Tetra Tech Inc (TTEK) 2002 Q2 法說會逐字稿

Good morning and thank you for joining us by now you should have recieved the copy of the press release. If you have not please contact the corporate office at 626-351-4664-456 and we will get you one out by the way. With us today from management are Dr. Li San Hwang, Chairman and Chief Executive Officer and James J. Jaska, President and Chief Financial Officer. Li San and James will provide a brief overview of the result and will then open the call for questions. During the course of the conference call Tetra Tech management will make forward-looking statement with in the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning Tetra Tech's fiscal 2002 financial and business prospects. The statements, which represent Tetra Tech's expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such Forward-Looking Statements. These uncertainties and risk are reported from time-to-time and Tetra Tech reports to the Security and Exchange Commission, including these described under the heading ""Risk Factors'' and its Form 10-Q for the fiscal quarter ended December 30, 2001. Tetra Tech undertakes no duty to update the Forward-Looking Statements. At this time I will like to inform you that all participants are in a listen only mode. At the request of the company we will open the conference for questions and answers after the presentation. With that I will now like to turn the conference over to Li San Hwang. Please go ahead Dr. Hwang.

Good morning my name is Li San Hwang, Chief Executive of Tetra Tech. Thank you for

attending this teleconference. As you know this is our new format this webcast and this is

designed to better communicate with you allow you to have a better information. As you

know this is our first time so, every time first time may not be as smooth as we will like

to. Our discussion basically first we will talk about business overview and then we will

talk about financial details and to give outlook and summary and then open for questions.

Overview being in this quarter, we restructured the communication activity and basically

we designed to workload we have so far we got. During this period also we

win many new contracts. Overall in the company. Our backlog increased

eventhough in the meantime some of the communication backlog we have some job

some during that period of time. We have invested some money to acquire company and to prepare for future growth without increased, debt increase.

Basically our debt remain above this time. All in all our revenues will meet our revised

downsize, downward guideline. At this earnings guideline which we have recorded is not

at pro forma include all the special charges associated with the restructuring of the

communication group or the write off in the profit. The next slide, overall

revenue, net revenue is 178 million dollars as compared to 179 million dollars which is a

reduction of 0.9 percent. Operating profit reduced by 50 percent to 10.2 million dollars

as compared to 20.4 million dollars last year. Our diluted earnings per share was 10 cents

as I mentioned earlier as compared to 20 cents last year. Our cash flow increased

significantly and it is about 27 million dollars that is a fairly quite a bit increased and Jim

will give more detail at the financial as all the items increased. Next slide,

slide 6 we talk about all business segment. As you will find now our communication, on

the other hand our resource management activities increased from 38 percent to 49

percent which is a very significant change in the process. We got to our grossly the

resource management showed growth of 26 percent , organic 5.5 percent. Most of the

growth is program. On the infrastructure side, we the total growth was

2.6 percent we do have organically to the minus 6 percent and most of that minus has

come from, we do have a group in the infrastructure as the communicative, it is a design

group. They have got the priority with designed groups during the communication the

power design as far and that part is because of the reduction. Basically because of the

significant reduction in that part of the . So that reduction basically

come from the communication part of the communication. And we do

have some communication part which also have ah as you communication would

basically have 46 percent 45.8 percetn of reduction, which is we hope that overall it will

stabilize and which we feel at this moment is and hope it will continue that way. Overall

the total gross rate is minus 9 percent minus 0.9 percent and organic 12.6 percent

basically of our confirmed communication. Our customer mix has some

increase and also see significant local increase and company buy the reduction office basically some of the communication cost. First look ahead of our business

strategy. What we don't want is they want to internal continuity and internal growth and

some acquisition. During this period of time that you turn to growth basically what we

want to be with strongly has been lot of management aspect and somehow the

and we acquired couple of companies in that area to enhance the strength.

We want to manage the financially particularly to get more cash out from the system

allow us to neutralize and get the target to grow. And during this period of time we have

acquired two companies one is Thomas Group, which has been basic at using one is

arbitration and housing structure activity. Hartman and Associates basically dealing with

. And we also received quite a meaninful program during this period of

time particularly in the water we have some smaller ones which keep on

you know in many outsource local government program total of many outcome and

revenue project . We have AT&T and under GSA no feeling I mean we can go sale for every weekend as though it

is does not a definite concept this could be potential quite a bit of

when it comes to do that part of it. We do have AT&T give us some about 6 million and most development activities so we are expecting that

productivity start to show some strength. We have got Lockheed Martin project which is

dealing with a the big deal and help apart services from the Lockheed

Martin, General Motor which is basically that model outsourcing we

provide about whatever they need to them and EPA US you know we have fire counter and projects which is plenty of and US Air Force which

we are dealing with the base infrastructure engineering activities about 45 million . Overall backlog shows some increase as I mentiond earlier a little bit

reduction in the communication aspect. So we are looking forward ready to be optimistic

provide this on you know the current economic situation atleast what have meant all

improved and now I am giving to James to talk about some details of our financial

analysis.

Thank you Li, and what I would like to do is provide an overview of the financial result for our quarter two and then provide comments on the income statement, balance sheet, cash flow, and finally I would like to end up with discussions of brief overview of some segmentation data on our three business areas. Just from the highlight stand point as Li San pointed out we are in line with revised estimate of 10 cents and from the backlog standpoint, we see an increase of about 7 percent below over 7 percent from both our first quarter and our year-ago data. We ended up, the quarter ended at about 674 million dollar backlog and growth in our backlog in both our reseach management, our infrastructure business and obviously a change in the backlog form our communications business. Li San pointed out that we generated a positive operating cash position, driven primarily from the reduction in our accounts receivable an from additional time but essentially our AR base was reduced by over 7 percent from our quarter one position and excluding newly acquired businesses of Thomas and Hartman, it was a 21million dollar reduction in that AR base. Talking about our net income and our income statements position. There was a 44, 46 percent reduction of our communication's gross revenue base and which impacted our ability to achieve our quarter one initial plan that was established in the beginning of the year. We talked about those changes in our conference call here which really provided guidance on our revised estimate. Now we also saw about a 32 percent reductions in gross revenue from our quarter one results. Let me briefly comment on that reduction of revenue basis we entered quarter two. We had indications as we left quarter one from our communication client that the project start up that we had in our base line plan which the clients workout with initiative begining in the quarter. When we saw those project did not unfold that the rate we had planned initially and our cost did not fully integrate with the result in revenue and therefore we received a comprssion of margin that we recorded in this quarters income statement in our communication businesses. As Li San pointed out we have taken action to improve the communication margin and we continue focusing on not only the work load in that business base but also the cost base. With respect to our selling, general, and administration cost we see about a 4 million dollar increase on year-to-year comparison and that is driven by about 3 million dollars from acquired companies with in that one year period as well as about a million dollar increase in our corporate support activitiy focusing on business development. That is a critical mission and we are allocating the resources to that mission. With respect to the cost in general and administration we will continue to focus on that. That is an important element of our financial management strategy as we unfold the remaining part of the year.

Now going to the balance sheet. My comment here will be of sequential reference relative to quarter-to-quarter references and comparisons but I will also like to make a few comments on comparisons to our year-end balance sheet. At the end of quarter two we had a cash position of over 20 million dollar and that is up 26 percent from our year-end 2001 cash position. And I think as Li San pointed out we have this making significant progress in reducing our receivable base and we reduced over 21million dollars or nearly 8 percent on a sequential basis and 5 percent from our year-end position. However our DSR went up about 5 days and this is the result of the reduction of the communications revenue base. We will continue to focus on our AR and looking and turning that AR into cash so we can strategic growth. We held our capital spending to about 1.1 million dollars per quarter to two or about 1.3 million dollar less than the previous quarter. And again focusing on our capital CAPEX activity towards our growing business areas. Our net debt position increased less than 3 million dollars from the previous quarter which we are pleased with given the affect that we utilized 24.3 million dollars for out cash for acquisitions during this quarter. With respect to cash flow as I mention previously we had a solid cash management performance in quarter two, which resulted in 27.3 million dollars of cash provided by operating activity. Significant portion is cash position resulted from our focus in the receivable area which yielded about 27 million dollars from our bills account receivable. Payment of long-term debt also exceeded the issuance by slightly over a million dollars, which points

to the progress in our cash management area. As I mentioned we focused cash generated in the quarter towards acquisition of businesses in expanding growth market as well as expansion in some of geographic region and this I thing very solid cash management performance for the quarter minimize the use of our available debt facility with capacity of about 250 million dollars. Last I would like to comment on is some segmentation we have done in with respect to our resource management business our operating margins reflects a historical ranges and as we have indicated previously that operating margin for resource management business reflect a higher percentage of federal government business. Our infrastructure margins were in line with our historical ranges and it does also reflect state local governments business as well as some commercial activity. And the last point is in our Communications area obviously a significant change from our historical operating margins of 13 percent to 17 percent. And frankly a dramatic change in our quarter one operating margins in fiscal year 2000 were we reported approximately little over 14 percent operating margins. I think this indicates the shift that we saw in the beginning of the calendar year in the communications business and as Li San pointed out we now have really integrated our staffing our cost basis to this go-forward work load level.

Now I would like to turn it back over to Li San for further comments.

Now I would like to go through the outlook and summary. Looking at the overall with assumption the Communication business went up unchange. We hopefully improved and now we assumed as last quarter two and with general economic conditions we were unchange and were not deteriorated and we expected net revenue of all the year to about 780 million dollars to 820 million dollars. Our guidance diluted earning would be getting to 70 cents to 74 cents range. And normally, in this second quarte we normally had a better performance in the previous year. In the third quarter we expect to be 200 million dollar to 211million dollars in the net revenue and around 18 cents we expect our (Indsicernible) to achieve. With this we present the previously, we had restructured the communication is behind us and we are managing strong in the cash flow area as we expect to invest in the future growth and hopefully we can continue the growth we had accomplished in previous year. Now I would like to get back to the monitor for questions and answers

The question and answers session will now began. Please be aware that there will be a 30 second pause in our webcast to avoid the buffering. At this time all our participants are invited to submit their questions. Please remember to mute the audio function on your computer before you speak. If you are using a speaker phone please take up the hand set before pressing any number. If you would like to ask a question please press the star key followed by the digit one and your touchtone phone. We will pause for just a moment. The first question today will come from Jamie Goodfriend please state your before posing your question.

Good morning that is I want to first start if you could with a little bit more color on the infrastructure group. I apologise; I think I missed the first couple of slides technically from the presentation but If you could talk a little bit more about the specific commercial project? I think on the whole is the outlook unclear to when it is coming back or ?

What we see Jamie is our commercial project; we have not received cancellation of some commercial projects. We see

a strong position in healthcare and school as well as really good regional development and in many of our business areas like water, waste water system. Our the design site have a private component to it, is very strong. But we do see some project delays for instance in the New York area that have that has impacted our first quarter results. We don't see those being cancelled. We think that they were just a slight delay in those projects. But all in all I think we still see a good design workload in our infrastructure business and especially in the and design capability or area.

Ok.

If you can you could just look on couple of questions on the recivables. First of all with respect to DSR, what was the average DSR then for the infrastructure growth in the quarter?

Well I think well we have'nt done a segmented but generally it is slightly over a 100 days or about 110 days a little over.

So the average communication among receivables is going down with this drive of the average by 5 days from the weighted average towards infrastructure?

You what you are seeing, the actual question is yes reduction in communication revenue has impacted the days sales factor. And for the company in total by 5 days.

It is a in that part it is almost about 30 days increased. It is not the total receivable increase actually come down soft but the fact is reduce the revenue so much as to result a increase the debt receivable. The other aspect we have a reduction in overall debt receivable.

How are you using accounts in communications now there is, is it still ok?

I did'nt hear the question could you repeat that please.

That the using of the accontancy involved in communication is about the same as last quarter?

It is it is. Ah Ah it is.

So in the receivables if increases about 15 million dollars sequentially in the decrease of bill receivables and about 14 million dollars sequentially. Should I assume that from the acquisition?

Some of that is the acquisition some of that is also timing and some designed build project in the water, waste water area.

Will that be in the infrastructure?

It will be in the infrastructure, correct.

Last question with respect to SG&A, what do you see going forward in terms of spending is the sort of a when there are timings of bonus payment or anything going out in the second quarter or would'nt be recurring at that level on the third quarter and that is the dollar basis?

We will get we will get there is some timing of some of the G&A epenses both corporate and at the unit level and we would expect in absolute dollars a reduction excluding any additional acquisitions with in there.

what amount of revenue was acquired in the quarter in annualized basis from the two?

About on an annualized basis about about 50 million dollars.

Ok that is right. Thank you very much.

Our next question will come from Joseph Mathews once again please state your affiliation befor posing your question.

Good morning gentlemen Joseph Mathews, Robertson Stevens. quick questions here on the pre- announcement call, you had indicated that the communications business would be back to a positive operating income level for the second half of the fiscal year. I was wondering if we are still on track at that level of profitability you talked about then?

Yes, we are on track.

Ok.

Secondly on the backlog up sequentially, could you give us an idea what were the main drivers of

that sequential increase, first any new business signed and secondly maybe backlog

acquired in the acquisition program?

With respect to new backlog that has entered sequentially Joe, we see we see some additional water program and really a significant amount of date work that we have talked about that we expected relative to watershed management in about 42 states right now. We have under contract to do watershed planning that is non point search work that has impacted positively on the backlog in our resource management as well as the infrastructure business. If we look at the acquired revenue

base, it is roughly and if we compare it on a quarter-to-quarter sequential base, we have a slight increase but the backlog essentially maintained on an organic basis. Now that remember that offsets a slight reduction in our communications backlog. So the other units had a positive impact.

So let me just understand it correctly it sounds like that the backlog, was the primary increase in the backlog then is a result of acquired backlog or organic additions to the backlog?

We had acquired backlog of about just slightly over 40 million dollars. So, that is essentially an offset of the reduction in our communications backlog.

Ok alright.

And then can you comment on any other large deals you had commented on previously including (indiscernible; is that business still out there or has it been given or you were that was given to somebody else or what is the status on that?

That is been delayed, I am expecting this month. You know the government chance will be made two three times actually now and I expect this month to do well we are going to get back.

Ok and then just finally as a result of the curtailing of the communications side, do we see any permanent structural change in kind of DSO characteristics of the company on a build or unbuild basis moving forward?

We do not expect that to permanently change except I think in the communication side because normally communication has a longer period of DSO now the fact that they suddenly drop out the DSO increased in that aspect, actually ah more than the reduction in the resource management. Resource management reduced by above and infrastructure reduced couple of days so that part take will take a little time to finally stop to coming down because of the job the revenue . So now, once revenue stabilizes that should come down and we are working hard to get that part down.

Ok thanks a lot gentlemen.

Our next question will come from John Rogers.

Couple of questions just first on segment results, do you expect that margins will hold at these levels particularly on the infrastructure side and the resource management?

We expect the resource management and infrastructure to hold on at this current level. The key question is the communication. We are spending somewhere in the 5 percent to 10 percent range just we point out and that is what we want to accomplish during this year. I am talking about within next couple of quarters.

I just wanted to know is that 5 percent to10 percent margin?

It is operating margin in the communication side because right now that we have been cut a lot of things of that we did on restructuring and all that and we are expecting to get that profit line but not to the level like before we are hoping to target at 10 but I think if we can get within 5 percent to 10 percent I think we should feel good about that.

Ok and then just feel line the interest expense level dropped sequentially in the quarter, is that just lower rate, looks like debt level state essentially the same but I can tell the timing?

The main driver to that is interest income attributed to that tax credit.

Ok. So will that Jim will that continue or?

No.

Will interest be back up around that 2.2 million dollars level?

Probably, a little lower. From modelling purposes that the good basis.

And then lastly just on the goodwill I think you said in the past you don't expect any impairment but can you give us a sense of where the goodwill is in terms of segment infrastructure, telecom or resource management?

Ya I can breakout about 140 million dollars of the goodwill is attributed to the Communication business and then the remaining goodwill primarily relates in to the infrastructure.

And it is still your initial tests still don't expect any impairment there?

We haven't changed our position on the impairment point.

And then last thing is just in terms of the bidding activity, not is much over the next month and more six months next couple of quarters what sort of opportunities are you looking at what is out there?

Opportunities and particularly in some of the home executed activity barely low and we have not seen a big

award yet, but is in the process and though we are basically we are trying to moving towards where the opportunity is.

Can you give us any sense of how much work is potentially there?

For that I could not count for I am sure it is very large you know the budget is very large still the key question is can we move fast enough to get those.

You know in home land security side obviously there is a very large budget that is coming through the administration and we are starting to see various support agencies and brandships for the car engineers the Office of Federal Securities as well as other agencies the allocating significant budget to home land security and those project are now entering the precurement cycle many of which have some very significant fast track components to it.

But are these I dont know whether you can quantify this but is this 50 million dollars, 100 million dollars, 200 million dollars opportunity, can we get any sense?

Well in the core of engineer, we are seeing the core of engineers coming out, and it is still it is very early in the stages, and the procurement cycle but certainly, contract values totaling over several hundred million dollars worth of potential and that is focused in on infrastructure assessment, infrastructure protection, both water infrastructure and transportation

infrastructure as well as ports and harbors.

Ok Ok great .

Oh no one more question sorry, any change in your accounts receivable allowances or anything there?

On our allowances, we have increased as a percent, in excluding the extra comp percent of receivable from a essentially 3 percent a little over 3 percent and at our quarter one ending period to 4.5 percent of receivables at the end of quarter two. And that is excluding (Indiscernibe) comp.

Ok. I am sorry that is just on the telecommunication or all of it?

No, that is across the entire business. That is an aggregate number.

Ok great. Thank you.

Your are welcome.

This will conclude the question and answer session I will now turn the conference back to Li San Hwang to conclude.

Ah we just basically wanted going to built a solid base for continued growth and I will position this to manage these receivables and to be to bring more cash and try to moving towards the areas we feel what we some area and at the same time we want to ensure that communication we are going to do is to profitable and we want to concentrate on that and we got the internal growth we put a lot of effort in (Indiscernibel) activity and in system and the water programs and home land security aspect we will be able to resolve the current situation. Thank you very much.