Tetra Tech, Inc. (NASDAQ:TTEK) Q2 2023 Earnings Call Transcript

Tetra Tech, Inc. (NASDAQ:TTEK) Q2 2023 Earnings Call Transcript May 11, 2023

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 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 prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer; Steve Burdick, Chief Financial Officer; Jill Hudkins, President; and Leslie Shoemaker, Chief Sustainability Officer. They will provide a brief overview of the results, and we’ll then open up the call for your questions.

I would like to direct your attention to the Safe Harbor statement in today’s presentation. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech’s periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech’s website. At this time, I would like to inform you that all participants are in a listen-only mode.

At the request of the company, we will open up the conference for questions and answers after the presentation. 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, Camila, and good morning and welcome to our Fiscal Year 2023 Second Quarter Earnings Conference Call. We had an excellent second quarter. Our revenue for the quarter exceeded $1 billion for the first time, as a result of our exceptional performance across Tetra Tech’s operations augmented by the addition of the RPS Group that joined us at the end of January of this year. Tetra Tech Leading with Science services are at the center of our client’s priorities to address climate change, resiliency, and adaptation worldwide. Given the strength of our performance and outlook, we’re increasing our guidance for both net revenue and earnings per share for fiscal year 2023, which I’ll give you more details on this later in the conference call.

I’ll begin with an overview of our performance and our customers followed by Steve Burdick, our Chief Financial Officer, who’ll provide more detail review of our financials and our capital allocation program. Dr. Leslie Shoemaker who’s joined us today, who’s our Chief Sustainability Officer, who’ll provide an update on our recently published annual ESG report, and Jill Hudkins, our President, will provide further insight into our growth markets. I’ll then address our earnings guidance for the third quarter and our increased guidance for all of fiscal year 2023. In the quarter, our net revenue increased 39% year-over-year from $700 million a year ago to $970 million this year, which is the highest net revenue for any quarter in the company’s history.

Our EBITDA income increased 30% from last year, reaching a second quarter record of $105 million. And finally, we delivered a $1.17 in earnings per share, which is up 19% from last year. I’d now like to show you what the underlying performance of Tetra Tech was without the contribution of RPS in the second quarter really to give you some good insight into how the legacy business is actually operating at this time. Tetra Tech hit new all-time second quarter highs and double-digit growth rates across the Board for revenue, net revenue, operating income, EBITDA, and earnings per share. Revenue without the contribution of RPS was $989 million, almost $1 billion up 16% year-over-year, a record revenue for any quarter in the company’s history without the contributions of RPS.

Our net revenue increased by 18% year-over-year. Our operating income and EBITDA were both up 19%, and we generated an earnings per share of Tetra Tech without RPS of $1.20 per share or up 22% from last year. I would now like to provide an overview of our performance by our end customer. Work for our U.S. federal clients was up 59% from last year driven by broad-based growth in water and environmental programs, and during the quarter, the rapid initiation of support for Ukraine under our U.S. State Department and USA contracts. Excluding contributions from our extraordinary disaster response-related programs, our state and local revenues were up 12% from last year, driven by our digital water and our municipal infrastructure work. International work or international revenues were a majority of the RPS operations are included increased by 55% year-on-year.

Excluding RPS, our international revenues grew on their own though, they were up 11% from their prior year, driven by strong performance in our global high performance buildings work in Canada, Australia, and the United Kingdom. Our United States commercial net revenues were up 25% from last year. Excluding the RPS acquisition, our underlying commercial revenues were up 13% year-on-year driven by our services in sustainability, including work specifically in environmental permitting, also high performance buildings and clean energy and renewable energy programs. I’d like to provide and present a detail of our performance by our two segments that we report on. The first segment, the Government Services Group or the GSG segment grew by 29% from last year with a significant increase in our international development work, especially for Ukraine energy programs.

The extraordinary contribution for Ukraine just in the quarter provided $70 million in revenue. Disaster response was down relative to the second quarter last year. For comparison purposes, excluding the unusual impacts of Ukraine and disaster response in the quarter, our Government Services Group had a strong double-digit growth rate of 16% year-on-year. Our Commercial/International Group or CIG segment grew by 47% year-on-year, even excluding RPS, which was a material contribution to the segment. The CIG segment was up 13% driven by growth and renewable energy programs, environmental work all across the United States and high performance buildings work worldwide. One of the highlights for the quarter, in addition to the actual performance of revenue and profit and extraordinary work was our backlog.

Our backlog was up 18% year-on-year on strong broad-based orders resulting in an all-time high backlog of $4.275 billion of contracted, funded, and authorized work. In the second quarter, we won new programs and task orders for commercial clients, especially for renewable energy and environmental restoration services. For U.S. federal agencies, we’re awarded major water focus contract vehicles such as the $105 million U.S. Watershed Assessment Contract with the U.S. Environmental Protection Agency. Our disaster planning and recovering practice also won a $54 million contract with Puerto Rico addressing the continued long-term resiliency planning needs for this hurricane prone region. Now, while those were an overview of our financials for the quarter and some of the growth areas, I’d now like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to go over some of the details of our financials in the quarter.

Steve?

Steve Burdick: Hey, thanks Dan. So as you just heard from Dan, we had an excellent quarter with results coming in better than anticipated. Those improvements also extend to our cash flows and our capital allocation related matters. So cash flows generated from operations for the second quarter totaled $108 million, up 13% over last year. Our focus on working capital and cash flows has also resulted in our DSO maintaining a leading industry standard of 59 days. This is a sustainable improvement from prior years, and the slower DSO trend continues to reflect the outstanding work that our project managers lead relative to higher quality projects and highly satisfied clients in our broad portfolio across all our end markets and geographies.

And regarding our dividend program, we’ve paid out $0.23 per share in dividends in the second quarter, which is a 15% increase over last year. And I want to announce that our Board of Directors approved an increase in our quarterly dividend again to $0.26 per share to be paid in June. This is our 36th consecutive quarterly dividend and our ninth consecutive year of double-digit year-over-year increases in dividends paid. As Dan mentioned earlier, we did have this acquisition RPS and the recent closing of the RPS acquisition, which was just over 100 days ago, has been going quite well in regards to integrating Tetra Tech and RPS together. We’ve been making excellent progress towards improving profit margins and I would like to update you on our financial plan and current status for the integration of RPS, which is a significant opportunity for Tetra Tech.

So when looking out over the next several quarters, our goal is to align the RPS margins to be at or above the Tetra Tech profit margins. And this will be accomplished in a similar manner as to what we had accomplished with our two previous public company acquisitions. And that is by focusing on high-end differentiated services and revenues while integrating the business onto our ERP platform and corporate systems for greater cost synergies. As such, we expect to increase the EBITDA margin for RPS from under 5% in their fiscal 2022 by almost 3x to a run rate of over 13% at the end of fiscal 2024. Now, while our operations are working together to focus on delivering high-end solutions in water and environment for our clients, we’re also supporting those activities and we expect to realize additional cost synergies through both the transition of the RPS business under our ERP system, as well as potential office consolidations.

These actions may result in additional one-time integration costs, primarily in the fourth quarter of fiscal 2023, but will provide increased long-term operating and financial benefits to the ongoing business. And so far today compared to our original projections, we are seeing improved margin opportunities based on our joint integration efforts with the RPS leadership team. And so through improved RPS profit margins and cash flows along with Tetra Tech’s strong positive cash flows from operations, we expect to continue to delever our balance sheet. We ended the second quarter with a net debt leverage ratio of about 1.9x EBITDA, which is within our targeted range. We expect to further delever the balance sheet to a factor of about 1.5x by the end of this fiscal year.

And so by increasing the EBITDA margins, while decreasing the interest expense on a lower debt, we would expect to be cash accretive after fiscal 2023, adding approximately $0.50 of EPS in fiscal 2024 and approximately $0.85 of EPS in fiscal 2025. And this will result in a double-digit EPS accretion in — probably in about the mid to upper teens by fiscal 2025, which we anticipate — which we had previously anticipated at the time of the acquisition. I’m pleased to share these quarterly financial results for the first half of our fiscal 2023. I want to thank you for your support and I will now hand the call over to Leslie, who will discuss our ESG sustainability program.

Leslie Shoemaker: Thank you, Steve. I would now like to provide you with an overview of our environmental social and governance program and recently released annual sustainability metrics. At Tetra Tech, we have set ambitious goals to reduce carbon emissions both through our operations and through the projects that we perform worldwide. We measure the global impact of our 27,000 staff and the projects they perform to our 1 billion people challenge. Our goal is to benefit the lives of over 1 billion people by 2030. Since the beginning of our impact evaluation in 2021, we have reached 545 million people and reduced greenhouse gas emissions by 101.2 million metric tons of carbon equivalents annually. For our global operations, we’ve also set goals to reduce greenhouse gas emissions as well as setting diversity, engagement, and community metrics.

This year we reduced emissions by 25% per employee through innovation and flexible work policies, application of virtual technology and cloud-based data management. Our commitment to an engaged and diverse workforce has helped us to scale the highly technical work that we do across Tetra Tech, across our entire global operations. Tetra Tech is providing sustainability at scale by developing technologies that can be brought to clients worldwide such as our greenhouse gas calculator that is used by our high performance buildings practice to help cities, college campuses, and companies decarbonize their fixed assets. We’re also performing large scale water management optimization for systems such as the Upper Egypt utility that provides over 1 billion gallons per day of essential water supply to the region.

We also manage terabytes of coastal data in our cloud-based OceansMap platforms that facilitates the permitting and management of offshore wind facilities in the U.S., United Kingdom, Europe, and Australia. And through our work supporting the U.S. Agency for International Development, we are protecting the biodiversity of forests and aquatic ecosystems by creating supply chain tracking systems that create sustainable fisheries, forestry, and agricultural production. By Leading with Science, Tetra Tech leverages our expertise and technology to address our clients’ needs at a global scale. And now, I’d like to turn the presentation over to Jill.

Jill Hudkins: Thank you, Leslie. The highly scalable solutions that we deliver through more than 100,000 projects for our clients each year result in annual revenues that demonstrate our market leading position in water and environment. I’m very excited to announce today that Tetra Tech has been ranked number one in water by Engineering News Record for the 20th year in a row. Tetra Tech is a leader in One Water strategies, providing intelligent planning, innovative design, and automation to develop, integrate, and manage reliable water supply sources for some of the largest U.S. water agencies. Tetra Tech has also ranked number one in water treatment and desalination by Engineering News Record. Tetra Tech designs innovative, high recovery, desalination facilities, primarily in water stress regions of Florida, Texas, and California.

These states represent 30% of the entire population of the United States. These facilities diversify water supply portfolios and future proof water infrastructure for many years to come. Tetra Tech also has decades of market leadership in providing environmental solutions that are innovative for our clients and sustainable for our future. Tetra Tech has been ranked number one in environmental management by ENR for 14 years in a row. Tetra Tech is also ranked number one in Green Government Offices in our first year of reporting in this ENR category. Tetra Tech designed sustainable and healthy buildings utilizing proprietary, energy, and greenhouse gas modeling software. Some great examples of the work we do in government buildings include Tetra Tech is developing the city of Los Angeles building decarbonization plan to support a carbon neutral future across the city’s 1,200 municipal buildings.

Tetra Tech is also developing a system-wide decarbonization framework to reduce greenhouse gas emissions across all 23 campuses of the California State University System, the largest university system in the United States. Outside of the U.S., Tetra Tech is delivering the largest closed loop underground geothermal heating and cooling system in Australia. And in the United Kingdom, Tetra Tech is advancing an innovative heat decarbonization plan to support Zero Carbon Oxford for the Oxford City Council. The U.S. government has set ambitious net zero building emissions goals for 2050. U.S. government building decarbonization efforts have been further accelerated by incentives in the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.

These funding priorities are directly aligned with what we do at Tetra Tech in sustainable government buildings today. The U.S. government owns more than 300,000 civilian and defense buildings. One of the largest opportunities for Tetra Tech is the U.S. Army’s commitment to spend $7 billion over the next four years on decarbonization. The army is the largest federal building owner with more than 138,000 buildings across 130 installations. Tetra Tech is leveraging proprietary greenhouse gas digital tools, and U.S. Army contract capacity to capture decarbonization programs that support the army’s climate plan. Also, more than 20 states have set clean energy and net zero emissions goals for 2050. The Inflation Reduction Act provides $32 billion of grant funding to support state and local building decarbonization efforts.

Tetra Tech is leveraging its standing contracts with more than 500 municipalities to advance their decarbonization efforts. And now, I’ll turn the presentation back to Dan.

Dan Batrack: Thank you, Jill. I’d now like to present our guidance for the third quarter and for all of fiscal year 2023. The guidance for this third quarter and for the year for Tetra Tech, excluding RPS, and I’ll provide those numbers in just a moment. But for the Tetra Tech excluding RPS for the third quarter, Tetra Tech’s guidance range is from $750 million to $800 million of net revenue with an associated earnings per share of $1.15 to $1.20. For all of fiscal year 2023, Tetra Tech excluding RPS has increased its net revenue estimates or guidance to $3.1 billion to $3.2 billion with an also increased earnings per share guidance range of $5.07 to $5.17. Now for this Tetra Tech portion of our guidance range the following assumptions are included.

It does include intangible amortization of $15 million, which equates to $0.21 per share. We do estimate a 26% effective tax rate. We assume 54 million diluted shares outstanding and does exclude any future acquisitions that we would do in the second half of this year. Now for RPS and these numbers are in addition to the Tetra Tech numbers I just provided or are listed in the presentation above. The numbers for RPS for the third quarter, we do estimate a range of net revenue contribution of $150 million to $175 million, and we expect that the earnings per share will be neutral, or there would be neither a contribution nor a detraction or a loss from RPS in the third quarter. And for the year, for fiscal year 2023, in total we anticipate RPS will add in addition to the Tetra Tech numbers listed above a range of $450 million to $500 million for fiscal year 2023 and also neutral and these numbers are consistent with numbers presented by Steve Burdick in the earlier slide for 2023.

In summary, I’d like to share with you that we see strong demand for our differentiated Leading with Science’s approach in water, environment, and sustainable infrastructure. In the second quarter, we set new records for revenue, net revenue, operating income, EBITDA, and earnings per share, and ended the quarter with an all-time high best ever visibility due to our backlog. The integration of RPS is exceeding our expectations, and it’s adding new opportunities and clients to our business that we just never saw before. It’s going exceptionally well and actually seeing it actually even looking better as we go-forward. And as a result of our strong year-to-date performance and our record high backlog, I’m really pleased to provide you the increased guidance for both net revenue and for the earnings per share that I just shared with you.

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

Q&A Session

Operator: Thank you. The question-and-answer session will begin now. [Operator Instructions]. Thank you. And our first question comes from Sean Eastman with KeyBanc. Please proceed with your question.

Operator: Thank you. Our next question comes from Tate Sullivan with Maxim Group. Please proceed with your question.

Operator: Thank you. Our next question comes from Andy Wittmann with Baird. Please proceed with your question.

Operator: Thank you. Our next question is from Michael Dudas with Vertical Research. Please proceed with your question.

Operator: Thank you. This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.

Dan Batrack: Thank you very much, Camilla. And thank you all for attending and being on the call today. I’m really pleased on behalf of the entire Tetra Tech organization to had the opportunity to present along with Steve and Leslie and Jill both the results financially the huge progress we’re making on ESG across the company and these great growth opportunities we have. I am very excited to come back to you next quarter and share with you the progress that we’ve made with RPS and supporting these other programs that I’ve outlined today. So I hope you have a great rest of the Thursday and great rest of the week, and I’ll talk to you on our next Investors’ conference call. Thank you very much. Goodbye.

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