Q2 2023 Tetra Tech Inc Earnings Call

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Speaker 5: Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investors section of its website at tetratec.com.

Speaker 6: This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information, in whole or part, without the prior written permission of Tetra Tech is prohibited.

Speaker 7: With us today from management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick,

Speaker 8: Chief Financial Officer Jill Hudkins, President and Leslie Shoemaker, Chief Sustainability Officer. They will provide a brief overview of the results and will then open up the call for your questions.

Speaker 9: 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.

Speaker 10: 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 TetraTek's section 1.1.1.1.1.

Speaker 11: Periodic reports filed with the FCC.

Speaker 12: Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements.

Speaker 13: 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 TetraTEC's website.

Speaker 14: 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.

Speaker 15: With that, I would now like to turn the call over to Dan Batrecht. Please go ahead, Mr. Batrecht.

Speaker 16: Great, thank you very much Camila and good morning and welcome to our Fiscal Year 2023 Quarter Earnings Conference Call.

Speaker 17: We had an excellent second quarter. Our revenue for the quarter exceeded a billion dollars for the first time.

Speaker 18: as a result of our exceptional performance across TetraTEX operations, augmented by the addition of the RPS group that joined us at the end of January of this year.

Speaker 19: TetraTEX leading with science services are at the center of our clients' priorities to address climate change, resiliency, and adaptation worldwide.

Speaker 20: Given the strength of our performance and outlook, we're increasing our guidance for both net revenue and earnings per share for fiscal year 2023, which I'll give you more details on this later in the conference call.

Speaker 21: I'll begin with an overview of our performance and our customers, followed by Steve Burdick, our Chief Financial Officer, who will provide more detailed review of our financials and our capital allocation program.

Speaker 22: Dr. Leslie Shoemaker, who's joined us today, who's our Chief Sustainability Officer, will provide an update on our recently published annual ESG report. And Jill Hudkins, our President, will provide further insight into our growth markets.

Speaker 23: I'll then address our earnings guidance for the third quarter and our increase guidance for all of fiscal year 2023.

Speaker 24: In the quarter, our net revenue increased 39% year over year from $700 million a year ago to $970 million this year, which is the highest net revenue for any quarter in the company's history.

Speaker 25: Our EBITDA income increased 30% from last year, reaching a second quarter record of $105 million. And finally, we delivered $1.17 in earnings per share, which is up 19% from last year.

Speaker 26: I'd now like to show you what the underlying performance of Tetra Tech was without the contribution of RPS in the second quarter, really to give you some good insight into how the legacy business is actually operating at this time.

Speaker 27: Tetra Tech hit new all-time second quarter highs and double-digit growth rates across the board for revenue, net revenue, operating income, keep it on, and earnings per share.

Speaker 28: Revenue without the contribution of RPS was $989 million, almost a billion dollars, up 16% year over year. A record revenue for any quarter in the company's history without the contributions of RPS.

Speaker 29: Our net revenue increased by 18% year over year. Our operating income and EBITDA were both up 19%, and we generated an earnings per share of Tetra Tech without RPS of $1.20 per share or up 22% from last year.

Speaker 30: I would now like to provide an overview of our performance by our end customer.

Speaker 31: I would now like to provide an overview of our performance by our end customer. for our US federal clients.

Speaker 32: was up 59% from last year, driven by broad-based growth in water and environmental programs, and during the quarter, the rapid initiation of support for Ukraine under our U.S. State Department and U.S.A. contracts.

11% from their prior year, driven by strong performance in our global high performance buildings work in Canada, Australia and the United Kingdom.

Our underlying commercial revenues were up 13% year on year driven by our services and sustainability, including work specifically in environmental permitting, also high performance buildings and clean energy and renewable energy programs.

I'd like to provide and present our detail of our performance by our two segments that we report on. The first segment, the Government Services Group or the GSG segment, grew by 29 percent from last year, with a significant increase in our international development work, especially for Ukraine Energy Programs.

The extraordinary contribution for Ukraine just in the quarter provided 70 million dollars in revenue.

Disaster response was down relative to the second quarter last year for comparison purposes, excluding the unusual impacts of Ukraine and disaster response in the quarter, our government services group had a strong double-ditch growth rate of 16% year on year.

Our Commercial International Group, or CIG segment, grew by 47 percent year on year. Even excluding RPS, which was a material contribution to the segment, the CIG segment was up 13 percent, driven by growth and renewable energy programs, environmental work all across the United States, and high performance buildings work worldwide.

You know, one of the highlights for the quarter, in addition to the actual performance of revenue and profit and extraordinary work, was our backlog. Our backlog was up 18% year on year on strong broad-based orders, resulting in an all-time high backlog of $4,275,000,000 of contracted, funded, and authorized work. In the second quarter, we won new programs and task orders for commercial clients, especially for renewable energy and environmental restoration services.

Our disaster planning and recovering practice also won a $54 million contract with Puerto Rico addressing the continued long-term resiliency planning needs for this hurricane-prone region. Now while those were an overview of our financials for the quarter and some of the growth areas, I'd now like to turn the presentation over to Steve Bird, a CAR-T financial officer, to go over some of the details of our financials in the quarter. Steve? Okay, thanks Dan. So as you just heard from Dan, we had an excellent quarter with results coming in better than anticipated.

Those improvements also extend to our cash flows and our capital allocation related matters. So cash flows generated from operations for the second quarter totaled a hundred and eight million dollars up 13% over last year. Our focus on working capital and cash flows has also resulted in our DSO maintaining a leading industry standard of 59 days. This is a sustainable improvement from prior years and

The slower DSO trend continues to reflect the outstanding work that our project managers lead relative to higher quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies.

And regarding our dividend program, we paid out 23 cents per share in dividends in the second quarter, which is a 15 percent increase over last year. And I want to announce that our Board of Directors approved an increase in our quarterly dividend again to 26 cents per share to be paid in June . This is our 36th consecutive quarterly dividend.

and our ninth consecutive year of double pitch year over year increases dividends paid. You know, as Dan mentioned earlier, we did have this acquisition RPS, and the recent closing of the RPS acquisition, which was just over 100 days ago.

has been going quite well in regards to integrating Tetra Tech and RPS together.

We've been making excellent progress towards improving profit margins, and I would like to update you on our financial plan and current status for the integration of RPS, which is a significant opportunity for Tetra Tech. So when looking out over the next several quarters, our goal is to align the RPS margins to be at or above the Tetra Tech profit margins. And this will be accomplished in a similar manner as to what we had accomplished.

with our two previous public company acquisitions. And that is by focusing on high-end differentiated services and revenues while integrating business under our ERP platform and corporate systems for greater cost energies.

As such, we expect to increase the EBITDA margin for RPS from under 5% in their fiscal 2022 by almost three times to a run rate of over 13% at the end of fiscal 2024.

Now, while our operations are working together to focus on delivering high-end solutions in water and environment for our clients, we're also supporting those activities and we expect to realize additional cost energies through both the transition of the RPS business under our ERP system as well as potential office consolidations.

These actions may result in additional one-time integration costs primarily in the fourth quarter of fiscal 2023, but will provide increased long-term operating and financial benefits to the ongoing business. And so far today, compared to our original projections, we are seeing improved margin opportunities based on our joint integration efforts.

with the RPS leadership team.

And so, through improved RPS profit margins and cash flows, along with tetrotech strong positive cash flows from operations, we expect to continue to de-lever our balance sheet. We ended the second quarter with a net debt leverage ratio of about one times not one point.

9 times EBITDA, which is within our target range. We expect to further deliver the balance sheet to a factor of about 1.5 times by the end of this fiscal year.

And so by increasing the EBITDA margins, while decreasing the interest expense on a lower debt, we would expect to be cash accrued of after fiscal 2023, adding approximately 50 cents of EPS in fiscal 2024 and approximately 85 cents of EPS in fiscal 2025. And this will result in a double digit EPS accretion.

and probably in about the mid to upper teams by fiscal 2025, which we anticipated at the time of the acquisition.

I'm pleased to share these quarterly financial results for the first half of our fiscal 23. I want to thank you for your support and I will now hand the call over to Leslie who will discuss our ESG sustainability program. Thank you, Steve. I would now like to provide you with an overview of our environmental, social, and governance program and recently released

Our goal is to benefit the lives of over a billion people by 2030. Since the beginning of our impact evaluation in 2021, we have reached 545 million people and reduced greenhouse gas emissions by 101.2 million metric tons of carbon equivalents annually.

For our global operations, we've also set goals to reduce greenhouse gas emissions, as well as setting diversity, engagement, and community metrics. This year, we reduced emissions by 25 percent per employee through innovation and flexible work policies, application of virtual technology, and cloud-based data management.

work that we do across petri deck across our entire global operations.

TetraDeck is providing sustainability at scale by developing technologies that can be brought to clients worldwide, such as our greenhouse gas calculator that is used by our high-performance buildings practice to help cities, college campuses, and companies decarbonize their fixed assets.

We're also performing large-scale water management optimization for systems, such as the upper Egypt utility that provides over 1 billion gallons per day of essential water supply to the region.

We also manage terabytes of coastal data in our cloud-based oceans map platforms that facilitates the permitting and management of offshore wind facilities in the U.S., United Kingdom, Europe , and Australia.

And through our work supporting the U.S. Agency for International Development, we are protecting the biodiversity of forests and aquatic ecosystems by creating supply chain tracking systems that create sustainable fisheries, forestry, and agricultural production.

By leading with science, Tetra Tech leverages our expertise and technology to address our clients needs at a global scale. And now I'd like to turn the presentation over to Jill. Thank you, Leslie. The highly scalable solutions that we deliver through more than 100,000 projects for our clients each year.

result in annual revenues that demonstrate our market-leading position in water and environment.

I'm very excited to announce today that Tetra Tech has been ranked number one in water by Engineering News Record for the 20th year in a row. Tetra Tech is a leader in one water strategy, providing intelligent planning, innovative design and automation to develop, integrate and manage reliable water supply sources for some of the largest U.S. water agencies.

petrotech is also ranked number one in water treatment and desalination by engineering news record. petrotech designs innovative high recovery desalination facilities primarily in water stress regions of Florida, Texas, and California. these states represent 30% of the

These facilities diversify water supply portfolios and future-proof water infrastructure for many years to come.

Tetra Tech also has decades of market leadership and providing environmental solutions that are innovative for our clients and sustainable for our future. Tetra Tech has been ranked number one in environmental management by E&R for 14 years in a row.

Tetra Tech is also ranked number one in green government offices in our first year of recording in this E&R category. Tetra Tech designs sustainable and healthy buildings utilizing proprietary energy and greenhouse gas modeling software.

Some great examples of the work we do in government buildings include Tetra Tech is developing the City of Los Angeles Building Decarbonization Plan to support a carbon neutral future across the city's 1,200 municipal buildings. Tetra Tech is also developing a system-wide decarbonization framework to reduce greenhouse gas emissions.

heating and cooling system in Australia. And in the United Kingdom, Tetra Tech is advancing an innovative heat decarbonization plan to support zero carbon Oxford for the Oxford City Council.

The U.S. government has set ambitious net zero building emissions goals for 2050.

U.S. government building decarbonization efforts have been further accelerated by incentives in the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

These funding priorities are directly aligned with what we do at Tetra Tech in sustainable government buildings today. The U.S. government owns more than 300,000 civilian and defense buildings. One of the largest opportunities for Tetra Tech is the U.S. Army's commitment to spend $7 billion.

over the next four years on decarbonization.

The Army is the largest federal building owner with more than 138,000 buildings across 130 installations.

Tetra Tech is leveraging proprietary greenhouse gas digital tools and U.S. Army contract capacity to capture decarbonization programs that support the Army's climate plan.

Also, more than 20 states have set clean energy and net zero emissions goals for 2050. The Inflation Reduction Act provides $32 billion of grant funding to support state and local building decarbonization efforts. Tetra Tech is leveraging its standing contracts with more than 500 municipalities.

The guidance for this third quarter and for the year for Tetra Tech excluding RPS, and I'll provide those numbers in just a moment, but for the Tetra Tech excluding RPS for the third quarter, Tetra Tech's guidance range is from 750 million to 800 million dollars.

$5.07 to $5.17.

Now for this Tetra Tech portion of our guidance range the following assumptions are included it does include Intangible amortization of 15 million which equates to 21 cents per share We do estimate a 26% effective tax rate. We assume 54 million

diluted shares outstanding and does exclude any future acquisitions that we would do in the second half of this year. Now for RPS, and these numbers are in addition to the Tetra Tech numbers I just provided or are listed in the presentation above. The numbers for RPS for the third quarter, we do estimate

a range of net revenue contribution of 150 million to 175 million. And we expect that the earnings per share will be neutral or there would be neither a contribution nor a detraction or a loss from RPS in the third quarter. And for the year for fiscal year 2023 in total.

We anticipate RPS will add in addition to the Tetra Tech numbers listed above a range of 450 million to 500 million dollars for fiscal year 2023 and also neutral and these numbers are consistent with numbers presented by Steve Burdick in the earlier slide for 2023.

In summary, I'd like to share with you that we see strong demand for a differentiated Leading with Sciences approach in water, environment, and sustainable infrastructure. In the second quarter, we set new records for revenue, net revenue, operating income, EBITDA and earnings per share and ended the quarter with a...

forward. As a result of our strong year-to-date performance and our record high backlog, I'm really pleased to provide you the increased guidance for both net revenue and for the earnings per share that I just shared with you.

And with that, Camila, I'd like to open up the call for questions.

Thank you. The question and answer session will begin now. Please be aware that there will be a 30-second pause in our webcast to allow for buffering.

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If you would like to ask a question, please press star 1 on your touch tone phone. Thank you.

And our first question comes from Shawn Eastman with KeyBank. Please proceed with your question. Hello, everyone. Thanks for taking my questions. I really appreciate the RPS accretion targets for fiscal 24 and fiscal 25. So I'm having a really good time.

This would be a good time to perhaps supplement that view with your updated thoughts on kind of the underlying Tetra Tech earnings growth trajectory underneath that RPS accretion. Perhaps while addressing this

This trend where we're seeing kind of outperformance on growth relative to the end market targets seemingly in advance of the bigger funding tailwinds that haven't really hit the model yet....

Well, it's a good question and I was really pleased to be able to present the underlying tetradactual performance in the second quarter and as you can see from the presentation materials, all of our key metrics from Topline Growth.

which were in the middle to upper teens, 16 and 18% for revenue, net revenue, respectively. Actually, I would say those numbers are understated because if you actually look at our net revenue growth adjusted for foreign exchange impact, FX, the net revenue growth for Tetra Tech is actually 21%. It's in the 20s.

Every one of our end markets of the underlying TechRetek have exceeded our targets. We've had 5 to 10% target growth rates before our commercial and our international. We've had a 10 to 15 for our state and local, which is well in there. And of course, uh...

We thought we'd be around 10% growth for our US federal and so we bracketed it with the seven and a half to twelve and a half to give us a percent or two up or down and we've actually been in the 20s. So we've doubled what we anticipated and the one thing I'd like to note this is without any material.

Well, I'll say material because there has been a little bit, but without any material kicking in or contribution of these major individual funding items that we see coming forward, which is the Infrastructure Investment Jobs Act, IIJA. It excludes the Inflation Reduction Act, which is a big renewable energy support program. And of course, the CHIP Act.

which will help infrastructure. So I think that things are looking quite well. It has been very fortunate that every one of our end markets are growing at levels higher than what we anticipated and that's without some of these very large macro trends of fundings that have been passed that we see still in our future.

Now, our backlog, I would like to parse out the backlog because what we did this last quarter is great.

But it's, of course, what are you going to do for me next? Or what have you done for me lately? And of course the best indicator of that is how are you doing on your backlog on the underlying Tetra Tech. And we saw a book to bill in our backlog of 1.1 and we saw an increase in our backlog of Tetra Tech itself without the contribution of RPS.

of a 10% increase year over year. So I'm still saying we can do better than even those numbers.

We're not hitting on all cylinders. There's still things that can go better, such as the influx of funding and other programs from the federal government on these large trillion dollar earmarked programs. But I'm feeling pretty good about the underlying business. And the great thing about RPS is they align very much.

propelling TetraTek forward are actually the same things that are going to drive RPS forward with us as we go forward. So I don't know, we're feeling pretty good here and of course it's reflected in our increased guidance and the performance we had this last quarter, Sean.

Okay, that's very helpful relative to how we can think about the top line momentum. But maybe to press you a little bit more, rounding it out with underlying margin expectations on the go forward. And perhaps Steve could chime in on how the cash conversion trend should – isn't that a bit BU viral?

compared to this kind of well in excess of net income type of ratio we've seen over the last several years.

I'll touch very briefly on the margin. I'll let Steve then speak to the cash conversion. We had forecasts coming into the year that we would have for the commercial international group margin range between 12.5 and 13.5 percent. That represents about a 50 basis point expansion in our margins in that group.

from last year and we do expect to achieve that or beat that. Our government services was actually a full of 100 basis points or percentage higher. We thought it would be between 13 and a half and 14 and a half which is also a 50 basis points increase over the prior year. We expect to achieve that for the year and we actually see that trend continuing as we move into 2024 and beyond.

you see not only the top line revenue growth, but if you look for roughly in those two segments about 50 basis points increase and that does not include the numbers that Steve had presented regarding margin expansion within the RPS portion of the company. So obviously when you have revenue growth and margin expansion it becomes a multiplicative.

addition to our earnings and earnings per share. But let me have Steve speak to the cash conversion and our outlook on that front. Yeah, I think, thanks, Dan. I think our cash conversion, we continue to expect our cash from operations to exceed net income going forward. And just to...

you know, make that a little bit more clear, our free cash flow should be fairly close to our cash flow from operations as our CapEx continues to be and will continue to be less than a half percent of our revenue. So we'll continue to be relatively CapEx light.

in generating cash flows that exceed our net income over the near future. All right. Very helpful. I'll leave it there.

in rating cash flows that exceed our net income over the near future. All right, very helpful. I'll leave it there. Thank you very much, John .

Thank you. Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question. Thank you. Yeah, a couple on RPS. To start on slide 9, indicating targeted RPS EBITDA margin, it looks like between 13 and 14 percent in fiscal year 25. Is that—

bringing RPS up to where Tetra Tech will be or should we look at Tetra Tech's combined EBITDA margin is higher than RPS's EBITDA margin.

where Tetra Tech will be or should we look at Tetra Tech's combined EBITDA margin is higher than our PS's EBITDA margin. Should we look at that number please?

You know, Tate, that puts the number very close to that at Tetra Tech. We believe by 2025, which in some respects, I say 2025 sounds like a long way in the future. However, Tetra Tech's fiscal year, we're less than six months out from going into 2024. That'll start on October 1st. So we're only about six quarters out from being in fiscal year 2025.

And our goal is that RPS will have closed the gap completely and be performing at a level at same as the rest of Tetra Tech. So I believe that Tetra Tech, and you look at the chart, it's just under 14 percent EBITDA margin. That would be the number that would be similar to the organization. Okay, in Ukraine, I mean, you mentioned...

That's a good question. It certainly was the largest single short duration amount of work that we've done for USAID ever. So I guess I could say in and within the interquarter. So we've had certainly other programs that have lasted longer and been larger over a longer period of time. But as far as just within one quarter.

as far as a single amount of funding that has gone through the company that is the largest. It particularly wasn't even just entered within the quarter. It actually was provided to us after our investor call last time, which is why it wasn't included in our guidance. And so it really happened in only two of the three months of the quarter. So it was really that much more accentuated.

conflict was resiliency of the grid, upgrading the grid, reliable energy supplies, including transitioning to renewable. And because of some of the damage that has been taking place, we were asked to come in and provide emergency power supplies for the citizens in certain areas of the country.

And so that's why it was short-lived and move now, get the power back up and bring in temporary power supplies and support the country and the humanitarian relief. And that's what took place. Now, could there and would there be more? It's possible, but as of this phone call, we don't have any specific.

order or tasks that are been directed to move forward on. So we've not included any extraordinary additional activities in Ukraine or any other location on something that.

that would be speculative on our part. So we're ready. We support our clients. We're completely behind them on any of the activities they'd like us to initiate. It had gone extremely well and was actually highly needed by the the residents and citizens of Ukraine.

if those other activities will be there in an instant, but it's not included in our guidance for our third quarter of the rest of the fiscal year. Great example of you can rapidly deploy in your contract capacity, I imagine, too. Okay. Thank you, that.

Thanks very much, Tate. Thank you. Our next question comes from Andy Whitman with Baird. Please proceed with your question.

Oh great thanks for slotting me in here. I guess I mean it sounds abundantly clear Dan that you feel pretty confident about how the business is performing. I thought I want would take the opportunity to zoom in a little bit on some of the pieces of your business that are a little bit more interest rate sensitive or maybe macro sensitive.

I guess so much of your business is publicly funded, but you've got this commercial business as well. Can you talk about how that commercial business splits up into pieces that might be interest rate or macro sensitive? Certainly the high performance building practice comes to mind, but maybe there are others. Maybe if you could just talk about that in a little bit more detail, because I think...

and some of the banking and other areas that are, you know, have been disrupted by it. So first of all, let's talk about the United States. Here in the U.S., it's about 20% of our total revenue. So we sort of parsed it to our commercial work, our U.S. commercial, 20%.

What's a little bit unusual about our commercial work, and we've talked about this in the past, but I'll remind our shareholders and other stakeholders on the call this, about half of the commercial work that we do are for commercial clients responding to and supporting regulatory directives they have for environmental programs.

These are areas where there's a record of decision regarding cleaning up legacy pollution or environmental impacted areas. This is actually performing remediation or long-term monitoring or innovative treatment. These areas are essentially...

I don't want to say completely immune, but pretty much removed from any cyclicality of interest rates, recessions, or anything else. These are moving forward. Now somebody's asked, is there any possible way that they couldn't? Well, there is. You could go back and contest a regulatory directive, but

What we've seen in some instances is once you have an agreed upon regulatory order and a prescribed workflow and schedule, if you revisit it, you may get to do more work than you were planning on doing before. So quite often the plan is I'm going forward with this. So that leaves the other half of the commercial work. You know, about almost half of that then.

A good portion of that is actually not regulatory driven, but regulatory priority, which is renewable energy portfolio. This is for renewable energy, offshore wind, onshore wind, solar, other items, which is to meet renewable energy portfolio goals of the states here in the U.S. And of course it's also become prevalent.

is going to be impacted because of incremental increase in interest rates. It's continued to be strong and where we've been pivoting is to two areas for our buildings. It hasn't been necessary that we've made traction yet although we are getting traction. But one is the

onshoring of high-end manufacturing, particularly chip fabrication plants. These are where there's very large dollars being committed to. There's huge grants and tax incentives here in the U.S. so we think that will be an offset to any softening in commercial buildings. And the other area is what Jill Hudson's presented on today's call, which is actually federal government buildings work where we can take our high-performance buildings experts that are doing decarbonization and move them.

to state and local and US federal government programs that are really isolated from interest rate impacts. So we do have some, I'm not going to say we have nothing that would be interest rate sensitive, but it's pretty limited in the areas that we do see some vulnerability.

We have very clear plans that we're implementing right now to diversify that and move to areas that are not impacted or susceptible to pullbacks due to interest rates.

That's a really helpful fulsome answer so I appreciate that. I guess for my follow-up question I wanted to ask a little bit more on RPS. Based on some of your numbers that you gave before it sounds like RPS added about three hundred and seventy five ish million dollars of backlog if you do the math on the 1.1 times organic book to build that you stated.

I thought it'd be useful for you to talk about kind of what the budget was and what the 144 number that you posted in the quarter means for what its pro forma organic growth would have been and if that pro forma organic growth at RPS is a sustainable way of thinking about what they're up to and what their backlog

before they joined you, how are they performing now that they've joined you and what you anticipated and what's it sort of look like going forward?

So they came in, if you took a straight year-over-year estimate when they joined Touchdeck in the second quarter, if you took it with just straight no growth, it probably would have been around 115 somewhere between 115 and 120. Look, I really thought, and our team made a subjective decision here, that coming and joining another firm, there is some disruption. When you move to a new house,

you're a little bit slower getting around the kitchen, you're a little bit slower getting around to other areas. Just when you're joining Tetra Tech, I expected that there would be some amount of disruption, and we estimated that at, give or take, 10%. So we actually, with 100 million, it was below. We did expect that we would have seen some disruption of joining part of joining us, and we just thought that that's just natural.

the right number. They did not deplete the backlog during the second quarter. In fact, they want enough work to keep the backlog in place and remain static. They do have a much lower backlog as a comparison of their annual revenue because their projects are typically a little bit smaller, a little bit more book and burn than tetra-tex and that's primarily associated with

Tetra Tech having much more big federal contracts that have larger amounts, longer durations. I actually, we're modeling them internally.

on 5%, maybe between 5 and 7% of growth. And I don't, we're a little cautious here. We don't think two months make a trend.

But it certainly is a great indication and you did see that we increased not only flowing through the $44 million dollar beat for the year, but we put another $50 million on top of that on what we had for the year from what we provided last quarter. So we do see it is continuing to be contributing and growing as they go forward and I'll just say

for any of the RPS folks that are either listening to this now or will listen to it in the future. They've just been a great addition. I'll tell you the Tetra Tech technical people and back office people could not hold them in higher regard. There are equals and some areas are bringing new capabilities and expertise that we've never had before. And I'll tell you they are a great addition to the company and I think they're going to make the entire organization substantially better.

technically with access to clients. And I'll tell you on Steve's books, both on cash return on invested capital and our margins are going to be beneficial to the entire company as we go forward.

Thank you, Dan, for that. I appreciate it. Have a good day. Thank you very much, Andy. Thank you. Our next question is from Michael Dudas with Vertical Research. Please proceed with your question.

Good morning, everybody.

Morning Michael. So Dan, I certainly appreciate and support the optimism looking at the business over the next several quarters. As you look at your book to build opportunities, I assume given what you're seeing that you can maintain a plus one level over the next few quarters and....

As you look towards the government versus the CIG business, is there areas that might be growing a little bit faster, a little bit more activity over the next two to three quarters, one versus the other, which might impact as we're thinking about margins and how we have an exit rate going towards 2024? Thank you.

Is there areas that might be growing a little bit faster, a little bit more activity over the next two to three quarters, one versus the other, which might impact as we're thinking about margins and how we have an exit rate going towards 2024. Thank you.

Yeah, good question Michael. I do see two different components of that. One I see is the top line growth and the second is the bottom line margin. Let me do it backwards and I do see that the margins for CIG are going to continue to increase.

GSG has been great. I've said they're 13 and a half to 14 and a half. I think the CIG is going to continue to see those margins increase. It's because we continue to shape our portfolio and go for higher end, higher demand services with our commercial clients.

I do know that that group is typically quite sensitive to recession, so I'll put, I guess, a footnote to that, that with recession duly noted, I do think our CIG margins are going to come up because of business mix and because of type of priority projects that we're performing for our clients that are...

time sensitive and actually will create a greater return for our clients like building chip fat plants that need to get online. Time, I don't want to say it's worth more than money, but time is a premium and the amount of people available to do that type of work is quite limited. A lot of the

a reoccurring revenue on subscription basis. A lot of it's on the commercial side that has very high value to our clients and actually creates huge value for them and that then means that the margins coming out of it for us are better. So is it better for us? Yes, but it's even better for our clients.

So I do see on a margin basis, I expect our CIG to outpace in the growth of that or expansion of our margins to see a little bit more coming out of CIG. Now, I'm not going to say GSG, I don't expect to come down. It's going to continue to expand as I'd indicated, about 50 basis points. Now quickly transitioning to top line growth.

Boy, it's hard to, they both have good drivers, but it's hard to match trillion-dollar funding impending contributions from the U.S. federal government on many different fronts. No doubt there's been a lot of dysfunction.

Washington DC and the government which has caused a slowdown but a slowdown to a certain extent is like rising the level of a dam the water or funding behind it just gets bigger so when it comes it's not going away it's still coming out it's just just a matter of time we I've seen nothing that actually says it's going to be reduced or eliminated

And in fact, the areas that we're working on, which is decarbonization, clean water, clean environment, do seem to be a very high bipartisan priority for both sides of the House here in the U.S.

So I do think that it is possible, and especially with short-term extraordinary contributions, and that would be for floods, disasters, hurricanes, fires after big rain events or really wet winters on the West Coast, those drive big revenue numbers for us. And you've seen we've not included those in our guidance, nor did it contribute here this last quarter.

So could that actually come through and be a big plus up from what we're currently forecasting? Yes. Could the timing of some of these federal programs move forward? Yes. And commercial is going to do well with renewable energy, environmental mandated programs, but the size of some of these on the government side, both state and local and federal.

are quite impressive. So I would say from our vantage point today, Michael, I think federal has the potential just in sheer dollar size to represent top line larger contributions.

Not a bad outlook for a dysfunctional unit. Thanks, Dan. I appreciate it. Absolutely, Michael. Thank you. This will conclude the Q&A session. I will now turn the conference back over to Dan Batrecht to conclude. Thank you very much, Camila. Thank you all.

growth opportunities we have. I'm very excited to come back to you next quarter and share with you the progress that we've made with RPS and supporting these other programs that I've outlined today. So I hope you have a great rest of the Thursday and great rest of the week and I'll talk to you on our next investors conference call. Thank you very much. Goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect now.