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Operator
Thank you for holding for the Stantec Inc.
Q1 2004 conference call.
I would like to introduce your chairperson, Mr. Tony Franceschini.
Tony Franceschini - Chairperson & CEO
Thank you Leah (ph).
Good afternoon, everyone, and welcome to our 2004 first quarter conference call.
As always, I'm 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 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, who are joining us today in a listen-only mode and who wish to quote anyone other than Don or me, to please request permission to do so from the individual concern.
This morning, prior to our Annual Meeting, we released the results of Stantec's operations for the first quarter of 2004.
Following the celebration of our company's first fifty years in business, and continuous profitability, I am pleased to report that we are beginning our next business era with continued strong performance.
Gross revenue for the quarter increased 8.2 percent to 117.3 million from 108.4 in the first quarter of 2003.
Net revenue increased 9.7 percent to 103.6 million, from 94.4 million.
Net income increased 12.9 percent to 5.7 million from 5 million, and basic earnings per share were 14.8 percent higher at 31 cents versus 27 cents.
Over the past year or so, we have been implementing a new enterprise system for our financial human resources Project Management and business intelligence.
I am happy to report that most of the hard work and heavy lifting required for the implementation is now behind us and we're returning to normal levels.
We expect to catch up with our backlog of billings by the end of the second quarter this year.
During this time, however, we did not standstill on the services side, but continued to strengthen our company by bolstering several of our practice areas to better serve our clients.
This afternoon, I would like to highlight some of the progress we have made in one of these areas, and have selected part of the buildings market segment and in particular with our Architecture and Interior Design group.
We have expanded this group to one of the leading practices in Canada, with an emerging presence in the U.S.
This group is also providing us with market leadership and sustainable design.
The group is certified to ISO's environmental management systems standard 14,001, and is the first architecture and interior design practice in Canada to achieve this registration.
It is also ISO certified for 9001 and 2000, the quality management systems standards.
In addition, over 45 of our staff are certified in leadership in energy and in environmental design from the U.S.
Green Building Council and 50 more are in the process of achieving certification.
This presence, combined with our capabilities in Project Management, buildings, engineering and facilities planning and operation, has strengthened our ability to offer both single source and multi-team project delivery to clients, contribution to new project activity across the company.
For example, our program and project management team is providing project management support services for a multi-year expansion program to improve the Halifax International Airport in Nova Scotia.
Our Architecture and Interior Design group on the same project is acting as the associate architect for the improvement program for one end of the airport terminal.
In Western Canada, we are providing architectural design and mechanical engineering services for the development of a new soccer center in Saskatoon and our facilities, planning and operations group is developing the Master Plan and functional program for a 500 bed expansion and renovation to the Rocky View General Hospital in Calgary.
In the U.S.
Southwest and West, we're providing a complete range of building services, surveying architecture and mechanical, electrical and civil engineering for the design of a new 480,000 square foot or a 44,600 square meter warehouse at the U.S.
Department of Defense Distribution Depot in Tracy, California, and this is for the U.S.
Army Corps of Engineers.
Even in the U.S.
Southeast, we're providing full architecture and engineering design services as the prime design consultant for the development of a new science and engineering research building for Research Triangle Institute International, one of the world's premiere institute based in Research Triangle Park in North Carolina.
Going forward, we will continue to evolve the depth and breadth of our building services as we pursue our commitment to excellence and design and project delivery.
Now, I would like to make a few comments and observations about some of our key markets.
As we have indicated previously, at the macrolevel, the infrastructure and facilities industry tends to grow in parallel with overall GDP growth.
The current consensus forecast for real GDP growth for the U.S. is about 4.7 percent in 2004, and 3.4 percent in 2005.
In Canada, their consensus forecast are 2.7 percent for this year and 3.3 percent in 2005.
Overall, our prospects for the next two years look favorable, particularly compared to the last two years.
A key market segment for Stantec in both the U.S. and Canada is the residential housing market, which accounts for about 35 percent of our business.
This market continues to be strong.
In the U.S., sales of new homes rose to a record annual rate of 1.23 million during the first quarter.
In Canada, sales increased to an annual rate of 0.21 million.
There are some regional differences in growth and interestingly in the last quarter, the largest increases occurred in the Northeast at about 8 percent compared to last year.
There are really two reasons for this continuing strong market.
Financing is still relatively inexpensive, but I think more importantly, the improving job market is increasing consumer confidence thus prompting more people to invest in real estate.
Looking at some of our other markets, we have also a few observations I would like to make.
In the buildings area, the best markets are in the education sector in both Canada and the U.S., as well as in health care in Canada.
The commercial market is generally flat.
The best opportunities though are in the postsecondary education, acute care hospitals, assisted living facilities, and freestanding commercial retail units, particularly in areas of high population growth.
In the environment sector, the best market currently are treatment facility renovations and upgrades, and water and wastewater systems security.
In the U.S., these markets are being driven by federal money such as the Wastewater Treatment Works Security Act of 2003, which has allocated about $220 million in funding.
In the U.S.
Northeast, a continuing strong market is the Brownfield Redevelopment or development on existing Brownfield site.
In the transportation sector, the overall market is generally flat due primarily to some uncertainty with federal funding, particularly in the U.S.
The TLU, or the Transporation Equity Act, a legacy for users which is the successor to the T21 which was the Transportation Equity Act for the 21st Century, has been approved by the House at $275 billion in funding over the next six years, but still requires White House approval.
There will be some discussions that continue into whether it passes in its current form.
But, regardless, something will emerge later this year.
It should create an upswing in this market and most of the states in which we operate certainly by the latter part of the year or early into next year.
In the power and resources sector, the outlook in Alberta, which is our principal market for resource work, has improved in both the conventional and nonconventional oil and gas sectors.
In fact, we had our most successful quarter in this area in the past quarter.
In Ontario, our principal market for power works -- there will be significant investment in new power facilities, although this has not translated to any specific work to date.
The biopharmaceuticals market which is our newest market, and everything that we have seen to date is that it is generally strong as revenues for the biotech companies continue to increase.
And the best markets that we have identified are in plant validation and in renovation of existing labs and (indiscernible) to allow for greater capacity, and these are really the principal market that Stantec (indiscernible) in terms of the project types and project size.
Hopefully this gives you a bit of an overview of where we are at this point in time.
This concludes the brief comments that we have prepared for today.
Don and I will now be available to answer any questions that you may have, and Leah, our conference call operator will explain the question procedure.
Operator
Thank you very much sir.
Thank you ladies and gentlemen. (OPERATOR INSTRUCTIONS) Cameron Webster with Light Year Capital in Calgary.
Cameron Webster - Analyst
Thank you.
Good afternoon.
A couple of quick ones and then I might re-queue here.
Maybe don, if you can try and quantify what we could expect the impact from Sear-Brown going forward in the year?
On a revenue year on year growth basis, I would think the back half of the year might be stronger, but you can comment there.
Don Wilson - CFO
Thanks Cameron.
I think as you know, at Sear-Brown we added just over 400 staff in that acquisition, and typically, if you take a look at the types of rules of thumb that we have in terms of generating revenue, we tend to average about $100,000 worth of revenues per person.
So, that would translate into about $40 million a year in terms of revenue.
This is an acquisition that we completed right at the beginning of the second quarter.
Therefore, we're going to see the revenue on that one occur over the remaining three-quarters of the year, but we won't have a full year worth of revenue on that one.
Cameron Webster - Analyst
In terms of investment that has to be I guess pursued on Sear-Brown, are there any systems upgrades, things like that, that might be required?
Tony Franceschini - Chairperson & CEO
I guess the beauty of having invested the time in Africa last year in our new system is that fundamentally we can integrate them into our systems quite seamlessly.
As far as the financial accounting project management and so forth, they have actually already been integrated.
Within three weeks, they were all in putting time cards and expenses into our system.
We have all of the jobs entered and so forth.
As far as other equipment, in terms of their relative level of support on things like cag machines and software, they had a very good inventory so there is really no major expenses on that side.
Cameron Webster - Analyst
Okay.
Maybe, Tony, if you can give me a sense of what locations within this Stantec world here are closest to the top three position in local markets?
What local markets are closest to breaking through to those top three positions?
And are you satisfied with the portfolio from that perspective?
Tony Franceschini - Chairperson & CEO
Well, to try and keep it brief since we have 55 offices, I don't want to go through all of them.
But generally speaking, most of the offices in Canada are currently in that position, and in the U.S. we are really only in that position in Reno, Tucson, Phoenix, Sacramento area, and Rochester now, as well as -- really that would probably be it.
The rest of the markets, we would still be not quite in that position.
Cameron Webster - Analyst
Okay, but are there any that are on the verge of breaking into that?
Tony Franceschini - Chairperson & CEO
Well, I guess -- again it would be tough to do it unless we do it individually, but there may be half a dozen, three or four in the Southwest, the remaining offices in the Southwest and maybe one or two or three in the Southeast U.S.
Cameron Webster - Analyst
Okay.
Thanks guys.
Operator
Mike Cohen (ph) with National Bank Financial in Toronto.
Mike Cohen - Analyst
Just one question, gentlemen.
Looking at the purchase price for Sear-Brown, it appears that Sear-Brown is not as profitable as your existing business.
My question simply is what your plans are to make that business better?
Tony Franceschini - Chairperson & CEO
Your first observation is correct.
They are not as profitable as we are.
They would be at about half of our expectation of our existing operation.
In terms of what we can do, it's a number things.
Basically we -- our combining some of our systems, and we are also redeploying and using some of their staff that we have kept.
If you notice in the numbers when we acquired that company, we had indicated they had about 500 employees.
In the end we ended up taking 410, I think.
There is going to be some efficiencies there even though one of them was an office, an entire office, that we didn't take.
I think there are some streamlining in that, and also to improve their utilization by taking some of their core people that are not being fully utilized at the present time and using them on our project.
Mike Cohen - Analyst
Okay.
That's it.
Operator
Frederick Bastien (ph) with Raymond James from Vancouver.
Frederick Bastien - Analyst
Good afternoon.
Could you please comment on your acquisition strategy and where you're at right now?
Tony Franceschini - Chairperson & CEO
I guess in simple terms is that with respect to our acquisition, we have about a handful of companies that are smaller size that would be less than $10 million in revenue, that are basically in-fill and complementary to our existing operation either in Canada or in one or two places in the U.S.
In terms of our more major presence, or our more major initiatives, they're really to try and strengthen our presence in the Northeast.
We saw Sear-Brown as being a catalyst to do a few other things and we do have other options and alternatives in that marketplace that we would like to focus on over the next six months to see if we can bring some of these to fruition, some of these that we had started in discussions 12, 18 months ago, some that are more recent than the last six months.
That is basically where we are at in terms of our strategy at the present time.
Frederick Bastien - Analyst
My second question, I noticed that the direct expenses were much lower in the quarter which reduced obviously the ratio of gross revenue to net revenue.
Can you comment on that?
Is this something that we can expect going forward?
Don Wilson - CFO
The direct expenses can fluctuate depending on the type of projects and the mix of projects that we have in any particular period.
I don't know that you can look at one quarter compared to another one and identify a trend.
I think over the longer-term, if you look back a number of years, it is true that our -- some consultants and other direct expense costs have been declining to some extent, and that is as we continue to add disciplines and service areas, we are able to provide more services to the same client.
So that we -- when we are prime consultant on a project, don't have to obtain so many subconsultants as we used to a number of years ago.
This has allowed us to reduce the amount of subconsultant and direct expense costs and instead keep more of the gross revenue as our fees.
But I wouldn't look at Q1 of 2003 to Q1 of 2004 and say that represents a trend.
Frederick Bastien - Analyst
Okay.
Thank you very much.
Operator
At this time we are waiting for additional questions. (OPERATOR INSTRUCTIONS).
Cameron Webster with Light Year Capital from Calgary.
Cameron Webster - Analyst
Just a follow-up I guess, Don, on -- maybe answers the same direct payroll costs versus admin and marketing, but at least in my model you were a little higher on admin and marketing than I was looking for.
So was there anything in the quarter that was I guess out of the ordinary there?
Don Wilson - CFO
Part of what we've got in the first quarter perhaps is the fact that we just had implemented a new set of systems in late 2003 and continued through 2004.
There is more time spent in terms of training and just the administrative time in terms of getting up to speed on a new system, (indiscernible) be part of it.
We have taken a look at our total labor costs though as a percentage of revenue, and there is really no change in that year-over-year.
So we believe that this is not something that is developing into a trend.
Cameron Webster - Analyst
You pretty much expect that to stay level for the rest of the year?
Don Wilson - CFO
I wouldn't say that.
I would say that I don't think that you can look at what we've done in Q1 and say that that is going to be the number for the remainder of the year.
Cameron Webster - Analyst
Okay.
Don Wilson - CFO
We believe it is more likely that more time will be dedicated through the rest of the year to direct project time, and there will be lower administrative and marketing expense time in the rest of the year as a percentage of revenue.
Cameron Webster - Analyst
Okay.
My final question would be, if you, either Don or Tony, if you guys could quantify your backlog of jobs that maybe are early stage and you're just getting into them?
We did hear some highlights, I guess in terms of projects that you're highlighting on the quarter, but on a go-forward basis, what is the materiality of your backlog so to speak?
Tony Franceschini - Chairperson & CEO
I think individually it would be difficult to address.
Our backlog is about 7.5 months of forward four quarter revenue right now.
That is reasonably consistent for what it's been in the last year.
Maybe up about six months from the end of I think 2003, where I think we were at about seven months.
So as you know, we do several thousand projects a year, so there is no one or two that stands out.
But I think overall, our backlog is a little stronger than it was at the end of the fourth quarter in '03.
Cameron Webster - Analyst
Thanks gentlemen.
Operator
At this time, we are waiting for additional questions.
Tony Franceschini - Chairperson & CEO
If there are no more questions, since I don't hear the bell or anything like that, I assume if there are no more questions then I would like to thank everyone for joining us today, and I will look forward to speaking to everyone at the end of our Q2 results.
Thank you very much for joining us, and we will sign off.
Thank you.
Operator
Thank you, ladies and gentlemen.
This concludes the Stantec Inc.
Q1 2004 conference call.
We thank you for your participation and ask that you please disconnect your lines.