Tetra Tech, Inc.

Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the investor's section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech and this broadcast is the copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. With us today from management are Dan Batrack, 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 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 the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Paul, and good morning. And welcome to our first quarter of fiscal year 2025's earnings conference call. That's been a very eventful month of January so far. Just over three weeks ago, the Eaton fire struck right here in Pasadena within about a mile of our corporate headquarters. And an equally destructive fire occurred a little over 20 miles away from our headquarters in the Palisades here in Los Angeles County. Unfortunately, some of the Tetra Tech staff did lose their homes. And many, many that work here in our Pasadena headquarters were evacuated. And in fact, still, some still remain evacuated all the way up until today. But most importantly, all of the Tetra Tech staff are safe. And we certainly do. send our condolences to those that were unfortunate because there were fatalities in both of the fires. So it was not a great start to the month just from a personal impact to Tetra Tech staff and individuals throughout Los Angeles County. Just 10 days ago, January brought us the inauguration of President Trump and the incoming of his new administration. And they are rapidly aligning the government to their policies, their programs, adjusting contracts to areas that are in line with their mandate as they're bringing it. And much of it's been implemented through executive orders and other actions. In fact, just beginning this week, just a few days ago, our USAID or foreign development contracts for the most part have all been put on hold. for up to 90 days while the administration embarks upon a review of all of these existing contracts. Now, while these may seem like a lot of change in the industry, it's not that dissimilar from what we've seen in temporary government shutdowns. We have seen programs that have been put on hold, typically comes quite quickly when a budget hasn't been arrived at through Congress, and so we have seen this in a different form, maybe it wasn't executive actions, but we have seen the net effect be quite similar here in the marketplace and here at Tetra Tech. But no doubt Tetra Tech's strength has always been in our ability to respond and to adapt to change. Whether it's mobilizing our staff to respond to fires or other disasters or hurricanes, or aligning our staff with our clients' priorities. We can move quite quickly. Our staff are in extremely high demand. And the ability to put them on other programs during these periods is actually quite high. Our services across the board continue to be in very high demand for things such as providing clean, secure water supplies, ensuring a healthy environment, or designing and putting in place resilient infrastructure such that it will be not impacted in the future regarding disasters or any other items. Now presenting with me today, I have Steve Burdick, our Chief Financial Officer, who will be providing additional details on our financial performance and capital allocation for the company. I also have Dr. Leslie Shoemaker, who will provide remarks on some of our key growth markets. But before I get to, or before we get to our drivers and outlook for fiscal year 2025, I'd like to first share with you the results of our first quarter. we had a very strong first quarter and beginning of fiscal year 2025. For the quarter, we achieved new record results, and not just record results for what we would normally perform in the first quarter, but high points for any quarter in the entire history of the company. In fact, our net revenue, which increased to $1.2 billion in the quarter, and again, that's for net revenue, It was up 18% from the prior year to an all-time record for any quarter in the company's history. Property income was $138 million for the quarter, an increase of 24% from the prior year. And by the way, I'll make a note, a year ago, that was a record high. So by having income being up 24% from a record first quarter was really quite impressive here for the company. And of course, that's an all-time high for a first quarter for the company. The strong performance resulted in earnings per share increase of 25%. over the previous year to $0.35 for the quarter, which was above our own guidance range and, of course, above consensus that were provided in the marketplace. And through all of this, and with this very large revenue being recognized in the quarter, it was even more impressive that our backlog grew. And it grew to $5.44 billion, about 15% from the first quarter of last year. I would like to discuss and present our performance by segment. Both of our segments contributed significantly to this outstanding performance in the first quarter. For the first quarter, the Government Services Group, or GSG segment, increased its revenue by 36% year over year to $601 million. And this is the first quarter we've ever had a GSG segment over $600 million. So it was really quite an accomplishment. Now, GSG generated a margin of 13.9% margin for the quarter. The GSG's revenue growth was largely driven by significantly higher than anticipated work in Ukraine for a USAID client. While this is extremely important work, and it's been quite successful supporting the U.S. government in this critical mission, uh the contracts that we have do carry lower margins due to the cost reimbursable nature of the contracts if you took out the ukraine work that we did this last quarter you would have seen gsg's margin at about 15.4 which is extremely strong for the first quarter of the year where we have holidays such as here in the u.s thanksgiving christmas and other times up so to be in the In fact, above 15% for this first quarter, extremely strong for the company. The Commercial International Group, or CIG segment, delivered a 13% margin. Quite pleased with that. It's up 50 basis points from last year, which is right in line with our forecasted annual increase in margins. The CIG segment had net revenue of $596 million, which was up 4% year on year, and I will note This is the closest balance we've had between government services at $601 million, CIG at $596 million. We really have about half of our work in GSG and about half of our revenues in CIG. Really quite balanced for the company. I would like to provide an overview of our performance by our end customer and how we look at how we contract in the marketplace. Work for our U.S. federal clients was up 32% from the same quarter last year. Now, without contributions from our Ukraine work, our federal revenues would have been up 7% year over year, which is exactly in line with our forecast for the federal government. This growth is driven by increases in our defense infrastructure and many of our critical civilian programs that we undertake. For state and local revenues, an amazing 47% year over year. Now, this was driven primarily by extraordinary hurricane response activity that we undertook in areas of Florida, Georgia, Carolinas, and other areas in the southeast in response to hurricanes Helene and Milton. We also saw growth, though. This growth wasn't just from these hurricanes. We also saw material growth on our digital water modernization. and advanced water treatment projects. Now, if we did take out the impact of the extraordinary hurricane response activities, our state and local revenues would have been up 19% year-on-year, very strong. Our U.S. commercial net revenues were up 7% year-on-year, again, very much in line with our forecast for the quarter, driven by growth in high-performance buildings, design services, as well as our support for Fortune 500 clients. And finally, our international work work that we actually contract form perform outside of the United States represented over a third of our revenues in a quarter. For international work includes the United Kingdom and Irish water programs are differentiated high end infrastructure services all across Canada and defense infrastructure resiliency work in both the United Kingdom and in Australia. I would like to discuss and point out a few items on our backlog, which increased to an all-time high of $5.44 billion, as I'd mentioned a moment ago, up 15% from last year. We won a whole group or a whole series of Army Corps of Engineers contracts for civil works design, sustainable water infrastructure projects, environmental engineering, emergency response, and flood protection activities. all critical programs that are priorities for the incoming administration. In the Midwestern part of the United States, we won a five-year single award. That means awarded just to Tetra Tech for emergency response and preparedness work within that entire region. And I'd like to remind you that while Tetra Tech has more than $25 billion in contract capacity with the US federal government, our backlog does not include any factored numbers associated with contract capacity or anticipated awards under IDIQ contracts. So the work that we have here is contracted, funded by the client, and authorized for us to go to work. Nothing else has been adjusted or factored or added into it. We don't have that component. Now at this point I'd like to turn the presentation over to Steve Burdick who can present the details of our financials in the quarter and particularly our capital allocation programs and priorities for the company. Steve?

Hey, thank you, Dan. I'd like to now provide an update of our GAAP financial results for the first quarter and our working capital, cash flow, and capital allocation. So as Dan discussed on this call, we continue to focus on the front-end cycle for water and infrastructure projects, which are carrying a higher margin across all of our end markets. And as such, even though revenue was up 16% over last year, our adjusted operating income and EPS for the first quarter increased at an even higher rate, with an adjusted EPS up by 25% over the last year. Now, this record financial and operating performances resulted in a strengthening balance sheet and cash flow positions, such that even though the decision by one of our subsidiaries to settle the 100-point litigation did result in a one-time charge that is material to the first quarter earnings, That decision will not materially impact our results or strategy going forward. And for those of you on the call or looking at our information, I refer you to our Reg G and to the appendix of this presentation for the gap to adjusted reconciliation. Now, cash flows generated from operations for the trailing 12 months were $363 million. These cash flows have continued to exceed income by more than 100%. And when looking back over our historical financial results, we noted that our 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 a DSO of about 55.9 days, much better than our industry peers who are more than 80 days. Our target is to keep the DSOs well below 60 days. We consider this a high watermark for our working capital to be sustainable over the long term as we continue to make cash flows from operations a priority. Also, our DSO 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. Our net debt on EBITDA was at a leverage of 1.33 times, which is much lower than our average one year ago, which stood at 1.51 times. Now, on an adjusted basis, without this one-time charge, the net leverage was at 1.05 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 returns to our shareholders. For those following along in the presentation, I'd like to now present our capital allocation overview. But prior to diving into these details, I'd like to point out that Tetra Tech is one of the few firms who is able to provide an increasing dividend, buy back our shares, make acquisitions, all the while lowering our net debt leverage. And with that, I would say that we have a very strong balance sheet, probably the strongest balance sheet in our history, as well as a significant amount of liquidity available to invest in organic and acquisitive priorities. And we have a well-balanced mix of fixed and floating rate debt to mitigate the interest rate risk as we look to invest in key strategic priorities. We have a strong pipeline for acquisitions, which is aligned towards technical leaders, especially in the water and environmental spaces, where we have led the market for the last 20 years. Now, regarding our dividend program, I want to announce that our Board of Directors approved a 5.8-cent dividend, which is a 12 percent increase year-over-year to be paid in the second quarter. This is our 39th consecutive quarterly dividend with an annual double-digit increase in the amounts paid, and this remains a priority for the company. As we've revised our capital structure to take advantage of the credit market to support our financing needs, I want to point out our ability to reduce our average interest rate by 57 bits to 3.44% this quarter versus last year. This, which is an environment of higher interest rates for longer. And based on reaching a lower leverage at the end of last year, We did reinstitute our stock buyback program this last quarter worth $25 million. 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 capital allocation strategy to use for future stock buybacks. You know, I am quite pleased to share these strong results for the first quarter of 2025. I want to thank all of our shareholders and analysts for your support. And I will now hand the call back over to Leslie and Dan to discuss Tetra Tech's future global and improvement opportunities, as well as our fiscal 2025 guidance. Leslie.