Tetra Tech, Inc.

Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting the 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 for management are Dan Batrack, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, Leslie Shoemaker, Chief Innovation Officer, and Joseph Fong, High Performance Buildings Global Lead. They will provide a brief overview of the results and will then open 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 the 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 obligations 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 now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Latonya. And good morning. Welcome to our third quarter's fiscal year 2024's earnings conference call. i'd like to start off with thanking everyone who attended our investor day that took place just a little over two months ago in new york city now at the event we set out our vision and our goals for our fiscal year 2030 which focused on our high-end consulting in water environment and sustainable infrastructure i'm pleased to report that tetra tech continued our strong performance through the third quarter of this fiscal year 2024, delivering both record quarterly revenue and an all-time high backlog of well over $5 billion for the first time in the company's history. Through our focus on front-end advisory and consulting work, we continue to expand our margins, with this quarter delivering a 13.3% EBITDA margin, up 120 basis points from last year. Due to our strong performance and visibility, pleased to say that we've been able to raise our full year guidance for fiscal year 2024, and I'll provide the details of that on our updated guidance slide here in just a few moments. During today's call, I'm going to begin this call with an overview of our third quarter and outlook for the remainder of the fiscal year. Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance. He'll cover our capital allocation, and I'm pleased to say he will discuss the scheduled stock splits and some of the details associated with that item. Dr. Leslie Shoemaker, our chief innovation officer, will provide an update on our global water markets. And I'm really pleased today to have Joseph Fong with us, our high performance buildings lead, who's going to provide insight into some of the newest approaches that we have in that market, which include cooling of high performance data centers and chip fab building systems. For the third quarter, We had a very strong third quarter this year. Our net revenue increased 12% to $1.11 billion in the quarter, setting a new record for any quarter in the company's history for revenue. Our EBITDA increased 32% to $129 million in the quarter, which has almost tripled the rate of our net revenue growth, directly in line with our goal to increase margins more rapidly than our revenue growth. And finally, in the quarter, we generated an all-time high for the third quarter earnings per share of $1.59, up 42% from the prior year. And I'd like to present our performance by our reporting segments. In the third quarter, our government services group, or the GSG segment, was up 25% compared to last year, to a total amount of $488 million. and the segment generated a strong 14.6% margin of 60 basis points from the prior year. The key driver for GSD's margin expansion was an increase in higher margin environmental and advanced water treatment work. The commercial international group, or our CIG segment, grew net revenue by 4% year over year and delivered a 13.9% margin, up an impressive 230 basis points from last year. Now that 230 basis points increase, about half of that increase in CIG margin was driven by an increase in the RPS margins and the work that they perform from our international operations. The RPS activities have now reached an 11% margin for our third quarter of this year, which is up 400 basis points from last year's 7% margin that we had in the third quarter of fiscal year 2023. The other half of CIG's margin expansion was driven by strong performance in our international operations, especially associated with our front-end consulting, environmental work, and renewable energy projects that we have in all of our international locations. I'd now like to provide an overview of our performance by our end customer. Work for our US federal clients was up 34% from the same quarter last year driven by increases in work that we do for USAID, our civilian and defense environmental programs. Without including the extraordinary work that we performed in Ukraine in the quarter, our federal revenues grew at an underlying 18% year-over-year rate. For state and local, if you exclude our disaster response work, our state and local revenues grew at an 8% rate, continuing to be driven by the work that we do in advanced water treatment for cities and utilities all across the United States. Our U.S. commercial net revenues were up 7% year over year, driven by renewable energy programs and environmental remediation services. And finally, our international revenue now represents about 40% of the company, and those revenues grew at a 5% rate during the quarter. As we've presented before on this call, we've been focusing on margin expansions in the RPS operations that joined us here just about a year and a half ago. We've been very focused on reducing select programs that have become commoditized and represent low or no margins within RPS. So this changing of the portfolio has been resulted in RPS's international revenues remaining relatively flat year over year. So if you exclude the RPS's international operations, which we are by purpose and objective reshaping, the remainder of our international revenues actually grew at nearly a 10% rate year over year. I'd now like to discuss our backlog, which increased to an all-time high of $5.23 billion, up 19% year over year, and grew more than 10% sequentially. We received over $2 billion dollars in orders during the third quarter alone, which represented a book to bill of 1.4, one of the highest rates that we've seen in some time here at Tetra Tech. I'd also like to note that Tetra Tech only reports backlog on orders that are contracted, funded and authorized for us to proceed to doing the work. So this does not include any unfunded orders, which is a completely different method and much more conservative than you'll see reported anywhere in the industry. This quarter's orders included first-of-a-kind projects in PFAS, which we press released here just recently, this last week, large-scale programs for advanced water treatment, and major initiatives to address climate mitigation and adaptation worldwide. At this point, I'd now like to turn the presentation over to our Chief Financial Officer, Steve Burdick, to present the details of our financials. So, Steve?

Hey, thank you, Dan. So I'd like to now provide an update on the results for year-to-date performance, as well as our working capital, cash flow, and capital allocation through the third quarter. So net revenues increased by 18% to over $3 billion year-to-date, driven by strong end markets across all the geographies. Our EBITDA and operating income increased at a higher rate than our top-line revenue growth. As Dan discussed earlier in the call, we continue to focus on the front-end consulting work for water and environment, which are carrying higher margins across all of our end markets. And as such, EBITDA came in at $414 million, or up 41% year-over-year. And the EBITDA margins improved 200 basis points year-over-year. Our operating income increased 43% to $357 million, and margins improved 190 basis points year-over-year. These margin increases were primarily driven by improvements in operations across both our GSG and CIG markets. And in CIG, as Dan discussed, we are seeing the successful results of our efforts related to the RPS acquisition from optimizing RPS's portfolio of projects and better mix overall. Year to date, our EPS is $4.40 increase compared to last year. And if you recall, last year included an FX hedge gain of about $1.23. So excluding this one-time FX hedge gain, EPS grew at 53% year over year. I would like to now provide an update on our working capital and our cash flow for the third quarter. So cash flows generated from operations for the third quarter were $141 million and exceeded net income by over 64%. The trailing 12 months totaled $376 million, which was up 23% from the previous trailing 12-month period. Now, over the last 12 months, cash flows exceeded net income by more than 100%. And when we look back over the last, our historical financial results, we noted that cash flow from operations has exceeded 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 54 days versus the industry average of about 80 days. The third quarter results saw an improvement of four days from last year, and this historical low DSO for working capital is sustainable over the long term as we continue to make cash flows from operations a priority. 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 geographies. And our net debt amounts to $650 million. And the net debt on EBITDA was at a leverage of 1.15 times, well below a year ago, which was at 1.73 times. Furthermore, Our current leverage is about half the leverage multiple at the time we acquired RPS, as it was about 2.3 times in January of 2023. I would like to now present our capital allocation overview as of the third quarter of fiscal 2024. We have a significant amount of liquidity available to invest in organic and inquisitive priorities. This balance between fixed rate and variable rate debt helps to mitigate interest rate risk as we look to investing in key strategic areas. This current mix of debt exposure has resulted in a weighted average interest cost of borrowing at less than 4%, which is 30% lower than the current Fed borrowing rates. We have a strong pipeline for acquisitions, which is aligned towards technology innovations, especially in water and environmental spaces where we have led the markets. Regarding our dividend program, I want to announce that our Board of Directors approved a $0.29 quarterly dividend, which is a 12% increase year over year. This is our 41st consecutive quarterly dividend, and our dividends have increased by double digits every year since we initiated these payments. As we revised our capital structure in the last year to take advantage of the credit markets to support the 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 as part of our disciplined capital allocation strategy. And, you know, as we've continued to generate record financial results, our stock price has increased significantly over the last 10 years. I want to announce Tetra Tech's five-for-one stock split that was approved by our board of directors. The impetus for this decision was very much based on the input we received this year from both analysts and our investors. The primary benefit for our shareholders is that we want to increase liquidity and lower trading costs for institutional and retail investors and our employees who will benefit from the stock split. The stock split will be effective after the close of trading on September 6th. Thus, this five-for-one adjusted trading will begin when the market opens on September 9th. And you can find additional details in our press release. Finally, we will provide to investors and analysts the financial disclosures related to the share count where we will recast all historical information in our next Form 10-K. So I'm very pleased to share these really strong results through the third quarter of 2024. I want to thank you all for your support, and I will now hand the call over to Leslie and Joseph to discuss our leading global water business.