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 addresses section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech and this broadcast is a copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Leslie Shoemaker, Chief Sustainability Officer. They will provide a brief overview of the results and will then 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 Investors section of Tetra Tech's website. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after this presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Shamali, and good morning. And welcome to our second quarter fiscal year 2024 earnings conference call. I'm looking forward to providing all of you an overview of Tetra Tech's second quarter results. over this next hour of our call. During the quarter, our focus on high-end consulting continued to reshape our revenue and our profit margins, resulting in Tetra Tech exceeding the high end of our guidance for this past quarter. At the same time, software as recurring revenue stream continues to gain traction as an offering that we're providing in tandem with our consulting services. In March, at the end of our second quarter, we were very pleased to see the US federal budget finally get completed after a series of continuing resolutions over the past six months. On April 10th and then following the next week on April 19th, two new regulations were finalized in the United States that represent a step change in the country's efforts to reduce and virtually eliminate the presence of PFAS-related chemicals in our water and in the environment. I'll begin this call with an overview of our second quarter and the performance across our operations. Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance in our capital allocation program. And Dr. Leslie Shoemaker, our Chief Innovation and Sustainability Officer, will provide some early insights into the significance of the recently announced PFAS regulations, as well as giving an update of our sustainability report that was just released in April. On another note, we look forward to presenting our strategic plan for Tetra Tech in 2030 at our inaugural investor day that will take place in about two weeks on May 14th. And I'll provide an overview of our key agenda items later in this call. In the second quarter of fiscal year 2024, our net revenues increased 9% to 1 billion, 1.05 billion in total. Excluding the impact of one-time events associated with our support in Ukraine, our year-on-year revenue growth was 12%, well into the double digits. Our EBITDA, our earnings, increased 28% to $135 million, and over doubled the rate of our revenue growth, which is directly in line with our goal to increase our margins more rapidly than our revenues. And finally, in the quarter, we generated an all-time high for our second quarter of earnings per share, which was $1.42, up 34% from the prior year. I'd now like to present our performance by our segments. In the second quarter, the government services group, or our GSG segment, was up 15% compared to last year, excluding Ukraine in disaster response. to a total of $466 million and generated a very strong 13.7% margin, which is up 170 basis points from the prior year. The key driver for GSG's margin expansion was an increase in the higher margin environmental and advanced water treatment work that we do all across the United States. The Commercial International Group, or CIG segment, grew net revenue by 10% year over year and delivered a 13% margin, which was up an impressive 320 basis points from last year. This CIG margin expansion was largely driven by the increase in the RPS margins, which are well ahead of the RPS margin expansion plan that we put in place. In addition, growth and higher margin renewable energy services also contributed to the higher margins that we saw in CIG in the quarter. I'd now like to provide an overview of our performance by our end customers. Work for our U.S. federal clients was up 14% from the same quarter last year, excluding Ukraine. Growth was driven primarily by increases in our federal environmental practice, including for our clients in Defense, NASA, the U.S. Department of Energy, and the U.S. Environmental Protection Agency. Our U.S. state and local revenues grew organically 14%, excluding the effects of disaster response, continuing to be driven by the work we do in advanced water treatment for cities and utilities all across the United States. Our U.S. commercial net revenues were essentially flat year over year. We did incur some weather-related delays in our larger coal ash programs that take place in the Midwest of the United States. And finally, our international revenues were up 17%. year over year. Tetra Tech's international operations, together with RPS that joined us, are growing water and renewable energy services, particularly in the geographies of the United Kingdom and in Australia. I'd now like to discuss our backlog, which completed the quarter, the second quarter, at $4.74 billion, which is up 11% from last year. In the quarter, we further increased our PFAS-related contract capacity with the award of a new $464 million U.S. Army Environmental Remediation Services contract. And we also added a new $375 million NASA environmental restoration contract. We also augmented our contract capacity for coal ash remediation with the addition of a $55 million single award contract in the quarter. And finally, decarbonization continues to drive new awards in the United Kingdom with addition of a $22 million single award contract for building system optimization. With the federal budgets now fully in place since March 24th, or really at the end of our second quarter, we're already seeing a significant uptake in the pace of new contract awards, and more importantly, the actual release of task orders under our existing standing contracts. At this point, I'd now like to turn the presentation over to Steve Burdick, Chief Financial Officer, to present some details of our financials. Steve?

Hey, thank you, Dan. So I'd like to now provide an update on the results of our first half of the fiscal year, as well as our working capital, cash flow, and capital allocation through the second quarter. So net revenues increased by 21% to just under $2.1 billion year-to-date. driven by strong in markets across all geographies and a contribution from RPS. Over the same six months, our EBITDA and operating income increased at a higher rate than our top line revenue growth. And as Dan discussed earlier in the call, we continue to focus on the front end cycle for water and environmental projects, which are carrying higher margins across our in markets. As such, EBITDA for the first six months came in at $266 million, or up 27% year over year. And our operating income also increased 23% to $229 million. And so for the first six months of the year, our earnings per share of $2.81 increased compared to last year. And the increase was primarily driven by the improvement in the second quarter operating margins across both our GSG and CIG operations. Now, cash flows generated from operations for the second quarter were $103 million and exceeded net income by over 30%. And the trailing 12 months totaled $368 million, or up 35% from the previous trailing 12-month period. And when we look back over our historical financial results, we noted that our cash flow from operations has exceeded our net income every fiscal year for the last two decades. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 55 days versus the industry average at over 80 days. The second quarter results saw an improvement of four days from last year. This historical low of of the DSO for working capital is sustainable over the longer term as we continue to make cash flows from operations a priority. And this lower DSO metric also provides significant insight into our core business as it reflects the outstanding work that our project managers lead relative to higher quality projects and highly satisfied clients in our broad portfolio across all of our end markets and all of our geographies. Our net debt amounted to $741 million, and the net debt on an EBITDA multiple was at a leverage of 1.4 times. This leverage includes the capital used to acquire LST in the second quarter, and if not for this acquisition, our leverage would have been closer to about 1.2 times. Our leverage is well within our target and much lower than when we acquired RPS just over a year ago. So in the second quarter, as I mentioned, we did close the LST acquisition. LST is a leading federal government technology consultant focused on the civil agencies and those markets and is part of our GSG segment. So as we presented here today, we continue to execute on high quality operating results with strong cash flows, industry leading day sales outstanding, and a net debt leverage well within our target range. And while this strengthening financial position and balance sheet is occurring, I would like to now present our capital allocation overview as of the second quarter fiscal 2024. We have a significant amount in liquidity available to invest in both organic and acquisitive priorities. And we have a well-balanced mix of both fixed rate debt at a 2.25% coupon, which matures in 2028, while their variable rate debt is sitting now just over 6.5% interest rate. This balance helps to mitigate interest rate risk as we look to invest in these key strategic priorities. We have a strong pipeline for acquisitions, which is aligned towards technical leaders, especially in the water and environmental services spaces where we have led the market for the last 20 years. And regarding our dividend program, I'm pleased to announce that our board of directors approved a 29 cent quarterly dividend, which is a 12% increase year over year to be paid in the third quarter. This is our 36th consecutive quarterly dividend with an annual double digit increase in the amount paid. And as we've revised our capital structure in the last year to take credit to take advantage of the credit market to support our financing needs. I want to remind our shareholders that we do have available a significant portion of the $400 million from the stock buyback plan approved by our board of directors back in 2022 for future consideration as part of our disciplined capital allocation strategy. So just as Dan also said, I'm also pleased to share these really strong results for the start of our fiscal 2024. I want to thank you for all your support, and I will now hand the call over to Leslie to discuss Tetra Tech's differentiated and market leadership in water and sustainability. Leslie.