Q1 2023 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 Samuel casting this presentation with slides in the investors section of its website I'll touch with dotcom.
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 Patrick <unk>, Chairman, and Chief Executive Officer, Steve Burdick, Chief Financial Officer.
And Joe Hopkins President.
They will provide a brief overview of the results and we'll then 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.
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 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.
At the request of the company, we will open up the conference for questions and answers after the presentation.
That I would like to turn the call over to Dan Patrick. Please go ahead Mr. Patrick.
Great. Thank you very much Daryl and good morning, and welcome to our fiscal year 2023 first quarters earnings Conference call.
We had an excellent first quarter and start to our 2023 fiscal year setting New records for net revenue, our operating income and earnings per share in the quarter, our EBITDA margin exceeded 14% for the first time in our history.
Backlog, the best indicator of future growth for US achieved an all time high of $3 eight 1 billion.
Up 11% from last year.
And just as the first quarter closed we announced the acquisition of Amax, bringing 500 high end security cleared staff to our U S Federal practice.
And more recent bank just 10 days ago, we completed our acquisition of the Rps group that ads 5000 staff and provides new growth opportunities, especially in international water and energy consulting business.
I'll begin today's presentation with an overview of our first quarter results and the business outlook, while Steve Burdick, Our Chief Financial Officer, who will provide additional details of our financial performance and capital allocation.
Joe <unk>, our President will also provide additional insight into our strategic growth opportunities that we see together with Rps.
We had a very strong first quarter setting new records for net revenue operating income adjusted earnings per share and backlog.
Our net revenue was $737 million in the quarter up 8% from the prior year, a new all time high for any quarter in the company's history.
We also had a record 14% adjusted EBITDA margin, which is 90 basis points increase from the prior year.
As a result of this increased margin we generated an operating income of $97 million for the company up 17% year over year.
Earnings per share from operations were a record $1 34 for the quarter first time, we've ever ceded.
<unk> 30 up 20% from last year, and an equivalent tax basis and in fact, we were well over $2 on a GAAP basis of earnings per share in the quarter.
Okay.
I would now like to provide an overview of our performance by our end customer.
In the first quarter, our growth was driven by strong performance across all four of our key client sectors.
Our U S. Commercial net revenue was the fastest growing sector in the company with net revenue up 22% year over year and comprised about a quarter of our overall business.
The commercial growth was driven by strong performance in high performance buildings, environmental restoration, and a very fast growing area and renewable energy services.
Work for our U S. Federal clients was up 10% year over year and represented 28% of our net revenue in the quarter.
The increase in our U S. Federal work was driven by a very broad based increases across all of our key government clients, but it was especially driven by civilian agencies for the U S. Federal government such as the Environmental Protection Agency U S State Department and the U S Agency for International development.
Our state and local revenues for municipal water infrastructure and planning services grew at a 10% rate year over year. This quarter with continued strong demand for our best in class water supply and watershed management solutions.
This 10% growth builds on our seven consecutive years of double digit growth in the state and local markets here in the United States.
Our international net revenue was up 13% year on year on a constant currency basis, driven by growth in water environmental and sustainable infrastructure work, primarily in the countries, Canada, Australia and the United Kingdom.
I'd now like to present, our performance by our two segments.
Our <unk> and our <unk> segments. Both grew in the first quarter as a result of broad based demand for our high end services.
I'll start with the GSP segment or the government services group segment, which was up 8% year.
Year over year with a growth in water and environmental programs are.
<unk> segment delivered a record 17, 1% margin.
240 basis points from last year.
This record margin was the result of really three different things first continued business shift.
Our mix to higher margin services.
Second favorable project, Closeouts, and really project performance and third higher utilization in the quarter we.
We had especially strong utilization for U S. Federal work in our disaster recovery services for responding to hurricane in which impacted Florida really just coming into the quarter. During the month of October and extending through November and December .
Without the extraordinary margin contributions from these project Closeouts and episodic disaster work.
We would have seen about a 15% margin in the <unk> segment for the quarter and it's probably more representative of an ongoing margin for that particular segment.
The <unk> segment grew by 9% year on year and delivered a 13, 1% margin in the quarter up 60 basis points from last year in line with our expectations.
This is the fifth consecutive quarter with a year on year margin expansion for the <unk> segment.
The margin expansion in the first quarter was driven by strong utilization and high performance buildings environmental programs and renewable energy services across our global operations.
Backlog at the end of the quarter was up 11% year on year, resulting in an all time high ending value of $3 $81 billion for the company.
In the first quarter, we won many new programs and task orders with both our commercial and government clients here in the United States and internationally.
We leveraged our 25 billion dollar value in contract capacity with the U S Federal government and our existing master service agreements to generate almost $1 billion.
And new orders just in the quarter.
We were also awarded new programs, such as the $42 million in additional contract capacity by USAID for energy transformation services in Moldova, and a new $95 million contract with the United States Navy to support their environmental restoration needs.
This broad based backlog provides us with excellent visibility for the remainder of fiscal year 2023.
Now just 10 days ago on January 23rd we closed the acquisition of the Rps group and we are rapidly moving forward on shared opportunities collaboration and actually aligning their systems with ours and I am very pleased to welcome everyone at the Rps group.
To Tetra Tech.
The Rps group brings to Tetra Tech over 5000 staff that are highly aligned with our approach to projects and high end consulting services and cheat in key geographic regions that we've been targeting for future growth for some time.
Rps doubled our staff in the United Kingdom, and Australia, broadening our services and client relationships and both of these regions.
Rps also extends our operations by adding 1200 employees in Europe across the countries of Norway, Netherlands in the Republic of Ireland, giving us for the first time, a significant presence in that region.
When we actually combine Tetra tech and the Rps group, we now have an organization collectively with 27000 employees.
Working from 550 offices worldwide servicing 22000 clients and we collectively deliver 100000 projects a year with an annualized revenue of approximately $4 5 billion.
Together Tetra Tech in Rps. This team is leading with science and driving growth by addressing our clients' increasing needs for water.
Environment and sustainable infrastructure services.
At this point I'd like to turn the presentation over to our Chief Financial Officer, Steve Burdick to go through more details of our financial performance in the quarter Steve.
Thank you Dan.
So I'd like to now review the financial results for the first quarter of fiscal 2023 overall.
Overall as Dan mentioned, we had record revenue and earnings and strong performance from our operations was marked by quarterly revenue of $895 million and net revenue amounting to $737 million, which is a quarterly record for us.
When adjusting for the FX change from last fiscal year revenue was up 7% and net revenue was up 12% over the last year on a constant currency basis.
We experienced strong revenue growth from all the end markets, including U S commercial international Federal government and state and local clients.
Yes.
Our profitability for the first quarter was also very strong our adjusted EBITDA came in at $103 million, which was up 16% over last year and our EBITDA margin increased 90 basis points to 14%.
This improvement came from both segments as you heard from Dan, but three quarters of this increase was driven by our growth in the <unk> segment and an improvement in <unk> operating margin, which was up 240 basis points over last year.
And about one quarter of the increase was in operating income coming out of <unk>, where the margins were up 60 basis points over last year.
Now our GAAP EPS came in at $2 18.
This was an increase of 74% from last year.
As noted in our reconciliation summary is provided in the appendix to this presentation, we entered into a hedge for the purpose of locking in the Rps price in U S dollars at the time, we signed the agreement back in September .
For the first quarter of fiscal 2023, we had an FX hedge gain of $68 million to contributed 94.
The GAAP EPS.
We entered into this hedge when the British pound was trading at a 30 year low to the U S dollar and ultimately at the time of the acquisition closed in late January .
10 days ago.
The cumulative effect.
Or the cumulative gain on our FX hedge amounted to about $110 million and this effectively reduced our purchase price by almost 15%, we will save over $6 million of interest expense per year going forward.
In addition to the hedge gain we incurred costs related to the Rps acquisition for bridge financing fee of about $2 7 million recorded in our net interest and for legal fees of about $3 8 million recorded in operating income.
Now excluding these acquisition gains and losses, our quarterly EPS came in at an all time record high of $1 30 for.
This was an increase of 13% compared to the adjusted EPS last year.
I also want to point out that our tax rate in the quarter was 25% versus 19% a year ago.
And the tax rate differential at an impact on our EPS and that if we were at the similar lower tax rate, our EPS would have been even higher by another 20%.
Cash flows generated from operations for the first quarter totaled $25 million.
Historically, the first quarter is seasonally our lowest period relative to cash generated from operations.
Our focus on working capital and cash flows as resulted in our DSO, maintaining our leading industry standard of 61 days.
This is a sustainable improvement from prior years and.
This lower DSO trend continues to reflect the outstanding work that our project managers lead relative to higher quality projects and highly satisfied clients and a broad portfolio across really all of our end markets and geographies.
Our net debt amounts to $82 million and the net debt to EBITDA was at a leverage of two times with a total cash position of about $164 million.
Now regarding our.
Dividend program, we paid out $12 million in dividends in the first quarter.
And I want to announce that our board of directors approved a 20 <unk> dividend.
To be paid this quarter.
And this is our 35th consecutive quarterly dividend and our seventh consecutive year of double digit year over year increases in the dividends paid.
As we presented here today, but continued high quality operating and financial results with improved EBITDA margins.
Positive cash flows and lower leverage has provided the opportunity for tetra tech to comfortably take on greater leverage through our banking relationships to fund the <unk> acquisition, which I will speak to next.
So for those following the presentation I would like to present, our financial plan for the integration of Rps, which is a significant opportunity for Tetra Tech.
And when looking out over the next three years, we expect to first <unk>.
Increase the actual EBITDA margins of Rps from the lower historical levels to be more in line with Tetra tech generating margins well over 13%.
This will be accomplished in a similar manner as we as what we had done for our two previous public company acquisitions, both coffee in 2016 and Wi G. In 2019.
By focusing on high end differentiated services and revenues, while integrating the business into our ERP platform and our corporate systems for greater cost synergies we.
We had increased the margins in those businesses from breakeven.
Tetra tech double digit levels.
And secondly through improve Rps profit margins and cash flows along with Tetra Tech's strong positive cash flows from operations, we expect to Delever, our balance sheet to a level to be more in line with our long term net debt to EBITDA goal of one times two times.
And we would expect to have a net net.
Net debt leverage of about one five times by the end of this year.
So as you can tell I'm very pleased to share these quarterly results.
<unk> for the start of our fiscal 2023, when and thank you for your support and I will now hand, the call over to Joe to discuss just a few of the many business opportunities of bringing Tetra Tech and Rps together.
Thank you Steve Rps is an excellent strategic fit for Tetra Tech expanding both our global water and renewable energy opportunities.
<unk> Tec has a leadership position in water as demonstrated by our number one water ranking by engineering news record for 19 consecutive years.
Tetra Tech is working worldwide to provide our clients with sustainable water supplies and innovative water treatment solutions.
Our rapidly growing digital water practice is advancing water utilities programs by providing remote automation monitoring and data analytics. The addition of Rps expanse Tetra tech addressable market by providing us with access to a 10 billion pounds per year UK water.
Market.
Rps brings long term relationships and consulting contracts with all of the major U K water agency clients.
These same clients utilized rps grid water net pro software platform on a subscription basis, a cloud based decision, making system that provides predictive analytics and visualization for water quality hydraulics and asset management.
The addition of Rps also advances Tetra Tech's global energy strategy by giving <unk> access to a 15 billion pounds per year offshore wind market in the United Kingdom, and Europe significantly increasing tetra Tech's renewable energy opportunities.
Tetra Tech hub top rankings with engineering news record and renewable energy for our hydropower wind power and solar power Tetra Tech has long term relationships with energy utilities.
Having provided high end sighting and permitting consulting for more than 1000 projects in the U S.
For the U S offshore wind market Tetra Tech provided all of the front end planning and permitting services for the only two operational project the block Island Wind project and the coastal Virginia Wind project.
Rps also brings an impressive resume for offshore wind in the U K and Europe .
Having worked for over a decade on the development of the Hornsea, one two and three wind project.
And providing specialized services in the areas of marine investigation and geophysical analytics.
Together, we are ideally suited to support our clients and the expected 260 gigawatt of.
Of offshore wind development in the North sea, representing a fivefold increase in current wind generation.
With offices in Ireland, the United Kingdom, Norway, and the Netherlands, Rps is well positioned to put Tetra tech on the map in the North Sea.
And now I'd like to turn the presentation back to Dan.
Okay. Thank you very much Jill.
I'd now like to present, our guidance for the second quarter and for all of fiscal year 2023.
To do that in two parts this morning.
First I'll be presenting tetra tech's guidance without Rps.
And I'll remind the collective group here they've been with US for just 10 days now.
And second I'd like to provide the outlook for the Rps groups financial contributions for both the second quarter and for all of fiscal year 2023 for the amount post acquisition or post January 2013.
I'd like to begin with our guidance as follows for Tetra Tech excluding Rps.
For the quarter for the second quarter of 2023, our net revenue guidance is a range of $685 million to $735 million.
With an associated earnings per share of $1 three to $1 eight.
For the entire year of fiscal year 2023, we are increasing our net revenue guidance range to a level of $3 billion.
To 315 billion of net revenue with an associated.
Earnings per share guidance of $4 90 to $5 and five.
This guidance for Tetra Tech excluding Rps.
Has the following assumptions it assumes within this guidance, we will take an expense of <unk> 21 per share or $15 million for intangible amortization.
Have an effective tax rate for the year of 26% for the remainder of the year, we have approximately $54 million.
Diluted shares outstanding and this guidance does exclude any other contributions.
That would take place.
After the Rps acquisition.
With respect to the contributions the financial contributions for Rps for the second quarter.
We have estimated that they will contribute approximately $100 million.
Our net revenue to Tetra Tech.
With an associated earnings per share of minus 10 in the second quarter for.
For the entire fiscal year of 2023, the eight months that they will be with us in total.
We expect that they will contribute approximately $400 million of net revenue and be neutral to our earnings per share on an adjusted basis, excluding transaction and integration costs.
Yeah.
In summary.
We had an excellent first quarter and just a fantastic start to fiscal year 2023, setting first quarter Records and frankly any quarter records for net revenue income and earnings per share.
Our backlog reached another all time high comprised of services that are aligned with our long term growth strategy that provides us excellent visibility for the remainder of 2023 and frankly, even farther into the future.
And as we begin the year, we're seeing increased opportunities and demand for our leading with science approach.
And advanced analytics solutions reaffirming our strategy to focus on the high end services in water.
Environmental programs and sustainable infrastructure.
And with that Daryl I would like to open the call up for.
More questions.
A question and answer session will begin now please be aware that there will be a 32nd pause in our webcast to allow for buffer.
At this time audio participants are invited to submit their questions. Please remember to mute the audio function on your computer before you speak if you are using a speakerphone. Please pick up the handset before pressing any numbers. If you would like to ask a question. Please press star one on your Touchtone phone.
Our first questions come from the line of Noelle Dilts with Stifel. Please proceed with your questions.
Hi, Thanks, everyone.
So I was hoping that you could just expand a bit on your expectations around rps margins for.
Fiscal 'twenty three I think when Rps had had before the.
Physician had been talking about kind of getting to a double digit.
EBITA margin in the near term so could you just expand upon sort of how youre thinking about.
The margin profile this year and how the cost savings that you've laid out rollout over the next.
Basically.
Two and a half years. Thanks.
Absolutely thanks for the question.
Steve actually put together a slide that was included in his prepared remarks that graphically depict our expanding margin.
Expectations for the Rps group now in 2022, which has been completed on skull that the trailing 12 months.
Rps group was around 4% just slightly over 4%, we expect that under Tetra Tech that number will double and we expect as an average for the year that that will increase to approximately 8%.
In fact, we will be exiting fiscal year 2023 at a run rate closer to 10%, but for the average that they'll contribute for 2023, it would be approximately 8% for the year with it beginning at approximately 4% now and expanding to a run rate at about 10 at the end of the year.
We expect in 2024 does that number to move into a double digit level.
Approximately 11%.
That level it'll enter at about 11 exited about 12 with an annual average rate there in the middle of about 11.
Would be for 2024, and then finally.
The following 12 months and we expect that to be up at Tetra tech level, which would be a 13% plus.
So in one respect I would say that 2024, it sounds like a long way away but.
Since we're on the U S Federal government calendar.
Less than eight months away, so it's actually quite quite close.
With respect to savings I did make a comment on the adjustments with respect to our forecast for contributions from RP.
Rps to Tetra Tech.
We do expect that on a cost synergy basis, moving to common platforms and aligning our systems. We will see once fully implemented we will have approximately a $25 million contribution.
Reduce cost or it will contribute to their EBITDA that is embedded in helping assist to get to the margins that I had just indicated.
We expect that it will cost us about 10.
Sorry, it will cost us about 20.
$1 million in order to achieve the 25 in savings per year.
We expect we will get about half of that.
Cost synergies this year and fiscal year 2023, so of the 25, we'd expect we get about $10 million a year savings here in this current fiscal year the costs for that will be about $15 million. So of our totaled 20 that we'll spend to achieve the 25, we will incur about half of that this fiscal year.
That will leave about five for fiscal year 2024.
Expect the annual yield to be up to about $20 million a year or 2024, and then beyond that 25 on a ongoing and future basis I don't know I ran through those numbers pretty fast.
Some questions on that I would be happy to get into those details or Hep Steve.
Provide some of the underlying support.
Sure.
I think.
So I think I guess, just while we're on the on the Rps topic.
I know that sales synergies have been and have been discussed as a key reason for the acquisition could you expand upon how you're thinking about some of those opportunities and really the growth potential of the combined sort of Tetra Tech Rps entity again as you look out over the next couple of years.
Tim.
Im really excited about that I know that our our financial folks and certainly.
Take great satisfaction on the accretion I know we've talked about.
The Rps.
Accretion to Tetra Tech once they've joined us for a year and we've actually had them integrated to be in the mid to upper teens on a financial basis I still believe thats easily achievable in fact, we'd look to perhaps do even better than that but what actually is most exciting is the revenue synergies and I think that tetra tech combined with Rps gives us new geography and new.
New capability that and then I won't use these terms very often is unmatched and permitting for some of the most innovative renewable energy programs out around the world and offshore wind is of course, one of the very biggest I know Jill spoke a bit to it but rps.
<unk> would not have the ability to have access to the U S markets that Tetra Tech brings in Tetra Tech would not have any meaningful participation in the largest new growth areas for offshore wind that go through the north sea and other areas. So I do think this is an example, thats one plus one is not slightly more I think it's one plus one is four or five.
The other item we have been very anxious to participate we think we can bring enormous value to the UK water markets Tetra Tech has been doing water quality programs, we have been doing impacts of agriculture and livestock.
Loading into water quality streams with respect to things like total maximum daily loads for chemical loading. This is the new priority for the Amp aid programs, where the asset management programs for the water utilities in the United Kingdom, and Thats, what <unk> been doing for the U S EPA and the U S. Local state governments here for the past 30 to 40.
Years, and its just new advent is the priority in the UK. So I think what we have plus the position that Rps has upholding framework or Master service agreement contracts with every one of the major utility water utilities in the U K is another another area, where it's not just one plus one is slightly more than two.
It's a big move and while Rps currently is number five or number six.
Ranking as far as revenues for the UK.
Water utilities, I think with the advent of Tetra Tech, we're going to move up that rank pretty fast by providing much better value.
Water utilities have never seen before and they can do it on the back of the investments that was made by the U S government measured in the hundreds of millions of dollars if not billions. They don't have to invest that they can get that by tetra tech bringing that technology.
Technology capability to the U K and actually building on the backs of the investments done here in the United States.
Great. Thanks very much.
Thank you. Our next question is come from the line of Andy Wittmann with Baird. Please proceed with your questions.
Oh, great. Thanks for taking my questions everyone.
I was just hoping maybe.
To just get a good sense of of the quarter and how it relates to the guidance here. So I guess ask the question this way.
You mentioned the <unk> segment.
Kind of had some items.
Artificially artificially certainly earned them, but the margins were a little bit higher than you expected and shouldnt be viewed as a continuing benefit in fact, you said, 15% is kind of more like what the underlying performance was so like if you just do the difference of that margin difference.
About 10 cents, which means you beat the quarter and beat your guidance, but.
But not as much it looks like.
Basically most of the guidance raise not all of it but the.
Majority of the guidance raise is due to that GST segment margin performance. So I guess the first question is is that right. The right way to think about your guidance and the implication is that the balance of the year outlook is still good and it's been supported but maybe it's not terribly changed is that does that.
The right way of thinking about it.
Yes, I think that is.
Primarily the right way to think about it we had.
A great first quarter.
The reason I made the comment that the extraordinary contributions.
And of course, I would say that we had we mobilized an additional 500 staff during the months of October through December to respond to Hurricane Aeon, all across Florida, We were really busy we mobilized staff from across the rest of our operations to go down there and to accelerate the response to minimize the impacts to the residents of Florida and the surrounding area.
But I do consider that a extraordinary.
With climate change and the impact of storms I'm hesitant to say one time event, because it's certainly not really become that but.
17%, if you model that out it would have.
Our guidance going up way up now we did flow through every bit of the beat in the quarter for our annual guidance and more so we do expect things will be a little bit stronger, but we came into the year with actually a very high.
Forecast for EPS, we had actually embedded in our forecast for 2023, another 50 basis points increase in our margin across the company.
So to actually maintain that and increase it a bit while actually absorbing and flowing through all of the beat that we had in Q1 I would say that yes. When you say does it leave intact, primarily the guidance, we had coming into the year I would say, yes, although we did increase it even more than the beat so we do have optimism coming in.
And of course.
In order to with only 10 days with Rps with us.
It was really we struggled with how can we communicate what theyre going to contribute.
While trying to have perfect insight after 10 days and Thats why we really presented this in two components what is the base company doing which you just highly.
Highlighted with flow through all of the beat and more a little bit more so yes. It remains intact plus and then I think as we go through the year with Rps, we will look to actually begin merging that into Tetra tech as we integrate the company and Youre going to see one collective number and it doesn't take much to add these together to do a calculation on your <unk>.
The parts to see the topline is growing well over 20% with these individuals and I will be.
Really excited to present, what it's going to contribute to the bottom line, both on valuable cost synergies and revenue.
But yes, I think your characterization of our maintaining and improving our outlook through the year, even with the beat is accurate Andy Okay. And then I guess the follow on question to that is obviously only 10 days with Rps here, but going forward can you just talk about how youre going to.
Talk about EPS guidance theres going to be an intangible amortization hit which you don't know yet obviously.
And so you gave us I think a very realistic way of looking at it with this kind of two pieces, but but going forward you think.
23, you're going to have like an adjustment for some of this intangible amortization and then maybe as you go to the future 24, something that you kind of get back to just closing it more like you've done historically, which is really founded in GAAP principles are or how you're talking and thinking about that internally.
I think that's it.
Great question, that's a great question.
For those that have followed Tetra Tech's guidance you would know that we are on a GAAP and in fact I think we're the only company not just in our industry, but any industry that actually does adjustments and moves our actual performance down and you can see that we adjusted from over $2 a share of earnings per share down to a $1 34, you would've seen each of the quarters last year, we took any type of extraordinary.
<unk> contribution and adjusted our EPS down so I don't know who does that other than Tetra Tech and we do present, the gap and we continue and we look to revert to that once we've actually incorporated Rps and understand what the one time transaction, which we actually know those costs, what the integration cost and the <unk>.
Tangible amortization I expect those will be on an adjusted basis will be quite transparent as to what those are but as we move into 'twenty four I expect us to be returning to where we've historically been in fact, even this quarter, where we've been which is the cleanest most direct reporting of our results which are on a GAAP basis.
And if they are extraordinary contributions we've even taken those out to reflect our increases that are well into the double digits. So yes, I'm not looking to change tetra techs reporting off into the future, but theres. So many one time items associated with Rps, joining us it would only be appropriate to provide a clear accurate understanding of.
Their contributions by adjusting for those because they are one time and in the case of intangible amortization, we don't even know that number yet so we'll put that into place. This next quarter, we'll probably have adjustments through 2023, and then we will return.
At appropriate timing to GAAP reporting for the company.
Okay.
That all makes a lot of sense. Thank you for your time and perspective.
Great. Thank you very much Andy.
Thank you. Our next question is coming from the line of Alex Dwyer with Keybanc. Please proceed with your question.
Hi, guys.
Can you talk about the JA it kind of sounds like the expectation is still for a minimal contribution later this year.
Has anything changed since the last update maybe in terms of customers moving forward with projects or more funding coming through the pipeline I'm just trying to get a sense of what's currently baked into the guidance could ultimately prove conservative this year.
Well.
Good question, its probably one we get quite frequently it's ever since both aig's past.
Into law.
I would say when the chips act and even the.
Inflation reduction Act.
Some combination of the special legislation that's passed we get different bearing comments, we do believe it.
We will have a contribution primarily late in the year, we havent being quite de Minimis overall, the growth rates that we've had in our state and local which we expect one area to be.
Contributed to the funding we've seen our clients begin to get some of the funds or grants provided to them, but they haven't necessarily flowed at any material level to us yet.
I expect in Q late Q2, but really Q3 and Q4 of these projects to start it's mostly going to be on the very upfront planning. The initial outline even conceptual design and so I expect many projects to start and the.
The second half of fiscal year 2023, but what's exciting for us about it is not the financial contribution in 'twenty three but it's when you start a program. They started a small level and they begin to build up like a bell curve and these are projects that start with small conceptual.
Tasks and assignments and move into permitting the detailed design and build and really contribute over many years. So these programs that will start in the second half of this year are going to build for multiple years and they'll contribute for three to five years or more and then of course owners engineer an oversight during.
Implementation by the constructors, so it's de Minimis contribution during 2023.
It really had no contribution in our first quarter and is not included in any material way in the second quarter, you'll see it begin to build in the second half and I've not seen anything that would cause it to be delayed or pushed out to the right and we're now seeing what's appropriate the funds go to our clients, which will then trigger the ability to procure and youll begin to.
See it in <unk>.
Backlog, but I'd also say not only did it not contribute to the revenue in the quarter I do want to make the note.
Hi.
And the other funding sources did not contribute to our backlog growth in the first quarter that was.
Excluding anything that I expect in the drilling will come later in the year.
Or backlog so the sequence of courses. It goes into contract capacity then it goes to backlog, which we report in detail then converts to revenue. So we are still a few quarters out from seeing that contribute to the revenue side.
Got it and second question you guys raise the margin target ranges for both of the segments last quarter and this quarter was interesting with the DSG margin coming in well above the high end of the range, even when you back out those three items you called out in the prepared remarks.
I was just wondering if there was the latest message on the timing of.
Margins potentially catching up with TSV margins.
It is still the case or what the timeline could be.
That's a great question, it's a great question every time.
I speak with our.
Leads and executives.
And they say theyre going to close the gap <unk> widens the gap by additional performance like you saw this last quarter.
I will say that we expected GST as an overall range for the year to be between on an EBITDA margin between 13, 5% and 14, 5%.
GSP thought they were beginning to close that gap by being 13, one in the first quarter.
I keep saying I expect that to close and then PSG puts in a 17% margin and what they would say to me and have said to me is we can do better.
So.
I guess, what I'll say at this time as I expect both the GST and <unk> margins to expand we included a 50 basis point increase in 2023 over 2022.
I do think GST was a bit of an outlier because of the disaster and a few other items.
And I do still think.
We'll catch in surpass GST.
The only thing I can tell you is it going to be one of the quarters. This year, but if they miss it is not because <unk> has underperformed is because <unk> has outperformed so for our investors and shareholders and analysts who track this.
<unk> doesn't capture surpassed GST.
It's good for our performance because that means we're going to be over the top of any of our estimates as you saw this last quarter.
Okay.
Thank you. Our next question is coming from the line of Tate Sullivan with Maxim Group. Please proceed with your question.
Hello, Thank you and good morning, Ken you mentioned renewable energy the great growth in U S commercial.
And use that term I hadn't heard before renewable energy services in a fast growing business is that does that is the majority of that already the offshore wind projects.
Projects that you work on before adding Rps.
That has been the fastest growing area I will say onshore wind has still continued to be strong solar has actually been strong.
Of course hydro is a is really the largest single component right now between both what we're doing in Canada, and the U S, but I would say that as of.
Well pre Rps I don't want to say as of today as of 10 days ago and earlier.
It would have been almost exclusively what we're doing in Canada, and the U S. But now with Rps joining us we think the opportunities will actually be substantially greater.
The new renewable energy work in Australia, and UK, Europe , which I commented on but the areas had been and it helped grow and drive our commercial 22% growth year over year, our renewable energies was a big part in permitting for offshore wind was.
A big aspect of that and one thing I don't want to.
Understate, what Jill said, the only two operationally productive that are actually producing energy offshore wind.
Our projects in all of the United States all of the permitting and upfront study work and support was done by Tetra Tech and in fact, most of the offshore leases that came from the New York bite, which was the big lease.
Actions that were completed here over the past many months, we're supporting most of those and right. When we feel that things are great here in the U S. Like having the only two operational programs that we did and having most of the new offshore leases that were supporting what are we told by Rps.
That's small and puny and I hope you guys can pick it up because we did the hornsea one two and three which is the world's largest offshore wind generation facilities and we're beginning others that are actually larger than that so I think when you take tetra Tech's programs.
And Rps as it really looks very favorable for us going into this year and on into the future.
And bringing what.
What you have done in offshore wind to Rps is it similar capabilities or is there. Some at some work that you can sell so to speak cross sell the Rps from offshore wind and the opportunity in the U K.
One thing that's interesting is the work the Rps has been doing to support the offshore wind is different than what we've been doing now they're both under the guys or under the general topic of permitting or offshore studies, but Rps brings new technologies that we've just not seen or utilized here in the United States. So an example would be they have.
Offshore automated autonomous.
Buoys and these are very large buoys. They are almost like small vessels and they have lidar systems on them. They have radar systems. They have self regenerating power supplies through solar panels are they measure all of the different attributes necessary for modeling in case of a discharge of oil.
Oil or something or some some some aspect of environ.
Environmental impact from the offshore wind or the vessels that are actually servicing them. So if you have a vessel out there and there is an oil spill you can do real time monitoring for oil spill.
Trajectories fate transport all of the rest of it real time on site with these buoys and we haven't used those here in the United States on the other hand.
The work that we have here in the U S with the offshore very high resolution Marine biology divers impacts to authentic studies, which are underground critters in the water.
Fisheries avian flyways, the very high radar.
Systems that we have to monitor all types of.
Avian species bats birds, others, we have here in the U S. We have a small fleet of offshore high resolution surveys path metric surveys Hydro survey subatom profiling and real time evaluation of marine mammals, we can bring to them. So they will bring to US technologies, we've never seen in the U S. It will bring to them technologies that haven't yet been.
Used in Europe or other locations. So I think it really is very complementary and synergistic so.
That's why again.
Love the financial model that will come out with <unk>.
Mid to high teens accretion no doubt that's fantastic but.
On the revenue side, what we can bring to the industry is just really exciting to us.
Okay and then.
One thing on Rps.
And maybe it depends on transitioning that GAAP accounting the higher some contracting costs to get from revenue to net revenue.
And then to bring up Rps's margins does that imply some divestitures, perhaps do they do some lower margin construction management work or is that.
Yes, yes, well if our gross to net is actually smaller than Tetra tech.
They actually have a less of a difference from gross to net so on a full annualized basis. A 12 month basis. There are about 700 million on gross revenue or total revenue and we expect on an annualized or 12 month basis to be around 600 million on net revenue so that about 15% difference between gross and net is.
Actually less than that of Tetra Tech.
Tetra Tech here, we do more government work than they do and we have more requirements for using small disadvantaged.
Participation on execution of federal work and so we naturally have contractual obligations to meet the sub contracting requirements.
As far as do they have some work that is lower margin yes.
We're not necessarily see divestiture, but as we've as we had implemented in both coffee and <unk>, we are going to change.
The model and move it to site of lead to one direction, which is more high end, which is reflected with less competition higher margin and technically differentiated services that are just not offered in the marketplace are have a much different competitive landscape in the marketplace.
So the efforts will be not to be quote bigger, but our absolute focus is to be better with rps and where is that can be reflected that is going to be reflected in margin.
Thank you Dan.
Thanks, Dave.
Sure.
Thank you. Our next question is coming from the line of Michael Dudas with vertical research. Please proceed with your question.
Thank you good morning, gentlemen.
Okay.
Okay.
So yes.
Continuing on to some thoughts on Rps I know, it's only been 10 days and such but maybe you can share a little bit about.
Your expectations relative to managing the new employees retention expectations are there any significant senior people that need to be around her joining the team.
And.
Relative to that in the margin question you just touched on before.
To help these margins and more tetra techs.
Expertise and value proposition adds to the through the contract base of Rps or are there things Rps can do better to extract extract those better margins amongst there, especially there are government clients.
Bill.
So two questions there one retention and the second is increasing the margins or project execution.
With respect to retention.
It is new we do have retention programs here in Tetra Tech.
We.
Have.
Equity positions that we will provide access to tetra tech stock as we do with Tetra Tech staff that actually is a component of retention, we actually want every employee to be a owner of the company and have same alignment as our outside shareholders. So we are putting that in.
We certainly have selected.
Our retention of.
Stock awards that vest over multi years for select areas across the top to make sure that they own a piece of the rock and they're part of the organization and that best over multi years as does for every Tetra tech employee and the existing management of Tetra Tech here.
I will say Rps is turnover currently are.
Say currently prior to our acquisition is higher than Tetra tech's quite a bit higher.
Tetra Tech's overall turnover rate is right around 10% slightly below that but the turnover rate of Tetra tech when you've been here more than five years at the company is in the order of sort of circa 1% is quite low.
And what I am looking to achieve is actually to put that type of.
Career stickiness with the people at Rps. This is not a next step in their career. This is the this is the next landing spot where they will continue their career all the way through retirement for those that want to be high end technical engineers and scientists I expect they have a home here forever and that they'll help bank tetra.
Better than we were before they joined US and it provides our clients extraordinary levels of <unk>.
Institutional knowledge consistency tetra tech's not going anywhere the next recession is not impacting our business and in fact, if you look at 2008, we grew through that if you look at the pandemic, we were up through that and so the tougher things get better home. This is for those employees.
Now with respect to can they run better.
Do think that they have been hampered and they have been restricted with respect to a lack of a single ERP system in their back office I think that the ability for their project management technical staff to have real time understanding of where they are decisions making to be made.
Immediately with respect to immediate access a percent complete accessing of knowledge systems across the entire organization is substantially higher at Tetra Tech we've just been.
I don't know one to two decades ahead of where Rps is on that journey and we're going to move what was a another five or 10 year journey for them, we're going to move that into 12 months to 24 months.
Period, and they'll be on our systems and so I think that will help provide new solutions for their clients.
And which then will result into better performance by ourselves and better delivery and value propositions for all of our collective clients and the 100000 projects. So with respect to efficiency and how are we going to drive the higher margin stuff just on cost, it's going to be giving them. The tools that they can even do their existing jobs better than what they have done prior to joining <unk>.
Okay.
Excellent. Thank you.
Thank you Michael.
Thank you. This will conclude the Q&A session I will now turn the conference back over to Dan Patrick conclude.
Thank you very much Daryl and thank every one of you for being on this call. Thank you very much for your patience with us as we look to have more clarity with respect to the very specific contributions on both revenue and earnings.
<unk>.
Really the outcome of the revenue synergies that we have with more projects for our end clients I know that again gives us.
Too many times during this call, but the first 10 days with us have actually been exceptional I had the great pleasure to be in the UK.
Last Monday, when we closed and had a chance to spend the entire week with many of their operations across the UK, Norway, Netherlands, and I left more excited than I went even going over that I think is going to be a great contribution.
I have the great opportunity to do the same across our Australian and Asian markets and it's not just me going in a ceremonial.
Visit is actually going on the frontline with our operation staff that are initiating the collaboration for new project wins and I will say in the first day, we've already had wins together that we otherwise wouldn't have had.
So I hope you can tell from today's presentation.
Looking forward to sharing with you more details on progress that we're making and that'll be as soon as this next quarter only 90 days away and I Hope you have a great rest of the week and I look forward talking to you on next quarter's call. Thank you.
Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day all parties may now disconnect.