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.

Great. Thank you very much, Melissa, and good morning. And welcome to our fiscal year 2022 second quarter earnings conference call. we had an excellent quarter with record second quarter revenue, net revenue, and operating income. Our international and state and local markets grew at more than 20% year over year, driving an overall net revenue growth of 17% for the company for last year. This performance is a direct result of our successful long-term strategy to provide high-end differentiated services that are leading with science in the water and environmental markets. Our strategy has put us at the center of critical programs that are addressing many of the world's climate change, resiliency, and adaptation challenges across all of our global operations. Recognizing our focus on water just this week, we're very proud to have been named again number one in water by the Engineering News Record publication for the 19th consecutive year as the largest consultancy in the United States. Given the strength of our performance and outlook, we are increasing our guidance for both net revenue and for earnings per share for fiscal year 2022. I'll begin today with an overview of our performance and our customers, followed by Steve Burdick, our Chief Financial Officer, who will provide more detailed review of our financials and capital allocation, both for the quarter and for year to date. And then I will address our customer outlook and earnings guidance for all of fiscal year 2022. In the quarter, we hit new all-time second quarter highs for revenue, net revenue, and operating income. Our net revenue increased 17% year over year from $600 million to $700 million, which is also the second highest net revenue for the company for any quarter in our history. Our operating income increased at an even faster rate, up 23% from last year, reaching a second quarter record of $75 million. And finally, we delivered $0.98 in earnings per share, which is up 18% from our previous year's results. I'd now like to provide an overview of our performance by our end customers. Our fastest growing client sector in the quarter was international, where our net revenue was up 29%, which included the addition of Hoor Lee last year. Without this acquisition, our international work grew at about 15% with expansion of sustainable infrastructure programs in Canada, Australia, and the United Kingdom. We saw continued strength in our state and local revenues, which were up 25% from the second quarter last year. Now, excluding the extraordinary contributions from disaster response work that we had in the quarter, our state and local work still grew at a double digit rate. with continued strength in municipal water business all across the U.S. Our U.S. commercial net revenue was 21% of our business, up 14% from last year, which is about double the 7% growth rate that we saw last quarter. Our services in sustainability, which include environmental permitting, high-performance buildings design, and clean energy services all contributed to our growth in this sector. And our fourth client sector, work for the U.S. federal government, was 27% of our net revenue in the quarter and was stable from the same quarter last year. Now, excluding the one-time impact for the Afghanistan wind down of our U.S. international development work, our federal work was up 7% on the year-on-year comparison driven by growth in both our civilian and Department of Defense agency services. I'd now like to present our performance by segment for each of our two segments. The commercial international group, or we refer to it as CIG, grew by 25% year on year, while also increasing its margin by 50 basis points from last year. This strong growth was across both the international and commercial markets within this business segment. The 50 basis point margin expansion is in line with our margin expansion goals and improves on the seasonally lower margins generated during the Canadian winter season, which aligns with our second quarter. We expect CIG margins to continue to expand as we move into the second half of our year, which will be both the spring and summer months in many of the northern latitude locations for this group. The base business for our government services group, or the GSG segment, also expanded by approximately 50 basis points. With the benefit of extraordinary disaster response work and favorable project closeouts, GSG delivered overall a 150 basis points increase, resulting in a 14.9% margin for the quarter. Overall, the GSG segment grew its net revenue by 9% in the quarter. Backlog. Backlog was also a very good indicator for us as we came out of the quarter. Our backlog was up 15% year-over-year and up 5% sequentially on strong, broad-based orders, resulting in a 1.2 book-to-bill for the quarter and an ending in an all-time high of $3.61 billion of contracted, funded, and authorized work for the company. The strong growth and backlog is particularly notable in the quarter with record revenue for the company. We had to cover both the amount of revenue we expended during the company and also increase the backlog by more than $100 million. In the second quarter, we won new programs and task orders across our global business that leveraged our more than $20 billion in federal contract capacity and expanded our long-term relationships with our key clients. We also won new programs with the US Army and added new water programs with USAID in Mozambique. Our work for Australia's International Development Agency, the Department of Foreign Affairs and Trade, or DFAP, also continued to expand with the addition of new programs in Indonesia. At this point, I'd now like to turn the presentation over to Steve Burdick to present the details of our financials.

Steve? Thank you, Dan. So I'd like to now review the GAAP financial results for the second quarter of 2022. Overall, as Dan noted earlier, we had strong Q2 results for revenue and earnings. The strong performance from operations resulted in top-line growth with second quarter revenue of $853 million. The net revenue amounted to $700 million, which was above the upper end of our guidance range, which was $620 million to $607 million. Overall, our revenue and net revenue were both up 13% and 17% respectively, over last year with strong growth from international, state, local, and commercial end markets. Our operating profit and earnings per share for the second quarter improved over last year. GAAP EPS came in at 98 cents in the second quarter, which is an increase of 18% over last year. Our GAAP EPS of 98 cents came in better than the top end of our guidance range, which was 86 cents to 91 cents. This higher EPS was due to the improvement in reported operating income, which came in at $75 million this quarter, up 23% over last year. Our improved operating income for the second quarter was largely driven by a 31% growth in our CIG segment operating income and a 21% growth in our GSG segment operating income. The GSG margin of 14.9% was an improvement of 150 basis points over last year, And the resulting CIG margin of 11.2% is an improvement of 50 basis points over last year. And on a consolidated basis, these improvements resulted in an EBITDA margin of 11.6%, which is 60 basis points over the second quarter of last year. Further, regarding the year-over-year EPS, I would like to note that our tax rate this year of 25.7% is higher than last year's tax rate of 21.5%, which equates to about a $0.05 headwind in this year's current quarter. Now, cash flows generated from operations for the second quarter totaled $95 million. The cash from operations year to date amounts to $178 million, which is an increase of 13% from the first half of last year. Our focus on working capital and cash flows has resulted in our DSO improving once again to an all-time low of 59 days. This is a further improvement of six days from last year at this time. And for many of you who have been following us for a while, you remember that our long-term goal was to generate a DSO of no more than 70 days. However, we now believe we can do better and generate a sustainable DSO below 70 days. This lower sustainable DSO trend reflects the outstanding work our project managers lead relative to higher quality projects and highly satisfied clients in our broad portfolio across all of our end markets and geographies. Our net debt amounts to $56 million. Our net debt on EBITDA was a leverage of 0.2 times with a total cash position of more than $194 million. As we presented here today, The continued high-quality results with an improved EBITDA and higher margins, along with strong cash flows and lower working capital requirements, has shown that Tetra Tech has been able to invest in the business and generate very strong returns. As over the trailing 12 months, our return on invested capital is at 21%. Our long-term capital allocation strategy calls for a balance of investing in the growth of our business, managing the balance sheet, and as I will now present, providing returns to our shareholders. For the trailing 12 months, cash from operations generated $324 million, or about $6 per share. And during the second quarter, we continued to provide significant returns to our shareholders through dividends and share buybacks. So regarding our dividend program, during the past quarter, we paid out $10.8 million in dividends. And I would like to announce today that our Board of Directors approved our 32nd consecutive dividend, which will be paid in the month of May at a rate of 23 cents per share, which is a 15% increase over last year. Also, this is the eighth consecutive double-digit annual increase since we started our dividend program. Further, we utilized $50 million in the second quarter on our stock buyback program. have a total of $448 million remaining in our approved stock buyback programs. And all told, for the first half of fiscal 2022, we returned more than $120 million to our shareholders through both these dividends and share buyback programs. Our strong cash flow allowed us to successfully complete several strategic acquisitions, which Dan will discuss later, and continue to return capital to our shareholders while holding our net leverage to 0.2 times. And our strong balance sheet and available liquidity of over $1 billion with our inaugural sustainability credit link facility positions us to continue investing in technical capabilities and strategic growth areas. I'm really pleased to share these financial results for the second quarter and the fiscal year to date. Thank you for your support, and I'll hand the call back over to Dan.

Great. Thank you, Steve. I'd now like to start with discussing some of the drivers associated with our fastest growing market in the company, our international work. Across our broad-based international markets, we're seeing a new focus on climate change programs and an increase in associate budgets for critical programs such as ocean protection. biodiversity and land management, and decarbonizing buildings. This funding is resulting in an increased demand for our differentiated high-end consulting and engineering services with large multinational companies and new regional work in our key international operations in the United Kingdom, Australia, and all throughout Canada. This year, we're quite pleased to see that the federal budget was finally approved in mid-March. The funding includes increases for key water, environmental, and international development priorities. We expect to see these funds convert to new task orders for our long-term clients that leverages our more than $20 billion we have in U.S. federal contract capacity. The U.S. Army Corps of Engineers has a budget of $8.3 billion, which is an increase of 7% over the previous year, to execute their programs that include dams and levees, navigable waterways, and key coastal protection projects. We expect to support the Corps with our more than 50 years' experience in world-class design expertise throughout all of these technical service areas. Our growth strategy includes investments in acquisitions, and the focus of the acquisitions have been to identify those that will further expand our high-end capabilities in water and in environmental programs. I'm pleased to announce and share with you that in the second quarter, we added two excellent firms that bring specialized skills and talented staff to Tetra Tech. The first is Pitot Associates, who are global leaders in hydraulic modeling and sustainable water management for commercial clients. Their capabilities are essential to addressing programs that make commercial operations more sustainable and environmentally sensitive. I'm also very proud to announce that Axiom Data Science joined us, and they provide unique expertise in technology for the analysis of massive big data sets that often include billions of observations that are essential to global climate change assessments and investigations. Both of these firms have rapidly integrated into Tetra Tech's differentiated Delta technologies, and both of these firms have brought cutting-edge data analytics solutions that help further our leading with science strategy. And now I'd like to present our outlook for the second half of fiscal year 2022 across our four client sectors. We see our growth rate projections staying the same as we saw in last quarter's outlook for each of our four markets. Our highest growth markets are expected to be U.S. state and local work and international, which represent about half of the company growing at a 10% to 15% rate. Our U.S. federal and our U.S. commercial markets are expected to grow at a 5% to 10% rate, and as I've noted, both of these forecasts or outlooks remain unchanged from last quarter. I will note, for modeling purposes, that last year's fourth quarter included an extra week, which we've adjusted for our year-to-year comparisons. I'd now like to present our guidance for the third quarter and for all of fiscal year 2022. Our guidance for the third quarter is as follows. For net revenue, our guidance ranges from $665 million to $715 million with an associated diluted earnings per share of $1 to $1.05. As noted in my opening remarks, we're increasing our full year guidance for both net revenue and for earnings per share. For net revenue, we're increasing the bottom end of our guidance by $70 million and increasing the upper end of our guidance by $20 million. Our new net revenue guidance is for a range of $2.72 billion to $2.82 billion. For earnings per share, we're increasing the bottom end of our earnings per share guidance for fiscal year 2022 by $0.15 and the upper end by $0.10. If you do that math, this would result in an increase in the midpoint of our guidance by $0.13, which exceeds the flow through of our Q2 earnings beat. Our new earnings per share guidance for fiscal year 2022 is for a range of $4.30 to an upper end of $4.40. This guidance includes the following assumptions as it has each of our quarters. It does include the expense for intangible amortization, which this year we estimate to be about $0.18 per share. We do estimate that for the remainder of the year we'll have a 26% tax rate. We have approximately 54.5 million average diluted shares that are used in the calculation and as in the past This guidance for the remainder of the year and the third quarter excludes any contributions from acquisitions that would be completed from this point forward. In summary, we had just an excellent quarter in the second quarter, setting new Q2 records for revenue, net revenue, and operating income. We released on April 22nd, which was this year's Earth Day. our sustainability report, which included a first-of-its-kind reporting of the quantitative impact of our high-end water, environment, sustainable infrastructure, and clean energy projects. We advanced our leading the science strategy with the addition of PITO and Axiom Data Science, and we increased our guidance for the second successive quarter of this year. And with that, Melissa, I'd like to open up the call for questions.

Thank you. The question and answer session will begin now. Please be aware that there will be a 30-second pause in our webcast to allow for buffering. 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 your handset before pressing any numbers. If you'd like to ask a question, please press star 1 on your touchtone phone at this time. Our first question comes from the line, I'm Shawn Eastman with KeyBank Capital Markets. Please proceed with your question.

Hi, team. Nice job this quarter, and thanks for taking my questions. I think the extra week dynamic in the fourth quarter is an important call out because the updated guidance for the second half kind of implies slowing growth into the fourth quarter at a headline level. So maybe some context for what that adjustment looks like and And, you know, if you could maybe comment on what you want us to take away from this second half guidance in terms of the pace of growth as we advance through this year and go into next year.

That's a good question, Sean. Thank you for pointing that out and being aware of the extra week in the fourth quarter. About every five or six years, our fiscal year has an extra week. So instead of 52 weeks, we have 53 weeks. It always lands in the fourth quarter. It was included in our guidance from the beginning of the year, but when you take the one week out of 53 weeks to 52, it's about 2%, just under 2%. So it does represent about an 8% difference. So if you take the actual for Q1 and actual for Q2 and our guidance for Q3, and then you impute the remaining amount for the Q4 and add 8% to that, that would get something we would call an equivalent basis as a comparison for year over year. Now, if you take a look at the midpoint, in fact, especially if you take a look at the upper point, you'll see that our growth rates both in the third quarter and in the fourth quarter are actually remaining similar to what we've just seen. They're well into the double digits, in fact, into the teens. So what we'd like to communicate with the guidance that we've updated is We see things remaining strong. We're seeing our growth rates remaining consistent to what we saw in the first and second quarter. We're projecting those on through the rest of the year. And in fact, we're actually seeing our margins expand even further than what we did both in the first quarter and the second quarter. And you can see that through the increase in the guidance of our earnings per share, which is at a percentage even greater than that of our increase in revenue that we just provided in our guidance. and in my comments a few moments ago that this is the second quarter or second time that we've increased our guidance we came into the year we had a very strong first quarter and we increased our guidance for earnings per share we've just finished the second quarter and we've increased it both in guidance for revenue and earnings per share at even a bigger rate and so uh i guess i want to make it clear we've increased our guidance twice this year, but it shouldn't be overlooked that it's two out of two. And so I'm really proud of the performance of the company to be having an opportunity to increase it each and every quarter that we've reported this year.

Very helpful, Dan. Good summary there. And, you know, it's nice to see this big uptick in commercial revenue and new bookings this quarter. It's interesting to see this at a time when people are starting to get worried about a potential recession coming and commercial being where we'd expect the most economic sensitivity in the Tetra Tech model. Do you think that the drivers of the commercial growth we're seeing could be more durable in a recession scenario than we've seen in prior business cycles?

Well, I think for us, the commercial performance will be better through this economic cycle for many reasons. I would start that, first of all, I've certainly been asked by some within the company, is this driven by one area? So, for instance, is it renewable energy? And, yes, that's a large – and we refer to it as clean energy, to be as broad as possible – And the answer is yes, it's been a contributor, but not the contributor. I've been asked, is it high-performance buildings that's performing and recovering quite well? And the answer is yes, it's a contributor, but not the contributor. We've had success with our industrial clients. We've seen our high-performance buildings up. We've seen our clean energy increase. We've seen sustainability and ESG support from our commercial clients across the board. We've seen more environmental programs, both on a prospective basis with our new design facilities, both in high-tech and the chip fab area. So it's been very, very broad-based. So one area where I feel more confident on the recovery and growth on commercial is that is very broad-based, and it's not based on a single leg or single component contributing to it. So the very large number you saw on commercial orders came from very broad sectors. And second of all, the area that we've seen most volatility, especially for ourselves, coming into slower periods in the past for the commercial industry, were driven by commodity work, and particularly oil and gas or mining, where you saw changes and fluctuation in commodity prices move our oil and gas work down 50% back when you saw a downturn of oil from $50, $70 down to zero or to very low numbers. We've had taken that out of our portfolio for the most part. Not that we took it out, but that area has not recovered particularly significantly, and it's really been driven by these other areas I just mentioned. So the volatility associated with these highly variable end markets, just as much a smaller part of our overall portfolio. And that's all on the commercial side. So I just don't see that level of vulnerability or exposure to this big negative impact in a potential recession or other economic challenged environment.

Great responses, Dan. I'll turn it over there. Thanks very much. Thank you, Sean.

Thank you. Our next question comes from the line of Noelle Diltz with Stiefel. Please proceed with your question.

Hi, guys. Thanks for taking my question and congrats on the strong results. I was hoping, Dan, that you could revisit, you know, the commentary that you've provided previously on how you're thinking about the growth rate by platform or by segment for the back half of the year and also the margins by division and then any changes in how you're thinking about sort of the longer-term margin profile for CIG and GSG. Thanks.

Great. Well, coming into the year, we've indicated on an annual basis the government services we did expect it was going to go up. We thought it would expand by roughly 50 basis points on an annual measure. This year coming in, we thought we'd be between a 13% and a 14% operating income margin. I do know that we've been above that both in the first quarter, and I know we've been above that almost 100 basis points. Let me not overstate that by 90 basis points above the upper end of that range here this last quarter. So it's going really well. I do expect that our highest margin quarters are coming up in front of us. So I don't want to provide insight into 2023 quite yet. But certainly for Q3 and Q4, which for us is the spring and summer, I expect the margins to be a little bit at the upper end of that range for our government services. We have more field work. But particularly in our commercial international group, it really does make a big difference. I'm very happy with the 50 basis points expansion in CIG. I'll tell you, every year, the second quarter is the toughest for us in margins in our CIG business. The largest of our international activities by far is Canada. We have the most headcounts, the most revenue, the largest clients. And in the middle of the winter, and that's when we do our training, our continuing education, our maintenance work, and preparation for mobilizing in the spring for the project. So I do expect that margins are going to expand naturally, and I'll call it seasonally, for the spring and summer. So I think you'll see a notable increase in the CIG's margins as we progress forward. I think that it's not only seasonal that we're going to see it go up, but structurally it's all up roughly 50 basis points. And if GSG would just slow down a little bit on its margin, which I don't want to see happen, I think CIG will actually close the gap on our government margin separation here as we move to the end of the year. And it is a matter of mix of work. And so with respect to timing and margin expansion, I expect government has less of a range. That still will go up because of higher utilization and work. We could see even higher upside if there's additional disaster contributions from hurricanes or other events throughout the summer. But I think the big movement on a relative basis should be CIG as we move into the summer.

Very helpful. Thank you. And then second, in the past you've talked about sort of how you think about the need to add labor or essentially how much additional revenue you can support with your current staff, given the strong growth you're seeing across the platform. Maybe could you just comment on how you're thinking about that today and also you know, as you shift toward more of the federal advanced analytics work, you know, how does that change the dynamic around the staff that you need to sort of support revenue growth? Thanks.

That's a really good question. We spent a lot of time here with that. I'll answer the first part consistent with my previous observations on how much more work can we handle with existing staff we have. By the way, we are adding more staff. The company is growing. And not only through new hires, but through staff that we're adding through acquisitions. But with the current workforce we have, we can handle just through labor about an additional 10%. And that's straight through utilization. I would say during the winter, we're a little bit lower utilization because of Canada and a few other items. But I would say overall, we're around 70% utilized on a financial basis, counting everybody, counting Steve, myself, the entire company on a financial basis. We can get up to probably the upper 70s, so let's say 70% to 77%. There's our 10% increase. But the actual amount of revenue is higher than that. The use of data analytics, the use of computer programs, the use of technology has actually decoupled the amount of growth that's tied to hours that we charge to revenue that we generate. And so currently we're about, I would say, one and a half times that. So for each hour an individual works on a project, the use of technology may allow another 50%. So I think about a 15% growth, 10% what I would associate with labor, and 50% with technology or efficiency. And our goal has been to turn that into a two to one. So our target is that we would be able to produce, through the use of technology, efficiency, and productivity, double whatever our labor contribution would be. So if we added 10%, we could generate an increase in revenue of 20%. And so that's moving toward partial decoupling of how much can we grow the company without it having to be individual heads or staff being added to the corporation. It really makes a difference for how productive we can be. Honestly, it makes our staff morale goes up. You'd say that some would say I'm being replaced by a program or a computer, but that's not the case. It's the most cutting-edge technology that exists in the world that we're bringing to the marketplace for our clients. So job satisfaction is going up. The collaboration of teams using these electronic platforms allows us to use staff from across the world and be really geographic agnostic. Folks can work on projects in the U.S. if they're in Australia or the U.K., We can work on projects in South America. So the use of technology not only increased productivity, but it opens up the ability to make our staff fungible across all the different end markets. So is staff an issue we're watching very closely? Yes. But the use of technology and the ability to drop the barriers to move work where we have people has really made a big difference. So back to your question is how much can we do right now with the staff we have? we can sustain the growth rates we have and perhaps another 15%.

Great. Thank you very much. Great answer.

Thanks, Noel.

Thank you. Our next question comes in line of Kate Sullivan with Maxim Group. Please proceed with your question.

Hi. Thank you, Dan. You mentioned at the end of your remarks your sustainability-linked credit facility of $1 billion and your sustainability report. How will you track the metrics going forward? Are those from all your projects around the world going forward in terms of the emissions reduced? And as a result, that's what leads to lower cost of credit in that facility? And is this a first facility of its kind in the consulting industry, please?

Well, let Steve speak to the specifics of the credit facility, but I can say just a few words about the measurements and establishment of it. Yes, it is the first of its kind, certainly in our industry. If you actually read other sustainability reports, you'll find common phrases or euphemisms such as we'll see consistent or continual improvement, we'll do better, lots of subjective, qualitative, wannabe statements. And when I say the first of its kind, we're the first ones to step up and actually quantify precisely not only what we'll improve with respect to our 21,000 associates around the world and how we'll reduce our carbon footprint and greenhouse gases, but have quantified through our projects. Now with over 70, I think we're up to 75,000 projects per year, we've actually taken a set that represents the most significant impact with respect to carbon reduction, both for the GHG reductions, but also for the impact of lives around the world. And that's our one billion person challenge, that we'll make a meaningful improvement in individuals' lives through equality and the environments that they actually live and are exposed to. But with respect to how it translates to the financial reduction of our interest costs or the rates, perhaps Steve can say a word on this. Sure.

So I would tell you that I work closely with Leslie Shoemaker, our chief sustainability officer, for the last probably year, trying to determine how we do this and track this. And if we meet certain goals and see those improvements, we will see up to about a 5% reduction in our interest rates. And it's based on two different metrics. One is related to GHG items, and one is related to the one billion person metric.

And one item to add to that is It's not a soft, squishy, qualitative. It's a quantitative goal. Working with our bankers, they don't have columns in their spreadsheets that take words or letters. It's only numbers. And so it has been quantified. And, in fact, we have an internal audit process that goes through and makes sure that this is quantified, supported, and provided as an audit trail for the basis of the reduction in our interest costs.

And Steve, just to confirm, this facility replaces your previous credit facility completely, is that true? Correct. Okay. And then, Dan, I imagine this kind of facility helps your customers themselves secure their own sustainability-linked credit facilities. Is that just speculation? I mean, the tracking you're doing for them, then in turn they can take to their banks to get their own facilities. Has that already happened or potentially in the future?

Well, you know, it's a good question, Tate, that there are certain clients and projects that we have that tracking of sustainability goals and metrics are included by the very nature of the scope of work as deliverables that we have. And for instance, the US Agency for International Development has mostly quantified metrics associated with the benefits that we're providing to these developing countries. However, I will say that many of our clients have not requested that or have harvested that yet from the work that we're providing, but it is something that we can bring to them. So I would say that it's something that is available, but not necessarily utilized by all of our clients at this time. But I will say it's interesting. I was at one of our high-performance buildings practices just last week, and we have a sustainability component, and that's an additional service that's being pulled from us or asked as an additional service deliverable item that can we go through and actually quantify the incremental differences per year. And, of course, it always starts with the biggest assignment, which is establishing a baseline. So I would say, yes, it will be helpful to them, but right now it's still only a small part of what's being sought out from our clients.

Okay. Thank you both.

Thank you. Our next question comes from the line of Alexander Leach with Barenburg Capital Markets. Please proceed with your question.

Hi, guys. Thanks for taking my question. If we could just jump back to the conversation around employees first. Can you talk a bit about attrition and retention over the last couple of quarters, given the higher market's been so active? What was the net employee or consultant change before accounting for any employees gained from PITO and Axiom?

Yes, we do this mostly on our fiscal year. So we go back, the numbers that we have most specifically on a full trailing year, go back to 2021, which in some respects is not that long ago. It's six months ago. In some respects, the world changed so quickly. Like a week is a different universe. But in 2021, we were just under 10%. And we consider that target we would like to be. Our turnover with respect to staff that have been here more than five years is roughly 1%, and that includes, and by the way, what I'm talking about is voluntary turnover. We do have certain projects that we have individuals that are brought on for a finite period, and they were intended to depart at the completion of a project, so we've excluded those, and that includes individuals we bring on for individual disaster response activity, because it is possible that during a hurricane or response to a fire or other a natural disaster, we can bring on as many as 2,000 or 3,000 people for a few quarters in order to respond to these activities. And in fact, in the second quarter, we ran approximately $30 million worth of additional revenue in the quarter for disaster response activities, and you can imagine what type of staff it takes. So just to, Alex, to make sure we're defining the same item, we call it voluntary turnover of our non-disaster transitory project-related activities. So the numbers are roughly just under 10%. Turnover for folks over five years is about 1%. And I will say, and I've said this before on these calls, that individuals in the first five years is, so let's call it 10 minus 1 is 9%. Turnover, is that too high or too low? It's unclear to us because in the first five years, it is important for people to determine is this the right company, maybe a performance culture, a technically science-based company is not right for them, and so they move on to academia or other vocations. It's also for us. Do they actually fit in? So I think that sorting out process is actually healthy for the company, for individuals that come through that first five-year process matchmaking period, determine if it's the right culture for them, ends up with people staying. And in fact, we're seeing that. And by the way, that 1% turnover includes retirements, medical leave, you know, anything, sabbaticals, anything that would be included in that. So we consider that a best-in-class number. And I will say a couple things that are really important for us. For us, individuals that come here are looking for a career, not a job. So the individuals that come here and depart and are transitory is extremely low. People do come here for a career, and they're looking for meaningful work and to work with exceptional colleagues, which is really a talented team. And it's those two that keep our turnover quite low. And if you're interested in You know, selling cars or, you know, being a fine dining chef is probably not the right company for you. If you're looking for being a commodity detail design engineer, it's probably not the right company for you. But if you're looking for meaningful work that actually will change the world and will be creative every single day you come here, people come here for the long-term career opportunities. And so that's why we've seen such low turnover here. And we've not seen, of course, the next natural question is have we seen wage escalation? So one, can you get people or keep people? The answer is yes. And the second question, of course, is how much more do you have to pay them? And is that going to erode your profit margins? And really, our salaries are competitive. I would call them at market. But really, the increases are not the headline inflation rates that you see. Those are really driven by housing and fuel and a few other items. not the overall cost of inflation. And a combination of salary, performance compensation, which is really bonuses and benefits collectively, put most of our staff with the ability to be best in class or highest in industry with respect to compensation based on performance. So I think that's another reason we see relatively little turnover of our senior staff of the company.

Okay, great. Thanks for all that, Carla. If we just move over to the state and local business as well, are there any risks to net revenues rolling off in 2023 given the strength in disaster response? I imagine there's a lot of event-driven work there. I know it's too early to call the next fiscal year, but any thoughts of how we think about cadence going from there?

Well, that's a good question, and we've been very fortunate. We've had double-digit growth in state and local, exclusive of disaster response. We've tried to be as transparent as possible with respect to how much of our quarterly growth rate in state and local has been contributed to by disaster. This last quarter, we were 11%. We've been running between 10% and 20% growth with what we call our underlying municipal work. That's been driven by recovery in state and local budgets. lower unemployment, rising tax receipts because of real estate and other items. Some would comment that we've hit optimal levels at the state and local level. What else is going to contribute? And we would point out to the IIJA or the Jobs Act or the Infrastructure Stimulus, which has a significant portion of the incremental $550 billion of federal funding that will make its way to state and local budgets for grants, joint funding, and other projects for technical engineering and infrastructure services we provide. That's going to come, we think it's a 2023, at least federal government calendar, which we're on. 2023, which means late fall or into next fiscal year. You'll actually see the translation from the bill actually passed or the law being passed to then the funding coming out. So for us, we see the health of the state and local budgets still funding these programs to go forward with additional infusion in 2023. Now, whether or not that's early or late 2023 is yet to be seen, but we think that that source of funding will continue to bolster and really move funds dedicated to the type of work we do to all-time highs. So that's That's what we see as underpinning a later 2023 without getting into detailed guidance on a percentage basis.

Great. And if I could just slip one more in on Afghanistan very quickly. Were there any revenues recognized from Afghanistan in H1? And if so, what's the roll-off impact next year from those revenues?

In the first half, we had minimal revenues. I think the answer is zero or close to zero in Q2. In Q2, we had a very little bit, which was basically demobilization in October. There was some thought that coming out of the departure from the country of Afghanistan from development agencies like USAID, there was some thought that we'd keep some of the staff in-country or the local nationals hired. on payroll because there would be an agreement to go back in very quickly, that this just wouldn't be in a position that they wouldn't take development aid going into the winter. It turned out to be not true. And so it was very de minimis in Q1. In fact, I would say I would not call our Q1 a year-on-year comp headwind. So for 2022 that we're in, it will be a roughly an $8 to $10 million per quarter headwind, relatively even revenue in 2021. So the comps are roughly 10, 10, 10, and 10. So I think overall total revenue was around 50 in 2021. But then after that, it really dropped essentially to minima. So the headwind on that comparison for Afghanistan is just a 2022 artifact. Thank you very much. Thank you all.

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

Well, Melissa, thank you very much. And thank you all for your insight, questions, and interest and support of Tetra Tech. In closing, I really want to commend all of the associates at Tetra Tech. They really had a fantastic second quarter. And in even areas where it's slower, Our folks were very efficient in their programs in setting us up for a really productive third quarter, which we're about one month into. And we look forward to presenting the results of both our third quarter and the progress through this year with you in about 90 days from now or next quarter. I hope you all have a safe day and a good rest of the week, and I'll talk to you next quarter. Thank you.

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