Tetra Tech, Inc.

Good morning, and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release. If you have not, please contact the company's corporate office at 626-351-4664. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investor section of its website at www.tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyright 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, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and will open up the call for questions. I'd like to direct your attention to the safe harbor statement in today's presentation. Today's discussion contains forward-looking statements about future growth 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 takes 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 investor section of Tetra Tech's website. At this time, I'd 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. Batrack.

Thank you very much, Laura, and good morning, and welcome to our fiscal year 2021 first quarter earnings conference call. We had a strong first quarter, delivering results ahead of our guidance for both revenue and and earnings. Our performance was attributable to our focus on high-end consulting services, which resulted in increased margins for both of our operating segments. Our leading the science approach is fundamental to our success, and we're increasingly leveraging our suite of proprietary technologies and tools that we call the Tetra Tech Delta. With a new administration leaving the United States and their appointees being put in place throughout the federal agencies, we're anticipating an increased focus on water, environment, and the related climate change priorities. I'll now begin with an overview of our performance and customers, followed by Steve Burdick, our Chief Financial Officer, who will provide a more detailed review of our financials and capital allocation. I'll then address our customer outlook and earnings guidance for fiscal year 2021 and for our second quarter. We had a strong first quarter led by our record earnings per share performance. In the first quarter, our operations generated an earnings per share of 96 cents, which is up 13% from last year. Our net revenue was $605 million, up sequentially for the second quarter in a row as we're recovering from the impacts of the pandemic. Our backlog into the quarter at $3,190,000,000, up 1% from the prior year. I'd now like to provide an overview of our performance by customer. Our U.S. federal and our state and local revenues were both up year on year. State and local revenues were up organically 11% year on year with continued growth in municipal water programs led by our digital water services. Work for our U.S. federal clients was 31% of our collective net revenues in the quarter and was up 8% year on year. This growth was led by double-digit increases in our work for the U.S. civilian agencies and the U.S. Department of Defense. However, as we've seen in the past several quarters, we continue to see some delays in our USAID projects due to travel restrictions associated with the COVID-19 pandemic. While our international net revenue was down 8% from last year, revenues did grow sequentially by 4% in this business area from our fourth quarter. We did see continued strength in our Canadian government and renewable energy services work. However, this growth was offset by reductions in discretionary work for our commercial clients, especially in the Asia-Pacific operations. And also in the United Kingdom, our UK practice, it was impacted negatively by project delays associated with renewed COVID-19 restrictions that were put in place in the region. Our U.S. commercial net revenue was 22% of our business in the quarter, down 7% from the prior year. While our regulatory-driven programs and renewable energy revenues continue to grow, we saw a reduction in discretionary work for some of our industrial services and our commercial real estate clients. I'd now like to present our performance by our segments or our business groups. In the first quarter, both of our segments contributed to an expansion of our operating margin for the entire corporation. The Government Services Group, or the GSG segment, was up 100 basis points year-on-year, delivering a 13.8% margin in the first quarter of fiscal year 2021. Their margin increase was driven by high-end, high-value data analytics and design services, as well as strong utilization across the entire GSG operation. The Commercial International Group, or our CIG segment, margin was up 60 basis points year and year. And as per our plan, and as we've signaled in the past, it is increasing and moving much closer to GSG's margin. CIG segment delivered an 11.4% margin in the quarter. CIG's first quarter performance was the result of growth in high-end services that resulted in a much more favorable business mix for us in that sector of the company. Our backlog was up 1% year-on-year, ending the quarter at just under $3.2 billion, which I will note is the second highest ending quarter number that we've ever had in the history of the company. Now, the first quarter of the fiscal year is typically lighter for us in orders. In the United States, the first quarter also happened to coincide this year with our U.S. elections. the federal budget negotiations and the lead up to the presidential leadership transition that took place in January. This was all together combined with a typical holiday season that starts from November through New Year's, which does make orders a bit lighter. But in spite of these seasonal impacts, we saw strong orders from our key federal agencies, including the Department of Defense, Department of Energy, and the U.S. Environmental Protection Agency. Now, at the same time, we also continue to add new contract capacity with agencies that are going to be at the forefront of the new administration's priorities, such as our recently awarded contract with FEMA and contracts that will support USA's renewable energy programs around the world. Now, I would like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials for this past quarter.

Steve? Well, hey, thank you, Dan. So I'd like to now review the GAAP financial results for the first quarter of fiscal 2021, as well as our financial condition as of the end of the first quarter. So overall, our revenue and net revenue came in better than expected when compared to our first quarter guidance. The fiscal 2021 first quarter revenue was at $605 million and was in excess of the top end of our guidance range, which was $570 million to $600 million. Our net revenue was up about 3% over the last quarter. And furthermore, our first quarter net revenue is up when compared to each of our most recent Q2, Q3, and Q4 results. When compared to the first quarter of last year, our revenue and net revenue was impacted by the economic conditions resulting from the COVID-19 global pandemic, as well as our decision last year to dispose of our Canadian turnkey pipeline business. Similarly, our operating margin and earnings per share improved. Our earnings per share of 96 cents came in better than the top end of our Q1 guidance range, which was 78 to 83 cents, and better than the first quarter of last year. This higher EPS was due to two reasons. First, earnings per share improved due to the improvement in operating income, which came in at $66 million this quarter. Our improved operating income was driven by an increase in our margins over the last year by 70 basis points. This operating income was a result of improvements in both our CIG segment, which realized a higher margin, 11.4%, and GSG, which realized an even better margin of 13.8%. Second, our tax rate benefited from a discrete tax matter primarily due to stock compensation. I do want to point out that if we apply the normalized 25% tax rate to both years in our first quarter, Our EPS would have come in at about 87 cents this quarter, which is still much stronger than the prior year of 81 cents at that same constant tax rate. While net revenue, operating income, and earnings per share have improved, we've also remained focused on generating positive cash flows in excess of our net income. Now, cash flows generated from our operations for the first quarter totaled $33 million. For those investors and others who have followed us for a while, you will note that we typically have a negative cash flow in the first quarter. However, as we continue to improve our working capital management, we've realized a $51 million improvement over last year. This working capital improvement also benefited from a decrease in our day sales outstanding, or DSO. Our focus on working capital and cash flows is resulting in a DSO decreasing to 67 days as of the first quarter. This is an improvement of six days from last year and a sequential improvement from last quarter. Now, our net debt of $139 million amounts to about a 38% decrease from last year. This is an improvement of $85 million compared to last year, even as we use cash for strategic acquisitions, stock buybacks over the last 12 months amounting to about $111 million, and dividends over the last 12 months of $36 million. So our long-term capital allocation strategy calls for a balance of investing in the growth of our business, managing the balance sheet, and providing returns to our shareholders. And so over the last trailing 12 months, cash from operations generated $314 million, which equates to about $5.75 per share. During the first quarter, we continued to benefit from this cash position by providing significant returns to our shareholders through both dividends and share buybacks. So regarding our dividend program, during the first quarter, we paid out $9.2 million in dividends, And I want to announce that our Board of Directors approved our 27th consecutive dividend, which will be paid in the month of February at a rate of 17 cents per share, which is a... Furthermore, we utilized $15 million in the first quarter on our stock buyback program. We do have about $193 million remaining under our previously approved stock buyback program. Just as important as successfully implementing our capital allocation strategy is ensuring we have a strong balance sheet and ample liquidity. We have both in terms of our balance sheet at the end of Q1 with a current leverage of 0.5 times to EBITDA and available liquidity of over $800 million in the form of cash on hand and funds available under our credit agreements. As a result, Tetra Tech has been a financial position such that we will continue to provide significant returns for our shareholders while investing in technical capabilities and strategic growth areas, both organically and through acquisitions. So I am very pleased to share these financial results for the first quarter with you all. And I want to thank you for your support. And I will now hand the call back over to Dan.

Great. Thank you very much, Steve. With the United States re-engaged in the Paris Climate Accord and the Biden administration's focus on climate change taking hold, we expect climate change opportunities to increase across our business. For Tetra Tech, climate change-driven services include four major markets, water, environment, sustainable infrastructure, and renewable energy. And we here at Tetra Tech are leading with science in addressing our clients' climate change needs with a combination of our experience, world-class scientists and engineers, and technical innovation. So in water, we're working with local governments to provide sustainable water supplies in regions affected by droughts or saltwater intrusion from rising sea levels. In environment, We're working with our Fortune 500 clients to address new air and water quality concerns and their increased emphasis on meeting sustainability goals. In sustainable infrastructure, we're designing solutions for coastal protection and providing innovative, resilient, high efficiency building designs. And in renewable energy, we're at the forefront of new offshore wind programs that are helping states meet their ambitious renewable energy targets here in the United States. The renewed emphasis by the U.S. Administration on Climate Change and associated water, environment and renewable energy programs will begin with the allocation of work under the $1.4 trillion fiscal year 2021 budget that was just put in place on December 27th of year 2020. Our federal work is across three primary sectors. First, civilian agencies. Second, Department of Defense. And third, international development. And collectively across these sectors for the federal government, we can leverage our over $20 billion in contract capacity to support our federal clients' programs. For the Department of Defense, we expect to see an increased focus on addressing PFAS and other emerging contaminants, as well as climate adaptation planning for military facilities that are at risk due to sea level rise. For civilian agencies, such as the Environmental Protection Agency, where we've supported programs with them for over 30 years, we expect a renewed focus on watershed management, regional programs, and science-based analysis of emerging contaminants. And for international development, the Biden administration has announced that USAID will be elevated to sit on the White House's National Security Council in full parity with diplomacy and defense for the first time. And as one of the largest USAID consultants, we're very well situated to address priorities in climate change and renewable energy with this agency. ESG, environmental, social, and governance. Again, also known as ESG, is increasingly a focus of companies, both for Tetra Tech and for our clients. For us, ESG is both what we do internally as a company, as well as what we do for our clients in the 65,000 projects that we perform each year. We have excelled in reducing our company's GSG emissions, greenhouse gas emissions, and achieving our sustainability goals. But it's actually the work that we do on our projects that provides a benefit at a scale that are well beyond the 20,000 staff at Tetra Tech. Our environmental work is reducing the discharge of contaminants, helping manage large scale watersheds, such as the Chesapeake Bay, and cleaning up impaired rivers, such as the Fox River in the state of Wisconsin. Our work in renewable energy in Southeast Asia is providing a societal benefit to over 70 million people. And programs like the Coral Triangle Initiative that we're working on is benefiting a 6 million square kilometer ecosystem that supports over 300 million people. In governance, we've worked for over a decade on programs that support gender diversity, economic development, and the rule of law. And today, in the country of Colombia, one of our current programs, we secure land tenure rights for over 20,000 people. These services, consistent with Tetra Tech's focus on water, environment, sustainable infrastructure and renewable energy, bring a new dimension to the scale and significance of the work that Tetra Tech is doing today. I'd now like to present our guidance for the second quarter of fiscal year 2021 and for the entire year. Our guidance is as follows. For the second quarter, to $595 million, with an associated diluted earnings per share of a range of 73 cents per share to 78 cents per share. For the entire year, I'm very glad to increase both our net revenue guidance and our earnings per share. Our updated net revenue guidance for the entire year is to $2.4 billion to $2.55 billion for net revenue. with an associated diluted earnings per share range of $3.45 per share to $3.60 per share. Some of the assumptions included in these updated guidance includes an expected intangible amortization for the year of $9 million, or approximately $0.12 per share, We do expect a 25% effective tax rate for the remainder of the year. That would be for Qs 2, 3, and 4. In fiscal year 2021, we have approximately 54.5 million shares, diluted shares outstanding. And as in the past, our practice is not to include, or in other words, this excludes any contribution of future acquisitions that would take place during the fiscal year. In summary, we had a very solid first quarter and start to our fiscal year 2021, setting new records for earnings per share for our shareholders. As we enter fiscal year 2021, our high-end water, environment, sustainable infrastructure, and renewable energy services, and our leading with science approach is more in demand than ever before. And our market-leading high-end services are directly in line with today's priorities for climate change, water, and environment, providing us with extraordinary opportunities as we enter this year, and particularly with the new administration here in the United States. And with that, Laura, I'd like to open up the call for questions.

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 numbers. If you would like to ask a question, please press star 1 on your touch-tone phone. One moment, I'll wait for questions. Our first question comes from the line of Noel Bilts with CFO. You may proceed with your question.

Hi. Good morning, Dan and Steve, and congrats on another nice quarter.

Thank you, Noel.

Of course. So just a couple of quick questions. First, very high level. Maybe you could speak to just how you're sort of thinking about the annual growth outlook for GSG versus CIG, as well as the margin profile, just given some of the momentum you're seeing in federal advanced analytics, as well as some of the expected pockets of softness you're seeing on the commercial side of the business.

Yeah, I think really things have started off well. I'll let me start with the margin, and then I'll get to the growth rates with our government clients. In the past years, we've indicated that our margin on an EBIT would be between a 12% and 13% operating income. We do see that with an increase in our advanced analytics that has increased. Our target was 12.5% to 13% for this year, and no doubt the first quarter increased. That was particularly strong. So I would say for the year in this coming quarter, and I will make a note that we do have a bit of a seasonal impact to our business. Our Q2 is a quieter time, less travel, less outside field work. It does snow in the northern portions and sometimes even here in the southern portions of the U.S. So seasonally, we'll see a bit lower margin in Q2. But for the year, we should be between 12.5 and 13.5. And with the performance recently, I would say at the upper end of that range. Growth rates have actually been very strong, and I would say without any special contributions from the federal government, in other words, not including stimulus or not including Recovery Act funding, we've seen our federal grow between 5% and 10%. That's what we indicated last quarter. We came in right in that range, the upper end of that range here in the first quarter. And we expect our state and local work driven by municipal water programs to grow between 10 and 15%. And we were in that range, albeit a little bit at the lower end of that range at 11%. So that's what we're seeing on the government side. And I think with just a little bit of funding or implementation of new priorities for the new administration, we could push the upper end of those levels for the federal government and perhaps even higher.

Perfect. That's really helpful. And then you mentioned PFAS mitigation as sort of a longer-term opportunity, which I think is an area of focus for a lot of investors. Could you speak to where you think we are today in the U.S. around some of those initiatives And, you know, one of the things we've been looking for is for the EPA to kind of come out and establish MCL levels. And, you know, that may sort of start to drive some of this activity. Can you talk about how you're thinking about this playing out over the next few years and where you see Tetra Tech as best positioned to participate? Thanks.

Yeah, absolutely. Well, I think that the PFAS, and for those unfamiliar with PFAS and PFOA are two acronyms that refer to chemical additives to fire suppression, foam and sprays and other materials that are used at any place that there's fire training done and that's Air Force bases and military is the largest use of these chemicals. It is a persistent chemical that impacts drinking water in groundwater primarily, although it can also be in lakes and other surface waters. And there are not a regulatory directed levels that have been established at the federal level and there are for the most part only guidance even at state levels. I do think MCLs, which is a drinking water standard definition, if it's passed at the federal level, will create an immediacy. It will take a little bit of time to be put in place. I do think that not only our federal clients, but our commercial clients we are seeing have added this to the chemicals for screening, analysis, and actually preliminary remediation of this material in order to get ahead of it. So I do see it growing just because of the new administration. I think that the trend or the die is cast that there's likely to be a regulatory standard put in place or at least a preliminary remediation goals, PRGs, during this administration. And so I do see it ramping up. I think it was going to go up regardless of administration because of concerns at the local municipal level, but I do see it growing much quicker with this administration being put in place and priorities for protection of the environment and human health administered through the EPA. So I think it will grow quickly. Tetra Tech is one of the leaders in this area, although I will say it is a land rush. Everybody who can actually spell PFAS or PFOA is saying that they're a leader in this. um we're doing a lot of the work for the department of defense branches and we're actually doing a fair amount of this work for our fortune 500 clients right now mostly on the assessment and for the federal government on what i would call pilot tests or feasibility studies and so it's very much in its infancy to develop technologies that will be more cost efficient and effective than using granular activated carbon or sort of a best demonstrated technology. So it could very easily get into a technical discussion that I'm sure many wouldn't have that much interest in. But I think it's a tens of billions of dollar market. is going to be ramping up, and it will affect essentially all drinking water supplies or a great majority of them across the U.S., particularly in proximity of military facilities where other firefighting was used, including proximity to airports. So I think it's a big opportunity for our environmental side. It's a great nexus with our water expertise, and I think Tetra Tech, if not the leader, will certainly be one of the top leaders in this market as it develops.

Thank you very much.

Thank you, Noelle.

Our next question comes from the line of Kate Sullivan with Maxim Group. You may proceed with your question.

Hi. Hi, thank you. Hi, Dan. Hi, Steve. I thought I'd start with your offshore wind work, and you mentioned in your comments a lot of emerging U.S. projects on that front, but can you remind us of your international offshore wind energy exposure, or is it not as large as your existing U.S.? ?

Yeah, it's not as large. The work that we're doing for offshore wind is probably 90% of the work with respect to projects and revenue generation for offshore wind is here in the United States. We have just a very, very small amount of offshore wind that we support some of the initial evaluations of potential suitable sites. uh is being done uh off of canada although the canada's biggest uh generation of renewable energy of course is hydro followed by onshore wind and just a very very little in the uk but i would say uh 90 95 of all of our revenues are here in the united states and the great majority of that is uh off the eastern seaboard although i will say we're just beginning to do some initial offshore marine assessment work, including siting, depth, sub-bottom profiling, environmental assessment off the west coast of the United States, where it's a much deeper shoreline, it's a much deeper water, so it's actually tethered off of cables rather than actually set on the bottom on the east coast. So that's the mix that we do, and what Tetra Tech does is we do have a very advanced And we believe the market leader in doing the initial studies, evaluation, research work that will support the permits to be issued for offsite siting and construction. And so we'll do the marine mammal studies, we'll do the offshore benthic studies with respect to shellfish, marine mammals, the rest of it. We'll actually do the setting up of floating systems to track via radar flyways for avians, so birds and if it's near shore bats. And so that's the work that we'll do. And the most complicated part of actually putting an offshore wind generation system together is obtaining the permits and then monitoring for compliance of the environmental permits. And that's the work that we do. And obviously, as you would intuitively recognize, that's the work that comes in first. They'll construct it later. And then, of course, the ongoing monitoring takes on essentially in perpetuity. So that's sort of where our work is and what we do.

Thank you. And shifting to project demand from commercial customers, and you mentioned some of your Fortune 500 doing more evaluation works on the PFAS and water contaminant fronts. But more than that, what really drives demand from your commercial customers? You mentioned a new focus to meet sustainability goals, but can you give an example of where that translates into a project? Is that mostly your sustainable building design business, or can you give an example of a project there that you see?

Yeah, I absolutely can. Well, I think sustainable buildings, and we refer to it as our high-performance buildings practice, I think is an excellent example of where discretionary dollars are being spent. to meet sustainability goals and sustainability goals for existing buildings are how retrofits or renovations can be put in place to reduce energy consumption to actually reduce or complete a full recycling capture recycling of water. So it can be self sufficient. And then, of course, enhancing their recycling for on the way side. And so there's a lot of that work taking place now for our existing Fortune 500 clients for their headquarters and their key facilities in order to meet their overall sustainability goals within their company. And then of course, new construction is being driven not only by voluntary decisions to create a more sustainable or healthy buildings, often defined by a wellness criteria, but there are more and more regulatory requirements coming in regarding energy efficiency requirements before permits will be issued for new construction. So it's a combination both of the election to make this a priority, which we've seen a significant increase in regulatory requirements, certainly on the energy side, and some have moved it to be even broader to cover energy, water, and waste, which is what we're focused on with our high-performance building design group. Thank you very much, Dan. Thank you, Tate.

Our next question comes from the line of Sean Eastman with KeyBank Capital Markets. You may proceed with your question.

Hi, Tate. Nice quarter. Thanks for taking my questions. I'd like to start on You know, clearly Tetra Tech is well aligned with this new administration's policy platform. And I know it's early days, but I'm just wondering how quickly you think we might see funding start to get funneled into Tetra Tech programs that support this very hard stance on climate and environmental resilience. Just curious how you see that playing out and how quickly we might start to see that.

It's a really good question, Sean. And our perspective has actually evolved here even over the past 30 days. And in fact, with a new administration coming in and a lack of clarity 30 days ago as to who would control Congress, we felt that a slow progression with respect to affirming or ratifying a number of the appointees for the new administration and some difficulty through Congress, the House and Senate would actually create a slow ramp of these. But with the elections taking place in Georgia and the Senate and of course the House, being on the Democratic side with the administration, we actually think it'll speed things up. So rather than this being a ramp up with momentum really picking up in 2022 and three, no doubt those will be the bigger years. But I think that this year toward the end of fiscal year 2021, so between now and fall, I actually expect this to convert from policy and priorities to funding and implementation. And I would say probably late third quarter and fourth quarter. Now, I know that those not as familiar with the federal government might sound like a long way away. You know, we're already a third of the way through the second quarter, so it's really not that far away. And I think the one thing that the government will do first, the administration will do first, is if you want to get moving, if you want traction and you want to make an impact, you use the capacity of the vehicles that you have in place. And with Tetra Tech having well over $20 billion with just U.S. federal contract capacity, we're in a great position. And these are not capacities for scopes of services that are something divergent from the priorities. These are $20 billion set dead center with respect to the priorities that this administration has identified. I think that the funding will come out sooner than originally anticipated because of the consensus that has been put in place through Congress and the executive branch. and the ability to actually access entities that have these contracts. So for us, I think it could come Tetra Tech's way in the second half and probably later in the second half of this fiscal year. So it's not exclusively a 2022 or 23 or out. I do think it'll continue to build, and the best are yet to come in the future, but I think it'll begin here in the next few quarters.

Okay, really helpful. And next one for me is just, you know, the GSG margins up 100 basis points a year over year is certainly noteworthy around the quarter. It would just be helpful if maybe we could, you know, get a bridge between the utilization benefit and that mixed benefit. And along those lines, if you could just give us a little bit more color on this digital water opportunity, you know, how that's unfolding, that would be helpful.

Sure. With respect to the increase in the margin within GSG, it was driven by two factors. We're trying to be clear about this. One was an increase in the margins from higher value work that we have on data analytics and federal IT practice. So it does carry a bit better margin. I would say that of the 100 basis points increase year over year, probably half of it was associated to what I'd call structural higher value execution of work or the work that we're performing. The other half was really because of utilization. As we saw continued growth, And in fact, between the state and local and federal work, revenues were up, utilization was up, and that drove probably the other half of the increase. So if you were wondering where did it specifically come from, it was split pretty evenly between higher margins for the work we're performing and the other half was just increased utilization. So that's what drove that increase.

uh and your second was just curious around the digital water opportunity dan i mean you know just given that you know we had a huge margin lift uh in part from higher margin work i just wanted to get a little bit more color on on that higher margin work opportunity and just understand kind of the growth outlook and and you know what's driving demand uh around some of those solutions and uh digital water sounded uh particularly interesting

Yeah, digital water, I've spoken about it. We've referred to it in a number of different contexts, but digital water is where we're taking primarily associated with our state and local work and surrounding municipal work where there was actually a regulatory mandate to evaluate the vulnerabilities of local water systems to cybersecurity attacks. uh you've seen it's only been in the past a month or two you've seen some cyber attacks at the federal level uh and certainly there's a red there's actually a regulatory uh requirement for evaluation so that is a digital evaluation of access uh through the internet or through other web accesses to these systems, putting in protections from cybersecurity. And what's come along with that is actually digital water upgrades and evaluation. If you're in the business, they refer to the SCADA systems, but it's basically the electronic brains of what control water systems and all of the data that comes in from wells and everything else. And we've done more of that work to actually update from analog system to digital systems and actually move to remote telemetry for monitoring and even operation. We've also been able to add digital water analysis and IoT into plants where we can actually create a digital twin and do the scenario planning and the simulation of what would a new treatment train or different technology affect removal of PFAS and PFOA and hexchrome and 1,4-dioxane and all these emerging contaminants without shutting the plant down, we're actually setting up a physical treatment plant for a pilot study. So we can do that electronically as part of a digital water process. It saves an unbelievable amount of money. It can be done faster. It actually reduces labor costs for our clients, all by moving to a digital water focus for our municipal and state clients. So that's, and I would say it's very, very early. Out of the thousands of water districts across the United States, only very few of them have moved to a complete digital water platform. Many of those we're doing the work for, and we think we have some of the most cutting-edge technologies that we've developed over the years, and they're included in the Tetra Delta technologies that we have available. And that's been one of the big growth areas, and we think it's going to do nothing but become bigger for us.

Very helpful, as usual. Thanks so much.

Great. Thank you, Sean.

Our next question comes from the line of Sam England with Beringer Capital Markets. You may proceed with your question.

Hi, guys. It's Alex Leach on for Sam. Our first question is around, could you discuss to what extent Biden's plan for $350 billion in state and local support addresses concerns around deficits in their budgets?

That's a good question. Certainly the administration has come out already. I think most of you would have heard on the initial proposed $1.9 trillion of additional recovery support. And in fact, this includes $350 billion that is earmarked directly for state and local governments in order to shore up financial shortfalls from the pandemic, from tax receipts and other economic pressures that are put on them. Now, no doubt for $350 billion, the headlines is that's to provide payroll support, that's to provide returning to school and additional pandemic testing, but no doubt that a portion of this will also support and be earmarked for the programs that we're focused on, which is water systems, wastewater treatment, sustainability and so the proposal at 350 as an initial start isn't expected to really fill the shortfall at the state and local budgets for this year. So that's the number we've looked at, and that does not include, that is exclusive of any discussion or earmark of dollars set aside for infrastructure stimulus or some of the others that have also been floated already, all the way running from the Department of Transportation all the way through state revolving funds and water infrastructure funding from EPA and others. So those are the areas they've actually called out specific dollar amounts, and it was earmarked as a number to replace the shortfall at the state and local. And in the past, I've talked about It's not a foregone conclusion that there'll be reduction in spending at the state and local level because there are multiple avenues of funding to replace any shortfalls, including federal funding, which we're referring to here. They also have increased user fees, which is another. They have issues of bonds and levies at the local level. So there's quite a few different sources. And not to forget, Unemployment certainly is up from the beginning of the pandemic, but so are housing prices and tax receipts from real estate and others. So it's not all just a minus sign and a challenge at the state and local level.

Okay, great. Thanks. And in the past, you've talked about sort of a 200 basis point expansion in GSG margins. Given the sort of strong expansion margins that you're currently seeing. Is that still the target, or do you think that expansion could be larger than this?

Well, I think we talked about a little bit longer term that these larger numbers that we could get the margins up, I think, for this year. We were talking for a full year, 50 basis points. But I do believe that we could go from a 12 or 13 to a 14 to 15. That would be a 200 basis points on bottom and top as we continue to – move the business that we have to a higher value advanced analytics, we do believe that the value provided to our clients, our margins, our operating margins would go up. We don't believe that that's not achievable. We do think that the 200 basis points is a goal over the next few years, but we've made a good a good start on that even this year. And so, no, we're not backing away from that. We do think it's achievable, and it is directly linked to our continued expansion of our high-end data analytics and other consulting engineering services.

Great. Thanks, guys. Great.

Thank you very much, Alex.

Our next question comes from the line of Mark Riddick with Sudoti & Co. You may proceed with your questions.

Good morning.

Good morning, Mark.

I wanted to switch gears a little bit. I wanted to go over if you could give a bit of an update on the use of cash. You're certainly continuing to generate concrete cash flow. You're about half a turn now. I was wondering if you could talk a little bit on the acquisition pipeline and what it looks like around the world and maybe what the pricing environment may look like, or maybe how that may have changed over the last few months, given the opportunities that are in the ESG world that have certainly been enhanced over the last several months.

Yeah, it's a really good question. I will say our focus of what we're looking for, and then I'll get to what the opportunities are in each area, but the areas we've been focused on is we'd like to expand our high-performance buildings work. We think that the U.S. federal government, governments in Canada, the U.K., and Australia will be focused on their own facilities, increasing their energy efficiency, water and waste reduction or elimination. In the case of a new water makeup, it'd be just full recycling. We would like to add a high-performance building practice. We would like to add additional water consultancy and engineering in the UK and Australia. Here in the US, disaster response planning, additional capability. Advanced analytics. So those are, you've heard all those before. With respect to opportunity, we actually have found those that we've worked with as teaming partners and subcontractors and folks that we have long-term relationships have actually expressed interest. in joining Tetra Tech because they do see, as we see, a large wave coming of additional priorities on these and having existing contract vehicles and more offices. You may be a small to medium-sized operation that's regional, and if you want to catch a wave that exists over a much larger geography or a wider client set, teaming up with someone like Tetra Tech and joining us just makes a lot of sense. So we've had a fair amount of interest. There's a lot of discussions in those areas that I've just outlined. Pricing, we have noticed that the pricing from auctions or investment bankers have come out at new levels that are I hate to use the word dizzying, but multiples that are ever climbing. But the numbers that folks are actually looking at joining Tetra Tech, and I'll work backwards, are still at a level that would be accretive to Tetra Tech's earnings per share on a gap basis in the first year. And that typically means multiples on trailing earnings of something, you know, seven or less. Whereas those that are looking simply to monetize have seen rises in their numbers. And it's because of the advent of SPACs and private equity and others in every industry, including consulting and engineering. But we have found opportunities for the best players who are not looking just to monetize their companies, but are actually looking not to exit the industry, but actually to increase their future and make their future brighter than it was before, are the ones that are interested in joining Tetra Tech. So there's good, strong opportunities out there. We think the ones that we would pursue and we'll announce it as we conclude them, not just when we sign agreements, We think there's plenty of opportunities in the pipeline for those. And I just did outline years that were focused on for acquisitions. And as Steve Burdick outlined, I think we have plenty of cash through our existing revolvers. We're just under a billion dollars accessible to us with the instruments we have in place today. And if we wanted to stretch for the right opportunity to numbers north of that, we think we have no issue at all to do that. And this is all use of cash, not actually diluting our share base.

But greatly appreciate it. Thank you very much. Thank you, Mark.

Our next question comes from the line of Ryan Connors with Benning and Scattergood. You may proceed with your question.

Good morning. So my question is a big picture in nature. You know, obviously the stock's done well. It's been caught up as a name that kind of screens well with the clean infrastructure spending. theme of the Biden administration. It seems you're very much on board with that. But if we look at the big picture, we looked back at some of your own transcripts and some of your peers in the past when new administrations were taking over, and that includes Obama and Trump. And pretty much every time early in administration, there's a lot of talk about infrastructure as a bipartisan thing. um theme that that can get moved forward but then you know as the you know the sound bites and the excitement turn into actual governing you know sometimes the the reality a little less significant than the initial talk um and i want to just get your reaction to that especially since there's already talk about you know more stimulus checks direct stimulus checks which are politically popular and even recurring stimulus checks and things like that um well when push ultimately comes to shove Where do you think infrastructure sits with so many other priorities that the administration is trying to fulfill?

Well, I think that's a great observation, and I would be the first to agree. I would hope you would note that we did not put a slide or a big spotlight on infrastructure stimulus package going through. I completely agree that it's one of the first items to be discussed as a priority and having bipartisan support only for it to not come out. And in the case back under Obama administration, under the infrastructure stimulus, which was the American Recovery Act, the shovel-ready projects at $787 billion. I was one of them that actually saw a wedding signature on it and felt very, very bullish that a lot of it would pass to consulting and engineering firms like ourselves, in fact, to see it not happen and really be used for filling potholes and keeping employment to levels high, admissible levels. So we're not including it. It's not included in our guidance. I've got this... This adage, we're planning for what's been passed but I'm hopeful that they would actually come together and pass something like this. I think it's good for the country. I think we have long-term assets that actually are a result of what's being spent, including water treatment systems and coastal protection and all the other things you're more than aware of. But I am hopeful. I'm a huge advocate myself, as well as most consulting and engineering and infrastructure firms, but we've not included it in our forecast. And when it happens, Even after it happens, we'll tell you how it's impacted Tetra Tech after we've signed contracts and are actually beginning to go to work. So my perspective is it sounds great, it's the right thing to do, but I'm very cautious as to whether or not it'll actually come to pass. And so that's why we've not incorporated it in our revenue or earnings guidance for this year. And while it'd be great to happen, we're not going to count those chickens before they're hatched.

Okay. Okay. Fair enough. Yeah. I mean, I think it's some of the Robin hunters might've already put it in the stock and that it's such a great quarter today that the stock not really reacting as much as we would think on the upside. So unfortunately it seems like some of these things are going into the valuation regardless of what companies are saying. Anyway, second question was, also big picture, and you kind of touched around this, but I wanted to kind of just ask it a different way. You know, one of the risks, I guess, of even a really bold market for your services would be that some of your best people become in hot demand. You know, if your competitors and yourself are trying to win this business and Some of the top engineers with certain niche expertise can sort of auction themselves off and put upward pressure on your comp and so forth. What's your take on that issue if we assume a real bull case scenario for demand in your markets today?

Yeah, I think that's a good question. And one thing I would say is that, and I'm sure others in private companies hold this in very high stead, but I would say that people come to Tetra Tech to work for a career, not for a short-term pay increase or to increase a signing bonus to go to another area. Every one of our division presidents have been with the company for 20 years or longer. Our upper management officers, I think the average is probably a bunch higher than that. In fact, we have looked at our statistics as a company. We have as an overall corporation annual turnover at about 9%, just under 10%. But I've actually broken that down because that's not the telling statistic. If you've been with Tetra Tech for more than five years, the average turnover per year is about 1%. And that includes retirements, medical leaves, or people that would depart to go to clients. So I think that the reason that if you asked me where I would be, and I don't know if I'd call it more concerned, this is just a reality, is that when things get really high, high demand, the person that's at Tetra Tech, the only place that I think would be enticing to them for the most part might be to go to a client. And having people that are long-term Tetra Tech that actually go to a client and know where they can get their work solved properly, done well, and best in class technically, I think they come right back to Tetra Tech. So if we lose someone to go to a client, that's actually not losing, that's actually investing. So with respect to compensation, can they get paid more going somewhere else? Maybe, maybe not with salary, but Tetra Tech does have a pay for performance practice here. It is very dominant in the company. And if they perform well, the Tetra Tech project managers and technical staff are at the forefront and can get compensated here at Tetra Tech as well or better than they can anywhere. And so I'm really not worried about overall compensation because we do compensate based on performance and are really best in class in the industry. And as far as turnover, I've been here a lot of years and a lot of bold cycles and down cycles, and I just haven't seen it. And it's measured by the final proof in the – in the quantification is how long have people been here and what's their turnover? And I just shared that with you. So I think we're actually one of them that are in better stead. And I'll just comment one more. I think that there's so much turmoil in the industry that people are chasing all sorts of stuff. Some people are going that we're water, are now moving management consultant. Some that want to be water and environment are really going geotech and calling it environmental. There's a whole bunch of people who are looking that the companies they work in, where they are experts in water and environment, look at Tetra Tech and say, that's an entity that's consistent, it's enduring, it's stable, and I want to go work over there. So we've been a net benefit of this movement. And when they come here, they come to stay. So I know it's kind of a long-winded answer, but... I'm always sensitive to the potential risks there, but the reality is I think we have a really good model to address that and actually be a net benefactor as we move through this bullish period with water, environment, sustainable infrastructure, and renewable energy.

Well, it's very clear, and your conviction is definitely clear as well. Thanks a lot, Dan. Okay. Thank you very much, Ryan.

This will conclude the Q&A session. I would now turn this conference back over to Mr. Dan Batrack to conclude.

Well, thank you very much, Laura. Thank you very much for opening the call today and for handing it back to me. Thank you all, all the shareholders, those that follow Tetra Tech, those that write up your outlook for us. Thank you very much. I have read almost all of the material, and I really do think that our message has gotten through, and I appreciate your support. I will tell you that while this may be officially on an astronomical calendar, we may be in the winter. It may be the end of January. But I'll tell you from a business standpoint, we here at Tetra Tech feel like it's springtime. uh we feel that there's new programs starting there's new contracts being awarded and there's new momentum and focus and support from our clients and uh from the public on what we're doing and where we're going from our end market so we do think of springtime we think the best is yet to come both for 2021 and into the future and i'm really looking forward to speaking with you all next quarter to give you an update on how we progress from the early parts of spring and the green shoots to actually large growing performance, both measured in margin and other areas. So thank you very much, and I look forward to talking to you all next quarter. Goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day.