TTEK - NASDAQ

Good morning and thank you for joining the Tetra Tech Earnings Call. As a reminder, Tetra Tech is also simulcasting the 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 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; Steve Burdick, Chief Financial Officer; Leslie Shoemaker, Chief Innovation Officer; and Joseph Fong, High Performance Buildings Global Lead. They will provide a brief overview of the results and we will then open 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 the various risks and uncertainties, including the risks described in Tetra Tech’s periodic report 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. [Operator Instructions] With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

Great. Thank you, and good morning. Welcome to our third quarter fiscal year 2024 earnings conference call. I’d like to start off with thanking everyone who attended our Investor Day that took place just a little over 2 months ago in New York City. At that event, we set out our vision and our goals for our fiscal year 2030, which focuses on our high-end consulting and water, environment and sustainable infrastructure. I’m pleased to report that Tetra Tech continued our strong performance through the third quarter of this fiscal year 2024, delivering both record quarterly revenue and an all-time high backlog of well over $5 billion for the first time in the company’s history. Through our focus on front-end advisory and consulting work, we continued to expand our margins, with this quarter delivering a 13.3% EBITDA margin, up 120 basis points from last year. Due to our strong performance and visibility, I’m pleased to say that we’ve been able to raise our full year guidance for fiscal year 2024, and I’ll provide the details of that on our updated guidance slide here in just a few moments. During today’s call, I’m going to begin this call with an overview of our third quarter and outlook for the remainder of the fiscal year. Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance, will cover our capital allocation. And I’m pleased to say he will discuss the scheduled stock split and some of the details associated with that. Dr. Leslie Shoemaker, our Chief Innovation will provide an update on our global water markets. And I’m really pleased today to have Joseph Fong with us, our High Performance Buildings Lead, who’s going to provide insight into some of the newest approaches that we have in that market, which include cooling of high-performance data centers and chip fab, our building systems. For the third quarter, we had a very strong third quarter this year. Our net revenue increased 12% to $1.11 billion in the quarter, setting a new record for any quarter in the company’s history for revenue. Our EBITDA increased 32% to $129 million in the quarter, which is almost triple the rate of our net revenue growth, directly in line with our goal to increase margins more rapidly than our revenue growth. And finally, in the quarter, we generated an all-time high for the third quarter earnings per share of $1.59, up 42% from the prior year. I’d now like to present our performance by our reporting segments. In the third quarter, our Government Services Group or the GSG segment was up 25% compared to last year to a total amount of $488 million, and the segment generated a strong 14.6% margin, up 60 basis points from the prior year. The key driver for GST’s margin expansion was an increase in higher-margin environmental and advanced water treatment work. The Commercial International Group, or our CIG segment grew net revenue by 4% year-over-year and delivered a 13.9% margin, up an impressive 230 basis points from last year. Now that 230 basis points increase, about half of that increase in CIG margins driven by an increase in the RPS margins and the work that they perform from our international operations. The RPS activities have now reached an 11% margin for our third quarter of this year, which is up 400 basis points from last year’s 7% margin that we had in the third quarter of fiscal year 2023. The other half of CIG’s margin expansion was driven by strong performance in our international operations, especially associated with our front-end consulting environmental work and renewable energy projects that we have in all of our international locations. I’d now like to provide an overview of our performance by our end customer. Work for our U.S. federal clients was up 34% from the same quarter last year, driven by increases of work that we do for USAID, our civilian and defense environmental programs. Without including the extraordinary work that we performed in Ukraine in the quarter, our federal revenues grew at an underlying 18% year-over-year rate. For state and local, if you exclude our disaster response work, our state and local revenues grew at an 8% rate, continuing to be driven by the work that we do in advanced water treatment for cities and utilities all across the United States. Our U.S. commercial net revenues were up 7% year-over-year driven by renewable energy programs and environmental remediation services. And finally, our international revenue now represents about 40% of the company, and those revenues grew at a 5% rate during the quarter. As we’ve presented before on this call, we’ve been focusing on margin expansions in the RPS operations that joined us here just about 1.5 years ago. We’ve been very focused on reducing select programs that have become commoditized and represent low or no margins within RPS. So this changing of the portfolio has been resulted in RPS’ international revenues remaining relatively flat year-over-year. So if you exclude the RPS’ international operations, which we are by purpose and objective reshaping the remainder of our international revenues, actually grew at nearly a 10% rate year-over-year. I’d now like to discuss our backlog, which increased to an all-time high of $5.23 billion, up 19% year-over-year and grew more than 10% sequentially. We received over $2 billion in orders during the third quarter alone, which represented a book-to-bill of 1.4, one of the highest rates that we’ve seen in some time here at Tetra Tech. I’d also like to note that Tetra Tech only reports backlog on orders that are contracted, funded and authorized for us to proceed to doing the work. So this does not include any unfunded orders, which is a completely different method and much more conservative than you’ll see reported anywhere in the industry. This quarter’s orders included first-of-a-kind projects in PFAS, which we press released here just recently last week, large-scale programs for advanced water treatment and major initiatives to address climate mitigation and adaptation worldwide. At this point, I’d now like to turn the presentation over to our Chief Financial Officer, Steve Burdick, to present the details of our financials. So Steve?

Thank you, Dan. So I’d like to now provide an update on the results for year-to-date performance as well as our working capital, cash flow and capital allocation through the third quarter. So net revenues increased by 18% to over $3 billion year-to-date driven by strong end markets across all the geographies. Our EBITDA and operating income increased at a higher rate than our top line revenue growth. As Dan discussed earlier in the call, we continue to focus on the front-end consulting work for water and environment, which are carrying higher margins across all of our end markets. And as such, EBITDA came in at $414 million or up 41% year-over-year and the EBITDA margins improved 200 basis points year-over-year. Our operating income increased 43% to $357 million and margins improved to 190 basis points year-over-year. These margin increases were primarily driven by improvements in operations across both our GSG and CIG markets. And then CIG, as Dan discussed, we are seeing the successful results of our efforts related to the RPS acquisition from optimizing RPS’ portfolio of projects and better mix overall. Year-to-date, our EPS of $4.40 increased compared to last year. And if you recall, last year included an FX hedge gain of about $1.23. So excluding this onetime FX hedge gain, EPS grew at 53% year-over-year. I would like to now provide an update on our working capital and our cash flow for the third quarter. So cash flows generated from operations for the third quarter were $141 million and exceeded net income by over 64%. The trailing 12 months totaled $376 million, which was up 23% in the previous trailing 12-month period. Now over the last 12 months, cash flows exceeded net income by more than 100% and when we look back over the last – our historical financial results, we noted that cash flow from operations has exceeded net income every fiscal year for the last two decades. Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 54 days versus the industry average of about 80 days. The third quarter results saw an improvement of 4 days from last year, and this historical low DSO for working capital is sustainable over the long-term as we continue to make cash flows from operations a priority. The slower DSO metric also provides significant insight into our core business as it 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 geographies. And our net debt amounts to $650 million and the net debt on EBITDA was at a leverage of 1.15x, well below a year ago, which was at 1.73x. Furthermore, our current leverage is about half the leverage multiple at the time we acquired RPS as it was about 2.3x in January of 2023. I would like to now present our capital allocation overview as of the third quarter of fiscal 2024. We have a significant amount of liquidity available to invest in organic and acquisitive priorities. This balance between fixed rate and variable rate debt helps to mitigate interest rate risk as we look to invest in key strategic areas. This current mix of debt exposure has resulted in a weighted average interest cost of borrowing at less than 4%, which is 30% lower than the current Fed borrowing rates. We have a strong pipeline for acquisitions which align towards technology innovations, especially in water and environmental spaces where we have led the markets. Regarding our dividend program, I want to announce that our Board of Directors approved a $0.29 quarterly dividend, which is a 12% increase year-over-year. This is our 41st consecutive quarterly dividend, and our dividends have increased by double digits every year since we initiated these payments. As we revised our capital structure in the last year to take advantage of the credit markets to support our financing needs, I want to remind shareholders that we do have available a significant portion of the $400 million from the stock buyback plan approved by our Board of Directors as part of our disciplined capital allocation strategy. And as we’ve continued to generate record financial results, our stock price has increased significantly over the last 10 years. I want to announce Tetra Tech’s 5-for-1 stock split that was approved by our Board of Directors. The impetus for this decision was very much based on the input we received this year from both analysts and our investors. The primary benefit for our shareholders is that we want to increase liquidity and lower trading costs for institutional and retail investors and our employees will benefit from the stock split. The stock split will be effective at – after the close of trading on September 6, thus, this 5-for-1 adjusted trading will begin when the market opens on September 9, and you can find additional details in our press release. Finally, we will provide to investors and analysts the financial disclosures related to the share count where we will recast all historical information in our next Form 10-K. So I’m very pleased to share these really strong results through the third quarter of 2024. I want to thank you all for your support. And I will now hand the call over to Leslie and Joseph to discuss our leading global water business.

Thank you, Steve. Two of the areas that we discussed during our Investor Day, where our significantly expanded opportunities for water-related services in the United Kingdom and the new requirements for PFAS water treatment in the United States. Most recently in the United Kingdom, we have a newly elected labor government, which has actually reemphasized the importance of their water quality management in rivers, flood management and water supply protection. These priorities and the associated aggressive goals that have been set for the new AMP8 cycle, which is just beginning, directly aligned with our technically differentiated expertise and industry-leading software solutions such as real-time control, spill management using CSOC, flood risk management using our fusion map platform, and advanced leak detection solutions using our water net system. In the U.S., similarly, the recently released national need survey reinforces increased concerns regarding water quality protection and advanced water treatment again, directly in line with what we do. Today, we are seeing our municipal clients begin to include PFAS treatment and updates and expansion of their water treatment facilities, which is a good indication of the integration of PFAS into long-range branding across our more than 500 municipal clients. And in California, they have just [indiscernible] a new $10 billion bond measure that would commit funding directly aligned with our expertise in water quality, advanced water treatment and watershed [indiscernible] programs. And with that, I’d like to turn the presentation over to Joseph Fong to discuss more of our water-related opportunities in high-performance buildings. Joseph?

Thank you, Leslie. Tetra Tech’s market-leading and advanced water treatment expertise has become a key competitive advantage in two of our high-performance buildings [indiscernible] fastest growth markets, advanced manufacturing fabrication and high-tech data centers. As we shared during our Investor Day in May, the U.S. investment to boost chip production incentivized manufacturers to commit over $200 billion for fabrication manufacturing facilities. In addition to requiring high-performing energy-efficient buildings, these fabrication facilities also require the production of ultrapure water that is essential for the ultrathin processing with silicon wafers we use to create computer chips. We are seeing increasing demand for our advanced water treatment solutions as chip manufacturers initiate expanding their ultra-advanced water processing capacity for new and upgraded facilities and municipalities invest in augmenting water supplies and pretreatment to attract fab facilities into the jurisdiction. Today’s AI servers require more computing power and generate much more heat than their predecessors. Tetra Tech is working with our high-tech data center clients to implement advanced liquid cooling solution, such as immersion liquid cooling and direct-to-chip cooling. Tetra Tech’s expertise in water chemistry and hydraulics is essential to designing liquid cooling systems which can capture up to 80% of the total heat [indiscernible] production of over $500 billion in future investment forecasted in new computing infrastructure, including a 50% increase of current global data center capacity by 2029, we expect the design of high-efficiency cooling solutions to be a significant growth market for us. I’ll now like to turn the presentation back to Steve Burdick.

Thank you very much, Joseph. I’d now like to present our guidance for the fourth quarter and our updated guidance for all of fiscal year 2024. Our guidance is as follows. For the fourth quarter, our range – our guidance for the range of net revenue is a range of $1.09 billion to $1.14 billion, with an associated diluted earnings per share at the range of $1.82 to $1.87. For the entire fiscal year of 2024, our increased guidance is for a revenue range of $4.27 billion to $4.32 billion. The midpoint of that range would actually represent or does represent a 15% increase in our net revenue from what we realized in fiscal year 2023. Our updated earnings per share guidance range is for a total of $6.23 to an upper end of $6.28 or $0.05 range. The midpoint of that range represents a $0.23 increase in our earnings per share from what we realized in fiscal year 2023. A few assumptions. If you’re following along on the webcast, you can see these are based on a pre-stock split numbers, which represents our 54 million shares outstanding. It does include intangible amortization, which is approximately $0.67 per share. But we do assume in the fourth quarter, we will have approximately a 27% tax rate. And as in past presentations, this does exclude any contributions of revenue or income that may be realized from acquisitions that we would complete between now and the end of the fiscal year. In summary, this morning, we see strong demand for our differentiated leading science services all across the water and environmental markets that we work in. Our third quarter results set new all-time records for revenue, net revenue, backlog. And as Steve indicated, our day sales outstanding or our cash generation, and we set third quarter record results for operating income, EBITDA and earnings per share. Our strategic focus on high-end water and environmental consulting is driving margin expansions, very much in-line with our longer-term goals that we presented in our Investor Day here back in May. As a result of our strong performance and confidence in our outlook, I’m pleased that we were able to raise our guidance for fiscal year 2024 for both net revenue and earnings per share. We’re looking forward to implementing our stock split. As Steve indicated a few moments ago, effective aftermarket closed on September 6 in 2024 to provide even broader access to Tetra Tech’s stock for all of our investors. And with that, Tania I would like to open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from Tim Mulrooney with William Blair. Please proceed.

Yes. Good morning. Thanks for taking my questions. I mean your backlog is really healthy right now of about 20% year-over-year. It’s the first thing that caught my eye on your release. And I’m just curious how investors – how you think investors should interpret this in terms of your visibility for hitting that annual organic growth target of 6% to 10% as you head into the fourth quarter and into next year?

Well, that’s a really good – that’s a great question. If I have any commentary with respect to details on net increase, I know that we’re up 19% in the quarter year-over-year. I will say that some of that, I think, was timing that I anticipated some of the orders would have come in our second quarter. So I will say there’s a little bit of catch-up included. So one thing I would caution our investors is not to interpret that the backlog growth is going to directly translate into our net revenue growth. You do see the 6% to 10% ranges between double the triple the level of our 6% to 10%. I would say that we did have one extraordinary area, one question we’ve had internally [indiscernible] the numbers is very much at the high end or above what we would expect. We did have some extraordinary contributions of orders that went into backlog from Ukraine. But I don’t want there to be misunderstanding that Ukraine was the majority of the contribution through USAID. It represented about third of that increase. So of the 19%, about 6% of that or about $160 million would have been extraordinary in the quarter. So we still are well over double-digit year-over-year, which is above what we anticipate our organic growth rates we’ve been targeting at this time. So it should give us great visibility of course, coming into the fourth quarter, but really all the way into 2025.

Okay. That’s helpful color. I want to switch gears really quickly to a regulatory conversation because it represents a preponderance of questions that we’ve been getting from investors lately and I was hoping you could comment on this. We heard that there are certain environmental regulations that may be more susceptible to being overturned now that Chevron deference has gone. Are there areas of your business that you think are exposed or susceptible to changes in regulation as a result of this ruling?

That’s a really good question. It certainly was – a heightened sense of analysis and evaluation. What does the Chevron Doctrine or the Chevron deference mean to our business? And we actually dove into it quite deeply over the past couple of months since the Supreme Court’s ruling on this has come out. And we actually try to simplify it in three different ways. First of all, most of the work that we do for environmental compliance activities is actually regulated at the state and local level. So in state regulations, it’s regulated by local counties and cities, and it’s actually not driven by federal regulation interpretation. So it only has a very small intersection or nexus with respect to the work we actually do. Second of all, the largest programs that we have are for the U.S. federal government. So it would be like the Department of Defense work what we do, the work that we do for the Army Corps of Engineers. And it’s not the practice of the U.S. federal government to contest regulatory determinations and take it to court. So the U.S. federal government doesn’t sue themselves and go to court over this. So the items that are determined or agreed to with the regulators at the federal level, it might be the Environmental Protection Agency or some of these others actually are just straight implemented. So we see that as essentially not applicable or it doesn’t really impact it. And the last item we saw, and this is what sounds a little contrary into the underlying, I guess, presumption is that if the Chevron Doctrine is going to cause some uncertainty and regulatory interpretation is bad for your business. I don’t know on the commercial side, if you’re going to – if you’re going to go contest the regulators’ interpretation and go to a court, you better be clear. You better be compelling. Yes, you may need some attorneys. Yes, you need people who can argue it, argue the positions and support the basis of your arguments, but all of it has to be based on data. It’s not just an opinion. It has to be based on data, data analytics. And actually, if you want to take it and boil it down to its essence, you actually have to lead with science. You actually have to bring in a technical, well positioned scientific basis. And there is a firm out there that has a tagline lead with science. And so it may actually bode very well for us – bode very well for Tetra Tech with respect to who you want to bring in to support your interpretations to the courts. So I actually see that this thing does have any likes to it with respect to where there may be something contested by some of the large commercial clients, it actually could begin presenting new opportunities that didn’t exist for us before. So in some ways, it’s actually maybe indirectly be good for our business.

Understood. Very clear, thanks again.

Okay, thank you very much, Tim.

The next question comes from Sangita Jain with KeyBanc Capital Markets. Please proceed.

Yes. Thank you so much for taking my questions. So if I can ask one on the revenue that you may be getting currently from the high-performance buildings and data centers if you’ve broken that out? And also how much faster is that slice growing compared to the rest of your CIG segment?

Yes, it’s a really good question, and we had Joseph on. He actually presented those details in earlier meetings we’ve had. So Joseph?

Yes. Thank you for that question. As shared during our Investor Day in May, we did share kind of the breakdown of those numbers in terms of our revenue and how our advanced manufacturing fabrication and our data centers revenue part of our high-performance building total revenue. We have shared that this year, we are tracking towards $100 million revenue target for those two sectors, and we are expecting a 20% CAGR for that market. So right now, we are again trending towards $100 million between those two markets.

Got it. That’s helpful. And if I can ask one on M&A. As you pointed out, your leverage is trending towards the low end of your target range. And we just talked about rising uncertainty of policy outcomes in the U.S. Would that make you consider shifting more of your revenue base overseas as you look at M&A?

That’s a good question. And I would say, no. I would say that the world’s largest economy is right here in the United States. The dollars set aside for environmental stewardship, for clean water, even compliance with new regulations, things like PFAS are measured in multiples of what they exist in other locations. Now I do think the technology is one area we’re very focused on. Steve had mentioned that in his comments with respect to priorities for our acquisitions or looking for people to join us. And the one thing that provides us or allows us is the transfer of what we would – let’s say we acquired here in the U.S. or if it came through Canada, Australia or the United Kingdom, it’s actually transferable across all of our platforms to all of our clients, and it gives us a technical differentiation or competitive advantage to move it across all of our operations and our more than 550 offices in the company. So we’re going to find the best technology. We’re going to find the best new innovations that exist anywhere in the world. It could be in the U.S. or elsewhere. But as far as taking a precedent and moving because of potential elections or potential changes in the legal systems, that is not biasing us outside the U.S. This is still the largest market in the world, and we have a top position in each of these markets that we’re focused on, whether it’s water, environmental, climate change, costal protection, flood protection. We’re in first place. And the only thing we’re focused on is distancing ourselves even more in those areas.

Alright, thank you so much, Dan.

Thanks, Sangita.

The next question comes from Sabahat Khan with RBC. Please proceed.

Great. Thanks, and good afternoon. I guess, just broadly, you’ve taken up your guidance for this year, a few moving pieces in the backdrop. I guess, how would you characterize 2024 within the context of kind of your overall guidance, you obviously have the fiscal ‘23 numbers out there. Over the next at least 2, 3 years, should we expect some elevated trends we’ve seen this year on the top line on margins? Or just trying to think about the cadence over the next 2 to 3 years of how kind of the numbers evolve and some of the funding from these larger U.S. bills flow through? Thank you.

Yes. Good questions, Sabahat. I’m glad you talked about sort of a longer trend. We’re pretty clear, and Steve had presented and I don’t want to overly continue to reference the Investor Day, but the cornerstone or the underpinning of Investor Day is 2030. And Steve indicated in great detail, it’s an organic growth rates between 6% and 10%. And – and so what you’d ask what’s it look like over the next 2 or 3 years, I’ll say what’s it going to look like over the next 5 years and say it’s going to be between 6% and 10% organic growth rate. That happens to be we were slightly over that this quarter, third quarter. But I would say not drastically so. So it’s nice if you’re going to be outside that range that you’re on the top end, which we have been for some time. But I would say over this next several year period, we think that’s about right. And then with respect to acquisitions or having people come join us. And we talked about a wide range of 5% to 10%. I think for modeling purposes, we’ve used 4% or 5%. And I think we’ve been well within – with that. It seems quite achievable. So I think if you look at a longer trend, and I would append our 2 to 3 years to, let’s talk up to 5 years, I think we’ll be within these ranges we just talked about. And of course, it’s very hard to talk about growth rates without talking about margin because revenue without income contribution, it’s like a day without sunshine here. So we do think that if you wanted to just use a general guide, about 50 basis points a year. We’ve been at that number of expanding our overall EBITDA margins. We’ve been about that rate for the past several years, and we expect that to continue on into the future. So I don’t really want to provide 2025 details. We’re only a little over 90 days or as our next investor call, we’ll provide the final tale of our performance for fiscal year ‘24 and we’ll provide fiscal year ‘25 for the next 1-year. But if you want to look at broader those ranges just provided, it should be pretty representative.

Great. And then just I guess on the M&A side, obviously, I think you provided some parameters around the discipline on the metrics. Can you maybe just talk a bit more about in focused areas where you might want to complement some expertise, whether it’s regions, whether it’s specific markets within water that might be of interest over the next few years?

Yes. I’d say there’s a couple that we are really focused on, I think, in the United Kingdom, we’re doing well, but we can do better with respect to a presence supporting the AMP structure - AMP programs, which is the asset management program for water utilities across all the United Kingdom. We’ve got some very large cornerstone programs. I think we can get more. So I would say if we can add additional capability and contract capacity. So we’d look for that in the UK. Same would be true in Australia. So look for additional acquisitions that would be around water, and all that mostly municipal water or in the UK, you’d call it water utilities. And then technology. I’ll repeat what I just said a few moments ago, we’re really focused on how can we technically differentiate ourselves even more so in the market. And it’s not so much exactly focused on peers or competitors, we’re focusing on how we can deliver better value to our clients. We want to deliver higher delivery, faster response, lower price point and have better outcomes from our clients than ever before, and we think that, that can largely be contributed through technology. And so whether or not it’s our digital water programs through remote monitoring and automation of water treatment plants, which we do believe over the next decade or so. There is 150,000 different water systems in the United States or water utilities, we think that eventually, they’re all going to go to remote monitoring and automation. And we’re not even in the first inning on that, and we want to be the leader in the forefront of that. So how can we do that? For sure, we have it internal, but acquisitions and identifying those that can come in. And I’m glad to say that just this last quarter, since our last investor call, we had Convergence join us. While it’s just a handful of individuals, the intellectual property and the technologies that they brought are really quite significant. So look for us to continue to add those over the next year and beyond.

Great. Thanks so much for the color.

Yes. Thanks, Sabahat.

The next question comes from Andy Wittmann with Baird. Please proceed.

Hey, good morning. Thanks for taking my questions, guys. I guess I just wanted to start out a little bit in asking about Ukraine. Maybe just for context, Dan, can you just talk about what the Ukraine contribution was to this quarter? And then recognizing that you did book $160 million. I just wanted to see – I mean you would not put that in your backlog if you didn’t have great visibility on the contract to do that, right? So I’m just trying to see how much visibility do you have there? Like by my calculations, you did somewhere between like $50 million and $60 million this quarter. So does that mean that you’ve got like 3.5 quarters of work with $160 million or how should we think about that?

Yes. Well, you’ve got the numbers about right. I hope to find this for you. So in the third quarter, we did about $60 million worth of revenue. It was a good quarter. It’s an interesting coming in, and I think we spoke on last quarter’s call that we expected the second half of fiscal year ‘24. So this year, we do about 100. So I think we’re about $10 million above for the quarter where we thought we would be. And interestingly enough, we were over the top of our guidance range for net revenue by about $10 million. So everything was very strong. It took us to the very high end of our own range and then Ukraine pushed it up even higher. So we did do about 160. It’s a great question on does that mean you have a good portion? Well, we burned – we put 160 in, but we burned 60. So you really would take a look at net on that. But if you take a look at our backlog slide and our press release, we presented on the first line $439 million new addition for work in Ukraine. That’s a contract or contract capacity. There’s a new program referred to as Spark with USAID. It allows us to continue the work that we have. And only a very small portion of that was actually obligated that went into our backlog in Q3. So we’ve got more contract capacity. We have more orders. We actually finished with a higher order book for Ukraine. And of course, the reaffirmation by the U.S. government to stand behind and with Ukraine does give us visibility with respect to, I would say, the political will. And I know there is a lot of questions, some have asked me if there is a change in administration, could that get turned off. And my comment is maybe if everybody with one phone call, the conflict is over, may we all hope that, that becomes true. I think it may actually allow additional restoration work through USA that we have never seen before. You can actually do more work when someone is not firing overhead, then you can, while you are in a conflict zone. So, we have contract capacity measured in several hundreds of millions of dollars, in the 439 that’s listed first in our backlog presentation slide and our press release, isn’t the only contract that we have there. We are much broader. And some have asked, well, what if there is some disruption regarding U.S. commitments to move forward with the contracts in place, I will tell you there is a lot of countries lined up behind to actually want to help once restoration started. And these are our clients, whether it’s UK Aid, whether it’s the European Union or whether it’s a coalition that includes places like Australia where we are one of the largest international development supporters. So, this is not a singular question. And in fact, even the singular question actually may have significant upside in the event the conflict is actually resolved. So, those are the numbers we have with respect to going into the fourth quarter for contract capacity, the $60 million. I will say we are still standing by our $100 million for the second half, so it’s pretty easy to take $100 million minus the $60 million in Q3. And I think we will do around $40 million in Q4, but we will give you more specifics on the next call how would that actually turn out.

That’s really helpful context. Dan, thank you for that answer. I wanted to ask my follow-up question on RPS. You made the comment that you have been running off some of the lower margin work. That was always part of the plan. You said that when you acquired it. But you have owned it for a year, 1.5 years here, still kind of running some of that off. I am just wondering, how long is that tail? How much more – I guess it would be contracted backlog or something that you have there that needs to be gone through before we think that you can show the underlying growth that you talked about there in the double digits for that international segment?

Yes. No, that’s a really good question. You are right, it’s been about five quarters right now, so just a little over a year since they joined us. As we have always indicated, we want to shape their mix of business to be similar to Tetra Tech. We want to put high-end technically differentiated in front of everything, less competition, higher margin, completely in collaboration with the rest of the company. I think we have got another one quarter or two quarters. I am not going to go to the dollar amount, but I think we have got one quarter or two quarters left before we have got the, what I would call the commoditized or the lower no-margin work, but also funny enough. I have always found it ironic that if you get lower no-margin on some of this work, it typically carries the highest risk too. And to say this just seems like it shouldn’t go together and we agree it shouldn’t go with us. So, I think one quarter or two quarters, I think you will see us by probably pretty close to the end of the calendar year, sort of the culling of the last small work that doesn’t really belong in our portfolio should be finished, and then you will see the contribution on the international come with RPS along with all the rest of our international operations. So, I hope that timing is helpful.

It is. Thanks very much. Have a good day.

Thank you very much Andy.

The next question comes from Ryan Connors with Northcoast Research. Please proceed.

Hey. Thanks. Good morning. First off, congrats on the stock split. I know those aren’t generally in vogue, but I wish more companies would follow your lead. I think it’s very positive. Wanted to come on the issue of kind of the margin outlook from a different slice, Dan, you mentioned 50 basis points a year is kind of what you laid out in the 2030 kind of the game plan there. But we look at the backlog and the composition of the backlog, you did mention one-third of it is the USAID work. I know you have said in the past that, that tends towards the lower margin side of what you do. So, is that in fact the case with that particular – those particular jobs with USAID? And any color you can kind of share on what the backlog composition would tell us about kind of the margin trajectory in the next relatively near-term?

Yes. That’s a great question and it’s very insightful, Ryan. Let me make one comment about our margin increase, the 60 basis points for Q3. If we – you are absolutely right. That’s the work that we do for international development generally and USAID specifically is almost all cost plus work. It’s a pre-negotiated low margin if you are taking low financial risk, you get a lower margin. So, if we did not have any Ukraine work, and I would say that work, not just Ukraine, but USAID carries about a 7% margin. If you took that from our portfolio, our Government Services Group, GSG would have been up over 100 basis points. And we would have been well into the upper 15% for the quarter. So, I don’t like to use the word weigh, but it is a lower margin when you do calculation. Let me clarify one item. The incremental contribution of the backlog was about a third of it, not it represents a third of our overall backlog. So, let me just clarify that. I simply was referring to how much was contributed in the quarter or the increase in the $500 million that we had sequentially. So, I do think the rest of our business is growing at a higher margin expansion, and the 50 basis points is with international development, whether it’s U.S., Australia or UK included in the business. We are not deemphasizing that. We are big-time supporters of our clients in all three jurisdictions. And it is included in the margin expansion. Now, how was the margin embedded in the backlog that we have overall, the $5.2 billion, it’s pretty close to representing the 50 basis points expansion that we expect to see. So, we are not expecting some new big win or a C state change in the business that we are performing. It’s actually embedded in the work that we are being awarded and funded through the orders that comprise our backlog.

Got it. Okay. Thanks for that. And then back on the Chevron issue, I think you make a really interesting point and kind of the counterintuitive point that it could actually be a tailwind in some areas. And my question is, how big is litigation support today for Tetra Tech? And is that an area where – I mean I would imagine, yes, it’s lead with science, but there are nuanced differences to that type of business, and obviously, the relationships are different. So, is that something where you feel – how big is it today? And would you be staffed appropriately to or would you have to move people, or could that actually be an area of potential M&A opportunity if, in fact, your counterintuitive take on that, that it does create some additional business.

Another good question, this actually has what I would call you really have to understand the business to parse that. So, what it would look like at the most surface level is, are you going to go support somebody litigating, what we would do is we will actually want to be the technical support for the data collection, the analysis and the – I will call it, try not to use the word conclusion because the courts may become the final arbiter on this, but the technical conclusion with respect to the presence, the movement, the fate, and the final recommendations or interpretation. With respect to when you talk about – when we talk about experts that are going to be supporting litigation, as soon as you were to use the word litigation, it generally means expert testimony in court on the stand, sometimes referred to as hired guns even if they are technical, Dr. Smith, Dr. Jones, and we try to stay out of that. They are people that are – make their livings being in court litigators. We simply want to provide an objective quantitative measure that is technically supported by data analytics, science, the rest of it. We will leave the expert testimony and the stand to others because what we have seen is every time you are in court, there is somebody on the other side of that. And we don’t want to be actually providing an opinion or opine on what the data is. For us, the data is quantitative, it’s objective. It’s scientifically supported. And there are firms and we certainly know many of them that actually have in-court hired guns testimony and don’t look for us to try to turn our PhD experts in hydrology, water mechanics, chemistry, remediation in court. So, I think that our people that we have within the company can support that work because that’s the work we are doing, for both our government, Federal, State, local, commercial, and that data can be used, whether or not it’s used currently to support the work we are doing or some other person’s objective work. But I don’t see that actually having to change the under-fabric of what we do as a company.

Got it. And then I assume we are near the end of the queue. So, if I could just sneak one more in. You mentioned a potential change of administration. I guess what we have learned since the last conference call is that there is going to be a change of administration one way or the other. We have got a new candidate. Is there any daylight that you have – as you look at the Biden Administration versus Harris kind of priorities, is there any difference – nuanced differences there, the potential approach versus the current administration, or is it pretty much, they are on the same page with most things that relate to Tetra Tech?

Yes, so what I have heard in the hallways here is a new voice, same platform and/or similar platform. And we have not seen any changes. I think that there might be a little bit more emphasis on environmental justice and as you are prioritizing areas that might have been lower in the queue, which is actually good for us, that would put more work on orphan sites that work for – would be done by EPA and others. And that’s certainly work that we do already, and we can see that actually seeing a plus, I think they could see reprioritization and speeding up some superfund site activity to get it done quicker to actually end it, because many of these locations are in underprivileged locations across the country, so you could see some of that. But I would say that the fundamental platforms are very similar. I won’t go so far to say, identical. But I think the general outage [ph], a different voice, same platform is a good way to look at it.

Understood. Thanks for your time.

Thank you very much Ryan.

The next question comes from Tate Sullivan with Maxim Group. Please proceed.

Hi. Thank you. Just a follow-up on the RPS and revenue growth, you said international revenue, excluding RPS was 10% year-over-year. Was that – what was the comment you specifically said about that? I think you said something in addition to running off some lower margin projects, or can you review that, please?

Well, what we are saying is that the RPS component of our international revenues has been relatively flat or same number, no growth. So, the growth rate on that would be when I say flat, I guess I mean zero. And I think that because what’s happening is we are adding work with the new work. And I don’t – I am going to try it as we go forward and trying quite a bit this year, we will try to even double down on it next year, not to use RPS as a different component of the company because they are as much part of Tetra Tech as I or anybody else is. RPS is doing a great job. They have got a number of individuals who are leading major divisions for Tetra Tech. They are technical leaders. They are financial leaders. They are just among the best that we have in the entire corporation. However, they are still in a transition. It’s been five quarters since they have joined us, and we did indicate that we wanted to take some of the revenues that have been more commoditized or was carrying lower – or lower margin or higher risk out of the business. So, at the beginning, we actually saw in the first several quarters, revenues actually for RPS went down. So, people had come in, and I know I had our investor relationships, Jim Wu and others talk to investors and analysts that we were going to grow through subtraction. And so margins are going to go up, profits are going to go up, and we are going to actually do less work for it. Now, we have got to the point where it’s not shrinking anymore, that the amount we are taking out of the business is roughly equal to the amount we are putting in, but still the amount is going down by 4%, 5% this last quarter, but we have added that amount of higher margin work. So, what do you see, you would see flat on revenues, but you see margins up by 400 basis points year-over-year. And I think that this phenomenon of it taking out as much as you had, taking out part is just one quarter or two quarters away. And then you will see RPS contributing not only on margin expansion, but also on revenue contribution internationally. So, that is really the dynamic that I am referring to. And I hope that helps with making it little clearer.

Thank you very much.

Thank you, Tate.

The next question comes from Michael Dudas with Vertical Research Partners. Please proceed.

Good morning everyone. Can you hear me?

Yes, Michael.

Okay. Thank you. Leslie mentioned in your prepared remarks about a new water bond proposed $10 billion in California. What’s the history on success of those types of initiatives in the state? And when something like that gets passed I mean historical levels what you are been involved with, how quickly that business can start to flow into your consultant advisory work?

Good question. We basically have seen in the past, they are relatively successful. So, I wouldn’t want to predict what’s going to happen in an election, but water quality and water programs have had a great track record of being approved. We actually had other measures that were related to water management and storm water that we passed in previous years and then were integrated over roughly a 1-year to 2-year period, they get integrated into the various local agencies and their implementation plan and funding. So, we would expect this one will run pretty much along that same cycle of organization and planning and bidding in the first year and then actually seeing it in actual proposals in the second year.

That’s very helpful. I appreciate that. Thanks. Thanks everyone.

Thank you, Michael.

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

Thank you very much Tania and thank all of you for attending the call today. I very much appreciate the questions that we had today, those that we see through investor relations and other avenues that we can actually incorporate into our presentations. We really do want to be as transparent in where we are thinking and communicative as possible. I look forward to speaking to you all again in our next quarterly call, where we will present the results of our fourth quarter and all of fiscal year 2024, which of course, after three quarters is off to a really, really strong start, and probably most importantly, sharing with you our guidance and outlook for fiscal year 2025. And with that, I hope you have a great rest of Thursday, and a great rest of the week. Thank you.