Tetra Tech Inc (TTEK) 2016 Q4 法說會逐字稿

Good morning, and thank you for joining the Tetra Tech earnings call. By now you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results, and we'll then open up the call for questions.

During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions and may differ materially from actual future events or results.

Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update 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 relations section of Tetra Tech's website.

(Operator Instructions) With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Thank you very much, Regina. And good morning. Welcome to our fourth quarter of fiscal year 2016 earnings conference call.

Before I begin my presentation today, maybe some of you have noticed that we had a presidential election two days ago here in the United States. I will say here at our corporate offices over the past 48 hours, I must have been asked about 100 times how is this new change in administration going to affect us here at the Company over the next year or even over the next four years, the entire term of the President-elect.

Well, first of all, I noted to everyone, and I'll share with you, that is very, very early in the transition process. In fact, it hasn't even really started yet. But there are a few things that we have noted and we'll share these with you.

The President-elect has identified that investing in infrastructure is one of his most fundamental priorities. The President-elect has used numbers like $1 trillion that will be spent on designing and building world-class infrastructure throughout the United States.

And early reports after the election have indicated that the investment in infrastructure is something that both parties can agree upon right out of the gate. And we're really glad to see sort of bipartisan support for some of these agenda items.

We do believe here at Tetra Tech there are a few firms that are more capable or better-positioned than Tetra Tech to support this national priority, especially in the areas of essential water infrastructure.

Now, no doubt as we see the new administration's programs develop and get implemented, we will provide you new updates as we identify new priorities and new implications for our businesses. And we'll include those in the quarterly calls as this actual transition takes place.

Now I'd like to provide you an overview of our financial performance for the quarter and for the entire fiscal year. We had an excellent fourth quarter, as demonstrated by all of our financial metrics. For the fourth quarter, our revenue from ongoing operations was $713 million, up 27% from the prior year.

Our net revenues were $526 million, up 25% from the prior year, which generated an operating income of $52 million, which was up 14% from last year. That operating income resulted in a record diluted earnings per share of $0.59 for the quarter, which is up 18% from the prior year.

And finally, our backlog, our best indicator of future revenue streams for our ongoing operations, was up 28% year-over-year at $2,353,000,000, a total record high for the Company in all of its history.

I'd now like to present our performance by segment. The WEI business group generated $216 million in net revenue in the quarter, which is up 14% prior year, with a very strong 16.4% EBITDA margin. WEI growth was driven by US state and local work and from US federal projects for water, environment and infrastructure services.

The RME business group, excluding the Coffey acquisition, delivered a solid 13% margin for the quarter. In aggregate, RME group was up 1% from the prior year, with significant growth in the international development market, which was largely offset by lower revenues from the oil and gas businesses.

Our recent acquisition of Coffey generated $76 million in revenue for the quarter, with a 7.6% EBITDA margin, which is consistent with our plan and the seasonal operations in Australia.

Collectively, the net revenue from our ongoing operations, which is our WEI business group, RME business group and the Coffey acquisitions, was $526 million, which is up 25% year-over-year with a 12% EBITDA margin for the quarter.

I'd now like to provide an overview of our performance by our end-customers. Our international net revenue was up 48% year-over-year. This was primarily driven by our Coffey acquisitions which contributed revenues from the Asia-Pacific region and from operations in the United Kingdom. At the end of the fiscal year, 30% of the net revenues from the company was generated outside the United States.

Work for our US federal claims was 29% of our net revenue for the quarter and was up 36% year-over-year.

Now, half of this increase, or about 18%, was from the Coffey acquisition. But the other half was generated by a broad-based organic growth in federal work for the Department of Defense and international development agencies here within Tetra Tech.

Our state and local revenues were actually the strongest organic growth in the entire Company this past quarter as we converted backlog to revenue and drove an organic growth rate of 30% year-over-year. This growth was a direct result of new programs for our municipal business, especially for water-related services for major metropolitan areas in cities located in California, Texas, Florida and New York. Those were the primary states that's the drivers for our growth at the state and local level.

Our US commercial work was down slightly, just 1% year-over-year. We did see growth in our environmental and solid waste services for our commercial clients, but that was offset by approximately a 20% reduction in revenues from our US oil and gas work.

I'd now like to review our results for the entire 2016 fiscal year. Tetra Tech's full-year revenue from ongoing operations was $2,531,000,000, which is up 14% from the prior-year. Net revenue was up 13% to just a little over $1.9 billion. Operating income generated from these ongoing operations was $170 million, up 10% from the prior year, which actually generated a diluted earnings per share of $1.80, or up 17% from the prior year.

As I mentioned earlier, we did end the year with a record high backlog of just under $2.4 billion. And overall, the results for the year were consistent with our plan and benefited from strengthening end-markets, especially in the fourth quarter as we finish the year, giving us great momentum as we are entering our fiscal year 2017.

I would like to say a few words about our backlog. Tetra Tech's backlog did reach an all-time high in our fourth quarter, as I mentioned earlier. Our total backlog is approximately $2.4 billion, which is up sequentially 5% and up 28% from the same quarter last year. And this is the third sequential quarterly increase we've seen in our backlog.

Our fourth-quarter awards included more than $1 billion in additional new contract capacity that was awarded to us by the Department of Energy, the US Army Corps of Engineers, the US Navy and the US Agency for International Development.

Now, we not only received new contract awards at over $1 billion in the quarter; we also received orders which added to our backlog, including the very first task orders from recently awarded contracts with the Department of Energy and the Navy.

I'm also particularly pleased that, while we had a book to bill of 1.2 times, we continue to build our backlog even in a record revenue quarter, which is really quite difficult.

I'd also like to note that Tetra Tech continues to use the strictest criteria for tracking and reporting our backlog, which is only to add orders that are awarded, funded and authorized by our clients. We actually don't -- are not aware of any other entity that actually holds to this strict a criteria for accounting orders into your backlog.

Now I would like to turn the presentation over to Steve Burdick, our Chief Financial Officer, to present the details of our financials. Steve?

Thank you, Dan. Before presenting our financial results for the third quarter, I would like to point out that a full reconciliation of our ongoing operations, which Dan just talked about, to our GAAP financials, which I will now discuss, can be found in the appendix of this presentation as well as our fourth-quarter earnings release.

Now, on to our GAAP results for the quarter. Gross revenue for the fourth quarter totaled $728.5 million compared to $578.4 million in the previous time period, which is up 26% year-over-year. We are pleased to report, and as Dan mentioned, that this quarter marks our highest quarterly revenue in the history of the Company.

Now, net revenue also improved and totaled about $530.9 million, which is up 24% year-over-year. And excluding Coffey's contribution, we saw about a 7% organic net revenue growth for this quarter primarily from our US federal and municipal markets bits that Dan also talked about.

Turning to operating income, for the quarter we generated $47.2 million in operating income, and this is an increase of about 16% over last year. Diluted earnings per share were about $0.53 for the fourth quarter, which is up 23% year-over-year. So on an ongoing basis, our diluted EPS totaled about $0.59, which is in line with our fourth-quarter guidance of $0.55 to $0.60 per share that we announced last quarter. And our ongoing EPS excludes about $0.06 from charges associated with the integration of Coffey as well as from our CM losses in the quarter.

Now, the losses associated with RCM were nearly all related to legal fees and outstanding claims. And we do continue to anticipate the wind down of RCM will be substantially complete in fiscal 2017. However, due to the fixed-price nature of the construction project that is going to be remaining, which is the fundamental reason that we got out of this business, there could be variances either up or down until all project performance and claims are finally resolved.

In addition, as of the end of the fourth quarter we have now taken all of our planned costs associated with the acquisition and integration of Coffey.

Now I'd like to review our cash flow metrics for the quarter. Cash flow from operations totaled about $52.2 million, which is up 82% year-over-year compared to last year's quarter. Excluding about $3 million in integration costs this last quarter, on an ongoing basis cash flow from operations totaled about $55 million.

For the full year, our ongoing cash flow from operations was about $170 million, which is right in the middle of our guidance of $160 million to $280 million for the fiscal year.

Our net debt totaled about $187 million for the quarter. Now, there was an increase, and this increase was due to the utilization of debt for acquisitions completed in 2016 for -- in the international development and data analytics space, and the utilization of free cash flow for the repurchase of shares and dividend payments to our shareholders.

We also continue to make progress in lowering our DSO. Days sales outstanding was 84.2 days for the fourth quarter. Now, excluding RCM and claims, our aggregate DSO was -- in the two [friends and] segments of our business was about 77 days. And throughout 2017 we will continue to work to reduce the DSO to be closer to 70 days.

So before concluding this portion of the call, I'd like to take a few minutes to discuss our capital allocation strategy for fiscal 2017. Consistent with 2016, we will continue to remain focused on maintaining a balanced approach between dividends, share purchases, acquisitions and investment in organic growth.

So we continue to target a leverage ratio about 1 to 2 times net debt to EBITDA. And with the current leverage ratio just under one times net debt to EBITDA, we have significant dry powder to invest in organic growth and acquisitions while still having the capital to deliver strong returns for shareholders. So, let me go into a few of the details and briefly explain how we plan to deploy capital over the next year.

First, we will continue to use our cash to invest in growing our ongoing operations. You'll hear more about this next from Dan when he provides an outlook for each of our end-markets in fiscal 2017.

Second, we will look to invest in strategic acquisitions to expand our consulting and engineering capabilities across our target end-markets and geographies. We have a combined $500 million in cash and credit facilities available for acquisitions through our banking relationships today and can take on additional debt as needed.

And third, we will continue to return capital to our shareholders through both buybacks and stock dividends. In the fourth quarter, we paid out $5.2 million in cash dividends and repurchased $25 million in stock, which together for the fiscal year totaled roughly $120 million.

And this week I'd like to announce that our Board of Directors approved Tetra Tech's 11th consecutive dividend. A dividend of $0.09 per share will be paid on December 14 to shareholders of record as of December 1, 2016. In addition, having recently completed our buyback program, our Board has authorized a new program to purchase up to $200 million of common stock.

Thank you all for your time today and support of Tetra Tech this past year. And I will now hand the call back over to Dan.

Great. Thank you very much, Steve. Now overall, we completed our 2016 fiscal year with an absolutely excellent book of business, strength across multiple end-markets and absolute strong financial performance. We had record revenue and income in the fourth quarter, as Steve just recounted for us, including 7% organic growth without the acquisition of Coffey. And with them, an overall growth of 20% from the same prior year.

We remain here at Tetra Tech focused on high-end consulting and engineering as providing us a very high-value business, providing us a very high-margin business, and it clearly differentiates us in the marketplace.

One of the areas we've been focused on as a corporation is quote leading with science, which emphasizes our innovation and investment in new emerging technologies, which is actually underpinning the growth of our business as we enter 2017. And we are developing completely new practices in the Corporation in areas of smart water infrastructure and data analytics that are integrating with new technologies that are giving us long-term growth that we are actually integrating with our practical experience in the industry.

And today, we have a record backlog and a portfolio of $14 billion in contract capacity with major federal customers worldwide. And this is what's putting us as a corporation in the best position ever to capitalize on new investments and new program priorities for the clients that we're serving.

Now, our outlook for fiscal year 2017 is for growth across all four of our end-client sectors. Now, as I've gone over earlier, our fastest-growing sector is with the United States state and local clients for municipal water and smart water services. And we expect this client to have growth rates between 7% to 12% during the year of 2017.

We expect our US federal work to be about a quarter of our overall business and grow at a rate of 5% to 10% for the year. Federal growth, we expect, will be driven by the Department of Defense and development-related services performed both here in the United States and overseas.

Now, Tetra Tech's international revenues is primarily generated in Canada and the Asia-Pacific region, which includes Australia, New Zealand and surrounding countries. We expect revenue growth in these areas to be in the 5% to 10% range, associated with infrastructure stimulus spending for work that would be performed in Australia and for UK aid agencies.

And finally, our US commercial work we expect to grow at a more modest rate at perhaps between a 1% to 3% rate, with actually very strong increases in our environmental revenues and for industrial water treatment and cleanup programs, and in solid waste. But we expect that growth to be offset somewhat by reductions in revenues in the oil and gas midstream services business.

However, I do want to make a comment on oil and gas. If we see an increase in oil and gas prices or an additional investment in our clients in the oil and gas pipelines, that could contribute to a much more rapid growth in our commercial work and a significant expansion in our margins in this area. Collectively, we expect our growth rates to be between 4% to 8% for the year, fiscal year 2017.

Now, I would like to briefly highlight some of the end-markets and types of projects that are actually driving our growth to give you a better idea of what we are doing for our clients and how we are being differentiated in the marketplace. So in state and local markets, we are designing key water infrastructure projects for the treatment of reclaimed water and water reuse.

For example, here in Southern California the design of the groundwater reliability improvement project, where it's often referred to as the GRIP project, is providing recharge of groundwater supplies with treated wastewater. Now, this is a great example of a project that is helping Southern California become less dependent on imported water. It's efficiently addressing long-term drought conditions, and it's supplying water for 4 million people in the Southern California region.

In areas of international development, this is also an area of strong growth for us. With the acquisition of Coffey, we now have access to a broader client base and an even more comprehensive set of qualifications and resources. We can now leverage our contract capacity for development agencies worldwide, which has already proven to be a benefit to our backlog over just the past few quarters.

Now, the projects that we do for international development agencies typically address very large-scale problems. For example, protecting over 1 million hectares -- that's about 2.5 million acres -- of coral reefs that are essential to protecting fisheries in Indonesia. It's these types of projects that really are making a difference in the entire world.

And finally, smart water infrastructure is an absolutely new emerging market. This is where we are using emerging technology to optimize how water is managed. We are applying this technology at multiple scales. And if you are following along on the webcast, you can see on this slide. And this is where we are doing things such as dynamically capturing storm water for reuse at homes and neighborhoods. We are managing runoff of water from roads and diverting it into underground storage locations. And we are treating this water and returning both to the groundwater or reusing it for irrigation.

And what makes smart water infrastructure different is how we are combining the use of wireless instrumentation, cloud data storage and numerical models to make decisions real-time for managing these very large watersheds. This is allowing us to manage the water more efficiently, more effectively and, most importantly, to save our clients money in the long-term.

Now I'd like to present our guidance for the first quarter of 2017 and for the entire fiscal year. Our guidance is as follows. For the first quarter of fiscal year 2017, our net revenue guidance is for a range of $450 million to $475 million for the first quarter, with associated diluted earnings per share of $0.44 to $0.48. And for the entire fiscal year of 2017, from $2 billion to $2.1 billion, with an associated diluted earnings per share of $2 to $2.20 per share.

We also for the entire year are forecasting providing guidance of $180 million to $200 million of cash from operations. Now, as in past years, this assumption for our annual guidance excludes any future contributions from acquisitions. We do anticipate intangible amortizations of $23 million for the year, or $0.26 per share, and that's a non-cash charge.

This should be taken note on these final assumptions: we do assume a 33% effective tax rate that is slightly higher than in 2016. Because we are actually growing faster in the United States than in other markets, that has driven our rate of just slightly from the prior year. And we do anticipate 58 million shares outstanding during the entire year.

In summary, we had an excellent fourth quarter with record revenues and income. Our backlog reached an all-time high of 28% from last year and, perhaps even more important, includes the highest quality of book of business in the history the Company.

Our focus on high-end consulting engineering service consistent with her Company's growth strategy is resulting in an increased margin and a reduced risk of our overall business.

And in closing, I'm very pleased with how we completed the fiscal year and the momentum that we have going into this new year, the excellent visibility we have with our backlog and the position that we are as leaders in the key growth markets that we are targeting.

And with that, I'd now like to open the call up for questions. Regina?

(Operator Instructions) Tahira Afzal, KeyBanc Capital Markets.

Thank you very much, and Dan and team congratulations on a good quarter.

Thank you, Tahira.

Dan, first question is, you know, as you said, your oil and gas work is largely short a cycle. To the extent you see the new administration becoming a little more friendly, could your current projections for fiscal year 2017 change to the positive rapidly enough to really provide upside to your guidance?

That's a great question, Tahira. We did come into the year cautious with respect to our outlook on the oil and gas business. In fact, as I've indicated, we expect another 20% reduction from 2016 into 2017.

I will say that most of the reduction we expect to take place in the later second and third and fourth quarters, we actually have good backlog coming into the year. So we do have time for changes in the administration's permitting or other positions that they've taken with respect to midstream.

Now, most of the work that we perform in oil and gas that's midstream is well over 80%. So as permitting clarity or certainty with respect to pipelines moving forward, it's clear, potentially with this new administration, we actually could see a pickup. We don't need a pickup in the first quarter or even the second quarter in order to make a big difference for our oil and gas. It could drive our commercial work up significantly if that was actually authorized and we began work in the second half of the year.

And I would say most noteworthy is the margins that come in our oil and gas work are actually quite favorable with respect to our mix and would actually help the overall forecasted margin for 2017 notably. So I do think there's time for it to make a difference in 2017.

Got it, okay. And Dan, second question is the current -- the new administration seems to be a little less friendly about climate change. I don't know whether that is actually going to have an impact on slowing climate change. So could you talk a bit about the (inaudible) and the role state, local and private funding are already playing, and really some of the environmental projects you're looking at going forward?

Well, it's a great question. There's a couple of perceptions with the new administration and the new political party that's taking place. One of them is their focus on climate change or perhaps the lack thereof.

Back in the Bush administration going back a few administrations, the term climate change was not necessarily in vogue. And, in fact, in some instances they preferred not to use that term. But they did use words such as infrastructure resiliency. They did talk about storm water protection. We did talk about actually coastal protection -- seawalls, lochs, dams. And in fact we saw more dollars spent during the Republic administration for coastal protection, particularly in the Gulf Coast, as a result of restoration for Katrina and other work than we did for many, many years before that.

So there may be different words used in climate change. But the fact is whether it's one administration or another or even an independent party, we've not seen that actually have any differences or impact on storms, floods or impacts to our infrastructure. That is actually a reality that takes place irrespective of an administration.

So, we do think that's going to go well.

With respect to the funding, where is it coming from? A number of states with respect to quote climate change, it's been manifesting itself in renewable energy portfolio requirements. That is not a federal mandate, not at all. That's actually a state mandate.

And renewable energy contributions -- for instance, state of California well over 20% -- you can go all across the country are state mandates. Fundings and tax credits are taking place at that level and are not necessarily directly impacted by what takes place at the federal.

I know this is probably one step removed from the direct question, but the other perception that exists is that the Republican administrations and perhaps this particular administration will have sensitivity or concerns with respect to international development or funding provided to countries as far as assistance.

And we've actually found -- we've been working since the 1970s for international development work here in the United States for USAID. The reality is when we've gone back since the Carter administration, way back into the mid-to-late 1970s to today, more dollars were spent over an administration when it was Republican than Democrat. I know it sounds counterintuitive, but that is the reality of what we've seen.

Some of the things that we see that might be more favorable under a potential new administration is a focus on actually hard infrastructure rather than soft support, such as education and health, maybe not as high as perhaps hard items that can have a lasting impact as dams, roads, power. Things they can actually put a monument on. And these are things that are absolutely center of what we do.

So there's many different perspectives that could make this as strong or even stronger revenue source for us under a potential future administration.

That is pretty helpful. I've got a couple of more questions, but I'll hop back into the queue.

Ryan Connors, Boenning & Scattergood.

I appreciate your comments; very comprehensive and helpful. I wanted to talk a little bit about human resource utilization specifically in the context of the margin outlook for the Company. And I wonder if you can give us kind of an overview of where you stand here at the end of your fiscal year on your broad labor utilization picture, and specifically where you see that trending from here and what the different margin scenarios are in terms of margin leverage as your utilization rate improves going forward.

That's a good question. In a professional services business sector, which we are in, labor is the largest cost by far. There's nothing even close to that. Even the second is facilities are offices (inaudible) far distant second. Since most of our work is time and materials or cost-plus, utilization is the biggest driver.

Now, at the margins that we've been generating, sort of at an 11% to 12% EBITDA, we as an all-in number -- I sometimes hesitate to use this number because there's so many different interpretations or calculations of this. But as we calculate utilization, it's the entire Corporation's labor base, in other words payroll. And that includes Steve Burdick, myself, the receptionist at the desk.

If you take the entire labor -- the entire Company as the denominator and the numerator are the dollars that are billed to clients, that's our utilization.

Similar to our backlog, I find few that actually do it that way. I know this is sort of my disclaimer before I answer your question because I know that it's ours is one, which of course is not representative because an expensive person has much bigger impact than a less expensive fields person. It could be available hours. That's not -- we count everything, holidays.

With that said, our utilization of the Company is right around 70% -- 69% to 70%. That typically generates about a 12% EBITDA margin. Some have asked the question in professional services that you don't have leverage like you might in a manufacturing operation. That's not correct. We do have leverage.

We can actually drive our utilization up to probably the mid- to upper 70s. At that time, we hit sort of a theoretical maximum when you add in holidays and vacations. And training takes up the rest.

So we can actually increase profitability by probably up to the 15% or higher level just through increased utilization of the staff we have. I know that's long answer, but I know that some of those metrics might be missed compared to other peers.

No, that's great. That's helpful that you laid out in such detail.

Now, I guess my follow-up would be going back to obviously the timely discussion of potential federal priorities and federal approaches, if you will, going forward.

When you look at your current staffing and you look at the Trump administration -- and I guess the approach there is more, I guess from what I've read, kind of trying to draw in private capital and incentivize public-private partnerships and that sort of thing as opposed to a direct federal stimulus program of direct funding maybe under a potential Clinton administration.

Are there different staffing needs under those two separate types of approaches where you've got a kind of shift now? Or do you feel like in either of those cases, the staffing needs are pretty much the same?

They're pretty much the same. The fact is that it can be a bit different on the construction side. What a P3 is -- public-private partnerships typically have a turnkey designer, constructor and funding provider. So that's the three pieces of the public-private partnership.

Typically we will work closer with a constructor than we would with a federal client. But the work that we would do with respect to design, optimization is identical. And I will say that in the US, 3Ps or the public funding of these projects is significantly less because in many states across the country, it's actually prohibited. They do not allow private investment into these.

One area that Tetra Tech is quite large -- we have about 4,000 staff and are performing many of these projects are in Canada. So as a Company, I would say we are one of the most experienced consulting engineers in the entire industry with respect to performing these works. We know how to do it, we are doing it, but we are doing it mostly in a legal jurisdiction outside the US. And so in the work we are focused on is on the design and support of the constructors all the way through.

And for those constructors on the phone, we can provide the best, cheapest, most effective design to allow you to complete your construction below your price target. And so we are their best partner.

Got it. Okay, well, that's really helpful. Thanks, Dan.

Noelle Dilts, Stifel.

Congratulations on a good quarter.

Thank you, Noelle.

My first question -- I just wanted to talk a little bit about timing here. I know you kind of approached this with, I think, Tahira's question earlier.

But just given that Trump's plans are so big and the details are pretty scant, are you at all concerned that we could see a little bit of a freeze here in terms of some spending before some of the funding starts to come into the market and maybe some of these bigger projects start? Just curious to know how you're thinking about that.

You know, I have read that. I actually think that -- I don't see that. And a lot of the work that we have are -- or we're not anticipating it or counting it that's in our contract capacity of the $14 billion. We're actually counting it from the $2.4 billion which is already authorized, and we are in the field working right now.

So we think we've got enough visibility to make it right through any type of transition period where they're going to work out how this goes. A lot of it is actually in state and local work and commercial, which is actually detached from the federal activity.

And finally, there certainly could be a phenomenon or a reality of, this is the end of an administration, like to get as many projects as I have under my direction and my vision put in place right now. So here's more, and get going. So certainly that -- it actually could be -- these other items could offset this concern on this delay you just talked about.

Okay. Then sorry if I missed this, but did you talk about your WEI and RME margin expectations as we head into 2017? Can you just give us some thoughts there, and also maybe talk a little bit about how you're thinking about the margin trends through the year?

Yes, we are -- if you actually take a look at our actual results for 2016 and you compare this to the midpoint of our 2017 guidance, we are actually up about 50 basis points, both at the EBIT and EBITDA line.

I would say that I think that's normally a 50-point-basis increase year-over-year with the markets we're heading into is okay. I know we can do better. But part of the headwinds that we have that's tempering the margin expansion has been the reduction in the oil and gas business.

So, we saw a roughly 20% during 2016 reduction. We had forecast similar numbers in 2017. And so when you think about the expansion of margin given even the reduction in the oil and gas, that's actually not bad. And that also includes the incorporation of Coffey into it. And Coffey is the lower-margin business, but we will be bringing it up, as I've mentioned, in 2017. And I believe they'd be actually at our margin profile by 2018. So, 50 basis points by taking on Coffey, which is lower business, and a reduced oil and gas and still seeing a 50-basis-point increase is not bad, and I do think there's upside from there.

Okay. And then last, if I may, can you just give us some thoughts on when you think the Canadian infrastructure stimulus spending could start to come through and help out that side of the business a little bit?

Well, I think orders -- we could see the orders come here in the first quarter between now and the end of the calendar year, but I think they'd be small, quite small. I think what we will do is report out to our shareholders either qualitatively with some data support on our quarterly calls -- or if there is anything of size, we'll press-release if there's any significance.

But the orders will be a precursor to it showing up in revenue. But I don't think actually from a revenue standpoint it's a Q1. It's probably a mid-to-late 2017.

Okay, perfect. Thank you.

Bobby Burleson, Canaccord.

Good morning. Congratulations.

Thank you, Bobby.

I think just a couple here. Curious about -- we've heard from some other guys that infrastructure or kind of large civil projects in the UK, they're seeing some push-ups there because of Brexit. I'm wondering what the dynamic might be for UK Aid kind of projects, whether or not you expect those to be intact and kind of immune to what we're seeing with some of the infrastructure activity.

That's a good question. First, UK -- the United Kingdom's budget is set at 0.8% of GDP for funding of their international development work, or DIFID work. So they had been just gotten close to that percentage. So you have seen those budgets grow because they hadn't fully obtained the 0.8% that's actually mandated in their allocations. And second is for work being done internationally or outside the country of the UK.

So we haven't seen a negative impact. But I'll also make a comment that of the three major international development agencies that we support -- USAID; Australian AID, or Defab; or UK Aid, UK is by far the smallest.

So the amount of them that we would see even if there was an impact would be very de minimis. I'm not sure we'd notice it. And we're really focused on adding new services that we provide to the other agencies into the UK. And that I would say that it's really our objective that even if it were a flat to challenged market, we would be adding so many more services. We're actually looking to participate if not take market share in the UK.

Okay, great. Thanks.

Should be a net upside.

Then you also mentioned that there's a sizable state and local impact driving things like infrastructure spending on water and things like that. Wondering if there are any specific measures that you've been tracking that may have passed recently or that you think are pretty relevant for you guys in terms of that TAM for you in 2017.

Bobby, that's a great question. While there were a lot of different moving pieces with respect to political parties, we did see Proposition M in California, which addressed water infrastructure. It really added more dollars to Proposition 1, which was part of the $8 billion. It supported large population of the state, which is the Los Angeles River water reuse. So this is additional funding. This is areas that we work. Our headquarters happens to be here in Los Angeles; some of our largest staffing concentrations.

So California had a number of bonds and tax increases associated with -- earmarked for water and infrastructure projects. And we actually saw that at different levels of really all across the country. So, it was actually quite favorable on the front. Which, I'm not saying that it's -- I want to make clear, I'm not saying that that's going to be an incremental significant increase. But at a 30% organic growth year-over-year, I think it portends well for us to continue double-digit organic growth rates in the state and local business.

Okay, great. And I'm sorry if I missed this, but what was the -- you mentioned that oil and gas has a higher margin relative to your corporate average. Wondering what the delta is; if that business does pick up what the EBITDA margin could be.

It could raise the Company's -- depending on the amount of revenue that's associated with it, it could raise it by 100 to 200 basis points of the overall Company's performance.

Great. Thanks a lot.

Tate Sullivan, Sidoti.

Following up a bit on state and local spending with the great 30% year-over-year growth rate in the last quarter. But going forward, given -- I imagine you have good visibility on water utility spending and muni spending trends. What were some of the considerations that led you to expect a lower 7% to 12% growth rate from 4Q? Certainly 30% is a very high growth rate, but how did you come up with the 7% to 12% range, please?

That's a good question, Tate. Well, a couple of things happened in the fourth quarter. Number one is we started up quite a few new programs. And when you start up a brand-new program, it's a little bit lumpy in a good way. Meaning, you have initial mobilization, you have a big initial push with respect to work plans. A conceptualization (inaudible). A lot of things that drive it higher. Our year-on-year comp was actually a little bit more favorable in the fourth quarter.

So I did want to temper for those modelers on the phone or that follow us, plugging in a 30% number. We do think that a sustainable basis when we've actually mapped out our spend from these new projects that we are starting, that do put us into double-digit growth. But, really hate to use the word aberration, but it was a strong quarter because of start-up of a lot of new projects on the water infrastructure side.

Okay. Thank you. And then I've noticed quarter-over-quarter employee growth, up about 800 employees. Can you comment on where you added employees and what divisions or regions?

The one thing that -- when you just talk about quarter over quarter or sequentially, the fourth quarter is always higher because of summer work. So I would say there's two things that drove work.

One is just an annual seasonality. So, in the summer we have more people out in the field in Canada. We have more surveyors. We're doing more sampling. So that accounts for probably half or a little more of that number.

But the other half actually was in response to some of the very significant storms along the East Coast. We do have a large -- in fact, we think at the municipal we have the broadest contract base of municipalities, about -- contracts with 400 municipalities across the country to provide emergency and expedited response with respect to engineering evaluation and expedited response of bringing water treatment plants back online. Identification of difficulties with wastewater treatment, how you keep the overflow of different sewers and materials from impacting rivers and surface waters and the like.

And so we had quite a significant addition in the fourth quarter for this type of rapid response in the Southeast of the US because of these storm events.

Okay. Thank you very much.

Ryan Cassil, Seaport Global Securities.

Hey, good morning. Nice quarter.

Thank you, Ryan.

I wanted to just continue on the state and local side in the US. Presumably, you're seeing a lot of demand from the West Coast and perhaps the Southeast. Are you seeing a continuation as you look out to next year from those areas, or is new opportunities in greater demand in new regions that are going to continue to drive that growth for you?

Well, we've seen the biggest funding sources, and actually where we've been winning the most contracts and putting people to work are -- Florida has been significant for us. Texas has been significant.

So, Florida has been driven by not so much water quantity but mostly water quality. So, desalination membrane work -- this is where we are a market leader. So that's gone quite well for us.

Texas, which is both water quality in the East where you get raining in Houston and water supply, meaning it's too dry in the West, which is the Midland area. So that's been -- Texas has been quite strong for us.

California -- drought. I will tell you drought is the issue. It's everything from water reuse to desalination. And storm water capture is a big issue here. The cheapest water is that that you can catch that falls down the mountains and you can prevent from flowing to the sea.

And by the way, it's not just capturing it for water use. It's also a huge water quality improvement when you actually prevent the sediments and other contaminants from flowing directly to sea. So it's a multi-beneficial approach to capturing storm water.

Our big three are California, Texas and Florida. But I would say collectively they represent less than half because the rest of the country has been quite strong also. We've had excellent wins up in the Northwest of the West Coast, up in the state of Washington. We've had some good new programs in New York and other programs.

So I don't want to slight the other locations around the country for the big three in the South. But if you had to pick what's really driving it, those are the most significant.

Okay. And do feel like the recent changes in the administration and some of the demand dynamics at the municipal level -- do you feel like the spending is just being accelerated here? Or perhaps does this have a longer tail on it than maybe you've previously expected, just based so far on what we've heard so far at the election?

Well, with respect to the state and local, is that your question?

Yes, with state and local and then at the federal level as well just on infrastructure spending.

I think that the -- I will start with state and local, and then I think it's similar at the federal level. But I think state and local was really a catch-up or a make-up for an under-spend during the early portions of the financial recession back in 2008, 2009, 2010, 2011, 2012. I think that this is a lot of new work that needs to be done. Financial tax receipts from lower unemployment, higher property taxes gives them a better amount to spend.

They've actually put bonds out that have been accepted by their voters. So that gives it better. So I think this is unrelated to the administration at the federal level. So I see very little connection to those two.

At the federal level with respect to budgets being spent out of these, I think that's another one that's been quite slow. I think this is actually the federal government getting closer back to normal with what we've seen prior to some of these contentious issues between the house and the executive branch and others.

So I don't see this as a particularly high point. In fact, I see if anything this is just beginning to get back toward what we would expect on a normal basis on infrastructure. So I -- we'll see. As I said, it's very, very early. We'll see what the priorities are. But this is not necessarily a high point on the federal side.

Got it. The last one for me, are you having to prioritize projects more now? And I guess it really relates to does it do anything for you on pricing if you are having to really prioritize with customers?

No, we have not prioritized one customer based over another. We are organized along clients or market sets with respect to clients. And every single client we have, we give it the best resource that we have the entire Corporation. An oil and gas engineer may be the best in class, but their availability does not necessarily impact whether or not we are building a dam or a flood control structure. It's a different expertise.

So we think we have the best engineers, the most technically advanced solutions and we wouldn't put one client over or beneath another.

Thanks.

John Rogers, DA Davidson.

A couple of follow-up things. One, in terms of the coal ash work that you were talking about over the last couple of years, is there any significant work that you are doing or expecting to do in 2017?

That's a really good question, John. We have held this out as a growth market for us. It has been a relatively small revenue stream for us relatively small revenue stream for us, and we've actually included a relatively small contribution in 2017. We have seen the utilities push back with respect to timing of implementation. So, some have actually filed lawsuits and taken legal avenues. Others have looked for ways to file for extensions. So it hasn't developed as quick as the regulations would have portended. So it is not a significant driver for us in our forecast in 2017.

Okay. Good. So any further delays shouldn't have any real impact?

I don't think so.

Yes, okay, good. And then just on the cash flow and acquisitions for a second, what are you seeing out there, Dan, in terms of opportunities? And now that you've gotten Coffey successfully integrated, are you prepared to take on another one of that size? And I guess are there opportunities to maybe talk a little bit about priorities there?

Yes, absolutely. And I want to say that the Coffey acquisition or merger really went quite well. I would give it a tribute to an absolutely strong management team they have within that entity and it being complementary to us. So I think that's gone quite well.

It was around 3,000 people. It did take us -- we are right around nine months now. It's gone quite well both financially and from a resources that we have in the company. We are ready for another one of that size or even larger. So, yes, we have management capacity and the ability to take on something that without any problem.

Now financially, you can see we have -- from Steve Burdick's presentation, we've gone leveraged under one. So we are 0.9 and dropping. And it's not our objective to be in that level. We do want to get a leverage back up between one and two. We do have a buyback that's been reauthorized for shares, but I would prefer to actually put it into growth into the marketplace that will make us more competitive.

We're not looking to be bigger; we're actually looking to be better. And so we do want to acquire. We've been looking for the right fit for technology, intellectual property -- owned IP or intellectual property on smart water. It is priority dollars.

We do want to be not only a market leader but a market maker. We want to actually demonstrate we can save our clients money in the long term and give them a better product for less money. Not the same product, a better product.

And so we are looking for data analytics firms. We are looking for folks that have written software that is proprietary to actually manage very complicated sensor arrays. So that's one area.

I will say folks think they have very lofty expectations in that area, but we will remain disciplined. Our acquisitions are expected to be accretive in the first year.

And the second area, some of our clients have begun to take us to Europe. Now, we have many project offices in Europe. We have a presence in the UK because of Coffey. It does look attractive with respect to opportunities there.

Technically -- and I'll tell you the exchange rates don't hurt us at all right now at all either. It's really quite favorable over a multi-year -- if you take a multi-year perspective on it.

Thank you. And just I guess one follow-up for maybe Steve. Capital spending -- maintenance capital spending this year, it dropped down in 2016. What should we be thinking about?

Yes, I think what you see is as we've gotten out of fixed-price construction, our capital spending has come down quite substantially from, I guess, our historical 1% of revenue. So this year and going forward, we'd expect to pay less than that at historical 1% of revenue on CapEx.

Okay. So closer to what we saw in 2016? Is that what you're saying?

No, I think 2016 was probably a bit low just because of the business cycle. So looking forward to next year for 2017, we're probably looking to spend about $15 million to $20 million on CapEx.

Thanks very much. Congratulations on the quarter here.

Tahira Afzal, KeyBanc Capital Markets

Just a quick follow-up on the amortization. Obviously, it jumps up a bit. But as we look into 2018 as of right now, what does the schedule look like?

If we look at 2017, our intangible amortization is about $0.26 per share. This year, it was $0.25. And going into 2018, because of the drop-off in the acquisitions, we're looking at about $0.16.

Okay, great. So, your numbers jump up a lot assuming no acquisitions?

Our EPS would jump up quite a bit with no further Acquisitions. You're right.

Okay, great. And last question, really backlog related. Obviously, we've seen very good organic growth this year. And, you know, it seems your backlog supports that for next year. How should we think of backlog? Do you think you're still in a position to organically grow it?

I do think so, Tahira. I think the focus that we have is not only to continue to win new programs in the marketplace and be competitive, preferably in areas that are sort of rising tides where they don't exist. So there's no incumbents to have to displace. It's actually to take new work to help our clients' new priorities.

But we really have a big focus on converting some of that $14 billion of existing contract capacity into orders, which then you'd see in backlog. And we didn't fully note it on our backlog slide that was included in today's presentation. But many of those awards are actually single awards. Those are awards that were made just to Tetra Tech. So these are not ID/IQs or multiple awards that will compete with other firms. These are actually contracts that will convert to orders in backlog as we actually perform this work for these clients.

And they include work for Department of Energy. They include single awards from the US Navy, many of them from international development. And so we do find that this is actually in the longer-term more efficient for our clients because they can get to the work quicker, faster and not have to go through this very long, complicated process of evaluating different approaches and different items.

So we think when they've picked the right contractor they can get their work done more efficiently, on a faster timeframe and, we believe, even at a lower price point. And many of those words at a contract basis are listed on that sheet, which gives us good insight into growing the backlog in 2017 organically.

Thank you very much.

Tate Sullivan, Sidoti.

Real quick follow-up on your commercial business being 29% net revenue. And on your slide 7, you have various commercial projects of $300 million. Can you give a sample, ex oil and gas, what you're working on on your commercial side?

Commercial is very broad. We are working for industrial clients that range everything from standard manufacturers of different raw products to automobile industry to the aerospace industry to steel. So that would be what I would call general industrials actually we work for.

What we do for them is we do environmental cleanup. We also do water supply and processing and reuse for those. So it's actually on the process side that makes up part of the work. We do work for commercial utilities where we actually do permitting work. We do waste management work. We do work with a large waste management company, the largest in the US, where we actually design and optimize existing landfills. So we'll do landfill gas collection. We'll do design of the new cells that's on the commercial side.

Oil and gas, of course, would be under our US commercial, which is mostly midstream -- almost entirely midstream. That would be under commercial.

And we do a bit of work on what I would call brownfield where commercial clients own contaminated real estate in urban settings where the values -- where the driver is partially regulatory -- in other words, you have to clean up contamination. That's part of it.

But the other part is really -- in this resurgence of economy is turning unused property into economic generation; in other words, redeveloping property for malls and buildings and other beneficial use. And that's a big driver in the urban setting, and those are commercial clients also.

So that's sort of an example of the type of work we're doing. And it's not just in one geographic area. It's actually spread across this entire country. We have over 250 offices here in the United States alone, and we are local to all of these clients. So we're a local solution for them with a national capability.

We'll go back to our centers of excellence to bring the absolute best technology, best experts, but it's delivered locally for them. So that's what's driving our commercial work.

Okay. Thank you for that, and have a great rest of the day. Thank you.

This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.

Well, I want to thank every one of you that were on the call today, especially those that asked questions. They were insightful. They were really good questions. I hope to have more insight and personal observations from the ground level on projects on what we see as part of this transition with the administration.

We will report the results of our first quarter almost concurrently with the transition to the new administration here in the US. So I think a lot of it will be speculative as to what will change, but we will share our insights on this next call. And thank you very much for your interest in Tetra Tech. And I'll talk to you in January. Bye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for joining, and have a nice day. All parties may now disconnect.