Tetra Tech, Inc. (NASDAQ:TTEK) Q1 2024 Earnings Call Transcript
Tetra Tech, Inc. (NASDAQ:TTEK) Q1 2024 Earnings Call Transcript February 1, 2024
Tetra Tech, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 Investors section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech and this broadcast is a copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. With us today from management are Dan Batrack, Chairman and Chief Executive Officer; Steve Burdick, Chief Financial Officer; Jill Hudkins President; and Leslie Shoemaker, Chief Sustainability Officer. They will provide a brief overview of the results and then we'll 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 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 all that 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.
Dan Batrack: Great. Thank you very much Paul, and good morning and welcome to our first quarter of fiscal year 2024 earnings conference call. We’re looking forward to sharing with you Tetra Tech's first quarter results and how we're building on our record-breaking 2023 performance. We just celebrated our first year since the RPS group joined us, and we couldn't be happier with their successful transition into the greater Tetra Tech. As a pure-play global leader in high-end water and environmental consulting, our future outlook is strong. It speaks to the success of our strategy to focus on the entire full water cycle. And you're going to hear a lot more about this today from both Jill Hudkins and from Leslie Shoemaker. Our leading with science approach is led by our talented workforce of scientists, data analysts and engineers who leverage our Tetra Tech Delta digital tool solutions in performing their work every day.
Our Delta technologies not only include analytic tools that make us best-in-class, but also include software and applications that are being subscribed to by our clients. Based on our strong first quarter and the outlook that we see for the rest of the fiscal year, we've raised our full year guidance for net revenue and increased our earnings per share guidance to reflect a 20% growth rate year-over-year. And while we report our financials on a US GAAP basis for our international investors we've included some IFR metrics for their reference. I'll begin with an overview of the quarter. Steve Burdick, our Chief Financial Officer will provide an overview of our financial performance and our capital allocation strategy. And Jill Hudkins and Dr. Leslie Shoemaker are going to provide today an overview of our differentiated water services.
Our first quarter results build on the record performance results that we had just last year. In the first quarter of fiscal year 2024, our net revenue increased 38% to $1 billion -- or $1.02 billion, which represents a double-digit organic growth rate. Our EBITDA increased 32% to $131 million in the quarter, which generated an all-time first quarter high earnings per share of $1.40. This quarter also had strong new orders of $1.2 billion, which resulted in our largest first quarter backlog of $4.74 billion, which is up 24% from last year. As I mentioned earlier, the alignment of RPS with Tetra Tech is proceeding extremely well. And I'm really pleased to announce and share with you, that in less than one year, RPS' EBITDA margin now exceeds 10%, rising more than 600 basis points from when they joined us on January 23 of last year.
I'd like to start by providing you an overview of our performance by our end customers. In the first quarter, revenue for all four of our client sectors increased by double digits, compared to last year. Work for our US Federal clients was up 49% from the same quarter last year. Federal growth was driven by the Department of Defense and USAID Resiliency Consulting. Our state and local revenues grew organically about 16%, continuing to be driven by the work that we're doing in the water supply and treatment areas that you're going to hear a lot more about from Jill and Leslie, later in this call. Our US Commercial, net revenues were up about 10% from last year. This growth was driven by increases in infrastructure decarbonization, which is mostly in our high-performance buildings practice, environmental permitting and high-end consulting and energy transition services.
And finally, our international revenue was up 74%. Now the international operations together with RPS are growing our water and clean energy services especially, in the geographies of the United Kingdom and in Australia. I'd like to share with you our performance by each of our two end segments, the Government Services Group and our Commercial International segment. In the first quarter, the Government Services Group, we referred to it as our GSG segment was up 25% compared to last year to $443 million and generated a strong 14.3% margin in the quarter. Key revenue growth drivers included inland waterways and coastal flood protection programs, as well as continued support for our USA Energy programs. For comparison purposes, I'll note that the first quarter of last year or 2023, were extremely busy across all of Tetra Tech because we were responding to the impacts of Hurricane Ian that went across Florida, which drove our margins to more than 17% in the first quarter of last year.
And so at least on a margin basis, it was a very high comp to compare our performance of this year. On the Commercial and International Group or the CIG segment, we grew our net revenue by 49% and delivered a 12.5% margin for the segment in the quarter. While the addition of RPS contributed significantly to the top line or revenue growth, we did see the CIG segment grow at about a 10% organic rate. I'd now like to discuss backlog, our best forward-looking indicator in our business. As I previously noted on these quarterly investor calls, we report backlog based on contracts that are signed, projects that are funded and where we receive authorization from our clients that's already been received here in-house. All three of these are required, before we include any dollars in our backlog.
Now, we do not include in backlog the financial estimates for future orders, on the more than $25 billion we hold in contract capacity across the company. Key wins that added to our contract capacity in the quarter included recent awards of $125 million United Utilities program or AMP 8 Better Rivers program, an $800 million US Army Corp of Engineers PFAS remediation contract, and a $450 million Great Lakes environmental restoration contracts. Overall, we booked about $1.2 billion in orders in just the first quarter of 2024. As a result, our backlog was up 24% from last year, resulting in a new first quarter high of $4.74 billion of funded and authorized work that we have in-house. Now, I'd like to turn the presentation over to Steve Burdick, our Chief Financial Officer who will go over some more of the details of our financials from the first quarter.
Steve Burdick: Thank you, Dan. So, I'd like to now provide an update on our working capital and cash flow for the first quarter. So, cash flows generated from operations for the first quarter were positive for the trailing 12 months totaled $353 million, which is up 26% year-over-year. Now, over the same 12 months cash flows exceeded net income by more than 152% and as I further thought about this key metric, I actually researched our historical financial results and found that our cash flow from operations has exceeded our net income every year for the last two decades. And I got to say I'm not aware of many other companies who have that same track record. So, I'm really proud of what Tetra Tech has been able to do. Our focus on working capital and cash flows has resulted in our DSO, reflecting an industry-leading standard of 55 days versus the industry average at over 80 days.
This first quarter results are an improvement of six days over last year. And we consider this high watermark for working capital to be sustainable over the long-term as we continue to make cash flows from operations a priority. The lower DSO metric also provides significant insight into our core business as it reflects the outstanding work that our project managers perform relative to high-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and all of our geographies. Our net debt amounted to $746 million and the net debt on EBITDA was a leverage of 1.5 times, well within our target and much lower than when we acquired RPS a year ago. In addition we have total cash positions of about $199 million at the end of the quarter.
So, as we present here today, we continue to execute on high-quality operating results with strong cash flows, industry-leading [Technical Difficulty] target range. For those following along in the presentation, I'd like to now present our capital allocation overview for 2024. We have a significant amount in liquidity available to invest in organic and acquisitive priorities and we have a well-balanced mix to both fixed and floating rate debt to mitigate interest rate risk as we look to invest in key strategic priorities. We have a strong pipeline of acquisitions, which are aligned towards technical leaders, especially in the water and environmental spaces where we have led the market for the last 20 years. And regarding our dividend program, I want to announce that our Board of Directors approved a $0.26 dividend, which is a 13% increase year-over-year to be paid in the second quarter and this is our 35th consecutive quarterly dividend with double-digit increases in the amount paid.
As we revise our capital structure in the last year to take advantage of the credit market to really support our financing means, I want to remind our shareholders that we do still have available a significant portion of the $400 million buyback plan that was approved by our Board back in 2022, for future consideration as part of our capital allocation strategy going forward. I'm really pleased to share these results for the quarter with you all. And I want to thank you for your support. I will now hand the call over to Leslie Shoemaker, to discuss Tetra Tech's differentiated leadership in the Water and Environmental sector.
Leslie Shoemaker: Thank you, Steve. Hello. My name is Leslie Shoemaker. And I've spent over 30 years with Tetra Tech in the research and development of Watershed Simulation, Watershed Protection studies and the advancement of our Tetra Tech Delta offerings across the company. Tetra Tech's pure-play focus on water and environment has differentiated us from the very beginning. Since our founding in 1966, we have developed first-of-a-kind solutions for the entire water cycle and then provided our clients with practical implementation at scale. Tetra Tech has set the standard for water analytics from the earliest simulation of flood protection structures to our industry-leading models of watershed behavior that have protected over 100,000 critical water bodies worldwide.
It is this work, leading with science and scaling solutions across government and commercial clients that has led to our rapid growth and the number one ranking that Tetra Tech has held in water for 20 consecutive years as well as number one rankings in water treatment, hydro and environment. So Tetra Tech works across the full water cycle, in four major phases. We think of it as Research and Development, followed by Climate and Watershed work, Water Treatment and then Flood Protection and Navigation. Our water work represents approximately 85% of our annual revenue or approximately $4.25 billion of revenue distributed across our four distinct water cycle phases. In the Research and Development phase the smallest in revenue but the most important in the work that we do working side-by-side with our clients to investigate new contaminants unlock the impact of climate on water quality and even decipher the root causes of degradation of essential water bodies.
It's this research that actually helps drive us to new opportunities and new research that can provide the Climate and Watershed phase with the new ideas. In the Climate and Watershed phase at $2 billion in revenue a year by far the largest base of our services, we scale these ideas into practical solutions. Applying our Analytical and Software Solutions on large regional programs like, The Chesapeake Bay, The Great Lakes and, The Gulf of Mexico as well as essential water bodies worldwide. Now increasing variability in climate has also further increased the demand for our risk-based analysis of watershed behavior and the science underpinning specific design solutions to adapt to these changes. Our leading with science approach, has also built our Tetra Tech Delta solutions that differentiate us.
It's the ability to leverage new technology and apply it at scale that has been the hallmark of Tetra Tech's success. Today we are scaling water solutions by providing new data platforms that make the application of Artificial Intelligence, practical and useful in managing water-related risks. The Research and Development we do and the Scalable Solutions we provide are the flywheel of our success in the water market. I'll now turn it over to Jill to speak to the other phases of the water cycle.
Jill Hudkins: Thank you, Leslie. Although, you may primarily know me as Tetra Tech's, President, I have spent most of my 25 years with Tetra Tech, designing advanced water treatment facilities. I've led the design of 15 desalination programs and developed a deep passion for our digital water services using data and digital technologies to create value for our clients. Tetra Tech is the market leader with $1 billion in water supply and treatment revenue for municipal, commercial and federal clients. We provide high-end engineering and consulting services for advanced treatment for drinking water, optimization of sewer networks and water reuse. Tetra Tech designs first-of-the-kind water treatment programs for PFAS removal, desalination and potable reuse including our award-winning Orange County Water District PFAS program, which includes the largest PFAS treatment facility of its kind in the US.
Continuing with the water cycle, Tetra Tech is the industry leader with $1 billion in flood protection and navigation revenue for state, local and federal clients. This phase of our water work includes planning, permitting and design for dams, levees and locks including Tetra Tech's design of the largest search barrier ever constructed by the Army Corps of Engineers. We are also a market leader for designing solutions that help communities adapt to the increased frequency of flood events. Tetra Tech is the leader in all four phases of the water cycle, while many of our competitors perform work that is limited to only one or two parts of the water cycle. When we discuss market drivers for the water cycle, a lot of airtime has been given to new federal infrastructure funding from the IIJA, IRA and the CHIPS and Science Act.
Clients across all of our end markets are benefiting from multiple state, local and commercial funding opportunities, sometimes augmented by federal government funding like the IIJA. Leslie spoke to Tetra Tech's early water cycle position in client funded research and development. Our federal clients such as the Department of Defense, NASA and NOAA distribute more than $100 billion in annual funding for research and development. Market drivers for Tetra Tech watershed protection and restoration projects include an estimated $380 billion spend for emerging contaminant removal from global watersheds, as well as site-specific environmental restoration programs such as the estimated $1.8 billion cleanup program for the Passaic River. Tetra Tech's water utility clients fund their programs through a combination of established sources.
These include user fee revenues, debt financing and tax receipts. These are sometimes supplemented by federal funding or loan programs. For example, the £96 billion U.K. water AMP 8 program will be funded through user fee revenues and debt financing. While the $1 billion Texas Water Fund has been funded 100% through state appropriation. Climate change and multiple $1 billion extreme storm events continue to drive demand for Tetra Tech's high-end flood protection and navigation services. The state of Florida estimates a $4 billion spend to protect Florida's coast from sea level rise and the state of California is investing $1.5 billion for modernizing the ports of Los Angeles and Long Beach. And now I'd like to turn the presentation back to Dan.
Dan Batrack: Great. Thank you very much, Jill, and thank you, Leslie for going over our position and our differentiation within the entire water market, specifically, the entire water cycle. As we enter the election cycle here in the United States we received quite a few questions recently about how Tetra Tech's business made by the outcome of the United States presidential election coming up this next November. Tetra Tech's US federal clients represent about 30% of the overall company's revenues. And they're distributed pretty evenly across the Department of Defense, civilian agencies and USA with the US State Department. I'd just like to start with each of these components to walk through them briefly and how we see there would be an impact depending on which administration may be in place when we come to the outcome of the election this November.
So I'll start with the approximately 10% of our revenues from defense that are likely to have stable growth under the current administration or an increase under a Republican administration and typically have a high priority with either political party due to their essential need to support national security. The second area or the second 10%. Our civilian agency programs are largely essential. For example, the services that we provide to our largest civilian client Federal Aviation Administration, Air traffic programs are just not optional and they require consistent funding and have bipartisan support and we really see no impact on the growth and the funding that we have in these areas of civilian programs. Now USAID or the US State Department does have the potential to be impacted by a change in administration.
But it is interesting the timing of the impact that we've seen historically is highly tempered by the long duration of contract awards that we have. When we go to international locations these contracts are typically five to 10 years long and have a direct linkage to national security interest. So they're not as discretionary as many might consider. Of course that's the 10% for each of these that 30%, but the remaining 70% of our revenues that are not associated with the US federal government are comprised of commercial state and local and international work which we see relatively unaffected by the outcome of any US presidential election. So regardless of the administration elected, we see Tetra Tech's federal revenues up on a collective basis either from continued increase in funding under a democratic administration or through an increase in the outsourcing of government services under a Republican administration.
I'd now like to present our guidance for the second quarter and our increased guidance for fiscal year 2024. First for the second quarter of fiscal year 2024, our net revenue guidance is for a range of $990 million to $1.04 billion with an associated diluted earnings per share of $1.25 to $1.35 per share. For the entire year, our increased net revenue guidance is for a range of one -- sorry $4.15 billion to $4.3 billion with an associated diluted earnings per share of $5.90 to $6.20. And I would note that if you take a look at the midpoint on the graph, if you're following along on the webcast this does represent a net revenue increase at a midpoint of 13% over a record high fiscal year 2023 and a midpoint of 19% over our GAAP earnings of 2023 to the midpoint of the guidance I've just shared.
Now, we do have assumptions on the webcast that you can see here. For the entire year, we do anticipate intangible amortization of a total of $44 million or $0.59 per share, and we provided on the presentation a breakdown of those charges per quarter and that are included in our guidance. We do estimate a 27% effective tax rate for the year, and approximately 54 million diluted shares outstanding. In summary, as we begin fiscal year 2024, we see strong demand for our differentiated leading with science services in both the water and the environmental markets. Our first quarter results set new records for revenue and profitability we've shared with you today. And our strategic focus on the entire pure-play water and environmental services markets are continuing to drive strong margin performance and long-term growth.
And I'm pleased to have shared with you today that, we've raised our entire fiscal year 2024 guidance for both net revenue and earnings per share. And with that, Paul, I would like to open the call up for questions.
Operator: The question-and-answer session will now begin. [Operator Instructions] Our first question is from Tim Mulrooney with William Blair. Please proceed with your question.
Tim Mulrooney: Yeah. Good morning, everybody. Thank you for taking my questions. I have two this morning on the guide. The first one, it looks like you raised the midpoint of your full year guidance range for net revenue by about $75 million. We noticed you beat the first quarter by about $40 million. So you raised the full year by more than you beat the first quarter. Can you just talk about what's driving that confidence? What businesses are seeing strong demand or that you're excited about as you head into 2024?
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