Tetra Tech, Inc.

Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investor section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. With us today from management are Dan Batrak, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Jill Hudkins, President. They will provide a brief overview of the results and then we'll open up the call for questions. I would like to direct your attention to the Safe Harbor Statement in today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements. 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 would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Melissa, and good morning, and welcome to our fourth quarter and fiscal year 2023 earnings conference call. We had an excellent fourth quarter that completed an already exceptionally strong 2023 fiscal year. Across our operations, we exceeded our already high expectations and delivered on both our financial and our strategic goals for the year. We were again recognized as industry leaders with number one rankings in water and environment and a newly announced number one ranking for human capital management, which I'll speak to a bit later in this presentation. This ranking recognizes that Tetra Tech's success is a result of our talented workforce and the technical excellence that has been the hallmark of the corporation. In fiscal year 2023, we increased our backlog by over $1 billion, including services in climate change, energy transition, water security, and environmental management. Today, together with RPS, we are cross-selling new services. For example, we're now providing innovative water management solutions to 19 United Kingdom water utilities and look forward to significantly expanding these services in this upcoming year. As we enter the new year, we look forward to providing our technically differentiated services, our expanded Delta technologies, and our newly launched software solutions to clients worldwide. I'll begin today with an overview of our fiscal year and fourth quarter. Steve Burdick, our chief financial officer, will provide an overview of our financial performance and our capital allocation. And Jill Hutkins, president of the corporation, will provide additional insight into some of our organic growth strategies. But before I review the fourth quarter results and the segment's performance, I'd like to provide an overview of the fourth quarter and what we did for the year. Simply stated, we came into this year with an ambitious goal and the highest ever guidance that we'd ever strive for. And I'm pleased to share with you that we not only beat these lofty goals that we set for each of the fourth quarters, but we finished the year with the best quarter of all of them. As a result, we achieved all time records for every key financial metric that we track. Now, For the fourth quarter, our revenue was up 40% from the prior year. Our EBITDA earnings increased to $153 million in the quarter, which is up 51% from last year, and a clear indication of both the strong performance of Tetra Tech and the contribution from the RPS operations that just joined us in late January of just this year. Our backlog increased to $4,790,000,000, up 28% from last year and up 9% just from last quarter. I'd now like to provide an overview of our performance by our end customer. In the fourth quarter, revenue for all four of our client sectors increased by double digits compared to last year. Work for US federal clients was 29% of our net revenue in the quarter and was up 46% from the same quarter last year. Federal growth was driven by a combination of environmental work, climate, IT, and international development related consulting services. We continue to deliver double digit growth with our state and local revenues being up organically 15% from the fourth quarter of last year, driven by our water management and resiliency consulting services. Our U.S. commercial net revenue was up 13% from last year. Growth in this customer sector includes environmental management and is increasingly driven by our high-end consulting and energy transition services and decarbonization services delivered by our high-performance buildings experts. And finally, our international revenue was up 78%. Of course, this is inclusive of our RPS operations. We are now increasingly leveraging our combined resources and expanded client network to win new programs across the United Kingdom, Australia, and Canada. I'd now like to present our performance by segment. In the fourth quarter, the government services group, or the GSG segment, was up 36% compared to last year at $457 million in the quarter. GSG generated a strong 15.7% margin, an increase of 60 basis points from last year. GSG's strong net revenue growth across key federal programs in civilian, defense, and international development agencies drove high utilization and exceptional project performance in the quarter. The commercial international group, or CIG segment, grew net revenue by 50% year on year and delivered a 14.7% margin up 110 basis points from last year. Our CAG segment also had exceptional performance in the quarter, with revenue increases driving strong utilization and additional efficiencies, especially in international infrastructure, high-performance buildings, and energy-related services. For the first time, we've presented this slide, if you're following along on the webcast, and I'd now like to discuss Tetra Tech's margin performance and the differences in reporting methodologies. You know, I'm often asked when talking to both analysts and shareholders and other stakeholders about the differences in methodologies used in the industry, especially as those compared to the United States, compared to the United Kingdom and Canada. If you're following along on the slides, the graph shows a comparison between our typical adjusted US GAAP approach, which Tetra Tech has traditionally, in fact, historically always used, and the international standard, which is also referred to as IFRS. As you can see on this graph, Tetra Tech's margin was 21% for the fourth quarter on an adjusted IFRS basis. On an annual basis, you can see our trend here at Tetra Tech over the past three years with a margin expansion of 180 basis points since 2021. For comparison purposes, the adjusted IFRS measure is about six percentage points higher than the adjusted US GAAP calculation that we report. And we think this is quite valuable for our shareholders, analysts, and stakeholders to actually understand this difference and make it more comparable when looking at this compared to others that report their financials. And I'd like to discuss our backlog, the best forward-looking indicator in our business. Our backlog was up 28% from last year, resulting in a new all-time high, as I mentioned a few moments ago, of $4,790,000,000 of funded and authorized work. This is not potential contract capacity or overall contracts awarded. This is funded and authorized work. Orders were particularly strong in the fourth quarter for us, which were up 45% year-over-year, driven by both commercial and government orders from our clients. In the quarter, we added more than a billion and a half dollars in additional contract capacity with our U.S. federal government clients. And notably, a lot of this was for IIJA-related contracts that are directly aligned with our specific strengths in areas like numerical modeling of sediment transport for inland waterways and associated high-end design services. And Jill Hudkins will give an example of this in just a few moments. This quarter, We were awarded a $33 million program for an inland waterway lock and dam system that leverages our specialized expertise in innovative solutions for optimizing waterway control structures. We also won new programs for key US federal agencies, including the Department of Energy, US EPA, USAID, the US Army Corps of Engineers, and others that advance priority water initiative programs, environmental and climate change mitigation, and adaptation programs. At this point, I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer, who will go over some of the details of our financials in the fourth quarter and for the year, and also talk about our capital allocations. So, Steve?

Well, hey, thank you, Dan. So, as Dan has just reviewed the fourth quarter operating results, I would like to now review the annual gap financial results for the fiscal year ending 2023. Overall, we have record revenue, operating income, earnings, and cash flow. And the strong performance from our operations was marked by record fiscal year revenue of $4.52 billion, which was up 29% over last year, and record net revenue amounting to $3.75 billion, which was up 32% over last year. And as you heard, we executed strong revenue growth from all our markets, including federal government, state and local, commercial, and international. which in particular benefited from the RPS acquisition as our footprint in the UK, Europe, and Australia has been greatly enhanced. Now, our operating income and earnings per share for the fiscal year were also both all-time highs. Our reported operating income came in at $358 million. This improvement resulted from both segments, and as Dan discussed earlier, the CIG margins have been closing in on the GSG margins. On a consolidated basis, these improvements resulted in our EBITDA increasing to $481 million, which is a 33% increase over fiscal 2022. Our EBITDA margins for Tetra Tech have been increasing at a higher rate compared to our revenue increases, such that our margins have increased an average of 50 basis points per year over the last four years. Now, GAAP EPS came in at $5.10, and adjusted EPS was $5.21, which was up 16% over last year. The adjusted EPS excluded the final RPS integration costs and lease impairment charges, the one-time FX hedge gain, and the associated tax-related items. Now, regarding our total FX hedge gain of $110 million, This provided a positive outcome relative to lowering the purchase price for RPS by almost 15% and reducing our debt load required to complete the acquisition. For further details in Q4 and fiscal 23, I'd like to refer you to the reconciliation slides in the back of this presentation, as well as our Regulation G attachments included in our earnings release. Now, on a going forward basis, and because we've successfully integrated RPS into TetraTax, and completed the acquisition accounting, we will provide the fiscal 24 reported results on a combined basis, including intangible amortization. Cash flows generated from operations for fiscal 2023 totaled $368 million, or more than 135% of net income. This higher percentage continues our historical long-term trend and goal to generate more cash flow from operations compared to our net income. Our focus on working capital and cash flows has also resulted in further improving our DSO to an all-time best of 54 days. This is an improvement of seven days from last year. And over the last five years, We've improved the DSO each year and brought our DSO down from over 85 days to an industry-leading DSO of 54 days. This lower DSO trend continues to reflect excellence in project delivery and highly satisfied clients in our broad portfolio across all of our end markets and geographies. Now, our net debt leverage was 1.4 times, which was much lower than immediately after the close of the RPS acquisition when our leverage was 2.2 times at the beginning of this calendar year. Throughout 2023, we've exceeded our initial projections on reducing our leverage to below the midpoint of our net debt target range of one times to two times. And as we increase our EBITDA and generate positive cash flows, we expect to further deliver the balance sheet throughout fiscal 2024. Our long-term capital allocation strategy to continue providing strong returns for shareholders calls for smart investing in the growth of our business, as well as managing a robust balance sheet. And we successfully accomplished key milestones with the RPS acquisition while deleveraging our net debt to an amount within our target range throughout this last year. And I expect that the accomplishments in 2023 will have sustainable benefits to our fiscal 2024 and beyond over the long term. The $575 million five-year convertible debt transaction we completed will result in a more diversified and balanced capital structure. The proceeds were used to pay down a significant amount of our floating rate debt, thus restoring the availability of our entire bank credit facility. The fixed rate coupon of 2.25% compares to a current floating rate, which is about three times that fixed rate, thus providing for an attractive arbitrage in annual cash savings to the tune of over $20 million in interest. With a cap call in place, we have mitigated the potential share dilution until our stock price reaches $260 per share. And furthermore, the stock price needs to essentially more than double and grow to over $318 per share to be 1% dilutive to the total shares outstanding. Our bank credit facility had $800 million in liquidity available at the year end. and will provide us the ability to invest in organic growth and complete acquisitions in key strategic markets that Jill will speak to next. Our bank credit facility includes sustainability-linked metrics relating to reducing greenhouse gases and improving the lives of 1 billion people. In our first year, we exceeded all metrics as measured and defined by our credit agreement, thus resulting in the lower cost of debt. Regarding our dividend program, we increased the dividends paid to shareholders by double digits in the last fiscal year. And I'm glad to announce that our board of directors have also just approved a quarterly dividend of 26 cents per share to be paid in December. This is a 13% increase over last year and represents our 34th consecutive quarterly dividend of double digit year over year increases in the amounts paid. You know I'm really pleased to share these financial results for our fiscal 2023. I'd like to thank everybody for your support, and I will now hand the call over to Jill to discuss a few of the strategic business opportunities for fiscal 2024 and beyond. Thank you, Steve.