Tetra Tech Inc (TTEK) 2003 Q1 法說會逐字稿

Good morning and thank you for joining us. By now you should have received a copy of the press release. If you have not, please contact the corporate offices (626) 351-4664 and we will get one to you right away. With us today from management are Li-San Hwang, our CEO and James M. Jaska, our President. Li-San and Jim 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 certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements including Tetra Tech's fiscal 2003 financial and business prospects. The statements which represent Tetra Tech's expectations or beliefs concerning future events are based on current expectations that involve a number of risks and uncertainties that could cause the actual results to differ materially from those of such forward looking statements. These uncertainties and risks are reported from time to time in Tetra Tech's reports to the Securities and Exchange Commission, including those described under the heading Risk Factors in it's form 10-K, fiscal year ended September 29, 2002. Tetra Tech takes no duty to update forward-looking statements. As a reminder, this call is being recorded. 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 up the conference for question and answer session after the presentation. With that I would now like to turn the call over to Li-San Hwang. Please go ahead, Dr. Hwang.

Good morning. I'm pleased to give the presentation on the Q1 and before I go over the details, let me go over the agenda. This is a business overview which I'm going to talk on there, the financial details, Jim Jaska will talk on. And then we're also mention about currently have a CFO, a new CFO and also some board members I want to briefly mention and then we'll talk about all of it in the summary and then we'll open it up for questions.

Page 4, the business for the first quarter overall, includes earnings and revenue exceeds the originally stated expectations. And overall business is concerned, our [inaudible] Market which is our domestic Business is very solid. And our year to year comparison in turn of the first quarter is [inaudible] The number from my side either stronger by the communication effect which is the communication part of the business as from 38 million down to 22 million. We are expecting from now on it should be bottom up and upwards. And also because of last year this time we have a lot of bank [inaudible] Market strong and that has positive effect of five million but in terms of comparison to current effect it's effect five million minus the comparison. So this quarter results are in comparison wise is relatively weak.

However, our bank is strong, year to year comparative improved 13.7 percent. Next page.

The revenue is roughly minus two percent, which is if we exclude communication those would be significant enhancements.

Our operating income as you know when we last, the previous years, roughly you have communication part, we have 5.5 million dollars of operating profit and this year, we're about million dollars. So it's a total of five million dollar effect. That's the reason the account for most of the reduction in the operating income. And [inaudible] We're not expecting that to

occur in the coming quarter.

If we look for the communication effect, the effects of the dark cloud will be lifted after this third quarter, then it's up current quarter we will have some -- it will have no effect in terms of the minus effect and we will exceed without that we have 10 percent of positive growth because of that reduction.

The focus effect earnings in terms of percentage [inaudible] And our cash flow this quarter is only -- we have 14 percent, we have spent a little bit more money. Normally we have significant money [inaudible] The current quarter, the second quarter on should be a very good cash flow situation.

By the way, the year to year comparison in terms of the DSO Are very Favorable year to year comparison. The business segment and we are going to have three business segments because of communication -- because communication -- very special situation, positive growth and the nature of that business, handling of the business is different. But in terms of the mere performance of the business is concerned, it's very similar to our infrastructure part, the other part of this. So this is based on the alignment of that and communication part of the business when compared with other aspects of the infrastructure. The reason we had that because the communication itself in terms of performance is concerned is very similar and also now are coming down to a point, it's normal infrastructure now because of the explosive growth. And we're running about current operate 11, 12 percent range in terms of net revenue is concerned. So there's no reason to separate out And also by prepared the costs of in terms of overall structure is concerned.

With that, reporting basically two segments. We saw management major part of one percent at the moment and infrastructure Communication were 49 percent. In sales growth, I mentioned earlier that the communication has -- they have some dark cloud that we're very happy to see that lifted, and without that our current situation based on our assessment we should be moving, actually should have improvement as time goes on. And without that year to year comparison effect, our overall

comparison should have 10 percent improvement in terms of annual growth.

I'm talking about that effect 10 percent. Now resource management part, total growth 9.1 percent and organic, minus .2 percent. I mentioned [inaudible] Coming up from the [inaudible] That's not normal comparison should be about five percent, four or five percent of annual growth. The infrastructure part, total growth minus 11.8 without communication effect by 8.9 percent and with organic growth, minus 24.3, [inaudible] 12.5, in that range.

Total growth at minus 2.1 percent, without communication effect it would be positive 9 percent. And organic part, total growth is minus 13 percent. In fact, I wanted to point out we're cash [inaudible] -- [inaudible] At the chart. We have some degree there. That should be minus 13.0 percent. And without communication it should be much less.

In terms of customer, our customers you see reduction in percentage is concerned in the private side. That's the communication and that's about 24 percent as compared to 26. [inaudible] increase to 23 percent and international about [inaudible] Two percent.

Our business strategy, in other words, Our target growth areas in terms of -- we're putting an effort in that area. And we also looking at some position in this area so therefore we'll have something going.-I In terms of financial management, we tried to reduce -- improve our tax growth, collect more money in terms of that, but I think we're to expect this year our cash flow should be pretty good. That definitely would be -- all the cash available to help probably find some good up[inaudible] Position intend today acquire that.

So this is basically our strategy and continues that. Now we should have a positive growth, solid growth from now on.

This quarter we won quite a few programs as we already announced-- the airport project, the EPA Project and the next three have not been announced, but we mentioned this year we went to New York transportation construction management project from

19 million [inaudible] Washington the plan and design Programs are about eight million and also U.S. State Department, some upgrades, this is really a protection from a biochemical attack, which Tetratech has developed from some techniques, people needing. So with have positive customer, positive sales.

And in addition we'll have some further additional [inaudible] From [inaudible] In West Virginia, from Pittsburgh, to California. We have many of those. And I will say we have managed new projects in this quarter.

About the backlog, As mentioned as a year to year comparison we have a 14.7 percent increase. Sequentially this is flat, which is very good almost in the previous year this quarter which is a new year's quarter, normally it's coming down earlier in the 2001, which is a 4635 from2629 come down and this quarter is flat, basically. But we're pretty confident we have really good backlog already for continued growth.

Thank you, Li-San. I'd like to turn to page 13 and cover key points of the financial results for our quarter 1 '03. As Li-San pointed out, we exceeded street expectations by a penny, with a EPS, diluted EPS of 17 cents. And exceeded also our net revenue expectations which had ranges of 170 and 180 million. We achieved 181 million dollars of net revenue. We used about $2 million of cash, which is very typical for our quarter 1 results and as we talked about at our last conference call at year-end, we have adopted 142 and have implemented it, reflect it in the income statements with respect to goodwill and other intangible assets.

Going to page 14 on the income statement, I'd like to hit a few high points.

The main drivers for our revenue and EPS performance in quarter 1 is a continued high priority of our water programs. As Li-San points out, both at the federal, state and local levels and I think the main drivers here are the continued need for high quality water. So health and safety drivers. I think another key point of this, managing this resource is economics.

Sustainability, as well as community economic development. It's driving our studies, programs for water, both on issues of sourcing of water, the allotment of water, the allocation as well as design for distribution of water. Very significant driver of our business.

In addition, our water communication projects are stronger than expected. We're seeing continued growth in that market and those business segments as there is consolidation in the market. The merger of various system providers which drive integration and assistance upgrades of those communication networks.

The point is that our education infrastructure business remains very steady, as communities still have a very high priority for education of -- K through 12 as well as higher education. Our gross margin is in line with Q1 expectations. Historically we see a higher indirect cost base and the driver there are both holidays and vacation, as well as business development activities at the project levels, again, positioning, contracts that we've been awarded, backlogs that have been issued and translating that into task orders which have an indirect cost associated with that activity.

In addition, what we saw in Q1, 2002, as Li-San pointed out, we had a very strong revenue base attributed to our emergency response business, as well as strong communication business. We had higher absorption of our overhead last year because of that revenue.

So when one looks at the comparables on a year to year basis, you'll see some difference, but I think that's in line with our expectations.

Going to SG&A, our SG&A costs are down about a million, as well as rates as revenue moves so did management of our costs, rates are down on a comparable basis. Now I'll talk later in my presentation about specifically about an update on 142. And the last point is that our effective tax rate is in line, right in line with what we had communicated at year-end of 40 percent rate. And as I mentioned last, at our year-end conference call,

we see a projected value of our R and E credit, lower in '03 than we saw in 2002 which we have reflected in our rate estimates.

Page 15 on the balance sheet.

Our cash position remains strong at 42.7 million. We see a reduction of about 3.6 million sequentially from our year-end results. However, we have a significantly higher level of cash outflows at year-end, attributed to our bonus payments for our one payment as well as tax payments. And that's what was nearly about 20 million dollars. So we have a significant outflow. So I think, and I'll talk a little bit more about that in our cash flow analysis, but all in all we're seeing that cash position in line with our expectations.

Our DSR for the quarter end was 94.8 days. Sequentially, about four days higher than year-end. And as I mentioned on previous calls, Q1 historically is a slower collection month, period, because of holidays. But I want to point out that when one looks at a year to year comparison, there's a five-day reduction of DSR from 99.8 days in '02 quarter one to our 94.8 as seen in this period.

Lastly, net debt is up sequentially about five percent. Although our debt, long-term, the current portion as well as the long-term is down sequentially, about several hundred thousand dollars. So that difference is our cash position. All in all I think the business and the balance sheet is strong and we see that reflected in the cash flow statements, which is the next point on page 16.

We used about $2 million in cash from operations. As I mentioned previously, this is within our expected range. Historically we see cash from operations in a utilized position, a use position for Q1. As I mentioned, the timing is a bonus 401(K) contributions as well as other yearly, year-end expenditures occur in our quarter one position period, rather, and it's reflected in our cash flow from operations. We've managed our capital expenditures to critical growth programs. And funding capital for markets that have strong returns on investment. And

all in all our capital expenditures are down because of the mix of our business, about 1.7 million dollars and/or about 20, 28 and a half percent year to year.

Our unbilled receivables that we reflected in our balance sheet has a positive impact by nearly $10 million on our cash flow. And the driver here is the focus in on billing cycles, we're really focusing to getting bills out the door to our clients so that we can put them into a cash collection position. And also a reduction of milestone contracts. We see that our fixed price contracts are down on a year to year basis and obviously impacting our unbilled receivables base.

The last point is on FAS 142. And as I mentioned last conference call, we adopt 142 effective September 30th. And we have included new guidance with respect to soft backlogs and client lists. So we're. Integrating a new guidance into the evaluation process. We have completed step one and the conclusion there is we've indicated no impairment in resource management or likely impairment in our infrastructure business, which has about 227 million dollars of goodwill.

We are moving forward on step 2, which is valuing those businesses so we can determine the magnitude of adjustments that will be reflected in our financial statements and we expect to complete that by the end of quarter 2 and I might point out that is ahead of our deadline for this requirement.

So all in all we're in the midst of valuing and doing the valuations of all our business areas in the infrastructure segment right now.

So with that, I'm going to turn the floor back over to Dr. Hwang.

Thank you, Ken. Let me just mention about the board members, we're very happy to have David King joining us. We just finished the board meeting and elected him to be the CFO for the company. Maybe I can make, David why don't you give a little bit of your discussion about yourself.

Hello everyone. I will not repeat too much you already know. Briefly prior to Tetratech I was the CFO at Walt Disney Engineering which is a division of the Walt Disney Company. And it is about a billion dollar a year operation, designing and building Disney theme parks and resorts worldwide. About three or 4,000 people in Los Angeles, Orlando, Paris, Tokyo and Hong Kong. In the mid to late '90s I was in Hong Kong working for [inaudible company name], I was the CFO for the Asia Pacific region. Had about 4,000 people doing business in about 14 countries in Asia. Roughly over a billion dollars revenue.

Prior to that I was with PriceWaterHouse for about ten years. I specialized in international tax and cross-border Transactions. I helped companies from China, Hong Kong Taiwan, expanding to the U.S., as well as US multi national, investing in China.

At Tetratech, this is my third month on the job and I'm still in the break-in mode and I'm learning a lot and still having fun.

Next we have elected two board members. One of the board members is Hue Grant, former vice chairman of Ernst & Young. Currently, he's chairman of the audit committee of [inaudible] Bank operation which is located by Tetratech also.

And he's now, we elected him to the board and also he would be the audit committee member. The next one [inaudible] is Jim Jeska, the President and we elected him to be a board member. So we have two internal board members, myself included. And then the five outside board members.

Let me just mention about our outlook and summary. Q2 we are expecting internal net revenue something like, 19 -- 187 to 200 million in that range. Our EPS of twenty cents, this does not include an acquisition accounted for.. As concerned for the whole year will be 785 to 800 million. And earnings per share was 88 to 92. We are very confident that all year we'll be [inaudible] And we certainly would like to see some further improvement.

So that's in summary. I think overall, we have exceeded our expectations, earnings,

and revenue. We'll continue to try to invest in the growth which we outlined earlier. I want to mention about next quarter, because of I mentioned earlier the communication business in the last couple of quarters was up two quarters pretty bad, effect us overall quite a bit.

With that, now we're expecting the overall major part of the problem to be done and I expect it to be internal profit and also revenue should be increased as good as previous quarters and should have an impact of growth is concerned because of no more minuses in that area. We'll have about the 10 percent positive effect according to the -- as far as internal growth is concerned. So we should some positive signs instead of negative signs in the future.

So we expect it to continue from now on to show some positive growth and we are also very confident this year we should have meet our guidance. And that concludes our presentation

The question and answer session will begin now. Please be aware there will be a 30 second pause in our web cast to allow for buffering. At this time all audio 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 pick up the handset before pressing any numbers. If you would like to ask a question, press star 1 on your touchtone telephone. We'll pause for just a moment.

Our first question comes from Deborah Coy, Schwab Capital Markets.

Good morning, guys and welcome David. A couple of questions. One, Jim, can you give any range on what you expect the overall cash flow outlook for the year to be relative to last year as we ramp up going into 2 Q? Secondly, can you give us any sense, you talked a little bit about the acquisitions you're looking at. If you're comfortable with giving any rough sort of budget outlook on what kind of range of revenues you might be looking to add in for the year based on what's in your backlog right now and whether there was any acquisitions in the quarter that we should note. And thirdly, if you can just address the

margin issue and resource management. You had a huge quarter last year on margin increase, talked about some contract mix issues. It pulled back a bit this quarter as we expected, although a little bit more than I expected, sort of how we should look at that going forward. And I'll get back in line.

I'll take the one first and then Jim can answer.

Our positions, our things, I'm sure until you sign, you can't tell however we do have a few we're looking at and also it's probably best I'm not going to say how big on that, but it would be a reason to go to effective overall results And that's all I can say in that area. We have [inaudible] And we'll let you know. Can we answer the other two?

Did you say what you added, if you did add revenues in the quarter for acquisitions?

No. Everything now we are trying to report has no acquisition will not be added in until it actually occurs. We'll give an announcement, change the numbers of how that effect our quarter.

Nothing in 1 Q.

Nothing.

Let me just comment, Deborah, on cash flow projections. As I mentioned we have looked at a cash flow and targeted numbers that are equivalent to operating income as generation of cash flow. The timing of that is what we're talking about, Q1 tends to, frankly, have a consumption of cash, but we think, as we go through the quarters, the remaining quarters, obviously we'll see a cash flow projection, cash flow yield similar to last year.

Now, with respect to the acquisitions, as Li-San mentioned, we have not projected in our Q2 acquisition a yield. And as I mentioned also in our year-end, we have not included forecasted

acquisitions into our guidance for the year. We look at the market. And we target both tuck-ins, regional tuck-in Although from a geographic standpoint we've got the geography covered. Although there are a few segments that we are honing in right now.

Also, expansion in some key growth markets supporting water and some federal systems. So we continue to scrub those, scour the market for transactions that make sense for our business.

Okay. Got it. My last question was on the resource segment margins.

On the margin?

Right.

On the margin, I think we're seeing obviously as a significant higher federal government cost reimbursement component to it. So I think what we see from our margins and we have given guidance about the eight to 10 percent margin rate, as a good run rate for resource management, given that mix of cost reimbursable business.

And also the reason why that last year is better, you know that we have seen quite a bit of work into that [inaudible] And all those things have a positive effect of the overall margin. So that part of the emergency response is we talk about is the five million [inaudible] And that is going away basically and becomes a normal situation.

I do understand that, but if I could get that point clarified. You had been running a resource management margin in that lower 10 percentish sort of range, as you've said. It jumped up to over 17 percent in the fourth quarter for resource management. You come back to this 11.1 percent level here. You did say in the last quarter that because of contract mix issues that the resource management segment margin was trending higher because of a higher percent of fixed unit contracts more toward a 14 percentish sort of range.

Can you give us a sense of where you are on that now?

No. I think, that's what I was alluding to in my answer, Deborah. It is really a mix issue. And when we look at our commercial business, we see a reduction of about 11 percent. That 11 percent, as Li-San pointed out it has a communication component. It also has the private side resource component to it. And with that comes primarily fixed price contracts.

So if you look, if one looks at our contract price, our fixed unit contract, fixed price contract, lump sum contracts are down about 10 percent, 11 percent on a year to year basis.

In the quarter.

Yeah, and we also see that same trend sequentially.

So what you saw and what we talked about at year-end was a mixed phenomenon.

I'll let that go. Thanks

Now we'll hear from Richard Eastman with Robert W. Baird.

Just a couple things. One is, Li-San you eluded to this emergency response business being down five million year-over-year. Is that a contractual reduction? Did something run off or was that just a one quarter?.

As you remember, we at that time have a lot of issues, I believe access or what the government really wanted us to provide many people to support that productivity, which would either push other aspects of the company, improve [inaudible] This and that. So we either have an extraordinary coming in about five million because of that concentrated effort. Our people would not only be working in the daytime but also nighttime. And a lot of over time was involved. And that is not expect to have, something which we hope don't happen.

So that was really the effect. So we do not expect that thing will come -- it's not a contract issue -- it's a requirement that emergency occurred we [inaudible].

On the state and local side of the business, if I use the weightings that you provided, the state and local business was up about 21 percent year-over-year. That was internal. How much did the state and local business improve internally year-over-year?

Are you asking organic growth?

State and local, as opposed to the infrastructure.

I think when we look at the total revenue, about half of that growth. We see about 12, about half of that growth.

10 percent would be internal growth and state and local?

Yeah.

Just lastly, I think I maybe need to clarify your comment as well from the previous question. The OP margin, the management business will be between, will run between eight and 10 percent? Or are you saying in the overall business?

What I'm saying, Rick, historically we've run between eight and 10 percent. We've seen some higher operating margin, as high as 12, 13 percent. That's driven by mix and task order mix.

Sometimes we have contracts and we finish and then the money is still there. So for that time we can pick up when we close out contract.

But that's again are you speaking to the overall operating profit?

No, I'm talking about resource management, Rick.

Richard Eastman All right. Thank you

Now we'll hear from Jeff Beach with Stifel Nicolaus.

This is [Unidentified Speaker] For Jeff Beach. I have three questions. First of all, the infrastructure goodwill of 227 million, can you give me idea of what portion of that is actually attributable to the old communication segment?

James Jaska The total infrastructure.

How much was the communication portion.

Are you looking at the growth rate or just --

The goodwill, I'm sorry the goodwill portion of the infrastructure. How much --.

James Jaska On the goodwill standpoint?

Yes.

It's about half.

And also I noticed that the interest expense was lower in the quarter even after include the debt reduction that happened in the fourth quarter. Was there any kind of interest income more than what you expected?

Yeah, we see Q4 interest income.

Okay. And also my last question, [inaudible] The private sector was up nicely sequentially. Was that almost entirely due the wide communication segment or you think from better business elsewhere such as building communications,

building systems, I'm sorry and could you comment on the market trends in the building systems division? Thank you.

Can I get a clarification? We're looking at infrastructure growth rate?

No. I'm talking about private sector, just private sector as a client group. And that was up sequentially about four million dollars from 19 million in the fourth quarter of 2002 to 94 million this quarter. And I was wondering if that is entirely due to the wide communications work or [inaudible].

Yeah, some of that we see a growth in our wire communications business. We also see some additional strength coming out of our building systems. Primarily on the industrial process side. Some of the consulting we have done. We have increased our efforts in automated command and control centers for private side as well as government. And so we have numerous increases in our commercial business on a year to year basis.

And is that kind of sustainable going forward?

Some of that has to do with capital spending by our commercial clients. Let me break that down a little bit. With respect to our communications business, we remain optimistic on the wire line side and the capital spending that we're seeing in network rebuild, network integration. As major players come together, such as Comcast and AT&T. With respect to industrial processes, we are working very, very closely with plant production operations and we are working on efficiency and effectiveness of plant yield which is a cost benefit for our clients and those are good investments, good capital investments of our clients. And we'll continue to provide that value-added on the plant line and hopefully continue very, very strong commercial business.

Okay. That's all. Thank you

Now we'll hear from Jay Tuft with Imminence Capital.

A quick housekeeping question. Looks like prepaids were up around four million sequentially. Is that just due to acquisitions or what's that?

I think it's the timing and primarily insurance.

Okay. Great.

And as a reminder, if you would like to ask a question today, please signal us by pressing star 1 on your touchtone telephone.

Now we'll take a question from Charles Newhauser, Rich and Cane.

I have two questions. The first one is you seem not to be concerned with the state budget shortfalls that are becoming so prevalent, particularly in California which I guess probably has the biggest problem. Could you talk a little bit about why you do or do not consider this something worth worrying about in the near term?

Let me start out by saying that we continually look at budgets and budget trends and I think our programs and the primary service that we provide to state and local governments are tied to essential services.

And essential infrastructure. And we talked about water and water infrastructure. And we see a continued demand for insuring that water quality meets health and safety standards. We also see continued demand for our services on identifying new sources of water, allocation of water, especially in areas of drought. We have a lot of critical programs going on there. In addition, we have programs that are driven by distribution requirements of water. Longer distance for supply purposes, which cities and state government as well as federal government view as critical to sustaining the economic conditions in regions, as well as critical for further economic development. So from our point of view, those are essential services, and what we do see is our

customers having to make decisions on prioritization of their budgets. And I think health and safety issues are high priority. That's what we're observing in the customer complex. And we see that on a continued basis.

I think what we're also seeing is state and local governments having to do more with less dollars. That's the reality of what we're all seeing in the media, as well as talking to government officials. And we're helping our clients through that prioritization problem. And it's not an insignificant problem. And consequently we watch those budgets. And I think if you look at water programs, the new TMDL requirements that now are translating to state planning, government has a legal responsibility, a regulatory responsibility to manage the water resources, they're entrusted with their natural resource and that includes both total maximum daily loads of pollutants Into those resources as well as wide use.

So that's how we see state programs sustaining as we've shown in the one chart where we see additional state's water programs being a shortage to our technical experts we hopefully can see a continuation of that.

On that we're consistently [inaudible] Some areas that do have some reduction on that. But that's why we are more cautious, otherwise we would be a little more bullish. So yes, we do concern and we do have some effects and particularly some [inaudible] [Inaudible].

Thank you. That was a very thorough answer.

My second question was sort of tag along with that, the Wall Street Journal seems to be on a tirade against on the subject of perchlorate water pollution. Is this something that you probably have been dealing with for a while or something that you would view as further source of new business?

Two things. I think we see that being a continuation of our business, both not only as from sources of dry cleaners, which I think are making the press, but also the

component of rocket fuel. So we have several significant programs that are going on with respect to large sites cleanup, but also we have some of the most knowledgeable individuals on toxicological risk on perchlorate, and we're working with our clients on risk assessments and other sources of business attributed to that chemical.

Thank you very much.

This will conclude the Q&A session. I will now turn the conference back over to Li-San Hwang to conclude.

Thank you for participating in this meeting. In summary I want to mention about and because earlier I alluded to communications part of this, we're coming back from a rapid decline to basically stable and the progress has some positive impact. We are certain we'll see some better signs for the coming quarters I think more positive signs instead of negative signs So we are very happy to say that finally that cloud is passing by us. That time is passing by us and we want to thank you for all the supporters in this difficult times. And I assure you we will continue to work to try to get back to our good quality.

Thank you very much.

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