Q3 2024 Tetra Tech Inc Earnings Call
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Operator: Good morning, and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting the presentation with slides in the investor section of its website at tetratech.com. 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
Speaker Change: Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting the presentation with slides in the investor section of its website at tetratech.com.
This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted with property of Tetra Tech
Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.
Operator: With us today for management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, Leslie Shoemaker, Chief Innovation Officer, and Joseph Fong, High Performance Buildings Global Leader. They will provide a brief overview of the results and will then open 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 those risks described in Tetra Tech's periodic reports filed with the SEC.
Speaker Change: With us today for management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, Leslie Shoemaker, Chief Innovation Officer, and Joseph Fong, High-Performance Buildings Global Lead. They will provide a brief overview of the results and would then open the call for questions.
Speaker Change: 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 Change: Actual results may differ significantly from those projected in today's forward-looking statements due to the various risks and uncertainties, including the risks described in Tetra Tech's periodic reports filed with the SEC.
Operator: Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statement. 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.
Except, as required by law, Tetra Tech undertakes no obligations to update its forward-looking statements.
Speaker Change: 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.
Speaker Change: At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.
Operator: At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.
Dan Batrack: Great. Thank you very much, LaTanya. And good morning, and welcome to our third quarter's Fiscal Year 2024 Earnings Conference Call. I'd like to start off by thanking everyone who attended our Investor Day that took place just a little over two months ago in New York City. Now, at the event, we set out our vision and our goals for our fiscal year 2030, which focused on our high-end consulting in water, environment, and sustainable infrastructure.
Dan Batrack: Great, thank you very much, LaTanya, and good morning and welcome to our third quarters of fiscal year 2024's earnings conference call.
Speaker Change: I'd like to start off with thanking everyone who attended our Investor Day that took place just a little over two months ago in
Speaker Change: Now at the event, we set out our vision and our goals for our fiscal year 2030, which
Dan Batrack: I'm pleased to report that Tetra Tech continued its strong performance through the third quarter of this fiscal year 2024, delivering both record quarterly revenue and an all-time high backlog of well over $5 billion for the first time in the company's history.
Focused on our high-end consulting in water, environment, and sustainable infrastructure.
Speaker Change: I'm pleased to report that Tetra Tech continued our strong performance through the third quarter of this fiscal year 2024, delivering both record quarterly revenue and an all-time high backlog of well over $5 billion for the first time in the company's history.
Dan Batrack: Through our focus on front-end advisory and consulting work, we've continued to expand our margins, with this quarter delivering a 13.3% EBITDA margin, up 120 basis points from last year. Due to our strong performance and visibility, I'm pleased to say that we've been able to raise our full-year guidance for fiscal year 2024, and I'll provide the details of that on our updated guidance slide here in just a few moments. During today's call, I'm going to begin this call with an overview of our third quarter and outlook for the remainder of the fiscal year. Steve Burdick.
Speaker Change: Through our focus on front-end advisory and consulting work, we've continued to expand our margins, with this quarter delivering a 13.3% EBITDA margin, up 120 basis points from last year.
Speaker Change: Due to our strong performance and visibility, I'm pleased to say that we've been able to raise our full year guidance for fiscal year 2024, and I'll provide the details of that on our updated guidance slide here in just a few moments.
Speaker Change: During today's call, I'm going to begin this call with an overview of our third quarter and outlook for the remainder of the fiscal year. Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance.
Dan Batrack: The Financial Officer will provide an overview of our financial performance, and discuss our capital allocation. And I'm pleased to say he will discuss the scheduled stock split and some of the details associated with that item. Dr. Leslie Shoemaker, our Chief Innovation Officer, will provide an update on our global water markets. And I'm really pleased today to have Joseph Fong with us, our High Performance Buildings Lead, who's going to provide insight into some of the newest approaches that we have in that market, which include cooling high-performance data centers and a CHIPFAB building system. Spring 3rd quarter.
Steve Burdick: He'll cover our capital allocation, and I'm pleased to say he will discuss the scheduled stock split.
Speaker Change: and some of the details associated with that item. Dr. Leslie Shoemaker, our Chief Innovation Officer, will provide an update on our global water markets.
Speaker Change: And I'm really pleased today to have Joseph Fong with us, our High Performance Buildings Lead, who's going to provide insight into some of the newest approaches that we have in that market, which include cooling of high-performance data centers and chip fab building systems.
Dan Batrack: We had a very strong third quarter this year. Our net revenue increased 12% to $1.11 billion in the quarter, setting a new record for any quarter in the company's history for revenue. Our EBITDA increased 32% to $129 million in the quarter, which has almost tripled the rate of our net revenue growth, directly in line with our goal to increase margins more rapidly and our revenue growth. And finally, in the quarter, we generated an all-time high for the third quarter earnings per share of $1.59, up 42% from the prior year. I'd now like to present our performance by our reporting segment. In the third quarter, our government services group, or the GSG segment, was up 25% compared to last year, to a total amount of $488 million.
Dan Batrack: And this segment generated a strong 14.6% margin, 60 basis points from the prior year. The key driver for GSD's margin expansion was an increase in higher-margin environmental and advanced water treatment work. The Commercial International Group, or our CIG segment, grew net revenue by 4% year over year and delivered a 13.9% margin, up an impressive 230 basis points from last year.
Speaker Change: for the third quarter.
Speaker Change: We had a very strong third quarter this year. Our net revenue increased 12% to $1.11 billion in the quarter, setting a new record for any quarter in the company's history for revenue.
Dan Batrack: Now that 230 basis points increase, about half of that increase in CIG margin was driven by an increase in the RPS margins and the work that they perform from our international operations. CRPS activities have now reached an 11% margin for the third quarter of this year, which is up 400 basis points from last year's 7% margin that we had in the third quarter of fiscal year 2023. The other half of CIT's margin expansion was driven by strong performance in our international operation, especially in our front-end consulting, environmental work, and renewable energy projects that we have in all of our international locations.
Speaker Change: margin for our third quarter of this year, which is up 400 basis points from last year's 7% margin that we had in the third quarter of fiscal year 2023.
Dan Batrack: I'd now like to provide an overview of our performance by our end customers. Work for US federal clients was up 34% from the same quarter last year, driven by increases in work that we do for USAID, our civilian and defense environmental program.
Dan Batrack: Without including the extraordinary work that we performed in Ukraine in the quarter, our federal revenues grew at an underlying 18% year over year rate. For state and local, if you exclude our disaster response work, our state and local revenues grew at an 8% rate, continuing to be driven by the work that we do in advanced water treatment for cities and utilities all across the United States. Our U.S. commercial net revenues were up 7% year over year, driven by renewable energy programs and environmental remediation services.
Speaker Change: For state and local, if you exclude our disaster response work, our state and local revenues grew at an 8% rate, continuing to be driven by the work that we do in advanced water treatment for cities and utilities all across the United States.
Dan Batrack: And finally, our international revenue now represents about 40% of the company, and those revenues grew at a 5% rate during the quarter. As we've presented before on this call, we've been focusing on margin expansions in the RPS operations that joined us here just about a year and a half ago, very focused on reducing select programs that have become commoditized and represent low or no margins within RPS. So this changing of the portfolio has resulted in RPS's international revenues remaining relatively flat year over year.
Speaker Change: As we've presented before on this call, we've been focusing on margin expansions in the RPS operations that joined us here just about a year and a half ago. We've been
Dan Batrack: So if you exclude the RPS's international operations, which we are purposefully and objectively reshaping, the remainder of our international revenues actually grew at nearly a 10% rate year over year. I'd now like to discuss our backlog, which increased to an all-time high of $5.23 billion, up 19% year-over-year, and grew more than 10% sequentially. We received over $2 billion in orders during the third quarter alone, which represented a book-to-bill of 1.4, one of the highest rates that we've seen in some time here at Tetra Tech. I'd also like to note that Tetra Tech only reports backlog on orders that are contracted, funded, and authorized for us to proceed to doing the work.
Speaker Change: I'd also like to note that Tetra Tech only reports backlog on orders that are
Dan Batrack: So this does not include any unfunded orders, which is a completely different method and much more conservative than you'll see reported anywhere in the industry. This quarter's orders included first-of-a-kind projects in PFAS, which we just released here just recently this last week, large-scale programs for advanced water treatment, and major initiatives to address climate mitigation and adaptation worldwide. At this point, I'd now like to turn the presentation over to our Chief Financial Officer, Steve Burdick, to present the details of our financials. So, Steve.
Steve Burdick: Hey, thank you, Dan. So I'd like to now provide an update on the results for year-to-date performance, as well as our working capital, cash flow, and capital allocation through the third quarter. So net revenues increased by 18% to over $3 billion year to date, driven by strong growth in markets across all geography. Our EBITDA and operating income increased at a higher rate than our top line revenue. As Dan discussed earlier in the call, we continue to focus on the front-end consulting work for water and the environment, which is carrying higher margins across all of our end markets.
Speaker Change: Hey, thank you, Dan. So I'd like to now provide an update on the results for year-to-date performance, as well as our working capital, cash flow, and capital allocation through the third quarter.
Steve Burdick: And as such, EBITDA came in at $414 million, or up 41% year-over-year. And the EBITDA margins improved 200 basis points year-over-year. Our operating income increased 43% to $357 million in March, and has improved 190 basis points year-over-year. These margin increases were primarily driven by improvements in operations across both our GSG and CIG markets.
Speaker Change: and others.
Speaker Change: EBITDA came in at $414 million or up 41% year-over-year, and the EBITDA margins improved 200 basis points year-over-year.
Speaker Change: has improved 190 basis points year-over-year.
Speaker Change: These margin increases were primarily driven by improvements in operations across both our GSG and CIG markets.
Steve Burdick: And in CIG, as Dan discussed, we are seeing the successful results of our efforts related to the RPS acquisition from optimizing RPS's portfolio projects and a better mix overall. Year to date, our EPS of $4.40 increased compared to last year. And, if you recall, last year included an FX hedge gain of about $1.23.
Speaker Change: And in CIG, as Dan discussed, we are seeing the successful results of our efforts related to the RPS acquisition from optimizing RPS's portfolio projects and better mix overall.
Speaker Change: Year-to-date, our EPS of $4.40 increased compared to last year.
Speaker Change: And if you recall, last year included an FX hedge gain of about $1.23. So excluding this one-time FX hedge gain, EPS grew at 53% year over year.
Steve Burdick: So, excluding this one-time FX hedge gain, EPS grew at 53% year over year. I would now like to provide an update on our working capital and our cash flow for the third quarter. So cash flows generated from operations for the third quarter were $141 million and exceeded net income by over 64%. The trailing 12-month total was $376 million, which was up 23% from the previous trailing 12-month period. Now, over the last 12 months, cash flows have exceeded net income by more than 100%.
Speaker Change: I would like to now provide an update on our working capital and our cash flow for the third quarter. So cash flows generated from operations for the third quarter were $141 million and exceeded net income by over 64%.
Speaker Change: The trailing 12-month totaled $376 million, which was up 23% from the previous trailing 12-month period.
Speaker Change: We noted that cash flow from operations has exceeded net income every fiscal year.
Speaker Change: for the last two decades.
Steve Burdick: And we, and when, you know, we look back over our historical financial results, we know that the cash flow from operations has exceeded net income every fiscal year for the last two decades. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 54 days, versus the industry average of about 80. The third quarter results saw an improvement of four days from last year, and this historical low DSO for working capital is sustainable over the long term as we continue to make cash flows from operations a priority. The floor is to you.
Steve Burdick: So Metro also provides significant insight into our core business as it reflects 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 geography, and our net debt amounts to $650 million. And the net debt on EBITDA was at a leverage of 1.15 times, well below a year ago, which was at 1.73 times. Furthermore, our current leverage is about half the leverage multiple at the time we acquired RPS, as it was about 2.3 times in January of 2023.
Speaker Change: Um, Slower Dia.
Speaker Change: So, Metric also provides significant insight into our core business as it reflects 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.
Speaker Change: the time we acquired RPS, as it was about 2.3 times in January of 2023.
Steve Burdick: I would now like to present our capital allocation overview as of the third quarter of fiscal 2024. We have a significant amount of liquidity available to invest in organic and inquisitive priorities. This balance between fixed rate and variable rate debt helps to mitigate interest rate risk as we look to invest in strategic areas. This current mix of debt exposure has resulted in a weighted average interest cost of borrowing at less than 4%, which is 30% lower than the current Fed borrowing rate.
Speaker Change: I would like to now present our capital allocation overview as of the third quarter of fiscal 2024.
Speaker Change: We have a significant amount of liquidity available to invest in organic and inquisitive priorities.
Speaker Change: This balance between fixed rate and variable rate debt helps to mitigate interest rate risk as we look to investing.
Speaker Change: and key strategic areas. This current mix of debt exposure has resulted in a weighted average interest cost of borrowing at less than 4%, which is 30% lower than the current Fed borrowing rates.
Steve Burdick: We have a strong pipeline for acquisitions, which is aligned towards technological innovation, especially in the water and environmental spaces where we have led the market. Regarding our dividend program, I want to announce that our Board of Directors approved a $0.29 quarterly dividend, which is a 12% increase year over year. This is our 41st consecutive quarterly dividend, and our dividends have increased by double digits every year since we initiated these payments.
Speaker Change: We have a strong pipeline for acquisitions, which is aligned towards technology innovation, especially in water and environmental spaces where we have led the markets.
Speaker Change: Regarding our dividend program, I want to announce that our Board of Directors approved
Speaker Change: This is our 41st consecutive quarterly dividend, and our dividends have increased by double digits every year since we initiated these payments.
Steve Burdick: As we revised our capital structure in the last year to take advantage of the credit markets to support our financing needs, I want to remind our shareholders that we do have available a significant portion of the $400 million from the Stock Buyback Plan approved by our Board of Directors as part of our disciplined capital allocation strategy. And, you know, as we've continued to generate record financial results, our stock price has increased significantly over the last 10 years.
Speaker Change: As we revised our capital structure in the last year to take advantage of the credit markets to support the financing needs.
Speaker Change: I want to remind our shareholders that we do have available
Speaker Change: A significant portion of the $400 million from the Stock Buyback Plan approved by our Board of Directors as part of our Disciplined
Speaker Change: Capital Allocation Strategy.
Speaker Change: And, you know, as we've continued to generate record financial results, our stock price has increased significantly over the last 10 years.
Steve Burdick: I want to announce Tetra Tech's 5 for 1 stock split that was approved by our Board of Directors. The impetus for this decision was very much based on the input we received this year from both analysts and our investors. The primary benefit for our shareholders is that we want to increase liquidity and lower trading costs for institutional and retail investors and our employees, who will benefit from the stock split. The SOX split will be effective after the close of trading on September 6.
Speaker Change: I want to announce Tetra Tech's 5-for-1 stock split that was approved by our Board of Directors.
Speaker Change: The impetus for this decision was very much based on the input we received this year from both analysts and our investors.
Speaker Change: The primary benefit for our shareholders is that we want to increase liquidity and lower trading costs for institutional and retail investors and our employees who will benefit from this stock split.
Leslie Shoemaker: Thus, this five for one adjusted trading will begin when the market opens on September 9th, and you can find additional details in our press release. Finally, we will provide financial disclosures related to the share count, where we will recast all historical information in our next forum. So I'm very pleased to share these really strong results through the third quarter of 2024. I want to thank you all for your support, and I will now hand the call over to Leslie and Joseph to discuss our leading global water business.
Speaker Change: The SOX split will be effective after the close of trading on September 6th. Thus, this 5-for-1 adjusted trading will begin when the market opens on September 9th. And you can find additional details in our press release.
Speaker Change: Finally, we will provide to investors and analysts the financial disclosures related to the share count where we will recast all historical information in our next Form 10-K .
Speaker Change: So, I'm very pleased to share these really strong results through the third quarter of 2024.
Speaker Change: I want to thank you all for your support and I will now hand the call over to Leslie and Joseph to discuss our leading global water business.
Leslie Shoemaker: Thank you, Steve. Two of the areas that we discussed during our investor day were significantly expanded opportunities for water-related services in the United Kingdom and the new requirements for PFAS water treatment in the United States. Most recently, in the United Kingdom, we have a newly elected Labour government, which has actually re-emphasized the importance of their water quality management in rivers, flood management, and water supply protection.
Speaker Change: Thank you, Steve.
Speaker Change: Two of the areas that we discussed during our Investor Day were significantly expanded opportunities for water related services in the United Kingdom and the new requirements for PFAS water treatment in the United States.
Speaker Change: Most recently in the United Kingdom, we have a newly elected Labour government which has actually re-emphasized the importance of their water quality management in rivers, flood management and water supply protection.
Leslie Shoemaker: These priorities and the associated aggressive goals that have been set for the new AMP 8 cycle, which is just beginning, directly align with our technically different and Shaded Expertise in industry-leading software solutions, such as real-time control, spill management using CSOFT, flood risk management using our FusionMap platform, and advanced leak detection solutions using our WaterNet system. In the U.S., similarly, the recently released National Needs Survey reinforces increased concerns regarding water quality protection and advanced water treatment, again, directly in line with what we do.
Speaker Change: These priorities and the associated aggressive goals that have been set for the new AMP 8 cycle, which is just beginning, directly align with our technically different
Speaker Change: expertise in industry-leading software solutions, such as real-time control, spill management using CSOFT, flood risk management using our FusionMap platform, and advanced leak detection solutions using our WaterNet system.
Speaker Change: In the U.S., similarly, the
Speaker Change: The recently released National Needs Survey reinforces increased concerns regarding water quality protection and advanced water treatment, again directly in line with what we do.
Leslie Shoemaker: Today, we're seeing our municipal clients begin to include PFAS treatment and updates and expansion of their water treatment facilities, which is a good indication of the integration of PFAS into long-range planning across our more, More than 500 municipal clients and in California. They have just passed on the ballot a new $10 billion bond measure that would commit funding directly aligned with our expertise in water quality, advanced water treatment, and watershed programs. And with that, I'd like to turn the presentation over to Joseph Fong to discuss more of our water-related opportunities in high-performance buildings.
Speaker Change: Today we're seeing our municipal clients begin to include PFAS treatment and updates and expansion of their water treatment facilities, which is a good indication of the integration of PFAS into long-range planning across our more
Speaker Change: More than 500 municipal clients.
Speaker Change: And in California, they have just passed on the ballot a new $10 billion bond measure that would commit funding directly aligned with our expertise in water quality, advanced water treatment, and watershed programs.
Speaker Change: And with that, I'd like to turn the presentation over to Joseph Fong to discuss more of our water-related opportunities in high-performance buildings. Joseph. Thank you, Leslie.
Joseph Fong: Thank you, Leslie. Tetra Tech's market-leading advanced water treatment expertise has become a key competitive advantage in two of our high-performance buildings' fastest growing markets: Advanced Manufacturing Fabrication and High-Tech Data.
Joseph Fong: Tetra Tech's market-leading advanced water treatment expertise has become a key competitive advantage in two of our high-performance buildings' fastest growth markets—advanced manufacturing fabrication and high-tech data centers.
Joseph Fong: As we shared during our Investor Day in May, the U.S.'s investment to boost ship production incentivized manufacturers to commit over $200 billion for fabrication manufacturing facilities. In addition to requiring high performing energy efficient building systems, these fabrication facilities also require the production of ultra pure water that is essential for the ultra clean processing of the silicon wafers used to create computers. We are seeing increasing demand for advanced water treatment solutions as ship manufacturers initiate expanding their ultra-advanced water processing capacity for new and upgraded facilities, and municipalities invest in augmenting water supplies and pre-treatment to attract bad and to the jurisdiction.
Speaker Change: As we shared during our Investor Day in May, the U.S.'s investment to boost ship production incentivized manufacturers to commit over $200 billion for fabrication manufacturing facilities.
Speaker Change: In addition to requiring high-performing, energy-efficient building systems, these fabrication facilities also require the production of ultra-pure water that is essential for the ultra-clean processing of the silicon wafers used to create computers.
Speaker Change: Thank you.
Speaker Change: We are seeing increasing demand for advanced water treatment solutions as ship manufacturers initiate expanding their ultra-advanced water processing capacity for new and upgraded facilities, and municipalities invest in augmenting water supplies and pretreatment to attract fab facilities into their jurisdictions.
Joseph Fong: Today's AI servers require more computing power and generate much more heat than their predecessors. Tetra Tech is working with our high-tech data center clients to implement advanced liquid cooling solutions, such as immersion liquid cooling and direct-to-chip cooling. Tetra Tech's expertise in water chemistry and hydraulics is essential to designing liquid cooling systems, which can capture up to 80% of the total heat production. With over $500 billion in future investment forecasted in new computing infrastructure, including a 50% increase in current global data center capacity by 2029, we expect the design of high-efficiency cooling solutions to be a significant growth market for us.
Speaker Change: Today's AI servers require more computing power and generate much more heat than their predecessors.
Tetra Tech: Tetra Tech is working with our high-tech data center clients to implement advanced liquid cooling solutions, such as immersion liquid cooling and direct-to-chip cooling.
Speaker Change: Tetra Tech's expertise in water chemistry and hydraulics is essential to designing liquid cooling systems which can capture up to 80% of the total heat production.
Speaker Change: With over $500 billion in future investment forecasted in new computing infrastructure, including a 50% increase of current global data center capacity by 2029, we expect the design of high-performance, high-performance, high-performance, high-performance, high-performance computing infrastructure to be ready for the next generation of high-performance, high-performance
Dan Batrack: I would now like to turn the presentation back to Dan and Batrack. Thank you very much, Joseph. I'd now like to present our guidance for the fourth quarter and our updated guidance for all of fiscal year 2024. Our guidance is as follows for the fourth quarter. Our range for the range of net revenue is a range of $1.09 billion to $1.1 billion. $4 billion with an associated diluted earnings per share in the range of $1.82 to $1.87.
Speaker Change: High-efficiency cooling solutions to be a significant growth market for us.
Speaker Change: I would now like to turn the presentation back to David and Dan Batrack.
Dan Batrack: For the entire fiscal year of 2024, our increased guidance is for a revenue range of $4.27 billion to $4.32 billion. The midpoint of that range would actually represent or does represent a 15% increase in our net revenue from what we realized in fiscal year 2023. The updated earnings per share, on pre-stock split numbers, which represents our 54 million shares outstanding, does include intangible amortization, which is approximately 67 cents per share, but we do assume in the fourth quarter we will have approximately a 27% tax rate. And as in past presentations, this excludes any contributions of revenue or income that may be realized from acquisitions that we would complete between now and the end of the fiscal year. In summary, morning.
Dan Batrack: guidance range is for a total of $6.23.
Dan Batrack: We see strong demand for our differentiated leading science services all across the water and environmental markets that we work in. Our third-quarter results set new all-time records for revenue, net revenue, backlog, and, as Steve indicated, our day sales outstanding or our cash generation. And we set third-quarter record results for operating income, EBITDA, and earnings per share.
Dan Batrack: Our strategic focus on high-end water and environmental consulting is driving margin expansion, and this is very much in line with our longer-term goals that we presented at our investor day here back in May. As a result of our strong performance and confidence in our outlook, I'm pleased that we were able to raise our guidance for fiscal year 2024 for both net revenue and earnings per share. We're looking forward to implementing our stock bid, as Steve indicated a few moments ago, effective after the market closed on September 6, 2024, to provide even broader access to Tetra Tech stock for all of our investors. And with that, LaTanya, I would like to open the call up for questions. Thank you.
Speaker Change: very much in line with our longer-term goals that we presented in our Investor Day here back in May.
Operator: 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. 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 number.
Speaker Change: 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. At this time, audio participants are invited to submit their questions.
Speaker Change: 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, press star 1 on your touchtone phone.
Operator: If you would like to ask a question, press star 1 on your touchtone phone. Our first question comes from Tim Mulrooney with William Blair. Please proceed. Yes, good morning. Thanks for taking my question. I mean, your backlog is really healthy right now at about 20% year over year. It's the first thing that caught my eye on your release.
Speaker Change: Our first question comes from...
Speaker Change: Tim Mulrooney with William Blair. Please proceed.
Tim Mulroney: Yes, good morning. Thanks for taking my question. I mean, your backlog is really healthy right now of about 20% year over year.
Dan Batrack: And I'm just curious how investors should interpret this, terms of your visibility for hitting that annual organic growth target, as you, you know, cut into the fourth quarter and into next year. Well, that's a really good question. That's a great question. If I have any commentary with respect to details on that increase, I know that we're up 19% in the quarter year over year. I will say that some of that, I think, was timing that I anticipated some of the orders would have come in during our second quarter. So I will say there's a little bit of catch up included.
Dan Batrack: So one thing I would caution our investors is not to interpret that the backlog growth is going to directly translate into our net revenue growth. You do see the 6% to 10% ranges between double to triple the level of our 6% to 10%. I would say that we did have one extraordinary area.
Speaker Change: Well, that's a really good question. That's a great question. If I have any commentary with respect to details on that increase.
Speaker Change: I will say that some of that.
Speaker Change: You do see the six to ten percent ranges between double to triple.
Speaker Change: the level of our six to ten percent. I would say that we did have one extraordinary area, one question I know we've had internally and certainly when I saw the numbers is
Speaker Change: orders that went into backlog from Ukraine. But I don't want there to be a misunderstanding that Ukraine was the majority of the contribution through USAID. It represented about a third of that increase. So of the 19%, about
Dan Batrack: One question I know we've had internally, and certainly when I saw the numbers, was very much at the high end or above what we'd expect. We did have some extraordinary contributions of orders that went into backlog from Ukraine. 6% of that, or about $160 million, would have been extraordinary in the quarter.
Speaker Change: 6% of that, or about $160 million would have been extraordinary in the quarter.
Dan Batrack: So we still are well over double-digit year over year, which is above what we anticipate our organic growth rates we've been targeting at this time. So it should give us great visibility, of course, coming into the fourth quarter, but really all the way through 2025. Okay, that's some helpful color.
Dan Batrack: I want to switch gears really, really quickly to a regulatory conversation because it represents a preponderance of questions that we've been getting from investors lately, and I was hoping you could comment on this. We heard that there are, you know, certain environmental regulations that may be more susceptible to being overturned now that Chevron's deference is gone. Are there any environmental regulations that are exposed or susceptible to changes in regulation as a result of this ruling That's a really good question.
Speaker Change: that you think are exposed or susceptible to changes in regulation as a result of this ruling?
Dan Batrack: It certainly gave us a heightened sense of analysis and evaluation. What does the Chevron doctrine or the Chevron deference mean to our business? And we actually didve into it quite deeply over the past couple months since the Supreme Court's ruling on this came out, and we actually tried to simplify it in three different ways. First of all, most of the work that we do for environmental compliance activities is actually regulated at the state and local level. So it's state regulations, it's regulations by local counties and cities, and it's actually not driven by federal regulatory interpretation.
Dan Batrack: So it only has a very small intersection or nexus with respect to the work we actually do. Second of all, the largest programs that we have are for the US federal government. So it would be like the Department of Defense work that we do, the work that we do for the Army Corps of Engineers. And it's not the practice of the US federal government to contest regulatory determinations and take them to court.
Speaker Change: Second of all, the largest programs that we have are for the U.S. federal government. So it would be like the Department of Defense work that we do or work that we do for the Army Corps of Engineers.
Dan Batrack: So the US federal government doesn't sue itself and go to court over this. So the items that are determined or agreed to with the regulators at the federal level, which might be the Environmental Protection Agency or some of these others. And the last item we saw, which sounds a little contrarian to the underlying, I guess, presumption is that if the Chevron Doctrine is going to cause some uncertainty in regulatory interpretation, it's bad for your business. I don't know, on the commercial side, if you're going to contest the regulator's interpretation and go to court, you better be clear. You had better be compelling. Yes, you may need some legal assistance.
Speaker Change: And it's not the practice of the U.S. federal government to contest regulatory determinations and take it to court. So the U.S. federal government doesn't sue themselves and go to court over this. So the items that are determined or agreed to with the regulators at the federal level, which might be the Environmental Protection Agency or some of these others,
Speaker Change: actually are just straight implemented. So we see that as essentially not
Speaker Change: applicable or doesn't really impact it.
Speaker Change: And the last item we saw, and this sounds a little contrarian to the underlying, I guess, presumption is that if the Chevron doctrine is going to cause some uncertainty and regulatory interpretation, it's bad for your business.
Dan Batrack: Yes, you need people who can argue it, argue the positions, and support the basis of your arguments with a scientific basis. And there is a firm out there whose tagline is lead with science, and so they may actually vote very well for Tetra Tech with respect to who you want to bring in to support your interpretations to the courts. So I actually see if this thing does have any... legs to it with respect to where there may be something contested by some of the large commercial clients, it could actually begin presenting new opportunities that didn't exist for us before.
Speaker Change: I don't know, on the commercial side, if you're going to be, if you're going to go contest the regulator's interpretation and go to a court.
Speaker Change: You better be clear.
Speaker Change: You better be compelling. Yes, you may need some attorneys. Yes, you need people who can argue it, argue the positions and support the basis of your
Speaker Change: your arguments, but all of it has to be based on data. It's not just an opinion. It has to be based on data, data analytics. And actually, if you want to take it and boil it down to its essence, you actually have to lead with science. You actually have to bring in a technical
Speaker Change: well
Speaker Change: And so they may actually vote very well for Tetra Tech with respect to who you want to bring in to support your interpretations to the courts. So I actually see if this thing does have any...
Speaker Change: Thanks to it, with respect to where there may be something contested by some of the large commercial clients, it actually could begin presenting new opportunities that didn't exist for us before. So, in some ways, it's actually maybe indirectly being good.
Speaker Change: Thank you for your patience.
Dan Batrack: Understood, very clear. Thanks, Dan.
Dan Batrack: So in some ways, it's actually, maybe indirectly, good for business. Understood. Very clear. Thanks, Dan. Thank you very much, Jim. The next question comes from Sangita Jain with KeyBank Capital Markets. Please proceed. Yeah, thank you so much for taking my questions.
Speaker Change: Thank you very much, Jim.
Speaker Change: The next question comes from Sangita Jain with KeyBank Capital Markets. Please proceed.
Dan Batrack: So if I can ask one on the revenue that you may be getting currently from the high-performance buildings in data centers, if you've broken that out, and also how much faster is that slice growing compared to the rest of your CIG segment? Yeah, that's a really good question. And we had Joseph Fong actually present those specific details in earlier meetings we had. So Joseph.
Sangeeta Jain: Yeah, thank you so much for taking my questions. So if I can ask one on the revenue that you may be getting currently from the high-performance buildings and data centers, if you've broken that out, and also how much faster is that slice growing compared to the rest of your CIG segment?
Speaker Change: That's a really good question.
Joseph Fong: We had Joseph Fong actually present those specific details in earlier meetings we've had. So, Joseph? Yes, thank you for that question. I shared during our investor day in May, we did share kind of the breakdown of those numbers in terms of our revenue and how our advanced manufacturing fabrication and our data center's revenue
Joseph Fong: Yes, thank you for that question. I shared during our investor day in May that we did share kind of the breakdown of those numbers in terms of our revenue and how our advanced manufacturing fabrication and our data centers revenue is part of our high performance building total revenue. We shared that this year, we are tracking towards $800 million revenue target for those two sectors, and we are expecting a 20% CAGR for that market. So right now, we are again trending towards $100 million between those two markets. Got it, that's helpful.
Speaker Change: Part of our high-performance building total revenue, we have shared that this year we are tracking towards a $100 million revenue target for those two sectors, and we are expecting a 20% CAGR for that market. So right now we are again trending towards $100 million between those two markets.
Dan Batrack: And if I can ask one on M&A, as you pointed out, your leverage is trending towards the low end of your target range, and we just talked about the rising uncertainty of policy outcomes in the US. Would that make you consider shifting more of your revenue base overseas? As you look at M&A? You know, that's a good question. And I would say, no, I would say that the world's largest economy is right here in the United States. The dollars set aside for environmental stewardship, for clean water, even compliance with new regulations, things like PFAS, are measured in multiples of what they exist in other locations.
Speaker Change: Got it, that's helpful. And if I can ask one on M&A, as you pointed out your leverage is trending towards the low end of your target range.
Speaker Change: and we just talked about rising uncertainty of policy outcomes in the U.S. Would that make you consider shifting more of your revenue base overseas as you look at M&A?
Speaker Change: You know, that's a good question. And I would say, no, I would say that the world's largest economy is right here in the United States.
Speaker Change: The dollars set aside for environmental stewardship, for clean water, even new, even compliance with new regulations, things like PFAS, are measured in multiples of what they exist in other locations.
Dan Batrack: Now, I do think technology is one area we're very focused on. Steve mentioned that in his comments with respect to priorities for our acquisitions or looking for people to join us. And the one thing that that provides us with or allows us is the transfer of what we would say we acquired here in the US or if it came through Canada, Australia, or the United Kingdom. It's actually transferable across all of our platforms to all of our clients.
Speaker Change: Now I do think the technology is one area we're very focused on. Steve had mentioned that in his comments with respect to priorities for our
Speaker Change: acquisitions or looking for people to join us. And the one thing that that provides us or allows us is the transfer of what we would, let's say we acquire it here in the U.S. or if it came through Canada, Australia or the United Kingdom, it's actually transferable across all of our
Dan Batrack: And it gives us a technical differentiation or competitive advantage to move it across all of our operations, and there are more than 550 offices in the company. So we're going to find the best technology, we're going to find the best new innovations that exist anywhere in the world, it could be in the US or elsewhere. But as far as taking precedent and moving because of potential elections or [inaudible] All right, thanks so much, Dan. Thanks, Sangita.
Speaker Change: to all of our clients, and it gives us a technical differentiation or competitive advantage to move it across all of our operations.
Speaker Change: and our more than 550 offices in the company. So we're going to find the best technology. We're going to find the best new innovations that exist anywhere in the world. It could be in the U.S. or elsewhere.
Speaker Change: But as far as taking a precedent and moving because of potential elections or
Speaker Change: potential changes in the legal systems. That is not buying us out, biasing us outside the U.S. This is still the largest market in the world and we have a top position in each of these markets that we're focused on, whether it's water, environmental.
Speaker Change: climate change, coastal protection, flood protection, we're in first place and the only thing we're focused on is distancing ourselves even more in those areas.
Dan Batrack: The next question comes from Sabahat Khan with RBC. Please proceed. Great, thanks, and good afternoon.
Vangelia: Thanks, Sangita.
Dan Batrack: I guess, just broadly, you've taken up your guidance for this year, with a few moving pieces in the background. I guess, how would you characterize 2024 within the context of your overall guidance? You obviously have the fiscal 23 numbers out there, but over the next at least two, three years, should we expect some elevated trends like we've seen this year on the top line margins, or just starting to think about the cadence over the next two to three years of how the numbers evolve and some of the funding from these larger US bills flow through? Thank you.
Speaker Change: Great, thanks and good afternoon. I guess just broadly, you know, you've taken up your guidance for this year, a few moving pieces in the backdrop.
Speaker Change: You know, I guess, how would you characterize 2024 within the context of kind of your overall guidance? You obviously have the fiscal 23 numbers out there.
Speaker Change: You know, over the next at least two, three years, should we expect some elevated trends like we've seen this year on the top line margins, or just starting to think about the cadence over the next two to three years of how kind of the numbers evolve and some of the funding from these larger U.S. bills flows through? Thank you.
Dan Batrack: Yeah, good questions. I'm glad you talked about sort of a longer trend. We're pretty clear, and Steve had presented, and I don't want to overly continue to reference Investor Day. But the cornerstone or the underpinning of Investor Day is 2030, and Steve indicated in great detail, it's an organic growth rate between six and 10%.
Speaker Change: Okay, good questions, Sabahat. I'm glad you talked about sort of a longer trend. We're pretty clear and Steve had presented and I don't want to overly continue to reference the Investor Day, but the cornerstone or the underpinning of Investor Day is 2030.
Dan Batrack: And so if you ask me what it looks like over the next two or three years, I'll say what it looks like over the next five years and say it's going to be between six and 10% organic growth rate. It happens to be we were slightly over that this, this quarter, third quarter, but I would say not, not drastically so. So it's nice if you're going to be outside that range that you're on the top end, which we have been for some time, but I would say over this next several year period, we think that's about right. And then with respect to acquisitions or having people come join us, we talked about a wide range of five to 10%. I think for modeling purposes, we used four or five.
Speaker Change: And as Steve indicated in great detail, it's an organic growth rates between 6% and 10%.
Speaker Change: And so, well, you'd ask, what's it look like over the next two or three years? I'll say what's it going to look like over the next five years and say it's going to be between six and ten percent organic growth rate.
Speaker Change: It happens to be, you know, we were slightly over that this quarter, third quarter, but I would say not drastically so. So it's nice if you're going to be outside that range that you're on the top end, which we have been for some time. But I would say over this next several year period, we think that's about right.
Speaker Change: And then with respect to acquisitions or having people come join us, I know we talked about a...
Speaker Change: wide range of five to 10%. I think for modeling purposes, we've used four or five. And I think we've been well within with that, it seems quite achievable. So I think if you look at a longer trend, and I would
Dan Batrack: And I think we've been well within that; it seems quite achievable. So I think if you look at a longer trend, and I would, append your two to three years to let's talk about up to five years. I think we'll be within these ranges we just talked about. And, of course, it's very hard to talk about growth rates without talking about margin, because revenue without income contribution. It's like a day without sunshine here.
Dan Batrack: So we do think that if you wanted to just use a general guide, about 50 basis points a year, we've been at that rate of expanding our overall EBITDA margins. We've been at that rate for the past several years, and we expect that to continue into the future. So I don't really want to provide 2025 details. We're only a little over 90 days or, as on our next investor call, we'll provide the final tail of our performance for fiscal year 24, and we'll provide fiscal year 25 for the next one year. But if you want to look a little bit wider, those ranges I just provided should be pretty representative.
Speaker Change: It's like a day without sunshine here. So we do think that if you wanted to just use a general guide, about 50 basis points a year. We've been at that number of expanding our overall...
Speaker Change: EBITDA margins. We've been about that rate for the past several years, and we expect that to continue on into the future.
Speaker Change: So, I don't really want to provide 2025 details, we're only a little over 90 days, or our next investor call will provide the final...
Speaker Change: Tale of our performance for Fiscal Year 24 and we'll provide Fiscal Year 25 for the next one year, but if you want to look a little bit
Dan Batrack: Great. And then just, I guess, on the M&A side, obviously, you provided some parameters around the discipline on the metrics. Can you maybe just talk a bit more about some of the more in-focus areas where you might want to complement some expertise, whether it's regions, whether it's specific markets within water that might be of interest over the next few? Yeah, I'd say there's a couple that we're really focused on.
Speaker Change: broader those ranges I just provided should be pretty representative.
Speaker Change: And then just, I guess, on the M&A side, obviously, I think you provided some parameters around the discipline on the metrics. Can you maybe just talk a bit more about some of the more in-focus areas where you might want to complement some expertise, whether it's regions, whether it's...
Speaker Change: specific markets within water that might be of interest over the next few years.
Dan Batrack: I think in the United Kingdom, we're doing well, but we can do better with respect to a presence supporting the AMP structure, AMP programs, which is the asset management program for water utilities across all of the United Kingdom. We've got some very large cornerstone programs.
Speaker Change: I'd say there's a couple that we're really focused on. I think in the United Kingdom, we're doing well, but we can do better with respect to a presence supporting the AMP structure and programs, which is the asset management program for water utilities across all the United Kingdom. We've got some very large cornerstone programs.
Dan Batrack: I think we can get more. So I would say if we can add additional capability and contract capacity, we'd look for that in the UK. The same would be true in Australia.
Speaker Change: I think we can get more. So I would say if we can add additional capability and contract capacity. So we'd look for that in the UK. Same would be true in Australia. So look for additional.
Dan Batrack: So look for additional acquisitions that would be around water, and I would call that mostly municipal water, or in the UK, you'd call it water utilities. And then technology. I'll repeat what I just said a few moments ago. We're really focused on how we can technically differentiate ourselves even more in the market. And it's not so much exactly focused on peers or competitors; we're focusing on how we can deliver better value to our clients. We want to deliver higher, you know, higher delivery, faster response, lower price point, and have better outcomes from our clients than ever before, and we think that that can largely be contributed to technology.
Speaker Change: acquisitions that would be around water, and I would call that mostly municipal water, or in the UK you'd call it water utilities.
Speaker Change: And then technology, I'll repeat what I just said a few moments ago. We're really focused on how can we technically differentiate ourselves even more so in the market. And it's not so much exactly focused on
Speaker Change: competitors, we're focusing on how we can deliver better value to our clients.
Speaker Change: hire
Speaker Change: higher delivery, faster response, lower price point, and have better outcomes from our clients than ever before. And we think that that can largely be contributed through technology.
Dan Batrack: And so whether or not it's our digital water programs through remote monitoring and automation of water treatment plants, which we do believe over the next decade or so, there are 150,000 different water systems in the United States or water utilities, we think that eventually they're all gonna go to remote monitoring and automation. And we're not even in the first inning on that.
Speaker Change: And so whether or not it's our digital water programs through remote monitoring and automation of water treatment plants, which we do believe over the next decade or so, there's 150,000 different water systems in the United States, or water utilities, we think that eventually they're all gonna go to remote monitoring and automation.
Dan Batrack: And we want to be a leader in the forefront of that. So how can we do that? For sure, we have an internal but acquisitions and identifying those that can come in. And I'm glad to say that just this last quarter, since our last investor call, we had some conversions join us. Well, it's just a handful of individuals, but the intellectual property and the technologies that they brought are really quite significant. So look for us to continue to add those over the next year and beyond. Great, thanks very much for the color.
Speaker Change: And we're not even in the first inning on that, and we want to be the leader in the forefront for that.
Speaker Change: So how can we do that? For sure we have it internal, but acquisitions and identifying those that can come in. And I'm glad to say that just this last quarter, since our last investor call, we had conversions join us, while it's just a handful of individuals.
Speaker Change: over the next year and beyond.
Dan Batrack: Thanks, Sabahat. The next question comes from Andy Wittmann with Baird. Please proceed. Great. Good morning.
Speaker Change: Great, thanks very much for the color.
Robert: Yeah, thanks, Robert.
Dan Batrack: Thanks for taking my questions, guys. I guess I just wanted to start out a little bit by asking about Ukraine. Maybe just for context, Dan, can you just talk about what the Ukraine contribution was to this quarter and then recognize that you did book $160 million? I just wanted to see. I mean, you would not put that in your backlog if you didn't have great visibility and the contract to do that. So I'm just trying to see how much visibility you have there. Like, by my calculations, you did somewhere between 50 and 60 million this quarter.
Robert: The next question comes from Andy Whitman with Baird. Please proceed.
Andy Whitman: Great, good morning. Thanks for taking my questions, guys. I guess I just wanted to start out a little bit in asking about Ukraine, maybe just for context, Dan, can you just talk about what the Ukraine contribution was to this quarter and then recognizing that you did book a hundred and sixty million dollars.
Dan Batrack: So does that mean that you've got like, three and a half quarters of work with $160 million, or how should we think about that? Yeah, well, you've got the numbers about right. I'll help refine this a little for you. So in the third quarter, we did about $60 million worth of net revenue. So it was a good quarter.
Speaker Change: I just wanted to see, I mean, you would not put that in your backlog if you didn't have great visibility and the contract to do that. Right. So I'm just trying to see how much visibility you have there. Like, by my calculations, you did somewhere between like 50 and 60 million this quarter. So does that mean that you've got like
Speaker Change: three and a half quarters of work with $160 million? Or how should we think about that?
Speaker Change: Well, you've got the numbers about right. I'll help refine this a little for you. So in the third quarter, we did
Dan Batrack: Uh, it's interesting coming in. And I think we spoke on last quarter's call that we expected the second half of fiscal year 24 to be around a hundred. So this year we do about a hundred.
Speaker Change: about $60 million worth of net revenue. So it was a good quarter. It's an interesting coming in. And I think we spoke on last quarter's call that we expected the second half of fiscal year 24. So this year, we do about 100.
Dan Batrack: So we're about 10 million above, uh, for the quarter of where we thought we would be. And interestingly enough, we were over the top of our guidance range for net revenue by about $10 million. So everything was very strong.
Robert: So, we were about $10 million above for the quarter where we thought we would be, and interestingly enough, we were over the top of our guidance range for net revenue by about $10 million. So, everything was very strong. It took us to the very high end of our own range, and then Ukraine pushed it up even higher.
Dan Batrack: It took us to the very high end of our own range, and then Ukraine pushed it up even higher. So we did do about 160. It's a great question on whether that means you have a good portion. Well, we put 160 in, but we burned 60.
Robert: So...
Speaker Change: We did do about 160. It's a great, it's a great question on does that mean you have a good portion. Well, we burned, we put 160 in, but we burned 60.
Dan Batrack: So you really would take a look at net on that. But if you take a look at our backlog slide and our press release, you'll notice... We presented on the first line a $439 million new addition for work in Ukraine. That's a contract or contract capacity. It's a new program referred to as SPARC with USAID.
Robert: So you really would take a look at that on that. But if you take a look at our backlog slide and our press release, you'll notice that we have a lot of
Robert: We presented on the first line a $439 million new addition.
Dan Batrack: It allows us to say, the political will. Now, I know there's been a lot of questions. Some have asked me, if there is a change in administration, could that get turned off?
Robert: for work in Ukraine, that's a contract or contract capacity.
Speaker Change: to continue to the work that we have and only a very small portion of that was actually obligated that went into our backlog in Q3.
Robert: So we've got more contract capacity.
Robert: We have more orders. We actually finished with a higher order book for Ukraine. And of course, the reaffirmation by the U.S. government.
Robert: to stand behind and with Ukraine does give us visibility with respect to, I would say, the political will. Now I know there's been a lot of questions. Some have asked me if there is a change in administration. Could that get turned off?
Dan Batrack: And my comment is maybe if everybody, you know, with one phone call, the conflict is over. May we all hope that becomes true. I think it may actually allow additional restoration work through USAID that we've never seen before. You can actually do more work when someone's not firing overhead than you can while you're in a conflict zone.
Speaker Change: And my comment is maybe if everybody, you know, with one phone call, the conflict is over.
Speaker Change: May we all hope that that becomes true. I think it may actually allow additional restoration work through USAID that we've never seen before. You can actually do more work when someone's not firing overhead than
Dan Batrack: So we have contract capacity measured in several hundreds of millions of dollars, and the 439 that is listed first in our backlog presentation slide and our press release isn't the only contract that we have there. We're much broader, and some have asked, well, what if there is some disruption? Regarding U.S. commitments to move forward with the contracts in place, I will tell you there are a lot of countries lined up behind who actually want to help once restoration has started, and these are our clients, whether it's U.K. aid, whether it's the European Union, or whether it's the coalition that includes places like Australia, where we're one of the largest international development supporters.
Speaker Change: you can while you're in a conflict zone.
Speaker Change: So we have contract capacity measured in several hundreds of millions of dollars and the 439 that's listed first in our backlogs presentation slide and our press release isn't the only contract that we have there. We're much broader and some have asked, well, what if there is some [inaudible]
Speaker Change: regarding U.S. commitments to move forward with the contracts in place.
Speaker Change: I will tell you, there's a lot of countries lined up behind who actually want to help once restoration has started, and these are our clients, whether it's UK aid, whether it's the European Union, or whether it's the coalition that includes places like Australia, where we're one of the largest international development supporters. So, this is not a singular question.
Dan Batrack: So this is not a singular question, and in fact, even the singular question actually may have significant upside in the event the conflict is actually resolved. So those are the numbers we have with respect to going into the fourth quarter for contract capacity, the $60 million. I will say we're still standing by our $100 million for the second half, so it's pretty easy to take $100 million minus the $60 million in Q3, and I think we'll do around $40 million in Q4, but I'll give you more specifics on the next call about how it actually turned out. That's a really helpful context, Dan.
Speaker Change: and in fact, even the singular question actually may have significant upside in the event the conflict is actually resolved.
Speaker Change: So those are the numbers we have with respect to going into the fourth quarter for contract capacity, the $60 million. I will say we're still standing by our $100 million for the second half.
Speaker Change: So it's pretty easy to take 100 minus the 60 in Q3, and I think we'll do around 40 in Q4, but I'll give you more specifics on the next call, how it actually turned out.
Dan Batrack: Thank you for that answer. I wanted to ask my follow-up question on RPS. You made the comment that you've been running off some of the lower margin work. That was always part of the plan. You said that. Unknown Speaker, you've owned it for a year and a half here, still kind of running some of that off. I'm just wondering, how long is that tail?
Speaker Change: That's really helpful context, Dan. Thank you for that answer. I wanted to ask my follow-up question on RPS. You made the comment that you've been running off some of the lower margin work. That was always part of the plan. You said that when you acquired it, but you've owned it for a year and a half here, still kind of running some of that off. I'm just wondering
Dan Batrack: How much more, I guess, I guess it would be contracted backlog or something that you have there that needs to be gone through before we think that you can show the underlying growth that you talked about there, you know, in the double digits for that in Yeah, no, that's a really good question. You're right, it's been about five quarters right now. So it has been just a little over a year since they joined us.
Speaker Change: How long is that tail? How much more, I guess, I guess it would be contracted backlog or something that you have there that needs to be gone through before we think that you can show the underlying growth that you talked about there, you know, in the double digits for that international segment.
Speaker Change: Yeah, that's a really good question.
Dan Batrack: We've always indicated we want to shape their mix of business, which seems to be similar to Tetra Tech. We want to put high-end, technically differentiated products in front of everything, less competition, higher margin, completely in collaboration with the rest of the company. I think we've got another one or two quarters.
Speaker Change: You're right, it's been about five quarters right now so just a little over a year since they joined us. We've always indicated we want to shape their mix of business.
Speaker Change: It has to be similar to Tetra Tech. We want to put high-end technically differentiated in front of everything. Less competition, higher margin.
Speaker Change: completely in collaboration with
Speaker Change: The rest of the company, I think we've got another one or two quarters. I'm not going to go to the dollar amount, but I think we've got a one or two quarters left before we've got the what I call it commoditized with the lower no margin work.
Dan Batrack: I'm not going to go to the dollar amount, but I think we've got one or two quarters left before we've got the, what I'd call it, commoditized with the lower no margin work. And that also, funny enough, I've always found it ironic that if you get lower no margin on some of this work, it typically carries the highest risk. And to say this just seems like it shouldn't go
Speaker Change: that also, funny enough, I've always found it ironic that if you get low or no margin on some of this work, it typically carries the highest risk to it. And to say this just seems like it shouldn't go together, and we agree, it shouldn't go with us.
Dan Batrack: And we agree it shouldn't go with us. And so I think one or two quarters, I think you'll see us probably pretty close to the end of the calendar year, sort of the culling of the last small work that doesn't really belong in our portfolio should be finished. And then you'll see the contribution on international comes with RPS along with all the rest of our international operations. So I hope that timing's helpful. It is. Thank you very much. Have a good day. Thank you very much, Andy.
Speaker Change: So I think one or two quarters, I think you'll see us by probably pretty close to the end of the calendar year.
Speaker Change: sort of the culling of the last small work that doesn't really belong in our portfolio should be finished and then you'll see the contribution on international come with RPS along with all the rest of our international operations. So I hope that timing is helpful.
Speaker Change: It is. Thank you very much. Have a good day.
Dan Batrack: The next question comes from Ryan Connors with North Coast Research. Please proceed. Hey, thanks. Good morning.
Speaker Change: Thank you very much, Andy.
Speaker Change: The next question comes from Ryan Connors with North Coast Research. Please proceed.
Dan Batrack: First off, you know, congrats on the stock split. I know those aren't generally in fashion, but I wish more companies would follow your lead. I think it's very positive. I wanted to come on the issue of kind of the margin outlook from a different angle. Dan, you mentioned 50 basis points a year is kind of what you laid out in the 2030 kind of game plan there. But we look at the backlog and the composition of the backlog.
Ryan Connors: Hey, thanks. Good morning.
Ryan Connors: First off, you know, congrats on the stock split. I know those aren't generally in vogue, but I wish more companies would follow your lead. I think it's very positive.
Speaker Change: wanted to come on the issue of kind of the margin outlook from a different slice.
Speaker Change: Dan, you mentioned 50 basis points a year is kind of what you laid out in the 2030 kind of game plan there. But we look at the backlog and the composition of the backlog. You know, you did mention one third of it is the USAID work. And you've said in the past that that's
Dan Batrack: You know, you mentioned one third of it was the USAID work. I mean, you've said in the past that that's, you know, tends toward the lower margin side of what you do. So is that, in fact, the case with those particular jobs with USAID? At any call, you can kind of share what the backlog composition would tell us about, you know, kind of the margin trajectory in the next, you know, relatively near term. Yeah, yeah, it's a great question. And it's very insightful, Ryan.
Speaker Change: tends toward the lower margin side of what you do. So, is that in fact the case with those particular jobs with USAID? In any color, you can kind of share on what the backlog composition would tell us about kind of the margin trajectory in the next relatively near term.
Dan Batrack: Let me make one comment about our margin increase of 60 basis points for Q3. If we, if I'm absolutely right that the work that we do for international development generally and in USAID specifically is almost all cost; It's pre-negotiated low margin. If you're taking low financial risk, you get a lower margin. So if we did not have any Ukraine work, and I would say that work, not just Ukraine, but USAID carries about a 7% margin.
Speaker Change: Yeah, yeah, I get it.
Speaker Change: That's a great question and it's very insightful, Ryan. Let me make one comment about our margin
Speaker Change: increase the 60 basis points for Q3. If we, if I, you're absolutely right that the work that we do for international development generally in USAID specifically is almost all cost
Speaker Change: plus work.
Speaker Change: It's a pre-negotiated low margin. If you're taking low financial risk, you get a lower margin. So if we did not have any Ukraine work.
Speaker Change: and I would say that work.
Dan Batrack: If you took that from our portfolio, our government services group, GSG, would have been up over a hundred basis points, and we would have been well into the upper 15% for the quarter. So I don't like to use the word margin that way, but it is a lower margin when you do the calculation.
Speaker Change: Not just Ukraine, but USAID carries about a 7% margin. If you took that from our portfolio, our government services group, GSG, would have been up over 100 basis points.
Speaker Change: and we would have been well into the upper 15% for the quarter.
Speaker Change: [inaudible]
Speaker Change: So I don't like to use the word way, but it is a lower margin when you do the calculation.
Dan Batrack: Let me clarify one item. The incremental contribution of the backlog was about a third of it, so it represents a third of our overall backlog. So let me just clarify that.
Speaker Change: Let me clarify one item. The incremental contribution of the backlog was about a third of it, not it represents a third of our overall backlog. So let me just clarify that. I simply was referring to how much was contributed in the quarter.
Dan Batrack: I simply was referring to how much was contributed in the quarter or the increase in the 500 million that we had sequentially. So I do think the rest of our business is growing at a higher margin expansion. And the 50 basis points is with international development, whether it's the US, Australia, or UK, included in the business. We are not de-emphasizing that. We are big supporters of our clients in all three jurisdictions, and that is included in the margin expansion. Now, what's the margin embedded in the backlog that we have overall, the $5.2 billion? It's pretty close to representing that 50 basis points of expansion that we expect to see.
Speaker Change: or the increase in the $500 million that we had sequentially. So I do think the rest of our business is growing.
Speaker Change: a higher margin expansion, and the 50 basis points is with international development.
Speaker Change: whether it's U.S., Australia or
Speaker Change: UK included in the business. We are not de-emphasizing that.
Speaker Change: We are big-time supporters of our clients in all three jurisdictions and it is included.
Speaker Change: and the margin expansion. Now, what's the margin embedded in the backlog that we have overall, the five point?
Speaker Change: $2 billion. It's pretty close to representing that 50 basis points expansion that we expect to see. So we're not expecting some new big win or a sea state change in the business that we're performing. It's actually embedded in the work that we're being awarded and funded through the orders that
Dan Batrack: So we're not expecting some new big win or a C-state change in the business that we're performing. It's actually embedded in the work that we're being awarded and funded through the orders that comprise our backlog. Got it. Okay, thanks for that. And then back on the Chevron issue. You know, I think you make a really interesting point, Dan, kind of the counterintuitive point that it could actually be a tailwind in some areas.
Dan Batrack: And my question is, you know, how big is litigation support today for Tetra Tech? And is that an area where, I would imagine, yes, it's led by science, but there are nuanced differences to that type of business. And obviously, the relationships are different. So is that something where you feel how big it is today? And would you be staffed appropriately, or would you have to move people?
Speaker Change: comprise our backlog.
Speaker Change: Okay, thanks for that. And then back on the Chevron issue. You know, I think you make a really interesting point, Dan, kind of the counterintuitive point that it could actually be a tailwind in some areas. And my question is, you know, how big is litigation support today for Tetra Tech?
Speaker Change: And is that an area where I mean, I would imagine, yes, it's lead with science. But, you know, there are nuanced differences to that type of business. And obviously, the relationships are different. So
Dan Batrack: Or could that actually be an area of potential M&A opportunity? And if, in fact, your counterintuitive take on that, you know, that it does create some additional business? Another good question.
Speaker Change: Is that something where you feel, how big is it today? And would you be staffed appropriately to, or would you have to move people? Or could that actually be an area of potential M&A opportunity, if in fact you're
Speaker Change: Your counterintuitive take on that, you know, that it does create some additional business.
Dan Batrack: This actually has what I would call, you really have to understand the business to parse that. So what it would look like at the surface level is, are you going to go support somebody who is litigating? What we would do is we would actually want to be the technical support for the data collection, the analysis, and the, I'll call it, I'm trying not to use the word, conclusion, because the courts may become the final arbiter on this, but the technical conclusion with respect to the presence, the movement, the fate, and the final recommendations or interpretation.
Speaker Change: Another good question. This, this actually has what I would call, you really have to understand the business to parse that. So what it would look like at the most surface level is, are you going to go support somebody litigating?
Speaker Change: And what we would do is we would actually want to be the technical support for the data collection, the analysis.
Speaker Change: and the, I'll call it, I'm trying not to use the word.
Speaker Change: conclusion, because the courts may become the final arbiter on this, but the technical conclusion with respect to the presence, the movement, the fate, and the final recommendations or interpretation.
Dan Batrack: With respect to when you talk about, or we talk about experts that are going to be supporting litigation, as soon as you use the word litigation, generally, it means expert testimony in court, on the stand, sometimes referred to as hired guns, even if they're technical, you know, Dr. Smith, Dr. Jones, and we try to stay out of that. There are people that make their livings being in-court litigators.
Speaker Change: With respect to when you talk about, or we talk about experts that are going to be supporting litigation, as soon as you use the word litigation, generally it means expert testimony in court, on the stand, sometimes referred to as hired guns, even if they're technical, you know, Dr. Smith, Dr. Jones.
Speaker Change: and we try to stay out of that. There are people that make their livings being in-court litigators. We simply want to provide an objective, quantitative,
Dan Batrack: We simply want to provide an objective, quantitative measure that is technically supported by data analytics, science, the rest of it. We'll leave the expert testimony on the stand to others because what we've seen is every time you're in court, there's somebody on the other side of that. And we don't want to be actually providing an opinion or an opinion on what the data is. For us, the data is quantitative, it's objective, it's scientifically supported.
Speaker Change: measure that is technically supported by data analytics, science, the rest of it. We'll leave the expert testimony in the stand to others, because what we've seen is every time you're in court, there's somebody on the other side of that.
Speaker Change: and we don't want to be actually providing an opinion or an opine on what the data is. For us,
Dan Batrack: And there are firms, and we certainly know many of them, that actually have hired guns for court testimony and don't look for us to try to turn our PhD experts in hydrology, water mechanics, chemistry, and remediation into witnesses in court.
Speaker Change: The data is quantitative, it's objective, it's scientifically supported, and there are firms, and we certainly know many of them.
Speaker Change: that actually have in-court hired guns testimony.
Speaker Change: and don't look for us to try to turn our PhD experts in hydrology, water mechanics, chemistry, remediation into in court. So I think that our people that we have within the company can support that work because that's the work we're doing.
Dan Batrack: So I think that our people that we have within the company can support that work because that's the work we do for both our government, federal, state, local, and commercial clients, and that data can be used whether or not it's used currently to support the work we're doing or some other person's objective work, but I don't see that actually having to change the under fabric of what we do as a company. And then I assume we're near the end of the queue.
Speaker Change: for both our government, federal, state, local, commercial, and that data can be used whether or not it's used currently to support the work we're doing or some other person's objective work, but I don't see that actually having to change the under fabric of what we do as a company.
Dan Batrack: So if I could just sneak one more in, you know, you mentioned a potential change of administration. I guess what we've learned since the last conference call is that there's going to be a change of administration one way or the other. We've got a new candidate.
Speaker Change: Got it. And then I assume we're near the end of the queue. So if I could just sneak one more in, you know, you mentioned potential change of administration, I guess what we've learned since the last conference call is that
Speaker Change: There's going to be a change of administration one way or the other. We've got a new candidate. Is there any daylight that you've, as you look at the...
Dan Batrack: Is there any daylight between you and, as you look at the Biden administration versus Harris kind of priorities, is there any difference, nuanced differences there, the potential approach versus the current administration, or is it pretty much that they're on the same page with most things that relate to Tetra Tech? Yeah, so what I've heard in the hallways here is a new voice, the same platform, or a similar platform, and we've not seen any, any changes.
Speaker Change: Biden administration versus Harris kind of priorities. Is there any difference, nuanced differences there, the potential approach versus the current administration or is it pretty much they're on the same page with most things that relate to Tetra Tech?
Dan Batrack: I think that there might be a little bit more emphasis on environmental justice and actually prioritizing areas that might have been lower in the queue, which is actually good for us. That would put more work on orphan sites that work for would be done by EPA and others. And that's certainly work that we do already, and we could see that actually seeing a plus sign. I think they could see reprioritization in speeding up some Superfund site activity to get it done quicker, to actually end up because many of these locations are in underprivileged locations across the country. So you can see some of that.
Speaker Change: Yes, what I've heard in the hallways here is a new voice, same platform.
Speaker Change: and or similar platform and we've not seen any any changes. I think that there might be a little bit more emphasis on environmental justice and actually prioritizing areas that might have been lower in the queue which is actually good for us.
Speaker Change: that would put more work on orphan sites that work for, would be done by EPA and others. And that's certainly work that we do already. And we could see that actually seeing a plus up. I think they could see reprioritization.
Speaker Change: and speeding up some Superfund site activity to get it done quicker to actually end it because many of these locations are in underprivileged
Dan Batrack: But I would say that the fundamental platforms are very similar. I won't go so far as to say identical, but I think the general adage, a different voice on the same platform, is a good way to look at it. Understood. Thanks for your time. Thank you very much, Ryan. The next question comes from Tate Sullivan with Maxim Group. Please proceed. Hi, thank you. Just to follow up on the RPS and revenue growth, you said international revenue excluding RPS was 10% year over year. What was the comment you specifically said about that?
Speaker Change: locations across the country. So you can see some of that. But I would say that the fundamental platforms are very similar, won't go so far as to say identical. But I think the general adage, a different voice, same platform, is a good way to look at it.
Speaker Change: Understood. Thanks for your time.
Speaker Change: Thank you very much, Ryan.
Dan Batrack: I think you said something in addition to running some lower margin projects, but can you? Well, what we're seeing is that the RPS component of our international revenues has been relatively flat or the same number with no growth. So the growth rate on that would be, when I say flat, I guess I mean zero, and I think that because what's happening is that we are adding work within the work, and I don't I'm going to try it as we go forward, trying quite a bit this year, and we'll try even double down on it next year not to use RPS as a different component of the company. Because they're as much a part of Tetra Tech as I or anybody else.
Speaker Change: The next question comes from Tate Sullivan with Maxim Group. Please proceed.
Tate Sullivan: Hi, thank you. Just a follow-up on the RPS and revenue growth. You said international revenue excluding RPS was 10% year-over-year. What was the comment you specifically said about that? I think you said something in addition to running off some lower-margin projects. Can you review that, please?
Speaker Change: Well, what I was saying is that the RPS component of our international revenues has been relatively flat or same number, no growth. So the growth rate on that would be, when I say flat, I guess I mean zero.
Speaker Change: And, uh, and I think that, uh, because what's happening is what we are adding work within the work, and I don't, I'm going to try it as we go forward and trying quite a bit this year, we'll try even double down on it next year, not.
Dan Batrack: RPS is doing a great job. They've got a number of individuals who are leading major divisions for Tetra Tech. They are technical leaders, they're financial leaders. They're just among the best that we have in the entire corporation.
Speaker Change: use RPS as a different component of the company, because
Speaker Change: they're as much part of Tetra Tech as I or anybody else. RPS is doing a great job. They've got a number of individuals who are leading major divisions for Tetra Tech. They are technical leaders, they're financial leaders. They're just among the best that we have in the entire corporation. However,
Dan Batrack: However, they are still in a transition, it's been five quarters since they joined us, and we did indicate that we wanted to take some of the revenues that have been more commoditized or are carrying lower or lower margins or higher risk out of the business. So at the beginning, we actually saw in the first several quarters, revenues actually for RPS went down. So people would come in, and I know I had our investor relationships, Jim Wu and others to talk to investors and analysts about how we were going to grow through subtraction.
Speaker Change: They are still in a transition. It's been five quarters since they've joined us and we did indicate that we wanted to take some of the
Speaker Change: of the revenues that have been more commoditized or was carrying lower or lower margin or higher risk out of the business. So at the beginning, we actually saw in the first several quarters revenues actually for RPS went down.
Jim Wu: So people would come in and I know I had our investor relationships, Jim Wu and others talk to investors and analysts that
Dan Batrack: And so margins are going to go up, profits are going to go up, and we're going to actually do less work for it. Now, we've got to the point where it's not shrinking anymore, and the amount we're taking out of the business is roughly equal to the amount we're putting in. So the amount is going down by four or 5% this last quarter, but we've added that amount of higher-margin work.
Speaker Change: that we were going to grow through subtraction.
Speaker Change: And so margins are going to go up, profits are going to go up, and we're going to actually do less work for it.
Speaker Change: Now we've got to the point where it's not shrinking anymore, that the amount we're taking out of the business is roughly equal to the amount we're putting in with. So the amount is going down by four or 5%.
Dan Batrack: So what do you see? You see revenues flat, but you see margins up by 400 basis points year over year. And I think that this phenomenon of taking out as much as you add, the taking out part, is just one or two quarters away.
Speaker Change: this last quarter, but we've added that amount of higher margin work. So what do you see? You see flat on revenues, but you see margins up by 400 basis points year over year.
Speaker Change: And I think that this phenomenon of it taking out as much as you had, the taking out part is just one or two quarters away. And then you'll see RPS contributing not only on margin expansion, but also on revenue contribution internationally.
Dan Batrack: And then you'll see RPS contributing not only to margin expansion but also to revenue contribution internationally. So that is really the dynamic that I'm referring to. I hope that helps with making it a little clearer. Thank you very much. Thank you, Tate. The next question comes from Michael Dudas with VertiCorps Research Partners. Please proceed. Good morning, everyone. Can you hear me?
Speaker Change: So that is really the dynamic that I'm referring to, and I hope that helps with making it a little clearer.
Speaker Change: Absolutely. Thank you very much.
Dan Batrack: Yes, Michael. Okay. Thank you. Thank you. Leslie mentioned in her prepared remarks about a new water bond proposed for $10 billion in California.
Speaker Change: Thank you, Ted. The next question comes from Michael Dudas with Vertical Research Partners. Please proceed.
Leslie Shoemaker: What's the history of success of those types of initiatives in the state? And how quickly does something like that get passed? Oh, good question. We've actually seen in the past that they are relatively successful. So I wouldn't want to predict what's going to happen in an election.
Michael Dudas: Morning, everyone.
Michael Dudas: Can you hear me?
Dan Batrack: But water quality and water programs have had a great track record of being approved. We actually had other measures that were related to water management and stormwater that were passed in previous years and then were integrated over probably a one to two year period. They get integrated into the various local agencies and their implementation plans and funding. So we would expect this one would run pretty much along that same cycle. Organization and planning and bidding in the first year and then actually seeing it in the actual proposals in the second year.
Michael Dudas: Yes, Michael. Okay. Thank you. Thank you. Leslie mentioned in her prepared remarks about a new water bond proposed $10 billion in California. What's the history on success of those types of initiatives in the state? And when something like that gets passed, maybe in the historical levels or what you've been involved with?
Speaker Change: How quickly that business can start to flow into your your consultant advisory work
Leslie Shoemaker: That's very helpful, Lizzie. I appreciate that. Thanks.
Speaker Change: Good question. We've actually
Speaker Change: seen in the past, they are
Speaker Change: relatively successful. So I wouldn't want to predict what's going to happen in an election, but water quality and water programs have had a great track record of being approved. We actually had other measures that were related to water management and stormwater.
Speaker Change: that were passed.
Speaker Change: in previous years, and then were integrated over probably a one to two year period, they get integrated into the various local agencies and their implementation plans and funding.
Speaker Change: So, we would expect this one would run pretty much along that same cycle of
Speaker Change: organization and planning and bidding in the first year and then actually seeing it in actual proposals in the second.
Speaker Change: [inaudible]
Speaker Change: That's very helpful. I appreciate that. Thanks. Thanks, everyone.
Dan Batrack: Thank you, Michael. This will conclude the Q&A session. I will now turn the conference back over to Mr. Dan Batrack to conclude. Thank you very much, LaTanya, and thank all of you for attending the call today. I very much appreciate the questions that we had today, those that we received from Steve and through Investor Relations and other avenues that we can actually incorporate into our presentations.
Dan Batrack: We really do want to be as transparent and forward-thinking and communicative as possible. I look forward to speaking to you all again on our next quarterly call, where we'll present the results of our fourth quarter and all of fiscal year 2024, which, of course, after three quarters is off to a really, really strong start. And probably most importantly, I will share with you our guidance and outlook for fiscal year 2025. And with that, I hope you have a great rest of your Thursday and a great rest of the week. Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may disconnect now.
Michael: Thank you, Michael.
Michael: This will conclude the Q&A session. I will now turn the conference back over to Mr. Dan Batrack to conclude.
Dan Batrack: Thank you very much, LaTanya, and thank all of you.
Dan Batrack: for attending the call today. I very much appreciate the questions that we had today, those that we received.
Dan Batrack: Steve and through investor relations and other avenues that we can actually incorporate into our presentations. We really do want to be as transparent and forward-thinking and communicative as possible.
Michael: I look forward to speaking to you all again in our next quarterly call, where we'll present the results of our fourth quarter and all of fiscal year 2024, which of course after three quarters is off to a really, really strong start.
Michael: and probably most importantly to sharing with you our guidance and outlook for fiscal year 2025. And with that, I hope you have a great rest of their Thursday and a great rest of the week. Thank you.
Speaker Change: Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect now.