Stantec Inc (STN) 2003 Q4 法說會逐字稿

Thank you for holding for the Stantec Q4 and year end earnings conference call.

I'd like to introduce your chairperson, Mr. Tony Franceschini.

Thank you and good afternoon, everyone, and welcome to our 2003 fourth quarter and annual results conference call.

As always I am joined by Don Wilson, our Chief Financial Officer, and we will both be available to answer any questions you may have at the end of our discussion.

I would also like to mention that this conference call is being broadcast live over the internet and will be archived for future reference at Stantec.com under the Investor Relations section.

We would also like to ask any members of the media joining us today, in a listen-only mode, and wish to quote anyone other than Don or me; to please request permission to do so from the individual concerned.

I was very pleased this morning to announce our record results to mark Stantec's 50th consecutive year of profitability.

We are proud of our 50-year history, and being profitable every one of those years is a track record few companies can boast of.

This year represents a number of milestones from our company.

As I mentioned, it's our 50th year in business.

It is also our tenth year as a public company, and after my fifth year as CEO, we are at the mid-point of our goal to be among the top ten global design firms in the targets that we established for ourselves in 1998.

Our strong 2003 results show that we remain on track with our long-term goals.

For fiscal year end 2003, our gross revenues increased 7.3% to $459.9 million, net revenue increased 9.9% to $391.4 million, net income increased 24.2% to $25.1 million, and basic earnings per share were up 22.3% at $1.37.

As we stated in the press release this morning, we would like to note that net revenue, net income, and basic earnings per share are compared to restated 2002 numbers.

Our 2001 and 2002 results have been restated to adjust the accounting for the allocation of the purchase price of acquisitions completed since July 1, 2001.

A portion of our goodwill for post July 1, 2001 acquisitions, primarily contract backlog and client relationships, has been allocated to identifiable intangible assets and charged to earnings over the estimated useful lives of these intangible assets.

It is important to note that these restatements have no impact on cash flow.

They reflect only the reclassification and amortization of certain intangible assets acquired at the time of acquisition of these businesses.

For more detailed explanation of these adjustments, you can refer to this morning's news release and attached financial statement.

Now I would like to review some of the highlights of the past year with you.

In 2003, our focus was on continuing to evolve our dynamic company, not by changing our business model or operating philosophy, but by strengthening our systems and processes to support our future goals.

To this end, we undertook eleven company-wide initiatives during the year.

The implementation of a new business enterprise information, system continuing to evolve our balanced leadership organizational structure, and investments in learning and training programs for our employees.

We also introduced an improved employee performance development review process and a human resources information management system.

The focus this year is to take advantage of these new systems and continue to train our staff to optimize their use.

With this solid foundation, we are positioned for further growth and we're ready to execute the second half of our ten-year plan.

We also strengthened our company through the acquisition of 4 firms.

In Vancouver, B.C., we added Architectura, which expanded both the depth and breadth of our architecture and design practice.

We also continued to strengthen and expand existing operations in Regina Saskatchewan, with the integration of the Interdimension Design Group; and in Calgary with the addition of Optimum Energy Management.

And we enhanced our environmental management practice by adding ESG International in Guelph, Ontario.

Every year we do several thousand projects for clients throughout the North America and it's difficult to establish exactly the wide scope and range of projects that Stantec does, but I would like to highlight just four current assignments that I believe best illustrate our ability to undertake diverse projects of any size, for both the public and private sectors in our industry, to illustrate the types of diversity that we have.

In Edmonton, Alberta, we are acting as the prime design consultant for the development of the Alberta Hearth Institute, which is a new state of the art healthcare facility.

Scheduled to open in 2005, the institute will bring together the best in cardiac patient care services, research and education to serve a population of approximately 1.6 million people across Alberta and western Canada.

In Las Vegas, Nevada, we are providing planning, engineering, surveying and landscape architectural services for the redevelopment of a 260-acre, 105 hectare, portion of the Stallion Mountain golf course community for residential use.

This project also includes lake reclamation, a practice not commonly incorporated into land development.

Our skills are also being used in an expansion and upgrade to secondary treatment of the Lou Romano Water Reclamation Plant, the largest capital work project to date to be carried out by the city of Windsor in Ontario.

In addition, we continue to provide infrastructure management and pavement engineering services for the New Jersey Department of Transportation, Pavement management Systems II Project, the follow-up to the first one; and this includes analysis of all state-maintained and county roads, which is more than 20,000 miles or 32,000 kilometers of pavement.

Now looking ahead to the rest of 2004, our principal task over the next few quarters will be to integrate the Sear-Brown acquisition, assuming that it proceeds as expected.

At this point we do not anticipate any issues which would impact the close and we expect Sear-Brown shareholder approval soon.

I would like to point out that infrastructure, and the facilities industry in general, is at least partially tied to the performance of the overall economy; and the outlook heading in 2004 is better than it was at this time in 2003.

The U.S. economy is forecasted to show continued strength through the year, and in Canada, the economy is projected to improve but at this point to underperform that of the U.S.

For the infrastructure and facilities sector overall, the consensus forecast is, and we'll put it in quotes, for modest optimism; with the overall growth prediction in the range of 1-4%.

Stantec responded well to a challenging market in 2003, and going into 2004 that we are confident that we can adapt our service delivery to the segments of greatest demand to capitalize on market opportunities.

A key market segment for Stantec, in both the U.S. and Canada, is the residential housing market; which accounts for about 35%, or a little over 35%, of our business.

I'd like to specifically address that.

Coming off historically high levels in both countries in 2003, housing starts are expected to decline slightly through 2004; but still remain relatively strong.

We expect to make up any declines in fee revenue in this area with our other market segments, which are showing improvement in sectors like healthcare and education and the public works area in environment and transportation.

Looking forward to the balance of 2004, we are also very active with other perspective acquisitions, and the likelihood of doing other transactions are very good, particularly in the northeast area to compliment some of the things we have already done with Sear-Brown.

So those really are an outline--or brief outlook for the market.

In closing, I would like to thank our employees for their efforts in 2003.

It is because of their hard work that we are now positioned for further growth and on track to meet our goals of becoming one of the top ten global design firms.

Now I would like to turn it over to the operator to outline the procedures for questions and answers, as Don and I will be available to answer any questions; and I understand the only comment is that because of the number of people that are on the line that perhaps to limit it to one question per caller initially and then we can certainly supplement it after that.

So I'll turn it over to the operator.

Thank you, sir.

If you have a question press 1 on the touchtone phone.

If your question has been answered press the pound key.

Our first question comes from Sara Elford with Cannacord Capital.

Hi there.

I'll make my first one a request.

Don, I'm hoping perhaps you could send me just the quarterly changes from the restatements.

I know there's just a couple of line items there that would be affected, but it would be great to see that on a quarterly basis; if that's possible.

Then into a question.

Just wanted to focus in on the implementation of your new MIS system.

Just looking at, obviously, you've gone through the unbilled revenue issue, and how that has climbed as a result of some delays in getting billings out; and then also just noting that you did increase temporarily your revolving credit facility up to $15 million to sort of get you through that process.

I'm just curious how that's going now and how long it takes you to get back into sort of the customary days outstanding of in that 30-35 day range.

Okay.

First of all on your first comment, absolutely, Don will We'll be able to, and he'll be able to address that in a second.

As far as the implementation of the new system, as always these things are always challenging and we had expected that we would have a period where our receivables would be higher just because of the transition and the training that's required.

The good news is that I think for the most part, the basic, and I call it the basic, implementation of the system is in place.

We can do our time entry, we can do our billings, we have reports and so forth.

There's no doubt that the system's going to continue to improve and evolve over the next year.

We expect right now that we're making progress almost weekly, and you know, I can't give you a definitive date that says for sure by the end of the first quarter that we will be back to our more normal levels; but certainly we'll be a lot closer to our normal levels by the end of the first quarter, and certainly our expectation is that by the end of the second quarter we would be back to our normal levels for receivables.

So presumably then, the increase that you have done in terms of your revolving credit facility, to the extent you need to extend that slightly, can you do that beyond February 28 if you have to?

Yes, I'll let Don answer that.

That's something, Sara, that we're in some discussions with the bank right now.

We don't foresee any problems with that, and just to expand on what Tony indicated, we did expect the work in progress to increase beyond what it was at the end of Q3.

The numbers actually didn't get as high as what we had anticipated.

We were able to manage through that a little better than what we thought, but I think what's happened is that the time period has extended a little longer.

So the dollars didn't get as high, but it's taking us longer on the learning curve.

As Tony mentioned earlier, the good news is that we are making some progress on that.

And just before we go to the next question, I will provide an answer right now with respect to the impact on quarters because I know that is something that a number of analysts are thinking about in terms of modeling.

For 2002, I'll just give you a breakdown of the impact on those quarters first; and then the impact in 2003.

These are all pre-tax numbers, the impact on the amortization of intangibles.

In the first quarter of 2002, it was about $50,000.

In the second quarter, just shy of $200,000.

In the third quarter, about $450,000.

And in the fourth quarter of 2002, it was about $400,000.

Again all pre-tax.

The impact on EPS during 2004 totalled 4 cents, and that was no impact in the first quarter. 1 cent in the second. 2 cents in the third quarter and 1cent in the fourth quarter.

Those are 2002.

And then in 2003, again by quarter, the first quarter was about $250,000, the second quarter just about $300,000, the third quarter just over $200,000, and the fourth quarter about $150,000 for a total of 900 and some-odd thousand dollars, pre-tax.

The impact on 2003 totalled about 3 cents, rounded for the year, and that converts into actually 1cent per quarter; and it's just the difference in rounding for the year that you end up with a cent per quarter but only 3 cents for the year.

I trust that that addresses one of the questions that may arise and thank you for your question, Sara.

Thank you.

Our next question is Andrea McReynolds from Sprott Securities.

Hi.

Actually I have a bit of a follow-up just to start on that.

In your financials, Don, you had a statement with--or a not with prior period adjustment and there was an income tax effect as well on that.

If you could maybe just provide the same sort of data as you did in the note and maybe just post it to your website, so we can have exact numbers; so we can have exact numbers in our model, I would appreciate that anyway.

Alright, and that seems to be an appropriate place to put that so that it is broadly distributed.

Okay.

Then maybe if you could just elaborate a little bit on some of the reclassification, I just had a couple of questions about this.

Was there a rule change that made you determine the reclassification was required; will we see further additions to this asset base, for example with the Sear-Brown acquisition, and as further ones go on.

And is there a sort of general rule of thumb at all on how the goodwill gets allocated--goodwill versus intangible in your business line that you looked at, or that you came across, so when we're forecasting going forward we'll know how to split out estimated purchase price?

Sure, and maybe I should start with the last part of that question first.

I don't pretend to be an evaluator.

This is certainly something that requires as much quantitative, as well as qualitative, information to arrive at some of these values.

It's very difficult to give you a rule of thumb and indicate how much of the excessive of the price over the tangible assets would end up in these identifiable intangible assets.

It really depends on a case by case basis.

Every acquisition we do will be different, and it really depends on the facts involved around the acquisition and how strong their client relationships are, how many they have, and how large the backlog is, and how profitable that backlog is anticipated to be.

Just to go back and give you a little bit of history about how this arose.

Back in July of 2001, both FASB and the CICA introduced changes to GAAP that would prohibit the amortization of goodwill after that point.

But at the same time, they introduced requirements that these identifiable intangibles; of which there's a long list of potential intangibles that could arise on an acquisition transaction, that they have to be separately identified, valued and then an amortized over their anticipated life.

Now at the time, we viewed--we looked at that change and we viewed these items as being either not material, or because there was no way to separate them from the transactions that we were doing, there was no way to specifically come up with any value because there is no market for any of these types of intangible assets; and as well that when we were looking at pricing these transactions, we did not have some of the information that would be necessary to come up with changes in values on any of these intangible assets.

In other words, when we came up with our pricing decision, if we had more or less information with respect to these assets, it would not have changed our pricing decision.

Therefore, from our view, there was no value to be attached to these identifiable intangibles, our auditors agreed with that in both 2001 and in 2002.

It seems like a lot of other companies must have been facing the same problems, because in 2003 there was an Emerging Issues Committee document that was issued that provided some clarification with respect to these types of assets.

Including identifying that whether they were separable from the transaction or not, whether there was a market available for these assets, or whether they could actually be sold in any case, or whether we considered this in the pricing decision or not; it was important to identify a value for these particular assets.

During our discussion with our auditors at the end of 2003, in terms of insuring we had the right breakdown for our 2003 acquisitions; they recommended, and in light of the clarification provided by the EIC that we retain independent evaluators to help us in coming up with some values for the intangibles.

We did engage independent evaluators, and this them review a number of transactions that occurred between July 1st of 2001 and the end of 2003; and we have reflected their recommendations in restating our financial statements.

Now I just want to point out that this didn't change the price that we paid for any of the acquisitions; simply that some amounts that had been reported as goodwill, which is now not able to be amortized, were reclassified as other intangibles and those are subject to amortization over their lives.

Again this doesn't affect cash flows arising from the acquisitions; although, those assets are being amortized and, therefore, the book value is decreasing.

At the same time the company continues to develop new assets, particularly the assets that are amortizing like client relationships and contract backlog; and those new assets can't be reflected on the balance sheet.

I hope that was a short enough answer to address that question.

Our next question is Steve Laseac with National Bank Financial.

Hi.

You spoke of the, I guess, the system implementation and its impact on your balance sheet; but could you comment on what you think might have been the impact on the earnings side in terms of people being distracted from the revenue end?

Well, you know, obviously when you do this, there are going to be some distractions.

If you look for the year, but particularly the fourth quarter, you know our overall utilization, which is the billable time was down around 1.5%.

So, clearly, there was some impact on efficiency during the fourth quarter; as translated through utilization, and that's probably the best measure of an overall impact.

There's all kinds of other unquantifiable ones, but that's the most obvious one.

And will you see your way through this, you think, on the utilization by the end of Q1?

That's our expectation.

Yes.

Thank you.

Our next question is Richard Stoneman with Dundee Securities.

Yes.

Morning, Tony, Don.

Or afternoon.

Congratulations on 50 years.

There are not many companies that have achieved that.

Thank you.

I have a question related to the captive insurance company.

Could you expand on that a bit, please?

Well, maybe I'll just give you the overview of what we did is, during 2003--in the early part of 2003 as our professional liability insurance--our errors and omissions insurance was coming up for renewal; and we had some reasonable two-year terms with other insurers in the past that we were reviewing a new insurance policy.

In reviewing the insurance policies and costs, we talked to all of the various underwriters and, you know, across the U.S. and as well as Europe; and as you know things in insurance have changed over the last few years, and what happened is that premiums were going up by about 30% a year for the last few years.

And also the terms of the insurance was changing.

Traditionally we had effectively deductibles that, a few years ago, were $25,000 per claim and then the last year sort of 2002-2003 they got to about $100,000 per claim.

When we renewed our insurance and we looked at all the options available to us in 2003, we decided to reinsure with Lloyds of London; and as part of the insurance increased our deductible to $500,000 so we were taking a larger exposure on the initial costs in terms of the potential claims that would be coming in.

To cover that first layer of insurance, if you will then, the $500,000 deductible; we established an offshore captive so that we can still continue to accrue premiums every month, so that we can build up for preserves to cover those claims the same way as if we had effectively tried to insure for those costs with a lower premium.

So in effect the first layer of insurance is now self insured which is the first $500,000.

Then we have two other layers over and above that.

Effectively the captive allows us to accrue premiums for that first layer of insurance exposure.

Thank you.

Our next question is Anthony Zicha with Scotia Capital.

Good afternoon, gentleman.

Tony, can you give us an idea on the backlog, what it was year-over-year?

It's still running about -- just trying to find it.

Just give me a sec here.

I'll give you the number.

It's about seven months.

I'll give you the exact number in a second.

While we find it here, I'll make sure that I'll provide that number in a few minutes.

And can you give us some color on acquisition opportunities on the market in Canada, as well as in the U.S., and it seems like you are looking at larger and larger companies to acquire, can you give us color on that?

Okay.

Before I do that, I do have, our total backlog at the end of the fourth quarter was about $311 million.

And that compares with about $313 million at the end of the third quarter in 2003.

On the basis of forward four-quarter revenue, that it's running approximately because in that 60%-odd range on an annualized basis, does that answer the question on backlog?

Then if we go as far as acquisitions were concerned, we've had a very active six months.

I think we've indicated that we are in discussions with at least 30 or so firms.

We do have a couple that are certainly very complimentary to what we've done with Sear-Brown in the northeast.

Some that are smaller and some that are, you know, even in the same size and range as Sear-Brown.

So we certainly have, you know, a very good pipeline; and particularly in the northeast.

So over the next few quarters, we would hope that some of these would come to fruition.

In addition to that, there certainly are a few more opportunities that have come up this quarter that are in the same size and range, some a little larger than the Sear-Brown; so it's about as healthy an acquisition backlog, if you will, as we've had in the last 15 months.

Thank you.

Our next question is Frederick Bastion with Raymond James.

Actually, thank you.

My question has just been answered regarding acquisitions.

Our next question is Cameron Webster with Light Year Capital.

Good afternoon.

Just a couple quick ones, if I may.

If you can give some kind of outlook on Canadian dollar strength, how you anticipate that to kind of play out in 2004.

I know we all have our crystal balls on that one.

And then just in terms of acquisitions on the back of that, given where your capital structure is now, is there any thoughts to what your preferred way of financing that would be?

It's Don here and what I'll do is I'll just address the first question and we'll move on from there.

As we indicated earlier, we are trying to keep it to one question per caller.

In terms of the Canadian dollar strength, this has been a question that has been raised a number of times in the past.

What I can tell you is just the breakdown of what our exposures are and what we're doing with those exposures to deal with them.

First of all, with respect to our U.S. operations, all of our revenues in the U.S.; and virtually all of our expenses right down to the income tax expense, are denominated in U.S. dollars.

So to the extent that the Canadian dollar is strengthening, we would have lower Canadian dollar equivalents for every line item in our U.S. operations.

As we've indicated previously, in 2003 our U.S. operations did not perform as well as our Canadian operations; and therefore the Canadian dollar effect of the after-tax net income of our U.S. operations was not all that significant.

So that's one area of exposure.

The other area of exposure has to do with our investment in U.S. operations.

And because they are self sustaining operations, the gain or loss that we experience on the value of that investment on a quarterly and annual basis, is booked to shareholders equity as part of the cumulative translation account.

And you'll see on our balance sheet at the end of 2003 is that there's been a significant negative amount created in that cumulative translation account that arose from the strength of the Canadian dollar during 2003.

To the extent that the Canadian dollar continues to strengthen, that amount will continue to grow as a negative amount to the extent that the Canadian dollar weakens in value relative to the U.S. dollar, that account will turn around and go the opposite direction.

And then the third area of exposure has to do with our Canadian operations that have assets that may be denominated in U.S. dollars.

And that would include operations that are doing specialist work in the U.S. using Canadian staff, so that their accounts receivable would end up being denominated in U.S. dollars.

It would include our corporate services that are provided to U.S. operations that are denominated in U.S. dollars, and those types of assets we try to hedge against that by borrowing U.S. dollars any time we get a positive exposure to U.S. dollars.

That's been an area that has been somewhat difficult to manage because we don't have large projects that have extremely large invoices and you can track a single invoice.

We are generally dealing with a lot of relatively small dollars that can create an aggregate exposure.

And that has resulted, in 2003, in a foreign exchange loss for us.

So those are the three areas of exposure to foreign exchange.

I'll quickly address the financing of acquisitions, and that's to say what we've indicated in the past that our objective is really an internal guideline to maintain our debt-to-ratio equity in the .5 or so range.

It doesn't mean we won't exceed it, certainly, for the periods of time, but that's our guideline, that's what we move towards; and as we get closer to that guideline, that's when we will start to take a look at equity versus cash with respect to transactions.

Our next question is from and Andrea McReynolds with Sprott Securities.

Just a quick one for you, Tony.

How many employees did you have at year end?

Exactly we were about 30-- give or take 25 or so.

About 3,850.

Okay.

Thank you.

At this point, sir, we have no more questions in the queue.

Well, again, if there are no more questions, I want to thank everybody for sitting in on the session today and for joining us.

And I look forward to our next conference call at the end of the first quarter.

Thank you very much for your attendance.