Good morning, and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is the copyrighted 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; Steve Burdick, Chief Financial Officer; and Jill Hudkins, President. They will provide a brief overview of the results, and then we'll open up the call for questions. I would like to direct your attention to the safe harbor statement in today's presentation. Today's discussion contains forward-looking statements about future business 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 undertakes 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. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. With that, I would like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Well, thank you very much, Donna, and good morning, and welcome to our fiscal year 2023 Third Quarter Earnings Conference Call. We had an excellent third quarter. We're advancing our growth strategy while rapidly integrating the RPS Group, who just joined us at the end of January of this year. [Technical Difficulty] performance have all exceeded our very high expectations here. Together, we now have 27,000 staff working worldwide on over 100,000 projects or 22,000 different clients. With about $5 billion a year in annual revenue, which is up over 30% year-over-year, were recognized as leaders in water and environment with #1 rankings by the entering news record for well over a decade. We see 3 major catalysts that will drive our growth in the future. First, we're just beginning to realize revenue synergies with the RPS Group. Today, we're bidding on hundreds of millions of dollars in new programs that are leveraging the benefits of our collective client base and the high-end capabilities of our workforce. Second, in the United States, we see the pace of funding from the IIJA and the IRA stimulus programs just beginning to increase as major contract vehicles are being put into place by our government clients. And third, we see spending commitments increasing for climate change-related programs in water supply, watershed management and renewable energy, especially in the geographies of the United States, the United Kingdom and Australia. Our growth catalysts and the margin expansion will continue to be underpinned by leveraging our Tetra Tech Delta technologies that we're utilizing all across our enterprise. Using tools such as generative AI-enabled Fusion map platform that we have here at Tetra Tech, we're providing risk mitigation for thousands of miles of rail systems. We're rapidly assessing tens of thousands of buildings and infrastructure, and we're…

Thank you, Dan. So as you just heard from Dan, we had an excellent quarter with results coming in better than anticipated. Those improvements also extend to our cash flows and capital allocation related matters. So cash flows generated from operations was strong, totaling $133 million, up 35% over last year. And including certain outlays for RPS transaction costs as we included in the reconciliation, cash from operations was $135 million. In addition, we paid down $158 million of debt in the quarter. Our focus on working capital and cash flows has resulted in our DSO maintaining an industry-leading standard and all-time record low for Tetra Tech of 58 days. This is a sustainable improvement from prior years, and the slower DSO continues the trend that reflects the outstanding work that our project managers lead relative to higher-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and all of our geographies. Regarding our dividend program, we paid out $14 million in dividends in the quarter. And I want to announce that our Board of Directors approved our quarterly dividend of $0.26 per share for this quarter. This is our 37th consecutive quarterly dividend and our ninth consecutive year of double-digit year-over-year increases for dividends paid. Now as Dan talked about, our recent closing of the RPS acquisition, which was just over 6 months ago, has been going quite well in regards to integrating the people and projects of Tetra Tech and RPS together. And I'd like to update you on our financial plan and current status for the integration of RPS, which is a significant opportunity over the long term for Tetra Tech. So when looking out over the next 3 years, we expect to increase our actual EBITDA margin from under 5%…

Thank you, Steve. We have all been eagerly awaiting the flow of money from once-in-a-generation U.S. federal stimulus programs that were passed in 2021 and 2022. We IIJA funding is beginning to flow to federal agencies and established programs. IRA incentives are driving new project development and offshore wind. And the chips for America funding process was rolled out just earlier this summer. This decade-long federal funding will be well distributed across Tetra Tech's core markets of water, environment, sustainable infrastructure and renewable energy. I'm excited to share a few examples of recent Tetra Tech wins that demonstrate early indications of the federal funding ramp-up. Tetra Tech's successful track record delivering industry-leading navigation and water control structures for the U.S. Army Corps of Engineers resulted in Tetra Tech being awarded the Kentucky Lock program. The first task order awarded under the $200 million IIJA Army Corps of Engineers contract that Dan just mentioned. The IIJA also provides significant federal funding to support state water projects that mitigate the impacts of PFAS and drinking water supplies. Dayton Water selected Tetra Tech to provide high-end consulting to support their PFAS management program, which received IIJA funding through the state of Ohio. The inflation Reduction Act is providing both funding and tax incentives for renewable energy, Tetra Tech's #1 ranking in wind power and our global expertise in floating offshore wind permitting scored a major project award of the Coast of California. Tetra Tech will support the early development of a 2-gigawatt floating offshore wind program that will benefit from incentives provided in the inflation Reduction Act. Another nearly $400 billion of programs that we see developing is the identification and treatment of emerging contaminants in our water supplies. Tetra Tech has provided innovative water solutions since the company's founding in 1966. Tetra…

Great. Thank you very much, Jill. I'd like to provide a guidance for both our fourth quarter and for our updated guidance for all of fiscal year 2023, in fact, for our increased guidance for the entire fiscal year of 2023. I'll begin with our consolidated outlook or guidance for the fourth quarter. This consolidated guidance is both for the legacy Tetra Tech operation and for the contributions of RPS. If you're following along on our investor slide deck, you'll actually see for your use. We've broken down the contributions from both the legacy operations and RPS, but the numbers I'll be providing are our consolidated guidance for net revenue and earnings per share for both the fourth quarter and for the full year. For the fourth quarter, our consolidated net revenue guidance is for a range of $965 million to $1.015 billion in the quarter, with an associated earnings per share of $1.43 to $1.48. For the entire fiscal year of 2023, we have updated and increased the -- both the projection and guidance for net revenue and earnings per share as follows: our new updated net revenue guidance is for a range of $3.66 billion to $3.71 billion with an associated earnings per share of $5.23 to $5.28. If you are following along on the slide presentation, you can see the assumptions. I'll highlight a few of these. Our guidance for the year does include intangible amortization of $15 million or $0.21 and that's incorporated already into the annual guidance. It does include effective tax rate in the fourth quarter of 27%, $54 million average diluted shares outstanding. This does exclude any contributions from future acquisitions that we would make between now and the end of the fiscal year. It also excludes specifically the transaction integration expenses associated…

[Operator Instructions]. Today's first question is going to be coming from Sean Eastman of KeyBanc Capital Markets.

Team. Nice update here. So I thought a good place to start would be quite a material beat versus the quarterly guidance range for EPS. I didn't hear anything extraordinary or episodic called out. So perhaps just some high-level thoughts on really what's driving the momentum here in the quarter.

That's a great question, Sean. The -- you didn't hear a specific area of beat with respect to any single unusual contributor, whether or not a quarter ago in the second quarter, we had an extraordinary unexpected contribution for work from USA in Ukraine, but that was not the case. So the work -- this was not driven by a beat specifically in USA or Ukraine or any other one location. We've historically had significant contributions in the individual quarters from disaster response because of fire floods, hurricanes. I actually did receive a few calls and questions that is our performance going to be up markedly because of the fires in Canada. No, that was not a market opportunity. We were we certainly observed here in the U.S., the smoke and ash from up north, but it was not actually a project driver for us. It was, in some ways, I've had some around here, say it was a an unexciting quarter because it was really very broad-based. I would actually characterize it as an exciting quarter in that we saw high performance across the board in all of our end markets. And I was really pleased to see we've done well in our state and local business. And if you want to say is there are a few areas that were a little bit better, but I'll tell you not much standout compared to others, but I was glad to see our state and local work actually pick up on its year-to-year growth. It's been growing. Historically, it was up at 15% to 20%. Last few quarters, we've seen it at 10% to 12%. I was really glad to see it back up at 16%, sort of above and mid-teen rates. That was -- I guess, I would say…

That's great, Dan. That's -- I think that's what everybody wants to hear. And then if I just do some calculations sort of pull out the foreign exchange headwind this year, pull out the episodic work this year and the adjustment for last year and look at sort of underlying organic growth. It seems we're trending in roughly the mid-teens in terms of organic net revenue growth. And it seems as though you're suggesting new order momentum is accelerating. So what should we extrapolate from that, Dan? I mean, does it feel like this kind of pace of growth can be sustained?

Well, I feel really good about where we're at now. I guess about -- I talked about revenue growth, which was the beat on revenue and earnings per share wasn't driven by any one area. I also say it's true on backlog because that really is the best indicator of where we're going to be on our growth coming up. I'll also say that there was no single big order that drove that increase of the 25% year-over-year or over $100 million sequentially. Now if you take the midpoint of our guidance for the fourth quarter, I will talk about organic growth and what we've included in our guidance, you'll see we're in the mid-teens. So you're right with respect to what we posted up to this point, sort of mid-teens organic growth on our revenue and slightly better than that on our earnings. We have included that guidance for the fourth quarter. I would say, directionally, things look very strong, but I'm going into 2024. And I think Jill Hudkins provided some good insight into a few areas that are going to contribute. But I do want to stay away from specific numbers on fiscal year 2024. I know it's only 90 days away, and I'll provide that specifics on the next call. But I would say we don't see anything from an economic outlook from the markets we're in or from our clients in any of these geographies that looks like there's a material change as we're moving forward.

Okay. I'm going to sneak one more in. Just relative to the RPS business, sort of 2 quarters, it's been in the mix, 2 quarters. You have kind of walked up the outlook indicated it's tracking ahead of plan now 2 quarters in a row. Perhaps what in particular would you communicate to investors is driving the better-than-expected results out of the gate here from RPS.

I attribute it -- well, first of all, they have an excellent workforce. They are experts in the areas that they serve primarily in the U.K., Australia, of course, Ireland and Norway with a reasonable presence also in Holland, the Netherlands. But I would say it's really the culture. The culture within RPS is very closely aligned to what we have at Tetra Tech. They're not commodity providers. They're not final detailed designers that are doing shop drawing. They really are providing high-level value, front-end consulting services that are very much in alignment with Tetra Tech. And I would say that having now had them with us for just 6 months, so a couple of quarters. I'm amazed at the high level, I thought Tetra Tech was very early in the overall life cycle process. I want to talk about a vertical from identifying a project and being advocate and doing the conceptual alternative review. RPS actually comes in even before Tetra Tech. Some of the advisory work that they do regarding advocacy with work for Department of Public Works, different political parties on how they would prioritize their infrastructure and renewable energies and climate change work is actually is very complementary. I didn't think you could go much earlier in the life cycle than us, but RPS certainly does bring some of that in their advisory work, particularly in Australia. It opens up a whole new set of clients and project opportunities. And where I think it could go, and this is aspirational in my part, I don't want to put it specific data on the calendar at this moment. But I have spoken in the past that RPS historically had margins higher than that of Tetra Tech. They've had numbers up high teens, approaching 20%. And I think that given the alignment with their Tetra Tech colleagues, I think culturally, we're very similar. I think that the priority on being best-in-class being a technical leader and that it's about quality, not quantity, has aligned very well with us. And that's why we've seen -- I think I've seen very little or no disruption on the workforce with respect to those that are client-facing and project facing. I've seen their performance going up. I've seen their backlog going up. And to a certain degree, I think some of the RPS folks have. So, let me stand next to the Tetra Tech colleague and show Tetra Tech how to do it at even a higher level, which I'm more than welcome here in the company.

The next question is coming from Andy Wittmann of Robert W. Baird.

Great. I wanted to talk about Tetra Tech Delta. This is not a new thing at Tetra Tech in the last few years. You mentioned at every conference call. But I feel like myself and I bet others would probably benefit from understanding this in a little bit more detail. So Dan, can you talk a little bit more about -- Tetra Tech Delta its own business? Or is it intertwined with kind of existing contracts? Maybe if you could talk about how its margin profile compares to the rest of the company or maybe even its growth rates. I don't know to the extent that it's relevant, maybe just giving an example of contract, a larger contract that were really able to employ these solutions just to give us as investors and analysts a little bit better sense about kind of what this business is and what we can expect for from it in the future. .

I'll tell you, Andy, the Tetra Tech Delta is one of the areas that I'm really excited about here at Tetra Tech. For those that have worked with me over the years, I came up from the technical side of the house. I think Tetra Tech has been a leader in modeling research and development as a think tank, it's really its origins. And to see the Tetra Tech delta, which has started off as the -- well, we've always had these models that we've used. We used the Tetra Tech delta to encompass the collection of the tools that we use internally that differentiate us in the marketplace. We have tools that we've developed for the federal government that we've been paid hundreds of millions of dollars over the years to have the best-in-class technical research that then can be deployed through the federal government, through state and locals that they give out on grants, in fact, become the underlying science and technology used by the world scientists and engineers to perform their work. And if you really dig deep enough, you'll find Tetra Tech at the origins of a bunch of that work. So the Tetra Tech Delta did start as far as our communicating publicly is the tools that are embedded in all of the work we provide. So we have all sorts of technology and tools where we can do remote sensing and remote assessments for green buildings for heat loss, heat transfer, damage erosion on things such as sea walls that can actually be seen through 3D cameras can then be identified and have sequential erosion rates and determine what type of operation and maintenance. It allows us to do work that would normally take 100 people 2 years to do can now take 10…

That was a comprehensive discussion. I appreciate that, Dan. Maybe a little bit more mundane question, but important, nevertheless. I was just hoping you could talk about the margins inside of the backlog that you've put in here during the quarter and how they may compare to the margins that were in the backlog before. Are you seeing any movement there given the overall demand trends in the marketplace?

I would say yes. Yes, we don't call out -- it's interesting. We -- you hear us begrudgingly talk about gross margins. So I'll actually talk about embedded operating margins in it. Because I've always thought gross margins is just a pocket trick where people call overhead G&A and then they don't count the cost. So I actually like to go to operating margins. So -- it is typically 50 to 100 basis points higher and sort of separate out the discussion I just had on the delta and the generative AI work we're doing. So it is tending higher. It is -- some of it is actually pricing power because some of the work that we're doing is very high demand, very fast track that has to be done. So there is some pricing power. But the rest of it is kind of mix. We are taking some of the lower work that we have in the company that might be considered being commoditized or actually having lower leverage, and we are moving more to the high end. And so we are finding through a combination of some pricing ability in the marketplace and just moving to a higher end mix. And I think that includes some of the advisory work that we talked about with RPS and others. So there is higher margin embedded in the backlog we have. And it's typically our backlog will burn off in a year. I think we say 85% of next year's revenue is in the backlog we have. another 15% would go slightly beyond that. So it's short-term backlog. And so that increase that we've talked about a 50 basis points increase year-over-year and our margin expansion would be reflected in that backlog that we've just booked.

The next question is coming from Michael Dudas of Vertical Research Partners.

I'm still getting over the comment about RPS with higher margins at Tetra Tech. You're really challenging the Tetra Tech folks now teams or at least the expiration for sure.

No, that's true. And I put myself in the bucket of the Tetra Tech folks. I'm wondering I need to get up a little earlier in the morning.

Excellent. I appreciate that. Couple of overall thoughts. Maybe share some -- there has been noticed much better activity out of Canada. And it seems like it kind of fits very well with tools in the mid-market you say. Is there opportunity for above-average booking and revenue growth across that market, especially in your water and, say, the renewable side?

Renewables has been very strong up there. As to the area that if you'd say Canada, our infrastructure and I'd say it's a provincial infrastructure in some of the large cities has gone really well for us. We've seen more spending there. Of course, there's been a high focus. I don't want to make this a negative item, but there have been a lot of economic activity coming out of Canada, which means a lot of rail. There have been some derailments associated with floods and other items, and we're glad to be working for some of the rail majors on infrastructure on that side. So that's been very busy for us. It is making use of some of the digital tools we talked about, including we have RailAI and a number of other programs like that. So water has been a big issue. I think that when you -- at least the last 30 days, you talked about Canada, you talk about fires in both British Columbia and the East. So those are areas that we're looking at for habitat work we do for environmental restoration, of course, for protection of watershed. So I kind of go back to my earlier comment about broad-based. Is Canada doing well. Yes, Canada is doing very well. But relative to other geographies we have, I would say that if this was 2 years ago, 3 years ago, I'd be glad to give even more accolades to Canada, but I'll tell you the other geographies are matching it across the board. The one area that's coming out of Canada that has done particularly strong, and I'm hoping to bring the expertise even more prominently here to the U.S. is our high-voltage engineering. I've talked about this before. Tetra's well over 500 high-voltage engineers. It's a very specialized technology. It's people that are typically 500 kV and up. I know our electrical engineers will chastise me later sending us really $480 and up. But that capability to have well over 500 high-voltage engineers that can work at a very specialized market where you have transmission from the renewable energy sources. Every single one of them are in some of off the beaten path location where you have to have local transmission to an interconnect to actually be used for the -- and it's even more true with the offshore wind because most people don't have factories sitting out in the ocean. So you really do have to complete the transmission, both onshore to the interconnect and then push it into the grid so that you can have green energy being used and reducing the carbon footprint. So that work is really coming primarily out of Canada, out of Ontario for us, a fantastic group, great management team, excellent technical leaders, and that's something that could actually be an outperformer even above the strong performance across the board. And for us, I put that under our Canadian expertise that differentiates us.

I appreciate those thoughts. And I guess my second question -- follow-up question would be, you talked about certainly broad-based strength amongst your segments and geographics. The success so far in fiscal year 2023. As you kind of look ahead to the year-end into 2024, do you see the pipeline of opportunities growing at similar better rate than what you've been booking in revenue and certainly leading to, I would say, continued plus 1 book-to-bills as you look to 2024. And certainly, in that pipeline, would those margins you talked about in response to Andrew's question, are somewhat in that similar range as you're looking to book new business?

Well I thought Jill highlighted the one that receives the most attention, I would say broadly, is what's the timing and the magnitude of the opportunities coming out of the U.S. stimulus programs? And what I'm glad to see and Jill highlighted that on her slide, the one item that we've not talked about too much and we caution not to infer too early of a conversion from the bill being passed to converting it to revenue is actually key program wins. So I'm really glad to see that a key program win is a contract is being put in place. And you saw programs as she spoke regarding City of Dayton, the U.S. Corps of Engineers that both she and I mentioned $200 million. They're using other vehicles. So I think when you ask the question, are there other things that could contribute to allow book-to-bill at greater than 1, even with the revenues increasing so high? I think new work actually coming out now in going from contract capacity into orders or task orders. That's what's going to go into our backlog as we go into 2024. And I think it will ramp -- the revenue will ramp through '24. But what's going to come first is going to be what we're seeing now is contract capacity or contracts. For us, others will actually dump that into their backlog. They'll do some factor and say $200 million. I think I'm going to get x amount of it, and let me just count it. We don't do that. We only count it after you've given us a task order and you've funded it and you've authorized us to do the work. So for us, you'll watch it translate I want to say a little slower than others who will account something that doesn't exist. We'll count it when they've given us both the authorization and the funding. So that will allow the translation to backlog to begin to pick up as we move into '24. And yes, I do believe it carries higher margins overall. It's not just government but also commercial work on the renewable energy and climate change that we're doing for our commercial clients.

At this time, I would like to turn the floor back over to Mr. Batrack for closing comments. .

Well, thank you very much, Donna, for turning it back and for moderating the questions. Great questions. I hope to have not only good performance in the coming quarters as we did here, but I hope to have individual high points that exceed everything else. So we really do have something that is an outlier that would be even something to highlight and spend even more time on. I know we're getting close to the end of our fiscal year. I know that our fiscal year 2024 is -- for us, we're in a U.S. federal calendar starts on October 1, so it's only about 6 weeks away, 7 weeks away. I'm really looking forward to a strong finish to this year. And I'm really looking forward to providing our guidance for 2024. I think it will be the -- among the last times you hear us talk about Tetra Tech legacy and RPS, I've not broken it up into these details because RPS is different than Tetra Tech. We are one and the same, but I think the performance of the I guess I'll call it underlying our legacy company has been so strong, and I want to track the contributions of RPS. We've provided that detail. But I will tell you, within the company, we are 1 company. We're working together. We have more collaboration, more revenue synergies, more opportunities together. And I think as we move into '24, I'm looking forward to presenting to you all what we are doing together as one number, one company, one future and on excellent set of performance. And with that, thank you very much for joining us for this quarter's investors call, and I'll talk to you in next quarter roughly in 90 days. I hope you have a great rest of the day and week. Bye.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and walk off the webcast at this time, and enjoy the rest of your day.