Tetra Tech, Inc.

Good morning and thank you for joining Tetra Tech's earning 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 the broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or in part without prior written permission of Tetra Tech is prohibited. With us on today's call from management are Dan Badtruck, Chairman and Chief Executive Officer, Steve Burdick, Chief Financial Officer, and Leslie Shoemaker, Chief Innovation Officer. They will provide a brief overview of the results, and we 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 statement 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 to 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 question and answers after the presentation. With that, I would now like to turn the call over to Dan Batryk. Please go ahead, Mr. Batryk.

Great. Thank you very much, Sherry. Good morning and welcome to our 4th quarter and our entire fiscal year 2024 earnings conference call. It seems like it's been a long time ago, but it's actually been a week and 2 days ago that we just had a major election here in the United States. Not only for the executive branch with the president, but the Congress, both the Senate and the house. And it's interesting, starting, we could go Tuesday during the election. I think right around midnight Pacific time, we started getting phone calls, emails, and other inquiries as to what is the change in the administration mean to Tetra Tech and its business. Questions came from shareholders, came from analysts, came from different stakeholders. Now we've, as a company, we've been around for more than six, about six decades, and we've seen a lot of different changes. transitions of administrations. In fact, we've been here through every one of them. And looking back, our position had been, through experience, whether or not it has gone either Democrat or Republican, it really hasn't had an impact on Tetra Tech's business because of the critical nature of the work that we perform as a company. But some have said what has happened in the past may not be an indicator of the future, and this is a different transition, one like we've maybe never seen before. So it did give us a moment's pause to go back and take a look at our business and reflect on what do we see based on our best insight at this moment. Now, of course, this administration isn't actually been sworn into office and haven't taken it, but we did take a few moments to go back and take a look. And I thought I'd share with you right at the beginning, before I start my prepared remarks, what are some of the things that we saw in our business and how does it actually interact and how it might be effective with this administration? The first thing we looked at is, well, what are we busy doing today? What is one of the big things that is important and that we're actually engaged in right today? And one of them is, no doubt, coastal protection here in the United States. And we see that being more important than ever. It's only been 30 days, a little over 30 days, since a pair of large hurricanes, Helene and Milton, impacted Florida coast and the Atlantic seaboard. And I'll tell you, whether or not you're moving to Democrat or whether Republican, the ability to protect your coastlines, protect the citizens, and address the impact of these storms knows no party. And we see that that is just as critical tomorrow as it is today and as it has been over the past 60 years for us. So I see no impact there. We're providing some of the most critical services for our defense clients, and not just in the United States. United States, United States, United Kingdom, Australia, and I think the services that we provide there are more critical than ever before. Whether or not it's modernizing the infrastructure, whether or not supporting the growth, whether or not it's ports and harbors and settlements, all of that work finds our services absolutely necessary. So I think that the work that we're doing for our defense clients will be unaffected. And in fact, if that actually is a more higher priority with respect to investment and growth. I think that that will be a contributor to the company. No doubt here in the United States, on-shoring or rebuilding capability for high-end manufacturing is a big growth area. And whether or not it's high-end manufacturing, you're referring to chip labs or whether or not you're referring to data centers, those are things that we've done. And we've, in fact, spent the last 10 years building up a high-performance buildings practice that is over half a billion dollars in size, and it does the most sophisticated, most cutting-edge support of the building structures that will house all of this high-end manufacturing. And we couldn't be in a better position for this. Whether or not the CHIPS Act is here or not, the amount of capital investment being done from these high-end manufacturers is going to cause this to go forward. So we think we're in an excellent position there. it's interesting the core of the company of course is water no doubt about it we talk about 85 and i tell you it's headed toward 90 percent of all the work that we do it's around water and the modernization of the water supplies whether or not it's protecting our water supplies from cyber attacks whether or not it's modernizing them so there's remote monitoring and remote automation for running them or it's treating the most unique emerging contaminants That's what Tetra Tech does. And the higher the requirement for that, the better we're in a position that we're situated for that. And I would say for the most part, 90% of the funding for our municipal water systems, whether it's water treatments for wastewater and sanitation or clean water delivery, that funding comes actually at the state and local level and from the actual consumers. And so I see that unaffected. One of the areas, of course, we looked at very closely is renewable energy. Renewable energy is not new. This didn't come in the last year. It didn't come in the last five years, the last single administration. We've seen this come through Republicans back to Democrats and back to Republicans now. And we actually see that the demand is very high. It's not only at the federal level, whether it's the IRA, which is really a renewable energy support stimulus program, but I'll tell you the cost actually here in the United States for renewable energy is fully competitive with any fossil fuel that exists today. So the cost per kilowatt hour for renewable energy can stand on its own in most cases. And for those that would say the subsidies don't make the US the best place to do renewable energy in the event that there is actually a change, In the IRA, I'll tell you, nobody's in a better spot than if this goes to places like Australia, which has huge amounts of investment going into offshore wind. We're one of the largest players in offshore wind permitting and development. In fact, if not one of the largest, we're the largest. And the same is true in the UK. So I feel that there's plenty of reasons it's going to move forward here in the United States. But if it doesn't go here to the US and it goes to these other geographic locations, we're in a great spot to actually capitalize from its movement. Now, of course, one of the areas that I'm most excited about, and while I say we're not going to talk about it financially yet, I am going to talk about it directionally. You know, the work that we're doing with subscription software solutions, as we call our 3S service line, software subscription services or solutions, it's gone from a concept just a couple of years ago to actually being launched and being subscribed and asked for by our clients. and it's actually contributing and making a difference. And Dr. Leslie Shoemaker, who leads that program for the company, is going to speak more about that today. And I'll tell you, some have asked me over the years, what's the new frontier? Is it new water treatment? Is it moving to a new country? Is it moving to, is it going to be to build out what we have in Australia? So the new frontier for Tetra Tech is actually in the software solutions and the use of AI to make our business not only better internally, but to be a huge technical differentiator against any competitor in the marketplace and to differentiate ourselves not only to be number one in water that we have been, but to make the technical divide larger than anyone has ever seen before from what we're providing. So those are some of the things that we're looking at and the impact to As we close out the fourth quarter, and we're just a little over a month into our fiscal year 2025, I hope to address many of these, both in our prepared remarks, and certainly looking forward to any questions you have on these accounts. So before I initiate my prepared remarks, I, of course, have Steve Burdick, our Chief Financial Officer, who will provide details of our financial performance during the year, capital allocation priorities. First, I have Dr. Leslie Shoemaker, who will provide remarks on our key water-related growth markets and the continued expansion of our recurring revenue services for our high-end consulting markets that we're supporting now. With that, I'll initiate my prepared remarks. As I mentioned at the beginning, that we had a great fourth quarter and fiscal year 2024. It is noteworthy that both the quarter and the year we achieve record results for all of our key metrics of revenue, net revenue, operating income, earnings per share, and backlog. And I do want to emphasize record high points with respect to all those financial metrics in the fourth quarter. I think one that I might quite often look at is individuals or firms say they had a great year. Well, they say they had a great year and don't focus on the fourth quarter because they were carried by their first three quarters. We left with the biggest beats of any quarter in the year, our fourth quarter, And the biggest momentum, and of course, the high point, backlog growing to the most visibility we've ever had going into the next year. For the year, for fiscal year 2024, our revenue increased by 15% to $4.32 billion. And notably, for the first time, our annual operating income exceeded half a billion dollars for the year. If I want to be more precise, I'd say 510 million, as you can see on the slide, which is an increase of 22%. from the prior year. This strong performance resulted in an earnings per share of $1.26 for the year, or if you wanted to go pre-split, that would be $6.32, an increase of 21% year-over-year. In the fourth quarter, we also had record performance. As I just mentioned, our revenue was $1.37 billion in the quarter. up nine percent from last year and i want to make a note that up nine percent is up from an incredibly strong fourth quarter we had a year ago which was an all-time record by a big number so this nine percent is not off of an easy comp it's a comp a very difficult comp and of course that would make the fourth quarter we just had the highest revenue quarter in the history of the company by a long ways Our operating income grew even faster than our revenue, though, and it was up 13%, up to $153 million in just the fourth quarter. And we ended the year, as I just alluded to, with an all-time high backlog at $5.38 billion, the highest backlog in the company's history. And to put it into real terms, we're up about $590 million from the same quarter last year, or an increase of about 12%. I'd now like to present our performance by our segments, and we have two segments, our Government Services Group and our Commercial International. Both segments contributed significantly to our great performance this last quarter and, frankly, for the entire year, fiscal year 2024. Within the fourth quarter, the Government Services Group, or GSG segment, had its revenue increase by 12% year-over-year to $513 million. They also generated a really strong 16.1% margin of 40 basis points from the prior year. The GSG, or government service groups, margin expansion was a result of just excellent performance across our entire base, and I really want to commend all of our technical project managers and staff that performed this work. It was just really an excellent performance as far as high-end deliveries and high margins in the fourth quarter. The commercial international group, or CIG segment, was actually on a relative basis the best we've seen from them in really a long time. They delivered a 15.6% margin, the highest that we've had out of that group in really close to the last decade, and it was up an impressive 230 basis points from last year. And they also grew their revenue on a 5% rate year over year. The margin expansion within CIG was due to a combination of strong project performance in our international operations and the continued expansion of RPS's margins, which finished the year in the fourth quarter about 12% operating margin, up about 200 basis points from the prior year. As laid out in our RPS strategy, they are now fully integrated and operational on all of our enterprise systems that we have here within Tetra Tech. And we expect RPS to approach margins in the mid-teens by the end of fiscal year 2025. I'd now like to provide an overview of our performance by customer. Work for U.S. federal clients was up 16% from the same quarter last year. Without the contributions of Ukraine, which was actually a material contributor, our margins with the U.S. federal government were up about 13%. with increases in our civilian and defense environmental and infrastructure programs. Our state and local revenue grew 9% driven by the work that we do in water system modernization and advanced water treatment for cities and municipalities all across the United States. Our U.S. commercial net revenues were up 5% driven by growth in data center design services, high voltage power transmission design, and environmental remediation. And finally, Our international revenue, which now represents almost 40% of the company grew at a 6% rate. International work is driving growth in the United Kingdom and Irish water programs that are large contributors and our differentiated high-end infrastructure building services that we're performing across Canada, the United Kingdom, and Australia. I'd now like to discuss our backlog, which increased to an all-time high, if I'd mentioned earlier, $5.38 billion, up 12% year-over-year. And I'd like to note that this metric is not uniformly presented by all firms that you're going to speak with. In fact, Tetra Tech only reports backlog on orders that are contracted, funded, and authorized for us to go do the work. This quarter, we were awarded significant contract vehicles that expanded our contract capacity with the US government. Contract awards include capacity in sustainable water infrastructure, defense cybersecurity, and system modernization. We also received a very nice state and local award, which is a single award contract for watershed resiliency services for the Utah Army National Guard. We continue to win new water contracts in the United Kingdom that leverage synergies between Tetra Tech and the RPS water teams that we have jointly working in these markets. And in the quarter we were awarded a new $1 billion, in fact $1.05 billion framework contract for water services in Northern Ireland. This contract builds on our collective long term relationships with this client, significant local presence and our global water capabilities. At this point, I'd like to turn the presentation over to our Chief Financial Officer, Steve Burdick, who will go through some of the details of our financials.

So, Steve. Thank you, Dan. So, I would like to now provide an update on the results for the fiscal year, as well as our working capital and cash flow. Revenue, net revenue, both increased by 15% over fiscal 2023. Our top-line revenue hit a record $5.2 billion, and net revenue was an all-time high of $4.3 billion. driven by strong end markets across all of our geographies. Now, coming in stronger, even stronger, was our operating income, which increased at a higher rate than our revenue. And as Dan discussed earlier in this call, we continue to focus on the front end for water and environmental projects, which are carrying higher margins across all of our end markets. As such, operating income for the year was $501 million, or 40% year-over-year. And our operating margin was up 60 basis points over last year. And the adjusted EBITDA margin saw an improvement of 70 basis points over last year. In comparing our fiscal 2024 results to our 2030 goals that we set out at our inaugural investor day earlier this year, I'm glad to report that we hit the high end of our revenue growth range of 15% and exceeded our EBITDA margin forecast of an annual 50 basis points improvement. Our EPS, this increased to an all-time high of $1.23, the improvement in our core operating margins was the key contributor to this 21% increase over last year. On a pre-split basis, our adjusted EPS came in at $6.32, which exceeded the top end of our EPS guidance range that we had previously provided for fiscal 24. I'd now like to provide an update on our working capital and cash flow for fiscal 2024. The cash flows generated from operations for the year were $359 million. These cash flows exceeded net income for the year, and when looking back over our historical financial results, we noted that our cash flow from operations has exceeded net income every year for over two decades. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading KPI of 54.9 days. We consider this efficient and effective management of our working capital to be 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. We've made significant progress in our leverage to reach our target range of one times to two times. At the end of the year, our net debt on EBITDA was at a leverage of 1.0 times. If you recall, when we acquired RPS a little less than two years ago, the net debt leverage ratio was more than double at 2.2 times. As we continue to execute on high-quality operating results with strong cash flows and a healthy working capital, we will continue to have the ability to invest in strategic initiatives, which will provide higher and longer-term returns for our shareholders. Now, for those following along in the presentation, I would like to now present our capital allocation overview. We have the strongest balance sheet in the history of our company, as well as the significant amount in liquidity available to invest in organic and inquisitive priorities. In addition, we have a well-balanced mix of fixed and floating rate debt to mitigate interest rate risk as we look to investments in key strategic priorities. We improved our capital structure to take advantage of the credit market to support our financing needs. And I want to point out that we reduced our average interest rate by 143 basis points to 3.94% this year. We have a strong pipeline for acquisitions, which is aligned towards the global and technical leaders, especially in water and environmental spaces where we have led the market for over 20 years. And regarding our dividend program, I want to announce that our board of directors approved a 5.8 cent dividend, which is a 12% increase year over year to be paid in the first quarter. This is our 42nd consecutive quarterly dividend with annual double-digit increases in the amount paid. Also, I want to remind our shareholders that we do have available a significant portion of the $400 million from our stock buyback plan that was approved by our board of directors for future consideration as part of this capital allocation strategy. You know, as a result of, I'll call it historically strong cash flows, And a solid balance sheet Tetra Tech is one of the few companies who've been able to execute on a capital allocation strategy, whereby we provide high returns for shareholders through cash dividends. stock buybacks and investments in strategic opportunities both organically and via acquisitions. I'm really pleased to share these strong results for fiscal 2024. I want to thank you all for your support, and I will now hand the call over to Dan and Leslie to discuss just a few of Tetra Tech's future opportunities, as well as our 2025 guidance. Leslie?