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.