Tetra Tech Inc (TTEK) 2017 Q1 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 will 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.

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 the conference up 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.

Great. Thank you very much, Jennifer and good morning. Welcome to our first quarter of fiscal year 2017 earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials I will start this morning's call of a brief overview of the company and some of our key financial metrics for the first quarter.

We had an excellent first quarter and start to the 2017 fiscal year with our results exceeding the top end of our guidance for both net revenue and for earnings per share. For the quarter our revenue from on going operations was $661 million, which is up 22% from the prior year. Our net revenue, which is primarily our labor, is $488 million, which is a record first quarter for us, which is up 18% from the prior year.

We generated an operating income of $43 million which is up 9% from the prior year and an EBITA or operating income with out amortization, up $49 million, up 12% from last year. This performance generated a Q1 record diluted earnings per share of $0.49 for us and for our shareholders, which is up 17% from the prior year. And maybe most noteworthy, and finally our backlog was up 37% year-over-year at just under $2.5 billion which is another record high for us.

Our results from the first quarter demonstrated Tetra Tech's strong fundamentals and just amazing performance of our experienced management team. I think it was just an excellent start to the first quarter. I would now like to present some specifics of our performance and specifically performance by our two business segments.

The Water, Environment and Infrastructure Business Group or the WEI Business Group, had net revenue that was up 12% from their prior year with an excellent operating margin of 12.4%. WEI's revenue and margin was driven by a very strong organic growth across their operations which was lead by continued high growth in our US state and local and US federal work for water and infrastructure related services.

The Resource Management and Energy Business Group or the RME Business Group had revenues of $287 million, which was up 22% from the prior year with margins of 9.3%. Now, Coffey, large acquisitions that joined us a year ago, had margins of 9.5% which was inline with our expectations and is a significant improvement over their performance from just a year ago when they joined us.

I would like to, actually, take a look at the performance by customer and I would like to provide you a quick update on our four primary areas. Work for our US federal clients was about 30% of our overall net revenues for the quarter. Our federal work grew without Coffey or without this acquisition from a year ago by 16% driven by work for the US Department of Defense, the US State Department and work for the Agency for International Development.

And even work for the United States Environmental Protection Agency, which is a relatively small client for us, which generated about $10 million this past quarter increased for us by 5% year-over-year.

Overall, for the quarter, inclusive of Coffey our federal work was up 37% year-over-year across a broad base of consulting and engineering services. Our international revenue, which is work contracted for and performed outside of the United States, was up 27% year-over-year and now represents about 30% of our net revenue.

This is work that's performed primarily in Canada, the United Kingdom, Australia and the Asia Pacific region. State and local revenues continued to be very strong for us this quarter with an organic growth rate of 24% year-over-year. This work was a direct result of new programs for our municipal business and especially for water-related projects in major cities throughout the United States and for new infrastructure work to address the flooding and damage from recent hurricanes on the east coast of the US.

Now our US commercial work was down slightly at minus 6% year-over-year in aggregate. I do want to point out we did see growth across all of our end markets on the environmental, remediation services, industrial clients, and solid waste but the strong growth in these areas was offset by lower revenues from our oil and gas work.

In the first quarter of 2017, our backlog increased for the fourth sequential quarter resulting in an all-time high backlog for us of $2.47 billion. I'm particularly pleased that in a very strong revenue quarter we still had a book to bill greater than one, in fact at 1.2, and we continue to build our overall backlog.

This quarter's book of business and book of orders was broad based and included work for task orders for water-related services from the United States Army Corp of Engineers, orders from commercial projects supporting some of the most complex environmental cleanup programs across the US, a [ward] of technically focused State Department and USA projects all around the world and even new contract vehicles with the Department of Energy here in the US.

And I would 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 included in our backlog for contracts that are awarded, the clients have provided funding for them and they've actually authorized us to do work. There is no inclusion of factory contracts, contract capacity or anything else that would be speculative.

Now, at this point, I would like to turn the presentation over to Steve to present the details of our financials for this first quarter.

Thank you, Dan.

Before presenting our financial results for the first quarter I'd like to point out that a full reconciliation of our on going operations, which Dan just spoke about, to our GAAP financials, which I will now discuss, can be found in the appendix of this presentation as well as our first quarter earnings release.

So, on a GAAP basis, gross revenue for the first quarter totaled about $669 million compared to $561 million in the previous time period which is up 19% year-over-year. On a net revenue, we also improved -- and that net revenue totaled $490 million up 16% year-over-year, exceeding the upper end of our guidance for the quarter.

And, as you just heard from Dan, these increases in our top line resulted from growth in both our state and local infrastructure and our federal business as well as from the acquisition of Coffey about a year ago. We also generated about $40 million in operating income which is an increase of about 21% over last year. This increase in operating income resulted from an improvement in our WEI segment margins for the quarter as well as the addition of Coffey in our RME segment.

Diluted earnings per share were $0.46 for the first quarter which is up 18% year-over-year. On an on going basis our diluted EPS totaled about $0.49, exceeding our quarterly guidance range of $0.44 to $0.48 per share. Now, our ongoing EPS excludes about $0.03 from charges associated with the wind down of our RCM segment and the losses associated with RCM related to legal fees on outstanding claims and project completion costs.

And so we continue to anticipate that the wind down of RCM segment will be substantially complete in 2017. However due to the fixed price nature of these construction projects there could be variances either up or down until all of the project performance and claim issues are resolved.

Now I would like to review our cash flow metrics for the quarter. We remain on track to meet our estimates for cash flow from operations for fiscal 2017. That said, timing did impact our cash flow generation in the first quarter. We anticipated a first quarter negative cash flow due to two items.

First we completed the ERP conversion of Coffey in October and as is the case for all of our system conversions, we did experience an initial delay due to invoicing processes at Coffey and so the conversion of Coffey impacted our cash flow by about $25 million and our DSO by about four days. Second we had an additional payroll period in the first quarter and this additional payroll cycle impacted our cash flow by about $30 million. I do want to point out that our cash flow is typically at its lowest in the first quarter and without these two items we would have been roughly break even on a cash basis.

We do anticipate that these two timing issues will resolve themselves fully by third quarter. Net debt totaled $261 million for the first quarter. This increase is due to acquisitions completed in fiscal 2016 that utilized about $150 million of cash and the repurchase of shares and dividend payments over the trailing 12 months for which we returned about $115 million to our shareholders.

Days sales outstanding was 86.8 days for the first quarter. Now, excluding RCM and claims our aggregate DSO in our two front end segments was about 81 days. And further excluding the two cash flow items I just talked about for the quarter our DSO would have been closer to about 77 days.

So in order to address how we will utilize our financial resources I would like to briefly discuss our capital allocation strategy. Consistent with 2016, in 2017 we have and will remain focused on maintaining a balanced approach between dividends, share repurchases, acquisitions and investments in our organic growth. We do continue to target the leverage ratio of one to two times net debt to EBITDA and with a current leverage ratio of about 1.2 times net debt to EBITDA we have significant dry powder to invest in organic growth and in acquisitions while at the same time having the additional capital to deliver strong returns for our shareholders.

So let me tell you specifically how we expect to deploy that capital over the next year. First we will continue to use our capital to invest growing organically so, as Dan just talked about, that's a key factor for us.

Second we will look to invest in strategic acquisitions such as our most recent acquisition of Ecological, which Dan will discuss next. 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 if needed. And third, we will continue to return capital to our shareholders through buy backs and dividends.

So the first quarter we paid out about $5.1 million in dividends and repurchased $10 million through our stock buy back. This week our Board of Directors approved Tetra Tech's 12th consecutive dividend. A dividend of $0.09 per share will be paid on March 3, to shareholders of record as of February 17, 2017. In addition we have $190 million remaining under our current $200 million buy back program. So, overall, between dividends and buy backs our long-term goal is still to return about one-third of our free cash flow annually to our shareholders.

With that said I want to thank you for your time today and I will hand it back over to Dan.

Great. Thank you very much, Steve. I would now like to provide you an over view of markets and our growth outlook for the remainder of this fiscal year. Now, our overarching approach here is to lead with science and grow our high end consulting and engineering services to provide us with a high value, high margin business that differentiates us in the marketplace.

Now, we are forecasting growth across all four of our client sectors which are US federal, US state and local, our US commercial work and, finally, international. Now, we expect our fastest growing sector to be with the US state and local clients here in the United States with growth rates between 7% to 12%.

State and local could exceed this high end of this range especially if infrastructure stimulus spending incentives are put in place this year. We expect our US federal work to be about a quarter of our business and it should grow at a rate of between 5% to 10% for the year.

Federal growth could also exceed the high end of the estimate with the potential for near term increases in the 2017 department of defense budgets and associated military expansion and facility restructuring expected under this Trump administration. Tetra Tech's international revenue is primary generated in Canada, United Kingdom, Australia, and the Asia Pacific region. I am very pleased to welcome today and, in fact, the announcement that came out yesterday that we closed this week with acquisition of Ecological Australia to our team.

Ecological is an environmental firm that has a very highly staffed company of 160 individuals that are going to join our local operation in expanding both our water and environmental services in Australia and the Asia Pacific region. Now, overall I expect our international revenues to grow between 5% and 10% range as we leverage Tetra Tech's expertise and local infrastructure stimulus spending, that's primarily going to be associated with work in Australia and Canada, where they have actually committed specific dollars to funding.

And I also expect additional growth to occur in Australia and the UK aid agencies. So with that combination I expect to achieve this 5% to 10% growth for fiscal year 2017.

And finally our US commercial work is expected to grow at a bit more modest rate between 1% and 3% level, with increases in our industrial work for water treatment, clean up programs and solid waste, which we do see is going to be offset by lower revenues for our US oil and gas services.

However, I do want to note that an increase in oil and gas prices or fast tracking of permitting and project starts and addtional investment in oil and gas pipeline infrastructure could contribute to a much more rapid growth of our commercial work and in associated margin expansion that would especially impact positively our RME business group.

Now, collectively across these four end markets or these four client sectors we expect our growth rates for the company to range between 4% to 8% for the entire fiscal year of 2017. Now I would like to highlight, briefly, some of our end markets and the types of projects that are specifically driving our growth this year.

In the United States, there is broad based bipartisan support for infrastructure investment. Although I will say there is no specific agreement how that's going to be implemented at this moment. Now, the estimates have ranged from approximately $500 billion up to $1 trillion in spending to address pent up demand for infrastructure upgrades across the United States.

Now this funding could be delivered by a very wide variety of different methods including direct increase in federal budgets, could actually show up in the form of matching funds, tax incentives and even public private partnerships or P3's. However, you can see from our state and local growth, for these past few quarters, local capital spending has already been on the increase over this past year.

As I noted earlier we saw 24% increase in our revenues for state and local, this last quarter we saw 30% to prior quarter and this increase has been driven by increases in local budgets, bond measures, and most recently with $200 billion in programs past in the November election here in the United States. Now, the new administration has already begun to identify potential priority projects across a very broad range of infrastructure services.

Now, these programs, should they go forward this year, are going to encompass many of the different areas where we are market leader here in the US And these are areas that include water infrastructure, things such as locks and dams, hydro power and even the roll out of the next gen aviation technology that we've been working on for many years. We do look forward to seeing some of the these long-standing infrastructure needs in the United States to actually begin to be addressed both through local, private and federal funding.

And any of this to move forward would be incremental to our guidance and put us at the high end of what we have estimated for the year. Tetra Tech also has a long history of supporting the United States Department of Defense and it's really all three primary branches, the Army, Navy and the Air Force, with essential consulting and engineering design services both both here in the US and internationally where we support the US military.

Today we have over $5 billion in contract capacity across the Department of Defense and we hold over 40 different indefinite delivery indefinite quantity or IDIQ contracts with just the Army to provide engineering services.

Now, we do assist our armed forces both here in the US and facilitates world wide with master planning, we do site restoration, remediation, we do munitions clearances, engineering design services and data and asset management services. So we can really support DoD across a very wide platform of support activities.

Now each base we support, we actually look at like a small city. Every one of them has very specific infrastructure needs, assets to manage and, actually, neighbors to protect. So we're involved in a lot of different aspects if the funding goes up at the Department of Defense.

And when the Department of Defense actually chooses to divest its assets or close some of the bases or consolidates its facilities we're one of the leaders in helping them clean up these properties so that they can actually be returned to beneficial use to the local communities.

Now today the new administration is reviewing military readiness and associated federal budgets from the department of defense. An increase or a request to increase the 2017 budget for Department of Defense is expected and this authorization could release a backlog of new task orders that are needed for upgrades to design projects accelerated clean up so they can be repurposed.

So, we do look forward to working closely with our Department of Defense clients, many of who we worked with for over 30 years and any up tick in the Department of Defense spending could cause us to move to the high end or above the guidance that we provided. Now I would like to actually present the guidance both for our second quarter and for all of fiscal year 2017. Now, our guidance is as follows, for the second quarter our net revenue guidance range is from $450 million to $480 million with an associated diluted earnings per share of $0.42 to $0.47.

For the entire year we left our guidance unchanged at this point primarily because it's still being quite early in the year. We did have an excellent performance, but we have left our net revenue guidance at a range of $2 billion to $2.1 billion for net revenue and associated earnings diluted earnings per share of $2.00 to $2.20.

We also had -- since our timing of cash on a given quarter can be somewhat variable because of timing of individual disbursement we do not provide that for the quarter, but for the year we left that unchanged, as Steve, our CFO, has indicated earlier. And so we recommit to $180 million to $200 million of cash from operations. I will make a note, if you are following along on the web cast, it's really quite noteworthy that we do expect to incur a $0.26 intangible amortization expense this year. This is a noncash charge.

And if you're following along we actually have graphed and provide the reduction in the intangible amortization. And, in fact, next year we will see a $0.10 reduction, if there are no additional acquisitions, a $0.10 reduction in our intangible amortization, which will become a tail wind as we move out into 2018 and years beyond. This guidance does -- the assumptions do exclude any contributions from future acquisition and it does assume a 32% tax rate for the entire year.

In summary, we here at Tetra Tech really had an excellent first quarter with net revenue and earnings per share from ongoing operations exceeding our guidance even as we came into this year. Our backlog reached an all-time high. which was up 37% from last year and perhaps even more important includes the highest quality of book of business in the history of the company. Our focus on high end consulting, engineering in a leading with science approach to our project is resulting in increased margins and a differentiation in the marketplace. And in closing we had an excellent start to fiscal year 2017. We've got momentum coming into the second quarter, excellent visibility with our backlog and we are well positioned to benefit from the increased budgets and to focus on infrastructure primarily in the US

And with that I would like to open the call up for questions. Jennifer?

(Operator Instructions). The first question comes from Tahira Afzal with KeyBanc.

Thank you very much. Hi Dan and Steve and congrats on the good quarter.

Thank you, Tahira.

Dan, the first question is, you know, if I look at that 4% to 8% growth rate for the top line, other drivers if you look at them are very project specific. As in were (inaudible) already in your backlog and it is more timing related or is it more just you trying to gauge the macroeconomic outlook in a sense (inaudible)? What would be the more important driver?

Well, I think that for fiscal year 2017 most of the drivers are in place in our backlog now. Our backlog, because of the definition that we have it, provides high visibility in the near term quarters. And, in fact, the backlog that we have, approximately 80% to 85%, will actually be expended in the next four quarters or within the next one year.

So we have excellent visibility for this year. So what gives us confidence for performance now is not only the backlog that we have, but actually how it's grown. So I would say that is number one.

But number two, I would not dismiss at all, the actual opportunities that have grown our contract capacity. Our contract capacity, as a company, has actually grown by 25% to 30%, actually in line with our backlog growth. We are up at about a $14 billion contract capacity. And that's without even having converted that into an order.

So, I would say, if you really want to talk about the macro drivers, which is additional funding and you can see it in our contract capacity and that's not even talking about the things we see coming down with respect to opportunities, which are solicitations and requests for proposals and other opportunities from our clients. Not all of which are competitive. Many of these we actually are the institutional memory and institutional incumbents on the sites and a lot of this work is extent ions to what we're working on today and will be self sourced.

So I would say for 2017 it is our backlog that gives us confidence in the growth rate, but longer term both the contract capacity and the opportunities coming down the pipe.

Got it. Okay. And that was actually pretty helpful. And I guess, just a follow-up question, do you know on the stimulus side, we had another stimulus back in 2008, 2009, how would you compare the two in terms of structure? And I know it is early to say, but any comments or color would be helpful or how the two are different from a potential scope and timing point of view.

Well, I'm actually glad you asked that, That's the first time I have heard that question through this forecasting of this new stimulus or this new infrastructure spending. We were here. We did live through the 2008-2009 stimulus commitment of just under $1 billion and a little over -- just under $1 trillion, a little over $800 billion.

And most of those dollars were spent for employment. They weren't spent at the municipal and some instances other areas with respect to maintenance. They talked about shovel ready projects, which meant they were smaller, diverse projects that actually helped bring the unemployment rate down from which it climbed quickly to high rates and actually helped stabilize municipal employment ranks.

This is actually quite different. This time there's actually been a list of 50 priority projects, which are specific projects that are very large infrastructure items. They include projects that are right in our wheel house, there's some areas that we're technique leaders in the United States. We think that about 20% of the work that is being identified for specific projects are for areas that we're actually top rated in the United States.

And those are areas like water resource management, water shed management, a desalination plant, flood control, specific barriers, locks and dams, navigation channels up the Mississippi and other areas of the country. This is very different. This isn't from a shovel ready general projects. This is specific large scale projects that will be -- that will specifically benefit leaders in work that requires larger firms with more technical capability and a longer history and I think that's right where we are. So I think they're actually quite different.

Thanks, actually, that's the first time I heard that answer as well so that was very helpful.

Thank you, Tahira.

Our next question comes from Bobby Burleson with Canaccord.

Congratulations on the strong quarter.

Great. Thank you very much, Bob.

Just switching gears to the commercial side of the business, I'm wondering what kind of short cycle work you guys have there other than oil and gas. You know, with industrial customers?

You know, most of the work that we do for our industrial customers on the commercial side is actually long, multi-year repeat work with clients that we've worked with for many, many, many years. Most of them we hold master service agreements or basic ordering agreements or long-term framework contracts. These are typically revenues and projects that are multi-year.

Now, what I would say is we have contracts that actually may be for -- I will give an example, a $20 million project, but what would be embodied in our backlog now might be $2 million or $4 million or $5 million, a small part of it. And so we do expect the rest of these projects are actually incrementally funded. That is very characteristic of industrial clients.

You'll retain a project but they will incrementally fund it and not fund an entire year, it gives them a bit more flexibility. So, I think we actually have a longer duration work, longer duration relationships with these clients and I would say the oil and gas has even been somewhat long, meaning we measured in two to three years and in the case of Canada we are actually coming to the completion of the longer project.

But we actually had quite a bit of visibility as to this ramp down and what the timing was going to be. So we don't have a lot of very short, very large duration projects that would represent a cliff on any one quarter.

Okay. And in terms of environmental clean up opportunities, was there anything in 2016 kind of larger, more discretionary projects that customers had that may have slipped into 2017 where you are starting to get better visibility on now?

No, we actually saw some of our projects, and as I mentioned, that oil and gas did decline and, actually, I will provide specifics to that because I think it helps put some context in our US commercial work declining at 6%.

Our US oil and gas work actually declined at a rate of about 25% in Q1 quarter over quarter. So that gives you an indication of how much the rest of our commercial work, including large environmental projects, actually increased across the country and really across all of the different client sectors within the US commercial.

So it was really very singularly US oil and gas. We did anticipate it was going to drop and we actually saw a slightly larger number than that in Canada primarily associated with the single pipeline project.

But, I think, it actually portends very well for the strength across all of the other clients that you saw minus 6%. If we hadn't had the strength in the other end markets in commercial clients you would have seen a minus 20%, minus 25% and that isn't the case. So I do like to provide a bit of detail on that to actually show that we have strength across all of these other areas and any type of movement in oil and gas could drive that from a minus number to a plus number really fast.

So, no projects that got pushed out to the right -- to 2017 and, in fact, some of these were up front studies that are actually going to ramp up into design projects, like very large sediment assessment and remediation projects that we're moving to design, some very large clean ups of some super [fund] sites for commercial clients that we have out here in the west, and these are projects measured anywhere from the $10 to $50 million in size. So they are not insignificant.

Great. And just one last quick one if I may. In terms of the construction site of -- industry wide the capacity limitations that we are hearing a lot about and in terms of being able to execute a large federal infrastructure plan, what are your thoughts on capacity for the industry? And can you kind of contrast the scalability of your business versus the legacy fixed price construction's scale ability to address a gigantic opportunity for infrastructure?

Well, that's a really good question. I've read and have heard comments on capacity constants on construction. I will just tell you what we are seeing on the front line.

We do team with the design build projects we're the designer, we're the perimeter, we're the value engineering partner with some of the largest constructors here in the US, we do partner with folks that do that. And I will tell you, pricing is still the primary determining factor and if it was constraints on resources, new construction, pricing wouldn't be the issue it would be availability and that has not been the case. We have not seen a flip in margins.

We haven't seen a flip in pricing being less of a determinant factor on the construction side. I think that, that is all forecasted to be a constraint, but I will tell you on the front line, working on projects and the proposals for our clients, there still is excess construction capacity. And so we all hope that becomes an issue, but I don't see that in 2017.

Maybe something farther down the road. With respect to our ability to actually participate in this work, now that we have removed some of the internal self-performance capability within construction, we have longstanding relationships with some of the largest constructors, we are part design build teams. If you're constructors out there we think we are the absolute best partner because we can find cleaner, faster, cheaper ways to get through the permitting process and maybe the government will help even accelerate that.

We know exactly how that can be leveraged to make the projects be completed at a lower level. And our value engineering and technical approach, which is really a fundamental lead with science, how can we get it done exceeding the technical specifications at a lower price? We are the best partner for that. So we think our performance, our delivery makes us the best partner on a design build. So we think we actually have a huge number of constructors that we can bring big value to.

And so that isn't going to inhibit our participating with respect to not having construction in house. It's the partners that will, together with ourselves, that will see some benefit of these opportunities.

Great, thank you.

Great, thanks, Bob.

Your next question comes from Tate Sullivan with Sidoti.

Hi, thank you. You kept your -- and it is great to hear you kept your language consistent on the backlog calling it a high quality backlog even though it grew again and you got an inflow of orders.

Can you provide more context that makes you say that? Is it a faster backlog? Is it a backlog with more follow on order opportunities? I mean, I take it to just imply the embedded margin, but is there more to that?

It is more embedded margin, but the embedded margin isn't -- we are not bidding jobs that will just drive margin. That is in fact an outcome that we are actually bidding and adding work that is up front evaluation with respect to decisions to be made with what type of facility can be put in place.

So for example, if we have flooding you can put in a barrier islands, you can put in a lock or dam, you can put in a levy, you could put in a diversion reservoir. Those decisions are actually the highest value to our client because if you can pick the right alternative that will save the client enormous amounts of money, get the project done quicker and actually be more resilient in the long-term, the clients actually are a little less sensitive on the price point because a small dollar up front can save enormous on the back end.

And that's what we've been adding. We've added more consulting orders, we've added more design orders and if you actually looked over the past few years you've watched our construction and work that was at the bottom of the execution, which is the construction or even the field oversight, that has a portion of our backlog has decreased dramatically and the front end consulting and preliminary engineering has grown.

Now, it's -- an artifact of that is it is higher margin. But it actually creates a huge differentiation. When you get in that early you actually have a place on the project that will follow all the way through to completion and commissioning. Whether or not it's the owner's engineer or subsequently with the builder who actually is successful in winning it on a turn key basis.

Okay. Thank you. Thank you for that context. And more of a specific question too is there was a recent press release about helping with environmental reviews with the Department of Energy. Would that preclude you from doing work for companies actually applying for, let's say, interstate pipelines through FERC?

No, we've actually worked for FERC for many, many years. And we actually provide assistance. We aren't the ones making the final determination. So it's not Tetra Tech making the determination. We are not on the issuance of the permit, that is inherently a government decision and we simply provide the technical support to them and it does not prevent us.

And, in fact, we think it is a benefit because we understand more closely what the specific requirements and priorities are of the different government agencies and, actually, weaving together the agencies are both at the local, the state and the federal level. And not just at the Department of Energy and FERC, but also the EPA and sometimes the BLM and sometimes the Corp of Engineers. Actually having that multi-agency understanding of how it all fits together so that it creates a high reliability of getting the permit and getting to work.

That allows us to work both for the -- as an advisor to FERC, but then also to the actual owner of the project.

Excellent. Okay. Thank you very much.

Great, thanks, Tate.

Our next question comes from Andrew Whitman with Robert Baird and Company.

Great. Thanks. I wanted to help everybody get a little better sense of the organic growth rates in the business. Federal -- I guess the question is it looks like international and US commercial were the segments of the business which were down organically? Dan, is that true? And then that was offset -- slightly more than offset by US federal and state and local.

I guess I wanted to confirm that. And then, maybe, one way of giving some more numerical commentary and that was asking how much revenue was contributed by Coffey in the quarter?

Those are great questions. First of all the two areas, just to reiterate your question, there were two areas that saw a reduction organically in our end markets. One is US commercial, I spoke of that. That, in fact, it was at minus 6% with oil and gas. If you take oil and gas out you actually saw it growing.

So I would say, yes, all in, or as my comments were in aggregate. We were down 6%. But if you just take the oil and gas and set it aside it is growing and it's really grown across our industrials, through our development, through our properties across the board.

Internationally if you take out Coffey, we did see a slight reduction, but it is, again, associated with oil and gas in Canada only. And in fact I will be even more specific. It is in Canada and just in Alberta. It is really the pipeline work we had up north. If you take that out, we actually saw that growing. Now to go to quantify it, you will see this in our filings and I want to provide a bit of a background before I provide the specific numbers.

We are extremely aggressive at indoctrinating, incorporating, and making our international acquisitions part of the family. They are -- and Coffey to be specific, is every bit as much Tetra Tech as the people, like myself, who have been here for over 30 years. They are part of the family, they are part of the leadership and we actually are sending Tetra Tech people down there, we actually are contracting with that entity, with our clients, our contracts and actually hoping that they use some or a lot of the $14 billion of the contract capacity we have and I will tell you as of today, that's also true of Ecological Australia.

They are every bit as much of the family and part of the fabric of this organization as anyone else. So it does become difficult to parse out what did Coffey contribute because we've signed contracts and executed work and actually put the new orders into Coffey so when the revenue is generated. So if you review our que you will see number, approximately, $69 million contributed for the Coffey collective organization to the company year-over-year, or that's would have been its number for Q1. But I will identify about $20 million of that was for contracts or proposals or work that we brought to the Coffey organization.

So if you wanted to use a number, that would be somewhat representative, $50 million would be a number that would be approximate. Again, it is somewhat difficult to de tangle this because our job is to completely integrate it and make us one collective operating company that's seem less to our clients, our customers and our contracts.

But if you did want to parse it out, if you used $50 million, that would be about the right number and it would be quite consistent with what we forecasted coming into the year.

That's good, helpful commentary on that, Dan. Thank you for that parsing that out. I guess the follow on question to that would be, looking at the resulting margins from the change in your business mix, and in this question I guess I would like to understand by segment by segment.

WEI seems to have the growth of your business is without the head winds. State and local is heavy in there and there is a decent federal component there as well. But it looks like RME is the portion that will see some of the tail off in the oil and gas work, almost exclusively, I think.

And so, as I understood it, some of the oil and gas work you were doing was higher margins. If that's the case, can you give us a little bit of help here as to what we should be expecting as the relative margin performances for the company different segments this year?

Well, you do have it right and I think you understand our segments. Oil and gas is almost exclusively within our resource management in energy. Energy being the operative word there. So RME does embody our oil and gas work almost exclusively. It is why you have seen the margin a bit lower. And it is interesting, our revenue has not been challenged as much as you might think in RME because we have grown in other areas but we're growing with lower margin, although it's not bad. It is double digit, it's 10, 11, 12, but we are taking our margins that are much higher.

So you are seeing, in the short term, sort of at the bottom of the cycle RME challenged on margins. You saw they were in the 9's and we think that on an EBITA, if you take A out I think we can get them up to -- a target would be, you know, up in the latter half of the year up at around 12%. We have said 11% to 13%, we think that we will achieve 12% and that's without specific recovery in oil and gas.

We think if that actually rebounds and, actually, over a complete cycle both the up cycle and down cycle RME should be two or three percentage points better than WEI because WEI is inherently government, 75%, 80% is government work, as you identified, state and local, federal. Most of the commercial work, which is oil and gas, mining, all of the industrial clients are primarily in RME.

So, currently, at the bottom of the cycle, and the first quarter's not indicative of the year because it is holidays, winter time, it's a bit lower at the nines. We do expect 12% overall but we think on an up cycle it should be two or three points better than that at least.

Okay. Great. I think I'll leave it there. Thank you very much.

Great. Thanks, Andy.

Your next question comes from Ryan Cassil with Seaport Global Securities.

Good morning, this is Jacob on for Ryan.

Good morning, Jacob.

With in the US did you guys see any changes in regional pockets of demand for the -- during the fourth quarter and then moving into the beginning of this year?

No, no we really didn't. We saw it really quite -- quite consistent and think you -- we break that up into different areas but I think of the areas that we saw the highest demand on the municipal side are typically the Southern states, California, Arizona, Texas, Florida. We have seen some growth in the state of New York and the upper Midwest, Ohio, Michigan, it's actually been quite strong.

So it's not one area but we didn't see it actually move across. What we saw is the areas that were strong continue to build and areas that were a bit smaller in population and funding actually become -- come to life a little bit. But I would say no particular shift in focus either commercial, federal, or local. The only big moving piece, at the risk of being repetitive here, was oil and gas and we saw that continue to be a bit of a headwind.

Okay. And then, if I could piggy back off of an earlier -- the earlier environmental question. It sounds like you guys have a good line of sight on the work in environmental because of your backlog. Given the change in administration do you guys have any different views on how future demand will play out in environmental?

You know, it's interesting that -- I think that some conventional perspective is that because of less enforcement they're maybe less environmental work, that's sort of a linear connection. I think if you actually understand it a bit deeper you may actually take a completely different perspective.

So, if the administration is actually focused on redevelopment of inner cities, urban development, putting big buildings up, big infrastructure, what is important, and this actually goes to individual liability, state and local liability, cities and individual corporate liability, they want to clean those properties up. Whether it's the buildings or the properties so that there's no long term liability to the future occupants and residents of these utilized properties.

It's often refereed to as Brownfield redevelopment, brown as if it's been impacted through industrial or other usage. And so what we actually see is, is you do more development on the inner cities, more building, you actually accelerate and move up the environmental work. So I would say that it's actually, if you think about it, it's actually the other way.

And, in fact, it actually may speed things up to get it done quicker. So instead of spending dollars over a ten year studying it, they may say get it done over two so we can repurpose this property on a quicker basis environmentally. So we don't really see this, fundamentally, as an undermining of this opportunity. If anything it's possible it could be accelerated, especially at the state level.

Okay. Great. Thank you.

Great. Thank you, Jacob.

Your next question comes from Noelle Dilts with Stifel.

Hi. Thanks. Good morning and congratulations on a good quarter.

Great. Thank you, Noelle.

I kind of wanted to circle back to, I think, Andy's question on, sort of, revenues and margins by segment for the year. It seems like, based on your second quarter guidance, you're looking at -- it would seem to imply a stronger WEI margin than we've seen over the past few years. So can you just give us some thoughts specifically on the quarter and how you're thinking about margins?

Well, with respect to WEI we've actually seen the building of revenue's and I think, as earlier questions were identified, that it's being driven primarily with the US federal government and state and local are the primary big growth areas. That is almost all or largely embodied in the WEI group, which is the government group, and so our utilization rates are going up and that translates directly into margin.

And so, as you see that we get busier there you are going to see margins go up. And I do think we have additional expansion there.

Yes.

So we were good at 12.4% but I think that could still go up another 100 basis points or more.

Okay. Okay. Yes, that's kind of my question because usually you see a little bit of, it seems like, a sequential decline and it seems like it might be a little bit less this year. Okay.

And then, I wanted to just touch on your acquisition strategy, maybe you could give us some thoughts on general markets that interest you and, from a geographic perspective, you know, where you're looking at, kind of, sticking home in the US or building out this Australian presence a little bit more? That would be helpful.

Well, I think that we -- I'll start with Australia, I'll start at the earliest time zones of the world. You know, we really do, we really are focused on growing out our Australia and Asia Pacific presence. Coffey was an excellent acquisition, they brought excellent technical capability. It was mostly on structural soils work, a lot of geotechnical work, a lot for the mineral and mining resource business, which, of course, is Australia.

But we really believed that Coffey plus Tetra Tech could make us one of the leaders for their eastern population centers so Melbourne, Brisbane, Sydney, you know, really where the population exists. And we are focused on that.

Certainly, I know it's been received well by the Coffey individuals that we've added Ecological Australia already, for the environmental. We are going to add additional water capability for water treatment, it'd be the equivalent of the municipal, so it's the cities and the states within Australia. So I do look for more of that.

We actually think we can bring value to the customers. It's not about what it is internally, it's what we can do for the customers. So that is a high priority for us, Ecological' s a small first, if you wan to call it, down payment or step in it but that's the first of more to come.

Here in the US we are looking for, not geographic expansion, although there's a couple of areas that we could do better in, but we're really looking for technical that will support state and locals at a broader level including commercial clients here in the US. And that's around smart water and data analytics. It's a huge priority for us, it is investment.

It's an incredibly fragmented market, it hasn't been well defined and we are looking to actually step in to that breach and help define what the market is and, from a technical standpoint -- or lead with science integration in smart sense or smart motors and domain expertise in water and water shed management to fill that void. And so that's a big area of investment that we're looking. So I would put that up at the highest level.

And if I do want to speak to geography I would say there's one area that we are significantly under represented that we think is an area that we can bring value to clients ant that's in the UK and Europe. And so that is an area that I would put in our -- so geographically Europe and the UK, technical differentiation US with smart water and as far as expansion and leverage of where we have a base business that we're gonna grow, Australia, where we're going add municipal and environmental.

Great. Thank you.

Thank you, Noelle.

Your next question comes from Ryan Connors with Boenning, Scattergood.

Hi. Thanks for taking my question.

Sure, Ryan.

I had a question, I wanted to pickup the topic of potential policy shifts with the new administration and Congress and the impact on your business but from a little bit of a different angle. So I'm curious if you can give us some perspective on, you know, being that it's anyone's guess exactly which way things will go, how flexible do you feel that the organization is right now? Both from -- in terms of both technical capability and also in terms of relationships to pivot whatever way the markets go.

For example, if we move to more of a state driven environmental regulatory climate, you know, how easy is it for the organization to pivot to that and serve that market and sustain the positive momentum you've had on utilization rates. So that's just one example but, in general, how flexible do you think you are to tackle whatever direction this goes without having to, kind of, retool your skill sets and/or your relationship base?

Well, that's a great -- that's actually a great question. And I would say that if you wanted to ask me what I think one of the true differentiators are. the first thing I would say for Tetra Tech is the technical expertise that we bring to our end markets but I would say right on the heels of that, and, in fact, actually connected to it is entreprenurially flexibility that we have embedded in this company.

The folks that actually work at the federal government cleaning up a naval facility for contaminated sediments are the same folks that actually work for an inner city and work for the Port of Seattle, which is a state local client, cleaning up contaminated sediments on the sea wall with respect to the viaduct coming down and the new tunnel, a diversion program going in. Which the same capability of expertise that we do for contaminated sediments off of an aluminum smelter along the Columbia river, that it's impacted sediments in loading and unloading areas or discharge points where they had marine discharge -- sewer discharges.

So, I'll tell you the capability to move these people between all of those different areas, what's common, is being the best experts in the world with respect to cleaning up, characterizing, and leaving a clean environment with respect to contaminated sediments. That is actually completely transferable between commercial, state, local and federal.

The same is true with respect to green buildings, if it's green that zero, gold, platinum, we have that capability and a building is a building and the building's energy envelope is what we're experts in. And the same is true with respect to renewable energy, whether it's being done for the government or a base, state and local for portfolio mandates, so I think that a great percentage of our staff are transferable to go to relationships.

I'll try to do this really quick, we have standing contracts at the DoD with almost all of the civil agencies at the federal level. We have over 300 -- 350 offices, I believe, here in the United States, we're in all of the states but one. And so we have the relationships and in commercial we're really quite broad.

So I think that --.

Great. Well, that's helpful. I know we're at an hour so I'll let you go but thanks for that, Dan.

Great. Thank you, Ryan.

Our final question comes from Tahira Afzal with KeyBanc.

Yes, I promise to keep it quick, Dan. If you had to wager on the DoD or uptake energy coming back, you know, to help meet the upper end of your guidance or maybe exceed it, which one would you bet on?

The Department of Defense for 2018 or 2017. For this year DoD.

Got it. Thanks a lot, Dan.

Great. Thank you, Tahira. And actually thank everyone of you for your questions, excellent questions. Actually some of these had very insightful, very different perspectives including comparisons of this stimulus versus ones and others. I just want to thank all of you for your interest in Tetra Tech, all of you for your support. We're working here very hard to make sure that we hit or exceed our guidance and expectations by our shareholders and analysts. And I look forward to speaking with everyone of you next quarter. Thank you very much. Bye.

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