Tetra Tech Inc (TTEK) 2015 Q2 法說會逐字稿

Good morning and thank you for joining the Tetra Tech earnings call. By now, you should have received a copy of the press release. If you have not, please contact the Company's corporate office at 626-351-4664.

With us today from management our Dan Batrack, Chairman and Chief Executive Officer, and Steve Burdick, Chief Financial Officer. They will provide a brief overview of the results and will then open up the call for questions.

During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. These statements are only predictions and may differ materially from actual future events or results.

Tetra Tech's Form 10-K and Form 10-Q reports to the Security and Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements. Tetra Tech undertakes no duty to update forward-looking statements.

In addition, since management will be presenting in some non-GAAP Digital measures as references, the appropriate GAAP financial reconciliations are posted in the investor relations section of Tetra Tech's website.

At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Jennifer, and good morning. And welcome to our second quarter of fiscal year 2015 earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials a bit later in this call, I will start with a brief overview of the Company and some of our key financial metrics.

In the second quarter, we delivered solid performance from our ongoing operations: the water environment and infrastructure group, WEI Group, and the resource management and energy group. Overall for the quarter, the Company generated $565 million in total revenue with $433 million in net revenue.

Both total and net revenue for the WEI and RME business groups were up organically 3% from the prior year on a constant currency basis. Operating income was $31 million, up operationally 26% from the prior-year. And our earnings per share were $0.31 for the quarter, up operationally 45% from last year.

And most notably, our backlog was up 11% year on year for the ongoing operations of WEI and RME segments. And it was also up 5% sequentially, giving us excellent visibility as we enter the third quarter of this fiscal year.

Tetra Tech's Board of Directors did authorize a 14% increase in our quarterly dividend, which is consistent with our commitment to return capital to our shareholders. Overall, we feel very good about the Company's performance over this past quarter and our outlook for the remainder of the year.

I would now like to present our performance by segment. In the second quarter, the WEI business group generated 40% of our net revenue from ongoing operations. WEI was up 2% on total revenue for the quarter and down slightly or 3% on net revenue. This reduction in net revenue from the prior year was primarily associated with slow orders from the United States federal government's Department of Defense.

The WEI segment otherwise had good performance in the civilian federal programs, such as EPA, the FAA, and the civil works portions of the US Corps of Engineers. The state and local work for the second quarter in this segment was particularly strong, with total revenue up 16% year on year for the WEI business segment.

WEI delivered 9% margins for the quarter, which is actually in line with our expectations and reflects the lower margins that we typically generate out of our Canadian consulting and engineering operations during the winter months.

The RME business group generated about 60% of our net revenues for the quarter and they were up 7% over the prior year. RME delivered an 8% margin, with strong performance in power generation and oil and gas midstream pipeline work.

I would now like to provide an overview of our performance by customer -- by our end customers. Our international net revenue for both WEI and RME was up 12% year on year and it now represents about 35% of our revenue from ongoing operations. The international growth was led by our oil and gas pipeline services in Canada, which had very strong revenue generation from projects that we performed during the winter months.

Work from our US commercial clients was up 6% year on year and now represents 29% of our ongoing work for the Company for this past quarter. Our commercial revenue included an increase in environmental projects, really across the country, especially for complex sediment remediation work that we have done for some of our very largest clients.

And finally, our US state and local work was up 3%, which is a direct result of increase that we are doing work for cities and municipalities, especially in the Southern and Western portions of the United States.

Now our US federal work represented 25% of our revenues -- of our net revenues from our ongoing business this last quarter, which is down 10% year on year, primarily due to the timing of orders and slow project startups from the Department of Defense. However, I do want to mention that the other work that we do for the federal government, which is non-Department of Defense-related work, is actually doing quite well.

And in fact, all of these civil works programs that we are working for for Environmental Protection Agency, the Federal Aviation Administration, National Science Foundation, the civil works of US Corps of Engineers, and NASA, are up year to date. And our USAID work, which is really one of our large federal clients, has maintained revenues at the same level as last year this past quarter.

Our federal bidding and our proposal activity does continue to increase and that includes the Department of Defense. And I expect our federal contracts to begin releasing more task orders over the next few months, although I will say this is a bit later than we expected as we enter this fiscal year.

We had a good second quarter of orders and contract wins. On a constant currency basis, our WEI and RME segments' backlog were up 11% year on year and 5% sequentially, as I mentioned a few moments ago. Our backlog growth was driven primarily by a broad base of orders across both the private and our public sector clients.

The commercial work orders included oil and gas, power, and environmental remediation services. Public sector work and new orders included major state and local awards, like a press release that we recently issued for a Washington, DC program for a sediment remediation contract that will support the restoration of the Anacostia River in the Washington, DC area.

We also received a very large and significant number of US federal government awards for the USAID, US Agency for International Development, the Army Corps of Engineers civil works, and the US EPA. And as we previously indicated, we are continuing to reduce the RCM backlog as we complete the remaining projects that we have in place.

At this point, I would like to turn the presentation over to Steve to present the details of our financials. Steve?

Well, thank you, Dan. I will begin with the fiscal 2015 second-quarter financial overview in a bit more detail. So overall, our second-quarter operating results fell in line with management's expectation regarding both the guidance ranges that we provided for net revenue and EPS.

First, comparing the second-quarter results this year to last year, revenue decreased by about $22 million or 4% to $565 million. Now, this decrease was primarily due to our decision to exit the non-core construction markets now reported in our RCM segment. And this year-over-year comparisons were also negatively impacted by foreign exchange rates due to the strengthening of the US dollar over the last year.

Our net revenue decreased to $433 million or down about 5% for the same reasons that gross revenue decreased. Although lower than prior year, the net revenue results were within our expectations and the guidance ranges provided due to the strength of our core markets in water, environment, resource management, energy, and infrastructure. Additionally, our midstream oil and gas work was particularly strong in the second quarter of this year.

Our revenue and net revenue were both up 3% on a constant currency basis, and excluding RCM, as Dan talked about last year, when we compare this year to last year. Now, this growth was organic and indicative of the trends that we see in our business.

Now, our operating income was about $30.4 million in the second quarter. This operating income was primarily driven by project execution and favorable results in both our WEI and RME groups. The operating income compared -- when we compare this year to last year, was impacted by significant non-operating gains on revaluing acquisitions related to earnout liabilities of about $21 million last year compared to about $3 million this year.

Also, the earnout gains in the -- in this year's second quarter were offset by legal settlement charges of about $3 million and lower adverse results due to foreign exchange translations of about $1 million. So excluding these, what I call nonoperational items, operating income actually increased about 26% on a year-over-year basis.

Our EBITDA was $41.1 million in the second quarter. EBITDA was driven by the same factors as our operating income and grew about 12% this year versus last year's second quarter, excluding the previously described nonoperating items. And on the same basis, our EBITDA margin was approximately 10%, which is as expected due to the winter seasonality effect.

SG&A -- this was about $42.5 million for the quarter, which was down about 4% from last year. This decrease in our SG&A costs compared to last year was consistent with our plan to decrease in overhead and back-office costs as a result of winding down the non-core construction markets.

The tax provision resulted in a net expense of about $9.6 million this quarter. The effective tax rate was about 33.5% and we expect a 32% effective tax rate for the second half of fiscal 2015.

Now as I mentioned at the beginning, our earnings per share of $0.31 was within our guidance. EPS was down 35% on a GAAP basis. However, as last year's results included about $0.26 from earnout gains. Excluding the earnout for both periods and the other non-operating items that previously mentioned, EPS was up about 45% compared to last year.

Next I would like to highlight a few of the more significant balance sheet items. As a result of project billing milestones and higher DSO in the RCM segment, we did experience about a 1% increase in our net accounts receivable balances.

The accounts parable payable balances decreased to $136.3 million due to lower pay-when-paid subcontracting activities for the year when comparing the current year to the prior year. These activities took place mostly in our federal and state government projects in the RCM segment.

Our net debt compared to prior year increased about $101 million to $140 million. Although our net debt increased as a factor of EBITDA, we are at about 0.8 times. We had positive cash from operations of -- as I will explain in the next few slides, and we have allocated a portion of our capital to shareholder returns through both dividends and share repurchases.

So as I noted in our discussion of the balance sheet, we did have positive cash flow from operations. Our results in the second quarter improved over the prior-year period. And we expect strong cash flows in the second half of the year, such that our 2015 forecast indicates cash from operations to be in the range of about $145 million to $160 million.

CapEx is similar to prior year and on track with our previous guidance for fiscal 2015. And we expect to continue our spending in 2015 to remain as initially forecasted to be in the range of about $15 million to $25 million. And this amount continues to represent a ratio of less than 1% of our annual revenue.

Days sales outstanding of 92 days are higher when compared to this year -- or compared to last year at this point. And the actual DSO was not in line with our expectation. Our DSO is higher, primarily due to the performance in our RCM segment.

However, on the other hand, the aggregate DSO in the front 2 segments are about 77 days. And so our efforts for fiscal 2015 are focused on reducing our DSO to below 75 days, with an ultimate goal to be closer to 70 days when we exclude the impact from RCM.

I would now like to provide an update on our capital allocation program. Our current leverage, as I talked about before, is a little less than 1 times EBITDA, while our target leverage range is about 1 to 2 times EBITDA.

As such, we have what I call plenty of dry powder to invest in both in growth through acquisitions and organically and to return cash to shareholders. Although our long-term target is to return about 33% of our free cash flow through a mix of dividends and buybacks, we have taken advantage of our leverage capacity in 2015 on a year-to-date basis to provide a greater return to shareholders.

And as such, we completed about $49 million in buybacks this quarter and about $4 million in cash dividends were paid out. On a year-to-date basis, we've repurchased about $69 million in buybacks and paid about $8 million in dividends.

Today, I would like to announce our further commitment to providing value to our shareholders. And as Dan mentioned earlier in the presentation, our Board of Directors has approved the declaration of Tetra Tech's fifth consecutive quarterly dividend. And this dividend has been raised to $0.08 per share or about a 14% increase from our previous dividend of $0.07 per share.

This increase reflects both management's and the Board's confidence in our ability to continue to generate strong free cash flow. And this amount, if annualized, continues to represent about 15% of our annual free cash flow and more than a 1% yield to our current stock price. This increased dividend will be paid on May 29 of this year to the shareholders of record as of May 14.

An important aspect to understand is that this cash dividend and stock buyback will not impact our growth strategy from either an organic or acquisitive standpoint. In fact, we expect to be very 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, environment, and energy-related services, both in the public infrastructure and in our commercial industry services. So while we will remain committed to a significant share buyback program over the next two years, we will update our shareholders on our capital allocation plan in each of the next quarterly conference calls.

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

Great. Thanks, Steve. I would like to give you an update on Tetra Tech's growth strategy. Our business encompasses three major markets, which all have long-term opportunities and demand worldwide. And especially in our primary geography here in the United States and Canada.

And these three markets -- water, environment, and energy -- each have emerging growth areas that are creating new funding sources and new opportunities for our engineers and scientists. I would now like to give you a brief overview of some of the specific emerging growth areas where we are investing.

Today, infrastructure and the associated public sector spending is becoming much more active in the United States, with a significant increase in new opportunities from cities and municipalities. We are addressing both ends of the water spectrum for these clients, providing water supplies where there is areas of just too little water, and designing solutions for areas where they are faced with increased flooding and water damage from areas where storms are bringing in too much water.

In the Southern and Western regions of the United States, a long-term drought has local governments investing in desalination, brackish water treatment and reuse, which is areas that are particularly strong for Tetra Tech. This increased level of urgency is creating new opportunities for a wide range of different water management solutions, which is water reuse -- which is just retreating the water that we have already used from different treatment plants -- desalination, both on the coasts and inland from groundwater wells, capturing of storm water, and treatment of contaminated groundwater sources, all areas that Tetra Tech is a market leader.

California, for example, not only passed an unprecedented $7.5 billion water program, but our governor out here in California recently announced an acceleration of $1 billion of the spending and new water -- a statewide water conservation program, all of which require new technologies, consulting, and engineering services, where Tetra Tech is a leader.

And this persistent drought could accelerate the development of new water supplies along the Pacific coast, which could include -- and in fact is including -- new private development of desalination projects.

Coastal and river flooding also continues to increase in frequency, providing opportunities for our emergency planning and response services and designing of coastal protecting structures, such as levees, dams, and other protection systems. And we are seeing states issue new contracts to address the infrastructure assessments and upgrade these structures, such as an Ohio program that we were recently awarded to protect floods from the river basins in the center portion of the US.

Water is equally critical, and in some cases, the actual limiting factor for growth for industry and commercial clients. In areas affected by drought, our industrial and commercial clients now have a renewed interest in further reducing their water use and recycling the processed water that they have actually already used. Tetra Tech addresses the full water cycle for our industrial and commercial clients, from identifying sources where they can get the water to treating the water once it has been used and then recycling it for reuse. And this is an area that we are quite focused on as growing.

The four sectors that we are focused on in this commercial sector include manufacturing, in areas I've just talked about; energy-related waste; oil and gas; and mining, all of which are very large water users.

In oil and gas, we expect that the recent concerns over deep well injection for the disposal of waste water in the central portion of the United States is going to lead to new opportunities to capture that water, recycle it, and actually design and construct centralized water treatment plants. That should be a new big area for us.

And in mining, we continue to see -- continue to expand our capabilities in the portfolio of projects that we have, developing long-term solutions to treating contaminated water at mines. As part of the mine closure processes, we have seen that market continue to slow in production. But as they slow in production, they then convert to closing the mines, which actually create new opportunities for us.

In the environmental market, we are focused on building our solid waste practice, which includes the management of waste generated from power production. New regulations just published in the US Federal Register in final form this month of April, define waste management requirements for managing residuals from coal-fired power plants, including fly ash and bottom ash byproducts from the combustion process.

Addressing these new regulations is estimated by the US Environmental Protection Agency to cost over $20 billion. We are now working with utilities to develop plans and designs to address these new requirements for power plants that are primary located geographically in the Central and Eastern portions of the United States.

And just yesterday, I am very pleased to announce the signing of a definitive agreement to acquire Cornerstone Environmental Group. This is a firm with about 160 staff, headquartered in New York, but they do have a presence both in the Northeast, the Midwest, and a limited presence in the West.

And they bring us additional technical expertise and a geographic presence, especially in the Northeast, with an excellent client base, many of which we had not had within the Company before. The addition of Cornerstone does advance our strategy to build on our number one ranking in solid waste in the United States and add additional resources to address this new and emerging market handling coal-fired waste disposal.

In oil and gas, our strategy is to focus on the midstream -- our focus to have focused on the midstream environmental permitting and engineering work, which is now about 85% of our oil and gas revenues, has proved to be the right approach in this low price oil and gas market. For the quarter, our work in the oil and gas midstream market was up by 15% from last year, which has more than offset the reductions that we have seen in upstream engineering and consulting work that we do, which was primarily in the oil sands area.

So far this year, we have done about $200 million in oil and gas-related work, which is up in aggregate from the prior year by about 7%. We do see in this current downturn cycle in the oil and gas industry as an opportunity to advance our strategy, both through adding new strategic hires and to complete acquisitions at more valuable favorable valuations. So this is an area we are going to continue to invest in and we expect to grow for the Company.

I would now like to address our segment outlook. The WEI segment, which has predominantly public sector clients who are government clients, we expect to have low single-digit growth, as infrastructure spending continues to build, especially in the United States. And we expect the margins in this segment to be in the 12% to 13% EBITDA range for all of fiscal year 2015.

The RME segment, which has predominantly private-sector clients, is expected to have flat to low single-digit growth, with growth in solid waste, energy-related services, and government programs, primarily in the USAID markets and in select remediation areas. The growth in those markets will be offset by weakness in some of the commodity-driven markets that we are in and that is namely mining.

Overall, I expect RME to maintain margins in sort of an 11% to 13% EBITDA range for the entire year of fiscal year 2015. For the RCM segment, I expect to continue to wind down the projects that we have, with the majority of the projects being completed in fiscal year 2015.

I would now like to present our guidance for the third quarter and for fiscal year 2015. Our guidance is as follows. Net revenue for the third quarter is at a range of $420 million to $470 million, with an associated diluted earnings per share up $0.40 to $0.44.

For the entire fiscal year of 2015, our net revenue range is $1.7 billion to $1.85 billion for a net revenue, again, with an associated diluted earnings per share of $1.60 to $1.70 per share. I will note that our cash earnings per share for the entire year we expect to be within the range of $2.30 to $2.55 per share.

Some of the assumptions, if you're following along on the webcast, are listed here on the slide. We do anticipate a total of $21 million of intangible amortization expense, non-cash expense, which represents $0.23 per share and that is incorporated into the guidance.

As Steve had mentioned earlier, a 32% effective tax rate for the remainder of fiscal year 2015, which will be for the third and fourth quarters. 62 million average diluted shares outstanding and it does exclude future acquisitions.

This guidance does include that of Cornerstone, but I will note that given the late date of acquisition for the fiscal year and the intangible amortization, that it is negligible or no contribution to earnings per share in the guidance. And it does assume the current FX rates that are in place today and no material degradation of the exchange rate.

In summary, we had solid performance in the second quarter, with year-on-year organic growth and a significant growth in our operational operating income and earnings per share during the quarter. Our backlog is up 11% year on year, with strong orders from our commercial and public sector services across all of our operations.

We have excellent growth opportunities, both in new and emerging markets, that are going to help us expand our business in areas where we are a market leader in water, environment, and energy. We are very pleased to welcome the new edition of Cornerstone to our team to support our environmental and solid waste growth strategy and we do, as Steve had mentioned just a few minutes ago, we do expect to have an active M&A season over the coming year.

And I will note and repeat what Steve had indicated earlier, that we did raise our dividend this quarter by 14%. And we expect to continue to deploy our cash to add value for our shareholders and to support our growth, both internal and throughout acquisitions.

And at this point, I would now like to open the call up for questions. Jennifer?

(Operator Instructions) Tahira Afzal, KeyBanc Capital Market.

This is Sean on for Tahira today. I guess first, I would just like to get a little bit of perspective on this future opportunity on the water infrastructure side. In the past, water infrastructure spending has at times been a little slow to ramp up. And if you could just frame that scope and the timing of a potential meaningful contribution to backlog and earnings, that will be very helpful.

Well, Sean, water infrastructure is really quite a broad area. But I will pick one area that is really quite topical and current. And that is funding and timing of water infrastructure projects out in California and other drought-affected states and regions.

So last fall, $7.5 billion was authorized through bonds here in California to address a number of different water infrastructure and some water management programs. But that number is actually half of the real number, because that is a matching fund with local municipalities.

So as the state puts money up, to a large extent, local cities and municipalities would put matching funds up. Those would include -- and the largest number of that, about half of that, is associated with what is often referred to as storm water, which is really the lowest cost of water, which is capturing runoff from rain or other types of precipitation: snow, rain, anything else.

So that -- the studies are taking place now. I expect that that will be smaller dollars for investigations assessment, alternative analysis. The state has and the governor has recently indicated he wants to fast-track the environmental permitting process to move these to construction. So I expect probably two to four quarters of slow ramp up and then the projects actually move to detailed design and then quickly follow through to construction.

So I expect that while there is a lot of headline notices in these areas, I think it is still a few quarters before it converts to direct revenue and EPS that you would see materially affect our top and bottom line.

That's very helpful. Thanks very much for that. Then my second question is just curious about the resiliency you are seeing in your midstream business. And if you could maybe just compare what kind of activities are driving that this year and how that is different from last year, whether that be geographies, customers, or different pipe sizes. So any other color there would be helpful.

Yes, that was one of the bright spots for us. We actually had several bright spots, but I would put the oil and gas performance on the midstream right up there at the top for us. I would say both in the -- for us, it is really two geographies. As far as countries, it is Canada and the US.

Now the US, since a lot of the work is driven by the fracking process and gas production, we were quite concerned, but a lot of the pent-up production that was put in place earlier is focused on moving it to market. I thought we would be potentially challenged in that area and it is really been flat to slightly up.

So the US has exceeded our expectations, but the primary growth was [that] came out of Canada and that is where a number of longer-term projects we have. And in fact, they are a handful of the few multi-year projects we have. And they were a smaller diameter of lines, the same type of work we have had before.

And so Canada drove the largest increase -- the majority of the increase year over year. And that is because a lot of the fieldwork and construction activities take place in the wintertime, when there is the freeze and you can actually get out to the sites.

So I believe on the midstream, certainly for Canada, the biggest quarter would be Q2, or the months of January, February, and March for us. So I feel quite good about the backlog and the outlook on the Canadian side. It remains great visibility, not only through the rest of this year, but actually into 2016.

And the US, where we are doing not fieldwork, as in construction management or oversight, the engineering work are smaller in the size. So the outlook isn't quite as long, but actually has not deteriorated. It looks pretty good for us right now.

Both very helpful answers. Thanks so much.

Andy Wittmann, Baird.

Dan, I guess I wanted to get your thought on guidance. There was obviously some moving pieces in the quarter, with the $6 million gain offset by -- I guess there was probably a $6 million charge in the RCM business. There is also the $3 million put and take with the legal settlement. And then the reversal -- the offset on that one.

I guess, where those specific charges and benefits contemplated in your previous guidance? Really what we are trying to get at here is how much of the guidance's slight tweak higher was operational versus items that were realized in the quarter?

I will address each of those three buckets. I will just do them backwards. How much of it was the increase in our guidance? We are raising the lower end of our annual guidance by $0.05. All of it was from operational. Absolutely all of it.

Now to back up to the two contributing questions with respect to what could be referred to as unusual items, I do -- I would agree. One of those two are unusual, in that there was a $3 million pick up from an earnout payment that we believe would not take place, so we took that into income.

But we also had a very unusual single -- it wasn't a group of legal settlements, it was a single legal settlement that was extraordinary. It certainly is quite extraordinary for us. We called those out. It was nonoperational. It was really quite different from anything we perform on a project site. And those two offset for a net zero impact at the corporate line.

Now with respect to the $6 million gain that you referred to, I had mentioned this coming into the year -- fiscal year. And also last quarter that as we complete construction projects, I expect them to be quite variable. And until you finish them, you quite often don't know exactly what the final tale of the tape is with respect to the cost.

However, we did anticipate if we spent more to complete projects, which is what happened in the second quarter, we were going to use and liquidate equipments that are on these projects. So as part of our construction management division, we have a fair amount of equipment that we have purchased over many, many years.

And so as these projects complete, we do the final true-up of whether or not we had a gain or a loss, based on what we expected. In this last quarter, we had more losses that we expected to finish those jobs. But as we had anticipated coming into the year, we are going to sell that equipment and use the proceeds of that to offset the performance in that group.

So if everything went quite well, maybe we would finish the projects better, sell the equipment, and have a big gain. But I will tell you, our safety valve was when those projects complete, the equipment that we had associated with those, was to sell it and have as an offset.

And that is what took place within RCM. It was all within RCM, so I would consider it non-core anyway. And actually, it turned out as offsets just about where we had anticipated. Although I would be much happier if we were finishing these jobs at a better economic position. But I will tell you, that is part of the reason we are getting out of that business.

Okay. That is helpful. Then just two more questions, if I might. Going back to oil and gas, it sounds like you were up on some specific projects that are giving you multi-year visibility.

Would you say -- so your results were good. Would you say the market is good? In other words, do you think that your backlog can grow in this business? Is it good enough to grow your backlog, recognizing your burn rates are going to come down now as you are not in those prime productivity months? Your thoughts on that would be helpful.

Well, I would love to tell you that I think it is a secular increase in the segment, but I don't think we see that. I think that with the exception of the one large project that we have in Canada that drove much of that work, which is multi-year, the rest of it was a lot of different projects, both in the US and Canada. So that does give me some encouragement.

I will say that we did burn off more backlog than we added in the second quarter in oil and gas because of that Canadian project, but I think that trend should reverse here in the third and fourth quarter, because we won't have as big a spend on the field construction activity. So I would say there are, I will call it, even or similar opportunities that we have seen here in the first quarter, but I wouldn't say that it represents a industry-wide recovery and growth market.

So we think that there is growth in that market for us, but I -- again, we are quite narrowly focused environmental permitting, initial design, and specific construction oversight and even some areas of self-performance. But I do think some of it is related to the type of work we perform and not necessarily a market-wide phenomenon.

Thanks for that context. You mentioned in the RME segment that power generation -- I am going to assume that is wind -- I will have you confirm that. And that power generation, wind, probably, was a contributor to some of the growth that you had seen there.

What is your forecast for year-over-year growth in 2015? And then does that set up as a tough comp as we move into calendar 2016 next year, where maybe some of these projects that are started with the PTC might not recur again? I just want to understand what that setup looks like over the next year or two.

Well, I am actually glad to say -- I don't really know if I am glad to say. I will clarify. It is not from the tax credits in the US for wind. The wind is (technical difficulty). So our -- when we talk about power, it was predominantly in Canada and it was predominantly in two areas -- hydropower. And so areas in the far east -- Hydro-Quebec, which is the largest hydropower production utility in Canada and actually one of the largest in the world. It is actually grown, done well for us. Manitoba Hydro, Hydro One, and even British Columbia Hydro, or BC Hydro. So that is a good portion of it.

And the other portion is the Ontario power generation, which is worked on at the power generating facilities in Ontario on the nuclear side. And so we are involved on that side, too, which is an area of expertise. And in the US, the growth was primarily on transmission. So it is corridor evaluation monitoring, design, and clearance work.

I would say that we -- while we still do permitting and evaluation for some wind, most of the work we have done has transitioned significantly from what used to be a trust [real] or land-based wind farms that you would see in Oklahoma, Texas, and Wyoming, the work we are doing now -- and we think we are a forefront leader in this -- is offshore marine. Locations, studies.

And this is where we have a small fleet of vessels. We are doing [bendict] work. We are looking at marine mammals and other impacts. We are doing geotechnical and geophysical surveys offshore. With our -- we are all self-performing this.

So the work in the US, where we do wind, has really transitioned offshore. The work onshore is transmission and power generation in Canada is hydro and nuclear.

David Rose, Wedbush Securities.

Thank you for taking my call. I had just a couple questions. One was a follow-up on the gain on the sale of assets. Just to be clear, when you book the loss or you reserve the loss, did you reserve for a loss ahead of time or did you take the loss at the same time you booked the gain?

I will let Steve talk about the very specifics from an accounting standpoint, but they were disaggregated or they were different activities. The projects are when we either recognized that there was going to be an additional charge to complete the project or our estimate to complete changed, so we recognized it at that month or that time. Or when we closed a project out and we did the final accounting reconciliation for what happened in the field.

And the actual sale of the asset, we actually went through a very formal process. We went through a third party. And essentially when we got the check in our hand and put it in our pocket is when we recognized it.

And those two dates are not exactly coincident. They were within the same quarter, but they are not coincident with respect to a calendar or a watch.

Okay. So the loss and the gain are within the same quarter? That's right, Steve?

Yes.

Okay. And going forward, can we expect future gains? Is that built into the guidance?

What we have in our guidance is basically breakeven. That is our goal. And right now, all these projects that we took these different charges on, we expect it to be breakeven on a go-forward basis.

So just to be clear, so you took the charges and then you expect additional cost and gains to even out.

Well, let me add about -- that -- if we -- right now, we are booked on all the projects based on our best estimate on how we think the projects are going to go from here to the end. Almost all of these -- I shouldn't say almost. I believe all these projects are in a loss position and so we have reserved that what we anticipate to have a loss and so we are booking no profit on them.

Now I will tell you that if I expect to lose $100 on a project that is going to take me another 6 months to go, at the very end of the day, it may be $101. It may be $99. We will true that up as we either have more visibility or the project concludes.

We don't have -- and I will state this. The majority of the equipment or other assets that we have under PPE were liquidated this past quarter. And so there is no large windfall of PP&E -- or plant, property, and equipment -- that we would liquidate that would be some large windfall. That was elimination of that equipment was this past quarter. And so I wouldn't expect to have -- I wouldn't say expect. From that category, we don't have a lot more.

Okay. So Steve, maybe from a margin perspective for this last quarter, do that equal out or is the margin cosmetically better?

No. It equaled out.

Okay. All right. I think we are good there. Sorry to beat it to death, but I just wanted to be clear. And then as we look forward, the transition from -- transition down from a lot of the fixed-cost contracts. I mean, your percentages has declined, I think, 6 points since 2009, with some really good progress.

But does that create a headwind for you? I think this has been asked before, but I would like to hear it again. Going forward and how do you manage that, given that generally, your fixed costs are higher margins?

We still have a pretty fair amount of fixed cost -- and I'm sorry -- fixed cost. Fixed price projects -- or FTP. Fixed price projects. And here is how I see the risk has changed significantly.

So if we have 30% fixed price contracts, it is a significantly different risk profile if you are doing it as a engineered project versus a construction project. So if we have to go out and build a bridge, we can have delays because of union strikes. We can have delays because materials show up late. We can have overruns because it snows, rains, sleet, or there is other external factors outside of our control.

If I have a fixed price project for the same number, where I am doing the design, where I have done the same type of design, I have typicals, and I am in an office with electricity and heat, as long as my folks can get to work -- and in some instances, even if they can't get to work, because they can do it electronically and we can send that work product to another location -- the potential for an overrun is significantly less and we would control a lot of that internally.

And I think your biggest thing you are going to see -- and is from a high point -- is subcontract is going to go to a much smaller percentage, where we control the outcome, not that we've used outside vendors and you have these external factors that we don't fully control. So even if the fixed price percentage doesn't significantly reduce, the risk profile for the Company is down dramatically.

Sure. No. I appreciate that. I guess I was just trying to get an idea to how you grow the margins back from peak levels with the decline in that business. But it certainly -- go ahead.

Well, I think that, first of all, you are right. There is potentially more margin embedded in fixed price. Of course, there is risk associated with it. And I will share with you, David, that the margin embedded into a fixed price engineering project is significantly higher than a fixed price that are margin embedded into a fixed price construction project. And so just the conversion of it going from construction to consulting and engineering has just a fundamentally better margin profile.

Okay. That's helpful. Then lastly, I know you have a lot of visibility in terms of margin profile of the backlog. As we look at the forecast for the WEI margins in the back half of this year, you are considerably higher than the back half of last year in order to get to the full-year goal. So help us -- is it based on specific projects that you see? Is there something more global?

I would say that some of the work that was being done by WEI, if you go back a full year ago, we actually had both in WEI and, to a lesser extent, in RME. Support for some of the projects that we were doing in the RCM or the construction division. And those -- some of the revenue there had low -- much lower or no margin.

And so we've -- if you take a look at it, these front two segments have performed even better than what some of the financials would indicate. Because we were doing other work internally on work that was being contracted for within RCM. So we have actually replaced that with higher margin work.

And as I'd indicated, I think WEI is going to be at these higher levels for the entire year, not just the third and fourth quarter.

Okay, great. Thank you very much.

Allie Hemmings, DA Davidson.

I was wondering if you guys could talk a little bit about your exposure to the oil sands up in Canada?

That is a good question. We consider that our upstream. It is about 15% of our work now overall is upstream. And probably two-thirds of that is oil sands. So I would say about 10% of the oil and gas revenues we have right now are in oil sands.

The work we are doing there is primarily sustaining capital. And what that means to us is there is requirements, permit requirements, up in the oil sands that they recycle and reuse a fair amount of the water.

So for any type of ongoing operations, the oil sands are trying to do their work more efficiently. In other words, lower their cost. So having a plant that is more, efficient, and so we are doing in-plant work or sustaining capital to help these clients reduce their cost of producing oil there.

And the second portion is we are actually doing design and evaluation of water recycling systems. How can you take the water, use it for separation of the oil from the sand, and then capture it, treat it to a level that it can be reused. In fact, in some instances, the recycled number can be up to 90% or higher.

And so that is the type of work we are doing up there. It overall probably represents about 10%, and perhaps just slightly under that, of our overall oil and gas work. And I will say that has come down quite significantly from a high point of about a year ago.

Okay. Have you been seeing delays there? Or work getting pushed out?

We did. We did. But that has been several quarters ago now. We started to see that late last summer and it was really quite pronounced in the fall and winter. The work we have has already come down quite a bit. And again, the work we are doing is sort of in-plant on sustaining capital.

So I think the biggest reductions -- I think -- I hope have already hit, but I guess if you want to call it good news, the amount of exposure we have there is down to quite a small number for us right now.

This will conclude the Q&A session. I will now turn the conference back over to Dan Batrack to conclude.

Well, I want to -- thank you very much, Jennifer. I want to thank every one of the investors who have been following us, who have interest, and certainly those that provided questions today. They are interesting and do provide good insight into the Company.

And I look forward to speaking to all of you again next quarter. Have a good rest of the day and thank you.

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