Tetra Tech Inc (TTEK) 2015 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. (Operator Instructions)

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 in 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 if 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 from 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.

Thank you very much, Laportia. And good morning and welcome to our first quarter of 2015 earnings conference call.

While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I will start this morning's call with a brief overview of the Company and some of our key financial metrics.

In the first quarter, we had solid performance delivered by our newly aligned segments which represented our ongoing operations. The two segments are the water, environment, and infrastructure group, which we refer to as WEI, and the resource management and energy group, which we refer to as RME, and you will hear me referring to those two acronyms throughout this morning's presentation.

Their performance resulted in our meeting our revenue guidance and beating the top end of our earnings guidance by $0.05 in the quarter.

Now, over this last year and especially during this past quarter, we have had a significant change in our foreign currency exchange with Canada. Today, about 30% of our revenue is generated in Canada and the Canadian dollar has decreased by value of about 10% relative to the US dollar, just since the beginning of the fiscal year. Quite a dramatic move.

To give you a better understanding of our business, I will be presenting our financial results on a constant currency basis. So overall, for the quarter, the Company generated $581 million in revenue, $437 million in net revenue with an operating income of $37 million that resulted in an earnings per share of $0.41 for the quarter.

For the first quarter, our total and net revenue were down 8% and 7%, respectively, from the prior year, but that was due primarily to our decision to wind down the RCM segment. Similarly, our operating income was down slightly from the prior year and that was due primarily to project-related losses from completing work in our RCM segment. In fact, we reported about -- just about $3.5 million loss in the quarter from RCM.

Our diluted earnings per share did benefit from the reduction of share count as a result from our buyback program. And Steve Burdick will speak to that and some tax issues. But I will say on backlog, and most notably, our backlog was up 5% year on year for the WEI and RME segments and was flat overall year over year which takes into account the continued wind-down of the remaining projects in the RCM business segments.

I would now like to present outperformance by segment. The WEI segment generated about 43% of our net revenue from ongoing operations during the quarter. WEI was up 4% on that revenue and delivered a 12% operating margin for the quarter with improvement across all of their end markets in both United States and in Canada. The RME segment is slightly larger and it generated 57% of our net revenue in the first quarter. RME delivered an 11% operating margin with strong performance in power generation, oil and gas midstream engineering services, and international development and remediation work. However, the revenue in RME was affected by a very slow ramp-up in the federal mediation projects and continued weakness in mine-related work during the quarter.

I would now like to provide an overview of our performance by customer. Our international net revenue, or WEI and RME, was overall essentially flat year on year and represented about 31% of our ongoing revenue. Work for our US commercial clients was also relatively flat year on year and represented also about 31% of our ongoing work for the quarter. Our US federal work was 27% of our ongoing business, which was down 9% year-over-year, but this was primarily due to timing of new orders and project start-ups and also had a very difficult year-on-year comparison when comparing it to federal work in the first quarter of last year.

I do expect our federal work to be trending up for the remainder of the fiscal year as we start up some of the large-scale remediation projects that we have already been awarded and are actually in the very beginning stages.

And, finally, our state and local work was up 5% and this is all organic. In fact, all of these numbers are organic, which was a direct result of an increase of our work for cities and municipalities all across the United States.

We had a good first quarter for orders and contract wins in our ongoing business. On a constant currency basis, our WEI and RME segments backlog grew by 5% year on year. Backlog was driven by a broad base of orders, primarily across the public sector with our government clients. And that was led by work for the US federal government work that we do for the U.S. Navy, the Army Corps of Engineers, US EPA, and USAID.

It was also benefited by work that we won for cities and municipalities across the United States and Canada, and it wasn't just in one geography. It was really very broadly spread out and included new large contracts with cities such as Montreal in Canada, Los Angeles out on the West Coast, and some new orders in Miami, out in the Southeast. So it was really a very broad spread.

As we have indicated, the remaining work that we have for RCM is in the process of being completed, and we are going to continue to reduce the RCM backlog for the remainder of the fiscal year.

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

Thank you, Dan. I will begin with the fiscal 2015 first-quarter financial results in a bit more detail. Overall, our first-quarter operating results fell in line with management's expectations regarding the guidance ranges that we provided for net revenue.

In addition, and as Dan mentioned earlier, our EPS results exceeded guidance.

So first, comparing the first-quarter results this year to last year, our revenue decreased by about $65 million or 10% to $581 million. This decrease was due to our decision to exit non-core construction markets representing low margin, high risk, fixed price work, primarily in the RCM segment. The year-over-year comparisons were also negatively impacted by the FX rates, due to the strengthening of the US dollar.

So for instance, and as Dan mentioned earlier, the Canadian dollar has lost about 10% against the US dollar over the last four months.

Our net revenue decreased to $437 million, also about a 10% decrease for the same reasons that our overall revenue decreased. And so, although lower than the prior year, the net revenue results were within our expectations and the guidance ranges that were provided, due to, first, the strength of our core markets in water, environment, resource management, energy, and infrastructure. In addition, on a constant dollar basis, without the impact of the foreign exchange rates, our net revenue would have exceeded the midpoint of our guidance.

Our operating income was about $36.6 million in the first quarter. Overall, operating income represents a margin of about 8.4%. Now, the operating income was primarily driven by project execution and favorable results in our WEI and RME groups. In fact, on a standalone basis, our two front-end businesses produced an operating margin of about 11%.

In addition, the operating income, when I compare it to the prior year, was impacted by a continued reduction in overhead costs, due, in part, to the rightsizing actions we have taken over the last two years. Also, there was a significant nonoperating gain on revaluing some acquisition-related earnout liabilities last year that have not been recognized or occurred this year.

Our EBITDA was about $49.3 million. Our EBITDA was driven by the same factors as our operating income but at a higher percentage as we recognized intangible amortization and appreciation of about $13 million in the current quarter. We achieved an EBITDA margin of about 12.3% on our front end businesses and this higher EBITDA margin from these front end businesses, WEI and RME, excluding the results of RCM, which is now currently being wound down.

SG&A was about $42.2 million for the quarter. This is less than the prior year quarter. The decrease of about 11% in SG&A costs, compared to last year, was consistent with our planned decrease in revenue as a result of winding down the non-core construction markets.

Further, we expect our overhead and back-office costs to further decrease a little bit as we complete the transition out of these non-core markets.

The tax provision resulted in a net expense of about $9.2 million. The effective tax rate was about 25% for the quarter. This lower rate resulted from the federal government's passage of the research and experimentation tax credit at the end of calendar 2014, which allowed us to recognize a significant benefit in the first quarter.

Overall, the expected rate is about 32% for the rest of the year without these R&D credits. And, as I mentioned at the beginning, earnings per share of $0.41 exceeded guidance. Our earnings per share benefited from this R&D tax benefit that I had talked about. However, if we removed the R&D benefit related to fiscal 2014, we still would have beat our guidance estimates.

So next, I would like to point out a few of the more significant balance sheet items. As a result of our higher days sales outstanding in the RCM segment, we did experience a 4% increase in our net accounts receivable balances. Also, the accounts payable balances decreased by about $[160] million, due to the lower payment paid subcontracting activities when comparing the current year to the prior year.

These activities took mostly -- or took place mostly in our federal and state government projects in the RCM segment.

Our net debt compared to the prior year did increase about $56 million to about $102 million. Although our net debt increased as a factor of EBITDA, we are still at about .5 times our EBITDA.

We have had positive cash from operations and, as I will explain in a few slides, we have allocated a portion of our capital to shareholder returns through dividends and share repurchases.

Now, as I noted in our discussion of the balance sheet just now, we have had positive cash flows from operations. Our first quarter is typically and historically the low point of our cash flows as we pay out year-end bonuses and our clients shut down around the Christmas holidays. So, as a result of this and the timing of our cash flows, our first quarter was less than the prior year.

However, we still expect to generate operating cash upwards of 25% to 30% more in 2015 as our forecast indicates cash from operations to be in the range of about $145 million to $160 million for the year.

CapEx is more than the prior year and slightly ahead of our previous guidance for fiscal 2015. We remain very disciplined in our spending, based on this strategic decisions implemented in 2014. And the initial CapEx amounts are higher in order to invest in organic growth for the remainder of fiscal 2015 and beyond. However, we will not remain on the same pace. We expect our spending for the rest of fiscal 2015 to remain as initially forecasted and be in the range of about $15 million to $25 million for the year million.

And, just as a side note, also, this amount continues to represent a ratio of less than 1% of our total annual revenue. Day sales outstanding of 87.8 days are higher when compared to last year at this point. The actual DSO is not in line with our expectations. Our DSO is higher due to the performance of the RCM segment.

On the other hand, the aggregate DSO in our two front end segments is about 75 days. So our efforts for 2015 are focused on reducing our DSO to below 75 days with an ultimate goal to be closer to 70 days when we exclude RCM.

For those following on the webcast, I would like to provide an update to our capital allocation program. Our current leverage is about a half [churn] on EBITDA, while our target leverage is about 1 to 2 times EBITDA. So as such, I would say that we have got plenty of dry powder to invest in future growth.

Now, although our long-term target is to return 33%, or about a third of our free cash flow through a mix of dividends and buybacks, we have enhanced our 2015 returns to take advantage of our leverage and provide a greater return to shareholders. As such, in the first quarter, we have provided about $20 million in stock buybacks this quarter and another $4 million in cash dividends.

And so today, I would like to announce our further commitment to provide value to our shareholders. The Board of Directors has approved the declaration of Tetra Tech's quarterly dividend. This quarterly dividend is $0.07 per share and this amount, if annualized, represents about 14% of our estimated annual free cash flow. And the annualized amount further equates to a bit more than a 1% yield on our current stock price. The dividend will be paid on February 26 of this year to shareholders of record as of February 11.

An important aspect to understand, relative to our capital allocation program, is that the cash dividend and stock buyback will not impact our growth strategy from either an organic or acquisitive standpoint. In fact, we expect to be active in the M&A market and move our leverage to our target range. And, as Dan will discuss in a bit more detail, our focus continues to be on a strategy of long-term growth through water and environmental-related services, both in the public infrastructure and the commercial industries.

So while we have committed to a more significant buyback program over the next two years, we will continue to update our shareholders on our capital allocation plan for each of our quarterly conference calls.

So with that said, I will now hand the presentation back over to Dan to discuss our outlook and our business strategy in a bit more detail.

Great. Thank you, Steve.

I would now like to give you an update on Tetra Tech's water focus business strategy. With our newly aligned organization in place, we are focused on organic and acquisitive investment plans to support growth in both our public and our commercial industrial water and infrastructure markets. Both the public and private markets are really driven by similar demands for water supply and the need to address regulatory requirements.

Our high-end experts in areas like hydrology, water quality, water treatment, and engineering design have the ability to support both our public and our private clients in addressing these needs. This provides us with a great amount of flexibility in meeting staffing needs across our operations, which is particularly important in times like today when we have rapidly changing demands from our clients. And I am actually going to speak to that in a moment in some of the commodity areas.

Now, I would like to give you a brief overview of some of the specific markets where we are investing in growth right now.

In light of the significant reduction in metal prices over the past two years, and most recently the dramatic drop in the oil and gas prices, our government sector work, which still remains the largest portion of our business, provides us with stability and reliable performance. In this business cycle, infrastructure and the associated public sector spending, is becoming much more active in the United States, both with a return to more predictable budgets from our federal customers we are glad to see in the past budgets quite early this year, and by significant increase in spending by our government clients with cities and municipalities.

Now, we here at Tetra Tech address the entire water cycle for these clients, and it is everywhere from storm water management to reuse of wastewater. In the Southern and Western regions of the United States, a long-term drought has local governments investing in desalination and brackish water treatment and reuse, which is a particularly strong area for the expertise here at Tetra Tech.

And one example of this -- and it is just one -- is the recent bond that was passed in California for $7.4 billion, just to address these issues -- water scarcity, reuse treatment, and the critical items in the state. On coastal river -- coastal and river flooding continues to increase in frequency all across North America and really other areas of the world, which is providing opportunities for our emergency planning and response and the expertise that we have in designing coastal protection structures and levees.

Now, water is equally critical and, in some cases, it is actually the limiting factor for expansion into the industrial and commercial markets. Tetra Tech addresses the full water cycle from identifying sources where they can find the water to treating it and reusing it, which is the ultimate solution for many of these commercial clients.

The four sectors that we are focused on in this general sector include manufacturing, solid waste -- and I'll speak to this and that is mostly growing in the energy-related field -- oil and gas, and mining. So those are the four -- manufacturing, solid waste, oil and gas, and mining.

And I'm going to present a few more details about our plans in oil and gas and solid waste now.

Since -- just since our last call, the price of oil has dropped another 40%. The last quarterly call we had here at Tetra Tech, the price of oil was $77 a barrel and today it is near $45 -- a 40% reduction.

Fortunately, our focus has been primarily on the midstream environmental permitting and engineering work, which now is about 80% of our oil and gas revenues. We have seen this as relatively stable so far, with some continuing momentum in regions where the takeaway capacity is needed and projects are already in development. In the upstream area, we are working primarily in the Canadian oil sands and sustaining capital projects.

These sustaining capital projects typically continue through a downturn to maintain the output from the existing facilities where the economics are just different. The capital has already been invested and this is where work typically continues.

This last year, in 2014, we did do about $400 million in oil and gas work. And our longer term goal and target still remains at growing this to $1 billion in annual revenues.

Now, this is a very large market and it is a very good fit for our portfolio of services. We see this current downturn cycle as an opportunity to advance our acquisition strategy under much more favorable valuations than we had seen over the past few years. So we actually see this -- in some respects -- as actually a good timing of opportunity for us to grow this market.

In the solid waste market, it really represents two areas for us. Management of municipal waste, first. And the second is management of waste generated from power production.

New regulations just released in draft final form in December, from the US Environmental Protection Agency, defined waste management requirements for managing residuals from coal-fired power plants, which includes things like fly ash and bottom ash byproducts and now require that they be handled differently. We are working with utilities to develop plans and designs to address these new requirements facilities, which are primarily located in the central and eastern portions of the United States.

Now, addressing these new regulations is estimated by the US EPA to require spending of more than $20 billion over the next 20-plus years. So, this is a very large market. The other part of solid waste for us -- or waste management -- is municipalities. And we're going to continue to provide conventional landfill design services while also supporting an emerging market for waste to energy systems that are reducing greenhouse gas emissions from these landfills. So this is also a new and growing market for us.

Overall, we expect solid waste to be a $500 million business for us in the coming years.

I would now like to address our segment outlook. The WEI segment, water, environment, and infrastructure, which predominantly -- which has predominantly public sector clients, is expected to have low single-digit growth as infrastructure spending continues to build all across the United States. We expect their margins to be in the 12% to 13% EBITDA range with strong performance across all other operations.

The RME -- the resource management and energy business segment, which is predominantly private-sector clients -- is expected to be flat to low single-digit growth with some growth in areas like solid waste that I just covered, some of the government programs in international development or remediation we expect to grow, but we think that that is going to be partially offset by weakness in commodity driven markets of mining and oil and gas.

Overall, I expect the RME segment to maintain margins in somewhere between the 11% to 13% EBITDA range. And for the RCM segment, which we are winding down, I expect to continue the wind-down process during the year with the majority of the projects to be complete during this fiscal year of 2015.

I would now like to present our guidance for second quarter and for all of 2015. Our guidance is as follows. For Q2, our net revenue will be in the range of $400 million to $450 million with an associated diluted earnings per share of $0.28 to $0.32. For the entire year of fiscal year 2015, our net revenue range will be from $1.7 billion to $1.85 billion with an associated diluted earnings per share of $1.55 to $1.70, and for the entire year our cash earnings per share would be between the range of $2.30 to $2.55. And Steve Burdick had covered some of the details of this a bit earlier.

I will cover very quickly some of the key assumptions that underpin the guidance. This guidance does include intangible amortization of $21 million, which would equate to $0.23 per share for the entire year; and effective tax rate of $0.32 for the entire year for the remainder of the year for fiscal year 2015, as Steve had indicated earlier; 63 million average diluted shares outstanding. It does exclude contributions from acquisitions and impacts of share buyback. And, as I said at the very beginning of this call, we are assuming that we are at a current FX and have not included any material movement in FX. And that is primarily with Canada, from where we are today.

In summary, our WEI and RME new business segments and operating units had solid performance in the first quarter, resulting in our -- exceeding our earnings-per-share guidance for the quarter. And I just want to reiterate. That includes, if you exclude any impact from the retroactive tax effect, it still exceeded significantly the high end of the guidance that we provided coming into the quarter.

The WEI and RME backlog continues to grow with strong orders for water and environmental-related services very broadly. And, with our new alignment in place, a focus on organic growth and acquisition opportunities, and an excellent public and private sector client base, we're very positive on our outlook and our future opportunities.

And, with that, operator, I would like to open the call up for questions.

(Operator Instructions). Tahira Afzal, KeyBanc Capital Markets.

This is Sean on for Tahira today. Congrats on a really solid quarter. My first question would just be addressing the more moderated outlook in your oil and gas business. Obviously, this business has been operating at a high utilization level and I just wanted to know if -- what do you guys sort of -- looking at in terms of utilization on a go-forward basis with this more moderate growth outlook?

Well, Sean, we came into the year having -- looking at building on a $400 million revenue base from 2014. As we entered 2015, we were anticipating a 10% to 15% growth rate in that. So around a $450 million revenue contribution for this year. We really saw little or no impact in the first quarter in our revenue so we were actually right on plan.

However, we have seen some projects being pushed to the right and we have seen, obviously, the uncertainty and volatility in the oil and gas sector. And so, we have -- we now have moderated our outlook down by about 10%, meaning that we are forecasting a flat year-over-year oil and gas.

So we, for fiscal year 2015, currently are anticipating about a $400 million contribution. And that is on a prospective basis assuming things are going to -- or predicting things are going to slow down a bit, even though we didn't see that in the first quarter. Fortunately, most of the work we have is on a time and materials basis.

And so for utilization, we actually have the timing to move staff to other projects that are strengthening, which we have seen both in our state and local work. It's probably the most notably. But I will tell you, I think we're going to have a good year on the federal front, too.

So experts that are doing work on the environmental and waterside and on oil and gas and other specialty engineering areas, we actually have the ability to move them to other areas that are growing. So I think our utilization. to use your specific term, can be addressed as it moves. We don't [exact] a exceptional movement in this and we look to reallocate the staff to other areas that are growing.

That is very helpful. Thank you very much. And then, I think in the presentation you said -- you mentioned that you are targeting specific regions on the oil and gas side. And I was just curious what specific region that might be.

We have been very interested in growing our West Texas business, which is the Permian. We think that some of the reserves that have been forecasted out of the Permian are extremely attractive and have long-term economic drivers.

Obviously, there is different price points for oil and gas production but we think that is one that will be quite favorable. So it is an area in the United States that we are interested in. And, in Canada, we think in the longer term, we are interested in having a larger presence in British Columbia because a lot of the production is -- we'll need to find additional exit points out of Canada -- not necessarily just down to the south, but east and west. And a lot of it would be to the Pacific -- through British Columbia. So we could do a lot of permitting work and a lot of valuation work, right of way work, and then, ultimately, the touch points at LNG terminals and other export points.

So in Canada, we are looking at British Columbia for the oil and gas sectors.

Okay. Great. And then, the last thing for me is just, if you could expand on this incremental opportunity in the coal residuals market. What do you guys expect in terms of the peak contribution to the top line from this opportunity? And do you think it might help offset some potential weakness in oil and gas in fiscal 2015?

I think that in 2015, it is just going to begin to grow. So the requirements are that this has to be implemented over a two- to three-year period. And what we find very encouraging is not only new disposal of coal residuals need to be regulated but existing impoundments, where the material has been disposed of in past years, need to be addressed and brought into compliance.

So this has actually, in some respects, has opened the market even a little bit larger than we originally envisioned. So that is a really good thing.

We think this year is going to begin to ramp up. We do have a goal of this being $200 million to $300 million contribution on an annual basis to the Company. And, currently, it is sub $30 million so we think this thing can go up by 10fold.

Now, we think it will ramp up. We think this year it could ramp up from -- we are sort of in the 20s right now -- $20 million-ish. And we think it could ramp up to double, to maybe even triple that number this year. And that will help offset some of the oil and gas uncertainty. But I think this is really a 2016, 2017 material contributor to us as you move from study and evaluation of the alternatives to implementation.

So I think this thing will ramp. And the nice thing about it, it has a very long tail to it. It is not only addressing the current discharges, but, again, the historical discharges. So we think this is an excellent market. It fits right into our wheelhouse and has a long run to it.

Mike Shlisky, Global Hunter.

Wanted to touch briefly here on the M&A environment, if you can give us your thoughts as to perhaps how some targets are looking from a valuation point now versus a few months ago and whether the effects changes between US dollar and the Canadian dollar might change the footprint in which you look for acquisitions.

Well, the multiples or the valuations of acquisitions in any of the sectors associated with commodities -- and we have seen this over the past two years, we have watched it steadily decline in mining, as an example, because we have a little longer history in that area -- has come down dramatically. And we are just seeing the beginning of it in oil and gas.

So I would say the valuations have come down dramatically and I would say it is even more than just the valuations. I would actually classify it as availability. Because, prior to this downturn in some of the oil and gas pricing, there was -- some of these were just not available.

So availability has increased dramatically and price points and valuations have become much more reasonable. And I would say that is in oil and gas and in the commodities sector which is mining for us. So that looks good.

It has been sort of a double benefit, then, with the reduction in the currency exchange. And it is not just in Canada. We have been looking in Europe and you have noticed quite a material change from $1.30 down to $1.10, roughly, on the euro. And so, I think it makes some of the areas we have looking been in Europe that have been relatively expensive on a translation basis on the US currency to be much more reasonable. So I would say both Canada and in Europe has actually looked better for us.

And I also want to say a word about here in the US. Some of the areas' new solid waste or the coal residuals becoming a larger market, we have been named as the largest US solid waste design firm. And most of this, of course, is in the municipal side because this is just an emerging market. And I do believe that the utilities are going to look for experts in solid waste disposal. And it is a good opportunity for us to consolidate capability and resources of the United States.

So I think that is also a good opportunity for us at reasonable valuations. So Canada, both from a reduction in commodity and FX. The same is true in Europe. And then, in the US, a lot of the large utilities are looking for larger firms who have a better footprint, a balance sheet, and a deeper technical expertise.

So I think all three of those bode well for us on the M&A side.

If I could just follow up on your answer there as far as hiring goes. Are there enough experts and people out there to meet some of the fly ash and other coal waste product demand that the new EPA rules might bring about?

Great question. First of all, there is enough experts. But I will tell you, part of what is I actually think is beneficial is the way that the ruling is being implemented. It is going to get phased in. We do have a few year period to implement it.

And what this means is, it is not going to create a lane grab for everybody flocking to this. So there will be -- they are going to look for the best experts, people with the most experience, and so I think those that have excellent leading positions in this market will be the ones that the utilities move to.

It is not an emergency. It doesn't have to be done this week, this month, or even this year as they have time to very thoughtfully and effectively come up with the right solutions that will be the best cost, the longest solution, the lowest risk. And we have a very deep bench for this all across the country.

So, from a long-term business perspective, this phased-in approach really bodes very well for us. If it all had to be done in one year, I think, then, you would have problems with capacity and anybody who has a slide rule or a backhoe would call themselves a solid waste expert and get business but not under what is being proposed as far as is phased in requirements.

Got you. And last, if I could just touch on your guidance for next quarter here. Is there some -- a component of seasonality to your results in the fiscal second quarter on a more normalized basis? Not versus last year.

Can you take us through about what might be different for your results in the average Q2 versus the other quarters of the year?

Yes. Q2, first of all, since we moved into Canada about four years ago -- maybe a bit more -- has become very seasonal for us. Q2 is the low point, both on revenue and on operating income. And the reason is, all of the field activities that we have in Canada go dormant. And, in fact, some of our operations we have spoken about this in the past -- some of our engineering operations in Canada actually are in a loss position during the second quarter. And, just to be really clear, the second quarter is the month of January, February, and March. And those are where we have no field survey work; we have no field assessment activities.

Now, I do know for pure pipe liners and some of the people in the oil and gas industry, deep freezes are good for digging and working in tundra and other soft-soiled areas but that is not true for a lot of the work we do in water. So taking water samples over a frozen lake is difficult, and other things.

So Q2, it has become very accentuatedly a seasonal low point for us so that's why you see some of the lower numbers. It has actually become maybe even a bit more accentuated because a lot of the RCM construction we were doing very little or no RCM construction and Canada, it was in the US. So as you take that down and that was what carried revenues through these winter months, doing construction in California, Texas, Florida, and you take that out, the remaining business appears to be even more cyclical because of the percentage of work we have in Canada.

So that is what is different from a year ago, but that is going to be representative of the business as we go forward during those three months.

Core Greendale, First Analysis.

A few questions for you. First of all, I appreciate the detail on the changing your assumption on oil and gas. Just a clarification. Are those numbers, were those gross revenue or net revenue numbers?

Those were gross revenue; total revenue. Our net revenue is about 75% of those numbers.

Okay. So, in other words, 75% of $50 million reduction in your assumption for net revenue in 2015?

We actually took $50 million down on net, is what we took down. So of the $100 million that we brought down on the top and bottom, about $50 million was oil and gas and about $50 million was directly FX calculation from Canada.

Okay. So you didn't change your assumption on mining work.

No.

Can you give the same high level numbers for your mining work? So how much of your maybe fiscal 2014 gross revenue, net revenue was from the mining industry?

Yes. Yes, I can. Let me give you gross numbers and then I will give you an approximation for net. And I will -- let me clarify this. Some of the reduction was from mining.

So in 2012, we were around $200 million. I'm sorry. In fiscal year 2014, the last year, we were about $200 million in gross revenue. Now, we expected that to come down. We did see it softening. So we came into the year with our original estimate of about $150 million to $160 million. So we saw almost a 25% reduction, we are anticipating.

And after the first quarter, we believe that that will even be softer or less than that in total revenue. We think that number will be maybe $120 million to $130 million. So maybe a $20 million reduction. Now,that is -- a lot of that is in Canada, a big, significant portion. And so, FX actually makes that a little bit less of the number in US. So, a portion of the revenue reduction was mining with the balance at oil and gas.

Sorry, Dan, those are gross revenue numbers?

Those are gross revenue numbers, yes. And net (technical difficulty) numbers are sort of 60% to 70% of that.

Okay. That helps. And then, I also appreciated the detail on the waste opportunity. Just one point on that. Is that the EPA regulation? It sounds like they are saying that no changes need to be made to -- let me restate that.

[Unlined] landfills that are currently in use can remain in use and you need to use liners on new landfills. Is that your understanding and does that impact the opportunity that you can continue to use unlined landfills that are already in use?

I think that, you have to go through the details of the draft final rule, but it is my understanding that they will have to be addressed to make sure that they meet integrity requirements that may or may not mean that they have to be retroactively lined, but they may have to be addressed through some other methodologies such as slope stability is the big one, with respect to the containment around the perimeter. And then also, for leachability, with respect to groundwater. And that could include other things other than full removal mining and replacement of the material. It could mean groundwater pump and treat. It could mean slurry protection.

So it doesn't mean that you have to, quote, line it, but it does mean that you have to monitor it and ensure that it meets all the containment requirements. And there are other ways to do that for ret -- for existing landfills than removal lining and replacement.

Justin Hauke, Robert Baird.

Dan, I noticed that you guys have not changed that $1 billion goal for oil and gas and I understand that the assumptions, I guess, on the organic side have come down and the offset is maybe the acquisitions are taking up a bigger chunk of that pie with valuations coming in. Is that the message you are trying to convey is that the goal to get from $400 million to $1 billion is probably more acquisition waited from here versus organic? Or what is your thinking on that?

Yes. I think that is exactly right, that if you went back to six months and earlier, we were growing at 20% plus organic. We brought in very few or no acquisitions in the past year or two and was growing very quickly. And we were looking. And I will tell you that we had all always presumed to achieve $1 billion run rate for an annual revenue from oil and gas that it would be a combination of organic and acquisitive at 20% growth, and you would double that, $400 million, in just under five years. So that would put you at $800 million. So we needed to acquire about $200 million somewhere along the way.

But the price points were so expensive on those, they were multiples -- not of earnings, but multiples of revenue -- which gave us pause. Now we have actually watched these come down. So I think that this is actually a very good opportunity for us to bring in acquisitions that will not only offset but probably more than offset where we were growing on an organic standpoint.

And then there are other regulatory drivers that are coming into place in the oil and gas areas such as handling of waste, similar to what you just saw in coal, water supply, and other items that will still be drivers for this business for us. So we think that, even under the current environment and maybe even with additional pressure, there is still areas that will drive this business for us.

Got it. And then I guess maybe my next question is just circling back to the RCM segment. I know you are exiting, but I think the assumption was that that would be more breakeven for the year and then there was another lost year and it also sounds like the DSOs' increasing are a function of that.

So how should we view that? Is that indicative of additional project disputes that are going on or change orders that are not being resolved? And is the goal still to be breakeven on RCM for the year?

I will start with the last part -- is, do we anticipate RCM to be breaking even for the year. Yes. Just to be clear, in the first quarter, we did have additional losses on projects of about $3.5 million for the quarter, which you see in our segment reporting. I think some of that is timing. In fact, I know some of that is timing so we do have some certain assets on projects. And I will give an example of equipment.

So we have fully depreciated equipment on projects like backhoes and excavators and things associated with construction projects. And so, as we move to complete projects, it may cost us more to finish it. There is your loss of $3 million, but we complete it; we will liquidate equipment that has essentially no book value and are only used to offset.

So I think that -- while some of it is timing and I do believe that our goal still is to have this year at a zero point with no profit or loss from our RCM. Now, with respect to the DSO, or our receivables outstanding there, no doubt, as we finish this construction work, we are still at about $100 million to go. A lot of it goes into unbilled, because we have to wait until we deliver projects to achieve either milestones or something else. And so it sits there and becomes aged until we hit these milestones.

We have had no material in the first quarter -- we have had no material change by adding additional disputes or change orders. That has remained unchanged from the fourth quarter. Most of it is just build-up of receivables that will be paid when we achieve a milestone or a project delivered.

Okay. So yes. So just to be clear, nothing indicative of material change order. It is more just a function of those are unbilled receivables until you get to the end of the project at which point they can be billed.

Right. And, of course, the calculation -- when you take a look at the calculation, one thing that -- actually, I'll have Steve Burdick say a word, too -- but I am very sensitive to the methodology of calculating DSO. Because as your revenue shrinks it, by definition, makes your DSO go up, but Steve, maybe you want to --.

Right. So we do have claims that we are collecting on and we do have receivables unbilled that Dan talked about. But, probably the biggest factor in terms of that DSO is in RCM, the much lower and decreasing revenue that it is calculated off of.

Steve Folse, Stifel Nicolas.

First question. I am assuming that the majority of your mining and oil and gas exposures in the RME segment -- so if I kind of look through and work through the assumptions that you have for the mining decrease and flat, year-over-year oil and gas, it is kind of implying pretty substantial growth in the other verticals in order to get to that flat to low single-digit growth in RME. So high single digits, low double-digit type growth. So I was wondering if you could go through and talk about what verticals in a little bit more detail that you are seeing particular shrink there. And what is going to drive that?

Yes. Steve, you have got it exactly right. So the mining work is essentially all in RME. So, research management resource component of it. So that is correct.

Our oil and gas work is essentially all in RME. That is correct.

So those areas are both under a bit of pressure based on the commodity pricing. But, what is offsetting those on the growth is, since we believe that our solid waste business is going to be driven primarily by the private utilities -- the ones that I talked about -- so, we think solid waste is going to grow. And offset. And so, that is on the plus side.

But we do have some of our remediation work from the US federal government is located in RME and we expect it to grow. And it is on the upside. That will go up under commercial in the US and show up virtually under US federal government. And you can see it there. And so that is a plus. It is a solid waste remediation.

And, actually, our USAID work. So the Agency for International Development under the US State Department has actually been very strong and, in fact, you saw an announcement that we made for a $200 million-plus contract for Promote that came along with initial funding right out of the gate. We expect our USAID work to be very strong. And that is a plus this year.

So, I would say you have got a bit of -- we have done well on oil and gas. And, because of the high concentration on midstream, we expect it to be relatively stable although we are not unfamiliar with the volatility in the market. Mining. So those are the two minuses. And on pluses on solid waste. Pluses on remediation and pluses on USAID and international development work.

So those are sort of the plus and minuses. And three offset the minuses with a little bit of pluses, somewhere between flat to slightly up. That is how we came to that juxtaposition between those different markets.

Okay. Great. Thanks. And then, I guess, sticking in the RME segment, much better margins in the quarter. I was wondering, how much of that was driven by kind of improvements in resource allocation as some of that legacy RCM businesses and projects have wound down. I know you guys cited that as a bit of a drag last quarter. Was most of that improvement that improved resource allocation or was it just market improvement?

You know, it is market improvement across the board, really. It was very broad-based. So it wasn't any one area at all.

And, in fact, I think that if you took a look at the oil and gas area from 2014 to 2015, you would have found, if you were able to parse that out, year on year, that part was maybe even slightly down this year and it just shows that the rest of the business was even that much stronger.

So no, it wasn't any one area that there was no project settlements. There was no litigation recovery. It was just performance across the board and very even.

Okay. Great. Then I guess the last one here. Looks like you lowered the targeted RME margin for the year on the bottom end by 100 basis points. I was wondering if that was mostly on the mining side. It sounds like it probably was. Or there was some anticipatory action there on what could come on the oil and gas, or whether or not you are already seeing a little bit of pricing pressure there.

I would say you could give that presentation for me. You hit it exactly right. It is mining is most notable. Now, we think the big reductions are not some type of cataclysmic change there, but it is just this continued pressure. So we have incorporated that.

And it is anticipatory. I think you used exactly the right word. We have seen -- and this is mostly in our upstream work. We have seen some communications from some of our oil and gas clients looking for concessions or participation in the pricing pressures of the market. And we have seen that on the upstream, mostly. But that is mostly anticipatory on oil and gas, just in this very uncertain period.

David Rose, Wedbush Securities.

This is a follow-up to the last question and thank you for taking my questions. On the RME side, looking at the hole from which you are been digging out, you are at 7% down on the first quarter. So you kind of highlighted a couple of the factors, like USAID, that should help. But, I mean, is there a concentration of project work that could be at risk and maybe you can kind of help us better understand -- this is -- I mean, this is a pretty significant move. So where are we seeing the big move from?

Well, I would say that, in RME, some of it is timing. I talked about the US federal government being down 9% in Q1 this year versus Q1 last year. The component, if you actually parsed it out -- the component that was actually down was on the remediation and so the group that actually took almost all of that are represented almost all of that reduction on year on year, happen to be in RME.

Now, as I mentioned during my prepared remarks, I actually expect that to strengthen and most of that is associated with timing and backlog looks very good. So I think that is part one. So I don't think it is indicative of where they will be. So I think that will come back.

I think the second area is mining was down and I do not expect that to materially come back, but we are in an incremental position where, as the reality is, the front end work on the mining, as we complete the work that is in the backlog, is not being replaced on the exploration or front feasibility study. The back end, which is cleanup work, continues to be about even and that represents most of our work.

So I do expect that to continue to be under pressure and represent a bit of a down move. And with respect to now having moved our Canadian midstream work into our RME to really consolidate all of our oil and gas there, a year ago, there was very cold weather in Canada and there was a very big oil and gas revenue that came from Canada.

First of all, the upstream at the oil sands was stronger a year ago. We didn't really have these pricing pressures when things were stronger. And our midstream pipeline, which is the biggest piece in Canada, was very strong. And I expect that to pick up here in the second quarter.

So you are actually going to see on a sequential basis -- and it will be very noteworthy year over year -- that pick up because of the work we are doing of the midstream up there. So I don't think it is anything that is -- we have no single project. We have one larger project in the oil and gas side that is somewhat material, but other than that, we have no concentrations of projects, programs, or singularity of client concentration that I think could be at risk.

Okay. That is helpful. And to be clear, are you assuming the FX headwinds in that growth? I mean, are you separating the two, organic and FX, excluding FX? Or is FX is included in that organic assumption?

The FX is actually separate and so when we took a look at reducing our topline revenue, we took the amount for what I would call a constant currency, which is a combination of oil and gas and mining, and that was roughly $50 million. And the other half is really FX. So we didn't double and we spread that across all the Canadian activities.

No. That part I understood. I was just wondering, when -- your slide, where you are showing RME, you show flat to single digit growth. That is incorporating the FX headwinds. Is that right? Slide 17.

No. I think that is on a --

It is on a constant currency.

Yes. Now I see what you mean.

Okay. That's helpful. Okay.

And then, lastly, given where the stock is today, why wouldn't we assume that you would have consistent share buyback that you had in the fourth quarter? Is there anything that would preclude us from seeing kind of a similar run rate or, if not, greater?

That would be a reasonable assumption. As Steve had indicated in our capital allocation, we do have approved for $200 million. We did approximately $20 million in the first quarter. If you do the math, and divide $200 million over eight quarters, you would see you are pretty well in that type of constant run rate with maybe additional triggers that would require equal or greater. So that would not be an unreasonable basis of calculation.

Thank you very much. I appreciate the help.

Thank you very much, David. And, thank you for your questions and interest in Tetra Tech. These are great questions and, I will tell you, it is a very interesting time when you see changes in such an enormous market like oil and gas moving 40% in 90 days, from one call.

So thank you very much for your questions and I do look forward to speaking with you again next quarter. And, if you are on the East Coast of the US, Canada, I hope you stay warm and dry through the storms and I will talk to you next quarter. Bye.

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