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. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at www.tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyright property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited. 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 we’ll open up the call for questions. I’d like to direct your attention to the safe harbor statement in today’s presentation. Today’s discussion contains forward-looking statements about future growth and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in Tetra Tech’s periodic reports filed with the SEC. Except as required by law, Tetra Tech takes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech’s website. [Operator Instructions] With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you very much, Melissa, and good morning, and welcome to our fiscal year 2022 second quarter earnings conference call. We had an excellent quarter with record second quarter revenue, net revenue and operating income. Our international and state and local markets grew at more than 20% year-over-year, driving an overall net revenue growth of 17% for the company for last year. This performance is a direct result of our successful long-term strategy to provide high-end differentiated services that are leading with science in the water and environmental markets. Our strategy has put us at the center of critical programs that are addressing many of the world’s climate change, resiliency and adaptation challenges across all of our global operations. Recognizing our focus on water, just this week, we’re very proud to have been named again #1 in Water by the Engineering News-Record publication for the 19th consecutive year as the largest consultancy in the United States. Given the strength of our performance and outlook, we are increasing our guidance for both net revenue and for earnings per share for fiscal year 2022. I’ll begin today with an overview of our performance and our customers, followed by Steve Burdick, our Chief Financial Officer, who will provide a more detailed review of our financials in capital allocation both for the quarter and for year-to-date. And then I will address our customer outlook and earnings guidance for all of fiscal year 2022. In the quarter, we hit new all-time second quarter highs for revenue, net revenue and operating income. Our net revenue increased 17% year-over-year from $600 million to $700 million, which is also the second-highest net revenue for the company for any quarter in our history. Our operating income increased at an even faster rate, up 23% from last year, reaching…

Thank you, Dan. So I’d like to now review the GAAP financial results for the second quarter of 2022. Overall, as Dan noted earlier, we had strong Q2 results and revenue -- for revenue and earnings. The strong performance from operations resulted in top line growth with second quarter revenue of $853 million. The net revenue amounted to $700 million, which was above the upper end of our guidance range, which was $620 million to $670 million. Overall, our revenue and net revenue were both up 13% and 17%, respectively, over last year with strong growth from international, state and local and commercial end markets. Our operating profit and earnings per share for the second quarter improved over last year. GAAP EPS came in at $0.98 in the second quarter, which is an increase of 18% over last year. Our GAAP EPS of $0.98 came in better than the top end of our guidance range, which was $0.86 to $0.91. This higher EPS was due to the improvement in reported operating income, which came in at $75 million this quarter, up 23% over last year. Our improved operating income for the second quarter was largely driven by a 31% growth in our CIG segment operating income and a 21% growth in our GSG segment operating income. The GSG margin of 14.9% was an improvement of 150 basis points over last year, and the resulting CIG margin of 11.2% is an improvement of 50 basis points over last year. And on a consolidated basis, these improvements resulted in an EBITDA margin of 11.6%, which is 60 basis points over the second quarter of last year. Further, regarding the year-over-year EPS, I would like to note that our tax rate this year of 25.7% is higher than last year’s tax rate of…

Great. Thank you, Steve. I’d now like to start with discussing some of the drivers associated with our fastest-growing market in the company, our international work. Across our broad-based international markets, we’re seeing a new focus on climate change programs and an increase in associate budgets for critical programs such as ocean protection, biodiversity and land management and decarbonizing buildings. This funding is resulting in an increased demand for our differentiated high-end consulting and engineering services with large multinational companies and new regional work in our key international operations in the United Kingdom, Australia and all throughout Canada. . This year, we’re quite pleased to see that the federal budget was finally approved in mid-March. The funding includes increases for key water, environmental and international development priorities. We expect to see these funds convert to new task orders for our long-term clients that leverages our more than $20 billion we have in U.S. federal contract capacity. The U.S. Army Corps of Engineers has a budget of $8.3 billion, which is an increase of 7% over the previous year, to execute their programs that include dams and levees, navigable waterways in key coastal protection projects. We expect to support the Corp with our more than 50 years’ experience in world-class design expertise throughout all of these technical service areas. Our growth strategy includes investments and acquisitions, and the focus of the acquisitions have been to identify those that will further expand our high-end capabilities in water and in environmental programs. I’m pleased to announce and share with you that in the second quarter, we added 2 excellent firms that bring specialized skills and talented staff to Tetra Tech. The first is Piteau Associates, who are global leaders in hydraulic modeling and sustainable water management for commercial clients. Their capabilities are essential…

[Operator Instructions] Our first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Nice job this quarter. I think the extra week dynamic in the fourth quarter is an important call-out because the updated guidance for the second half kind of implies slowing growth into the fourth quarter at a headline level. So maybe some context for what that adjustment looks like. And if you could maybe comment on what you want us to take away from the second half guidance in terms of the pace of growth as we advance through this year and go into next year.

That’s a good question, Sean. Thank you for pointing that out and being aware of the extra week in the fourth quarter. About every 5 or 6 years, our fiscal year has an extra week. So instead of 52 weeks, we have 53. It always lands in the fourth quarter. It was included in our guidance from the beginning of the year. But when you take the 1 week out of 53 weeks to 52, it’s about 2%, just under 2%. So it does represent about an 8% difference. So if you take the actual for Q1 and actual for Q2 and our guidance for Q3, and then you impute the remaining amount for the Q4 and add 8% to that, that would get something we would call an equivalent basis as a comparison for year-over-year. . Now if you take a look at the midpoint, in fact, especially if you take a look at the upper point, you’ll see that our growth rates, both in the third quarter and in the fourth quarter, are actually remaining similar to what we’ve just seen. They’re well into the double digits, in fact, into the teens. So what we’d like to communicate with the guidance that we’ve updated, we see things remaining strong. We’re seeing our growth rates remaining consistent to what we saw in the first and second quarter. We’re projecting those on through the rest of the year. And in fact, we’re actually seeing our margins expand even further than what we did both in the first quarter and the second quarter. And you can see that through the increase in the guidance of our earnings per share, which is at a percentage even greater than that of our increase in revenue that we just provided in our guidance. And in my comments a few moments ago that this is the second quarter -- or second time that we’ve increased our guidance. We came into the year. We had a very strong first quarter, and we increased our guidance for earnings per share. We’ve just finished the second quarter, and we’ve increased it both in guidance for revenue and earnings per share at even a bigger rate. And so I guess I want to make it clear, we’ve increased our guidance twice this year, but it shouldn’t be overlooked that it’s 2 out of 2. And so I’m really proud of the performance of the company to be having an opportunity to increase it each and every quarter that we’ve reported this year.

Very helpful, Dan. Good summary there. And it’s nice to see this big uptick in commercial revenue and new bookings this quarter. It’s interesting to see this at a time when people are starting to get worried about potential recession coming and commercial being where we’d expect the most sort of economic sensitivity in the Tetra Tech model. Do you think that the drivers of the commercial growth we’re seeing could be more durable in a recession scenario than we’ve seen in prior business cycles?

Well, I think for us, the commercial performance will be better through this economic cycle for many reasons. I would start that, first of all, I’ve certainly been asked by some within the company. It’s just driven by one area. So for instance, in renewable energy. And yes, that’s a large -- and we refer to it as clean energy to be as broad as possible. And the answer is yes, it’s been a contributor, but not the contributor. I’ve been asked, is it high-performance buildings is performing and recovering quite well? And the answer is yes. It’s a contributor but not the contributor. We’ve had success with our industrial clients. We’ve seen our high-performance buildings up. We’ve seen our clean energy increase. We’ve seen sustainability and ESG support from our commercial clients across the board. We’ve seen more environmental programs, both on a prospective basis with our new design facilities, both in high tech and the chip fab area. So it’s been very, very broad based. So one area where I feel more confident on the recovery and growth on commercial is that it’s very broad based, and it’s not based on a single leg or single component contributing to it. So the very large number you saw on commercial orders came from very broad sectors. And second of all, the area that we’ve seen most volatility, especially for ourselves coming into slower periods in the past for the commercial industry, were driven by commodity work and particularly oil and gas or mining, where you saw changes in fluctuation in commodity prices move our oil and gas work down 50% back when you saw a downturn of oil from $50, $70 down to 0 or to very low numbers. We had taken that out of our portfolio for the most part, not that we took it out, but that area has not recovered particularly significantly and it’s really been driven by these other areas I just mentioned. So the volatility associated with these highly variable end markets, just as much a smaller part of our overall portfolio. And that’s all on the commercial side. So I just don’t see that level of vulnerability or exposure to this big and negative impact in a potential recession or other economic challenged environment.

Our next question comes from the line of Noelle Dilts with Stifel.

Congrats on the strong results. I was hoping, Dan, that you could revisit the commentary that you provided previously on how you’re thinking about the growth rate by platform or by segment for the back half of the year and also the margins by division. And then any changes in how you’re thinking about sort of the longer-term margin profile for CIG and GSG.

Great. Well, coming into the year, we’ve indicated on an annual basis, Government Services, we did expect it was going to go up. We thought it would expand by roughly 50 basis points on an annual measure. I think this year coming in, we thought we’d be between a 13% and a 14% operating income margin. I do know that we’ve been above that both in the first quarter. And I know we’ve been above that almost 100 basis points. Let me not overstate that, by 90 basis points above the upper end of that range here this last quarter. So it’s going really well. I do expect that our highest margin quarters are coming up in front of us. So I don’t want to provide insight into 2023 quite yet. But certainly for Q3 and Q4, which for us is the spring and summer, I expect the margins to be a little bit at the upper end of that range for our Government Services. We have more field work. But particularly in our Commercial/International Group, it really does make a big difference. I’m very happy with the 50 basis points expansion in CIG. I tell you every year, the second quarter is the toughest for us in margins in our CIG business. We had the largest for our international activities by far is Canada. We have the most headcount, the most revenue, the largest clients. And in the middle of the winter, and that’s when we do our training, our continuing education, our maintenance work in preparation for mobilizing in the spring for the project. So I do expect that margins are going to expand naturally, and I’ll call it seasonally for the spring and summer. So I think you’ll see a notable increase in the CIG’s margins as we progress. I think that it’s not only seasonal that we’re going to see it go up. But structurally, it’s all up roughly 50 basis points. And if GSG would just slow down a little bit on its margin, which I don’t want to see happen, I think CIG will actually close the gap on our government margin separation here as we move to the end of the year. And it is a matter of mix of work. And so with respect to timing and margin expansion, I expect government is less -- has less of a range. That still will go up because of higher utilization and work, and we could see even higher upside if there’s additional disaster contributions from hurricanes or other events throughout the summer. But I think the big movement on a relative basis should be CIG as we move into the summer.

Very helpful. And then second, in the past, you talked about sort of how you think about the need to add investment -- to add labor or essentially how much additional revenue you can support with your current staff given the strong growth you’re seeing across the platform. Maybe could you just comment on how you’re thinking about that today. And also as you shift toward more of the federal advanced analytics work, how does that change the dynamic around the staff that you need to sort of support revenue growth?

That’s a really good question. We spent a lot of time here with that. I’ll answer the first part consistent with my previous observations on how much more work can we handle with the existing staff we have. By the way, we are adding more staff. The company is growing and not only through new hires, but through staff that we’re adding through acquisitions. But with the current workforce we have, we can handle, just through labor, about an additional 10%, and that’s straight through utilization. We’re, I would say, during the winter, we’re a little bit lower utilization because of Canada and a few other items. But I would say, overall, we’re around 70% utilized on a financial basis, counting everybody, counting Steve, myself, the entire company on a financial basis. We can get up to probably the upper 70s, so let’s say, 70% to 77%. There’s a 10% increase. But the actual amount of revenue is higher than that. The use of data analytics, the use of computer programs, the use of technology has actually decoupled the amount of growth that’s tied to hours that we charge to revenue that we generate. And so currently, we’re about, I would say, 1.5x that. So for each hour an individual works on a project, the use of technology may allow another 50%. So I think about a 15% growth, 10% what I would associate with labor, 50% with technology or efficiency. And our goal has been to turn that into a 2:1. So our target is that we would be able to produce, through the use of technology, efficiency and productivity, double whatever our labor contribution would be. So if we had a 10%, we could generate an increase in revenue of 20%. And so that’s moving toward partial decoupling…

Our next question comes from the line of Tate Sullivan with Maxim Group.

Dan, you mentioned at the end of remarks, your sustainability-linked credit facility of $1 billion in your sustainability report. Is -- how will you track the metrics going forward for the -- are those from all your projects around the world going forward in terms of the emissions reduced? And as a result, that’s what leads to lower cost of credit in that facility. And is this a first facility of its kind in the consulting industry, please?

Well, I’ll let Steve speak to the specifics of the credit facility, but I can say just a few words about the measurements and establishment of it. It was -- yes, it is the first of its kind, certainly, in our industry. If you actually read other sustainability reports, you’ll find common phrases or euphemism such as we’ll see consistent or continual improvement, we’ll do better. Lots of subjectives, qualitatives, want-to-be statements. And when I say the first of its kind, we’re the first ones to step up and actually quantify precisely, not only what will improve with respect to our 21,000 associates around the world and how we’ll reduce our carbon footprint and greenhouse gases that have quantified through our projects. Now with over 70 -- I think we’re up to 75,000 projects per year, we’ve actually taken a set that represents the most significant impact with respect to carbon reduction, both for the GHG reductions, but also for the impact of lives around the world. And that’s our 1 billion person challenge that we’ll make a meaningful improvement in individuals’ lives through the quality and the environments that they actually live and are exposed to. But with respect to how it translates to the financial reduction of our interest costs or the rates, perhaps Steve can say a word on this.

Sure. So we’ve -- so I would tell you that I worked closely with Leslie Shoemaker, our Chief Sustainability Officer, for the last probably a year trying to determine how we do this and track this. And if we meet certain goals and see those improvements, we will see up to about a 5% reduction in our interest rates. And it’s based on 2 different metrics. One is related to GHG items and one is related to the 1 billion person metric.

Yes. And one item, Tate or Steve, I would add to that is it’s not a soft, squishy qualitative. It’s a quantitative goal of working with our bankers. They don’t have columns in their spreadsheets that take words or letters, it’s only numbers. And so it has been quantified. And in fact, we have an internal audit process that goes through and make sure that this is quantified, supported and provided as an audit trail for the basis of the reduction in our interest costs.

And Steve, does this -- just to confirm, does this facility replaces your previous credit facility completely? Is that true?

Correct.

Okay. And then Dan, I imagine this kind of facility helps your customers themselves secure their own sustainability-linked credit facilities, or is that just speculation? I mean the tracking you’re doing for them then in turn they can take to their banks to get their own facilities. Has that already happened or potentially in the future?

Well, that’s a good question, Tate, that there are certain clients and projects that we have that tracking of sustainability goals and metrics are included by the very nature of the scope of work as deliverables that we have. And for instance, the U.S. Agency for International Development has mostly quantified metrics associated with the benefits that we’re providing to these developing countries. However, I will say that many of our clients have not requested that or have harvested that yet from the work that we’re providing. But it is something that we can bring to them. So I would say that it’s something that is available but not necessarily utilized by all of our clients at this time. But I will say it’s interesting. I was at one of our high-performance buildings practices just last week, and we have a sustainability component. And that’s an additional service that’s being pulled from us or asked as an additional deliverable item that can we go through and actually quantify the incremental differences per year. And of course, it always starts with the biggest assignment, which is establishing a baseline. So I would say yes, it will be helpful to them. But right now, it’s still only a small part of what’s being sought out from our clients.

Our next question comes from the line of Alexander Leach with Berenberg Capital Markets.

If we could just jump back to the conversation around employees first. Can you talk a bit about attrition and retention over the last couple of quarters given the hiring market has been so active? What was the net employee yield consultant change before accounting for any employees gained from Piteau and Axiom?

Yes. We do this mostly on our fiscal year. So we go back, the numbers that we have most specifically on a full trailing year. Go back to 2021, which in some respects is not that long ago, it’s 6 months ago. In some respects, the world changed so quickly like a week is a different universe. But in 2021, we were just under 10%. And we consider that a target we would like to be. Our turnover with respect to staff that have been here more than 5 years is roughly 1%, and that includes -- and by the way, what I’m talking about is voluntary turnover. We do have certain projects that we have individuals that are brought on for a finite period and they were intended to depart at the completion of a project. So we’ve excluded those and that includes individuals we bring on for individual disaster response activity because it is possible that during a hurricane or response to a fire or other natural disaster, we can bring on as many as 2,000 or 3,000 people for a few quarters in order to respond to these activities. And in fact, in the second quarter, we ran approximately $30 million worth of additional revenue in the quarter for disaster response activities and you can imagine what type of staff it takes. So just to -- Alex, to make sure we’re defining the same item, we call it voluntary turnover of our non-transitory project-related activities. So the numbers are roughly just under 10%. Turnover for folks over 5 years is about 1%. And I will say, and I’ve said this before on these calls, that individuals in the first 5 years is -- so let’s call it 10% minus 1% is 9% turnover. Is that too high…

Okay, great. If we could go to the state and local business as well. Are there any risks to net revenues rolling off in ‘23, given the strength in disaster response? I imagine it’s a lot of event-driven work there. I know it’s too early to call the next fiscal year. But any thoughts of how we think about the cadence going from here?

Well, that’s a good question. And we’ve been very fortunate we’ve had double-digit growth in state and local, exclusive of disaster response. We’ve been -- we’ve tried to be as transparent as possible with respect to how much of our quarterly growth rate in state and local has been contributed to by disaster. This last quarter, we were 11%. So we’ve been running between 10% and 20% growth with what we call our underlying municipal work. That’s been driven by recovery in state and local budgets, lower unemployment, rising tax receipts because of real estate and other items. Some would comment that we’ve had optimal levels at the state and local level, what else is going to contribute. And we would point out to the IIJA or the Jobs Act or the infrastructure stimulus, which has a significant portion of the incremental $550 billion of federal funding that will make its way to state and local budgets for grants, joint funding and other projects for technical engineering and infrastructure services we provide. That’s going to come. We think it’s a 2023, or at least federal government calendar which we’re on. 2023, which means late fall or into next fiscal year. We’ll actually see the translation from the bill actually passed, the law being passed to then the funding coming out. So for us, we see the health of the state and local budgets still funding these programs to go forward with additional infusion in 2023. Now whether or not that’s earlier or late 2023 is yet to be seen. But we think that, that source of funding will continue to bolster and really move funds dedicated to the type of work we do to all-time highs. So that’s what we see as underpinning a later 2023 without getting into detailed guidance on a percentage basis.

Great. And if I could just slip one more in on Afghanistan very quickly. Were there any revenues recognized from Afghanistan in H1? And if so, what’s the roll-off impact next year from those revenues?

In the first half, we had minimal revenues. I think the answer is 0 or close to 0 in Q2. In Q2, we had a very little bit, which was basically demobilization in October. There was some thought that coming out of the departure from the country of Afghanistan from development agencies like USAID. There was some thought that we keep some of the staff in country or the local nationals hired on payroll because there would be an agreement to go back in very quickly, that this just wouldn’t be in a position that they wouldn’t take development aid going into the winter. It appeared to be not -- it turned out to be not true. And so it was very de minimis in Q1. In fact, I would say I would not call our Q1 year-on-year comp headwind. So for 2022 that we’re in, it will be roughly an $8 million to $10 million per quarter headwind, relatively even revenue in 2021. So the comps are roughly $10 million, $10 million, $10 million and $10 million. So I think overall, total revenue was around $50 million in 2021. But then after that, it really it really dropped to essentially de minimis. So the headwind on that comparison for Afghanistan is just a 2022 artifact.

Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Batrack for any final comments.

Melissa, thank you very much. And thank you all for your insight, questions and interest and support of Tetra Tech. And in closing, I really want to commend all of the associates at Tetra Tech. We really had a fantastic second quarter. And in even areas where it’s lower, our folks were very efficient in their programs and setting us up for a really productive third quarter, which we’re about 1 month into. And we look forward to presenting the results of both our third quarter and the progress through this year with you in about 90 days from now or next quarter. I hope you all have a safe day and a good rest of the week, and I’ll talk to you next quarter. Thank you.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.