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Tetra Tech(TTEK) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue for Q2 2023 exceeded $1 billion for the first time, reaching $970 million, a 39% increase year-over-year from $700 million [5][6] - EBITDA income increased by 30% year-over-year, reaching a record $105 million for the second quarter [5] - Earnings per share (EPS) rose to $1.17, up 19% from the previous year [5][6] - Without the contribution of RPS, revenue was $989 million, a 16% increase year-over-year, with EPS of $1.20, up 22% [6] Performance by Business Lines - U.S. federal client work increased by 59%, driven by growth in water and environmental programs, including support for Ukraine [7] - State and local revenues grew by 12%, supported by digital water and municipal infrastructure projects [7] - International revenues increased by 55%, with a growth of 11% excluding RPS, driven by high-performance buildings work in Canada, Australia, and the UK [7] - Government Services Group (GSG) segment grew by 29%, with a significant contribution from Ukraine-related work [8] - Commercial/International Group (CIG) segment grew by 47%, with a 13% increase excluding RPS, driven by renewable energy programs [9] Market Data and Key Metrics Changes - Backlog increased by 18% year-over-year, reaching an all-time high of $4.275 billion [9] - New contracts included a $105 million U.S. Watershed Assessment Contract and a $54 million disaster planning contract in Puerto Rico [10] Company Strategy and Industry Competition - The company is focused on integrating RPS to improve profit margins and align them with Tetra Tech's margins [12][13] - Tetra Tech aims to leverage its expertise in sustainable infrastructure and renewable energy to drive future growth [27] - The company has been recognized as a leader in water and environmental management, ranking number one in various categories by Engineering News Record [20][21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the underlying business performance, with growth rates exceeding expectations across all end markets [29] - The company anticipates continued strong demand for its services, particularly in light of upcoming federal funding initiatives [31][62] - Management noted that the integration of RPS is exceeding expectations and creating new opportunities [27] Other Important Information - Cash flows from operations totaled $108 million, up 13% year-over-year, with a Days Sales Outstanding (DSO) of 59 days [11] - The quarterly dividend was increased to $0.26 per share, marking the ninth consecutive year of double-digit increases [11] Q&A Session Summary Question: Insights on RPS accretion targets and underlying Tetra Tech earnings growth - Management highlighted strong underlying performance with revenue growth in the 20% range, driven by federal funding initiatives [29][30] Question: Margin expectations and cash conversion trends - Management expects margin expansion in both Commercial/International and Government Services segments, with cash from operations exceeding net income [35][36] Question: RPS EBITDA margin targets and backlog contributions - RPS is expected to align its EBITDA margins with Tetra Tech's by 2025, with a stable backlog performance noted [37][53] Question: Impact of interest rates on commercial business - Management indicated that about half of commercial work is driven by regulatory requirements, which are less sensitive to interest rate fluctuations [44][46] Question: Future growth prospects and backlog contributions - Management sees potential for significant contributions from federal government funding, particularly in decarbonization and clean water initiatives [61][62]