Tetra Tech Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 10 speakers on the call.

Operator

Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website attratech.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 prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer Steve Burdick, Chief Financial Officer and Jill Hudkins, President.

Operator

They will provide a brief overview of the results and then we'll open up the call for questions. I would like to direct your attention to the Safe Harbor statement in today's presentation. Today's discussion contains forward looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward looking statements.

Operator

In addition, since management will be presenting some non GAAP financial measures as references, the appropriate GAAP Reconciliations are posted in the Investors section of Tetra Tech's website. At this time, I would like to inform you that all participants are in a listen only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr.

Operator

Batrack.

Speaker 1

Great. Thank you very much, Melissa, and good morning, and welcome to our 4th We had an excellent 4th quarter that completed an already Exceptionally strong 2023 fiscal year. Across our operations, we exceeded our already high expectations and delivered on both our financial and our strategic goals for the year. We were again recognized as industry leaders with number 1 rankings in Water and Environment and a newly announced number one ranking for Human Capital Management, which I'll speak to a bit later in this presentation. This ranking recognizes that Tetra Tech's success is a result of our talented workforce and the technical excellence that has been the hallmark of the corporation.

Speaker 1

In fiscal year 2023, we increased our backlog by over $1,000,000,000 including services in climate change, energy transition, Water Security and Environmental Management. Today, together with RPS, we are cross selling new services. For example, we're now providing innovative water management solutions to 19 United Kingdom water utilities and look forward to significantly expanding these services in this upcoming year. As we enter the new year, we look forward to providing our technically differentiated services, our expanded Delta Technologies and our newly launched software solutions to clients worldwide. I'll begin today with an overview of our The fiscal year and Q4, Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance and our capital allocation and Jill Hudgens, President of Corporation will provide additional insight into some of our organic growth strategies.

Speaker 1

But before I review the Q4 results and the segment's performance, I'd like to provide an overview of the Q4 and what we did for the year. Simply stated, we came into this year with an ambitious goal and the highest ever guidance that we'd ever strive for. And I'm pleased to share with you that we not only beat these lofty goals that we set for each of the 4th quarters, but we finished the year with the best quarter of all of them. As a result, we achieved all time records for every key financial metric that we track. Now for the Q4, our revenue was up 40% from the prior year.

Speaker 1

Our EBITDA or earnings increased to $153,000,000 in the quarter, which is up 51% from last year and a clear indication of about the strong performance of Tetra Tech and the contribution from the RPS operations that just joined us in late January of just this year. Our backlog increased to $4,790,000,000 up 28% from last year and up 9% just from last quarter. I'd now like to provide an overview of our performance by our end customer. In the Q4, revenue for all 4 of our client sectors increased by double digits compared to last year. Work for our U.

Speaker 1

S. Federal clients was 29% of our net revenue in the quarter and was up 46% from the same quarter last year. Federal growth was driven by a combination of environmental work, climate, IT and international development related consulting services. We continue to deliver double digit growth with our state and local revenues being up organically 15% from the Q4 of last year, driven by our water management and resiliency consulting services. Our U.

Speaker 1

S. Commercial net revenue was up 13% from last year. Growth in this customer sector includes environmental management and is increasingly driven by our high end consulting and energy transition services and decarbonization services delivered by our high performance And finally, our international revenue was up 78%. Of course, this is inclusive of our RPS operations. We are now increasingly leveraging our combined resources and expanded client network to win new programs I'd now like to present our performance by segment.

Speaker 1

In the Q4, the Government Services Group or the GSG segment was 36 was up 36% compared to last year at $457,000,000 in the quarter. GSG generated a strong 15.7% margin, An increase of 60 basis points from last year. GSG's strong net revenue growth across key federal programs in civilian, Defense and International Development Agencies drove high utilization and exceptional project performance in the quarter. The Commercial International Group or CIG segment grew net revenue by 50% year on year and delivered a 14.7 percent margin, up 110 basis points from last year. Our CAG segment also had exceptional performance in the quarter with revenue increases driving strong utilization and additional efficiencies, especially in international infrastructure, high performance buildings and energy related services.

Speaker 1

And for the first time, we've presented this slide if you're following along on the webcast. And I'd now like to discuss Tetra I'm often asked when talking to both analysts and shareholders and other stakeholders about the differences in methodologies used in the industry, especially as those compared to the United States, compared to the United Kingdom and Canada. If you're following along on the slides, the graph shows a comparison between our typical adjusted U. S. GAAP approach, which Tetra Tech has traditionally, in fact, historically always used and the international standard, which is also referred to as IFRS.

Speaker 1

As you can see on this graph, Tetra Tech's margin was 21% for the Q4 on an adjusted IFRS basis. On an annual basis, you can see our trend here at Tetra Tech over the past 3 years with a margin expansion of 180 basis points since 2021. For comparison purposes, the adjusted IFRS measure is about 6 percentage points higher and the adjusted U. S. GAAP calculation that we report.

Speaker 1

And we think this is quite valuable for our shareholders, analysts and stakeholders to actually understand this difference and make it more comparable when looking at this compared to others that report their financials. I'd now like to discuss our backlog, the best forward looking indicator in our business. Our backlog was up 28% from last year resulting in a new All time high, as I've mentioned a few moments ago of $4,790,000,000 of funded and authorized work. This is not potential contract capacity or overall contracts awarded. This is funded and authorized work.

Speaker 1

Orders were particularly strong in the Q4 for us, which were up 45% year over year driven by both commercial and government orders from our clients. In the quarter, we added more than $1,500,000,000 in additional contract capacity with our U. S. Federal government clients. And notably, A lot of this was for IIJA related contracts that are directly aligned with our specific strengths In areas like numerical modeling of sediment transport for inland waterways and associated high end design services and Jill Hudkins will give an example of this in just a few moments.

Speaker 1

This quarter, we were awarded a $33,000,000 program for an inland waterway lock and dam system that leverages our specialized expertise in innovative solutions for optimizing waterway control structures. We also won new programs for key U. S. Federal agencies, including the Department of Energy, U. S.

Speaker 1

EPA, USAID, The U. S. Army Corps of Engineers and others that advance priority water initiative programs, environmental and climate change mitigation and adaptation programs. At this point, I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, who will go over some of the details of our financials in the Q4 and for the year and also talk about our capital allocation. So, Steve?

Speaker 2

Well, hey, thank you, Dan. So as Dan has just reviewed the 4th quarter operating results, I would like to now review the annual GAAP financial results for the fiscal year ending 2023. Overall, We have record revenue, operating income, earnings and cash flow. And the strong performance from our operations was marked by record fiscal year revenue of $4,520,000,000 which was up 29% over last year and record net revenue amounting to $3,750,000,000 which was up 32% over last year. And as you heard, we executed strong revenue growth from all our markets, including federal government, state and local, commercial and international, which in particular benefited from the RPS acquisition as our footprint in the U.

Speaker 2

K, Europe and Australia has been greatly enhanced. Now Our operating income and earnings per share for the fiscal year were also both all time highs. Our reported operating income came in at $358,000,000 This improvement resulted from both segments. And as Dan discussed earlier, the CIG margins have been closing in on the GSG margins. On a consolidated basis, these improvements resulted in our EBITDA increasing to $481,000,000 which is a 33% increase over fiscal 2022.

Speaker 2

Our EBITDA margins for Tetra Tech have been increasing at a higher rate compared to our revenue increases Our margins have increased an average of 50 basis points per year over the last 4 years. Now GAAP EPS came in at $5.10 And adjusted EPS was $5.21 which was up 16% over last year. The adjusted EPS excluded the final RPS integration costs and lease impairment charges, the one time FX hedge gain and the associated tax related items. Now regarding our total FX hedge gain of $110,000,000 This provided a positive outcome relative to lowering the purchase price for RPS by almost 15% and reducing our debt load required to complete the acquisition. For further details in Q4 fiscal 'twenty three, I'd like to refer you to the reconciliation slides in the back of this presentation as well as our Regulation G attachments included in our earnings release.

Speaker 2

Now on a going forward basis and because we've successfully integrated RPS into Tetra Tech and completed the acquisition accounting, we will provide the fiscal 'twenty four reported results on a combined basis, including intangible amortization. Cash flows generated from operations for fiscal 2023 totaled $368,000,000 or more than 135 percent of net income. This higher percentage continues our historical long term trend and goal to generate more cash flow from operations compared to our net income. Our focus on working capital and cash This also resulted in further improving our DSO to an all time best of 54 days. This is an improvement of 7 days from last year.

Speaker 2

And over the last 5 years, we've improved the DSO each year and brought our DSO down from over 85 days to an industry leading DSO of 54 days. This lower DSO trend continues to reflect excellence in project delivery And highly satisfied clients in our broad portfolio across all of our end markets and geographies. Now our net debt leverage was 1.4 times, which was much lower than immediately after the close of the RPS acquisition when our leverage was 2.2 times at the beginning of this calendar year. Throughout 2023, we've exceeded our initial projections on reducing our leverage to below the midpoint of our net debt target range of 1x to 2x. And as we increase our EBITDA and generate positive cash flows, We expect to further delever the balance sheet throughout fiscal 2024.

Speaker 2

Our long term capital allocation strategy to continue providing strong returns for our shareholders calls for smart investing and the growth of our business as well as managing a robust balance sheet. And we successfully accomplished key milestones with the RPS acquisition while deleveraging our net debt to an amount within our target range throughout this last year. And I expect that the accomplishments in 2023 will have sustainable benefits to our fiscal 2024 and beyond over the long term. The $575,000,000 5 year convertible debt transaction we completed will result in a more diversified and balanced capital structure. The proceeds we used were used to pay down a significant amount of our floating rate debt, thus restoring the availability of our entire bank credit facility.

Speaker 2

The fixed rate coupon of 2.25 percent compares to a floating a current floating rate, which is about 3 times that fixed rate, thus providing for an attractive arbitrage and annual cash savings to the tune of over $20,000,000 in interest. With a cap call in place, we have mitigated the potential share dilution until our stock price reaches $2.60 per share. And furthermore, the stock price needs to essentially more than double and grow to over $3.18 per share to be 1% dilutive to the total shares outstanding. Our bank credit facility had $800,000,000 in liquidity available at the year end and will provide us the ability to invest in organic growth and complete positions in key strategic markets that Jill will speak to next. Our bank credit facility includes sustainability linked metrics relating to reducing greenhouse gases and improving the lives of 1,000,000,000 people.

Speaker 2

And in our 1st year, we exceeded all metrics as measured and defined by our credit agreement, thus resulting in the lower cost of debt. Regarding our dividend program, we increased the dividends paid to shareholders by double digits in the last fiscal year. And I'm glad to announce that our Board of Directors have also just approved a quarterly dividend of $0.26 per share to be paid in December. This is a 13% increase over last year and represents our 34th consecutive quarterly dividend of double digit year over year increases in the amounts paid. I'm really pleased to share these financial results for our fiscal 2023.

Speaker 2

I'd like to thank everybody for your support. And I will now hand the call over to Jill to discuss

Speaker 3

Thank you, Steve. Tetra Tech's core businesses of water, environment and sustainable infrastructure are extremely well aligned with U. S. Government priority programs for fiscal year 2024 and beyond. The Infrastructure Investment and Jobs Act, or the IIJA, will provide our government clients with a $550,000,000,000 funding plus up to deliver priority infrastructure programs in the U.

Speaker 3

S. This increased climate resilient infrastructure spend is directly aligned with the work we do in water and the environment. Our U. S. State and local clients continue to prioritize digital water solutions to modernize and secure their water facilities.

Speaker 3

As the number one water firm in the U. S, Tetra Tech is leveraging domain expertise and digital innovation to deliver state of the art automation, Advanced analytics, artificial intelligence and proprietary software solutions to our 500 plus municipal clients nationwide. Tetra Tech's recent key wins demonstrate why Tetra Tech has been ranked number 1 in water by engineering news record for 20 years in a row. Tetra Tech's market leadership in high end water supply and treatment secured a key win to modernize Foster's wastewater treatment facility and to improve water quality in the Massachusetts Bay. In Southern California, Tetra Tech was awarded a major drought resilient water delivery program that will serve 7,000,000 Metropolitan Water District customers.

Speaker 3

Tetra Tech will leverage its successful track record delivering industry leading navigation and water control structures for the U. S. Army Corps of Engineers to win new contract capacity and new task orders. Tetra Tech recently announced major contract wins with multiple districts to support inland navigation, flood risk management and aquatic system biodiversity. Tetra Tech is providing digital water transformation services for some of the largest cities in the U.

Speaker 3

S, including Los Angeles, Houston and San Diego, our innovative digital water solutions increase remote operability and reduce operating expenses for our water clients. Our digital water services support double digit growth and margin expansion for our state and local business. Tetra Tech's industry leading climate change services continue to be in high demand as our clients Continue to prioritize funding for resilient and sustainable infrastructure programs in fiscal year 2024 and beyond. In the United Kingdom, regulated water utilities will invest £96,000,000,000 in water and wastewater infrastructure from 2025 to 2,030, doubling the investment from the prior 5 year regulatory period. Tetra Tech is winning new work in the United Kingdom by further enhancing our proven local experience with additional global perspectives and technology innovation.

Speaker 3

Global sustainability priorities will require a $1,500,000,000,000 investment to meet net 0 greenhouse gas emission targets by 2,030. Tetra Tech is winning work worldwide in the areas of energy transition, decarbonization and nature based solutions. Next, I'd like to highlight recent key wins that demonstrate our industry leadership in 3 key areas: Energy Transition, High Performance Buildings and Watershed Management. Tetra Tech recently announced The award of a $22,000,000 marine environmental survey to support development of a first of its kind floating offshore wind project in Victoria, Australia. In Canada, Tetra Tech recently won the design of a first of its kind biofuel production facility in Quebec that will convert recycled carbon and hydrogen contained in residual forest biomass into alternative fuels.

Speaker 3

Tetra Tech designs sustainable and healthy buildings using proprietary energy and greenhouse gas modeling software. Tetra Tech recently won a $45,000,000 multi award energy resilience contract with the U. S. Army Corps of Engineers to improve energy resilience and security. Our government portfolio also includes a 1200 building decarbonization plan to support a carbon neutral future across the City of Los Angeles, as well as a system wide decarbonization framework for all 23 California State University campuses.

Speaker 3

Finally, Tetra Tech recently won a 20,000,000 pound modeling and analytics contract with United Utilities and a £7,000,000 AMP 8 Network Modeling Framework with Severn and Trent. Tetra Tech brings industry leading sewer overflow reduction expertise from the U. S. And Canada and proprietary modeling and analytics software to provide best in class sewer overflow reduction services to support the priorities of the UK AMP-eight cycle. And now, I'd like to turn the presentation back to Dan to discuss our fiscal 'twenty four outlook.

Speaker 1

Great. Thank you very much, Joe. I'd now like to preside, not preside, but I'd like to present our outlook for fiscal year 2024 across all of our 4 end client sectors. First, the U. S.

Speaker 1

Federal revenues should grow at about 10% from what they were in 2023, supported by our strong backlog and our ability to leverage our existing $25,000,000,000 contract capacity that we have with the U. S. Federal Government. For state and local, we expect to grow at a double digit pace between a 10% and 15% rate. Client funding priorities are well aligned with our U.

Speaker 1

S. Commercials is expected to be about 20% of our overall net revenue business and grow at about a 5% to 10% rate. We see growth continuing in the high performance buildings and clean energy transformation markets that will probably be the fastest growing areas for us in the commercial sector. And the 4th area, international. Our international work is now about 40% of our business, evenly split between government and commercial.

Speaker 1

We expect international to grow at about a 10% to 15% rate as we continue to expand our water, environment and In fiscal year 2024, We expect to leverage our expanded client base and resources, especially in the United Kingdom and Australia and further realize the revenue synergies of the RPS acquisition. Before I move to the guidance for fiscal year 2024, I'd like to take just a moment to discuss How we here at Tetra Tech think about human capital. As a consulting company, human capital is the workforce that provides us the insight, Analysis and solutions that drive our business every single day. There are three aspects to what makes Tetra Techs unique in the industry and what you might Our secret to success with our staff and our human capital. First, we have just an extraordinary staff across All experience levels within the company, from long standing experts to the very top entry level university recruits.

Speaker 1

We attract individuals who don't just want a job, they want a career. They want a location that they can come and work at, they can get promoted and that they can actually finish their career in a spot better than any other location in the industry. And this has really resulted in our low turnover rates of about 7% per year and the prioritization of internal advancement opportunities for our staff. There is no doubt the first people that we look to take new positions within the corporation are those that actually work here and have already demonstrated and contributed to the company. The second area, our workforce leverages our Delta Technologies that create new solutions and even design software for our clients, not to substitute what we do for our clients with services and professional consulting, But to add to them and allow our clients to achieve even better outcomes than they can just with our consultants alone.

Speaker 1

For our workforce here at Tetra Tech, for every one of the Employees, technology is an enabler, something to make them better. It's not a risk or something they have to be afraid of. And I will tell you all 27,000 people here Embrace the use of technology to make them better, more efficient and have better outcomes for our clients than ever before. And third, We believe in the ability to make a positive difference in the world, both as individuals and as part of the entire company of Tetra Tech. This is a real key aspect of our ability to attract and retain talent.

Speaker 1

When we look at how Tetra Tech impacts the world, our workforce is committed to our aspirational goal of improving the lives of a 1000000000 people through the projects that we do every day. Now, I'd like to move to guidance for the Q1 of the fiscal year and for the entirety of fiscal year 2024. Our guidance is as follows. And before I move into the numbers with respect to earnings per share, I want to both book in this at the beginning, probably the middle and the end that our guidance for fiscal year 2024 and the Q1 are on a GAAP basis. I know I spoke to the difference between U.

Speaker 1

S. GAAP and IFRS earlier. And so if you want to compare these to IFRS, add 6 percentage points to these and you'll be pretty close. With respect to the Q1, our net revenue guidance is for a range of US950 $1,000,000,000 to US1 $1,000,000,000 for the Q1 with an associated earnings per share And I'll state gain associated GAAP earnings per share of $1.30 to 1 point 3 8 for the entire year of fiscal year 2024. Our net revenue is for a range of $4,050,000,000 or 4.05 $1,000,000,000 to $4,250,100,000 with an associated GAAP earnings per share of $5.70 to $6 We went ahead and did the calculations for you.

Speaker 1

The midpoint on a GAAP 2023 to a GAAP 2024, which I've just outlined, would impute a midpoint. The midpoint of our guidance range would be an 11% top line or revenue growth with an associated 15% at the midpoint GAAP earnings per share growth. Some of the assumptions if you're following along on the webcast So reviewing the slides, this includes and this is different than what we had done in Q2, 3 and 4 of 2023, This includes the charge or cost of intangible amortization, which we estimate at $42,000,000 for the fiscal year. I do know for those modeling, there'll be questions as to how does that actually get charged Per quarter, so you can see in the footnotes here $12,000,000 in Q1 $11,000,000 in Q2 $10,000,000 in Q3 $9,000,000 in Q4. So for modeling purposes or estimating our quarterly charges for IA, you can use this.

Speaker 1

We do assume we have a Effective tax rate of 27% for the year, 54,000,000 average diluted shares outstanding and as has been our practice. This excludes any additional contributions of revenue or income from future acquisitions that we would complete after today. In summary, as we enter fiscal year 2024, we see very strong demand for our differentiated Leading With Sciences Water, Environmental and Sustainable Infrastructure Services. For fiscal year 2023, we set new all time records across the board. And I'm very pleased to have just presented to you, we expect to go up from there.

Speaker 1

The strong cultural alignment with RPS accelerating our combined opportunities in supporting our growth and performance goals for fiscal year 2024. And just as Restatement, RPS has culturally fit so well with the company. While it's been 9 months, I'm getting close to 10 months here. It feels like they've been with us for 20 years. They're part of the culture.

Speaker 1

They're part of the company. They're part of the contribution. And frankly, the best is still yet to come as we move forward. No doubt, our record orders in the Q4 and strong backlog Support our ambitious targets that we've set for net revenue and earnings per share growth in 2024. And with that, I'm very pleased to have presented to you the results of both the Q4, all of fiscal year 2023 and our outlook for 2024.

Speaker 1

And with that, Melissa, I would like to open up the call for questions.

Speaker 4

Thank you. The question and answer session will now begin. 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.

Speaker 4

If you are using a speakerphone, please pick up the handset before pressing any numbers. Our first question comes from the line of Sam Kussbaum with William Blair. Please proceed with your question.

Speaker 5

Hey, Dan, Steve, Joe. Hope you are doing well this morning.

Speaker 1

Thank you, Sam.

Speaker 5

I guess to start, I wanted to ask a little bit about fiscal stimulus, Namely the IIJA, which I know you highlighted in your prepared remarks. I understand you've won quite a few contracts, but are still in the early stages here. But based on what you see today, do you expect a more material impact to your backlog in fiscal 2024? And when do you expect IJA related projects to have a peak impact in your business? Is that more of a 2025 timeframe?

Speaker 1

That's a great question. There's no doubt IIJA or the Infrastructure Stimulus Program has been maybe the hottest topic that has been asked ever since we got passed into law here getting close 2 years ago now. For us, we're seeing the first revenue contributions and I know your question went to backlog and I'll address that. But we are now seeing actual revenue contributions from specific clear earmarked programs associated with IIJA. We did press release earlier just this week, a $33,000,000 lock and dam inland navigation program For the Army Corps of Engineers that is not just a contract capacity is within a $200,000,000 contract that we were awarded And it's a $33,000,000 individual project.

Speaker 1

So I'll work a little bit backwards on this. For this year, fiscal year 2024, We've got a little bit less than $50,000,000 anticipated to contribute to revenues. You can see that $1,000,000 program will largely be completed over this next year. It really accounts for pretty much only what we have in orders already. And so we think this is the beginning of a ramp up.

Speaker 1

We think this year we'll see backlog begin to grow. We've got just probably a little under $50,000,000 in backlog. So that's what we've calculated for revenue contribution this year. Hopefully, it turns out to be conservative, but that's what we see this year. I do see it continuing to ramp.

Speaker 1

I think that we'll add more contract capacity. It's already measured in 100 of 1,000,000 of dollars just for IIJA Programs, I expect that number to go up quite significantly as we move toward the end of this fiscal year in contract capacity and orders. I do think that the peak and we're I'll let you know as we get closer to the end of the year, but it does look like the peak for us would be late 2025 early 2026. So I think that the number this year that we have embedded again is around $50,000,000 of actual revenue. I think that number will go up by several fold When you move into 2025 and since we are very early in the program with respect to infrastructure projects both on the initial Permitting initial design layout, we should see that much earlier than others would see it in the overall Duration of the IIJ program.

Speaker 5

Very helpful. I appreciate the color there. Maybe pivoting to offshore wind next We've seen some negative news flows over the last month or 2 related to offshore wind from the no bid activity in the U. K. To some comments made by developers.

Speaker 5

Also a few negative headlines on the solar side. Can you remind me how big the renewables business is for you and whether you expect these recent developments

Speaker 1

That's another great question, Sam. It's interesting. We of course see these headlines. So let me start with how big is TetraDex Renewable Energy Business overall right now? It's about 5% of our business.

Speaker 1

So it's about $200,000,000 a year. Half of it has been longstanding traditional work with hydro or hydropower production. So, that's about 100,000,000 So that leaves the other $100,000,000 roughly, so a couple percent for the company, associated with the wind both on and offshore and solar primarily that makes up Now the headlines with respect to offshore wind being more expensive, potentially more difficult To move online, in many ways is actually I don't want to say it's good news. We never want anything that's difficult for our clients to be good news. But it actually is from a project standpoint good news for us because we can help our clients actually find different ways to get their projects completed at a lower price point.

Speaker 1

So if they would do it in a more traditional manner and I would say with other firms that might be less experienced, Have less technical approach to it, their projects may not be viable. But certainly some of the approaches that we have make these projects More viable and in the instances where they don't fit within their economic portfolio, we can actually come up with Contributions on how they actually might move this to other developers who would fit within their economics. Respect to the one big developer who did cancel 2 programs on the East Coast of the U. S, those were not 2 of our programs. So we're not associated with those at all.

Speaker 1

I Certainly, I've had a few incoming calls asking how disruptive is that to our business. And I said not only is it not disruptive, the experts for Tetra Tech that are running Other offshore wins for the same developer that are moving forward have commented to me that this is actually good. They'll likely be resold to other developers Not moving forward with the existing leaseholders give us additional opportunities beyond what we even had today. So We don't actually see it as a negative. I think I shared with you the current dollar amount that we're doing in this field now.

Speaker 1

And I think The future still looks very promising in this area. I've always said that it's not going to be a perfectly smooth downhill road on this. There's going to be a pothole or speed bump along the way. I would put these in that category. But the final destination of expanding the renewable or alternative energy generation is without question, where the industry and frankly the world is going and we want to be at the forefront of making that happen.

Speaker 5

Great. Appreciate the answers there and congrats on the quarter.

Speaker 1

Thank you very much, Sam.

Speaker 4

Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Speaker 6

Great. Thank you. Yes, it really jumped out The implied number order amount of $1,665,000,000 and Dan you said earlier that You had new programs across Australia, Canada and U. K. Were those international orders a larger portion Of those the total orders for the quarter?

Speaker 1

They weren't. They were really They were stronger than we normally see from those geographies that you just mentioned Australia, Canada, UK. But the Q4 of our fiscal year aligns with the end of the U. S. Federal government year and that's when the final funding where some say the final, I I don't want to use the one hand.

Speaker 1

Final topping off of projects takes place. So typically in the 4th quarter Is our biggest order from the U. S. Federal Government and that was definitely the case. So I would say Q1s, Q2 and Q3 are more representative of other sources.

Speaker 1

But the Q4 is the federal government's truing everything up from what they didn't spend during the year. And that's what really drove the biggest numbers.

Speaker 6

And then did you say earlier still a goal for going forward to have CIG margins move Closer to GSG, particularly with the large number of commercial orders that you highlighted on the slide.

Speaker 1

Well, yes, I think my ambitious goal is, and this is to all the Tetra Tech Experts and management in the CIG side, I'm looking forward to CIG eclipsing GSG. So, But I guess we first got to match and it's getting closer. I think that the performance in the commercial side has been good. And but I will say that some of the extraordinary contributions such as Disasters, some of the emergency work we do regarding very high priorities can make catching them a little bit more difficult, but not Withstanding these extraordinary revenue contributions that drives very high utilization and positively impacts margins, if you sort of set that aside, Maybe in 2024, CIG will catch them. So yes, we're looking for them to catch.

Speaker 1

And Really, the commercial side has the potential to be higher than the government side in a robust economic environment.

Speaker 6

Thank you, Dan.

Speaker 1

Thank you, Tate.

Speaker 4

Thank you. Our next question comes from the line of Andrew Wittmann with Baird. Please proceed with your question.

Speaker 7

Great. Thanks for taking my questions this morning. I guess the first couple that I want to ask are just to understand The quarter a little bit better than talk a little bit more about on the forward look. But just Dan, I don't think you You commented on the benefit to revenue from the activities you had in Ukraine for the quarter. Recognizing that those can be episodic, So they were back in the Q2 of 2023, then not in Q3, back here in the Q4.

Speaker 7

It would probably be smart to have that quantified unless I missed that. And then just maybe just because the margins in GSG, in the Q4, were obviously very good beyond what We were thinking, just wondering if there was any award fees, incentive fees, that hit in the quarter that are just notable, Maybe not individually, but in totality, given that there sometimes are fees paid to you when you get a lot of awards. And obviously, the backlog Here this quarter showing that you have a lot of awards. So if you could just comment on those two things and start off, I think that'd be helpful.

Speaker 1

Yes, those are 2 great points with respect to things that were sort of standouts or great contributors in our Q4. I'll start with Ukraine. Ukraine, we have been doing what I call an ongoing Assistance level that we had even before the outbreak of the hostilities in Ukraine, which has probably been maybe $10,000,000 a quarter or something like that. But we did an additional $40,000,000 So I think if you actually looked at Ukraine overall, we were probably just slightly above $50,000,000 in the quarter And $40,000,000 of that I would call incrementally higher than what we'd anticipated coming in. That was for a lot of humanitarian work.

Speaker 1

And now it is cost plus work, so it is a very low risk to the company. We don't carry a big margin in that work For supporting humanitarian work, we do get paid quite quickly and it's low risk financially, but it does carry slightly lower margins. So What was the good thing in the quarter is it did help drive by about $40,000,000 to beat on the top end revenue, Ukraine specifically, Above what we sort of had anticipated at the sort of maintenance level that we're doing both in Ukraine and we have other areas around the world. But It did contribute to earnings per share, but actually it kind of moderated the margin that we had in GSG Because that carried lower margin. So it was good.

Speaker 1

On the revenue side, it was good on EPS, but on margin, so there's two sides to that coin. With respect to margins in the quarter, we did not have a true award fee or any special award from our clients To make up for the great work we have done. But conversely, on the other side, we did have additional fee from just Great performance from our project managers and I would call those project closeouts. The examples of those are, we often carry A small amount in our projects, a percent or 2, for contingency in the event that there's something that might have to be re additional comments from regulators on some aspect. And a lot of these projects were closed out with a no comment And in fact, accelerated approval from the regulators and outside stakeholders on our work.

Speaker 1

So that also contributed to, I would say, A byproduct of it or sort of a bank shot that contributed, you can see it in our DSO. When you're getting paid that quick and that much in advance of what your regular schedule is, You can see it in the DSO and you see it at 54 days. And that also means when you're getting paid that quick and projects are going that well, And you're able to close out without having to use up contingency items. So I would say there was project closeouts in the Q4 just because of excellent project management And technical delivery from our staff across the company.

Speaker 7

That makes sense and it's helpful context. Just digging a little bit here next into the guidance, It might be helpful actually for you guys just to comment on the interest expense given that interest rates have been changing and are so much higher. Maybe you want to give that, and then we can all kind of back into your EBITDA. But when you get to the EBITDA, it looks like there's certainly some margin Improvement baked into 2024 over 2023. Certainly, that makes sense.

Speaker 7

It sounds like your utilization is very good and sounds like even getting better here. You've got year over year benefits from the cost synergies that you've got in flight, but haven't been recognized yet in the Q1, second And then there's even some of these mix things that we talked about. There's always puts and takes on mix, but Certainly, a lot of Ukraine contribution, like you just talked about, mixes margins down. You had the incentive fees the other way to mix it up. But I guess maybe it would be helpful for you to kind of level set us about what the implicit EBITDA margin is and how much it is year over year And what you think the variables could be to make it even better than what you've guided?

Speaker 7

Because it seems like it's good, but Could even be better if the year unfolds, like you're saying it could.

Speaker 1

There's a lot of moving pieces there. Let me start at a high And then I'll let Steve talk to interest in some of the other items embedded within the company that we have. So for instance, our IA is up higher this year Because having RPS for a full year, but let me start at a high level. We do we have embedded if you do the calculations of our Low end of our revenue range to the low end of our EPS range, you'd see there's about a 50 basis point increase. In fact, you'd see it quite uniform if you went High, high and mid, mid and you did the calculations, you'll see about a 50 basis point increase.

Speaker 1

I do think if you take a look at a favorable mix, which might be a low end of revenue and a high end of EPS, you'd be up at about an 80 basis point increase within fiscal year 2024. So that's sort of a range. I will say that RPS was not with Tetra Tech in the Q1 of last year. They didn't join us until the very end of January. So our guidance for the Q1 margins are actually weighed on a little bit even though they're higher than last year.

Speaker 1

They are weighed on a little bit because RPS's margins still are not at a level of Tetra Tech. In fact, Tetra Tech is up around 13 ish percent, maybe a little more, And they'll be coming into the year around 10. So in the Q1, while you'd expect margins to continue to increase, I will comment that we have about 20 percent additional revenue, which represents RPS at a lower margin. And of course, it will ramp through the year. So, I think there are a number of Puts and takes, but overall, I would go to the annual year at somewhere between 50 to 80 basis points depending on how you Take the comparisons of different components of our margin within guidance for 2024.

Speaker 1

And let me have Steve speak to

Speaker 2

Yes. So Andy, if you take a look at our model, Based on the run rate of depreciation each quarter, midpoint is probably about $26,000,000 of depreciation next year. Amortization, it was on Dan's slide up there, you saw about $42,000,000 Our net interest cost, Probably somewhere between $40,000,000 $45,000,000 is what we're looking at. So the midpoint of $42,500,000 And those are probably those moving pieces to get to an EBITDA number.

Speaker 7

Great. That's all for me. Thank you very much.

Speaker 1

Thank you very much, Andy.

Speaker 4

Thank you. Our next question comes from the line of Ryan Connors with Northcoast Research. Please proceed with your question.

Speaker 8

Great. Thanks for fitting me in and good morning.

Speaker 1

Good morning, Ryan. So I want to go stick on

Speaker 8

the federal side, Dan. And You're one of the few companies that's actually seeing, it seems like, a tangible impact from some of the stimulus infrastructure Spending, you definitely we're not hearing that from the equipment providers at this point. And even some of your peers on the engineering side, We're not hearing that there either. One of the things it seems that is a recurring theme is that Build America provisions, the BABA provisions are kind of a headwind and impediment the obstacle to those funds getting deployed and yet you are seeing it. So how do we interpret that?

Speaker 8

Is it your upstream nature that You don't necessarily rely on actual projects in the field, but you're doing up I mean, why do you think that is that you're seeing that a little sooner?

Speaker 1

Yes, I think you've hit it right. And I think it went to the comment I had, Well, it's a different end market. My comment is on offshore wind. My comment was that before anything gets built, You actually have to come up with a plan before you'll build something. So the Buy America, Build America and have something built here, That comes much farther down the road.

Speaker 1

That's after so I sort of see the projects With respect to service providers in 4 areas, there's where Tetra Tech resides, which is the upfront valuation technology assessment, Initial layout permitting and that's us. That's what Tetra Tech does. A second phase And this goes to the other engineering companies, then you move to the full service engineering firms that will actually do detailed As built drawings, constructible drawings, and they'll take it from where we typically would leave at about a 30% design, and they'll take it all the way through Detailed design constructible design drawings and those are a hallmark of large engineering houses typically characterize themselves as engineering companies, which we don't, and have a attribute of having offshore low cost engineering centers. So look for people who have big houses Malaysia and India and places like that, they were in Phase 2. We can be very busy and they can never see a dollar of revenue Unless the project is going to go to being prepared to go out.

Speaker 1

Phase 3, which really begins to move into the BABA or the Buy America, Build It in America. Those folks are after it's been built or anticipating it being built and you're bidding either a design build project, which would be putting together the engineering and the constructor. And so that third piece is the construction piece And that's you're not going to see anything coming out of the Baobab part of the work until it's ready to be it's already been built, And they're ready to move forward, then you're going to see it move. And that could be anywhere from, I don't know, in the fastest I've ever seen it, maybe 6 months So 9 months later from when we finish our work, not start our work, finish it until they just get started and then they'll move the ladder. And then the 4th area I consider It's really the commissioning and the O and M or the operation and maintenance people, which is the tail end of the projects once they've been commissioned.

Speaker 1

So Almost every project that has a capital aspect to it has those four phases. You might conflate number 23, the engineering and the construction when you go to a design build, But that doesn't encroach on the work that we do before. You can't go to a design build project, which then would trigger BABA spending And both backlog, funding and anything that you would visibly see from IIJA until after you've done what I call this Phase 1. Phase 1 though hallmarks, which is classic Tetra Tech, sole source, limited competition, smaller project, much more diverse. And I don't want to call it completely immune or insulated from whether or not you build it or not, but largely decoupled, largely decoupled.

Speaker 1

And frankly, when there's difficulties in supply chain, cost of materials, availability of construction, trade labor, you know what that, That actually means there's more opportunity and it's even more important to go back to your Phase 1 provider. And we're one of those and frankly in certain areas like water, Environment Sustainable Infrastructure, we're clearly a market leader in those areas. But there's other segments, there's other people that are will benefit from But I hope that sort of describes how we see this interrelationship with respect to what's coming out of IIJA. And I would say for those that are farther downstream in general Phases 2, 3 and 4, they should be encouraged that we're seeing numbers come out both in contract capacity and revenue Because it's pretty difficult to get to Phase 2, 3 and 4 without Phase 1.

Speaker 8

Yes. No, that's great color. I appreciate that detail, Dan. And then my other question, just look, nobody denies things are great today And optimism is a great quality in management, and I think you've given us all the positives. But just if I can get you to kind of Talk about some of the risks that keep you up at night in the business and specifically looking at some data this morning about your stock and It's been much more volatile historically in election years than not.

Speaker 8

And I look at the last 30 years, stock's been twice as volatile in election Years as it has in non election years, and we're getting ready to go into an election year. So can you talk qualitatively about kind of the How you see the different scenarios politically? I know you said you still think we're a year or 2 off from the peak in the current spending plan. But What are the scenarios you see out there? And particularly focusing on

Speaker 2

what are

Speaker 8

the risks in the business? Because certainly listening to the call today, it seems like there's very few things But there must be some risk factors and specifically related to the election and maybe the budgetary situation.

Speaker 1

Well, I'm glad that we're not on a video conference today because you would see a very tired worn out Dan. And what keeps me up? Well, what keeps me awake at night and has kept me awake coming up to even tomorrow Because it isn't signed yet is the dysfunction with the US Congress and a government shutdown. We were sitting there in September. It was going to be A shutdown, they extended it for 6 weeks, which is till tomorrow.

Speaker 1

At the beginning of this week, it's, I think that through the media, it's there's no way they can come to any agreement. And then they'll suddenly come to a bipartisan continuing resolution. But until it's signed, I'm not sleeping. And so what makes me feel uncomfortable Is the dysfunction with the U. S.

Speaker 1

Federal government and shutdowns. Now, do I have a plan for what I'm going to do when that happens as Tetra Tech? Yes. We're going to make sure that our clients have funded us for more than 30 days in advance before it gets shut down. So we do all these sorts of things.

Speaker 1

But records are made to be broken and not just our financial performance, but the amount of time the government shutdown. Who knows if 35 ish days Is the new high, maybe they're going to go for the gusto and go 60 days and I lose sleep over that. I really do. I'll tell you, anytime there's disruption on these, it makes me feel very uncomfortable. And so that is some of the areas that I pay a lot of attention to.

Speaker 1

Unfortunately, it's not something other than my vote as a single individual to vote for people that will be Collaborators and move things forward. So those are things that do make me feel pretty uncomfortable. I do, I guess I used to say lose sleep on it, but that'd be true. It is a high level of concern. I will say that Outside the U.

Speaker 1

S. Federal government, I thought you made a great point in that 40% of our revenues are now outside the U. S. So we are much more diversified. So I will say a sneeze by the U.

Speaker 1

S. Government may give us a cold, But it's not going to be terminal for us. So I when things aren't We're not immune from the upside. We do look to be optimistic with respect to not just our words, but our actions To be prepared for multiple contingency plans on different scenarios, but there's no doubt the federal government. I would say That some would comment.

Speaker 1

Let me just go to, on the flip side with the government though. And you did mention this, the volatility of Tetra Tech stock during an election year. This goes all the way back to the, I think it was the Roosevelt era, a long, long time ago, it was 100 years ago almost. And it's during election year, a chicken in every pot. And so during an election year, Politicians are not looking to say, I want to become more fiscally restrained.

Speaker 1

They are not saying, I want to spend less and take away your bridge or I want to take away Your sure protection or I want to take away whatever your individual project in your jurisdiction might be. Typically, election years are the opposite, which are I have more gifts for you to garner additional support for votes. So I would say the volatility kind of runs around that level of perspective. And we can look Maybe they have different priorities, the Republicans and Democrats, but one might want to build one item for border Someone might want to build items for water and environment, but I haven't seen even under the most stringent Proposal, either side say I want less.

Speaker 7

Good. Well, that's good color.

Speaker 8

I appreciate it. Thanks for your time today.

Speaker 1

Thank you very much, Ryan.

Speaker 4

Thank you. Our next question comes from the line of Michael Dudas with Vertical Research Partners. Please proceed with your question.

Speaker 9

Good morning, Jill, Steve, Dan.

Speaker 3

Good morning, Michael. Good morning.

Speaker 9

Dan, it sounds obviously Given what you talked about with your growth in the business and certainly the opportunities internationally and it seems like you've evidence that the RPS So, assimilation has gone quite well and probably could really kick into gear the next 12 to 18 months. How are you thinking about As you reset and recapitalize on the balance sheet, it sounds like you'll be paying down further debt with strong cash flow. How do we think about going forward relative to your historic kind of tuck in smaller type acquisitions versus the opportunistic RPS? What do you see over the next couple of years? Is it kind of in between, just opportunistic either way?

Speaker 9

Do you want to share how you're thinking through that as you kind of meet some of these pretty aggressive Mark, it's a team that needs your services for quite a few years.

Speaker 1

Well, when we after RPS, one of the premises we had when we had Yes, it was our largest acquisition. Yes, it was 5,000 people. And yes, it expanded our U. K. And Australia, but Prince.

Speaker 1

And yes, it did take our leverage up to just over 2x, which is right at the upper end of our range. But my discussion with our CFO and Treasury staff is, we want to do this, but without inhibiting at all Tetra Tech's long term plan to add technology experts, companies that can bring us new clients or new areas for growth. So Steve Burdick, this is great. It's going to be great for operations, but you've got to keep that channel open. And that was part of what drove the convert, I expect that you'll see continued more of what we have done for years years years, which are small, We call them tuck ins, some of those call them bolt ons, which is just sort of assimilate them into the company.

Speaker 1

They come in as equal partners with the corporation. They're super important for us. They lead the technical areas for all of Tetra Tech. So if you're out there in a firm that's looking to think about is it a good You don't come to Tetra Tech to work for us. You come to Tetra Tech to lead us all.

Speaker 1

And so, those will continue to take place. And if I know Steve presented on a slide in prepared remarks that we have $800,000,000 of existing today capacity, which would be more than enough to do what we just Transacted with RPS, but that's just what's available today. We have access to over $2,000,000,000 and direct line of sight funding That we could trigger within frankly within a few phone calls. So if there are opportunistic entities that would make sense for Tetra Tech, Our capital structure is not such that our balance sheet would be an inhibitor, in fact, as an enabler. So I would just say that expect business as usual with respect to adding companies that bring in new technologies, Access to new clients or round out some of the geography we have within Australia, Canada, the U.

Speaker 1

K, portions of Europe and the U. S. But if the right company comes on Comes along that actually makes sense and that will make us better than we are today, both for today and the long term. We do not bet on companies coming here To make us better in 10 years from now, we know that'll be the case if they come with us. But we wanted to actually show it and demonstrate it to our shareholders today.

Speaker 1

And I know we've used that there'll be GAAP accretive on year 1. That's still our goal for the small tuck ins. I do know like RPS, some of that are much larger and much More complicated, we may have a quarter or 2 to, that there'll be cash accretive, but it may take a quarter or 2 for the GAAP portion. So expect more of the same. We'll continue to move forward with companies that fit with us.

Speaker 1

That should not be a surprise and that Isn't even felt we're below the midpoint as Steve had indicated, we're below the midpoint of the range that we'd like to reside in between 1 and 2 times. We're below 1.5, 1.4 and if we don't do an acquisition in the next 6 weeks, that ratios continue to get favorable during this year.

Speaker 9

Seems like your business development team will be busy. Dan, I appreciate your thoughts. Thank you.

Speaker 1

Okay. Thank you very much, Michael.

Speaker 4

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Bachtrock for any final comments.

Speaker 1

Well, thank you very much, Melissa. I appreciate your moderating the call today. And I'd like To thank everyone who's followed the company, been supportive of us during fiscal year 2023. I think we're off to A bright start to 2024. I'm really looking forward to talking to you in about 90 days from now on our next quarterly call to tell you how we've And with that, I hope you enjoy not only today, the rest of this week, but I hope you have a safe and enjoy the holiday season.

Speaker 1

Thank you very much.

Speaker 4

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Tetra Tech delivered an all-time-record Q4 with net revenue up 40% year-over-year, EBITDA up 51%, and backlog reaching $4.79 billion (up 28% YoY).
  • For fiscal 2023, revenue hit a record $4.52 billion (+29%), net revenue was $3.75 billion (+32%), and adjusted EPS climbed 16% to $5.21, supported by strong cash flow and DSO improving to 54 days.
  • The company’s FY2024 guidance targets net revenue of $4.05–4.25 billion (≈11% growth at midpoint) and GAAP EPS of $5.70–6.00 (≈15% growth), implying ~50–80 bp of margin expansion.
  • Integration of the £520 million RPS acquisition is complete, driving cross-selling in the UK, Australia and Canada and helping international revenue grow 78% in Q4, with 10–15% growth expected in FY2024.
  • Tetra Tech faces potential disruption if a U.S. federal government shutdown occurs, as ongoing funding delays could temporarily impact backlog conversion and project cash flows.
AI Generated. May Contain Errors.
Earnings Conference Call
Tetra Tech Q4 2023
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