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spk01: 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.
spk09: 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?
spk07: 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.
spk05: Thank you, Steve. Two of the areas that we discussed during our investor day were significantly expanded opportunities for water-related services in the United Kingdom and the new requirements for PFAS water treatment in the United States. Most recently in the United Kingdom, we have a newly elected labor government, which has actually reemphasized the importance of their water quality management in rivers, flood management, and water supply protection. These priorities and the associated aggressive goals that have been set for the new AMP8 cycle, which is just beginning, directly align with our technically differentiated expertise in industry-leading software solutions, such as real-time control, spill management, management using Seesoft, flood risk management using our FusionMap platform, and advanced leak detection solutions using our WaterNet system. In the U.S., similarly, the recently released National Needs Survey reinforces increased concerns regarding water quality protection and advanced water treatment, again, directly in line with what we do. Today, we're seeing our municipal clients begin to include PFAS treatment in updates and expansion of their water treatment facilities, which is a good indication of the integration of PFAS into long-range planning across our more than 500 municipal clients. And in California, they have just paced on the ballot a new $10 billion bond measure that would commit funding directly aligned with our expertise in water quality, advanced water treatment, and watershed programs. And with that, I'd like to turn the presentation over to Joseph Fong to discuss more of our water-related opportunities in high-performance buildings. Joseph?
spk02: Thank you, Leslie. Tetra Tech's market-leading advanced water treatment expertise has become a key competitive advantage in two of our high-performance buildings' fastest growth markets, advanced manufacturing fabrication and high-tech data centers. As we shared during our investor day in May, the US's investment to boost chip production incentivized manufacturers to commit over $200 billion for fabrication manufacturing facilities. In addition to requiring high performing energy efficient building systems, these fabrication facilities also require the production of ultra pure water that is essential for the ultra clean processing of the silicon wafers used to create computer chips. We are seeing increasing demand for advanced water treatment solutions as chip manufacturers initiate expanding their ultra-advanced water processing capacity for new and upgraded facilities, and municipalities invest in augmenting water supplies and pretreatment to attract fab facilities into their jurisdictions. Today's AI servers require more computing power and generate much more heat than their predecessors. Tetra Tech is working with our high-tech data center clients implement advanced liquid cooling solutions such as immersion liquid cooling and direct-to-chip cooling. Tetra Tech's expertise in water chemistry and hydraulics is essential to designing liquid cooling systems which can capture up to 80% of the total heat production. With over $500 billion in future investment forecasted in new computing infrastructure, including a 50% increase current global data center capacity by 2029, we expect the design of high efficiency cooling solutions to be a significant growth market for us. I would now like to turn the presentation back to Dave and Batrak.
spk09: Thank you very much, Joseph. I'd now like to present our guidance for the fourth quarter and our updated guidance for all of fiscal year 2024. Our guidance is as follows. For the fourth quarter, Our range, our guidance for the range of net revenue is a range of 1.09 billion to 1.14 billion with an associated diluted earnings per share with a range of $1.82 to $1.87. For the entire fiscal year of 2024, our increased guidance is for a revenue range of 4.27 billion to 4.32 billion. The midpoint of that range would actually represent or does represent a 15% increase in our net revenue from what we realized in fiscal year 2023. Our updated earnings per share guidance range is for a total of $6.23 to an upper end of $6.28 or a 5 cent range. The midpoint of that range represents a 23% increase in our earnings per share from what we realized in fiscal year 2023. A few assumptions. If you're following along on the webcast, you can see these are based on pre-stock split numbers, which represents our 54 million shares outstanding. It does include intangible amortization, which is approximately 67 cents per share. We do assume in the fourth quarter, we will have approximately a 27% tax rate. And as in past presentations, this does exclude any contributions of revenue or income that may be realized from acquisitions that we would complete between now and the end of the fiscal year. In summary, this morning, we see strong demand for our differentiated leading the science services all across the water and environmental markets that we work in. Our third quarter results set new all-time records for revenue, net revenue, backlog, And as Steve indicated, our day sales outstanding or our cash generation. And we set third quarter record results for operating income, EBITDA, and earnings per share. Our strategic focus on high-end water and environmental consulting is driving margin expansion very much in line with our longer-term goals that we presented in our investor day here back in May. As a result of our strong performance and confidence in our outlook, I'm pleased that we were able to raise our guidance for fiscal year 2024 for both net revenue and earnings per share. We're looking forward to implementing our stock split, as Steve indicated a few moments ago, effective after market close on September 6th in 2024 to provide even broader access to Tetra Tech stock for all of our investors. And with that, LaTanya, we'd like to open the call up for questions. Thank you.
spk01: 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 the handset before pressing any numbers. If you would like to ask a question, press star 1 on your touchtone phone. Our first question comes from Tim Mulroney with William Blair. Please proceed.
spk12: Yes, good morning. Thanks for taking my question. I mean, your backlog is really healthy right now, up about 20% year over year. It's the first thing that caught my eye on your release, and I'm just curious how investors, how you think investors should interpret this in terms of your visibility for hitting that annual organic growth target of 6 to 10% as you, you know, head into the fourth quarter and into next year?
spk09: Well, that's a really good, that's a great question. If I have any commentary with respect to details on that increase, I know that we're up 19% in the quarter year over year. I will say that some of that I think was timing, that I anticipated some of the orders would have come in in our second quarter. So I will say there's a little bit of catch-up included. So one thing I would caution our investors is not to interpret that the backlog growth is going to directly translate into our net revenue growth. You do see the 6% to 10% ranges between double to triple the level of our 6% to 10%. I would say that we did have one extraordinary area, one question we've had internally, and certainly when I saw the numbers is, as very much at the high end or above what we'd expect. We did have some extraordinary contributions of orders that went into backlog from Ukraine. But I don't want there to be a misunderstanding that Ukraine was the majority of the contribution through USAID. It represented about a third of that increase. So of the 19%, about 6% of that or about 160 million would have been extraordinary in the quarter. So, we still are well over double-digit year-over-year, which is above what we anticipate our organic growth rates we've been targeting at this time. So, it should give us great visibility, of course, coming into the fourth quarter, but really all the way in through 2025. Okay.
spk12: That's helpful color. I want to switch gears really quickly. really quickly to a regulatory conversation because it represents a preponderance of questions that we've been getting from investors lately and was hoping you could comment on this. We heard that there are certain environmental regulations that may be more susceptible to being overturned now that Chevron deference is gone. Are there areas of your business that you think are exposed or susceptible to changes in regulation as a result of this ruling?
spk09: That's a really good question. It certainly gave a heightened sense of analysis and evaluation. What does the Chevron doctrine or the Chevron deference mean to our business? And we actually dove into it quite deeply over the past couple months since the Supreme Court's ruling on this has come out. And we actually try to simplify it in three different ways. First of all, most of the work that we do for environmental compliance activities is actually regulated at the state and local level. So it's state regulations, it's regulations by local counties and cities, and it's actually not driven by federal regulation interpretation. So it only has a very small intersection or nexus with respect to the work we actually do. Second of all, the largest programs that we have are for the U.S. federal government. So it would be like the Department of Defense work that we do or work that we do for the Army Corps of Engineers. And it's not the practice of the U.S. federal government to contest regulatory determinations and take it to court. So the U.S. federal government doesn't sue themselves and go to court over this. So the items that are determined or agreed to with the regulators at the federal level, which might be the Environmental Protection Agency or some of these others, are just straight implemented. So we see that as essentially not applicable or doesn't really impact it. And the last item we saw, and this sounds a little contrarian to the underlying, I guess, presumption is that if the Chevron doctrine is going to cause some uncertainty and regulatory interpretation is bad for your business. I don't know on the commercial side, if you're going to go contest the regulator's interpretation, and go to a court, you better be clear. You better be compelling. Yes, you may need some attorneys. Yes, you need people who can argue it, argue the positions and support the basis of your arguments. But all of it has to be based on data. It's not just an opinion. It has to be based on data, data analytics. And actually, if you want to take it and boil it down to its essence, you actually have to lead with science. You actually have to bring in a technical, well- positioned technically left a scientific, uh, basis. And now there is a firm out there that a tagline is lead with science. And so that might actually vote very well, vote very well for Tetra tech with respect to who you want to bring in to support your interpretations to the courts. So I actually see if this thing does, um, have any legs to it with respect to where there may be something contested by some of the large commercial clients. It actually could begin, uh, presenting new opportunities that didn't exist for us before. So, in some ways, it's actually maybe indirectly being good for our business.
spk12: Understood. Very clear. Thanks, Dan.
spk09: Thank you very much, Dan.
spk01: The next question comes from Sangeeta Jain with KeyBank Capital Markets. Please proceed.
spk06: Yeah, thank you so much for taking my questions. So, if I can ask one on the revenue that you may be getting currently from the high-performance buildings and data centers, if you've broken that out, and also how much faster is that slice growing compared to the rest of your CIG segment?
spk09: Yeah, that's a really good question, and we had Joseph Hong actually present those specific details in earlier meetings we've had. So, Joseph?
spk02: Yes, thank you for that question. I shared during our investor day in May, we did share kind of the breakdown of those numbers in terms of our revenue and how our advanced manufacturing fabrication and our data centers revenue as part of our high-performance building total revenue. We had shared that this year we are tracking towards a $100 million revenue target for those two sectors, and we are expecting a 20% CAGR for that market. So right now we are, again, trending towards $100 million between those two markets
spk06: Got it. That's helpful. And if I can ask one on M&A. As you pointed out, your leverage is trending towards the low end of your target range. And we just talked about rising uncertainty of policy outcomes in the U.S. Would that make you consider shifting more of your revenue base overseas as you look at M&A?
spk09: You know, that's a good question. And I would say no. I would say that the world's largest economy is right here in the United States. The dollar set aside for environmental stewardship, for clean water, even compliance with new regulations, things like PFAS, are measured in multiples of what they exist in other locations. Now, I do think the technology is one area we're very focused on. Steve had mentioned that in his comments with respect to priorities for our acquisitions or looking for people to join us. And the one thing that, uh, that provides us or allows us is the transfer of what we would, let's say we acquire it here in the U S or if it came through Canada, Australia, or the United Kingdom, it's actually transferable across all of our platforms to all of our clients. And it's, uh, gives us a, gives us a technical differentiation or competitive advantage to move it across all of our operations and are more than 550 offices in the company. So we're going to find the best technology. We're going to find the best new innovations that exist anywhere in the world. It could be in the U.S. or elsewhere. But as far as taking a precedent and moving because of potential elections or potential changes in the legal systems, that is not biasing us outside the U.S. This is still the largest market in the world. And we have a top position in each of these markets that we're focused on, whether it's water, environmental, climate change, coastal protection, flood protection. We're in first place. And the only thing we're focused on is distancing ourselves even more in those areas.
spk06: All right. Thanks so much, Dan.
spk09: Thanks. Thank you, too.
spk01: The next question comes from Sabahat Khan with RBC. Please proceed.
spk04: Kaveh Khoshnood, Great thanks and good afternoon um I guess just broadly, you know you're taking up your guidance for this year few moving pieces in the backdrop. Kaveh Khoshnood, I guess, how would you characterize 2024 within the context of kind of your overall guidance, you obviously have the fiscal 23 numbers out there. Kaveh Khoshnood, You know, over the next at least two three years should we expect some elevated trends like we've seen this year on the top line and margins or. Kaveh Khoshnood, Just don't think about the cadence over the next two to three years of how. kind of the numbers evolve and some of the funding from these larger U.S. bills flow through. Thank you.
spk09: Okay, good questions, Sabah. I'm glad you talked about sort of a longer trend. We're pretty clear, and Steve had presented, and I don't want to overly continue to reference the investor day, but the cornerstone or the underpinning of investor day is 2030. And Steve indicated in great detail It's an organic growth rates between 6% and 10%. And so while you'd ask what's it look like over the next two or three years, I'll say what's it going to look like over the next five years and say it's going to be between 6% and 10% organic growth rate. It happens to be we were slightly over that this quarter, third quarter, but I would say not drastically so. So it's nice if you're going to be outside that range that you're on the top end, which we have been. for some time but i would say over this next several year period we think that's about about right and then with respect to um acquisitions or having people come join us i know we talked about a uh wide range of five to ten percent i think for modeling purposes we've used four or five and i think we've been well within uh with that it seems quite achievable so i think if you look on a longer trend and i would append your two to three years to let's talk up to five years. I think we'll be within these ranges we just talked about. And of course, it's very hard to talk about growth rates without talking about margin because revenue without income contribution, it's like a day without sunshine here. So we do think that if you wanted to just use a general guide, about 50 basis points a year, we've been at that number of expanding our overall EBITDA margins. We've been about that rate for the past several years, and we expect that to continue on into the future. So I don't really want to provide 2025 details. We're only a little over 90 days, or as our next investor call, we'll provide the final tale of our performance for fiscal year 24, and we'll provide fiscal year 25 for the next one year. But if you want to look a little bit broader, those ranges I just provided should be pretty representative.
spk04: Kaveh Khoshnood, Great and then just take us on the on the m&a side, obviously, they provided some parameters around the discipline on the metrics can you maybe just talk a bit more about some of the more. Kaveh Khoshnood, In focus areas where you might want to compliment some expertise, whether it's regions, whether it's specific markets within water that might be of interest over the next few years.
spk09: Yeah, I'd say there's a couple that we're really focused on. I think in the United Kingdom we're doing well, but we can do better with respect to a presence supporting the AMP structure, AMP programs, which is the asset management program for water utilities across all the United Kingdom. We've got some very large cornerstone programs. I think we can get more, so I would say if we can add additional capability and contract capacity, so we'd look for that in the UK. Same would be true in Australia. So look for additional acquisitions that would be around water. And I would call that mostly municipal water. Or in the UK, you'd call it water utilities. And then technology. I'll repeat what I just said a few moments ago. We're really focused on how can we technically differentiate ourselves even more so in the market. And it's not so much exactly focused on peers or competitors, we're focusing on how we can deliver better value to our clients. We want to deliver higher delivery, faster response, lower price point, and have better outcomes from our clients than ever before. And we think that that can largely be contributed through technology. And so whether or not it's our digital water programs through remote monitoring and automation of water treatment plants, which we do believe over the next decade or so, there's 150% thousand different water systems in the United States or water utilities, we think that eventually they're all going to go to remote monitoring and automation. And we're not even in the first inning on that. And we want to be the leader in the forefront for that. So how can we do that? For sure we have it internal, but acquisitions and identifying those that can come in. And I'm glad to say that just this last quarter, since our last investor call, we had Convergence join us. While it's just a handful of individuals, the intellectual property and the technologies that they brought are really quite significant. So look for us to continue to add those over the next year and beyond.
spk04: Great. Thanks very much for the color.
spk09: Yeah, thanks a lot.
spk01: The next question comes from Andy Whitman with Baird. Please proceed.
spk11: Great. Good morning. Thanks for taking my questions, guys. I guess I just wanted to start out a little bit in asking about Ukraine. Maybe just for context, Dan, can you just talk about what the Ukraine contribution was to this quarter? And then recognizing that you did book $160 million. I just wanted to see, I mean, you would not put that in your backlog if you didn't have great visibility and the contract to do that, right? I'm just trying to see how much visibility you have there. Like by my calculations, you did somewhere between like 50 and 60 million this quarter. So does that mean that you've got like three and a half quarters of work with $160 million or how should we think about that?
spk09: Yeah, well, you've got the numbers about right. I'll help refine this a little for you. So in the third quarter, we did about $60 million worth of net revenue. So it was a good quarter. It's an interesting coming in. And I think we spoke on last quarter's call. that we expected the second half of fiscal year 24. So this year, we do about 100. So we're about 10 million above for the quarter where we thought we would be. And interestingly enough, we were over the top of our guidance range for net revenue by about $10 million. So everything was very strong. It took us to the very high end of our own range. And then Ukraine pushed it up even higher. So we did do about 160. It's a great question on does that mean you have a good portion? Well, we put 160 in, but we burned 60. So you really would take a look at net on that. But if you take a look at our backlog slide and our press release, we presented on the first line a $439 million new addition for work in Ukraine. That's a contract or contract capacity. There's a new program referred to as SPARC with USAID. It allows us to continue to the work that we have. And only a very small portion of that was actually obligated that went into our backlog in Q3. So we've got more contract capacity. We have more orders. We actually finished with a higher order book for Ukraine. And of course, the reaffirmation by the U.S. government to stand behind and with Ukraine does give us visibility with respect to, I would say, the political will. Now, I know there's been a lot of questions. Some have asked me if there is a change in administration, could that get turned off? And my comment is maybe if everybody, you know, with one phone call, the conflict is over, maybe we all hope that becomes true. I think it may actually allow additional restoration work through USAID that we've never seen before. You can actually do more work when someone's not firing overhead than... You can while you're in a conflict zone. So we have contract capacity measured in several hundreds of millions of dollars and the 439 as listed first in our backlogs presentation slide and our press release isn't the only contract that we have there. We're much broader and some have asked, well, what if there is some disruption regarding U.S. commitments to move forward with the contracts in place? I will tell you there's a lot of countries lined up behind to actually want to help once restoration started. And these are our clients, whether it's UK aid, whether it's the European Union, or whether it's the coalition that includes places like Australia, where we're one of the largest international development supporters. So this is not a singular question. And in fact, even the singular question actually may have significant upside in the event the conflict is actually resolved. So those are the numbers we have with respect to going into the fourth quarter for contract capacity. the 60 million i will say we're still standing by our 100 million for the second half so it's pretty easy to take 100 minus the 60 in q3 and i think we'll do around 40 in q uh in q4 but i'll give you more specifics uh on the next call how it actually uh how it actually turned out it's really helpful context and thank you for that answer
spk11: I wanted to ask my follow-up question on RPS. You made the comment that you've been running off some of the lower margin work. That was always part of the plan. You said that when you acquired it. But you've owned it for a year and a half here, still kind of running some of that off. I'm just wondering, How long is that tail? How much more, I guess it would be contracted backlog or something that you have there that needs to be gone through before we think that you can show the underlying growth that you talked about there in the double digits for that international segment?
spk09: Yeah, that's a really good question. You're right. It's been about five quarters right now, so just a little over a year since they joined us. As we've always indicated, we want to shape their mix of business to be similar to Tetra Tech. We want to put high-end technically differentiated in front of everything, less competition, higher margin, completely in collaboration with the rest of the company. I think we've got another one or two quarters. I'm not going to go to the dollar amount, but I think we've got one or two quarters left before we've got the... i'd call it commoditized with the low or no margin work uh that also funny enough i've always found it ironic that if you get low or no margin on some of this work it typically carries the highest risk to and to say this just seems like it uh shouldn't go together and we agree it shouldn't go with us and so uh i think one or two quarters i think you'll see us by probably pretty close to the end of the calendar year uh sort of the culling of the last small work that doesn't really belong in our portfolio should be finished, and then you'll see the contribution on international come with RPS along with all the rest of our international operations. So I hope that timing is helpful.
spk11: It is. Thank you very much. Have a good day.
spk09: Thank you very much, Andy.
spk01: The next question comes from Ryan Connors with North Coast Research. Please proceed.
spk10: Hey, thanks. Good morning. First off, congrats on the stock split. I know those aren't generally in vogue, but I wish more companies would follow your lead. I think it's very positive. I wanted to come on the issue of the margin outlook from a different slice. Dan, you mentioned 50 basis points a year is what you laid out in the 2030 game plan there, but we look at the backlog and the composition of the backlog. You did mention one-third of it is the USAID work, and you've said in the past that that's you know, tends toward the lower margin side of what you do. So is that in fact the case with that particular, those particular jobs with USAID? And any color you can kind of share on what the backlog composition would tell us about, you know, kind of the margin trajectory in the next, you know, relatively near term.
spk09: Yeah, you know, I think that's a great question and it's very insightful, Ryan. Let me make one comment about our margining. increase the 60 basis points for Q3. You're absolutely right that the work that we do for international development generally in USAID specifically is almost all cost plus work. It's pre-negotiated low margin. If you're taking low financial risk, you get a lower margin. So if we did not have any Ukraine work, and I would say that work, not just Ukraine, but USAID, carries about a 7% margin. If you took that from our portfolio, our government services group, GSG, would have been up over 100 basis points. And we would have been well into the upper 15% for the quarter. So I don't like to use the word way, but it is a lower margin when you do the calculation. Let me clarify one item. The incremental contribution of the backlog was about a third of it, not it represents a third of our overall backlog. So let me just clarify that. I simply was referring to how much was contributed in the quarter or the increase in the 500 million that we had sequentially. So I do think the rest of our business is growing even at a higher margin expansion. And the 50 basis points is with international development whether it's U.S., Australia, or U.K., included in the business. We are not deemphasizing that. We are big-time supporters of our clients in all three jurisdictions, and it is included in the margin expansion. Now, what's the margin embedded in the backlog that we have overall, the $5.2 billion? pretty close to representing that 50 basis points expansion that we expect to see. So we're not expecting some new big win or a C-state change in the business that we're performing. It's actually embedded in the work that we're being awarded and funded through the orders that comprise our backlog.
spk10: Got it. Okay. Thanks for that. And then back on the Chevron issue, I think you make a really interesting point, Dan, kind of the counterintuitive point that it could actually be a tailwind uh, in some areas. And my question is, um, you know, how big is litigation support today for Tetra Tech? Um, and is that an area where, I mean, I would imagine, yes, it's lead with science, but you know, there, there are nuanced differences to that type of business and obviously the relationships are different. So is that something where you feel, how big is it today? And would you be staffed appropriately to, or would you have to move people or could that actually be, uh, an area of potential, um,
spk09: m a uh opportunity and if in fact your your counterintuitive take on that you know that it does create some additional business uh another good question this uh this uh actually has what i would call uh you really have to understand the business to uh parse that so what it would look like at the most uh surface level is are you going to go support somebody litigating what we would do is we would actually want to be the technical support for the data collection, the analysis, and the, I'll call it, I'm trying not to use the word, conclusion, because the courts may become the final arbiter on this, but the technical conclusion with respect to the presence, the movement, the fate, and the final recommendations or interpretation. With respect to when you talk about, when we talk about experts that are going to be supporting litigation, as soon as you use the word litigation, Generally, it means expert testimony in court on the stand, sometimes referred to as hired guns, even if they're technical. You know, Dr. Smith, Dr. Jones, and we try to stay out of that. There are people that make their livings being in court litigators. We simply want to provide an objective, quantitative measure that is technically supported by data analytics, science, the rest of it. We'll leave the expert testimony in the stand to others. Because what we've seen is every time you're in court, there's somebody on the other side of that. And we don't want to be actually providing an opinion or an opine on what the data is. For us, the data is quantitative, it's objective, it's scientifically supported. And there are firms, and we certainly know many of them, that actually have in court hired guns testimony. And don't look for us to try to turn our PhD experts in hydrology, water mechanics, chemistry, uh, remediation, uh, into, uh, in court. So I think that our people that we have within the company can support that work because that's the work we're doing for both our government, federal, state, local, commercial, and that data can be used whether or not it's used currently to support the work we're doing or some other person's, uh, objective work. But I don't see that actually having, uh, to change the under fabric of what we do as a company.
spk10: Got it. And then I assume we're near the end of the queue. So if I could just sneak one more in, um, you know, you mentioned potential change of administration. I guess what we've learned since the last conference call is that there's going to be a change of administration one way or the other. Um, we've got a new candidate. Um, is there any daylight that you've, as you look at the Biden administration versus Harris kind of priorities, is there any difference, nuanced differences there? the potential approach versus the current administration, or is it pretty much they're on the same page with most things that relate to Tetra Tech?
spk09: Yeah, so what I've heard and always hear is a new voice, same platform and or similar platform, and we've not seen any changes. I think that there might be a little bit more emphasis on environmental justice and actually prioritizing areas that might have been lower in the queue, which is actually good for us. That would put more work on orphan sites that would be done by EPA and others. And that's certainly work that we do already. And we could see that actually seeing a plus up. I think they could see reprioritization. been speeding up some Superfund site activity to get it done quicker, because many of these locations are in underprivileged locations across the country, so you can see some of that. But I would say that the fundamental platforms are very similar. I won't go so far as to say identical, but I think the general adage, a different voice, same platform, is a good way to look at it. Understood. Thanks for your time.
spk10: Thank you very much, Ryan.
spk01: The next question comes from Tate Sullivan with Maxim Group. Please proceed.
spk03: Hi, thank you. Just a follow-up on the RPS and revenue growth. You said international revenue excluding RPS was 10% year-over-year. What was the comment you specifically said about that? I think you said something in addition to running off some lower-runner margin projects, but can you review that, please?
spk09: Well, what I was saying is that the... that the RPS component of our international revenues has been relatively flat or same number, no growth. So the growth rate on that would be, when I say flat, I guess I mean zero. And I think that because what's happening is we are adding work within the work. And I'm going to try it as we go forward, trying quite a bit this year. We'll try even double down on it next year. to use RPS as a different component of the company because they're as much part of Tetra Tech as I or anybody else is. RPS is doing a great job. They've got a number of individuals that are leading major divisions for Tetra Tech. They are technical leaders. They're financial leaders. They're just among the best that we have in the entire corporation. However, they are still in a transition. It's been five quarters since they've joined us, and we did indicate that we wanted to take some of the revenues that have been more commoditized or was carrying lower margin or higher risk out of the business. So at the beginning, we actually saw in the first several quarters, revenues actually for RPS went down. So people had come in, and I know I had our investor relationships, Jim Wu and others, talk to investors and analysts that we were going to grow through subtraction. And so margins are going to go up, profits are going to go up, and we're going to actually do less work for it. Now we've got to the point where it's not shrinking anymore, that the amount we're taking out of the business is roughly equal to the amount we're putting in, so the amount is going down by 4% or 5% this last quarter, but we've added that amount of higher margin work. So what do you see? You see flat on revenues, but you see margins up by 400 basis points year over year. And I think that this... this phenomenon of it taking out as much as you add, the taking out part is just one or two quarters away. And then you'll see RPS contributing not only on margin expansion, but also on revenue contribution internationally. So that is really the dynamic that I'm referring to. And I hope that helps with making it a little clearer.
spk03: Absolutely. Thank you very much.
spk12: Thank you, Tate.
spk01: The next question comes from Michael Dudas with Vertical Research Partners. Please proceed.
spk00: Good morning, everyone. Can you hear me? Yes, Michael.
spk08: Okay, thank you. Leslie mentioned in her prepared remarks about a new water bond proposed $10 billion in California. What's the history on success of those types of initiatives in the state? And when something like that gets passed, maybe in historical levels or what you've been involved with, how quickly that business can start to flow into your consultant advisory work?
spk05: Good question. We've actually seen in the past they are relatively successful. So I wouldn't want to predict what's going to happen in an election, but water quality and water programs have had a great track record of being approved. We actually had other measures that were related to water management and stormwater that were passed in previous years and then were integrated over probably a one to two year period. They get integrated into the various local agencies and their implementation plans and funding. So we would expect this one would run pretty much along that same cycle of organization and planning and bidding in the first year and then actually seeing it in actual proposals in the second year.
spk08: That's very helpful, Liz. I appreciate that. Thanks. Thanks, everyone.
spk12: Thank you, Michael.
spk01: This will conclude the Q&A session. I will now turn the conference back over to Mr. Dan Patrak to conclude.
spk09: Thank you very much, LaTanya, and thank all of you for attending the call today. I very much appreciate the questions that we had today, those that we received through investor relations and other avenues that we can actually incorporate into our presentations. We really do want to be as transparent and forward thinking and communicative as possible. I look forward to speaking to you all again at our next quarterly call, where we'll present the results of our fourth quarter and all of fiscal year 2024, which, of course, after three quarters is off to a really, really strong start. And probably most importantly, to sharing with you our guidance and outlook for fiscal year 2025. And with that, I hope you have a great rest of your Thursday and a great rest of the week. Thank you.
spk01: Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect now.
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