Dan Batrack - Chairman and CEO Steve Burdick - CFO.

Tahira Afzal - KeyBanc Capital Markets Andrew Wittmann - Robert W. Baird Bobby Burleson - Canaccord Noelle Dilts - Stifel Tate Sullivan - Sidoti Ryan Connors - Boenning & Scattergood Ryan Cassil - Seaport Global.

Good morning and thank you for joining the Tetra Tech Earnings Call. By now, you should have received a copy of the press release. If you have not, please contact the Company’s corporate office at 626-351-4664. With us today from management are Dan Batrack, Chairman and Chief Executive Officer; and Steve Burdick, Chief Financial Officer.

They will provide a brief overview of the results and will then open up the call for questions. During the course of the conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include statements concerning future events and Tetra Tech’s future financial performance. These statements are only predictions and may differ materially from actual future events or results.

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

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investor Relations section of Tetra Tech’s website. At this time, I would like to inform you that all participants are in a listen-only mode.

At the request of the Company, we will open the conference up for questions and answers after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack..

Great. Thank you very much, Regina. And good morning and welcome to our second quarter of fiscal year 2017’s earnings conference call. While Steve Burdick, our Chief Financial Officer, will present the specifics of our financials, I’ll start this morning’s call up with a brief overview of the company and some of our key financials metrics.

We had a very strong second quarter for fiscal year 2017, with results exceeding the top end of our guidance for both net revenue and earnings per share. For the second quarter our revenue from ongoing operations was $664 million, which is up 8% from the prior year. Our net revenue was $516 million, which was also up 8% from the prior year.

We generated an operating income of $44 million, up 27% from last year. This performance generated a diluted earnings per share of $0.48 for the quarter, which is up 30% from the prior year and I am very pleased to state that this as an all-time high record for us on an earnings per share for second quarter for the company.

And finally our backlog was up 18% year-over-year and approximately $2.5 billion, another record high for us. Our second quarter performance is a result of Tetra Tech’s growth strategy and absolutely strong execution capabilities across our entire global operation. I would like to present our performance by segment, our two business segments.

The water, environment and infrastructure business group’s increase net revenue was up 21% from the prior year and it had an excellent operating margin of 11.1%. The WEI business group’s increase in net revenue and excellent margin performance was driven by organic growth in multiple end markets. This is organic growth in U.S.

State and local work, U.S. federal work and our commercial environmental work. This was an especially strong quarter, when you consider the typical winter slowdown that we see each year in Canada. The resource management and energy business group had a revenue of $315 million, which is up 2% from the prior year with a margin of 9.4%.

And that margin is up 50 basis points from the prior year. RME saw growth in our U.S. commercial markets and on planned performance for Coffey, an acquisition that joined us last year, which has just completed his first year with the company.

Our growth in our energy and solid waste markets more than offset the continued reductions in revenues from the oil and gas work that we are seeing both in the United States and Canada. Overall, I am quite pleased with the expansion of our margins over the past few years.

For our ongoing operations, our second quarter margins have increased from 8.3%, which we had back in 2015 subsequent year in 2016 we had increased it to 9.2%. I am very pleased to report that we had double-digit margin in second quarter of 2017, at 10.1%.

This is directly in line with our objective to increase our margins to more than a 13% basis annually. I’d now like to provide an overview of our performance by customer. Our work for the U.S. Federal clients was up 24% from last year it was 29% of our net revenues in the quarter. Our growth in federal work was driven by projects for the U.S.

Department of Defense, the U.S. State Department and the Agency for International Development. This growth was even more impressive and that we saw this growth as it took place in our second quarter of that pre-date of the passing of the 2017 appropriations that are just being agreed to even this week.

State and local revenues for the company continue to be very strong for us this quarter, with an organic growth rate of 21% year-over-year for the second quarter.

This growth has been built on an expanding base of state and local clients across the United States and an excellent success rate in winning new programs including cutting edge, water management and reuse programs in mostly the Southern states across the U.S. Our U.S.

commercial work was up 8% year-over-year, driven by strong performance primarily from our environmental units. The growth in environmental and solid waste related work more than offset the continued reductions that we are seeing in our oil and gas revenues.

And our international net revenue, which is worked as contracted for and performed outside of the United States was down 6% year-over-year and represented 32% of our net revenue. Now this is work that’s primarily performed in Canada, United Kingdom, Australia and Asian Pacific region for us.

Now we continue to grow our differentiated services in water and environmental work internationally, but this work in the second quarter was more than offset by the reductions in our oil and gas revenues in Canada.

In the second quarter, our backlog increased for the fifth sequential quarter, resulting in an all-time high for us at $2.497 billion, right about $2.5 billion. We again had an excellent book of orders across our global business, which included task orders for all sorts of water related projects and services for the U.S.

Army Corps of Engineers; orders for our commercial projects, supporting some of the most complex environmental cleanup programs across the United States. Award of technically focused State Department and USAID projects, including a new major program for energy development in Pakistan.

And we even saw orders from the Federal Aviation Administration supporting the next generation of air navigation systems.

I would like to note one thing that’s unique about Tetra Tech, we continue to use the strictest criteria for tracking and reporting backlog, which is only to include work that’s been awarded, funded and authorized for us to complete the work. Now, I would like to turn the presentation over to Steve, to present the details of our financials.

Steve?.

Thank you, Dan. So as Dan just reviewed our key financial metrics for the quarter, I won’t spend time going through the numbers line-by-line.

However for your reference this financial overview provides our GAAP financials for the second quarter and a full reconciliation of our ongoing operations, which Dan just spoke about to these GAAP financials can be found in the appendix of this presentation and in our second quarter earnings release.

So for those following on the webcast, I’d like to point out two items addressed on this financial overview side. So first, you may recall that in the second quarter of fiscal 2016 both operating income and EPS included charges related to our Coffey acquisition, so you can see that in the difference here.

And second, EPS for this second quarter was negatively impacted by about a net of $0.02 of earnings per share from changes associated with the earn-out expenses and the wind down of our RCM segment. So we’ve revised our estimates on earn-outs resulting from prior year’s acquisitions and thus we recognized an aggregate gain of about $7.2 million.

Now regarding RCM, we counted four negotiations of settlements for several claims, which resulted in a negative impact to P&L of close to $8 million. Though in this segment quarter our cash impact was essentially nil for the RCM items.

Now we nearly have about three projects remaining in RCM and anticipate that the wind down will be substantially complete in 2017. However, due to the fixed price nature of these constructions projects, there could be variances either up or down until all the project issues and claims are resolved.

I’d now like to review our cash flow metrics for the quarter. We are very pleased to report that in the second quarter, we not only caught up to, but surpassed several cash flow timing delays from the first quarter to deliver very strong cash flows from operations of $109 million. And year-to-date our cash flow of $50 million is up 67% year-over-year.

Our cash from operations remained healthy and for the remainder of fiscal 2017, we expect the range to be about $160 million to $180 million for the year. This range does include about a $20 million deferred tax payment in the third quarter, due to the timing of the payment from future years into fiscal 2017.

However, I do also want to point out that these tax items basically had a zero impact on our EPS in the second quarter. With such a strong quarterly cash flow, our net debt saw a significant decline both year-over-year and sequentially totaling about $174 million for the quarter.

Now, due to our continued strong cash flow, our leverage ratio of net debt to EBITDA is down below our target range of one to two times. We therefore have significant dry powder not only to invest in organic growth, but also invest in acquisitions, while still having a capital to deliver strong returns to our shareholders.

And I will speak to that more shortly. So lastly, our day sales outstanding was about 82.3 days in the second quarter. So as we continue to focus on frontend consulting and engineering work we have been able to do a couple of things.

One is, we decreased our CapEx spend, which will not benefit our free cash flows in the current year, but it will also benefit our EPS in future years. And just as important we still remain committed to a DSO target of 75 days or less. Now as we look at our capital allocation and give you an update here.

Delivering strong returns for shareholders is an essential part of our balanced capital allocations strategy that we have been talking about the last couple of years. Our long-term goal is to return one-third of our free cash flow annually to our shareholders through a combination of both buybacks and dividend.

But we can adjust our buybacks either up or down according to different business requirements. So year-to-date we paid about $10 million in dividend and repurchased $20 million in stock. And just this week our Board of Directors approved an 11% increase in Tetra Tech’s quarterly dividend to $0.10 per share. But our plan is not to stop there.

In November 2016, our Board approved a $200 million share buyback program. So without any material acquisitions or unforeseen events for fiscal 2017 we anticipate spending a total of $100 million in share buybacks this fiscal year.

As a result, we will return an estimated three quarters of our free cash flow to shareholders this fiscal year and even with these amounts we continue to delever our net debt.

Now, our M&A pipeline is healthy with many opportunities and we actually have a combined $500 million in both cash and credit facilities available through acquisitions and have the ability to take on additional debt if needed.

So as we continue to increase the return and value to our shareholders, we have an abundant capital to invest in strategic acquisitions that expand both our technical capabilities across end markets and geographies. Thank you all for your time today and I will now turn it back over to Dan. .

for the third quarter our guidance for net revenue is a range of $510 million to $540 million, with an associated ongoing earnings per share up $0.50 to $0.55.

Now for the entire year, based on a very strong first half of the year and outlook, we have updated our net revenue guidance for the entire year by increasing the bottom end of our range from $2 billion to $2.50 billion to an upper range of $2.1 billion with an associated ongoing earnings per share of $2.10 to $2.25.

This updated guidance for earnings per share represents a $0.10 increase at the bottom end of that range and a $0.05 increase in the top.

I would note that this guidance that I have just provided does exclude contributions from future acquisitions, it does anticipate a $0.26 per share intangible amortization, a non-cash charge that we’ll take and effective tax rate of 32% and with 58 million shares outstanding at the end of the year.

In summary, we had an excellent second quarter, exceeding both our net revenue and our earnings per share guidance. Our backlog reached an all-time high, up 18% from last year and for the fifth quarter sequentially grew.

Our focus on high end consulting engineering and our leading with science approach to our project is resulting in increased margins and significant differentiation in the marketplace.

And in closing, we had an excellent first half of 2017, we have momentum going into the third quarter, excellent visibility with our backlog and are well positioned to benefit from the increase budgets and a focus on infrastructure in all the markets we serve both here in the U.S. and globally.

And with that, I’d now like to open the call up for questions.

Regina?.

[Operator Instructions] Our first question comes from the line of Tahira Afzal with KeyBanc Capital Markets. Please go ahead..

Hi, folks and Dan congrats on a very strong quarter. .

Thank you, Tahira..

Dan, you’re seeing momentum continue in a lot of your state and local businesses, but now we have also started to see a pretty nice visible pickup in your DOD, USAID businesses.

What’s the next step for you, I mean how do you build on this momentum and maintain it? Clearly these secular cycles that seem like they will be pretty sustained, but is this given you are seeing a lot of strength, given that your free cash flow is coming in strong.

What are you really focused on as you look to add even more value for shareholders?.

Well, I think that the state and local work that we have seen in last three quarters sequentially from Q4 we were up 30%, we were up mid-20s in the first quarter and we’re up over 20% for state and local. While it’s strong I think we’re actually not -- we have actually confidence of three things that actually make us still early in this growth.

I think number one is we’re actually seeing budgets increase, I think that there is an increase in specialized products such as storm water and water collection out in the South west, which is California. Desalination in Texas and in Florida based on water quality and intrusion with respect to solidity in other items.

And I think these are just getting started. Budgets are up, funding is up, our business is up. So I think this isn’t toward the end in many of the projects that we have been awarded at the state and local level are at the very beginning. So these aren’t at the middle and end, these are actually at the very beginning.

We have also seen some excellent inclusion of Tetra Tech now in public private partnerships, which are design built, but weren’t actually the designer. And so we see these are big projects that actually have multiyear visibility. So for all of those reasons, we actually see the state and local work having sort of a long runway to it.

And the one part that we have not even included in our guidance here in the U.S. is any incremental contribution from the stimulus. And I know that the federal government executive branches talked about a $1 trillion, we have seen other numbers that range both above and below that.

But I think that any type of move in those areas will actually be incrementally upside for those. Now the Department of Defense, I think I said about a year ago, we were not seeing exactly this type of growth, but it was from a low point both on spending and contracting.

I actually think that we can do much better, most of the work and the growth we have seen is for task orders and projects that were awarded to us through our existing vehicles. And I think actually coming to an agreement with the budget between the House Senate and the executive branch will actually allow new contracts to come out.

And so our growth in DOD hasn’t even been on new contracts. And the one thing I have said internally, I mean actually our staff has come back to me. If the focus of the administration is more planes, more boats and more infantry.

If you have planes, you have to have a runway, you have to have infrastructure, you have to have permitting, you have to have design work, you have to actually have infrastructure first and that’s us.

If you are going to have a ship, you have to have some place to put it, you have to have a bird that has to float on water, you have to have sediment, you have to have dredging, you actually have to have all the planning, that’s what we do.

And finally for infantry, you have to actually have some place for them to reside and that’s everything from military family housing to barracks to infrastructure. Essentially these are small cities that require power, water, waste and that’s what we do. So we think we will be one of the earliest benefactors, as this money actually flows through.

Because by the time you can build it, everything else has to be done first and that’s what we do. And as we move more and more to the earlier stages of the projects, which is high end consulting, lead with science, which is certainty of completion of the design and the permitting and allowing these to go through.

I think we’re certainly if not the best choice, one of the best choices out there and I think that’s why we are still very early on growth both in state and local and Department of Defense. And by the other things that are upside oil and gas we have actually factored in 1% to 3% for commercial growth in the U.S.

because of a significant reduction in oil and gas, if anything comes back we are very well poised to be have a significant upside. And most of that’s going to be driven to margin because that’s the most profitable work that we have in the company..

Right, I remember that Dan, it’s pretty high margin work, I know you seem to have been taking a more conservative stance on the oil and gas side in Canada, though.

While I am hearing things are picking up there, is that more of a story for you guys for fiscal year ‘18 is that how we should think about it?.

I think so, we are hearing positive things meaning, notices from our clients that solicitations will come up, procurements will come out, the planning for new solicitations, but until we actually see them on the street and we have won them, we don’t want to be taking any credit or claiming that we are seeing a resurgence yet.

But, we are hearing the same things and you are right, we are being cautious, you could say that we are conservative, but I would hope that this forecast actually converts to reality here. But I do think it would likely be a 2018 effect to the company..

Got it. Thank you very much Dan, and congrats to your team again..

Great, thank you, Tahira. .

Your next question comes from the line of Andrew Wittmann with Robert W Baird. Please go ahead. .

Great, good morning..

Good morning, Andy..

I guess one of the things that caught our eye was the increase in the buyback for the year Dan to return $100 million is obviously more significantly than you significantly forecasted.

What is it saying that you're upping it for this year about the M&A environment if anything in relation to the number of deals that you might be seeking or even valuations that are out there that you're choosing to buy your own company rather than maybe others?.

I'm actually glad you asked that question Andy, because the one thing we do not want to communicate, and I guess we couldn't quite think of how to include it in our prepared remarks. But there is no connection between the buyback and the number and level of opportunities we have out in the M&A environment.

The reality is with $100 million of cash generated, $109 million of cash generated just in the second quarter, it was very clear that even if we did a significant amount of acquisitions in this fiscal year.

That we would still continue to delever the balance sheet back to a level that would move us further and further away from our target about 1 to 2 leverage of earnings to EBITDA. So after taking a look at it, we in forecasting how to cash generation for Q3 and Q4.

We get a little bit more aggressive little more proactive and the fact is we can do a reasonable amount of acquisitions in fiscal year 2017 still between now and the between do the $100 million buyback and we'll still deleverage the balance sheet and move farther away from a range of 1 to 2.

And it's just not where we want to be, it's not efficient for our shareholders, we are bullish on the stock and our performance, we're bullish on our end markets. And so these should be looked at and things that we're doing in parallel not causing effect because of a lack of acquisition opportunities to increase this.

So they are independent and should not be looked at in conjunction. Now with respect to the multiples, I will say there is no doubt, it's on inspiring to certain degree with some of the multiples that are being paid and the consolidation in the market. But those are not our targets of where we shop and how we find people.

We do not go out and our primary -- and I would say almost not all through investment bankers in an auction process where we're looking to pay someone to monetize their firm and apart.

Who were looking for is actually strategic partners, people that are looking to join Tetra Tech for a long-term strategy to enhance and further our number one positions technically and with our clients. That's what our focus is.

And we want to pay them a fair amount, in fact we want to be a full and fair payment for their acquisitions and for them to join us. And then we want to see them to get paid again as they join the success of the company that both Tetra Tech and they together realize as we go forward.

So we see that they can get two payments by joining Tetra Tech, both the acquisitions when they join us and the success that we have together. But where we find that these are direct one-on-one negotiations almost exclusively and not through investor banker auctions that are yielding really heavy multiples..

Thank you for that. Try to ask my next question without getting a stock answer, but I'm going to try. Given what you said about being able to do deals still deleveraging. So the implication there is that there is lots of cash.

You've got a steady your business model now without the fixed price construction activities and probably little bit more predictable in terms of the cash flows in particular. Is there a room do you think for the Board to maybe reconsider the dividend policy, I mean 11% us great, but you could make an argument it should be a lot higher.

Or the whole idea that only returning a third of the cash flow in your model should be increased to some other level.

Is that something that the Board kicks around on a regular basis and can I just hear your thoughts on that perspective?.

Yes, Steve will speak to some of the technical details, but I'll give you actually maybe a bit more of a big picture answer, with respect to not just being a candid answer yes, yes it is something we kick around, yes it is something we discuss.

But I will tell you that in order for Tetra Tech to be very flexible and to actually achieve our leverage range and be acquisitive as how we have been. We actually didn’t want to and currently it's not our objective to get into a fixed amount of dividends that we have the flexibility to turn and it's easier to turn it up.

But once you turn it up, it creates a new floor. And so any adjustment to move it down is really off the table. And so our commitment to both the dividends that we pay and an annual increase and this is a multi-year increase we've done again at this time.

We want to give ourselves flexibility in that if we have multiple opportunities we do not want to say that we can't bring the best company to join Tetra Tech. They gives us access to clients' geography or technical services, because we've committed to a dividend it’s either or.

Now I know today it's easy to say we have almost an amazing amount of capacity available because we're sitting here at 0.8 of leverage. And if we didn't do anything with the buybacks we’d go down to approaching zero.

But the reason we've not moved the dividend up appreciably is in order to give us flexibility to grow the company and to bring folks on and that we’ve moved that discretionary use of cash through a share buyback rather than pushing it to dividends where we’d have less flexibility. .

Okay. I think that's good, Steve you can chime if you want, but I think that answers most of the questions. I did have one kind of operational question and the questions were around solid waste end market. This is an end market that I think over the last year has actually seen some challenges.

Dan maybe I'm wrong in that, but I think that's right it hasn't been growing, but now it seems like one of the material drivers must be that would be offsetting some of the other challenges you're seeing in the U.S. commercials.

So I was just wondering if you could comment on; one, kind of the overall size of that business now, as well as any trends that you're seeing there. Is it one project or is it broad based projects in terms of what -- how kind going to inform the outlook from here for solid waste.

Are we back on the growth trajectory in other words?.

Yes it has been a bit stagnant, I would say. It's I think between $150 million to $200 million annual revenue for us as a business line. So it's well less than 10% of the business. It is a mix of both state and local. So we do work for cities and states and counties, mostly cities and counties. And we also do work for the major landfill owners.

So we did the design of the new sales and cap covers and landfill gas recovery. I will say that it has -- I don't want to say the word disappointed, but it has not met our expectations. Because we felt that the combusted coal rules for land filling on an accelerated basis is coal fired power plant waste material was going to be a big driver.

And in fact we expected it to be significant now there have been a number of legal challenges, states have push back, the administration has not been as aggressive on enforcement or moving. So we do think that it has slowed the business. So that has been flat and we’ve seen modest growth at the state and local and commercial level.

It is very broad no single project, no group of two or three or five projects represent material amount that’s been broad based and it's mostly been again in the Southern States. And so if we can see the either close down for economic reasons from coal to natural gas that's beneficial for us.

And that's lot of land filling and if we continue to operate I think even the utilities that operates these do want to see that they don’t carry long-term environmental liabilities with the waste projects. So regulatory enforcement directives are not -- I think this is a market that's going to grow, it’s just may not be as quick as we thought..

That's great over here, thank you Dan. .

Thanks, Andy. .

Your next question comes from the line of Bobby Burleson with Canaccord. Please go ahead. .

Hey good morning..

Good morning, Bobby..

Congratulations in the strong quarter. .

Thank you. .

So just curious in terms of outsourcing to contractors and kind of federal budget, evolving federal budget and Tetra Tech's role going forward. What types of work do you guys have the highest kind a competitive advantage in terms of institutional memory you guys have built up overtime.

Doing a work for the client?.

Well, we talk about competitive advantages here a lot at Tetra Tech and where we focus. And I'll tell you the things that we focus on are client relationships, institutional memories. So I'll give you examples for the Department of Defense Tetra Tech goes back 40 years, more than 40 years with the number of the branches with U.S. Department of Defense.

I'll tell you it really does breakdown that not so much at the Pentagon level, but actually at the base or the installation or the facility itself. And in many instances of course the military commanding officers, the base engineers get transferred to different assignments every two to three years sometimes they make four years.

They move we don't, we are the bridge between this rotational assignments of the Department of Defense staff and the sites. We did do the investigations at sites that they all the way back to the late '70s and '80s.

We have done most of the design work at a number of the facilities and these are everything from the large naval bases all up and down the West Coast of the United States all the way through Alaska with some of the outpost. We actually have the data we have the sites and we have the people that are outside these bases.

Now I do note the one thing I get comments on is Tetra Tech has well over 300 offices or actually close to 400 offices and the question is why don't you consolidate all of those offices down to some smaller number. Some competitors to that and we don't.

And it's not because I like more offices, it does require a bit more administration, but we want to be local immediately outside the base, outside the office of our clients. We want to be there and it is by definition the institutional knowledge for these bases and sites.

So these are not I'm not talking project offices that come and go, I'm actually talking about institutional memory and actually the continuity even as our clients changed within their assignments. So, as the federal government has put -- the federal workforce is declining that puts even more reliance and emphasis on contractors like ourselves..

Okay. Yes, so I guess the implication there is that the work you're doing in some cases cannot be done, cannot be taken in-house by the clients..

No and I will say the one thing about to do administration that we actually are pretty positive on. The new administrative believes that private industry can do it more efficient and more effectively, and we're there to actually help support that..

Great, And then in terms of oil and gas, it sounds like I'm assuming scenarios where you've taken up your outlook you've omitted I guess commercial in terms of changing anything at this point.

Is it still down 20% year-over-year kind of in the -- implied in the guidance?.

It is. Actually I'll give you a little more detail on that, in Canada it's down more like 30%, it was about 30% reduction year-over-year the first half, we expect a similar number in the second half. The U.S. is actually a little bit better, we were down about 25% the first half we think that's actually going to moderate maybe 15% the second half.

But -- so that I would say of an implied year-on-year reduction for the year in the U.S. oil and gas around 20% on an overall annual basis that's already embedded into our guidance. .

Okay. And at this point in the game is there still an opportunity for that to perform a little bit better than the guidance. .

There is, I will say that there are a number of proposals and opportunities with the oil and gas clients. I will say that's the one area or one of the few areas that can move to book and burn big numbers very quickly.

Because in the commercial sector particularly in the commodity oil and gas and mining, if a project has to move forward often it's with a very mature timeframe. So it is possible we could see an upside on that.

But we are roughly five months left in our fiscal year, So this window is beginning to close with respect to meaningful contribution this fiscal year. .

Okay. And then you mentioned mining and we’ve seen some mining kind of equipment book-to-bill get quite positive in March for some of these -- for the mobile equipment.

And I'm just curious are you seeing any developments there if these guys are spending more money on equipment is there increased activity? I'm thinking of kind the Michigan area kind of Midwest area?.

No, it's been at a on life support level for the past couple of years. And I mean, we've seen very small signs of upticks, I know people like to use words green shoots and it's very small early indicators.

But I would say it's so spotty and inconsistent that, I won't say it's getting any worse, but I haven't yet seen the reality of contracts giving us a trend. And if we do see that we’ll certainly included in our calls when we see some material indication of a pickup for say. .

You guys have record backlog and backlog just keeps getting stronger and stronger. Are you doing a lot of organic kind of hiring here or like how do you make sure the capacity doesn't become an issue, I'm sure if you draw a line out a year or two that backlog number gets even bigger.

So do you have the staffing available right now to give you enough headroom. .

Well, we do and I will say that if you part of the industry overall, there has been an amazing amount of consolidation and changes and changing of companies through sale or even breakups.

And I will say that for very high end engineers and scientists and chemists and technical professionals, a lot of them are looking for stability, clarity of where they're going and consistency of ownerships.

So they're no bidding contracts so making outsource of changes and that's something that we represent maybe best in class in the entire industry.

And so we have been in that attractor for some of the best talent in the entire industry through some of these really Tier 1 competitors that are actually looking from their staff for stability, best-in-class position and a technical differentiation. So we have been a net beneficiary of all these changes that's been taking place..

Great, thank you. .

Thanks, Bobby. .

Your next question comes from the line of Noelle Dilts with Stifel. Please go ahead. .

Hi, guys a lot of good questions have been asked so far. I just thought I would see if we can get an update on given that you are still really actively pursuing acquisitions.

Can you talk about some of the areas and markets that are of particular interest to you at this point?.

I can speak to a few. And sort to break them into three categories geographic presence to move to an area that where they're under presented or not represented geographically. Areas -- second would be areas that we're looking to add new clients that there is very high barriers to entry with the clients.

So we'd actually look to bring someone on who can bring us existing contracts or relationships. And the third then is someone who bring us a technical resource or technical capability that doesn't exist. So with respect to geographic, one area that were there are some locations in the U.S. that were under represented.

A lot of them are sort of the mid-Eastern seaboard of the U.S. so the Atlantic, mid-Atlantic area. It's an area that we've been under represented and so geographically that area. And then internationally of course Europe is an area that we are quite interested in. We think we can actually bring best-in-class in a number of technical areas.

So those are geographically areas we'd be looking at. With respect to technical areas, we're looking to add technical resources in Australia to expand our ability to provide city and Australian state capabilities. So environmental, water, and when I call, we would call municipal infrastructure work in Australia.

A good example we did do one acquisition this last quarter Ecological Associates of Australia joined us. We really do want to take from just being an engineering and geotech first-in-class provider in Australia and we want to move that to environmental and infrastructure and water. And so we'd look for water and those items in Australia.

We're very actively looking and we think we can make a big move there. And then technically we are focused on smart water, which is really in-excess of or intersection of water experts that can actually implemented through smart sensors and instrumentation and smart meters and others for water shade and large scale water system management.

And so those are technical areas and I would most be here in the United States. So those are the areas that we’re specifically looking for and we're I would say none of those are higher priority than the other. And so whichever is the best opportunity that's a market leader we're looking to have joins..

Okay great. And then I just wanted to focus a bit on Canadian market you've been -- that you spend much time building much operations there. Can you kind of break out what you're seeing in oil and gas versus the rest of the market? And just given this headwinds you're facing in the oil and gas with the completion of the large project.

Can you help us think about when that market will -- Canada overall will bottom and start to inflect up..

Actually we look at Canada almost in two buckets right now. And I think you said it well sort of oil and gas and then everything else. And maybe I could say oil and gas and maybe I could say mining because at one point mining was really quite large for us up there with uranium and other specialty minerals potash.

Let me start with a good news, we actually see that the work for the provinces and for the cities and even for commercials with respect to development infrastructure water systems and even three pieces, we've had some very good success.

In fact if you go and take a look our clients have been announcing Tetra Tech has been hired as either directly or as part of large consortium teams you can go find those, some of those run very, very large projects. We've had great success there we're seeing growth both in Quebec, which we have a significant presence all the way to British Columbia.

So I'd say really across the country we're seeing growth what you might call the municipal business and that's going well. However oil and gas we do have some very large oil and gas projects that are twilighting, in fact the biggest one we had essentially just finished this last quarter or two.

We do have other opportunities, but they will come in smaller pieces. So it take 3,4, 5 projects to equal the one big one, we do we are proposing on and being considered on multiple projects. But I would say these are individual projects it's not we're submitting on 20 and we only need win 3 or 4 we're submitting on 4 or 5 and need 2 or 3.

So it's -- I would say it's a I don't want to call the complete absence, but a lack of significant number of opportunities at least at this time. So that's why we remain very cautious on the oil and gas side here in Canada..

Thanks, that make sense, appreciate it..

Thank you, Noelle..

Your next question comes from the line of Tate Sullivan with Sidoti. Please go ahead. .

Hi, thank you.

The consistent mentions of the high quality backlog, I mean do you have an internal EBITDA margin target as part of that good visibility?.

We do, we actually do have an embedded margin and the projects we bid. Obviously we bid a project from the bottom-up we have our margin included in it. And only when we won it and they've as I've said before they've signed a contract, they funded it and authorized us to go do it to we get to work.

We're very cautious on making claims on embedded profitability on the backlog. Because I believe having been a project manager and project engineer for many, many years. The difference between the proposed margin and a delivered margin can be night and day.

And so I will tell you that the margins embedded in our backlog are equal to or slightly better than what we are even reporting, as performance. But I find that it's much easier to underperform on a proposed margin than to significantly over perform. You can watch a 10% margin go to zero a lot easier than you go watch 10 go to 20 usually.

And so I prefer to actually demonstrate the embedded margin in our backlog with our quarterly actual results..

Okay thanks. Yes, I mean, I was just -- I mean, I can back into the implied EBITDA margin from your guidance I mean, I get you up to almost 12 and then I was trying to get some visibility into where it could go from there too. And then just detailed oriented on page six the backlog slide.

Sorry, if I missed this earlier, you have the sealing project orders, is that not into the current backlog to clarify?.

That's correct, we have -- we're approaching $15 billion in contract sealing and there is great examples you can see that when we receive a contract we do not put it in backlog until they give us an actual assignment. We generally refer to those as task orders or authorized executions. So those numbers are not in the backlog..

Okay, great. Thank you very much. Have a good rest of the day..

Thank you, Tate. .

Your next question comes from the line of Ryan Connors with Boenning & Scattergood. Please go ahead. .

Great, thanks for fitting me in. Couple of questions, first, I wanted to take the flips of the earlier question regarding staffing bandwidth. Because if you look in the quarter it looks like there was actually a 2% decline in personnel.

So if could you just give us some perspective Dan on what's going on there and maybe where in the last quarter release you're adding people versus where you're downsizing? And why and what the outlook is for labor utilization in dollar terms?.

Yes, absolutely. Well how our business works is, in the summer time we have a lot of people out doing field surveys or doing oversights, we're doing investigations, we have drill rigs, we did samplings, we're on dredging sites, where we're actually doing surveys and other items.

In the winter time, we do -- so those staff in order to be efficient and to keep our staff utilized a lot of those staff are either part-time that can come off our payroll. So we seasonally are significantly lower in headcount in the winter than we are at the summer.

And so if you take a look between Q1, which included October, November and December things were still going through the fall. But the lowest headcount and it is seasonally adjusted number all the time. We do not hold staff where we don't have work. We actually do manager it.

So what's you're seeing is actually the natural cadence of the staffing for our business. So that's not a reduction that would be indicative of the work we have. With respect to adding, it's mostly where we work in the winter, which is where it's wormer and can get outside and do staffing work, so in the Southern states in the U.S. in those locations.

So when you look sequentially that's really not a great representation. If you wanted to take a look you could take a look at the second quarter from a year ago. We were at 15,556 those called 15.5, and this year we're at almost 16.3 for Q2 to Q2 that would be a better indicative indication. So we added about 800 new staff in Q2 to Q2.

And last year we included Coffey already. So it's not from an acquisition..

Got it, okay. That makes sense. And the other one was just it seems like the delta between the segment's margins, so WEI more than 300 basis points above RME now in the quarter, which is the biggest gap that that's been at in a while.

Obviously, there are some discrete things from quarter-to-quarter, but it seems like that segment is kind of galloping ahead and coming at a higher margin business over time.

When you talk about the high-quality backlog and so forth, I mean is that skewed toward that business? And should we expect that gap to continue to grow in the water segment's favor? Or is that just short-term noise?.

Well, the WEI, water, environment and infrastructure is inherently mostly government work. So the federal state, local. It -- typically they would have lower margins as compared to RME, given favorable economic conditions. I would say it's just great execution by the project management and the technical staff and leadership within WEI.

So I actually am -- I don't want to say this on this call because I think they're doing well enough already, but honestly, they're doing a great job, absolutely a great job. There is ability to have a bit more margin expansion there. But inherently, the profits on cost-plus work and certain other government work would show that these are nice.

They are at the high end of a range that we would expect. Really the issue is the RME, and RME had historically had the highest margins in the company by far, driven by oil and gas, and a 30% reduction in Canada and 25% to 20% in the U.S. was putting significant pressure on RME.

So it's not so much that WEI can continue to outperform and drive that separation. It's really we need a bit of economic turnaround to drive the margins up on RME and I actually look to the day, hopefully soon that you would say that RME is outpacing WEI without WEI coming down at all.

I think RME has the ability to be well above 15%, and that gives incredible leverage to our model on overall margin and returning of earnings to our shareholders..

Got it, that makes a lot of sense. Thanks for your time today..

Absolutely, Ryan. Thank you. .

Our final question comes from the line of Ryan Cassil with Seaport Global..

Hey guys. A lot of my questions have been answered, but a couple of things. I guess the first, your comments on Tahira's first question on the federal side, just kind of partnering that with your expectations for federal for the year.

You've left some room for deceleration and perhaps that's conservatism, but it doesn't sound -- it sounds like you actually wouldn't be surprised, based on what you said to see an acceleration in that business.

Do you agree with that? Or am I getting a little over my skis there?.

No, I actually agree with you, but the reason we aren't more -- we aren't translating that opportunity at the upside into even more raise on our revenue guidance or others are for every time we see a budget approved. For instance, this week and more funding put into DoD, these are all great things.

Agreement that a funding has been put across other key clients for us, those are great things. But it seems like the next minute, if not certainly the next day or two, there's threat of shutting the government down and all sorts of things. So I do see many opportunities.

It would not surprise us for that 15% -- greater than 15%, and that's why we put greater than. We didn't actually include a range, because we could easily be at the federal level, 20% or significantly higher. But on the other hand, if something comes out of left field and shuts everything down, we want to be prudent or cautious.

So the reason isn't because we see any material foreboding clouds. In fact, it's quite the opposite, but there is an awful lot of different information coming out on any given week. So I think we just like to be cautious at this time..

Okay, makes sense. And then the last one from me is a little bigger picture, but perhaps you'll take a swing at it. On your state and local business, I mean everything just seems rock-solid. We've heard from competitors and customers that the demand is there for the permitting and front-end work.

But at the same time, I guess where we're not seeing it is the follow-through on construction activity and demand for equipment that relates to the actual construction of projects. So I was wondering if you agree with that.

And if you do, what you'd think it takes to get those projects moving? And I guess lastly, is there any risk that as this continues that your customers will ultimately get backed up on projects and could slow some of the front-end work that you guys do?.

Well, the question is, why isn't the front end not translating into the back end to a certain extent. And I do think it's with respect to certainty of funding, that might come from the federal that might be tax-relief related, so it might be tax incentives. It may be stimulus. Actually, dedicated earmarked funds.

It's lots of things like that that I think are causing some hesitation in converting it from a plan or a permit to actually construction. And so we have found in the years past that even for projects not constructed, it can still be excellent for the front end. Things change, development takes place around project sites.

So if you design something or permit something and you wait for three months, six months, a year, you may get to do that all again. So we certainly have seen opportunities where we get to design or look for other alternatives for value engineering on something to make it better and more efficient.

So just because something's not constructed, it doesn't mean it has a direct impact to our work. And in fact, when it doesn't get constructed, quite often it's a net positive for us because we can find other ways to design it or find even a more efficient alternative for our client.

And if you can spend a few dollars on planning and save a lot of dollars on construction, that's an incredible value. So that's how we see where we're at. So I have seen what you're talking about. A little bit less conversion from front end to back end, and I think it's certainty of funding and tax implications and other items.

So I don't know if that's helpful..

Yes. No, it is. Thanks for very. Appreciate it..

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

Well, thank you very much, Regina, and thank every one of you for being on the call and for your insight questions and interest in Tetra Tech.

I look forward to speaking with all of you next quarter, and we'll do a very focused job on doing the best we can for our clients, projects and building our book of business as we go forward to the second half of 2017. Thank you very much, and have a great rest of the week. Bye..

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