Q4 2022 Tetra Tech Inc Earnings Call
[music].
Good morning, and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also a simulcast of this presentation with slides in the investors section of its website at 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 prior written permission of Tetra Tech is prohibited.
With us today from management are Dan Backtrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Jill Hopkins President they.
They will provide a brief overview of the results and then we'll open up the call for questions.
I would like to direct your attention to the Safe Harbor statement in today's presentation. Today's discussion contains forward looking statements about future business and financial expectations.
<unk> 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.
Sept as required by law Tetra Tech undertakes 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.
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 Patrick. Please go ahead Mr. Patrick.
Thank you very much Melissa and good morning, and welcome to our fourth quarter and fiscal year 2022 earnings Conference call.
I'd like to start this morning by saying that we had an excellent fourth quarter that completed an exceptionally strong 2022 fiscal year.
Our performance was a direct result of our leading with science approach on focus with water environment and sustainable infrastructure.
We completed the year with strong growth across all of our client sectors and generated a record orders for fiscal year 2022 that resulted in an all time high backlog of $3 billion $740 million.
We saw strong demand for our services in alignment with climate change priorities across both our government and our commercial clients.
I'll begin this morning, with an overview of our fiscal year and fourth quarter, followed by a financial update from our Chief Financial Officer, Steve Burdick.
I'm also pleased to include today Tetra Tech's precedent Jill Hudkins, who will join me in providing the market outlook.
After providing our guidance I'll also provide some initial comments on the pending Rps group acquisition.
We had an exceptional fourth quarter and finish to our full fiscal year.
If you're following on the webcast you can see that both the fourth quarter and the entire fiscal year of 2022. The company achieved all time record highs for the key metrics that we track.
And what was a record year. We also ended the year with the strongest revenue quarter.
And the highest of any quarter in Tetra Tech's history, providing us with significant momentum.
As we enter fiscal year 2023.
Most notably in the quarter with a record revenue. We also had record new orders of $1 3 billion, which.
<unk> and our book to Bill of one four for the quarter and ended with an all time high backlog.
$3 $74 billion.
I'd now like to present the results of our fourth quarter.
We hit new all time highs across the board.
Net revenue increased to an all time high for any quarter of $736 million up 12% from last year.
Our record Q4 operating income of $94 million generated in earnings per share of $1 26 or up 30% from last year.
This represents the highest quarterly earnings per share for any quarter in the company's history.
I'd now like to provide an overview of our performance by our end customer.
In the fourth quarter revenue for all of our client sectors increase compared to last year.
Work for our U S. Federal clients was 29% of our revenue in the quarter and was up 15% from the same quarter last year.
Growth was driven by an increase in priority water environmental and international development programs for our key government clients.
We saw continued strength in our state and local revenues, which were up organically, 12% from the fourth quarter of last year, excluding extraordinary contributions from our disaster response work that we performed in fiscal year 2021.
Our U S. Commercial net revenue was a quarter of our overall business up 25% from last year.
Our high performance buildings, and a renewable energy services, both contributed to a significant growth in this sector.
And finally, our international revenues were up 15% on a constant currency basis from last year with an expansion in our sustainable infrastructure programs in Australia, the United Kingdom, and all across Canada.
I'd now like to present, our performance by our segments.
In the fourth quarter, the government services group or our <unk> segment was up 8% compared to last year to a revenue of $336 million.
<unk> generated a strong 15, 1% margin in the quarter, which was up 130 basis points from last year.
Performance was driven by our high end data analytics and design services for our federal water and environmental programs augmented by our digital water work across the United States.
The commercial international group or <unk> grew by 15% year over year and delivered a 13, 6% margin up 80 basis points from last year.
<unk> fourth quarter results were driven by growth in our international operations as well as strength in the United States based sustainable infrastructure and renewable energy markets.
For backlog, our backlog was up 8% from last year and on a constant currency basis. It was up 13%, resulting in a new all time high as I've mentioned, a few times now up to $3 $74 billion, but to be clear that is work that we have that is contracted funded <unk>.
Authorized and it's only a small part of our overall contract capacity that we have.
In the fourth quarter, we won new programs and task orders for differentiated water environment and renewable energy services, while adding over $8 billion of additional contract capacity just in the fourth quarter.
We won new programs for key U S federal agencies, including the department of energy The U S. Environmental Protection Agency USAID. The Army Corps of engineers, and others that advanced the government's priorities initiatives in water environment, and resilient infrastructure, including climate change mitigation programs.
In the fourth quarter, we also had strong commercial orders up over $400 million to.
<unk> renewable energy environmental restoration and sustainable infrastructure services.
And at this point I'd like to turn the presentation over to Steve Burdick, Our Chief Financial Officer, who will provide more details of our financials, both in the quarter and in the year Steve.
Thank you Dan.
As Dan just reviewed the fourth quarter operating results I would like to now review the GAAP financial results for the fiscal year ending 2022.
Overall, we had record revenue earnings and cash flow.
Strong performance from our operations was marked by record fiscal year revenue of $3 5 billion, which was up 9% over last year.
Record net revenue amounting to 284 billion, which was up 11% over last year.
And when adjusting for our 50 253 week fiscal year revenue was up actually 11% and net revenue was up 13% over last year.
We experienced strong revenue growth from all of our end markets, including international commercial state local and federal government.
Our operating income and earnings per share for the fiscal year were also both up to all time highs.
Our reported operating income came in at $340 million up 22% over last year.
This improvement came from both segments.
About two thirds of this increase was driven by a 28% growth in the <unk> segment net revenue and the continuing improvement of Cit's operating margin, which was up 100 110 basis points over last year.
And about a third of this increase in operating income came out of GST, where the margins are up 70 basis points over last year.
And on a consolidated basis. These improvements resulted in our EBITDA margin, increasing 100 basis points over last year.
GAAP EPS came in at $4 86, an increase of 14% over last year.
And for those that are willing to take a look at the reconciliation in the appendix to this presentation. We did have a onetime employee tax credit and a significant foreign exchange hedge gains this year.
And excluding these two matters our EPS came in at an all time record high of $4 50 for the year, which was an increase of 21% compared to the adjusted EPS last year.
Now cash flows generated from operations for fiscal 2022 totaled $336 million.
An increase of 10% over last year.
Our focus on working capital and cash flows has resulted in further improving our DSO to 61 days.
And this is an improvement of over two days from last year.
But just as important as the year over year improvement as our long term focus and over the last four years, we've improved the DSO each year and brought it down from over 80 days to an industry, leading best in the low sixty's.
This lower DSO trend continues to reflect the outstanding work or project managers lead relative to higher quality projects and highly satisfied clients and a broad portfolio across all of our end markets and all of our geographies.
Our net debt amounts to $74 million and.
This net debt.
On an EBITDA basis was that a leverage of two times with a total cash position of about $185 million.
As we presented here today, the continued high quality operating and financial results with improved EBITDA margins.
Strong cash flows and lower working capital requirements as shown that Tetra Tech continues to generate very strong returns with our calculated return on invested capital of over 20% in the fourth quarter.
Now our long term capital allocation strategy to continue providing these strong returns calls for a balance of investing in the growth of our business.
Managing the balance sheet and providing returns to our shareholders.
And in fiscal 2022 cash.
Noted before cash from operations generated $336 million.
Our strong cash flows allowed us to successfully complete for strategically important acquisitions. This year in the areas of digital water deal.
The analytics and sustainability.
And we continue to provide significant returns for our shareholders through dividends and share buybacks.
Regarding our dividend program, we paid $46 million in dividends in fiscal 2022.
And I want to announce that our board of directors approved our 34th consecutive dividend of <unk> 23 per share for this quarter, which is a 15% increase over last year.
On an annualized basis. This represents a 92 per share run rate.
Furthermore, this year, we utilized $200 million on our stock buyback program.
All told we returned $246 million to our shareholders through these dividends and share buybacks.
These continuing strategic investments our.
Our capital allocations to the shareholders and the Tetra Tech's stock price increase all resulted in a total shareholder return or <unk> over the last trailing three years of 54%, which is almost three times higher than a key benchmark. The S&P 1000, which had a return of 19%.
Over this same time period.
So I am very pleased to share. These results of our fiscal 2022 I want to thank you for your support and I will hand, the call back over to Dan.
Thank you very much Steve.
I'd now like to spend a few minutes discussing our outlook and the major market drivers that we see today to drive our business as we move into 2023.
I'm sure. Many of you if not all of you have been watching the results of the midterm elections here in the United States.
Regardless of the final outcome, we expect the bite administration to continue to prioritize the U S. Federal government agencies focus on infrastructure resiliency and de carbonization.
With current funding commitments and our strong backlog entering 2023, we see a favorable outlook for our U S Federal work.
In the United States, a sequence of three major legislative actions have set the stage for future spending increases.
These three funding streams augment an already strong focus by our clients on areas that Tetra Tech strengths.
Aligned with in water environment and renewable energy services.
Just this past October just about a month ago, we appointed Jill Hudkins to president of Tetra Tech.
She brings to the role over 24 years of expertise in high end water treatment programs expansion of digital water practices here at Tetra Tech and the overall leadership of our global water initiatives.
Jill is ideally suited to providing an update on the recent legislative programs and how we here at Tetra Tech are prepared to help our clients navigate the various funding streams and at this point I would now like to turn the presentation over to Jill hiccups.
Thank you Dan I now want to address the three key legislative action that were passed in the last year.
First the one two trillion dollars of infrastructure investment and jobs Act.
Hey.
Truly unprecedented levels of infrastructure funding with a combination of commitments from existing appropriations and $550 billion in new funding over the next decade.
Almost a full year after the act with signed into law. We are just starting to see an increase in client solicitations for projects that will benefit from that from the federal infrastructure funding associated with the I I J a.
The Iia funding is well distributed across our markets of water environment and sustainable infrastructure and renewable energy. These are the markets, where tetra tech is a market leader.
We expect to see new orders with IHA funding to begin to ramp up in the second half of fiscal year 'twenty three.
The second major Legislative action is a 280 billion chips Act, which represents an additional $53 billion investment focused on revitalizing domestic semiconductor manufacturing.
That shift act was passed with significant bipartisan support and we will fund the expansion and development of semiconductor facilities in the U S.
Tetra Tech has a strong competitive position.
<unk> high and sustainable infrastructure design services for U S based chip manufacturers and the chips Act funding priorities are directly aligned with what we do across North America today.
For example, Patrick.
Tetra Tech provides high end design of specialized mechanical electrical and hydraulics system for high performance manufacturing facilities.
We also design high end facilities for advanced water treatment and water recycling and you don't have chip manufacturing without ultra pure water supplies and sustainable water management.
I will also note that the official name of the chips Act as the chips and Science Act. The science component of the act potentially represent another $200 billion in scientific R&D funding that will flow to the federal agencies that we work for and is aligned with Tetra Tech's, leading with science position.
And the most recent legislative action the inflation reduction act or IRA was signed into law on August 16 2022.
The IRI include a $369 billion investment in energy security and climate change over the next 10 years.
The inflation reduction Act climate change investment is just beginning to be implemented through a variety of tax incentives loans and agency funding.
The IRI commitments advanced progress towards the U F 'twenty 30 energy and carbon reduction goals.
The IRI also includes funding for critical infrastructure to protect our nation's asset from impacts of climate change.
In the last decade, Tetra Tech has provided high end siting and permitting consulting for more than 1000 utility scale hydro wind and solar projects.
In fact, we hold top 10 rankings with engineering news record for hydropower wind power and solar power.
Also tetra Tech design first of their kind fled protection solutions, such as the Mississippi River surge barrier that protects the people of New Orleans, Louisiana from Hurricanes.
Our design with for the largest civil works design build project and the Army Corps of Engineers history.
And now I'd like to turn the presentation back to Dan.
Great. Thank you very much Joe.
I'd now like to present, our outlook for fiscal year 2023 across each of our four and client sectors.
For our U S Federal government, our U S. Federal revenue should grow at about 10% in alignment with the administration's priorities and increased budgets.
We assume however that the material increases associated with the II J, a and the other new legislative items that Jill just discussed are going to build pretty slowly throughout the year. In fact in late 2023, we expect them to begin contributing and therefore, we've not anticipated a material contribution from these fundings.
Sources into the guidance that we're providing today.
State and local should continue to grow at a double digit pace for us our state and local non episodic revenues will grow at a rate between 10 and 15% for the year.
U S. Commercial is expected to be about 20% of our overall business and grow at a 5% to 10% rate.
This increase in revenues will be supported by our renewable energy consulting and engineering practice as well as environmental compliance and restoration services.
International.
International work is expected to be about a third of our business evenly split between government and commercial work. Our international work is expected to grow at a 5% to 10% rate as we increase our support for sustainable infrastructure and climate change services in the key geographies of the United Kingdom, Australia and Canada.
I'd now like to preside.
[laughter] preside and I have to present, our guidance for the first quarter and for all of fiscal year 2023. Our guidance is as follows for the first quarter. Our net revenue guidance is for a range of 675 million to $725 million.
With an associated earnings per share of $1 15 to $1 20.
For the entire fiscal year of 2023, our net revenue guidance is for $2 9 billion.
The $3 $1 billion with an associated earnings per share of $4 70.
To $4.90.
There are some assumptions that this guidance is based on this guidance does include.
An estimated intangible amortization or $10 million for the year or converted to earnings per share of <unk> 14.
Charged during the year. It does assume for this first quarter and for the guidance I just provided that we will have a tax rate of 23%.
A 26% for the remainder of the year that will be for our Q2, three and our fourth quarter.
Assuming a $54 million.
Average diluted shares outstanding and it does exclude.
Any contributions from future acquisitions.
With respect to acquisitions, just six weeks ago.
We announced an offer to acquire the Rps group a publicly traded company based in the United Kingdom.
And although the transaction is not completed yet and is not included in our guidance I'd like to provide you with some preliminary background on the Rps group and our rationale for the combination with Tetra Tech.
The Rps group very much like Tetra Tech as a high end global consultancy.
<unk> has over 5000 staff with operations, primarily in the United Kingdom, Europe , Australia and here in the United States. We have worked with the Rps group.
For many years now and we know the company extremely well and believe that culturally. The Rps group is very similar to Tetra Tech.
The strategic rationale for the combination of Tetra Tech and the Rps group is actually very very strong with highly complementary clients expertise and geography, we have very little or no overlap.
The Rps group and brings us a strong water practice in the United Kingdom with long term relationships and multiyear contract vehicles with the major water utilities all throughout the United Kingdom.
Our environmental services are also highly complementary for restoration investigation and environmental data management programs.
The Rps group expands our client base also while adding new geographies, such as Norway, and the Netherlands, while increasing the resources that we can put on our programs in the United Kingdom, The Republic of Ireland, Australia and here in the United States.
P S group and brings a high end global practice in renewable energy, especially in offshore wind that is highly complementary to our first in class practice that we have here in the United States.
And finally, the Rps Group group brings new software solutions for chemical spill and faith in transport modeling and real time oceanographic analysis systems, which further expands tetra Tech's Delta suite of technologies that we can offer our clients all throughout the world.
In summary, we had an excellent fourth quarter and all of fiscal year 2022, setting New records across the board for Tetra Tech's performance as.
As we enter fiscal year 2023, we see a strong demand for a differentiated leading with science approach for water environmental and sustainable infrastructure programs.
Our all time high backlog of $3 74 billion and $25 billion and U S. Federal contract capacity provides us with both had excellent momentum for future opportunities.
And excellent positioning as we enter new the fiscal year and at this point Melissa I'd like to open the call up for questions.
Thank you the question and answer session will begin now.
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Our first question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, everyone. Thanks for taking my questions and congrats on a strong finish.
I thought the comment about no material contribution from the <unk> funding.
Being contemplated.
Contemplated in the fiscal 'twenty three guidance to be interesting. This this notion that the ramp will be slow in fiscal 'twenty, three and not come until the back half.
Why is that I just wanted to try to parse out you know, maybe some conservatism versus the mechanics of what's happening around the legislation.
Sean Good morning, and that's a really good question. We've been following this obviously since it was enacted.
And we find as having been a U S. Federal contractor for many decades that there is indicators in a sequence by which our funding.
Close to actually hitting the marketplace. So the first items, we see our procurements and solicitations for contract capacity. So long before revenues actually are recognized by Tetra Tech. The very first of a series of sort of three steps are the first step is we actually see solicitations for contracts and increased contract capacity.
And in fact, that's what we're beginning to see now we've actually seen more contracts come out with larger IQ ceilings, with which actually would be used to facilitate and execute lots of projects and they're just seeing the solicitations pickup and in fact I mentioned in my prepared remarks over $1 billion of new contract capacity was added.
Largely with the U S. Federal government here just in the fourth quarter. So that's the first step so the contract solicitations that come out and contract awards typically are the first step and many of them are just initiating now so you'll go through the solicitation process and be awarded the contract. It may take one to two quarter.
<unk>, which would take us through Q1 and into Q2 than you would see it actually show up in our orders and while we had a fantastic one 3 billion dollar quarter of orders in Q4.
Essentially none of that is associated with IHA a funding that came out of those contracts. This was for other work out of the federal budget and our other clientele. So we would expect the new contract capacity being put in place now and through the next quarter roughly a quarter and a half to then begin translating into contract awards and then Youll see it in our backlog.
Once it shows up in our backlog, which would be late Q2 or Q3, and we are seeing indications of that again on the contract capacity of the vehicles being put in place. You will then begin to see orders you'll see it show up in our quarterly reports with respect to backlog growth and then the third move is third step is you'll actually see it in revenue so.
One is contracts contract ceiling solicitations to us actually into backlog as orders and three then converted to revenues and if we look at the timing.
We've just not seen things move materially faster than what we are.
Seeing it this time, but the good news is the confidence level begins to increase as you see contract capacity put in place and then youll see it convert to orders so.
That is our experience in the marketplace and what we're seeing from our interactions with our clients at this time.
Okay. That's very interesting thanks for that Dan and the second one for me is on the Rps acquisition.
You guys have a mid to high teens accretive to fiscal 'twenty four EPS essentially is the are the.
Kind of a placeholder out there right now I was hoping you could talk through what that contemplates in terms of Rps margin enhancement relative to what Tetra Tech's things petrofac thinks the ultimate potential could be.
And perhaps how that margin enhancement playbook around the Rps acquisition.
Compares or contrasts with what you guys accomplished around other acquisitions like <unk> and coffee.
Well I'll address that.
Starting with the our experience in the two previous acquisitions with coffee in Australia, primarily in Wi G White young green in the U K.
Both of those two excellent entities that we're highly aligned with Tetra Tech did come with lower margins.
The goal was to move them to higher end professional services focus to actually begin bid.
Bidding them and margins that were more in line with Tetra Tech.
Both of those took about two years to move from.
The margins that they had coming into Tetra tech, which were really in the low single digits one 2%.
Our goal is to move them to double digits or a 10% roughly within one year.
Which we were successful in and then in the second year move them up to.
Margin similar to that of Tetra Tech there was a little delay in Wi G. Because of something called the Covid pandemic. So it did push us back about six months, but that was all it pushed us back and in fact I'm pleased to announce that the.
The inclusion in our guidance that includes work in the United Kingdom that W. Y G is the principle lead on are at margins similar to that in Tetra Tech overall and just to be clear what that is that's about 13%.
Now with respect to Rps historically, if you go back in years their margins historically has actually been higher that Tetra Tech and fact that operation has performed in the upper teens and the past higher than even what Tetra Tech is currently targeting.
We do think that in the first year and I will say by the end of Tetra Tech's fiscal year, 2023, which you could say, where we'll soon be getting to the end of our first quarter here in another one.
Or two so to leave about nine months left I think will go from their current margins up to roughly 10% or double digit and I think within the second year in 2024, there'll be preferring in margins very similar to Tetra Tech and all the communications I've had with their operations their back office their leadership I think that we have that very much in alignment of where were.
We're going how we're going to get there and if you want to say how does it align with the playbook of coffee and Wi Gee, I'd say quite similarly, and I again, I'll repeat one comment I had made during the prepared remarks, we have very little.
Overlap with them as complementary new clientele, new geography, New services and this is really one plus one is something much greater than either Rps has on its own or tetra tech and theyre not joining us as an acquisition not at all they are joining us as an equal partner that we're gonna help tetra tech become better than either one of us are today.
So I'm really looking forward to this and I know that my enthusiasm is eclipsed by that of the people working at Tetra Tech. So so that's our playbook and timing Sean.
Thanks, very much Dan I'll turn it over there.
Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Alright. Thank you following up on the Rps commentary you have in the slide deck annual revenue of 700 million for Rps group Im wondering if thats their current run rate or how are the SaaS, what you're projecting for fiscal year 'twenty. Three. Please I think just in the first half the increased revenue about 15% year over year are you assuming.
That similar level of growth for RPM.
Just on their current run rate and they do have reporting. They know you reported a mid quarterly update here. Just recently so this is right off of their financials, and therefore cast and actually their historical numbers.
In fact, one item I would make note of as we were putting together our offer here at late summer the exchange rate was a little bit different and in fact, our internal numbers had that in the $800 million. So the exchange rate has brought it down to 700, so it's very.
Very much to be influenced by the exchange rate, but that is that's basically their current.
Run rate and forecast that they have.
Thank you and then.
And your commentary that you mentioned future. The total amount of future contract capacity you have what was that number.
I had indicated that tetra Tech's current U S. Federal government contract capacity is approximately $25 billion.
And then.
And Thats just U S. But then in the list on page seven includes U S contract ceilings versus funded values, but is that a similar dynamic in the UK and Australia since you will be increasing your exposure there.
It's interesting that's a good question, we have an equal level of strong clients and funding contributions coming from Australia, and the U K and I got to include Canada also but the but generally the national governments, but we might referred to as analogous to the U S Federal government.
Quite often at least in Australia, and Canada don't provide these types of ceilings in many instances. They are open ended and don't define a specific number we have press released in the UK, what they referred to as framework contracts and we have several billions of dollars in the U K under the framework ceilings that had been identified.
And again I would comment that here at Tetra Tech those do not include any of the water utilities or the different frameworks that exists that rps will bring across but.
But it is typically smaller with respect to ceilings are undefined in some of these other Commonwealth countries and so that's why we're more specific with respect to U S federal contract capacity.
Okay. Thank you Dan.
Thank you.
Thank you. Our next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.
Oh, great. Good morning, and thank you for taking my questions. I guess I also had some questions on Rps and I guess I just wanted to start and strategically.
Thank you.
The end market mix and I think you've had aspirations to grow internationally for some time, so I think nothing strategically from that.
Wei and surprising but I'm just wondering if you see rps is maybe.
I guess, maybe a platform or a launch point by which you could do more bolt on acquisition internationally to continue to build this out is that part of the strategic rationale as you've seen the longer term, obviously, recognizing you haven't closed on the deal yet, but I'm just trying to understand the thought process on that thanks.
It's a really good question good observation, Andy Yes, I think that with the existing operations, we have plus rps and the geographies specifically.
Australia and UK It will give us a first in class and both in scale and both of those geographies to allow additional bolt ons or we would prefer to tuck ins to actually enhance technical expertise in certain areas.
But it also is our first foothold.
Foot hold I would say into continental Europe with the presence in Norway and in the Netherlands, and if we had an opportunity to select a few countries that we would want our first initial presence in the Nordics no doubt it would be Norway.
Fantastic economy.
<unk> contributions and priorities to infrastructure and great funding sources through the different wealth generation, that's being generated that country and of course, if we're going into not just the nordics but into.
Continental Europe . Another lengths of course has a high priority on water programs flood control watershed water treatment water supply many areas that we've had huge investments here in the U S. I know flood control some of it has gone from Norway to the U S, but on water supply and water treatment is coming from the U S to the Netherlands, and we think that.
Best in class this will be a great platform for us to move in that direction.
Also think I'll make a comment Andy that yes, I've been very much interested since the beginning of my tenure in this role.
<unk> was a 100% U S based only firm we didn't have a single office we.
We didn't have a single staff on a dedicated basis outside the U S. Other than specific project assignments and I'm pleased to state that Tetra Tech today has about a third of its revenue outside the U S, primarily Canada U S and.
In the United Kingdom, and I see that growing even more to bring the expertise that we have to the international clients and vice versa. I do think that this acquisition will accelerate our strategic plan in the United Kingdom, and Australia by probably three to five years.
The amp cycles with water clients in the United Kingdom, or they're moving from <unk> to Amp eight if youre, a turkey in that business, which is the big cycle and so those next set of major.
Procurements for water suppliers in the water utilities don't even come out for two years and then we would have to get to a position to compete via prime and it would be very difficult to come from ground zero and Rps brings us from a plan to actually implemented so for.
All of those reasons. This is strategically exceptional and I think the financials.
Who has been asked earlier, we've stated upper teens accretion to our earnings per share.
Is actually quite good for our shareholders so strategic.
Strategic yes, a big move and yes, there'll be platforms and yes. It should allow for additional acquisitions as tuck ins or bolt ins bolt ons as we go forward.
Yeah.
Thanks for the context I guess for my follow up question I wanted to ask a little bit about the implicit margins in your guidance here I'm getting something around EBITDA margins around 13% maybe at the mid point and then I was just wondering if you could talk a little bit about what's driving what would be around I guess 30 basis points of margin.
The improvement year over year is that sort.
Is that a pick up in mix.
The higher margin stuff growing faster in other words or are you expecting to.
Push on the utilization a little bit more.
I guess the nuance to all of this is that last year you had.
$75 million of <unk>.
Asked the restoration work, which is not inconsequential.
Typically high margin.
And in your guidance, you're basically assuming none of that so I guess you'd call that a margin headwind yet you're still putting up.
Round 30 basis points.
Once see where you are attributing that that growth too I guess, thank you.
It's a good it's a good comment a good observation and a great context as to what helped drive this year's margins.
Its primarily mix and it has not increased utilization. So the increase in the margin that we have at the midpoint for 2023 is based on more high end work with respect to data analytics digital water and other higher margin services that are in high demand I think that on top of this if you see that we have.
<unk> from the midpoint, which would actually you would see that we are you're right about 13% at the midpoint.
You can see is last quarter, we were up.
14%, I think higher utilization driven by either.
A.
Response to natural disasters hurricanes fires or other items, which drives utilization would drive that margin on any given quarter higher or also faster growth rates by which we would perform with our existing workforce and you saw that in the fourth quarter with our government services group at margins in the fifteens, so $15 one.
Driven by increased utilization because of the federal work that sort of a catch up from a slower Q2 and Q3, so if either of those happen increase.
Flow of revenues, whether or not it's from a disaster or other faster growing areas that would be incremental on top of on a margin basis from what we provided our guidance today.
Great. Thank you very much have a good day.
Great. Thank you very much Andy.
Thank you. Our next question comes from the line of Michael Dudas with vertical Research partners. Please proceed with your question.
Good morning, gentlemen, Joe.
And congratulations Joe.
Thank you.
So my first question for Joe.
As Dan talked about some of the lagging timing on Iga, maybe you can discuss a little bit more further detail since chips in IRI were later.
Implemented into legislation.
How that may flow through and what areas of the business. We will we will see some of that earlier rather than.
Catching up later in the cycle.
Yes, I think Dan talked through I gave fairly well earlier.
On your IRA and the chipset, so we already see momentum behind the chip back.
In the U S based chip.
Chip manufacturers, starting new projects that will have chips Act funding. So we see that are happening around the same time the end of fiscal year 'twenty three based on the solicitations, we're seeing now.
I R. A I believe will have a <unk>.
The longest lag three acts.
And we'll probably start seeing.
Yes.
Contributions from that in fiscal year 'twenty for the IRA probably is the act that had the least amount of bipartisan support. So we're still watching the impact of the midterm elections. Although there are many funding benefits that will benefit congressional districts on both side and so we believe the IAA.
<unk> will withstand any political pressure from our results the midterm elections.
I appreciate that.
Maybe if you can maybe.
Maybe you can talk about with regard to midterm looking at defense allocation budgets or where the opportunities are of course, where you're strong.
Can't imagine will be any issues, but if the Republicans take the house. So it can be somewhat of a lot of noise I would think.
Well for the previous administrations, we've heard a lot of noise. So its not good.
So it's a good point.
Wellpoint.
Maybe if you went back a couple of election cycles, I would I would say youre right. This might be really interesting, but we've got a little bit used to it being noisy you know it is interesting with even if it does go a one party or the other so both the Senate and the house Republican for example, having a split overall with the administration on the other side and having.
Such narrow I think regardless of how we're all watching this and which way it ultimately falls out it's the narrowest of of mandates for either side generally found that narrow mandates for us is actually optimal.
What happens is they continue through without any major moves either left or right or visibility is actually clear because we can see where we are today and you don't see any big shifts so I think to that end it's.
Kind of a good thing and I would say that what is most frequent with respect to thin majorities or split houses is the continuing resolution, which is we can't agree to change things one way or the other so we'll just agreed to take what we have today and extend it on and with today's funding at the federal at the federal level with respect to the.
All annual budget, we find that quite favorable and it's good that they are actually committed to it.
And I do think I would just add one comment that might be interesting for us.
For our shareholders and analysts to observe as we go forward the chipset.
Look at IHA Chips Act and the inflation reduction act or all that drill projects and someone may look to our federal funding and our revenues increase the chip sector is largely going to be moving through our commercial clients. The very large chip manufacturers. We do work for them now in fact, our third largest client is one for one of our and all of Tetra Tech is.
One of the high end of chip manufacturing entities here in the United States and we're doing work for others. So you take a look at it that's actually going to have an indirect positive impact on our commercial work that we have while it may be initiated by the federal government the chip sector, you're going to see the outcome of that in other sectors that we have here at Tetra Tech so.
Hey.
Not be immediately obvious, but youre going to see benefits across multiple different and clients for us through the funding here. So it's not going to be just purely.
What happens in Congress and is it going to just show up in federal.
So I hope that helps a little bit Michael.
It certainly does thank you just a quick my quick follow up on the financial side, maybe you could share once Rps is closed how youre thinking about the financial profile and capital allocation and such as you move through the integration and the visibility in our business.
Yeah, I'll comment at a very high level.
We've been very consistent our target has been to be have a leverage of between one and two times earnings.
We've it's one area, we've not been successful our leverage has been pretty much zero.
That's not the worst place to be and life, but this at the peak.
After Rps it'll put us right about to we'll be looking to very quickly Delever you can take a look at it as Stephen indicated the $336 million generating cash in one year, you don't have to do much calculations to realize that within one year about half of that could be reduced.
We have always said, we would prioritize our acquisitions over buybacks or other areas. So number one internal growth number two dividends no change number three acquisitions. This fits clearly into that category and number four buybacks. So take a look at our take.
Take a look at it.
From a perspective that will use buybacks as a lever or a knob to offset the acquisitions on a quick payment of.
Our debt down and we are not just as a comment from capital allocation. We are not out of the market. So to speak great companies that fit and further Tetra Tech strategy and financial performance are still open and available and.
Are in our pipeline of M&A and while this does put us up at about two obviously are our covenant limits are sort of like double that number. So we have no limitations with respect to ability to still add the best and brightest to join Tetra Tech.
Doing fine thank you very much.
Thank you.
Yeah.
Thank you that will conclude the Q&A session I will now turn the conference back over to Dan <unk> to conclude.
Great. Thank you very much Melissa and thank all of you for joining the call today for your insight and your questions and your interest.
We're excited here at Tetra Tech to keep you updated on how things progressed with Rps, We think it is a next.
Big step for us, particularly in our strategy and some of these international growth areas and I look forward to speaking to you again next quarter and I Hope you have a great rest of the day and week. Thank you very much.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.