Dan Batrack - President, Chairman & CEO Steven Burdick - EVP, CFO & Treasurer.

Sean Eastman - KeyBanc Capital Markets Andrew Wittmann - Robert W. Baird Noelle Dilts - Stifel Nicolaus Robert Burleson - Canaccord Genuity Gerard Sweeney - ROTH Capital.

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 up the conference for queuing for questions after the presentation. With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack..

Great. Thank you very much, Jennifer, and good morning. And I'd like to welcome all of you to our Third Quarter of Fiscal Year 2017's Earnings Conference Call. This morning, with me here today is Steve Burdick, our Chief Financial Officer.

Steve will be presenting during -- our materials today, the specifics of the financials and some of the details for the quarter. But I'd like to get this call started this morning with a brief overview of the financial performance for the company and actually, the performance from some of our end customers and actually our business segments.

While we had a very good third quarter, and actually a record quarter in many respects, we did see our oil and gas revenues, particularly in Canada, drop off at a faster rate than we'd expected coming into the quarter.

Our oil and gas revenues in Canada were primarily driven by a very large turnkey program that we awarded about three years ago, which was materially completed at the end of the second quarter.

And due to a very competitive bidding environment, we were not able to secure the additional work that we'd expected in Alberta, Canada, up near the oil sands area, that would have replaced the large contract for a project that we just completed.

But even with that significant reduction in our oil and gas revenues in the quarter, we had a very good Q3 for fiscal year 2017, with record all-time highs for our third quarter operating income, earnings per share and backlog. For the quarter, our revenue was $685 million, up organically 3% from the prior year.

And our net revenue was $498 million, which was flat from the prior year. But underneath that flat performance, we had very strong performance in most of our markets that was offset by this reduction in the oil and gas revenue. We generated an operating income of $46 million, which is up 17% from last year and was a record high Q3 for us.

And this performance generated a diluted earnings per share of $0.52 for the quarter, which is up 18% from the prior year, which is also an all-time high for us in our third quarter. And finally, our backlog was up 12% year-over-year, reaching over $2.5 billion, another record high for us.

I'd now like to provide an overview of our performance by our end customers. We had strong growth across most all of our end markets, with the exception of just oil and gas. Work for our U.S. federal clients was up 10% from last year, and was 30% of our overall net revenue for the quarter.

Our growth in the federal work was primarily driven by projects for the U.S. Department of Defense, U.S. State Department and the U.S. Agency for International Development. Our state and local revenues continued to be very strong for us this quarter with an organic growth rate of 16% year-over-year.

This growth is built on an expanding base of state and local clients all across the United States, and we had an excellent success rate in winning new programs during the quarter, including emerging opportunities for water management on large watershed programs and reuse projects all across the southern U.S. states. Our U.S.

commercial work, actually up slightly for gross revenue and flat for net revenue, with strong growth in environmental work, offset by the continued reduction in our oil and gas revenues.

Our international revenue, which is work that is contracted for and performed outside of the United States, was down 8% year-over-year for our gross revenue and represented for the quarter 28% of our business. Our international work is performed primarily in Canada, United Kingdom, Australia, and the Asia Pacific region.

And we continued to see growth in our differentiated services in water and environmental work internationally, especially in Canada, but this growth was offset by the reduction that I spoke of in the oil and gas revenues.

Overall, if you look at the company for the quarter, without our oil and gas reductions, our total net revenue for the quarter was up approximately 7% from the prior year. I'd now like to present our performance by our segments. We have two business segments. First, I'll speak of is the water, environment and infrastructure business group or segment.

Its net revenue was up organically 10% from the prior year with an excellent operating margin of 13.7% for Q3, improving 50 basis points on last year's strong margin. WEI's increase in gross revenue, net revenue and operating margin was driven by strong broad-based growth in multiple end markets, including our U.S. state and local work, U.S.

Department of Defense projects, commercial environmental work and Canadian infrastructure programs. The second business group, the Resource Management and Energy business group's revenue was up slightly from the prior year also, with its margins increasing to 9.5% or up 70 basis points from just a year ago.

RME saw growth in international development markets and commercial markets, if you exclude the oil and gas reductions I've spoken of already.

In Australia, where we did our Coffey acquisition a little over a year ago, operating margins continue to increase, in line with our integration strategy to increase efficiency and focus that operation on higher margin work. For our ongoing operations, our third quarter EBITDA margins increased 11.7%, up 40 basis points from the prior year.

This is directly in line with our objective to increase our margins to more than 13% in the mid to longer term. In the third quarter, our backlog increased for the sixth sequential quarter, resulting in another all-time high for us at $2,534,000,000. We had an excellent book of orders across our global business.

We received task orders for water-related services for the U.S. Army Corps of Engineers, the United States Environmental Protection Agency and new orders for major water infrastructure programs all across Canada. We had a really strong quarter for commercial orders also that added more than $350 million to our backlog.

We also received $100 million -- $170 million in new orders and awards for the international development work that went into backlog, and we won a new contract with the Federal Aviation Administration to provide a broad range of infrastructure data analytics and IT services.

Now as always, Tetra Tech continues to use the strictest criteria for tracking and reporting our backlog, which is only to include work that's been awarded to us, that's been fully funded and authorized for us to initiate the work immediately.

At this point, I'd now like to turn the presentation over to Steve Burdick, our Chief Financial Officer, who will present some more details on our financials for this past third quarter.

Steve?.

Thank you, Dan. So for those following along on the webcast, I'll begin my remarks by addressing a few key items on the financial overview slide. Please note that you can find a full reconciliation of our GAAP results presented on this slide to our ongoing results, which Dan just addressed previously, in our third quarter earnings press release.

So while gross revenue in the quarter improved 3%, net revenue was flat year-over-year as double-digit increases in our U.S. federal and U.S. state and local markets in particular were offset by weaknesses in the oil and gas market and most notably in Canada.

In the previous quarter, we completed a single Canadian oil and gas project, which, over the past three years, accounted for roughly $300 million in revenue.

But even with this decline in the Canadian oil and gas revenue, our operating income was a record for the third quarter -- for a third quarter and improved 17% year-over-year, with operating margins in both our WEI and RME segments up this quarter.

So as we continue to focus on our front-end differentiated services that we've assigned, our margin has improved and the overall risk profile of the business has declined. EPS of $0.52 was also the highest third quarter EPS in the history of the company and comfortably within our guidance range for the quarter.

I'll now review our cash flow metrics for the third quarter. Cash flow from operations totaled about $21.2 million. This cash flow figure reflects accelerated deferred tax payments of about $23 million made in the third quarter. And also, during the quarter, we had 1 additional payroll cycle with disbursements of roughly $30 million.

We will experience the reverse of this timing issue as we will have 1 less payroll cycle in the fourth quarter. As a result, we will see an even further improved cash position by year-end. So excluding these two items, on a pro forma basis, our third quarter cash flow from operations totaled approximately $75 million, which is up 25% year-over-year.

A testament of our strong business model, our cash flow from operations remains very healthy, and we continue to expect cash flow from operations to range from about $160 million to $180 million for fiscal 2017. So now turning to our net debt; our net debt totaled $187 million for the third quarter.

But due to our solid cash flow, not only has our net debt declined, but our leverage ratio of net debt to EBITDA has also remained below our target range of 1 to 2x.

As a result, we continue to have significant excess liquidity to invest in organic growth and acquisitions while still having capital to deliver strong returns to our shareholders, which I will speak about more shortly. And lastly, our day sales outstanding was 80.4 days in the third quarter.

And by focusing on this differentiated printing, consulting and engineering work, we have been able to lower our DSO, and we remain committed to a DSO target of less than 75 days. So Tetra Tech's differentiated business model has enabled us to consistently deliver industry-leading financial performance.

Our lead with science approach has resulted in improved margins for the company. And in fact, on a year-to-date basis, our operating margin has increased 40 basis points over the same period of last year. And in addition to improving margins, our cash flow position remains very strong.

And as we have implemented a strategy to exit the fixed price low-bid construction work, our capital expenditure requirements have declined significantly. And with that lower CapEx comes a stronger free cash flow. Our year-to-date CapEx represents only about 0.3% of revenue, whereas historically, our CapEx equaled roughly 1% of revenue.

So for fiscal 2017, we expect CapEx of approximately $10 million and our free cash flow to total roughly 130% of net income. So our strong free cash flow provides us with additional capital to return to shareholders through buybacks and dividend.

And delivering significant returns to our shareholders remains a key part of our balanced capital allocation strategy. So on a year-to-date basis, we paid approximately $16 million in dividends and bought back $60 million in stock. We do anticipate spending a total of $100 million in share buybacks this fiscal year.

And just this week, our Board of Directors has approved our 14th consecutive dividend amounting to $0.10 per share. And so we estimate, based on all this, we will return roughly about 3/4 of our free cash flow to shareholders in fiscal 2017.

So ultimately, our high-margin business, our strong free cash flow and significant return to our shareholders has been favorably recognized by the market. And in fact, over the past three years alone, our stock return -- our stock has returned approximately 72%, which is more than double the S&P 1000 over that same time period.

So in summary, providing the highest quality consulting and engineering services to each of our clients goes hand in hand with delivering market-leading returns to each of our shareholders. Thank you for your time today, and I will now hand the call back over to Dan..

Great. Thank you very much, Steve. Thank you very much. I'd like to highlight just a few of our growth markets that actually drove our backlog up, and are giving us great visibility into the end of 2017 and great visibility into programs that will go through 2018 and far beyond. Tetra Tech does have a very long history of supporting the U.S.

Department of Defense, and that's the Army, Air Force, Navy and National Guard, with essential consulting and engineering design services both here in the U.S. and at U.S. operations all around the world. We see the U.S.

military's budget increases as a long-term growth driver for us, with early opportunities resulting from the recent 2017 budget increases that are just now starting to emerge and get funded from the current administration. Early indications are that the Department of Defense budgets may increase again in 2018.

With our early discussions of plus-ups in the $20 billion to $50 billion range that are coming out of the executive branch's request and recommendations coming out of the House of Representatives.

Tetra Tech currently holds over $5 billion in contract capacity across the Department of Defense to provide a very wide range of support services, such as master planning and site restoration, engineering design and data analytics and asset management. This is an excellent growth market for us as we enter the end of 2017 and into 2018.

The second area that's been a big contributor for us, over the past year, it's been our U.S. state and local markets that have been growing very quickly for us, and it's actually up 20% -- over 20% year-to-date here in 2017. One of our key drivers for this growth is the restructuring of U.S.

water supply infrastructure to address and manage drought, primarily in the southern U.S. states. This has resulted in new projects to reuse water, requiring new water treatment plants and new infrastructures to support the rerouting of water supplies. Now these new programs across mostly the southern U.S.

states, from Florida all the way across to California, are an ideal platform for delivery of Tetra Tech's differentiated services. We see this market building rapidly for us due to the increased local spending, with over $18 billion in planned spending for water reuse programs across the U.S.

With the passage of bonds and funding programs, such as water measures here out -- out here in California, and the potential increased investments by the private sector, in P3, or public private partnerships or alternative delivery programs in the water market.

These are all long-term investments by our clients, making water reuse programs a long-term growth opportunity for us. In many cases, the funding is just beginning to make its way through the system, which can often take between two and five years from the time it's actually passed in bonds or other commitments.

For example, a program we have here called the GRIP program, a water reuse project in Southern California, where we're the lead design engineer, is one of the first programs to receive funding under the California bond measures that were passed way back in 2014.

That's a good example of the timing from the time it's passed to the time we actually see the revenues and projects. In Canada, we're also at the early stages of infrastructure opportunities.

Over $22 billion in infrastructure stimulus is expected to support the build-out of drinking water, wastewater and storm water systems over the next decade in Canada.

In addition, the new Canada Infrastructure Bank, with $35 billion in funding, will continue to stimulate and draw even additional funding into an already very attractive P3 or public-private partnership market that exists in Canada.

We're very well positioned for consulting and design work on this P3 or their design build or alternative delivery programs in water and transportation projects across Canada where we have over 50 offices.

In our specialized expertise in arctic engineering and geotechnical services are key differentiators for addressing infrastructure needs in the farthest northern regions of Canada, even including the new facilities that are going to be needed to support the Northwest Passage across the Arctic regions of the country.

When we look across our end markets, we see continued organic growth. Our four major client sectors, which are the U.S. federal government, our U.S. state and local clients, U.S. commercial and international, with the exception of oil and gas, all have seen strong growth year-to-date and have a strong outlook for the remainder of the year.

We expect our U.S. federal work to represent about 30% of our business and grow at a rate of approximately 15% for the year. And we expect new opportunities for us as the Department of Defense priorities are being put in place, even for this year in 2017 in new projects and task orders awarded. We expect to continue growth at 15% or more with our U.S.

state and local clients. As I've mentioned earlier, our state and local work is up 20% year-to-date and is driven by our demand for differentiated water and infrastructure services. Our U.S.

commercial work is also expected to grow at a 5% rate, excluding oil and gas, for industrial water treatment and environmental programs and even solid waste activities we have all across the U.S.

Tetra Tech's international revenue, primarily generated in Canada, the United Kingdom and Australia, is expected to grow at about a 10% rate, excluding the effect of oil and gas, strengthened by recent awards in the Canadian and Australian infrastructure operations.

However, oil and gas, primarily in Canada, is expected to reduce by about 65% in the second half of our fiscal year 2017. This is down further from the 30% rate we saw in the first half of the year.

Reduced revenues in the sector are actually driven by Tetra Tech as a direct result of our disciplined approach to risk management and our response to a very highly competitive market, especially for oil and gas work related to Canadian oil sands. So overall, across all of our markets, we expect a growth rate of about 5% for 2017.

I'd now like to present our guidance for the fourth quarter and our updated guidance for fiscal year 2017. Our guidance is as follows. For the fourth quarter, our guidance for net revenue is for a range of $500 million to $520 million for the quarter, with an associated ongoing earnings per share of $0.60 to $0.62.

Our updated guidance for all of fiscal year 2017 is for net revenue up $2.0 billion to $2.02 billion net revenue, with an associated ongoing earnings per share of $2.10 to $2.12. This guidance does exclude any effect of the RCM unit.

It does include a $0.26 a noncash amortization charge that we will have incurred for the year, and we do estimate a 31% effective tax rate for the entire year of 2017.

In summary, our strategy is to focus on very high-end consulting, engineering and a leading with science approach to our projects that differentiates us in the marketplace more than ever before. It is this focus that has resulted in a record third quarter earnings per share of $0.52 and a record third quarter operating income of $46 million.

We have the highest book of business and that's the highest quality book of business in the history of the company, with our backlog reaching an all-time high up 12% from last year and up for the sixth sequential quarter. And we have an excellent position in large long-term growth markets, especially here in the U.S.

with our state and local clients and the federal Department of Defense markets. And that's not even to include large growth areas in international infrastructure markets in Canada and Australia. Overall, we're really looking forward to a strong performance as we complete fiscal year 2017 and a very promising 2018.

And with that, Jennifer, I'd like to open the call to questions..

[Operator Instructions] The first question comes from Sean Eastman with KeyBanc Capital Markets..

Just wanted to start on oil and gas here. Obviously, this large midstream project has been well telegraphed by you guys as being a lumpy one. And it does set up a bit of a tough comp into the first half of fiscal '18.

So I'm just trying to get a sense of what the likelihood of you guys being able to see a stabilized decline in the oil and gas business into the first half? And I'm wondering, in your view, what kind of oil price scenario or macro viewpoint you need to take for that business in Canada to pick up? And also in the past, you've talked about some business development initiatives with some new customers in the oil and gas space.

So any kind of color around those dynamics will be helpful..

Yes. Absolutely, Sean. Those are good questions, certainly ones we've been spending some time with. First thing I'd like to clarify is we are not out of the oil and gas business. We do work for many of the majors, a lot of the juniors and we have a significant position on lots of projects, both in the United States and in Canada.

But with respect to oil prices returning, there are as many estimates out there as there are individuals, and that seems like a -- we've been focused on is enduring projects that will actually be funded and present both through an upturn and a downturn.

Now we have not taken an estimate as to what price point would be required in order to have the actual oil sands work recover. But the work that we've seen in the U.S. sequentially has actually been reasonably flat. In fact, we saw it flat between Q2 to Q3, and our forecast is actually Q4 will be relatively similar to Q3.

This is where we have more very high-end value-added services. This is where we're supporting permitting, design work, right-of-way evaluation and consulting support on many different fronts. So expect the U.S. activity to be relatively stable. With respect to the decline, I think the decline will and has taken place largely in Q3.

And it is fully baked in or reflected in our Q4 guidance. You are right that the Q1 and Q2 will have headwinds from just the Canadian -- largely from the Canadian aspect. So expect the rest of it to be stable sequentially.

We'll try to highlight this as we move forward in subsequent quarters to actually show you and to share with you what we've seen in these end markets.

We have seen other, what we would call framework contracts or master service agreements with some of the majors that have actually allowed us to do consulting work both for permitting and engineering work outside of the geographies we've seen in the past, which is just Canada and the U.S.

So we do think there are some opportunities, but we've not reflected any of that into our guidance now. So I would say the step down is largely associated with a single project, which you identified as lumpy. There's no doubt about it. We are going to remain disciplined.

And I just want to say a word on the backlog because I do think it has a relationship to the oil and gas. We did have an opportunity to actually contract for substantial additional work to replace revenue, but we want to remain disciplined.

It's not the size of our backlog which is, of course, the largest we've seen, but actually, the quality and composition of it is the best ever in the company's history, regardless of size. And that's actually a function of the discipline we've taken.

And I'm quite pleased, in one respect, that we've burned off $300 million in oil and gas backlog on a single project and grown our backlog every quarter through that period, certainly the last six. So I think that actually shows what the overall fundamentals of the collective business are.

And I think notwithstanding a couple of quarters of short-term headwinds due to this 1 project twilighting, I feel pretty good about even the oil and gas business..

Okay, great. And then I just want to move over to the federal side. We're headed into a pretty important quarter for federal bookings, and it seems like a bit of a unique situation this year given what's happening in Washington. I'm just hoping to get some color on what you're expecting around bidding activity this quarter.

And if you could discuss some of the moving parts in there, it sounds like DoD is looking great, but curious if the pace of activity has continued in USAID as well?.

one is the Department of Defense, so about one-third of the work that we have. It's been up the most. It's up well in excess of 20% year-over-year. And we actually see more contract vehicles come out. We press released a few. As we have more successes, you'll see more of those.

And so we see that, as I've spoken in the prepared remarks, that increases is in funding, increases in proposed funding, even in '18 from the House and the President, House of Representatives and the current administration, makes the outlook in the Department of Defense very strong.

And so the growth rates there, we've been suggesting are sort of at the 15% to 20% rate, although I will say we've seen a quarter or two, where it's been well above that. We have another one-third. So the second bucket is international development, for us, which is really USAID and State Department.

That has been growing, and we've had a few announcements there also. We've more opportunities. We've seen more funding, and that continues to grow and have a healthy pace of new opportunities, and we've seen between 10% and 15% growth in that bucket. And so the second -- third.

The final, third, which, because these are all roughly similar size, is all of -- we sort of lump all of the rest of the civil programs. And this would be the Federal Aviation Administration, this would be the U.S. EPA, this would be NASA, those would be some civil agencies. And that area has actually been flat for us here so far in 2017.

However, I will say we've seen some nice opportunities come out to bid these last couple of quarters. We're quite hopeful that we'll be successful in some of the competition. You should be able to look for those on press releases. If we are successful, they're large enough that they would be noteworthy.

And I will say that the one area that's been a little challenged for us earlier in the year was the Federal Aviation Administration and was quite pleased to announce and saw this a couple of weeks ago with the Federal Aviation Administration's $77 million multiyear program. It's a single award. It's won to us and just to ourselves.

And I think in and of itself will help turn the comparisons and the growth of the FAA around. We have other opportunities that may help that. But we do expect some decisions out of EPA and even NASA that could help turn even the third bucket into a positive growth and actually increase the overall contribution of our growth from the federal sector.

And that would put all three areas in growth, two that are significant right now, and I think even the civil is going to begin contributing..

Thanks for the really detailed responses Dan..

Yes, great. Thank you, Sean..

The next question comes from Andrew Wittmann with Robert W. Baird..

I wanted to talk about the margins a little bit. They've been kind of consistently running higher, this quarter because more of the same -- I guess, maybe my question is as we look forward from here, when I look at the margins, they're up, call them, rough numbers, 100 basis points or so year-over-year.

Is the mix of business, Dan, helping you get there? Is it utilization that's driving that? And as we look to the future, do you feel like this kind of mix of business or whatever it is, is to sustainable so that we can continue to drive the margins higher as we move into '18?.

It's not -- so you identified two items there, and this could be one or the other or both and it's a mix for utilization. And I call utilization meaning the amount of work we have coming through a unit.

So the mix typically -- our mix would be -- would cause our margins to go higher if we saw more commercial work and more attractive work in commodities, which should be oil and gas and mining. That actually wasn't the driver for our margin increase.

The large margin increase is mostly in the WEI, which is the government space, and it was because we've got people very busy, it's on the utilization side.

So you hit it right on, that what we see -- we didn't have to hire additional staff, we didn't have that add offices, we didn't actually have to add additional assets in order to drive up our revenues, which then put leverage on our fixed costs and other items, which then translated into margin.

Now I don't -- at some point, we have to start adding more office spaces and more people, but I think we still have additional room in our margin, in our state and local work in our federal work, in our government activities that would actually drive higher margin.

And this is the lowest risk revenue we have because its time and materials and in some instances, even cost plus, so -- and I think that's what actually driven it. That does mean that it looks sustainable too because it's not driven -- I'm going to make this very clear, it's not driven by a single fixed price contract that had a close-out.

There were no unusual pickups or contributions that happened in the third quarter. So this is what we see as the best kind of increase in performance, which is -- we just earned it..

Great. I guess, my follow-up question was, just looking at the revenue compares as well, obviously, you guys have had some very large growth in state and local. Federal has been obviously doing well, as you've articulated here.

It seems like, as I look back over the last three or four quarters, that the compares should start getting higher in the state and -- harder in state and local in particular and maybe even so in federal.

I guess, I wanted to get your sense on the markets in relation to the compares that you'd be coming up with in the next couple two or three quarters?.

Yes, I think we've kind of embedded that. And I know I've had some comment that perhaps we're being conservative, and we -- let me share with you what I mean by that. So when I spoke of our state and local growth being between 15% to 20% -- or 20%, we've actually been averaging quite a bit higher than that.

So there are embedded comps as you're getting up with a larger business there. Even if you add the same dollar amount on a percentage, it will appear to be slightly less. And that's why you can see our year-to-date numbers measuring in 20% or more, but we've actually included in our materials that we expected to be 15% or more.

That's not intended to be extremely precise, but it's extended to actually capture that slightly increased year-on-year comparable. We see the actual pace of new contracts, new awards and the dollar growth being quite consistent and with great visibility.

But when you actually do the accounting calculation of that percentage, it would -- it may make the growth rates from 20-plus percent to 15% to 20%. And so we've intended to actually capture that concept or thought in the forecast that we have already.

So looks good, looks good out into the future, but just the arithmetic calculation may make that math 1% or 2% a lower base on comps, Andy..

All right. Thank you. I think I'll leave it there..

Okay. Thank you, Andy..

The next question comes from Noelle Dilts with Stifel..

Thanks, good morning.

Just a quick sort of high-level question; when you look at the Department of Commerce nonresidential -- or I should say the Census Bureau, nonresidential construction put in place numbers year-to-date, you're not seeing -- the numbers just don't look great if you're talking about water supply or even sewerage and waste, relative to what you're seeing and what other companies are seeing in the industry.

So do you think that's just a function of how they collect data and what they're tracking? I'm just trying to kind of connect the dots here in terms of what seems to be discrepancy..

Yes. I think that we're not drinking a lot more water. There just is a lot less water. So when you talk about consensus and new buildings and new activity that would actually consume water, it's not the overall increased demand. It's actually the supply that's the problem. So it's happened as new emerging contaminants are being identified for regulation.

You've seen this with respect to pharmaceuticals. You've seen this with new -- what we refer to as emerging contaminants. They do require upgrading, retrofitting and designing of new technologies to treat.

You hear words like chlorate and you hear words like hexavalent chrome and you hear words about nitrates, and these are all items that actually require not just the run-of-the-mill wastewater engineer, but actually have driven the market largely to where we are, which is very high-end technical scientist evaluation of chemists and physicists and other hydraulic professionals.

The other item I mentioned -- and I talked about some very large numbers with respect to water reuse. So this isn't just California droughts that are, of course, have been quite severe. And it's how do you generate a water supply when there isn't water. And so they're not drinking more water, there's just less of it to get.

And so that has been these water reuse programs.

In fact, the largest water reuse program, which is capturing wastewater, treating it and then reusing it, in that case for groundwater recharge and then recovery to the drinking water supply, the largest in the entire United States, in fact, the largest in the world is right here in Southern California and we're the design engineer.

And so these are new programs, new revenues, new activities that didn't take place before and it wouldn't show up in census or nonresidential construction. It's really a different animal..

Right, that makes sense. And then just shifting over again to oil and gas. I guess, coming out of last quarter, I thought you sounded a little bit more confident there in potentially picking up some of those opportunities.

So it was just really -- it sounds like this was just really a function of the terms and conditions on those projects changing pretty dramatically.

And then that leads to my question, which is really if you're seeing just increased competition, unattractive terms and conditions in the Canadian market, are you still comfortable with your participation there? And how are you thinking about the longer-term opportunity?.

Well, I'm trying to think of the right word with the Canadian opportunity. You just say -- you're exactly right. It was a combination of terms and conditions and price point.

We're not willing to take it either on the come, meaning that we'd take it at a price point that would appear to be breakeven or a loss on the hope that we can somehow come up with lower subcontract bids to make it work. That's quite a common practice in some of the construction activity on a turnkey. We're unwilling to do that.

I do see that area is stressed, the price points for production of oil. I mean, this is not a secret. Everyone knows that it costs more to produce oil and transport it and also do some of the refining for oil sands than it does in the Permian and other -- some of the easier accessible energy supply locations in the U.S.

So I'm not optimistic on it in short term for turnkey projects because it does appear to me that the items that are under the most stress are items that we're not overly excited about anyway, unless they're for clients that we've been working with that are high-priority programs.

And that means projects that are heavy reliant upon construction or at risk or something like this.

But the other work in Canada, we actually still feel pretty good about, which is the design work, the consulting work, the environmental, the right away, all of the other items, the technical support work with respect to even economics work, working with First Nations up in Canada, we actually feel really good about those things.

Now those are smaller margin. Not any one project will drive, that will move the needle, so to speak, but we are cautious. We are not exiting that work though. We are -- we do have the ability to do turnkey. There are smaller projects that we would negotiate directly with our long-term clients, and so we'll still remain active.

But I am being nice about it. I'll say I'm very cautious on the conditions in the oil sands for turnkey projects turning around in the near future..

Great, thanks. That's helpful..

Great. Thank you, Noelle..

Our final question comes from Bobby Burleson from Canaccord..

So just a follow-up on Canadian oil and gas. I'm just curious how it works in terms of -- maybe you guys are proactively walking away from business where the margins aren't good.

Do you have the ability to kind of repurpose people? Does that free up any capacity for areas where you're seeing strength in Canadian commercial?.

Some of them, the answer is yes. So -- and this is actually what we saw in the mining activity. So what we can do is what I would call midlevel and junior level engineers and technical staff. So civil engineers, electrical mechanical, structural, we can actually take and repurpose for municipal work.

We can actually put them on other projects that would be in some of the commercial work that we have. So a foundation for a pipeline support is not materially different than a foundation and structural support for a building. I mean, they are still geo tech calculations, compaction, all the rest of it seems true for these other disciplines.

Where we have difficulty was in individuals that are highly specialized for an end market. And we are -- the one thing that has been fortunate -- because it's inherent to the business that our full-service turnkey work in Canada is seasonal.

You could call it, that is -- it does vary between the winter when we're quite busy, so we would staff up to 500, 600, 700 people. And it would then drop to well less than 100, maybe less than 50, in the spring. And so without the work coming back up, it wasn't how were you going to adjust and reallocate or redeploy these staff.

That is what we've been doing for the past several years. So the natural cadence of the business with respect to this turnkey business was inherent or built into it. So it was just a matter of not staffing backup materially for these variable labor costs. And we are very closely looking at the fixed costs.

That would be some of the equipment and materials we have and other fixed facilities and that we'll address that to keep our assets and resources associated as commensurate and right sized to the business that exist. So yes, we can redeploy staff that would be -- on the technical side, that would be applicable to other markets.

But a lot of the downsizing adjustment is already inherent in the business based on this seasonal cyclicality we have..

Okay, great.

And I'm just curious, can you contrast what's happening in some of the bid margins up in Canada versus in oil and gas versus you what you might be seeing here in the U.S.?.

That's -- I'm glad you asked that question because for us, and I've spoken of this on past calls, I'm not sure it's been in the last quarter or 2, but let me just articulate what Tetra Tech is doing in Canada versus what Tetra Tech is doing in U.S. In Canada, we've actually taken projects on a turnkey basis. We've taken it from the very beginning.

You can call it design-build, you can call it EPC, you can call it a full turnkey, but we've actually taken it from the initial design all the way through commissioning. And so that's the projects that have had constructors that have come in at very aggressive price points.

Some people say they're donating equipment and all sorts of things like this, which creates its own dynamic. In the U.S., we do not do that. We haven't done any of that work. What we've done in the U.S. is we've actually done the upfront consulting design. It's all professional engineering and professional consulting services.

So we've not seen the same dynamic. But it's not because oil is red-hot here. It's because we're in a completely different niche part of the market here in the U.S. So it's been professional services, professional design, professional consulting. It really has been right in the sweet spot of Tetra Tech's high-end consulting differentiated services.

In Canada, it's actually included full service, which is actually embedded within that in aspect of implementation, which has a different dynamic with respect to commoditization..

Okay, that's helpful. And then just quickly one last one on the L.A. Olympics win. Curious kind of what the -- what you see is kind of important things that might need to be addressed infrastructure-wise early on, where you guys can get involved in some of the planning..

Yes. It's exciting out here in Los Angeles. This is our hometown, home county, home court, it's 11 years away and the planning work will get started soon. And I think some of the big things are going to [indiscernible] certainly, we've got a very rapidly expanding light rail program.

But an area that's been really interesting for us and we've been involved in it for many, many years now has been the Los Angeles River or the LA River program. It's one that's had significant funding from the county and from the city of Los Angeles because the river does run from both the county through the city.

There have been large funds set aside for it, and it also has an intersection with the U.S. Army Corps of Engineers, which is the one of the lead entities on this. So it's really nice nexus for us. It has a federal component for stakeholders. It has a city with L.A. and the county.

And there's very few firms that actually have long, long-term relationships with all three. And that's a multibillion dollar program that could actually be well put in place that could serve some of the venues, everything from biking to running to potentially even -- in television, looks like a concrete channel.

But there's actually areas that are -- actually, whitewater rafting and kayaking are done even now. So we're excited about it. The county and city are excited about it. And it's -- it will be a good opportunity. But I will say this is 1 week old, the news and -- but it is something that will build over the next decade because it's 11 years out..

Okay, thank you..

Great. Thank you, Bobby..

And we also have a question from Gerry Sweeney with ROTH Capital..

Good morning, guys. Thanks for squeezing me in. One more question on the oil and gas side, specifically in the U.S. And I apologize if this is a little bit too granular.

But if you look at a lot of the oil and gas activity in the U.S., I'll use rig count as a proxy, a lot of activity has been focused in areas with -- where there's already existing infrastructure. Like the Permian is somewhere 40% of all additional rigs this year, and if you add any other Texas regions, it's somewhere around 60%.

So the question is, do you need activity in other areas to accelerate to get your oil and gas business moving? Or another way to look at it, historically, has your business been more related to areas outside of Texas?.

Well, for those, obviously, who are quite familiar with oil and gas and the geography, Permian, for those not familiar with it, is located at West Texas. The major, if you want to call them, major metropolitan areas, Midland-Odessa, is the closest largest area.

And the one thing that has been persistent in West Texas is it's dry, it's hot and there's not much water. And as you've said, the largest amount of rigs that have been deployed with respect to generation of oil and gas or exploitation of reserves that are there, which are enormous, those are rigs and they all require lots and lots and lots of water.

And some projects that we've been focused on there -- and we are focused in Texas, in the Permian, but we think that what's going to drive us is not -- we don't drive rigs but we do, do permitting and design of the pads and the water retention ponds. So that's what we would do.

And also working with both cities, municipalities and even other water providers or purveyors to get the water licensed and permitted so that you can use it to frac. Because without water, those water -- those wells -- those drill rigs and wells aren't doing anything.

So it is an area we're focused on and we think that we can actually participate in the upside there.

We have been broader, but the area that we've been focused on has been the Eagle Ford, which is Texas; the Permian, which you just talked about; and then we have a good presence on a natural gas up in the Marcellus, which, of course, is in New York, Pennsylvania, sort of that Northeast area.

So that has been relatively consistent for us up in the New York -- up in that area. But we expect the growth and we have had some excellent wins in Texas. And we do have Permian, as you just identified it, is one of the largest areas of focus in the U.S. not just for drillers and the oil producers, but for support contractors ourselves.

So I hate to say we're all over it, but we have offices in Midland, not everybody can say that. I know these do a lot of outsourcing of the work, of the design and engineering work in Houston. But we'd actually like to provide the work right there at ground zero and not have to ship it east for them.

So I don't know, Gerry, I hope that answers some of your questions..

No, it does provide some -- I appreciate it, and it puts me on the right track. And then just a quick question on the buyback. I think there was $40 million left. Obviously, the stock is taking a little bit of a hit.

Is there any -- do you have specific criteria as to when you can be in the market? Or do you have some discretionary basis as when you can deploy some of that capital?.

Well, we tried to take a lot of discretion out of this when we put it in place, so we don't want to get into all the details, but we did -- we do have an automatic trading structure put in place. It has both a linear aspect to it to achieve our $100 million over the year. You can see that what we've reported on the past quarters.

It doesn't take a math genius to see it was $10 million, $10 million, Q1 and Q2 and $40 million, $40 million in Q3 and we said we would commit to that in Q4. In addition to that, we do have a grid set in place, that if certain items are triggered, that would contribute even additionally.

But it's not discretionary as to how Steve Burdick and I feel on a given morning. So this has all been prepared and well vetted through with support from our Board of Directors..

Great. I appreciate it. Thank you very much..

All right, thank you very much Gerry..

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, Jennifer, and thank you all for your questions. I thought they were actually very insightful and clearly demonstrate your understanding of the oil and gas industry. We work very hard here to try to communicate to our shareholders and stakeholders where we have any type of uncertainty or things that may have variability.

I'm glad you had excellent detailed questions on oil and gas. But with this down step, I think that the -- one of the areas that had created the greatest variability with respect to our performance and outlook has now fully been baked in and is incorporated into our outlook.

And I think the remaining market areas, as I've spoke both on the Q&A here and the prepared remarks, really look very, very strong as we going to into the fourth quarter and into 2018. And I look forward to the call in a quarter from now, both to give you the full results for 2017 and maybe more importantly, what our outlook in 2018 looks like.

And I'll tell you, at this point, we feel pretty good about that. And I look forward to speaking to you all in a little over 90 days from now. Have a great day. Bye..

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