the cash from operations year to date amounts to $178 million, which is an increase of 13% from the first half of last year.
Our focus on working capital and cash flows as resulted in our DSO improved once again to an all time low of 59 days.
This is a further improvement of six days from last year at this time.
And for many of you who've been following us for a while you'll remember that our long term goal was to generate the DSO of no more than 70 days. However.
However, we now believe we can do better and generate a sustainable DSO below 70 days.
This lower sustainable DSO.
<unk> reflects the outstanding work of our project managers lead relative to higher quality projects and highly satisfied clients and a broad portfolio across all of our end markets and geographies.
Our net debt amounts to $56 million, our net debt on EBITDA was the leverage of two times with a total cash position of more than $194 million.
And as we presented here today, the continued high quality results with an improved EBITDA and higher margins along with strong cash flows and lower working capital requirements as shown that Tetra Tech has been able to invest in the business and generate very strong returns.
Over the trailing 12 months, our return on invested capital is at 21%.
Our long term capital allocation strategy calls for a balance of investing in the growth of our business.
Managing the balance sheet.
I will now present, providing returns to our shareholders.
For the trailing 12 months cash from operations generated $324 million for about $6 per share.
And during the second quarter, we continued to provide significant returns to our shareholders through dividends and share buybacks.
So regarding our dividend program during the past quarter, we paid out $10 8 million in dividends.
I would like to announce today that our board of directors approved our 30 <unk> consecutive dividend, which will be paid in the month of may at a rate of 23 per share, which is a 15% increase over last year.
Also this is the eighth consecutive double digit annual increase since we started our dividend program.
Further we utilized $50 million in the second quarter on our stock buyback program.
We have a totaled $448 million remaining in our approved stock buyback programs.
All told for the first half of fiscal 2022, we returned more than $120 million to our shareholders through both the dividends and share buyback programs.
Our strong cash flow allowed us to successfully complete several strategic acquisitions, which will which Dan will discuss later and continue to return capital to our shareholders by holding our net leverage to two times.
And our strong balance sheet and available liquidity of over $1 billion.
With our inaugural sustainability credit linked facility positions us to continue investing in technical capabilities and strategic growth areas.
We are pleased to share these financial results for the second quarter and the fiscal year to date.
Thank you for your support.
The call back over to Dan.
Great. Thank you Steve.
I'd now like to start with discussing some of the drivers associated with our fastest growing market in the company.
Our international work.
Across our broad based international markets, we're seeing a new focus on climate change programs and an increase in associate budgets for critical programs such as Ocean protection.
Biodiversity and land management and Decarbonising buildings.
This funding is resulting in an increased demand for our differentiated high end consulting and engineering services with large multinational companies and new regional work in our key international operations in the United Kingdom, Australia, and all throughout Canada.
This year.
We're quite pleased to see that the federal budget was finally approved in mid March.
The funding includes increases for key water environmental and international development priorities.
We expect to see these funds convert to new task orders for our long term clients that leverages, our more than $20 billion.
We have in U S federal contract capacity.
The U S. Army Corps of Engineers has a budget of $8 3 billion, which is increase of 7% over the previous year to execute the programs that include dams and levees navigable waterways in key coastal protection projects.
We expect to support the core with our more than 50 years experience in World class design expertise throughout all of these technical service areas.
Okay.
Our growth strategy includes investments in acquisitions and the focus of the acquisitions have been to identifies those that will further expand our high end capabilities and water and environmental programs.
I am pleased to announce and share with you that in the second quarter. We added two excellent firms that bring specialized skills and talented staff to Tetra Tech.
The first is <unk> associates, who are global leaders in hydraulic modeling and sustainable water management for commercial clients there.
Their capabilities are essential to addressing programs that may commercial operations more sustainable and environmentally sensitive.
I'm also very proud to announce that axiom data sciences joined us and they provide unique expertise and technology for the analysis of massive big datasets that often include billions of observations that are essential to global climate change assessments and investigations.
Both of these firms have rapidly integrated into Tetra Tech's differentiated Delta technologies and both of these firms have brought cutting edge data analytics solutions that help further our leading with science strategy.
And now I'd like to present, our outlook for the second half of fiscal year 2022 across our four clients sectors.
We see our growth rate projections staying the same as we saw in last quarter's outlook for each of our four markets.
Our highest growth markets are expected to be U S state and local work.
And international.
Which represent about half of the company growing at a 10% to 15% rate.
Our U S federal and our U S. Commercial markets are expected to grow at a 5% to 10% rate and as I have noted both of these.
<unk> forecast our outlooks.
Main unchanged from last quarter.
I will note for modeling purposes that last year's fourth quarter included an extra week, which we've adjusted.
For our year to year comparisons.
I would now like to present, our guidance for the third quarter and for all of fiscal year 2022, our.
Our guidance for the third quarter is as follows for net revenue.
Our guidance ranges from 665 $665 million to $715 million with an associated diluted earnings per share of $1 to $1 <unk>.
As noted in my opening remarks, we're increasing our full year guidance for both net revenue and for earnings per share.
For net revenue, we're increasing the bottom end of our guidance by $70 million.
And increasing the upper end of our guidance by $20 million.
Our new net revenue guidance is for a range of $2 72 billion to $2 eight 2 billion.
Earnings per share, we're increasing the bottom end of our earnings per share guidance for fiscal year 'twenty.
22 by <unk> 15 in the upper end by <unk> <unk>.
If you do that math. This would result in an increase in the midpoint of our guidance by 13.
Which exceeds.
The flow through of our Q2 earnings fee.
Our new earnings per share guidance for fiscal year, 2022 is $4 <unk> for a range of $4 30.
To an upper end of $4 40.
This guidance includes the following assumptions as it has each of our quarters. It does include the.
The expense for intangible amortization, which this year, we estimate to be about <unk> 18 per share and we do estimate that for the remainder of the year. We will have a 26% tax rate, we have approximately $54 5 million average diluted shares.
That are used in the calculation and as in the past.
This guidance for the remainder of the year and the third quarter.
Excludes any contributions from acquisitions that would be completed from this point forward.
In summary, we.
Had just an excellent quarter in the second quarter setting New Q2 records for revenue net revenue and operating income.
We released on April 20, <unk>, which was this year's Earth day, our sustainability report, which included a first of its kind reporting of the quantitative impact in <unk> infrastructure and clean energy projects.
We advanced our leading with science strategy with the addition of <unk>.
Quarter of this year.
To open up the call for <unk>.
Four questions.
Yes.
Thank you the question and answer session will begin now please be aware that delta.
It will be a 32nd pause on our webcast to allow for buffering. At this time participants are invited to submit a question. Please remember to mute the audio assumption on your computer thus far you speak.
You are using a speakerphone please pick up your handset before pressing any numbers.
If you'd like to ask a question. Please press star one on your Touchtone phone at this time.
Our first question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi team nice job this quarter and thanks for taking my questions.
Hi.
I think the extra week dynamic in the fourth quarter is an important call out because the updated guidance for the second half kind of implies.
<unk> growth into the fourth quarter.
At a headline level, so maybe some context, what that adjustment looks like.
And if you could maybe comment on what you want us to take away from this second half guidance in terms of the pace of growth as we advance through through this year and go into next year.
That's a good question, Sean Thank you for pointing that out and being aware of the extra week in the fourth quarter about every five or six years.
Our fiscal year has an extra week. So instead of 52 weeks, we have 53, it always lands in the fourth quarter.
It was included in our guidance from the beginning of the year, but when you take the one week out of 53 weeks to 52, it's about 2% just under 2%. So it does represent about 8% difference. So if you take the.
The actual for Q1 and the actual for Q2 and our guidance for Q3, and then you impute the remaining amount for Q4 to get.
Something that we would call an equivalent basis of comparison for year over year.
Now if you take a look at the <unk>.
Mid point in fact, especially if you take a look at the upper point Youll see that our growth rates both of them.
For the third quarter and in the fourth quarter are actually remaining similar to what we've just seen they are well into the double digits in fact into the teens, so what we'd like to communicate with the guidance that we've updated we see things remaining.
Being strong we are seeing our growth rates remaining consistent to what we saw in the first and second quarter.
We're projecting those on through the rest of the year and in fact, we're actually seeing our margins expand even further quarter and you can see that through the increase in the guidance of our earnings.
Per share, which is at a percentage even greater than that of our increase in revenue that we just provided in our guidance in my comments a few moments ago that this is the second quarter or second time that we've increased our guidance.
We came into the year, we had a very strong first quarter and we increased our guidance for earnings per share. We've just finished the second quarter and we've increased it both.
<unk> for revenue and earnings per share at even a bigger rate and so.
I guess I want to make it clear we have increased our guidance twice this year, but it shouldn't be overlooked at its two out of two and so I'm really really proud of the performance of the company to be.
Having an opportunity to increase it each and every quarter that we've reported this year.
Very helpful. Dan Good summary, there.
And it's nice to see this big uptick in commercial revenue and new bookings.
Quarter.
It's interesting to see this at a time when people are starting to get worried about a potential recession coming in.
Marshall being where.
We would expect the most sort of economic sensitivity and the Tetra Tech model.
Do you think the drivers of the commercial growth we're seeing.
Could it be more durable in a recession scenario than we've seen in prior business cycles.
So I think for us the commercial.
The commercial performance will be better through this economic cycle.
Or for many reasons I would start that first of all.
<unk> certainly been asked by some within the company.
Is this driven by one area. So for instance is it renewable energy and Thats a large.
Referred to as clean energy to PEO as broad as possible and the answer is yes, it's been a contributor but not the contributor I've been asked is it high performance buildings is performing and recovering quite well and the answer is yes, it's a contributor but not the contributor we've had success with our industrial clients. We've seen our high performance buildings up we've seen our clean energy increase.
We've seen sustainability and ESG support from our commercial clients across the board, we've seen more environmental programs, both on a prospective basis with our new design facilities, both at Hy Tech.
Chip.
Fab area. So it's been very very broad based so one area, where I feel more confident on the recovery and growth on commercial is that its very broad based and it's not based on a single leg or single component contributing to it. So the very large number you saw on <unk>.
Commercial orders came from very broad sectors and second of all theory that we've seen most volatility, especially for ourselves coming into slower periods in the past for the commercial industry were driven by commodity work and particularly oil and gas or mining, where you saw changes a fluctuation in commodity prices move our oil and gas.
Worked down 50% back when you saw a downturn of oil from $50 $70 down to zero or to very low numbers, we had taken that out of our portfolio for the most part not that we took it out but that area has not recovered, particularly <unk>.
Significantly and its really been driven by these other areas. It just mentioned so the volatility associated with these highly variable and Marcus just as much smaller part of our overall portfolio and Thats all on the commercial side. So I just don't see that level off.
Full mobility or exposure to.
To this big a negative impact and a potential recession or other economic challenge day environment.
Great responses, Dan I'll turn it over there thanks very much.
Thank you Sean.
Thank you. Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.
Hi, guys. Thanks for taking my question and congrats on the strong results.
I was hoping Dan that you could revisit the commentary that you provided previously on how youre thinking about.
<unk> III.
Platform or by segment.
Half of the year and also the margin margins by Division and then any changes in how youre thinking about the longer term margin profile for <unk>.
AIG and Jesse Thanks.
Great well coming into the year, we've indicated on a on an annual basis. Our government services. We did expect that was going to go up.
We thought it would expand by roughly 50 basis points on an annual and an annual measure.
This year coming in we thought we'd be between 13, and a 14% operating income margin.
I do know that we've been above that both in the first quarter and I know, we've been above that almost almost a 100 basis points.
Let me not overstate that by 90 basis points above the upper end of that range here This last quarter.
So it's going really well.
I do expect that our highest margin quarters are coming up in front of us. So I don't want to provide insight into 2023 quite yet, but certainly for Q3 and Q4, which for US is the spring and summer I expect the margins to be a little bit at the upper end of that range for our.
Government services, we have grown our field work, but particularly in our commercial.
International Group, It really does make a big difference.
I'm very happy with the 50 basis points expansion in CIB.
I'll tell you every year the second quarter is the toughest for us in margins in our <unk> business, we had the largest for our international activities by far is Canada. We have the most head counts the most revenue largest clients and in the middle in the middle of the winter and that's when we do our training our continuing education.
Maintenance work in preparation for mobilizing in the.
Spring for the projects. So I do expect that the margins are going to expand.
Naturally in I'll call it seasonally.
For the spring and summer so I think youll see a notable increase in the margins as.
As we progress.
Think that it's not only seasonal that we're going to see it go up but structurally it's all it's all up roughly 50 basis points and <unk> would just slow down a little bit on its margin, which I don't want to see happen I think.
We'll actually close the gap on our government.
Margin separation here as we move to the end of the year and it is a matter of mix of work.
And.
So with respect to timing and margin expansion.
<unk>.
Government is less and less of a range that still will go up because of higher utilization and work that we could see even higher upside. If there is additional SaaS contributions from hurricanes or other events.
The summer, but I think the big movement on a relative basis should be <unk> as we move into the summer.
Very helpful. Thank you and then second.
In the past you've talked about.
Sort of how you think about.
The need to add.
To add labor or essentially how much additional revenue you can support with your current staff on given the strong growth you're seeing across the platform.
Maybe could you just comment on how youre thinking about that today and also as you shift toward more advanced analytics work, how does that change the dynamic around.
But the staff that you need to sort of support revenue growth.
So thats a really good question, we spent a lot of time here with that.
I'll answer the first part consistent with my previous observations on how much more work can we handle with the existing staff we have.
By the way, we are adding more staff.
<unk> is growing and not only through new hires.
But true staff that we're adding through acquisitions, but with the current workforce, we have we can handle.
Just through labor about an additional 10%.
And thats straight through utilization.
I would say during the winter or a little bit lower utilization because of Canada and a few other items, but I would say overall, we're around 70% utilized on a financial basis accounting everybody accounting, Steve myself, the entire company on a financial basis, we can get up to probably the upper 70%, So, let's say 70% to 77%.
There's a 10% increase but the actual amount of revenue is higher than that the use of data analytics to use of computer programs. The use of technology is actually decoupled the amount of growth that's tied to hours that we charge to revenue that we generate and so currently we are about I would say.
Say, one five times that so for each hour an individual.
Works on a project the use of technology may allow another 50%. So I think about a 15% growth 10%, what I was associated with labor at 50% with technology or efficiency and our goal has been to be turn that into a two to one so.
So our target is that we would be able to produce.
The use of technology efficiency and productivity.
Double whatever our labor contribution would be so if we added 10% we could gen.
Generate an increase in revenue of 20% and so thats moving toward partial decoupling of how much can we grow the company without it having to be individual heads at staff being added to the corporation.
It really makes a difference for.
How productive we can be honestly it makes.
Our staff morale goes up you would say that some would say I'm being replaced by a program or a computer but thats not the case, it's the most cutting edge technology that exists in the world that we're bringing to the marketplace for our clients. So job satisfaction is going up.
The collaboration of teams using these electronic platform allows us to use staff from across the world and be really geographic agnostic folks can work on projects in the U S. If theyre in Australia or the U K, we can work on projects in South America. So the use of technology, not only increased productivity, but it opens up the ability to make our.
That fungible across all the different end markets. So.
His staff and issue, we're watching very closely yes, but the use of technology and the ability to drop the barriers to move work, where we have people has really made a big difference so.
To your question is how much can we do right now with the staff we have we.
We can sustain the growth rates, we have and perhaps another 15%.
<unk>.
Great. Thank you very much great impact.
Thanks Al.
Thank you. Our next question comes from the line of Keith Sullivan with Maxim Group. Please proceed with your question.
Hi, Thank you Dan you mentioned at the end of your remarks Youre sustainability.
Sustainability linked credit facility of $1 billion in your sustainability report.
How will you track the metrics going forward are those from all your projects around the world going forward in terms of the emissions reduced and as a result.
It's what leads to lower cost of credit in that facility and is this a first facility of its kind in the consulting industry.
Well, let's speak Steve speak to the specifics of the credit facility, but I can say just a few words about other measurements and establishment of it.
<unk>.
Yes. It is the first of its kind of certainty in our industry.
If you if you actually read other sustainability reports youll find common.
Phrases or euphemisms, such as we will see consistent to our continual improvement will.
We will do better lots of subjective qualitative wanna be statements and when I say the first of its kind with the first one is to step up and actually quantify precisely not only what will improve with respect to our 21000.
Associates around the world and how we will reduce our carbon footprint and greenhouse gases, but have quantified through our projects that with over 70, I think we're up to 75000 projects per year.
We've actually taken a set that represents the most significant impact with respect to carbon reduction.
Both for the GHT reductions, but also <unk>.
The impact of lives around the world and that's our 1 billion person challenge that we will make a meaningful improvement in individuals' lives through.
Through the quality and the environments that they actually live and are exposed to but with respect to how it translates to the financial a reduction of our interest costs or the rates, perhaps Steve can say a word on this.
Sure. So we've so I would tell you that.
Closely with literally shoemaker, chief sustainability officer for the last probably year trying to determine how we do this in practice.
And.
If we meet certain goals and see those improvements we will see.
Up to about a 5% reduction in our interest rates.
And it's based on.
Two.
Two two different metrics one is related to GH G.
Items and one is related to the 1 billion person.
That metric.
And one item container.
Add to that is.
It's not as soft squishy qualitative or quantitative goal of working with our bankers they don't have columns.
Columns in their spreadsheets that take our words or letters as only numbers and so it has been quantified and in fact, we have an internal audit process. It goes through and make sure that this is quantified supported and provided as a.
An audit trail for the basis of the reduction in our interest costs.
And Steve just.
Just to confirm it does this facility replaces our previous credit facility completely metric.
Correct.
Okay.
And then Dan I imagine this kind of facility helps your customers themselves secure their own sustainability linked credit facilities or is that just speculation I may know tracking youre doing for them and in turn they can take to their banks and get their own facilities has that already happened or potentially.
Future.
Well you know it's a good question Tate that there are certain clients and projects that we have that tracking of sustainability goals and metrics R. R.
<unk> included by the very nature of the scope of work as deliverables that we have and for instance, the U S Agency for International development has mostly quantified.
Metrics associated with the benefits that we're providing to these developing countries.
However.
I will say that many of our clients have not requested that or have harvested that yet from the work that we're providing but it is something that we can bring to them. So I would say that it's something that is available.
Available, but not necessarily utilized by all of our clients at this time, but I will say it's interesting.
At one of our high performance buildings practices just last week.
And we have sustainability component and Thats, an additional services being pulled from us our assets additional deliverable item that can we go through and actually quantify the incremental differences per year and of course, it always starts with the biggest assignment which is establishing a baseline.
I would say.
Yes, it will be helpful to them, but right now it's still only a small part of whats being sought out from our clients.
Okay.
Thank you both.
Thank you. Our next question comes from the line of Alexander Leach with Barbara Capital Markets. Please proceed with your question.
Hi, guys. Thanks for taking my question can you just jump back to the.
The competition around employees can you talk a bit about attrition and retention.
Over the last couple of quarters, given the high Mark has been so active.
Net employee consultant change before accounting for any police gained from the Taiwan axiom.
Yes, we do this mostly on a on our fiscal year. So we go back that the numbers that we have most specifically on a full trailing year.
Go back to 2021, which.
Some respects is not that long ago that six months ago, some respects the world changed so quickly.
A week is a different.
Universe, but in 2021, we were just under 10%.
And.
We consider that.
Target, we would like to be our turnover with respect to staff that have been here more than five years is roughly 1% and that includes by the way of what I'm talking about is voluntary turnover. We do have certain projects that we have individuals that are brought on for a finite period and they were intended to depart at the completion of our projects. So we've excluded those.
And that includes individuals', we bring on for individual disaster response activity because it is possible that during a hurricane or a response to a fire or other natural disaster, we can bring on as many as two or 3000 people for a few quarters in order to respond to these activities and in fact.
And in the second quarter, we ran approximately $30 million worth of additional revenue in the quarter for disaster response activities and you can imagine what type of staff. It takes so just too Alex too.
To make sure we're defining the same item we call it voluntary turnover of our non.
Transitory project related activities so.
The numbers are roughly just under 10% turnover.
Got it.
Folks over five years is about 1%.
And I will say and I've said this before on these calls that individuals in the first five years is so let's call. It 10 minus one 9% turnover or is that too high or too low.
It's unclear to us.
Because in the first five years. So it is important for people to determine the right company, maybe a performance culture a technically.
Science based company is not right for them.
So they move on to academia or other locations. It's also for us to they actually fit in so I think thats sorting out process is actually healthy for the company for individuals that come through that first five year.
Matchmaking period determine if it's the right culture for them ends up with people staying and in fact, we're seeing that and by the way that 1% turnover includes retirements.
Uh huh.
Medical leave.
Anything sabbaticals anything that would be included in that so we consider that a best in class number and I will say a couple of things that are really important for us.
For us individuals that come here.
Are looking for a career not a job so the individuals that come here and to part and are transitory is extremely low.
People do come here for a career and Theyre looking for meaningful work and to work with exceptional colleagues, so which is really a talented team and it's those two that keep our turnover quite low and if youre interested in.
Selling cars or being a fine dining chef is probably not the right company for you. If you are looking for being a commodity.
Detailed design engineers, probably not the right company for you or if youre looking for meaningful work, that's actually will change the world and we'll be creative every single day you come here people come here for the.
Long term career opportunities and so that's why we've seen such low turnover.
And we've not seen of course. The next natural question is have we seen wage escalation.
So one are you can you get people or keep people. The answer is yes, and the second question of course is how much more do you have to pay them.
And is that going to road show, our profit margins and really our salaries are competitive I would call them at market.
But really the increases are not the headline inflation rates that you see those are really driven by housing and fuel and a few other items not the overall cost of.
Inflation and a combination of salary performance compensation, which should really bode on bonuses and benefits collectively put most of our staff with the ability to be best in class are highest in the industry with respect to compensation based on performance.
Performance. So I think that's another reason, we see relatively little turnover.
All of our senior staff of the company.
Okay, great. Thanks for all that color.
If we just move over to.
State and local business as well are there any risks to.
Net revenues rolling off in 2020, given the strengths in self to response.
It's event.
Event driven work.
I know, it's too early to call.
The next next fiscal year.
Any thoughts on how we think about the cadence.
From that.
Well that's a good question and we've been very fortunate we've had double digit growth in state and local exclusive.
Disaster response, we've been we've tried to be as transparent as possible with respect to how much of our quarterly growth rates in state local has been contributed to by disaster of this last quarter, we have 11%. So we've been running between 10% and 20% growth with what we call our underlying municipal work.
That's been driven by recovery in state and local budgets.
Lower unemployment.
Rising tax receipts because of real estate and other items.
Somewhat.
Comment that we've had optimal levels at the state local level, what else is going to contribute.
And we would point out to the Iia JA, the jobs act or the infrastructure stimulus, which has a significant portion.
The incremental $550 billion of federal funding that will make its way to state and local budgets for grants joint.
<unk> funding and other projects for.
Technical engineering and infrastructure services, we provide.
That's going to come or we think it's a 2023 or at least federal government calendar, which we're on.
2023, which means late fall or or into next fiscal year, we'll actually see the translation from the bill actually passed a law being passed to then the funding coming out so for US we see the health of the state and local budgets still funding. These programs to go forward with additional infuse.
<unk> in 2023, and whether or not that's earlier late 2023.
It's yet to be seen but we think that that source of funding.
We will continue to bolster and really move.
Funds dedicated to the type of work, we do to all time highs. So that's that's what we see is underpinning a later 2023 without getting into detailed guidance on a percentage basis.
Great and if I could just slip one more in on Afghanistan very quickly.
Yes.
Were there any revenues recognized from Afghanistan in each one.
And if so what's the.
The role of impact next year from those revenues.
In the first half we had minimal.
Revenues I think the answers.
Zero or close to zero in Q2, and Q2, we had a very little bit which was basically demobilization in October .
There was some thought that.
Coming out of the departure from the from the country of Afghanistan from development agencies like USAID.
There's some thought that we keep some of the staff in country or the local nationals hired on payroll because there would be an agreement to go back and very quickly at this just wouldn't be in a position that they wouldn't take development aid going into the winter.
It appeared to be not that turned out to be not true and.
So it was very de Minimis in Q1 in fact, I would say I would not call our Q1, a year on year comp.
Headwind so for 2022 that we're in it will be a roughly $8 million to $10 million per quarter headwind relatively even.
Revenue in 2021, so the comps.
Our roughly 10 10 10 10, so I think overall total revenue was around 50% in 2021, but then after that it really has really dropped to essentially de minimis. So.
The headwind on that comparison for Afghanistan is just a 2022.
Artifact.
Okay, great. Thank you very much thank.
Thank you all.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Pascoe for any final comments.
So Melissa thank you very much.
And thank you all for your insight questions and interest in support of Tetra Tech.
In closing I really want to commend all of the associates at Tetra Tech and it really had a fantastic second quarter and and even areas where it's slower.
Our folks.
We're very efficient in their programs and setting us up for a really productive third quarter, which were about one month into.
And we look forward to presenting the results of both our third quarter and the progress through this year with you in about 90 days from now or next quarter I Hope you all have a safe day and a good rest of the weekend I'll talk to you next quarter. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.