Tetra Tech Inc

NASDAQ:TTEK

Earnings Call Analysis

Tetra Tech Reports Strong Liquidity and Growth

Tetra Tech displays solid financial health with significant liquidity, balanced debt, and a $400 million buyback plan still in play. The Board of Directors approved a $0.26 dividend, a year-over-year 13% increase. The company maintains its leadership in the water and environmental sectors, leveraging its expertise to scale solutions and drive growth; it ranks first in the water market, with water-related projects contributing roughly 85% to its $4.25 billion annual revenue. Funding is mainly through user fees, debt, and tax receipts, with federal funding as a bonus. With 30% of revenue from U.S. federal clients, Tetra Tech expects stable growth regardless of the upcoming presidential election due to their essential services and long-term contracts.

Sailing Success: Q1 Fiscal Year 2024 Bolsters Tetra Tech's Ambitions

Tetra Tech started the fiscal year 2024 on an exceptionally high note following the integration of the RPS group. Celebrating their first year together, the company saw a strategic calibration bearing fruit with a robust focus on high-end water and environmental consulting leveraging their Leading with Science principle and digital tool solutions like Tetra Tech Delta. Their footprint in the pure-play water sector is further emphasized by the increased reliance on technology, specifically leveraging analytics and applications, ensuring they not only match but surpass industry standards, setting them apart as a leader.

Financial Fortitude: Strong First Quarter with Elevated Guidance

The first quarter manifested an impressive 38% increase in net revenue, bringing it to $1.02 billion, and a 32% increase in EBITDA boasting $131 million. This financial uptick handed shareholders a high of $1.40 in earnings per share. The numbers speak volumes, with new orders reaching $1.2 billion and the backlog amassing to a monumental $4.74 billion, marking a 24% year-over-year growth. This successful quarter pushed Tetra Tech to hike their full-year guidance for net revenue, now expecting up to 20% year-over-year growth in earnings per share. The portfolio diversification illustrates a hearty balance between government services and commercial international segments, both contributing to the edge in profit margins.

Robust Capital Management and Allocation Strategy

Steve Burdick, Tetra Tech's CFO, highlighted the company's prudence in capital management. With operational cash flows up by 26%, surpassing net income by 152% over the last 12 months, it carves out a narrative of efficiency and effectiveness over two decades. Additionally, the reduction in Days Sales Outstanding (DSO) to 55 days from 61 days last year demonstrates operational excellence. On the funding aspect, their liquidity and balanced mix of debt ensure readiness for strategic organic and acquisitive initiatives, particularly in water and environmental segments. The dividend payout saw a 13% increase, maintaining the tradition of quarterly increments and shareholders have the reassurance of a substantial buyback program being part of the capital allocation strategy moving forward.

Engineering Market Leadership: The Water and Environmental Edge

Tetra Tech has firmly established its domain expertise over its competitors in the water and environmental sector through continued innovation and scalability. With their roots firmly in research and development, they have paved the way for pioneering solutions. Having secured top rankings consistently over two decades, they carve a distinct path across the entire water cycle, bringing in approximately $4.25 billion annually with advanced treatment programs and designs like PFAS removal and desalination. Their market leadership is further reinforced by their digital technology services and the recently launched subscription services, demonstrating a commitment to offering high-value solutions to clients.

Confident and Unfazed: Perspectives on U.S. Elections and Stimulus Programs

Chief Executive, Dan Batrack, laid out the company's fortitude against the backdrop of the looming U.S. presidential election. Reinforcing the strong underpinning of a diversified portfolio, he noted that approximately 70% of the revenues are unlikely to be swayed by election outcomes. With consistent federal revenue irrespective of the leading administration, Tetra Tech stands strong and has even increased the guidance for the fiscal year. Contributing to this forward momentum are aspiring federal programs like the IIJA, which are anticipated to peak in late 2025.

Looking Ahead: Refined Guidance Suggests a Stellar 2024

As a testament to their confidence and in response to the first quarter's performance, Tetra Tech has raised net revenue guidance for fiscal year 2024 to a range of $4.15 billion to $4.3 billion. With a diluted earnings per share guidance increase to $5.90 to $6.20, the forecast promises a revenue midpoint increase of 13% and GAAP earnings midpoint growth of 19% from fiscal year 2023. Considering an effective tax rate of 27% and intangible amortization costs, the company projects continued strong margin performance driven by differentiated services and insightful market strategies.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning and thank you for joining the Tetra Tech earnings call. As a reminder, Tetra Tech is also simulcasting this presentation with slides in the Investors section of its website at tetratech.com. This call is being recorded at the request of Tetra Tech, and this broadcast is a copyrighted property of Tetra Tech. Any rebroadcast of this information in whole or part without the prior written permission of Tetra Tech is prohibited.

With us today from management are Dan Batrack, Chairman and Chief Executive Officer; Steve Burdick, Chief Financial Officer; Jill Hudkins, President; and Leslie Shoemaker, Chief Sustainability Officer. They will provide a brief overview of the results, and then we'll open the call for questions.

I would like to direct your attention to the safe harbor statement in today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties including the risks described in Tetra Tech's periodic reports filed with the SEC. Except as required by law, Tetra Tech undertakes no obligation to update its forward-looking statements.

In addition, since management will be presenting some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted in the Investors section of Tetra Tech's website [Operator Instructions] With that, I would now like to turn the call over to Dan Batrack. Please go ahead, Mr. Batrack.

[Dan Batrack, executive]

Great. Thank you very much, Paul, and good morning, and welcome to our first quarter of fiscal year 2024 earnings conference call. We're looking forward to sharing with you Tetra Tech's first quarter results and how we're building on our record-breaking 2023 performance.

We just celebrated our first year since the RPS group joined us, and we couldn't be happier with their successful transition into the greater Tetra Tech.

As a pure-play global leader in high-end water and environmental consulting, our future outlook is strong. It speaks to the success of our strategy to focus on the entire full water cycle. And you're going to hear a lot more about this today from both Jill Hudkins and from Leslie Shoemaker.

Our Leading with Science approach is led by our talented workforce of scientists, data analysts and engineers who leverage our Tetra Tech Delta digital tool solutions in performing their work every day. Our Delta technologies not only include analytic tools that make us best-in-class but also include software and applications that are being subscribed to by our clients.

Based on our strong first quarter and the outlook that we see for the rest of the fiscal year, we've raised our full year guidance for net revenue and increased our earnings per share guidance to reflect a 20% growth rate year-over-year. And while we report our financials on a U.S. GAAP basis, for our international investors, we've included some IFR metrics for their reference.

I'll begin with an overview of the quarter. Steve Burdick, our Chief Financial Officer, will provide an overview of our financial performance and our capital allocation strategy. And Jill Hudkins and Dr. Leslie Shoemaker are going to provide today an overview of our differentiated water services.

Our first quarter results build on the record performance results that we had just last year. In the first quarter of fiscal year 2024, our net revenue increased 38% to $1 billion or $1.02 billion, which represents a double-digit organic growth rate. Our EBITDA increased 32% to $131 million in the quarter, which generated an all-time first quarter high earnings per share of $1.40. This quarter also had strong new orders of $1.2 billion, which resulted in our largest first quarter backlog of $4.74 billion, which is up 24% from last year.

As I mentioned earlier, the alignment of RPS with Tetra Tech is proceeding extremely well. And I'm really pleased to announce and share with you that in less than 1 year, RPS' EBITDA margin now exceeds 10%, rising more than 600 basis points from when they joined us on January 23 of last year.

I'd like to start by providing you an overview of our performance by our end customers. In the first quarter, revenue for all 4 of our client sectors increased by double digits compared to last year. Work for our U.S. Federal clients was up 49% from the same quarter last year. Federal growth was driven by the Department of Defense and USAID resiliency consulting. Our state and local revenues grew organically about 16%, continuing to be driven by the work that we're doing in the water supply and treatment areas that you're going to hear a lot more about from Jill and Leslie later in this call.

Our U.S. Commercial net revenues were up about 10% from last year. This growth was driven by increases in infrastructure decarbonization, which is performed mostly in our high-performance buildings practice, environmental permitting and high-end consulting and energy transition services.

And finally, our international revenue was up 74%. Now the international operations, together with RPS are growing our water and clean energy services, especially in the geographies of the United Kingdom and in Australia.

I'd like to share with you our performance by each of our 2 end segments, the Government Services Group and our Commercial International segment. In the first quarter, the Government Services Group, we refer to it as our GSG segment was up 25% compared to last year to $443 million and generated a strong 14.3% margin in the quarter. Key revenue growth drivers included inland waterways and coastal flood protection programs as well as continued support for our USAID energy programs.

For comparison purposes, I'll note that the first quarter of last year or 2023 were extremely busy across all of Tetra Tech because we were responding to the impacts of Hurricane Ian that went across Florida, which drove our margins to more than 17% in the first quarter of last year. And so at least on a margin basis, it was a very high comp to compare our performance of this year.

On the Commercial and International Group, or the CIG segment, we grew our net revenue by 49% and delivered a 12.5% margin for this segment in the quarter. While the addition of RPS contributed significantly to the top line or revenue growth, we did see the CIG segment grow at about a 10% organic rate.

I'd now like to discuss backlog, our best forward-looking indicator in our business. As I previously noted on these quarterly investor calls, we report backlog based on contracts that are signed, projects that are funded and where we receive authorization from our clients that's already been received here in-house. All 3 of these are required before we include any dollars in our backlog. Now, we do not include in backlog the financial estimates for future orders on the more than $25 billion we hold in contract capacity across the company.

Key wins that added to our contract capacity in the quarter included recent awards of $125 million United Utilities program or AMP8 Better Rivers program, an $800 million U.S. Army Corp of Engineers PFAS remediation contract and a $450 million Great Lakes environmental restoration contract.

Overall, we booked about $1.2 billion in orders in just the first quarter of 2024. As a result, our backlog was up 24%, from last year, resulting in a new first quarter high of $4.74 billion of funded and authorized work that we have in-house.

Now I would like to turn the presentation over to Steve Burdick, our Chief Financial Officer, who will go over some more of the details of our financials from the first quarter.

[Steven Burdick, executive]

Thank you, Dan. So I'd like to now provide an update on our working capital and cash flow for the first quarter.

So cash flows generated from operations for the first quarter were positive and for the trailing 12 months totaled $353 million, which is up 26% year-over-year. Now, over the same 12 months, cash flows exceeded net income by more than 152% and as I further thought about this key metric, I actually researched our historical financial results and found that our cash flow from operations has exceeded our net income every year for the last 2 decades. And I got to say, I'm not aware of many other companies who have that same track record. So I'm really proud of what Tetra Tech has been able to do.

Our focus on working capital and cash flows has resulted in our DSO reflecting an industry-leading standard of 55 days versus the industry average at over 80 days. This first quarter results are an improvement of 6 days over last year. And we consider this high watermark for working capital to be sustainable over the long term as we continue to make cash flows from operations a priority. The lower DSO metric also provides significant insight into our core business as it reflects the outstanding work that our project managers perform relative to high-quality projects and highly satisfied clients in our broad portfolio across all of our end markets and all of our geographies.

Our net debt amounted to $746 million and the net debt on EBITDA was a leverage of 1.5x, well within our target and much lower than when we acquired RPS a year ago. In addition, we have total cash positions of about $199 million at the end of the quarter. So as we present here today, we continue to execute on high-quality operating results with strong cash flows, industry-leading days sales outstanding and the leverage well within our target range.

For those following along in the presentation, I'd like to now present our capital allocation overview for 2024. We have a significant amount in liquidity available to invest in organic and acquisitive priorities and we have a well-balanced mix to both fixed and floating rate debt to mitigate interest rate risk as we look to invest in key strategic priorities. We have a strong pipeline of acquisitions, which are aligned towards technical leaders especially in the water and environmental spaces where we have led the market for the last 20 years.

And regarding our dividend program, I want to announce that our Board of Directors approved a $0.26 dividend which is a 13% increase year-over-year to be paid in the second quarter, and this is our 35th consecutive quarterly dividend with double-digit increases in the amount paid.

As we revised our capital structure in the last year to take advantage of the credit market to really support our financing means, I want to remind our shareholders that we do still have available a significant portion of the $400 million buyback plan that was approved by our Board back in 2022 for future consideration as part of our capital allocation strategy going forward.

I'm really pleased to share these results for the quarter with you all. And I want to thank you for your support. I will now hand the call over to Leslie Shoemaker to discuss Tetra Tech's differentiated leadership in the water and environmental sector.

[Leslie Shoemaker, executive]

Thank you, Steve. Hello. My name is Leslie Shoemaker, and I've spent over 30 years with Tetra Tech in the research and development of watershed simulation, watershed protection studies and the advancement of our Tetra Tech Delta offerings across the company.

Tetra Tech's pure-play focus on water and environment has differentiated us from the very beginning. Since our founding in 1966, we have developed first-of-a-kind solutions for the entire water cycle and then provided our clients with practical implementation at scale. Tetra Tech has set the standard for water analytics from the earliest simulation of flood protection structures to our industry-leading models of watershed behavior that have protected over 100,000 critical water bodies worldwide.

It is this work, Leading with Science and scaling solutions across government and commercial clients that has led to our rapid growth and the #1 ranking that Tetra Tech has held in water for 20 consecutive years as well as #1 rankings in water treatment, hydro and environment.

So Tetra Tech works across the full water cycle in 4 major phases. We think of it as research and development, followed by climate and watershed work, water treatment and then flood protection and navigation.

Our water work represents approximately 85% of our annual revenue or approximately $4.25 billion of revenue distributed across our 4 distinct water cycle phases. In the research and development phase, the smallest in revenue, but the most important in the work that we do, working side-by-side with our clients to investigate new contaminants, unlock the impact of climate on water quality and even decipher the root causes of degradation of essential water bodies. It's this research that actually helps drive us to new opportunities and new research that can provide the climate and watershed phase with the new ideas.

In the climate and watershed phase, at $2 billion in revenue a year, by far the largest phase of our services, we scale these ideas into practical solutions. Applying our analytical and software solutions on large regional programs like the Chesapeake Bay, the Great Lakes and the Gulf of Mexico as well as essential water bodies worldwide.

Now, increasing variability in climate has also further increased the demand for our risk-based analysis of watershed behavior and the science underpinning specific design solutions to adapt to these changes. Our Leading with Science approach has also built our Tetra Tech Delta solutions that differentiate us. It's the ability to leverage new technology and apply it at scale that has been the hallmark of Tetra Tech's success.

Today, we are scaling water solutions by providing new data platforms that make the application of artificial intelligence practical and useful in managing water-related risk. The research and development we do and the scalable solutions we provide are the flywheel of our success in the water market.

I'll now turn it over to Jill to speak to the other phases of the water cycle.

[Jill Hudkins, executive]

Thank you, Leslie. Although you may primarily know me as Tetra Tech's President, I have spent most of my 25 years with Tetra Tech designing advanced water treatment facilities. I've led the design of 15 desalination programs and developed a deep passion for our digital water services using data and digital technologies to create value for our clients. Tetra Tech is the market leader with $1 billion in water supply and treatment revenue for municipal, commercial and federal clients. We provide high-end engineering and consulting services for advanced treatment for drinking water, optimization of sewer networks and water reuse.

Tetra Tech designs first-of-their-kind water treatment programs for PFAS removal, desalination and potable reuse including our award-winning Orange County Water District PFAS program, which includes the largest PFAS treatment facility of its kind in the U.S.

Continuing with the water cycle, Tetra Tech is the industry leader with $1 billion in flood protection and navigation revenue for state, local and federal clients. This phase of our water work includes planning, permitting and design for dams, levees and locks, including Tetra Tech's design of the largest surge barrier ever constructed by the Army Corps of Engineers.

We are also a market leader for designing solutions that help communities adapt to the increased frequency of flood events. Tetra Tech is the leader in all 4 phases of the water cycle while many of our competitors perform work that is limited to only 1 or 2 parts of the water cycle.

When we discuss market drivers for the water cycle, a lot of airtime has been given to new federal infrastructure funding from the IIJA, IRA and the CHIPS and Science Act. Clients across all of our end markets are benefiting from multiple state, local and commercial funding opportunities, sometimes augmented by federal government funding like the IIJA.

Leslie spoke to Tetra Tech's early water cycle position in client-funded research and development. Our federal clients such as the Department of Defense, NASA and NOAA distribute more than $100 billion in annual funding for research and development.

Market drivers for Tetra Tech watershed protection and restoration projects include an estimated $380 billion spend for emerging contaminant removal from global watersheds as well as site-specific environmental restoration programs such as the estimated $1.8 billion cleanup program for the Passaic River.

Tetra Tech's water utility clients fund their programs through a combination of established sources. These include user fee revenues, debt financing and tax receipts. These are sometimes supplemented by federal funding or loan programs. For example, the GBP 96 billion U.K. water AMP8 program will be funded through user fee revenues and debt financing. While the $1 billion Texas Water Fund has been funded 100% through state appropriation.

Climate change and multiple $1 billion extreme storm events continue to drive demand for Tetra Tech's high-end flood protection and navigation services. The state of Florida estimates a $4 billion spend to protect Florida's coast from sea level rise, and the state of California is investing $1.5 billion for modernizing the ports of Los Angeles and Long Beach.

And now I'd like to turn the presentation back to Dan.

[Dan Batrack, executive]

Great. Thank you very much, Jill, and thank you, Leslie, for going over our position and our differentiation within the entire water market, specifically the entire water cycle.

As we enter the election cycle here in the United States, we received quite a few questions recently about how Tetra Tech's business may [ be impacted ] by the outcome of the United States presidential election coming up this next November. Tetra Tech's U.S. federal clients represent about 30% of the overall company's revenues. And they're distributed pretty evenly across the Department of Defense, civilian agencies and USAID with the U.S. State Department.

I'd just like to start with each of these components to walk through them briefly and how we see there would be an impact, depending on which administration may be in place when we come to the outcome of the election this November.

So I'll start with the approximately 10% of our revenues from defense that are likely to have stable growth under the current administration or an increase under a Republican administration and typically have a high priority with either political party due to their essential need to support national security.

The second area or the second 10%. Our civilian agency programs are largely essential. For example, the services that we provide to our largest civilian client, Federal Aviation Administration. Air traffic programs are just not optional, and they require consistent funding and have bipartisan support, and we really see no impact on the growth and the funding that we have in these areas of civilian programs.

Now USAID or the U.S. State Department, does have the potential to be impacted by a change in administration. But it is interesting the timing of the impact that we've seen historically is highly tempered by the long duration of contract awards that we have. When we go to international locations, these contracts are typically 5 to 10 years long and have a direct linkage to national security interest. So they're not as discretionary as many might consider.

Of course, that's the 10% for each of these, the 30%, but the remaining 70% of our revenues that are not associated with the U.S. federal government are comprised of commercial, state and local and international work, which we see relatively unaffected by the outcome of any U.S. presidential election. So regardless of the administration elected, we see Tetra Tech's federal revenues up on a collective basis, either from continued increase in funding under a Democratic administration or through an increase in the outsourcing of government services under a Republican administration.

I'd now like to present our guidance for the second quarter and our increased guidance for fiscal year 2024. First, for the second quarter of fiscal year 2024, our net revenue guidance is for a range of $990 million to $1.04 billion with an associated diluted earnings per share of $1.25 to $1.35 per share. For the entire year, our increased net revenue guidance is for a range of 1 -- sorry, $4.15 billion to $4.3 billion with an associated diluted earnings per share of $5.90 to $6.20.

And I would note, and if you take a look at the midpoint on the graph, if you're following along on the webcast, this does represent a net revenue increase at a midpoint of 13% over a record high fiscal year 2023 and a midpoint of 19% over our GAAP earnings of 2023 to the midpoint of the guidance I've just shared.

Now, we do have assumptions on the webcast that you can see here. For the entire year, we do anticipate intangible amortization of a total of $44 million or $0.59 per share, and we provided on the presentation a breakdown of those charges per quarter and that are included in our guidance. We do estimate a 27% effective tax rate for the year and approximately 54 million diluted shares outstanding.

In summary, as we begin fiscal year 2024, we see strong demand for our differentiated Leading with Science services in both the water and the environmental markets. Our first quarter results set new records for revenue and profitability that we've shared with you today. And our strategic focus on the entire pure-play water and environmental services markets are continuing to drive strong margin performance and long-term growth. And I'm pleased to have shared with you today that we've raised our entire fiscal year 2024 guidance for both net revenue and earnings per share.

And with that, Paul, I would like to open the call up for questions.

[Operator]

[Operator Instructions] Our first question is from Tim Mulrooney with William Blair.

[Timothy Mulrooney, analyst]

I have 2 this morning on the guide. The first one, it looks like you raised the midpoint of your full year guidance range for net revenue by about $75 million. We noticed you beat the first quarter by about $40 million. So you raised the full year by more than you beat the first quarter. Can you just talk about what's driving that confidence? What businesses are seeing strong demand or that you're excited about as you head into 2024?

[Dan Batrack, executive]

Great question, Tim, and thank you for noticing that our raise was much more than our beat in the first quarter. I would like to point out that a few of the examples I gave in our backlog commentary that had added to our contract capacity of $25 billion, I commented on our new win with the Army Corps of Engineers of $800 million, I commented on our U.K. single award at over $100 million. And in fact, we included on our backlog sheet in the presentation, a full tabulation of new awards. And what I would comment on those based on the way that Tetra Tech tracks and reports its backlog, these are new contract wins that have gone into our contract capacity and yet don't even show up in our backlog or revenue. And the first quarter, while our -- while we did book $1.2 billion in new orders that were added to our backlog, I'll tell you it's not nearly representative of how much new work we won in the quarter.

And so a number of these new very large programs we won really across the United States with many programs with the federal government, state, local and others, both in the U.K. and Australia being the primary large awards, are going to begin contributing to revenue as we move through the rest of the year.

So I think that with the new records of our backlog hitting new all-times high is pretty clear to us, particularly with single awards that are going to be executed solely by Tetra Tech for these clients and the new synergies that we're seeing with RPS. We see that things are going to continue to build based on actual awards, not just a feeling or some insight that things are getting better. We've got tangible awards, new clients and new programs starting up that will begin to contribute as we move through the year.

So it's really those items that have come together to cause us to raise the outlook for the year even more than we had in the first quarter. And by the way, you see the growth rates in the upper 30%. Just adding those numbers, we felt it was even better than that.

[Timothy Mulrooney, analyst]

Interesting. Okay. Very clear. Staying on this idea about the guide, I just wanted to ask, I mean it looks like you raised the full year EPS guide by about $0.15 at the midpoint, which is greater than what we would have expected from the increase in your revenue guide. I think that implies that you're expecting some stronger margins this year. Can you just also talk about what kind of higher-margin work that you're doing, which I assume is differentiated, that's maybe helping drive that guide?

[Dan Batrack, executive]

Yes, that's a really good question. I think if you followed Tetra Tech for a number of years, you've seen we've continued to shape the business by moving more and more to the front end of the services of work we provide for our clients. And I know that we're quite often discussed that we do consulting and engineering work, but I would put a very large C on the consulting and maybe a lower E on the engineering because the work that we're providing is earlier and earlier by our scientists, our technical professionals and engineers. But it's not necessarily for general engineering support, it's more and more for consulting, being thought leaders, which allow us to have higher billing rates for the very differentiated individuals that -- really, there isn't many that exist in the different markets we have.

So our average charge-out rates are actually going up as we move to the earlier portion. And by the way, it's not that we're more expensive. We're providing more value than ever to our clients on their approaches and evaluations and outcome of their programs.

The second item, so I would say our average billing rate is going up, it's a more differentiated service and they carry slightly higher margins. So that's the differentiation between revenue coming in and margin. And I would say the second area is the use of the internal tools, digital tools we have that we utilize in the water cycle. You heard both Leslie and Jill speak to those. So as we do the work on a fixed price basis more efficiently, it's converting to higher margins. And so that's being helpful. And we're seeing that become a larger contribution.

And the final item that I would say is in its nascent phase. At the very beginning is -- I did get an early Christmas present this year -- it did come through December. And one of them was it was reported to me that Tetra Tech subscription services have actually seen an uptake. We do have them on our website, and these are areas where we've not had a "marketing" team out trying to sell these to clients, but we've had clients go to our website and actually subscribed for and put payments directly down on subscription services for the different software packages we have for managing watersheds, optimization for water treatment systems and other specialized services.

So I'm glad to see that actually begin to take a -- I don't know if I'd call it, certainly, it's an organic, but self-filling subscription revenues increasing, still quite small, but it does contribute to this margin expansion that you see that's reflected in our earnings increase for EPS for this year.

[Timothy Mulrooney, analyst]

That's interesting. I know that you're excited to see that gain some traction because it's harder at first to gain traction, but then it builds on itself. But I'll let the others -- a lot of questions I'd love to ask you after that, but I'll get back in the queue and let others ask questions.

[Operator]

Our next question is from Sangita Jain with KeyBanc Capital Markets.

[Sangita Jain, analyst]

Dan, if I can ask you on -- you had some nice AMP8 and PFAS awards this quarter amongst the recent wins. Can you elaborate a little bit on how you're seeing the pace of these awards materialize? Are you still thinking of a slow ramp this year with the peak next year? Or is it happening a little bit faster?

[Dan Batrack, executive]

Well, I'll make a comment overall regarding a peak next year or late next year. We have spoken, and I think both I've spoken, I know Jill did on a previous quarterly call, that we expect the U.S. stimulus programs, particularly IIJA, to see a peak probably in late 2025, so a little over a year from now. But AMP8 is a United Kingdom or U.K.-wide asset management program for their water utilities and it's really unrelated to a peak of next year.

So we see that this is going to continue the contracting for their AMP8 cycle, which is a 5-year cycle. It's just beginning here shortly. And maybe I can just have -- Jill is tracking this quite closely, both on IIJA, but more importantly, I'm really pleased to share with you that in the presentation to the client for United Utilities, Jill herself was over there all the way up until essentially Christmas Eve, the Friday before Christmas, participating in our presentation and making commitments to, in this case, our U.K. clients of United Utilities that will bring the best of all RPS has and the more than 50 years of technical leadership we hold here in the U.S. and bring all of those lessons learned to the U.K.

And certainly, I think it's just the first of, I would hope, many different successes we have under the AMP program, but maybe I can have Jill say a few words to this.

[Jill Hudkins, executive]

Yes. Thanks, Dan. And great question, Sangita, on AMP8 U.K water. Although the AMP8 funding cycle officially starts in April 2025, what we're seeing is multiple U.K. water clients going out for procurement to be ready and start the planning for the AMP8 water cycle. A lot of our existing contracts or frameworks as they call them in the U.K. are also being utilized to start the planning or acceleration for the historic AMP8 U.K. water spend, which I mentioned in my remarks, is GBP 96 billion, which is 2x the spend from AMP7.

So we're very excited about bringing the resources and capabilities and client relationships of RPS, along with Tetra Tech's water industry leadership in both wastewater overflow reductions and high-end water management services that Leslie and I talked about earlier on the call.

[Sangita Jain, analyst]

Great. That's very helpful. If I can ask one more. Dan, thank you for the breakdown on the elections and the possible outcomes. But if I can ask a more shorter-term question. It looks like we've avoided a shutdown, but there is still not that much clarity on passing a full budget. So does this continuation of a short-term CR situation hurt your line of sight into funding opportunities? Like at what point do we start to worry over the next several months if we don't get a full budget?

[Dan Batrack, executive]

That's a really good question. And I've spoken to this, unfortunately, quite a few times over the past few years because of the bit of dysfunction in this funding process. I personally -- we here at Tetra Tech, I think an ongoing continuing resolution is a pretty good outcome. In fact, a really good outcome. So continuing resolution means that we agree to disagree and that we'll fund at the same level that existed a year before.

And the year before, 2023 was at record highs. And in fact, it allows the administration in this case, the Biden administration or the Democrats to further the priorities that they have with the appointees that they have in the different areas for executing strategies. Those do include priorities for a clean environment, for clean water, for mitigation of climate change or extreme flooding events in areas that are very much tailwinds as many of -- described it for us.

So a continuing resolution. I would just assume they do one continuing resolution between now and the end of the fiscal year or September 30 and that we don't have these various milestones where they do a continuing resolution. But I don't see that a CR actually has any negative impact for us. In fact, it's pretty favorable in a lot of different respects. We'll see how each one of these go that has -- they all have their own drama to the 11th hour before they approve them. But I don't see it as an issue.

The one thing I will comment on this, when I go back many years, the first time there was a shutdown. We were quite disappointed and surprised that "Really? You would really do this?" But this goes all the way back to Gingrich a number of years ago. But if you take a look at the more frequent threats and dysfunction that's taken place, we've become much more adept at working with our clients to have funding put in place so that we're well prepared for funding that's been already authorized, where we can work remotely outside of government facilities that might have temporary restrictions. And so we do think that the impact or short-term impact may be measured in a month or so, would be very de minimis with respect to impact to our ongoing activities in the event that they actually do go through another one of these uncomfortable and unfortunate short-term shutdown.

So I hate to say bring it on, I want to never go that far, but we're not uninformed or unaware about the different implications of what we can do as a company.

[Operator]

Our next question is from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

I guess you provided a bit of color earlier and as well as in the materials around the RPS integration so far and the margin uplift you've seen. Can you maybe talk about -- maybe some of the bigger contributors to that 600-basis point of margin improvement? And then maybe what are some of the bigger buckets that are still to go, which can maybe add to that margin profile over the next 1, 2 years? And maybe on the tail end of that, just like what are the longer-term things because I think the comment in the past has been RPS can do maybe even higher margins than legacy Tetra Tech. So I just want to -- if you can maybe lay out kind of the margin story on the acquired platform for us, so kind of the near to medium and long term, please?

[Dan Batrack, executive]

Yes. I'll kind of -- I'll go near, mid and long term, and I'll call it our Phase 1, 2 and 3. And Phase 1, which was really this last 1 year, so it was the first year they were with us. We were mostly focused on having them move their cost structure, I'll call it, cost synergies, which was mostly back office, moving to more efficient ERP systems, moving on to Tetra Tech. So the 600 basis points, I would say, was mostly associated with cost synergies, and that moved them from somewhere between 2% to 4% margin up to the 10% that we entered this year. So those were pretty discrete, finite.

We took about 2/3 of their entire operation, which is really U.K., and the U.S., very small U.S. portion and moved them onto our ERP system. So we are quite busy doing that. So I'd say we're 2/3 finished with that process on the cost side, and I'd call that most of what's Phase 1. So take the cost, takes us from -- that's the 600 basis points.

Phase 2 is actually having them run on our systems, and it actually will yield from running their programs more similarly to Tetra Tech, changing the portfolio of contracts. I think one comment I've made before is we have addition through subtraction. And because the work that they've had in the past that is revenue that may not carry margins or carries unusual risk with respect to the type of contracting mechanism, we would look to have that exited from the business and not continue with that work. And that's why I would say that RPS on a revenue basis has been relatively flat from when we first acquired them. And in fact, some areas actually down, but the actual dollars contributed on an EBITDA basis and margin have gone up quite dramatically, and that's what you've seen.

I think we're going to continue the portfolio shaping by having them focus on high-end differentiated services that will carry higher margins. And I believe that process along with revenue synergies is what Phase 2 is. And I think you saw -- we've seen it not in the revenue yet, but we've seen it in contract wins, which I've spoken to that helped drive our increase in our guidance for both top and bottom line. So I think this year, we'll watch them operationally, not from a cost synergies but operationally execute moving to higher end and move another 20% higher, so from 10% to 12% at the end of this year. And I think we're off to a really good start on that here in the first quarter.

Then I'll call Phase 3. Phase 3 is where we'll actually be executing work together with RPS seamlessly as one single company. We're going to move collectively to the high end and I do believe that RPS -- I do recognize that RPS does not have what I would call inherently lower margin work that we have that is cost plus with the federal government, which actually dampened some of the margins that we have. They have more consulting.

And I think as we grow this front-end consulting and advisory business they have, particularly the advisory business in Australia as an example, led by our division leader, Meegan Sullivan, who's just phenomenal and one of the leaders in the entire industry in that region, that I expect that will carry margins that are far higher than what we have at Tetra Tech. I'd say well over 15% that's going to help, I think, in this Phase 3 of Tetra Tech's overall margins up, and that's not even including the technologies that Tetra Tech is bringing with respect to the Delta technologies and subscription services.

So the fundamental consulting revenues on the margins associated with that out of RPS, I think, in the Phase 3 that I think will be at 2025, if you want to move to it, you would call it a longer term, I think it's going to be very big contributions to the company.

[Sabahat Khan, analyst]

Great. And then maybe sort of related to the kind of the improved utilization or improved margin side, can you maybe give some perspective on how the utilization for the combined business is trending? Were there opportunities to maybe improve the utilization at RPS? Just an understanding of how that's kind of going for the combined platform? And are you on track to -- maybe what your initial plan might have been for the combined business?

[Dan Batrack, executive]

Well, I would say operationally, because we don't -- we at the legacy Tetra Tech, we don't differentiate operations from the collective activity. So when we've talked about 70% target, that's if you take the entire company's payroll and what we built. So I would say that in RPS, those that have migrated on to Tetra Tech's ERP system, we call it Tetralinx here. But the ERP system have actually seen the utilization go up and it's beginning to approach Tetra Tech's level. But we still have another 1/3 to go with respect to that transition.

And so they do have a lower utilization. Their systems are not as state-of-the-art as Tetra Tech. They're not on one complete common system. So they have a lot of integration activities that take place that bring down utilization. So I would say we've watched the RPS utilization move up to the Tetra Tech level throughout fiscal year 2024 as we remove the rest of -- as we move the rest of the company onto our platforms.

So Tetra Tech remains pretty highly utilized. I would say we're still up about 70% of what I'd call legacy Tetra Tech and by the way, to say the 2/3 of RPS has moved to our systems typically translates to a 13% to 14% EBITDA margin on a GAAP basis. I want to make clear, a GAAP basis. I would just make a comment for international investors if you use IFRS and if you use NSR, it's probably about a 6 percentage points or 600 basis points difference. So you can take our numbers and add 600 basis points if you want to compare it using some international standards.

But -- so I don't think RPS will get to our full utilization until the end of this year as we move them over and transfer them onto our ERP systems in the last 30% of their business. So that's sort of our timing and about the transition on the utilization staff.

[Sabahat Khan, analyst]

Okay. Great. And if I could sneak in one more here. You alluded to some of the progress you're making with the digital subscription model and that tracking better than expected. Can you maybe just share some thoughts on sort of your outlook or strategy for that business. How big or meaningful could that be over the next 2, 3 years? And maybe what are you doing to support its growth? You indicated you're not doing much marketing now, but maybe just a plan for the next few years, if you can.

[Dan Batrack, executive]

Well, I've spoken to some investors. And one thing they have pointed out to us is clearly you're not a software company. And I would say, "Boy, that's the truth." But that the very nature of the work that we're paid for by our clients to develop these software applications, I think Leslie Shoemaker spoke well to the funding on the research and development and software applications that were funded by our clients to develop. We typically retain the IP or the patents and trademarks and the technology itself. It has picked up, it has sort of taken a growth rate on its own, call it, organically growing without our pushing it.

I do want to -- it is growing well. We want to mature the software products a bit more, have a number of anchor clients that will become reference platforms that we use as we expand this to other clients. In fact, it is interesting, some of our anchor clients have referred it to other colleagues in the industry, state and local clients. That's what's picked up the subscription without our having gone out and market it. So we're -- maybe we're playing catch-up to our own growth.

As far as visibility and talking about recurring subscriptions and all of the rest of the metrics that come along with subscription services, I expect to roll out somewhere between 5% to 10% of our overall earnings or EBITDA of the company. I think that would translate to $50 million to $100 million in revenue. We see it's about a 50% margin. And I've shared with others, I think selling the first 1,000 subscriptions -- although I'd say in some areas, we're well over that already. But selling the first 1,000 is, in some instance, more difficult than selling the next 100,000. And so we're in that first [ formulaic ] period. I'd like to say it's 1 to 2 years before we would hit our financially disclosing, tracking and sharing all of the individual metrics on this part of the business. And personally, my goal would be that it's a segment and that we have complete transparency with respect to all of the financial performance metrics or key performance indicators, the KPIs in that industry.

So I don't think it's a 2024 full disclosure, but I would hope that maybe towards the end of 2025 we'll be at that level. And if we had it earlier, it's because we're able to play catch-up with respect to how this is growing on its own.

[Operator]

Our next question is from Tate Sullivan with Maxim Group.

[Tate Sullivan, analyst]

Okay. Great. And actually, a question for Jill on -- I think do -- you mentioned a PFAS treatment facility in the U.S. and was that the Orange County facility? And can you talk a bit about the PFAS opportunity in terms of how a lot of your orders started to be funded, please?

[Jill Hudkins, executive]

Sure. Speaking directly to the -- my comments, our prepared comments, the Orange County Water District program actually includes multiple water treatment programs, multiple water treatment facilities, including the largest U.S. facility that I mentioned. So that really puts us at the forefront of municipal water opportunities and thought leadership and expertise.

Relative to our PFAS revenues, historically, we have had somewhere between $50 million and $60 million in annual revenues for PFAS work. That's predominantly been with Department of Defense and more in the characterization and remediation of water bodies. And as we contemplate or finalize federal-level regulations, I think we will see growing opportunities for state and local facilities, much like the Orange County Water District program.

[Tate Sullivan, analyst]

And is that still a -- I think, a couple of presentations ago, you highlighted that just the U.S. PFAS market or maybe of $200 billion and is that part of the watershed market -- watershed management opportunity of $380 billion?

[Jill Hudkins, executive]

Yes. Well, in -- the $380 billion refers to multiple emerging compounds. Tetra Tech is not just a leader on PFAS, but also in microplastics and pharmaceuticals and other emerging contaminants. So the $380 billion was the combination of multiple emerging compounds and the market that we see the -- you're correct, the $200 billion referred to, what we see as the PFAS market, not just for watershed protection and enhancement but also for future treatment opportunities on the municipal side.

[Tate Sullivan, analyst]

Is this opportunity moving faster than you expected or sort of as you expected? Or any delays in getting PFAS work, if you could summarize it?

[Jill Hudkins, executive]

I would say, as expected, as Dan has commented on prior calls as well as myself, which is having spent my whole career in the water treatment arena, when our clients move forward on programs once there is a final regulation. And so until there is a final U.S. EPA regulation for PFAS, there's going to be continued conversation about the levels that utilities will be requested or required to treat to.

And so I think it's as expected. It's going to mostly be on the watershed side for characterization until the final U.S. EPA regulations are established. And there will also be another -- at that point, another 24 months typically for compliance.

[Tate Sullivan, analyst]

Okay. Great. And just one more to fit in, please either Dan or Steve, you mentioned -- you put a sentence in the press release about the repurchase capacity. Just how are you thinking about repurchases relative to acquisitions at this point a year on from RPS, please?

[Steven Burdick, executive]

Yes. No, I think as many people noted and as we explained a little over 1.5 years ago as we were preparing for and figuring out the financing to do or to complete RPS, we put our share repurchases on hold. And as we've brought our leverage down to kind of the midpoint between our range, where we're starting to once again think about does that make sense from a capital allocation, a long-term value for our shareholders. So that is something that we are starting to think about now that we've paid that down quite a bit. And so that's why that's there.

[Operator]

Our next question is from Andy Wittmann with Robert W. Baird.

[Andrew J. Wittmann, analyst]

I guess I'll just build on that last one and ask Dan. You mentioned that the M&A pipeline is strong. I'm just curious, as you look at the opportunities that are in that pipeline, are there larger deals in there that you would consider doing? I guess I asked that because I guess it's an implication if RPS is far enough along now that you're willing to do something else bigger that would take management time the way larger deals can typically do.

[Dan Batrack, executive]

That's a great question. I have said we've got an incredible track record of companies between 100 and 1,000 people. So if you'd ask what's our normal diet, we've had hundred people, 300 people, 500 people, 1,000 people. So that's been sort of our 1 to 2 acquisitions, 3 acquisitions a year in that size range. And then we've had a few that are larger. So we've had about 5, 6-plus years ago, Coffey in Australia, that rounded us out, that was a few thousand people, U.K. with White Young Green, 2,000, 3,000 people and then 5,000 people. So these have been every sort of 2 to 3 years. There are others out there that actually fit that are in this.

I would say that the management's time -- and I would say that means my time and Steve's time is relatively de minimis with respect to RPS. This has moved into integration of execution within our operations. Actually, out of all of them, RPS arguably has gone the smoothest, it's the largest, but it's actually gone the smoothest with respect to each of the different areas. Our people are working together. And in many respects, they wouldn't know they haven't been here for a long, long period of time.

So I would say if there's something else at the size of RPS or larger, which means sort of $1 billion a year revenue, we're ready, and we've got the resources. And I will tell you that there'd be no inhibition whatsoever with respect to management's ability to manage it, integrate it and make it even more successful than either of the two entities were before they joined us. So we're up ready to go.

Now with respect to does it actually going to happen, it needs to fit 2 criteria. It's got to fit our strategic -- maybe 3 criteria. It's got to fit our strategic direction. We're not going to start making shoes, and we're not going to compete with SpaceX. So we know what we do. We want to be the global leader as we are today, in water, environment, sustainable infrastructure. And we want to further the distance that we have with respect to our #1 ranking. So if they fit with that criteria strategically, they're in.

Number two, culturally, we want people that are culturally aligned, that want to be front-end, best scientists and technical engineers that are differentiated by providing the best technical solutions to our clients, bar none.

They fit those 2 criteria, then we've got the last one, which Steve holds me to task all the time as it needs to make financial sense for the company, and it needs to be accretive for the company and to our shareholders so that it actually adds value to the financial structure of the corporation and support our returns to shareholders. So those are 1, 2, 3. There are companies out there that meet that but with respect to, are we still busy with RPS or anything else, we're ready to go. And if we find the right opportunities, we will make them actionable.

But I'd like Steve's comments, so we did include it here with intent. We have no -- there's no intent for the company to move its leverage down to sub-1%. If we don't find the right entities that we will take action on, we're going to deploy the capital back to our shareholders either through dividends or buybacks in the event that we don't have a strategic entity through M&A to join the company. So we are going to use our capital allocation to ensure that it goes back to shareholders.

[Andrew J. Wittmann, analyst]

That was a thorough answer. I guess I'm going to ask for just another kind of angle on that one just because I haven't asked it before or at least in a while, but there's been private equity that has moved into the consulting and the environmental consulting space. I think today, more than we've seen in the last while, some pretty highly regarded companies. I'm just curious, as they look to transact, while you've never been an auction buyer, a buyer from a banker, are these companies candidates, do you think? Or could they be a good fit inside of Tetra Tech? I'm just kind of curious as to your thought process on that now that the company has grown -- your company has grown to a larger size.

[Dan Batrack, executive]

Yes. It's a really good question. I've had the great fortune -- good fortune to have been in this industry for a while. And I do recall that it seems like yesterday, when the only thing PE ever stood for was a professional engineering license. We didn't know that was private equity in a million years. That's changed. Nowadays, it wouldn't -- nobody knows that PE stands for professional engineering, it's only private equity.

Now the thing I've seen over the past few years, it's remarkable. That if you go back, pre the increased interest rates, I don't want to wander too far on this, but there was no cost of capital. They could lever up 8x, 9x. I saw some private equities go to 10x. They required management teams to roll over 40%. So buying these companies essentially with no out-of-pocket dollars. But I've seen in the past 2 or 3 years, that changed dramatically. Rollover dollars have become less. The leverage has become smaller, maybe down to 6x or even less. And what's happened is I think that some private equity who are not equity entities that are not as familiar with this industry may have overpaid dramatically.

And in fact, based on the -- and you're going to see it through all sorts of different metrics, if you're in the industry, I could take it off-line and go into all the details, you'd see what those are. And I think they may end up having to break up and sell components and look for more, what I would call appropriate valuations that would make it attractive for us.

Now, I think they'll try auctions, but I've actually seen management's team say that I don't want to go to X. So I'm also seeing management teams interact with private equity to actually have us say where they go. And when a company has a say where they want to go for a career, nobody is a better destination than Tetra Tech, period. And I think it can be a win-win for the shareholders, we can actually help out private equity where they need to monetize portions of an overpaid investment and it could be good for Tetra Tech.

So a straight-up auction where you pay a higher number because they want to flip it and yield some large return, that may not be as viable as it was when interest rates were sub-1%. So maybe a little bit more detail than you were looking at, but it does reflect the perspective we have here at Tetra Tech.

[Andrew J. Wittmann, analyst]

I appreciate the context and thanks for indulging on that one. Just a technical question, maybe Steve, for you to wrap up for me. Can you quantify the amount of Ukraine net revenue in the quarter as well as any contribution that you expected from Ukraine in the second quarter guidance?

[Steven Burdick, executive]

Yes. In the last quarter, it was probably right around $75 million is what came in from Ukraine. And that was...

[Andrew J. Wittmann, analyst]

That's gross or net revenue? Sorry.

[Steven Burdick, executive]

Net. And that was about $35 million more than what we had expected going into the quarter just because there was quite a few contracts that were won late after we released earnings.

[Andrew J. Wittmann, analyst]

Got it. And then is there any expectation for second quarter revenue contribution from Ukraine?

[Steven Burdick, executive]

Yes. There's -- we have contracts that are continuing, and that's included in our guidance. Now -- right around there, $20 million to $40 million-ish is our estimate.

[Operator]

Our last question is from Michael Dudas with Vertical Research Partners.

[Michael Dudas, analyst]

Just quickly on your assessment, you talked a bit about it on the last call about renewable energy and some -- what's been going on with some of the volatility in that space. Maybe some updated thoughts as you assess in '24 -- through the lens of RPS and what you're doing internationally and some of the wind and offshore work that's been the kind of pushed and pulled here in North America.

[Dan Batrack, executive]

Yes, it's a really good question. I'll start with renewable energy overall for us is four big ones and, call it, one small one. So it's onshore wind, offshore wind, solar, hydro and a little bit of geothermal. So that's our -- that's primarily our truly renewable energy, a portfolio of areas that we're focused on. And no doubt, the supply chain, which is code for increased costs and availability of turbines, towers, labor, other items has gone up and has created some volatility, for sure. We've not really engaged that much on the on-site support of the construction activities. We do do compliance that they're meeting their environmental permits and water quality monitoring and things like this. So most of the work we're doing on the upfront permitting work. So it is interesting.

We did support a number of the -- some of the programs that have actually been canceled or tabled and they're looking to sell them, or -- I don't know if I'd call the word offload, but provide them to other developers that it may make their financial measure better. And so that has given us a chance to do the work all over again. So what has been one project may turn into two projects or three projects if it rolls over again. So it is interesting on the upfront work. It's actually been pretty good for us, interestingly enough. I certainly don't want to say that a misfortune because of economic challenges for a developer turned into good fortune for us. But we do think that we can help the clients turn lemons into lemonade with respect to what was a difficult situation into something that can actually yield value through a different permitting process or changing the number of power generation locations.

We've not seen that impact quite as much on solar. We've not seen hydro. It's a big item. As you know, hydro has generated about half of the overall renewable energy power generation across North America, about half of it comes just from hydro. I think the most recent number is like 44%. So that's gone well for us. And of course, the big push for environmental impacts associated with impacts to fisheries and others. Some have said taking TAMs down. You can hardly imagine the number of permitting technical evaluations, things with respect to fisheries, everything else, endangered species with respect to taking something down or what we are big advocate. I think it can be a win-win. We're doing a lot of work on hydro with fish passages. So how can you actually include or expand fish passages such that you can restore the habitat for fisheries while still maintaining power generation and flood control along major river systems across North America.

So that's gone well for us here in the U.S. We've had a number of big wins in Australia that we've actually press released that would not have been won either we believe, by RPS or Tetra Tech alone. Phenomenal people in Australia and really some of the thought leaders we have in the U.K., where really a lot of the biggest offshore wind and onshore wind was initiated, we've done well with the advent of RPS joining us.

So I kind of wondered about -- around there a little bit. But I guess I'd say on balance, I see the renewable energy work up for us. And that does not translate into more as being constructed. I'm saying more as being studied and evaluated for bringing power generation online through renewable energy sources.

[Operator]

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

[Dan Batrack, executive]

Well, thank you very much, Paul. Thanks for introducing us this morning and for turning it back to us as a team. I really appreciate all of your questions. I appreciate you being on the call today. And for all of the current shareholders and those interested in following Tetra Tech, I really appreciate your being on the call and following in, getting a little bit of insight into Tetra Tech's entire water cycle.

I know there's been some confusion that individuals that may do treatment of one water treatment plant or one other aspect or somehow analogous to Tetra Tech and that they're magically up here. I hope that today's details presented by Dr. Leslie Shoemaker and Jill, and I assure you we have thousands and thousands of others professionals that dedicate their entire careers just to the water cycle, all the way from research and development to coastal flooding and navigation systems that we are the pure-play water and environmental leader, and we expect to remain in that, and we are going to continue to evolve the entire thought process and technology application to this industry to transform it to new heights to report value for our clients across the board.

And I look forward to sharing more details on exactly which programs we have and in sharing with you how they translate into higher growth and higher margins for our collective business and for our shareholders. And with that, I look forward to talking to you on our next quarterly call, and hope you have a great rest of the day and week. Thank you.

[Operator]

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