Tetra Tech Inc (TTEK) 2005 Q3 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 at 626-351-4664 and we will get them right away to you.

With us today from management are Li-San Hwang, Chairman and CEO; Sam Box, President; and David Kind, CFO. They will provide a brief overview of the results and we will then open the lines for questions.

During the course of the conference call, Tetra Tech's management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning 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 risks factors that could cost actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

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 then open the conference up for questions and answers after the presentation.

With that, I would now like to turn the conference over to Li-San Hwang. Please go ahead.

Thank you. Good morning might. My name is Li-San Hwang, CEO and Chairman of Tetra Tech. I'm happy to report to you our third-quarter results and the progress of our efforts to the refocusing of our business.

In the water, Homeland Security are refocusing aspect. The resource management part, what we have is we're concentrating more in the water and the (indiscernible) tied to the consorting and engineering aspect. In the infrastructure we're more focused to toward the water engineering as they tie into water which Tetra Tech is very strong. And we think we can expand it on a system support and Homeland Security related part of the business.

As you will see in the chart, we normally have three stages given the complex part from a customer, three stages. One is consulting aspect, another one is engineering and then construction management. In these three businesses, what we have done is that we are Tetra tied basically to concentrating in consulting and engineering part of the business and that some people gravitated into some construction area. So we think the focus is to pull those and to refocus back into the consulting and engineering area which we are good at.

So that is what we have done in this area. And in the communication side, we -- wireless we exited. We expect all that FX will be done this year, this calendar year, it will be all done. We are pretty much finishing up the most significant part of it and whatever is leftover is a relatively small percentage. That is why that we've been doing internal profit we are doing very well. So we have not final decide what we are trying to do yet and that is in progress.

Let me give you a little overview where we stand in terms of different segments. The resource management part, the market overall is steady. Our profit is affected by exiting of certain construction part of the business. Rather unfortunate in the process of closing down a small operation, and we uncovered some of the practice related to personal behavior which we state in our announcement. But we do not believe this will affect the result in the period.

In the infrastructure area which we have made quite a good progress, the group is quarter-to-quarter is growing and also the profitability are improving and we expect that where before they improve now is about 7.3. In the communication aspect, the wireless is profitable with 7.0 and we expect to further improve in that area also. The wireless as I mentioned earlier we will be getting out totally by end of this calendar year. Essentially, we will be finishing up on most of it in this fiscal year.

In terms of revenue, our revenue profit guidance and also cash flow is pretty good. We have very significant reduced rate of receivables, down to 74 days. We expect to see some further improvement. All this effort in summary is to improve our margins which we want to get back to higher margin and reduce or minimize our investment for the (indiscernible) part of business. And certainly if we reduce the days receivables, we will do that. And reduce the risk because construction aspects of the business is relatively high risk. We do that. And enhance the growth, would move into higher growth area, and that is the whole purpose is try to accomplish those four things (ph).

Let me go over some financials. The financial in the revenue is concerned. We (indiscernible) 6.9% reduction but if we incorporate in the business we (indiscernible) in a minute on the wireless aspect actually if we account for that, it actually had some increase.

Our net revenue is within our guidelines and it will even come down because of the some of the business we are trying to eliminate. The income from operation is 17.4 million to 15.3 as some reduction by 12%. Actually the profit actually is better than that because compared to apples-to-apples, the spending this year we have SOX and RP aspect effected about $2 million a quarter. So without that, we would be comparable to essentially get back to last year. And so does the EPS affected by $0.02. Otherwise it would have been very close to last year.

Looking at the custom mix, two quarters practically very similar in terms of the overall percentage of distribution concern. However, if you look at the commercial side, actually that is 1% increase. So even 1% because all of the commercial, the wireless is commercial, the whole commercial part of the business, the wireless business reduction is compensated by some increase in other part of the commercial business. So it's almost the same. So basically the growth in the commercial part of business really overcome the wireless part of the reduction.

In terms of the growth rate, here I'm talking about quarter-to-quarter because there was not meaningful year-to-year comparison. We have no acquisitions; they are all internal. In resource management, 1.3% but if we take in account -- if we take out the (indiscernible) business and it is really about 6.8%. Infrastructure about 7.2% this quarter-to-quarter growth is a very improvement. Complications not meaningful to discuss about the growth rate.

In terms of the business segment, as you see the communication was reduced 11% down to 7. (indiscernible) percent are the same. The resource management is 51% (ph) compared to 57%.

We have some -- those are some key wins, some data managed program driven by the missile defense as you see which is about (indiscernible). DOT, Department of Transportation. It is a research center, a (indiscernible) research we're having in there a monumental management aspect. And for our Navy and our (indiscernible), we're doing some groundwater work for them which is about 20 million (ph), monumental system basically dealing with how to achieve with groundwater related issues.

(indiscernible) we've got some infrastructure design projects which is the first time we have been in infrastructure activity for our Federal Government. That is certainly (indiscernible) infrastructure because the Federal Government part of the program is a normally longer duration and more stable in terms of the overall. We have also one program in our technical support in the Navy (indiscernible) division.

And last but not least is the City of Los Angeles, Los Angeles River revitalization plan. This is basically the money is coming is for the initiative called master plan and the beginning of the plan of a 32-mile of the river, the Los Angeles River, and they want to revitalize. What needs to be done and basically this is potentially a very large program and it is that Los Angeles wants to revitalize whole along the river and make it become a centerpiece of the Los Angeles. So we are very happy with that. And it is almost everybody is in competition when we win the competition, so we are very happy at that.

Back to the backlog. If we took the ongoing operations, take out some of the excess part of the business our, I start to show some signs of increase. However the overall contract backlog -- last year in fact were number one among all the companies in our business area.

David, could you talk about your financials?

Thank you, Li-San. First, I would like to echo Li-San that this is a good quarter. We have met all three key metrics of revenue, our EPS and our cash. We continue to exit successfully non-core businesses. The wireless project is being executed according to plan. The entire turn for our civil infrastructure business, in fact, our civil infrastructure units have achieved a record (indiscernible) efficiency. The DSR has improved from 100 plus days to 85 days.

Look at income statement. Revenue on plan. The reduction as Li-San mentioned earlier reflects exit of wireless and other noncore businesses. Income from operations, first it's a very low revenue base and plus the exit impact. I may want to point out that infrastructure segment is performing as (indiscernible). Its operating margin achieved as Li-San mentioned earlier 7.3% from a 5% plus last year and from a loss last quarter.

Our SG&A costs has a slight decrease based on total revenue but as Li-San mentioned earlier, we incurred this quarter about 2 million in terms of Sarbanes-Oxley compliance. As you know, we are at the tail end of Sarbanes-Oxley compliance. And we do not see that entire amount to repeat in the next year.

Our net interest cost increased for two reason. One is we have amended financing terms and also LIBOR rate has increased and caused the rate to total expense to go up at this quarter.

Our receivable and let me put them together to talk about it. This is -- you can see significant reductions both in accounts receivable, billed and unbilled. It reflects better business mix primarily due to asset of our wireless business. We also exercised significant focus in terms of billing collection and we in fact collected more than $350 some million this quarter.

Our payable purse is also due to a lower revenue base. It also helped -- if you look at revenue differences and we actually yield some cash -- provide some cash field for it this quarter. our net debt continue to be a good story. It reflects positive cash flow. We expect to continue paying down our debt in the next two quarters.

Cash flow, cash from operations, 6.1 million exceeded our goal of 5 million. We are on plan for the fiscal '05 which is 25 million and we expect Q4 to be about 10 to $15 million in cash collection, cash operation. Cap expenditure again, we continue to control our spending and we now do not have investment in our wireless business or communication business as a whole. We believe that 2 to $3 million is a good benchmark moving forward for our ongoing business.

Again, Li-San mentioned our DSR at 73, 74 days. It is a record efficiency. Again our civil infrastructure unit has improved significantly together with our communication unit. And our communication unit is trending toward 100 days. So we are making great progress in our asset efficiency. Okay, Li-San.

The remainder of the year in fourth quarter we are expecting our revenue to be 240 to 250 million range and we certainly will also improve our asset efficiency and improve the profit margin. We expect our diluted EPS should be higher than the current quarter. That came to $0.17.

In summary, we have substantial improvement from last quarter. Infrastructure profit is up and DSR is improvement. Our effort now is focused more in the expanding of our core business, and improving the market, marketing aspect. And we are expecting improved -- this improvement to continue. Thank you.

We will now turn it over to the questions and answers.

(OPERATOR INSTRUCTIONS) Debra Coy.

Good morning guys. A couple of follow-up questions. It's nice to see things moving in the right direction. But it does appear that backlog is still kind of lackluster. And I'm wondering Li-San if you can talk about you said you're starting to see things moving in the right direction and that you said that you were number one in our key business areas. If you can get me a little caller on what exactly that means? If you are winning things and you think that the somewhat lower backlog over the last several quarters is just simply market issues?

And then what you see the growth outlook going forward when you talked about the quarter-to-quarter sequential growth being up significantly but we are still done over last year -- trying to sort out apples and oranges with the businesses that you have exited. What can you tell us about what you really see as the underlying growth rates in your remaining businesses in the two segments going forward?

We currently get together our people to discuss what other areas we can move forward. And one of the most important aspects is how to expand the water part of business. We've developed a significant number of initiatives both basically in the water area. Just one second. And so we have basically developed six, seven initiatives in the water area that basically tie into the basic aspects; tie into many aspects in terms of water engineering aspects which you know quite a lot of issues are dealing with the water tie into the how the sewage treatment plant getting saltwater -- how to separate all those aspects of that.

Right.

That is a major aspect. In fact, we are currently doing some work at already doing some design work in the Michigan/Ann Arbor area. And certainly recently some announcement related to the Washington area. We have done work significant for both of those customers. I understand they want to expand. They have to spend significant part of money, we certainly will be very successful in that area.

And also related to many aspects tied to the infrastructure for like Los Angeles; we are looking at those overall. In many cities, they want to develop the water along the river, how to develop the water -- to develop that whole area. So we are winning Los Angeles. In fact, there are many of them. We have many other aspects of that. That area we're getting a lot of response in that aspect.

Another aspect we've tried to do is to really look at what are the things we can do in -- for EPA in dealing with the overall basic management expansion into different aspects of that. So this whole area we are being really very active in promoting that aspect. And also the current basic -- the alignment certainly will add a lot for us in the relatively long-term future.

So, are we entering a period of, say, mid to upper single digit growth in the two combined businesses? We haven't -- that's where exploiting the telecom area, Tetra Tech used to have organic growth in 5 to 8% range pretty consistently. That hasn't been true for the last couple of years. Is that, would you suggest --?

The part of where we have issues -- we expect somewhere in 6 to 7% type of growth in that part. And Homeland Security, (indiscernible) 11 or something. So we are looking at upper single digits, maybe lower double-digit type of growth.

Okay, thank you. David, a couple of questions on the finance and operating side. You mentioned amended finance terms. Can you explain what that is about? I though you had a set piece of debt there was your primary piece of debt?

Yes, in our last amendment which as a result of our Q2, we have renegotiated our terms and the set terms also got a bump by 1%.

Okay. After the loss in 2Q that you had to renegotiate? Okay, got it. And then can you just give me an update on where we stand on the European implementation? You mentioned that it is some source of cost in the quarter. But can you give some color on where we are in the roll-out? Whether the costs are in line or ahead of expectations as it seems they often end up being and how that is going?

Yes. Again I appreciate the question. ERP, in fact, we are tracking on plan and on budget. And when Li-San mentioned about $2 million in the combination of Sarbanes-Oxley and ERP, only a small fraction of it came from ERP. And the majority is the peak compliance exercise for the Sarbanes-Oxley which is about 1.6, 1.7 million.

All right, thanks. I'll get back in line.

(OPERATOR INSTRUCTIONS) Richard Eastman.

Good morning. A couple things. I wanted to just circle around the resource management business. If I interpret the plan, it appears to me that from a margin standpoint that maybe you missed plan a little bit on the resource management side coming in at maybe 6 to 6.5% op profit. That we should have been a little bit closer to 9 to 10 for the fourth quarter. I'm just wondering if there is some -- you alluded to the fact that maybe there were some excess costs in there?

That is because we are about 7% right now but that is because as I mention about earlier that we are closing off some activity which will cause the significant write-off.

Can you just toss a number out there? Was it a few million bucks that maybe would be excess to where you were planning?

It is a few million dollars.

In the neighborhood of 3 to $4 million which we do not see repeating in FY '06.

So that would be maybe -- wait a minute -- FY '06 or repeating in the fourth quarter?

We may still have some in fourth quarter.

All right. And that would be again maybe if you want to throw a label on it, that would be over and above restructuring cost? That would be restructuring cost over and above the op profit, you are saying?

This part is the, if we account for this, if we do not calculate -- that is not a problem, we should be about 10% range. But because of that, we have reduced that part down to 7, 8%.

All right.

Next year to the normal situation which is about double-digit.

Okay, so resource management should be the 10% manage number in '06. Okay. And then the FTE number that you disclosed which is kind of the end of June number, is that -- should we now expect that most of the headcounts reductions are done? Should that number start growing now, or are we maybe another quarter of declines?

This is Sam Box. The number should start growing. We will, though, still have some continual wind-down in the area of the wireless business because of completely exiting that business. To just give you an idea, between now and the end of September, we will have dropped another 20 or so people in that business line. Of course, it will go to zero here somewhere in Q2 of '06. But the other business units, as backlog and work continues to improve, should begin to rehire.

So we should see that sector rebound, okay. And then just maybe one additional question. When I do the math on the federal revenue component, year-over-year the federal business looks like it was down about 8%. I'm maybe trying to figure out what on the federal side is down.

Federal business you are right, Rick, was down, and there are two components of that. One is the wind-down of the UXO contract in Iraq, which has, as we've cleaned up munitions in Iraq, that now is winding down. And the second is some of the Navy programs which we're performing environmental work for, that money was reallocated back at the cost of war. So we have seen a slow-up in some of those programs, and those two things caused the decline.

Okay. Is there any -- and do we annualize on that? I guess the UXO contract probably not until early '06; is that fair? When do we start to annualize on that revenue hit?

Yes, that will be early part of '06.

Okay, all right. And then just one last question. You have had about nine EPA recompetes kind of outstanding this year. And I'm wondering is there any update there at all?

So far we won two. We won one new one; we lost one old one. So far (indiscernible) announced, we break even. There are still about four or five not announced yet and still a couple of them in the process of putting proposal together.

Is there any opportunity here to maybe gain some market share, or are we basically recompeting for the same similar contracts?

In the water side, yes, we have some new activities associated with that.

Okay.

I'm talking about the EPA water programs.

All right, great. Well, thank you.

Matthew McKay.

Matthew McKay at Jeffries & Co. Just a couple questions here. First of all, just actually a follow-up to the last. On that UXO contract in Iraq, how much revenue did that contribute on a quarterly basis?

On a quarterly basis, the total contract value that we've spent in Iraq was probably up around 80 million on UXO. And that quarterly basis would probably be kind of averaged across the timeline of the contract over a period of a little over a year.

Okay. So that is 20 million in the first and second fiscal quarter of 2005?

Yes. Well, and the -- yes, 2005, right.

And now it is starting to ramp down.

Yes, it's essentially ramped down now.

That is helpful. Just in the quarter, were there any onetime charges that were in that cost of net revenue line?

Yes. We talk about exit costs of 3 or $4 million we referred earlier.

Okay, and then just on the tax rate going forward. It sounds like with everything that's been going on in the business, have you been doing any tax planning and what do you expect for the tax rate to be in '06?

Yes, on the next year for planning purpose, we should plan for 40%.

Okay.

This year has delivered volatile because of the Q2 and the goodwill impact, but for FY '04, we should plan the whole-year basis about 22%, 23%.

Okay. Thank you.

FY '05, yes.

And then just looking at the operating margin in '06, obviously it should be greatly improved relative to '05. Given that you are sort of going to be a little flattish in the revenue probably the first half and accelerate in the back half, just trying to kind of bracket that a little bit in terms of where you think the margin will come out?

This is Sam Box again. I would say that our -- in '06 our margins in the resource management group should be in the high 9's, low 10 range. The infrastructure area should be -- we've already recovered up into the 7% range, and as the economy continues to recover and the tax receipts from various states are improving, I think we ought to see that improve into say the 7 to 9% range.

Okay. And then I guess that sort of -- the end of that sort of leads into the next question if it is more sort of --.

Let me add one more for you just to give you a metric here. The system support and security area of our business should still remain in the 10% plus range.

Okay. And then sort of more a big picture sort of direction of the business. You talk about -- at the front you talk about water and Homeland Security sort of being how you are looking at the business. A, just sort of trying to understand exactly where you see the synergies between the two sides, if there's some synergies on the sale side. Obviously, both of them have a large federal component to them. And then just sort of how some of the various segments would fit into that strategy, for example, the wired segment or maybe stuff in infrastructure as well?

I would say as we look at our marketplaces, the resource management group is obviously driven by water as a focus area for us and, of course, the expansion as we've said before to you under the international sector of that business. Also an element that wasn't mentioned in the earlier overview comments is the new BRAC. That obviously is a nice bump to the industry from the standpoint of providing revenue opportunity for the Company in the future for especially the RMG (ph) side of the business. I really believe that as these -- especially the tax receipt issues in the various states and virtually the majority of all the states in the U.S. are above expectations, and some way above, and the continued improvement of the economy, we're going to see a continual improvement in the infrastructure area both in our commercial business and state and local.

And we obviously have the continued importance and system support in security. So I think we have a good business mix from where the economy and the funding is going to go over the next few years, as well as the wired business is rebounded and stable now. And we will have, as Li-San has said, we will have to make a final decision on that in the near future.

If this keeps, it will be essentially in line with the system support and Homeland Security data aspects, which have required some communication aspects. So that is a decision we are in the process of thinking how to group them.

Okay, that is helpful. So I guess one way of looking at it is sort of higher level consulting, engineering services as you talked about at the front end, and sort of being sort of the commonality between the two sides. But I guess that third piece, the construction management, just sort of if you could give me a rough idea of what percentage of revenue that accounts for now and how much that potentially either goes down as you kind of deemphasize that side of the business?

Right now, it's not that many percentage; just almost left over, the business we are finishing up, which is about something like 60 some million dollars. We are not making money on that, which is the overall assessment and the windup (indiscernible) profits. So that effect on margin. But overall, I would say a very small percentage would be in that area, and we have -- our effort it would be more of trying to focus in the consulting and engineering, I think. (indiscernible)

I would say some of the construction management work planned and executed by some of our unit experienced in this field working for federal government, that will continue. They are consistently profitable and they behave like a government contract, and that probably as a whole is 5 to 10% of our business.

More in the cost (indiscernible) I would think, other than fixed price aspect of it.

Okay, that helps. I'll go back in the queue. Thanks, guys.

(OPERATOR INSTRUCTIONS) Ben Sun (ph).

Actually, I just wanted to follow up on the scaleback for the construction part. I mean what does that mean to the -- I guess in terms of organization? Shall we expect some headcounts reduction there?

Well, that is basically what has happened the last few quarters. Essentially, the (indiscernible) had the reduction quite a bit. Even the wireless, which we have 70 to 80 people, but by end of the calendar year will be gone. And a few projects need to finishing up, those people will be gone. So that is why (indiscernible) somewhere in the (indiscernible) or 50 (ph) people.

So it's essentially complete?

Right.

Yes. Then maybe a second question just in terms of the market opportunities in the water and the Homeland Security area. Can you just comment on the general macro environment you see there and what you particularly like?

In the Homeland Security side is a lot of opportunities that we are bidding on. We won quite a few. It is all aspects of it, such as dealing with poor security and the problems associated with the new -- how to defend ports from people coming in the ships, Ukrainians, how to monitor in both domestically and internationally. Maybe you might want to talk some more about that aspect of it?

This is Sam Box again. I would say if you look at our systems support and security area, a lot of information management, a lot of outsourcing opportunity in the near and long-term there. There has been tremendous growth in all companies related to that industry, and we have a good solid base of operation to grow on. As Li-San said, on the water side as I said earlier, not only our domestic water programs but our international programs.

Currently, the program we just got from USAID, and they allocate some significant in our money start to come. Maybe we are also going to be involved in the development of -- we're going to be a significant participant in some of their activity, and this is currently underway. In addition, we are doing quite a bit in the area of, as far as airplanes, Air Force aspects. We have a very large program. We expanded our marketing activities how to get into all the bases, so in terms of the (indiscernible) and also the water program. The (indiscernible) management aspects, we are expanding in that, beginning with clean-up and (indiscernible) aspect too. In addition, we are currently involved in (indiscernible) services, how to design the program to allow you to be more energy-efficient, and that's energy dependent aspect of that water reuse; significant (indiscernible) water reuse programs we are also involved. So that is the kind of thing we do.

So in terms of, I guess, total project that TTEK is currently bidding on, generally you see an uptrend comparative with a year ago in these two areas?

Yes, we have quite a lot activity in that.

Okay, good. Thanks.

There appear to be no further questions. That will conclude the question and answer session. I will now turn the conference back over to Li-San Hwang to conclude.

I want to thank you for the support given the difficult times, but we (indiscernible) the tide turning and all aspects seem to be working. People are very cooperating to all the effort. So we are looking forward to have better quarters to come. Thank you very much.

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